UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 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)
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Delaware
| | | | 95-2564584
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State or other jurisdiction of incorporation or organization | | | | (I.R.S. Employer Identification No.) |
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500 Naches Ave. SW, 3rd Floor • Renton, Washington 98057
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| (Address of principal executive offices) | | | | (Zip Code) |
Registrant’s telephone number, including area code(425) 965-4000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
| | | | Name of each exchange on which registered
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| 5.80% Senior Notes due 2013 | | | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $100 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (Not applicable)
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. (Check one):
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| 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 ¨ No x
No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at February 1, 2010: 50,000 shares
Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE: None
Table of Contents
| * | Omitted pursuant to General Instruction I(2)(c) of Form 10-K. |
PART I
Forward-Looking Information is Subject to Risk and Uncertainty
Certain statements in this report may be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Forward-looking statements are based upon assumptions about future events that may not prove to be accurate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak to events only as of the date they are 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). |
This report includes important information as to these risks in Item 1.Business, Item 1A.Risk Factors,and in the Notes to our Consolidated Financial Statements. Additional important information as to these risks is also included in Item 7.Management’s Narrative Analysis of the Results of Operations.
Item 1. Business
GENERAL
Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is a wholly owned subsidiary of Boeing. The Company was incorporated in Delaware in 1968. In the commercial aircraft market, we facilitate, arrange, structure and provide selective financing solutions for Boeing’s Commercial Airplanes customers. In the space and defense markets, we primarily arrange and
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structure financing solutions for Boeing’s Defense, Space & Security (formerly Integrated Defense Systems) customers.
At December 31, 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 December 31, 2009, our portfolio totaled $5.7 billion, which was substantially collateralized by Boeing commercial aircraft. At December 31, 2009, we owned 274 commercial aircraft, one C-40 aircraft and had partial ownership or security interests in an additional 43 aircraft.
RISK MANAGEMENT
We monitor the potential volatility in the value of our portfolio and the amount of capital required to support our portfolio, using internally and externally developed statistical models. In addition, we track and analyze our exposure to potential net income fluctuations, analyze and assess transactional support and guarantees, and assess individual transaction values considering factors such as forecasted aircraft values and potential credit rating migrations. This analysis allows us to structure transactions that are designed to achieve our targeted balance of risks and rewards.
RELATIONSHIP WITH BOEING
We have agreements with Boeing that are significant to our operation. These agreements provide for financial support, among other things. At December 31, 2009, Boeing provided us with various types of partial and full guarantees, including first loss deficiency guarantees, residual value guarantees and rental loss guarantees, with a maximum potential value of $1.9 billion related to portfolio assets totaling $2.6 billion. For further discussion of these guarantees, agreements and other arrangements with Boeing, see Item 8.Financial Statements and Supplementary Data, Note 2.
For a further description of significant factors that may affect Boeing, see Boeing’s Annual Report on Form 10-K for the year ended December 31, 2009. That report is not incorporated by reference into this filing of Boeing Capital Corporation.
COMPETITIVE CONDITIONS
The Boeing products we finance are influenced by the aerospace and financial markets and general economic conditions. The financing solutions we develop are part of overall sales campaigns and can be integral to Boeing winning orders in the commercial aircraft and space and defense markets. During campaigns we compete with other aerospace and defense companies also offering in-house customer financing. Some customers periodically require a financing commitment prior to ordering aircraft. Third party financiers are often unwilling to offer financing when orders are made since there may be a delay of several years between order and delivery. Therefore, we may provide a financing commitment when products are ordered and subsequently assist our customers in obtaining alternative financing from third parties.
When we sell or remarket used aircraft, we compete with other leasing companies and financial institutions primarily on the basis of pricing, terms, structure and service. The prices at which we sell aircraft or rental rates at which we lease aircraft are impacted by the demand for suitable aircraft and the quantity and type of aircraft that are available. For further discussion on the airline industry environment, see Item 7.Management’s Narrative Analysis of the Results of Operations, Business Environment and Trends.
SIGNIFICANT CONCENTRATIONS
For a discussion of our geographic and portfolio concentrations, see Item 8.Financial Statements and Supplementary Data, Note 15.
EMPLOYEES
At December 31, 2009, we had 161 employees, compared with 160 at December 31, 2008. While we believe that our current level of employment is adequate to support our current and projected business operations over the next year, our actual employment levels may vary from our current levels due to changes in the needs and requirements of our business operations and timing of filling open positions. No
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employees are covered by collective bargaining agreements. We believe our employee relations are satisfactory. As of February 1, 2010, we had 159 employees.
AVAILABLE INFORMATION
General information about us can be found at www.boeing.com. The information contained on or connected to Boeing’s web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed by the Company with the SEC. Our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q are available free of charge through Boeing’s website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Our SEC filings, including any amendments, and our Current Reports on Form 8-K may be obtained at the SEC’s public reference room at 100 F Street N.E. Washington, DC 20549. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC issuers, including Boeing and Boeing Capital Corporation.
