UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 endedJune 30, 2009
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 number0-10795
BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
| | | | |
| Delaware | | | | 95-2564584 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
| | |
| 500 Naches Ave. SW, 3rd Floor • Renton, Washington | | 98057 |
| (Address of principal executive offices) | | (Zip Code) |
(425) 965-4000
(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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
| | | | | | |
Large accelerated filer | | ¨ | | | | Accelerated filer ¨ |
Non-accelerated filer | | x | | (Do not check if a smaller reporting company) | | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at July 22, 2009: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Boeing Capital Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | | |
| (Dollars in millions, except par value) | | June 30,
2009 | | | December 31,
2008 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 100 | | | $ | 305 | |
Receivables: | | | | | | | | |
Finance leases | | | 2,085 | | | | 2,142 | |
Notes and other | | | 1,194 | | | | 697 | |
| | | 3,279 | | | | 2,839 | |
Allowance for losses on receivables | | | (62 | ) | | | (59 | ) |
| | | 3,217 | | | | 2,780 | |
Equipment under operating leases, net | | | 2,407 | | | | 2,492 | |
Investments | | | 7 | | | | 7 | |
Assets held for sale or re-lease, net | | | 562 | | | | 685 | |
Other assets | | | 126 | | | | 109 | |
| | $ | 6,419 | | | $ | 6,378 | |
| | |
LIABILITIES AND SHAREHOLDER’S EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 85 | | | $ | 78 | |
Other liabilities | | | 338 | | | | 385 | |
Accounts with Boeing | | | 131 | | | | 11 | |
Deferred income taxes | | | 1,498 | | | | 1,520 | |
Debt | | | 3,636 | | | | 3,652 | |
| | | | 5,688 | | | | 5,646 | |
Shareholder’s equity: | | | | | | | | |
Common shares – $100 par value; authorized 100,000 shares; issued and outstanding 50,000 shares | | | 5 | | | | 5 | |
Additional paid-in capital | | | 714 | | | | 730 | |
Accumulated other comprehensive income (loss), net of tax | | | (2 | ) | | | (3 | ) |
Retained earnings | | | 14 | | | | – | |
| | | | 731 | | | | 732 | |
| | $ | 6,419 | | | $ | 6,378 | |
| | |
See Notes to Condensed Consolidated Financial Statements.
1
Boeing Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, | |
| (Dollars in millions) | | 2009 | | | 2008 | | 2009 | | | 2008 | |
REVENUE | | | | | | | | | | | | | | | |
Finance lease income | | $ | 38 | | | $ | 43 | | $ | 77 | | | $ | 85 | |
Interest income on notes receivable | | | 19 | | | | 14 | | | 34 | | | | 28 | |
Operating lease income | | | 99 | | | | 116 | | | 201 | | | | 235 | |
Investment income | | | – | | | | – | | | – | | | | 2 | |
Net loss on disposal | | | (1 | ) | | | – | | | – | | | | – | |
Other income | | | 12 | | | | 6 | | | 18 | | | | 14 | |
| | | 167 | | | | 179 | | | 330 | | | | 364 | |
EXPENSES | | | | | | | | | | | | | | | |
Interest expense | | | 43 | | | | 57 | | | 90 | | | | 119 | |
Depreciation expense | | | 52 | | | | 56 | | | 104 | | | | 112 | |
Provision for (recovery of) losses | | | 9 | | | | 4 | | | 14 | | | | (2 | ) |
Operating expenses | | | 13 | | | | 13 | | | 24 | | | | 24 | |
Asset impairment expense | | | 10 | | | | – | | | 17 | | | | – | |
Other expense | | | 4 | | | | 4 | | | 8 | | | | 5 | |
| | | | 131 | | | | 134 | | | 257 | | | | 258 | |
Income from continuing operations before provision for income tax | | | 36 | | | | 45 | | | 73 | | | | 106 | |
Provision for income tax | | | 13 | | | | 16 | | | 27 | | | | 39 | |
Income from continuing operations | | | 23 | | | | 29 | | | 46 | | | | 67 | |
Net gain (loss) on disposal of discontinued operations, net of tax | | | 1 | | | | 1 | | | (4 | ) | | | 6 | |
Net income | | $ | 24 | | | $ | 30 | | $ | 42 | | | $ | 73 | |
| | |
See Notes to Condensed Consolidated Financial Statements.
2
Boeing Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Total | | | Common
Shares | | Additional
Paid-In
Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Retained
Earnings | | | Comprehensive
Income | |
Balance at January 1, 2008 | | $ | 865 | | | $ | 5 | | $ | 861 | | | $ | (1 | ) | | $ | – | | | | | |
Non-cash capital contributions from Boeing | | | 1 | | | | – | | | 1 | | | | – | | | | – | | | | | |
Cash dividends to Boeing (including return of capital) | | | (74 | ) | | | – | | | (1 | ) | | | – | | | | (73 | ) | | | | |
Net income | | | 73 | | | | – | | | – | | | | – | | | | 73 | | | $ | 73 | |
Reclassification adjustment for gain realized on investment in net income, net of tax | | | (1 | ) | | | – | | | – | | | | (1 | ) | | | – | | | | (1 | ) |
Balance at June 30, 2008 | | $ | 864 | | | $ | 5 | | $ | 861 | | | $ | (2 | ) | | $ | – | | | $ | 72 | |
| | |
Balance at January 1, 2009 | | $ | 732 | | | $ | 5 | | $ | 730 | | | $ | (3 | ) | | $ | – | | | | | |
Non-cash capital contributions from Boeing | | | 1 | | | | – | | | 1 | | | | – | | | | – | | | | | |
Cash dividends to Boeing (including return of capital) | | | (45 | ) | | | – | | | (17 | ) | | | – | | | | (28 | ) | | | | |
Net income | | | 42 | | | | – | | | – | | | | – | | | | 42 | | | $ | 42 | |
Unrealized gain on investments, net of tax | | | 1 | | | | – | | | – | | | | 1 | | | | – | | | | 1 | |
Balance at June 30, 2009 | | $ | 731 | | | $ | 5 | | $ | 714 | | | $ | (2 | ) | | $ | 14 | | | $ | 43 | |
| | |
See Notes to Condensed Consolidated Financial Statements.
3
Boeing Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | |
| | | Six Months Ended June 30, | |
| (Dollars in millions) | | 2009 | | | 2008 | |
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 42 | | | $ | 73 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Non-cash items: | | | | | | | | |
Depreciation and amortization expense | | | 99 | | | | 110 | |
Provision for (recovery of) losses | | | 14 | | | | (2 | ) |
Net gain on investments and derivative instruments | | | (7 | ) | | | – | |
Asset impairment expense | | | 17 | | | | – | |
Share-based plans expense | | | 1 | | | | 1 | |
Other non-cash adjustments related to discontinued operations, net of tax | | | 4 | | | | (6 | ) |
Change in deferred income taxes | | | (22 | ) | | | 88 | |
Change in assets and liabilities: | | | | | | | | |
Other assets | | | (10 | ) | | | 26 | |
Accrued interest and rents | | | 2 | | | | 3 | |
Accounts payable and accrued expenses | | | 7 | | | | (13 | ) |
Other liabilities | | | (52 | ) | | | 23 | |
Accounts with Boeing | | | 120 | | | | (80 | ) |
Net cash provided by operating activities | | | 215 | | | | 223 | |
INVESTING ACTIVITIES | | | | | | | | |
Proceeds from available-for-sale investments | | | 1 | | | | 135 | |
Payment for capitalizable costs in process | | | (45 | ) | | | (16 | ) |
Proceeds from disposition of equipment and receivables | | | 130 | | | | 19 | |
Principal payments of leases, notes and other receivables | | | 87 | | | | 92 | |
Origination of leases, notes and other receivables | | | (545 | ) | | | – | |
Net cash (used in) provided by investing activities | | | (372 | ) | | | 230 | |
FINANCING ACTIVITIES | | | | | | | | |
Proceeds from intercompany borrowing | | | 200 | | | | – | |
Repayment of debt | | | (203 | ) | | | (27 | ) |
Payment of cash dividends (including return of capital) | | | (45 | ) | | | (74 | ) |
Net cash used in financing activities | | | (48 | ) | | | (101 | ) |
Net (decrease) increase in cash and cash equivalents | | | (205 | ) | | | 352 | |
Cash and cash equivalents at beginning of year | | | 305 | | | | 463 | |
Cash and cash equivalents at end of period | | $ | 100 | | | $ | 815 | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | |
Net transfer to assets held for sale or re-lease | | $ | 23 | | | $ | 133 | |
| | |
Net transfer to (from) equipment under operating leases | | $ | 19 | | | $ | (78 | ) |
| | |
Transfer from finance leases | | $ | (4 | ) | | $ | – | |
| | |
Transfer from other assets | | $ | (38 | ) | | $ | (55 | ) |
| | |
Decrease/(increase) in debt due to fair value hedge derivatives | | $ | 8 | | | $ | (12 | ) |
| | |
See Notes to Condensed Consolidated Financial Statements.
4
Boeing Capital Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions)
Note 1 –Basis of Presentation
Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is an indirect wholly owned subsidiary of The Boeing Company (Boeing). We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the condensed consolidated financial statements. We have evaluated subsequent events through July 22, 2009, which is the date that these financial statements were issued. Operating results for the period ended June 30, 2009 are not necessarily indicative of the results for the full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2008 Annual Report on Form 10-K.
Note 2 –Transactions with Boeing
As an indirect wholly owned subsidiary of Boeing, our mission is to arrange for the financing of products manufactured by Boeing. When third party financing is not available, we may provide such financing directly.
We have a number of general contractual arrangements with Boeing to facilitate our operations including, among others, a support agreement, tax sharing agreement and an agreement allowing us to borrow under Boeing’s committed revolving lines of credit. We also have an intercompany borrowing and lending arrangement with Boeing.
In addition, we may require other forms of support from Boeing with respect to certain financing transactions we undertake. This support may take the form of intercompany guarantees, subsidies, remarketing agreements or other support arrangements.
During the first quarter of 2009, under our intercompany borrowing and lending arrangement with Boeing, we loaned Boeing $150, which was repaid in the same quarter. During the second quarter of 2009, we borrowed from Boeing $200, as described inNote 4 – Debt.
In April 2009, Boeing sold us a 100% participation in a $100 note receivable.
There can be no assurances that these intercompany agreements and arrangements will not be terminated or modified by us or Boeing. However, our and Boeing’s ability to terminate or modify the support agreement is subject to certain conditions. See Item 8.Financial Statements and Supplementary Data, Note 2 of our 2008 Annual Report on Form 10-K.
At June 30, 2009, we were the beneficiary under $2,099 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,748.
Intercompany guarantee amounts by type are summarized as follows:
| | | | | | | | | | | | |
| | | June 30, 2009 | | December 31, 2008 |
| | | Guarantee Amount | | Carrying Value | | Guarantee Amount | | Carrying Value |
717 (out of production) | | $ | 1,666 | | $ | 2,227 | | $ | 1,693 | | $ | 2,264 |
Out of production single-aisle aircraft | | | 174 | | | 174 | | | 182 | | | 182 |
Out of production twin-aisle aircraft | | | 110 | | | 154 | | | 182 | | | 244 |
Other, including other Boeing aircraft | | | 149 | | | 193 | | | 51 | | | 94 |
| | $ | 2,099 | | $ | 2,748 | | $ | 2,108 | | $ | 2,784 |
| |
At June 30, 2009 and December 31, 2008, Accounts with Boeing included deferred revenue of $74 and $85 associated with guarantee and subsidy settlements and terminations.