Item 1A. Risk Factors
An investment in our debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past performance due to a variety of factors, including, without limitation, the following:
A substantial deterioration in the financial condition of the commercial airline industry may adversely impact us.
The financial condition of the airline industry is of particular importance to us because substantially all of our portfolio consists of lease and loan financing with commercial airline customers. If terrorist attacks, a serious health epidemic, significant regulatory actions in response to environmental concerns, increases in fuel related costs or other exogenous events were to occur, a material adverse effect on the airline industry, increased requests for financing, significant defaults by airline customers, repossessions of aircraft or airline bankruptcies and restructurings could result. If this were to occur, aircraft values or lease rates could decline. These events could have a material adverse effect on our earnings, cash flows and/or financial position.
We may be unable to obtain debt to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms or in sufficient amounts.
We depend, in part, upon the issuance of debt to fund our operations and contractual commitments. If we were called upon to fund all outstanding financing commitments made by us and Boeing, our market liquidity may not be sufficient. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and a decline in Boeing’s or our own financial performance or outlook or credit ratings. The occurrence of any or all of these events may adversely affect our ability to fund our operations and contractual commitments or financing commitments made by us or Boeing.
Our allowance for losses on receivables may prove to be inadequate.
Our allowance for losses on receivables is intended to cover probable losses on notes receivable and finance leases. Unexpected adverse changes in the economy or other events adversely affecting our customers, the airline industry as a whole or collateral values could cause us to make additional provisions, which could have a material adverse effect on our earnings and/or financial position.
We may be required to recognize significant asset impairment charges on equipment under operating leases.
We periodically review our portfolio of equipment under operating leases for impairment. The cumulative undiscounted cash flows expected to result from the use and eventual disposition of these
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assets are greater than their carrying value. However, the fair value of certain of these assets as measured at their expected sale price is less than their carrying value. Expected cash flows could be adversely affected by certain factors, including credit deterioration of a lessee, declines in future rental rates or by a change in our intention to hold or dispose of an asset. If, during our periodic reviews, we determine that the fair value of an asset is less than the carrying value and the revised expected undiscounted cash flows reflect an adverse change, we may recognize impairment charges, which could have a material adverse effect on our earnings and/or financial position.
We may be unable to maintain assets on lease at satisfactory lease rates.
Our profitability depends largely on our ability to maintain assets on lease at satisfactory lease rates. A number of factors can adversely affect utilization and lease rates, including, but not limited to, reduced demand or oversupply in the markets in which the company operates and changes in customer preferences for aircraft types. For example, bankruptcies or restructurings of our current or potential customers could lead to reduced demand for leased aircraft and reduced lease rates. If aircraft lease rates fall or if a significant number of our aircraft were to remain idle for an extended period, there could be a material adverse effect on our earnings, cash flows and/or financial position.
We face competition which could cause us to lower our lease rates and offer terms which may adversely affect our financial results.
Our primary competitors include other commercial aircraft, aerospace and defense companies offering in-house customer financing as well as other finance companies. Additionally, when selling or re-leasing used aircraft, we compete with other leasing companies and finance companies in the used aircraft market. We compete primarily based upon pricing, terms, structure, service and type of aircraft offered. Increased competition could have a material adverse effect on our earnings, cash flows and/or financial position.
We are a wholly owned subsidiary and therefore subject to strategic decisions of Boeing and affected by Boeing’s performance.
We are fundamentally affected by our relationship with Boeing. As a wholly owned subsidiary of Boeing we are subject to a wide range of possible strategic decisions which Boeing may make from time to time. Those strategic decisions could include the level and types of financing provided 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 certain aircraft programs. In addition, circumstances affecting Boeing can significantly affect us. For example, our debt ratings are closely tied to those of Boeing, and when rating agencies take actions regarding Boeing’s ratings, they may take the same actions with respect to our ratings. Significant changes in Boeing’s overall strategy or its relationship with us or material adverse changes in Boeing’s performance could have a material adverse effect on us.
We may experience volatility and decreases in our earnings due to a reduced asset base.
From time to time, we may sell notes, leases, investments or other assets from our portfolio. The timing of these sales could affect our earnings due to the resulting gains or losses. If we sell assets from our portfolio or if normal portfolio runoff or prepayments from customers occur and we do not replace those assets, our income may decline.
We operate in a highly regulated industry and changes in laws or regulations may adversely affect us.
Aspects of our business are regulated by state, federal and foreign governmental authorities. We are also subject to various laws and judicial and administrative decisions, mostly as a result of our activities as a lender and lessor, that restrict or regulate, among other things,
| | – | | our credit granting and financing activities, |
| | – | | the establishment of maximum interest rates, |
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| | – | | financing transactions we enter into, |
| | – | | our collection, foreclosure, repossession and claims-handling procedures and other trade practices, |
| | – | | the use and reporting of information related to a borrower’s or lessee’s credit experience and other data collection, and |
| | – | | disclosure requirements. |
We may not be able to forecast changes to legislation; tax, accounting and other regulations; and judicial and administrative decisions and orders or interpretations, and these changes could have a material adverse effect on our earnings, cash flows and/or financial position. Our operations and results could also be materially impacted by financial regulatory reform.