5
We recorded the following activity under the intercompany guarantee and subsidy agreements for the six months ended June 30:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Applied to income | | $ | 36 | | | $ | 23 | |
Net change in deferred revenue | | | (11 | ) | | | (6 | ) |
Net cash received under intercompany guarantee and subsidy agreements | | $ | 25 | | | $ | 17 | |
| | |
For the six months ended June 30, 2009 and 2008, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies, of $10 and $17.
For the six months ended June 30, 2009 and 2008, we recorded new business volume of $481 and $33 related to Boeing aircraft, equipment or services we purchased or financed.
Note 3 –Allowance for Losses on Receivables
The following table reconciles the allowance for losses on receivables for the six months ended June 30:
| | | | | | | |
| | | 2009 | | | 2008 |
Allowance for losses on receivables at beginning of period | | $ | 59 | | | $ | 74 |
Provision for (recovery of) losses | | | 14 | | | | (2) |
Write-offs | | | (12 | ) | | | (11) |
Recovery of write-offs | | | 1 | | | | – |
Allowance for losses on receivables at end of period | | $ | 62 | | | $ | 61 |
| |
Allowance as a percentage of total receivables | | | 1.9 | % | | | 2.1% |
The carrying value of impaired receivables consisted of the following:
| | | | | | |
| | | June 30,
2009 | | December 31,
2008 |
Impaired receivables with specific impairment allowance | | $ | – | | $ | 16 |
Impaired receivables with no specific allowance | | | 171 | | | 163 |
Carrying value of impaired receivables | | $ | 171 | | $ | 179 |
| |
At December 31, 2008, allowance for losses on impaired receivables was $8.
Non-Performing Assets
Non-performing assets (assets either not earning income on an accrual basis or equipment without a purchase commitment or current contractual lease revenue) consisted of the following:
| | | | | | | |
| | | June 30,
2009 | | | December 31,
2008 |
Assets placed on non-accrual status: | | | | | | | |
Receivables | | $ | 19 | | | $ | 5 |
Equipment under operating leases, net (1) | | | 97 | | | | 57 |
| | | 116 | | | | 62 |
Assets held for sale or re-lease, net (1) | | | 1 | | | | 19 |
| | $ | 117 | | | | 81 |
| |
Percent of non-performing receivables to total receivables | | | 0.6 | % | | | 0.2% |
Percent of total non-performing assets to total portfolio | | | 1.9 | % | | | 1.3% |
| (1) | | At June 30, 2009 and December 31, 2008, equipment under operating leases of $290 and $205 and assets held for sale or re-lease of $308 and $361 are not included in non-performing assets due to intercompany guarantees provided by Boeing. |
6
Note 4 –Debt
Debt, including the net effects of interest rate swap revaluation adjustments and unamortized deferred debt costs, consisted of the following:
| | | | | | |
| (Interest rates are the contractual rates at June 30, 2009) | | June 30,
2009 | | December 31,
2008 |
0.32% intercompany borrowing due through 2009 | | $ | 200 | | $ | – |
4.00% - 7.58% fixed rate notes due through 2017 | | | 3,187 | | | 3,396 |
1.86% - 2.24% floating rate notes due through 2023 | | | 120 | | | 120 |
1.42% - 5.79% non-recourse notes due through 2013 | | | 63 | | | 66 |
1.22% capital lease obligation due through 2015 | | | 66 | | | 70 |
| |
| | $ | 3,636 | | $ | 3,652 |
| |
At June 30, 2009, and December 31, 2008, we were a party to interest rate swaps, which effectively convert debt of $725 and $725 from fixed rate to floating rate and $92 and $92 from floating rate to fixed rate.
The most restrictive covenants in our debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At June 30, 2009, we were in compliance with these covenants.
Note 5 –Derivative Financial Instruments
Effective January 1, 2009, we adopted Statement of Financial Accounting Standards (SFAS),Disclosures About Derivative Instruments and Hedging Activities (SFAS No. 161) – an amendment of Financial Accounting Standards Board Statement No. 133 (SFAS No. 133), which expands the quarterly and annual disclosure requirements about our derivative instruments and hedging activities.
We primarily use derivative instruments to manage exposures to interest rate risk. We enter into interest rate swap contracts to hedge interest rate risk associated with our debt obligations. These interest rate swap contracts are designated as cash flow hedges or fair value hedges in accordance with SFAS No. 133. At times, we may enter into certain derivatives that are not designated as hedging instruments. At June 30, 2009, derivatives that do not receive hedge accounting treatment consisted of warrants to purchase common stock of an unaffiliated third party, which we received in connection with a financing transaction.
The fair values of derivative instruments included in the Consolidated Balance Sheet were as follows:
| | | | | | | |
| | | June 30, 2009 | |
| | | Other Assets | | Other Liabilities | |
Derivatives designated as hedging instruments under SFAS No. 133 Interest rate swaps | | $ | 40 | | $ | (1 | ) |
| | |
Derivatives not designated as hedging instruments under SFAS No. 133 Warrants | | $ | 18 | | $ | – | |
| | |
The notional amount of our interest rate swaps is disclosed in Note 4 – Debt.
At June 30, 2009, we held warrants with a total exercise price of $21 to purchase common stock of an unaffiliated third party.
7
The following table summarizes the effect of our derivative instruments on Accumulated Other Comprehensive Income (AOCI) and the Statement of Operations for the six months ended June 30:
| | | | | | | | | |
| | | 2009 | |
| | | Gain Recognized
in AOCI | | Loss Reclassified from
AOCI into Income | |
| | | | | Location | | Amount | |
Derivatives in SFAS No. 133 cash flow hedging relationships | | | | | | | | | |
Interest rate swaps (effective portion) | | $ | 2 | | Interest Expense | | $ | (1 | ) |
| | |
For the three and six months ended June 30, 2009, we recognized a gain of $7 and $8 in Other Income related to our warrants.
Note 6 –Commitments and Contingencies
Litigation
Various legal proceedings and claims are pending or have been asserted against us. We believe that the final outcome of these proceedings and claims will not have a material adverse effect on our earnings, cash flows and/or financial position.
Restructurings and Restructuring Requests
As of June 30, 2009, we have received a number of requests from both domestic and foreign airlines to reduce lease or rental payments or to otherwise restructure obligations. Whether such requests will result in a material adverse impact on our earnings, cash flows and/or financial position depends on a number of factors including whether the request is granted, the type of aircraft, the collateral value, market rental rates and guarantee coverage, if any.
In May 2009, we agreed to a restructuring of lease terms with Midwest Airlines (Midwest), under which Midwest is scheduled to return the remaining nine 717 aircraft currently on lease by the end of the current year. We have firm contracts for these aircraft to be placed on lease with a follow-on customer. As a result of guarantees from Boeing that limit our risk of loss for non-payment by Midwest under our existing leases, we do not expect that the return of these aircraft as a result of this restructuring will have a material effect on our financial position, results of operations or cash flow.
Commitments
At June 30, 2009, we and Boeing had unfunded financing commitments of $9,542, primarily resulting from firm contracts, options for deliveries or proposals as part of sales campaigns. These commitments are provided to give Boeing customers reasonable assurance of financing in connection with orders of Boeing products in advance of delivery. However, customers typically seek lower cost financing from other sources prior to actual delivery. In addition, we continue to work with third party financiers to provide alternative financing to customers and eliminate the need for our financing. Based on historical experience and anticipated capital market acceptance of Boeing aircraft covered by Boeing’s and our current commitments, we anticipate that a significant portion of these commitments will not be exercised by the customer or will expire without being fully drawn upon. However, there can be no assurance given the current capital market disruptions that we will not be required to fund greater amounts than historically required. To the extent we are obligated to provide financing, such financing generally includes participation by engine manufacturers which further reduces our obligation. Therefore, the reported amount of commitments does not necessarily represent a future net cash requirement. However, we expect to ultimately provide funding for those commitments which are exercised, whether they are Boeing’s or our commitments. If there were requirements to fund all Boeing’s and our commitments, the timing in which these commitments may be funded (based on estimated earliest funding dates as of June 30, 2009) is as follows:
| | | |
| | | Total |
July through December 2009 | | $ | 1,194 |
2010 (1) | | | 2,101 |
2011 (1) | | | 1,031 |
2012 (1) | | | 393 |
2013 (1) | | | 1,590 |
Thereafter (1) | | | 3,233 |
| |
| | $ | 9,542 |
| |
| (1) | | Does not reflect the impact of the 787 first flight delay announced in June 2009 which may delay certain of these commitments. |
8
Note 7 –Fair Value Measurements
Effective January 1, 2009, we adopted SFAS No. 157,Fair Value Measurements for our nonfinancial assets and nonfinancial liabilities measured on a non-recurring basis. The adoption of SFAS No. 157 for our nonfinancial assets and nonfinancial liabilities measured on a non-recurring basis did not have a material impact on our fair value measurements.
The following tables present our assets and liabilities that are measured at fair value on a recurring basis, as of June 30, 2009 and December 31, 2008, and are categorized using the three levels of fair value hierarchy.
| | | | | | | | | | | | | | |
| | | June 30, 2009 |
| | | Total | | | Quoted Prices in
Active Markets for
Identical Assets (Level 1) | | Significant Other
Observable
Inputs (Level 2) | | | Significant
Unobservable
Inputs
(Level 3) |
Assets | | | | | | | | | | | | | | |
Available-for-sale investments: | | | | | | | | | | | | | | |
Marketable securities | | $ | 1 | | | $ | 1 | | $ | – | | | $ | – |
EETC | | | 4 | | | | – | | | – | | | | 4 |
Interest rate swaps | | | 40 | | | | – | | | 40 | | | | – |
Warrants | | | 18 | | | | – | | | – | | | | 18 |
Total | | $ | 63 | | | $ | 1 | | $ | 40 | | | $ | 22 |
| |
| | | | |
Liabilities | | | | | | | | | | | | | | |
Interest rate swaps | | $ | (1 | ) | | $ | – | | $ | (1 | ) | | $ | – |
Total | | $ | (1 | ) | | $ | – | | $ | (1 | ) | | $ | – |
| |
| | | | | | | | | | | | | | |
| | | December 31, 2008 |
| | | Total | | | Quoted Prices in
Active Markets for
Identical Assets (Level 1) | | Significant Other
Observable
Inputs (Level 2) | | | Significant
Unobservable
Inputs
(Level 3) |
Assets | | | | | | | | | | | | | | |
Available-for-sale investments: | | | | | | | | | | | | | | |
EETC | | $ | 5 | | | $ | – | | $ | – | | | $ | 5 |
Interest rate swaps | | | 48 | | | | – | | | 48 | | | | – |
Warrants | | | 10 | | | | – | | | – | | | | 10 |
Total | | $ | 63 | | | $ | – | | $ | 48 | | | $ | 15 |
| |
| | | | |
Liabilities | | | | | | | | | | | | | | |
Interest rate swaps | | $ | (3 | ) | | $ | – | | $ | (3 | ) | | $ | – |
Total | | $ | (3 | ) | | $ | – | | $ | (3 | ) | | $ | – |
| |
Marketable securities.The fair value of our marketable securities is determined using quoted prices in active markets for identical assets. Unrealized gains (losses) are recorded in Accumulated other comprehensive income (loss).
Enhanced Equipment Trust Certificate (EETC). The fair value of our EETC is derived using discounted cash flows at market yield based on estimated trading prices for comparable debt securities. Unrealized gains (losses) are recorded in Accumulated other comprehensive income (loss).
Interest rate swaps. The fair values of our interest rate swaps are determined using cash flows discounted at market interest rates in effect at the period close.
Warrants. The fair value of warrants is determined using a third party options model. Principal inputs to the model include stock price, volatility and time to expiry. Unrealized gains (losses) are recorded in Other income.
9
The following table presents a reconciliation of Level 3 assets measured at fair value on a recurring basis at June 30, 2009. At June 30, 2008, there were no Level 3 assets valued on a recurring basis.
| | | | | | | | | | | | | | | | | | | |
| | | June 30, 2009 |
| | | Fair Value
Beginning
of Year | | Unrealized
Gains
Included
in Income | | Accumulated
Other
Comprehensive
Gain/(Loss) | | Purchases,
Sales, and
Settlements | | | Transfers
In/(Out) | | Fair Value
at End of
Period |
Assets | | | | | | | | | | | | | | | | | | | |
EETC | | $ | 5 | | $ | – | | $ | – | | $ | (1 | ) | | $ | – | | $ | 4 |
Warrants | | | 10 | | | 8 | | | – | | | – | | | | – | | | 18 |
Total | | $ | 15 | | $ | 8 | | $ | – | | $ | (1 | ) | | $ | – | | $ | 22 |
| |
Certain assets are measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3). The table below presents the non-recurring losses recognized for the six months ended June 30, and the carrying value and asset classification of the assets still held as of June 30, that incurred these losses:
| | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | Carrying
Value | | Total
Losses | | | Carrying
Value | | Total
Losses | |
Assets | | | | | | | | | | | | | | |
Receivables (1) | | $ | 16 | | $ | (6 | ) | | $ | 7 | | $ | (7 | ) |
Equipment under operating leases (2) | | | 45 | | | (15 | ) | | | – | | | – | |
Assets held for sale or re-lease (2) | | | 6 | | | (2 | ) | | | – | | | – | |
Total | | $ | 67 | | $ | (23 | ) | | $ | 7 | | $ | (7 | ) |
| | |
| (1) | | Represents carrying value and related write downs of receivables which were based on the fair value for the related aircraft collateral. |
| (2) | | Represents carrying value and related write downs which were based on the fair value for the related aircraft. |
Effective April 1, 2009, we adopted SFAS No. 107-1,Interim Disclosures about Fair Value of Financial Instruments (SFAS No. 107-1), which requires interim and annual disclosure of the estimated fair value of financial instruments including those financial instruments for which we did not elect the fair value option.
The carrying values and estimated fair values of our financial instruments were as follows:
| | | | | | | | | | | | | | | | |
| | | June 30, 2009 | | | December 31, 2008 | |
| | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
ASSETS | | | | | | | | | | | | | | | | |
Notes and other | | $ | 1,194 | | | $ | 1,205 | | | $ | 697 | | | $ | 701 | |
| | | | |
LIABILITIES | | | | | | | | | | | | | | | | |
Debt, excluding capital lease obligations | | $ | (3,570 | ) | | $ | (3,731 | ) | | $ | (3,582 | ) | | $ | (3,646 | ) |
| | | | |
OFF-BALANCE SHEET ARRANGEMENTS | | | | | | | | | | | | | | | | |
Guarantor obligations from us | | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) |
Items not included in the above disclosures are Cash and cash equivalents. The carrying value of those items approximate their fair value at June 30, 2009, as reflected in the Consolidated Balance Sheets.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Notes and other. The fair value of our variable rate notes that reprice frequently approximate their carrying values. The fair values of fixed rate notes are estimated using discounted cash flows analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality.
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Debt.The fair value of debt is based on current market yields for our debt traded in the secondary market.
Guarantees. For residual value guarantees where we are the guarantor, the carrying value approximates fair value.
Financing commitments. It is not practicable to estimate the fair value of future financing commitments because the amount and timing of funding those commitments are uncertain.
Note 8 –Concentrations
A significant portion of our portfolio is concentrated among a few customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across aircraft product types and vintages. Our concentration risk is mitigated in part by intercompany guarantees from Boeing with respect to certain portfolio assets, which primarily relate to 717 aircraft.
Portfolio carrying values for our five largest customers were as follows:
| | | | | |
| | | June 30, 2009 |
| | | Carrying Value | | % of Total Portfolio |
AirTran | | $ | 1,506 | | 24.1% |
American | | | 568 | | 9.1 |
Hawaiian | | | 462 | | 7.4 |
Delta | | | 392 | | 6.2 |
Continental | | | 358 | | 5.7 |
| | $ | 3,286 | | 52.5% |
| |
| | | | | |
| | | December 31, 2008 |
| | | Carrying Value | | % of Total Portfolio |
AirTran | | $ | 1,529 | | 25.4% |
American | | | 552 | | 9.2 |
Hawaiian | | | 467 | | 7.8 |
Continental | | | 374 | | 6.2 |
Virgin Atlantic | | | 223 | | 3.7 |
| | $ | 3,145 | | 52.3% |
| |
For the six months ended June 30, 2009 and 2008, AirTran Holdings, Inc. accounted for 20% and 18% of our revenue.
Portfolio carrying values were represented in the following regions:
| | | | | | | | | | | |
| | | June 30, 2009 | | | December 31, 2008 |
| | | Carrying Value | | % of Total
Portfolio | | | Carrying Value | | % of Total
Portfolio |
United States(1) | | $ | 4,752 | | 76.0 | % | | $ | 4,457 | | 74.0% |
Europe | | | 886 | | 14.1 | | | | 1,037 | | 17.2 |
Asia/Australia | | | 355 | | 5.7 | | | | 341 | | 5.7 |
Latin America | | | 201 | | 3.2 | | | | 122 | | 2.0 |
Other | | | 61 | | 1.0 | | | | 66 | | 1.1 |
| | $ | 6,255 | | 100.0 | % | | $ | 6,023 | | 100.0% |
| |
| (1) | | United States includes assets held for sale or re-lease that may be physically located in another region. |
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Portfolio carrying values were represented by the following product types:
| | | | | | |
| | | June 30,
2009 | | December 31,
2008 |
717 | | $ | 2,327 | | $ | 2,365 |
757 | | | 953 | | | 991 |
737 | | | 542 | | | 475 |
767 | | | 520 | | | 550 |
MD-11 (1) | | | 464 | | | 560 |
777 | | | 407 | | | 81 |
747 | | | 364 | | | 383 |
MD-80 | | | 272 | | | 298 |
Other(2) | | | 406 | | | 320 |
| | $ | 6,255 | | $ | 6,023 |
| |
| (1) | | MD-11 aircraft are currently in freighter configuration or are committed to be modified into freighter configuration. |
| (2) | | Other includes aircraft, equipment, notes and stock. Some of these aircraft are out of production, but are supported by the manufacturer or other third party parts and service providers. |
Our aircraft portfolio by vintage, based on carrying value (excluding investments and pooled assets), are categorized as follows:
| | | | | |
| | | June 30,
2009 | | | December 31,
2008 |
2004 and newer | | 19.6 | % | | 12.8% |
1999 – 2003 | | 57.3 | | | 60.4 |
1994 – 1998 | | 9.1 | | | 11.3 |
1993 and older | | 14.0 | | | 15.5 |
| | 100.0 | % | | 100.0% |
| |
Note 9 –Discontinued Operations
On May 24, 2004, we entered into a purchase and sale agreement with General Electric Capital Corporation (GECC) to sell substantially all of the assets related to our Commercial Financial Services business. The final asset sale closed December 27, 2004.
Part of the purchase and sale agreement with GECC includes a loss sharing arrangement for losses that may exist at the end of the initial and subsequent financing periods of the transferred portfolio assets, or in some instances, prior to the end of the financing period. Such losses may result from asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. The loss sharing arrangement provides that cumulative net losses (if any) are to be shared between us and GECC. The provisions effectively limit our exposure to any losses to $245. At June 30, 2009, our maximum exposure to loss associated with the loss sharing arrangement was $222, for which we have accrued a liability of $48.
The following table reconciles the reserve under the loss sharing arrangement, which is included in Other Liabilities for the six months ended June 30:
| | | | | | | |
| | | 2009 | | 2008 | |
Reserve at beginning of period | | $ | 39 | | $ | 59 | |
Increase (reduction) in reserve | | | 7 | | | (10 | ) |
Payments received from GECC | | | 2 | | | 4 | |
Reserve at end of period | | $ | 48 | | $ | 53 | |
| | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Boeing Capital Corporation
Renton, Washington
We have reviewed the accompanying condensed consolidated balance sheet of Boeing Capital Corporation and subsidiaries (the “Company”) as of June 30, 2009, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2009 and 2008, and of shareholder’s equity and comprehensive income, and of cash flows for the six-month periods ended June 30, 2009 and 2008. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Boeing Capital Corporation and subsidiaries as of December 31, 2008, and the related consolidated statements of operations, shareholder’s equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 21, 2009
13
Item 2. Management’s Narrative Analysis of the Results of Operations
Forward-Looking Information is Subject to Risk and Uncertainty
Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “targets,” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by federal securities laws. Our actual results and future trends may differ materially depending on a variety of factors, including the following:
| | – | | the financial condition of the airline industry, which could be adversely affected by changes in general economic conditions, credit ratings, increases in fuel related costs, the liquidity of the global financial markets, responses to increasing environmental concerns, as well as events such as war, terrorist attacks or a serious health epidemic, |
| | – | | the impact of bankruptcies or restructurings on commercial airline customers, |
| | – | | the impact of changes in aircraft valuations, |
| | – | | the sufficiency of our liquidity, including access to capital markets, |
| | – | | the impact on us of strategic decisions by The Boeing Company (Boeing), including the amount of financing necessary to support the sale of Boeing products, the level and types of transactional or other support made available to us by Boeing and the ending of production of certain aircraft programs, |
| | – | | the market acceptance of Boeing products, |
| | – | | a decline in Boeing’s or our financial performance, outlook or credit ratings, |
| | – | | the availability of commercial and governmental financing and the extent to which we are called upon to fund Boeing’s and our outstanding financing commitments or satisfy other financing requests, and our ability to satisfy those requirements, |
| | – | | reduced lease rates as a result of competition in the used aircraft market, or the inability to maintain aircraft on lease at satisfactory lease rates, |
| | – | | financial, legal, tax, regulatory, legislative and accounting changes or actions that may affect the overall performance of our business, |
| | – | | the adequacy of coverage of our allowance for losses on receivables, |
| | – | | volatility in our earnings due to the timing of asset sales, other risk mitigation activities and fluctuations in our portfolio size, and |
| | – | | other risk factors listed from time to time in our filings with the Securities and Exchange Commission (SEC). |
Please see Item 1A.Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2008, for a description of risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements.
Overview
During the six months ended June 30, 2009, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.
During the six months ended June 30, 2009, a weak global economic environment and continuing capital market disruptions affected the availability of credit for the airline industry. While there are still sources of financing available for aircraft deliveries, the amount of third party financing available has declined, increasing the amount
14
of financing we are providing and expect to provide to Boeing’s customers. Once capital market conditions improve, we believe the overall aircraft financing market should improve as well and lessen the need for us to provide financing for Boeing aircraft deliveries, although we can provide no assurance when that will occur. In addition, the continued problems in the airline industry adversely affected our results of operations in the form of lower revenues, increased asset impairments, increased allowance for losses and increased redeployment costs.
At June 30, 2009, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. At June 30, 2009, we owned 280 commercial aircraft and two C-40 aircraft and had partial ownership or security interest in an additional 49 aircraft. Our portfolio at June 30, 2009 increased to $6.3 billion from $6.0 billion at December 31, 2008. The following table summarizes the net change in our total portfolio:
| | | | | | | | |
| (Dollars in millions) | | Six Months Ended
June 30, 2009 | | | Year Ended
December 31,
2008 | |
New business volume | | $ | 583 | | | $ | 155 | |
Write-offs | | | (12 | ) | | | (11 | ) |
Recovery of write-offs | | | 1 | | | | – | |
Asset impairment | | | (17 | ) | | | (35 | ) |
Asset run off and prepayments | | | (89 | ) | | | (329 | ) |
Asset dispositions | | | (130 | ) | | | (69 | ) |
Depreciation and amortization expense | | | (104 | ) | | | (220 | ) |
| | |
Net change in portfolio balance | | $ | 232 | | | $ | (509 | ) |
| | |
At June 30, 2009 and December 31, 2008, we had $562 million and $685 million of assets that were held for sale or re-lease, of which $557 million and $305 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. In March 2009, Mexicana Group committed to lease 25 717 aircraft, including four of which were placed on lease and 12 that were held for re-lease at June 30, 2009. The remaining nine aircraft are currently on lease to a third party and are scheduled to return by the end of the current year. Additionally, aircraft subject to leases with a carrying value of approximately $417 million are scheduled to be returned off lease in the next 12 months. These aircraft are being remarketed or the leases are being extended and $227 million had either executed term sheets with deposits or firm contracts at June 30, 2009.
Our net income was $42 million for the six months ended June 30, 2009 compared with $73 million for the same period in 2008, a decrease of $31 million.
Consolidated Results of Operations
Revenue
Revenue was $330 million for the six months ended June 30, 2009 compared with $364 million for the same period in 2008, a decrease of $34 million.
Finance lease income was $77 million for the six months ended June 30, 2009, a decrease of $8 million compared with the same period in 2008, primarily due to a decrease in the weighted average balance of finance leases as a result of normal run-off, reclassification to equipment under operating lease and asset dispositions.
Interest income on notes receivable was $34 million for the six months ended June 30, 2009, an increase of $6 million compared with the same period in 2008, due to an increase in the notes receivables balance partially offset by a decrease in the weighted average annual effective interest rate to 7.5% from 8.2%.
Operating lease income was $201 million for the six months ended June 30, 2009, a decrease of $34 million compared with the same period in 2008, primarily due to a decrease in the equipment under operating leases as a result of the return of aircraft and asset dispositions. Without the support from Boeing in the form of intercompany guarantees our Operating lease income, which includes income applied to assets classified as held for re-lease, would have been $46 million and $39 million less than reported, for the six months ended June 30, 2009 and 2008. For a discussion of our relationship with Boeing, see Item 1.Financial Statements, Note 2 – Transactions with Boeing.
15
Expenses
Expenses were $257 million for the six months ended June 30, 2009 compared with $258 million for the same period in 2008, a decrease of $1 million.
Interest expense was $90 million for the six months ended June 30, 2009, a decrease of $29 million compared with the same period in 2008, primarily due to a decrease in the balance of debt outstanding as a result of scheduled debt repayments and a decrease in the weighted average annual effective interest rate on all borrowings to 5.1% from 5.5%.
Depreciation expense was $104 million for the six months ended June 30, 2009, a decrease of $8 million compared with the same period in 2008, due in part to a lower depreciable balance of equipment under operating leases as a result of asset dispositions in 2008.
The provision for losses was $14 million for the six months ended June 30, 2009, compared with a recovery of $2 million for the same period in 2008. The increase in our allowance through a provision for losses was primarily due to declines in aircraft collateral values exceeding run off of our finance leases and notes receivable.
Asset impairment expense was $17 million for the six months ended June 30, 2009, an increase of $17 million compared with the same period in 2008, primarily due to reduced projected cash flows for certain aircraft.
Provision for income tax
Provision for income tax was $27 million for the six months ended June 30, 2009, a decrease of $12 million compared with the same period in 2008, primarily due to a decrease in pre-tax income.
Loss on disposal of discontinued operations
Loss on disposal of discontinued operations, net of tax, was $4 million for the six months ended June 30, 2009, due to an increase in our expected losses under our loss sharing agreement with General Electric Capital Corporation related to the sale of certain assets of our Commercial Financial Services business in 2004. This compared to a gain of $6 million, net of tax, for the six months ended June 30, 2008.
Liquidity and Capital Resources
Our cash and cash equivalents balance was $100 million at June 30, 2009, a decrease from $305 million at December 31, 2008. The following is a summary of the change in our cash and cash equivalents for the six months ended June 30:
| | | | | | | | |
| (Dollars in millions) | | 2009 | | | 2008 | |
Net cash provided by operating activities | | $ | 215 | | | $ | 223 | |
Net cash (used in) provided by investing activities | | | (372 | ) | | | 230 | |
Net cash used in financing activities | | | (48 | ) | | | (101 | ) |
| | |
Net (decrease) increase in cash and cash equivalents | | $ | (205 | ) | | $ | 352 | |
| | |
Operating activities
During the six months ended June 30, 2009, net cash provided by operating activities included net income from operations of $42 million. We had net adjustments for non-cash items of $106 million which primarily related to depreciation expense. We also had a net decrease in cash due to changes in assets and liabilities of $67 million.
During the six months ended June 30, 2008, net cash provided by operating activities included net income from operations of $73 million. We had net adjustments for non-cash items of $191 million which primarily related to depreciation expense and an increase in deferred income taxes. We also had a net decrease in cash due to changes in assets and liabilities of $41 million.
Investing activities
During the six months ended June 30, 2009, net cash used in investing activities primarily included $545 million relating to the origination of notes receivable offset by asset run off.
16
During the six months ended June 30, 2008, net cash provided by investing activities primarily resulted from asset run off.
Financing activities
During the six months ended June 30, 2009, net cash used in financing activities included scheduled debt repayments of $203 million and cash dividends (including return of capital) to Boeing of $45 million offset by intercompany borrowings of $200 million from Boeing.
During the six months ended June 30, 2008, net cash used in financing activities included scheduled debt repayments of $27 million and cash dividends (including return of capital) to Boeing of $74 million.
Outstanding debt at June 30, 2009 and December 31, 2008 was $3.6 billion and $3.7 billion, of which $589 million will be due in the next 12 months. During the six months ended June 30, 2009, we had no commercial paper borrowings outstanding. Our leverage (ratio of debt to equity) at June 30, 2009 and December 31, 2008 was 5.0-to-1.
We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. Financing commitments made by us and Boeing totaled $9.5 billion as of June 30, 2009. We anticipate that a significant portion of these commitments will not be exercised given alternative financing sources available to our customers. Given the challenges faced by the aircraft financing market we have been financing a moderate amount of new aircraft deliveries in 2009 and we expect to continue to do so into the foreseeable future. We expect that any future borrowing needs would be met by issuing commercial paper or term debt, or obtaining funding from Boeing. There can be no assurance that the cost of funding or availability of funding sources to us will not be adversely impacted in the future.
We believe we have adequate borrowing capacity. We have $1.5 billion available exclusively for us under Boeing’s committed revolving credit line agreements for general corporate purposes. In addition, we have a Support Agreement with Boeing under which Boeing has committed to make contributions to us if our fixed-charge coverage ratio, as defined in the Support Agreement, falls below 1.05-to-1 on a four-quarter rolling basis.
Risks that could affect our liquidity include among others:
| | – | | continuance or worsening of the downturn in the economy, |
| | – | | significant restructurings, defaults or bankruptcies by airlines, |
| | – | | additional disruptions in the global capital markets, and |
| | – | | a decrease in our and/or Boeing’s credit ratings and/or financial performance. |
We continually assess our leverage, as measured by our debt to equity ratio, in light of the risks in our business, including those set forth in Item 1A.Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2008.
Credit Ratings
Our access to capital is affected by ratings of our debt by credit rating agencies. As a wholly owned finance company, our credit ratings are closely tied to those of Boeing due to the Support Agreement entered into between Boeing and us in December 2003 and transactional support and guarantees. Our ratings and spreads could be impacted positively or negatively by changing perceptions of Boeing, the airline industry, the defense industry or of Boeing’s competitive position. It is possible that these changes could affect our access to the capital markets. We believe our access to the capital markets is adequate.
Our credit ratings are as follows:
| | | | | | |
Debt | | Standard & Poor’s | | Moody’s Investors
Service | | Fitch Ratings |
Short-term | | A-1 | | P-1 | | F1 |
Senior | | A+ | | A2 | | A+ |
17
On January 29, 2009, Standard & Poor’s (S&P) affirmed Boeing’s and our A+ credit rating but changed its outlook from stable to negative, citing the challenging commercial aviation environment. On April 10, 2009, S&P placed Boeing’s and our A+ credit ratings on credit watch with negative implications. The rating for short-term borrowings was reaffirmed at A-1. S&P indicated in its April 10, 2009 announcement that they expect any lowering of the long-term ratings in connection with the credit watch placement would likely be limited to one notch, which would be to an ‘A’ rating. On April 30, 2009, Fitch Ratings affirmed Boeing’s and our A+ credit rating but changed its outlook from stable to negative. On July 7, 2009, Moody’s affirmed Boeing’s A2 credit rating.
Additional Disclosures Regarding Allowance for Losses on Receivables
The following table reconciles the changes in the allowance for losses on receivables for the six months ended June 30, 2009 and 2008. Column 3 presents this information, calculated in accordance with our accounting policy, if the impact of intercompany guarantees from Boeing were excluded. The exclusion of the net impact of intercompany guarantees shown in Column 2 would increase the applicable exposure for various receivables. Management believes that the presentation of this information provides more complete information on the effect of intercompany guarantees provided by Boeing.
| | | | | | | | | | | |
| (Dollars in Millions) | | (1) | | | (2) | | | (3) |
| 2009 | | Allowance
for losses | | | Impact of
intercompany
guarantees
from Boeing | | | Allowance
excluding
intercompany
guarantees |
Allowance for losses on receivables at beginning of period | | $ | 59 | | | $ | 210 | | | $ | 269 |
Provision for (recovery of) losses | | | 14 | | | | (2 | ) | | | 12 |
Write-offs | | | (12 | ) | | | – | | | | (12) |
Recovery of write-offs | | | 1 | | | | – | | | | 1 |
| |
Allowance for losses on receivables at end of period | | $ | 62 | | | $ | 208 | | | $ | 270 |
| |
Allowance as a percentage of total receivables | | | 1.9 | % | | | | | | | 8.2% |
2008 | | | |
Allowance for losses on receivables at beginning of period | | $ | 74 | | | $ | 121 | | | $ | 195 |
Provision for (recovery of) losses | | | (2 | ) | | | 82 | | | | 80 |
Write-offs | | | (11 | ) | | | – | | | | (11) |
Allowance for losses on receivables at end of period | | $ | 61 | | | $ | 203 | | | $ | 264 |
| |
Allowance as a percentage of total receivables | | | 2.1 | % | | | | | | | 9.2% |
Item 4. Controls and Procedures
| (a) | | Evaluation of Disclosure Controls and Procedures |
Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our President and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
| (b) | | Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings and claims are pending or have been asserted against us. We believe that the final outcome of these proceedings and claims will not have a material adverse effect on our earnings, cash flows and/or financial position.
Item 6. Exhibits
A. Exhibits
| | |
| Exhibit 15 | | Letter From Independent Registered Public Accounting Firm Regarding Unaudited Interim Financial Information. |
| |
| Exhibit 31.1 | | Certification of President pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| Exhibit 31.2 | | Certification of Chief Financial Officer pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| Exhibit 32.1 | | Certification of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with Securities and Exchange Commission Release Nos. 33-8212 and 34-47551. |
| |
| Exhibit 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with Securities and Exchange Commission Release Nos. 33-8212 and 34-47551. |
19
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.
| | |
| | | Boeing Capital Corporation |
| |
July 22, 2009 | | /s/ KEVIN R. MILLISON |
| | Kevin R. Millison Vice President and Chief Financial Officer (Principal Financial Officer) and Registrant’s Authorized Officer |
| |
July 22, 2009 | | /s/ KEVIN J. MURPHY |
| | Kevin J. Murphy Controller (Principal Accounting Officer) |
20