We may act to mitigate certain risk in our portfolio assets.
When market conditions permit, we may consider asset sales or other risk reduction initiatives which may involve adjustments in our capital structure, portfolio size and portfolio risk. If we pursue any of those actions our future earnings could be impacted.
A significant portion of our portfolio is concentrated among certain customers based in the United States, and in certain types of Boeing aircraft, which exposes us to concentration risks.
A significant portion of our portfolio is concentrated among certain customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across Boeing aircraft product types. Our concentration risk is mitigated in part by intercompany guarantees from Boeing with respect to certain portfolio assets, which primarily relate to 717 aircraft. Nonetheless, if one or more customers holding a significant portion of our portfolio assets experiences financial difficulties, or if the types of aircraft that are concentrated in our portfolio suffer greater than expected declines in value, our earnings, cash flows and/or financial position could be materially adversely affected.
Circumstances and conditions may change. Accordingly, additional risks and uncertainties not currently known, or that we currently deem not material, may also adversely affect our business operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our headquarters, which is our main administrative and operational facility, is located in Renton, Washington, and is leased by Boeing. We also have offices in greater Los Angeles, California; Hong Kong, China; and Moscow, Russia.
We believe that our properties are suitable and adequate to meet the requirements of our business.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We are a wholly owned subsidiary of The Boeing Company (Boeing), and accordingly, there is no public trading market for our common stock. In 2009 and 2008, we declared and paid dividends (including return of capital) totaling $93 million and $254 million to Boeing.
A covenant in one of our debt agreements requires us to 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. At December 31, 2009, as well as at each quarter end during the year, we were in compliance with this covenant.
Item 6. Selected Financial Data (Unaudited)
The selected consolidated financial data should be read in conjunction with our audited Consolidated Financial Statements and with Item 7.Management’s Narrative Analysis of the Results of Operations.
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (Dollars in millions) | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 |
New business volume(1) | | $ | 766 | | $ | 155 | | $ | 24 | | $ | 250 | | $ | 601 |
| | | | | |
Statement of operations data: | | | | | | | | | | | | | | | |
Revenue | | $ | 660 | | $ | 703 | | $ | 815 | | $ | 1,025 | | $ | 966 |
Income from continuing operations | | $ | 80 | | $ | 102 | | $ | 147 | | $ | 185 | | $ | 146 |
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Dividends to Boeing (including return of capital) | | $ | 93 | | $ | 254 | | $ | 408 | | $ | 344 | | $ | 338 |
Non-cash capital contributions from Boeing | | $ | 2 | | $ | 3 | | $ | 5 | | $ | 9 | | $ | 17 |
| | | | | |
Balance sheet data: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 596 | | $ | 305 | | $ | 463 | | $ | 589 | | $ | 297 |
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Portfolio(2) | | $ | 5,666 | | $ | 6,023 | | $ | 6,532 | | $ | 8,034 | | $ | 9,206 |
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Total assets | | $ | 6,774 | | $ | 6,378 | | $ | 7,044 | | $ | 8,584 | | $ | 9,544 |
Total debt | | $ | 4,075 | | $ | 3,652 | | $ | 4,327 | | $ | 5,590 | | $ | 6,322 |
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Debt to equity ratio | | | 5.8 | | | 5.0 | | | 5.0 | | | 5.0 | | | 5.0 |
Ratio of earnings to fixed charges(3) | | | 1.7 | | | 1.7 | | | 1.8 | | | 1.8 | | | 1.6 |
| (1) | | New business volume equals funded transactions that have been recorded as notes, leases or investments excluding transfers from Boeing. |
| (2) | | Portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. |
| (3) | | For the purpose of computing the ratio of earnings to fixed charges, earnings consists of income from continuing operations before provision for income tax and fixed charges; and fixed charges consists of interest. |
Item 7. Management’s Narrative Analysis of the Results of Operations
The following should be read in conjunction with our Consolidated Financial Statements included in Item 8.Financial Statements and Supplementary Data.
Business Environment and Trends
2008 and 2009 were extremely challenging for the world’s airlines as key external business factors (oil prices, economic growth, exchange rates and financing terms) experienced high levels of volatility. In the first half of 2008, airlines focused on adapting to spiking oil prices which peaked close to $150/barrel. In
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autumn 2008, the airlines’ focus shifted to the fallout of the global credit crisis and recession as fuel prices fell below $40/barrel for the first time since 2004, and in 2009 passenger and cargo traffic experienced their worst ever declines. This business environment curtailed the airline industry profit recovery that started in 2006. As a result, the global airline industry has now reported losses in seven out of the last ten years, and over 30 airlines have entered bankruptcy since the beginning of 2008.
In this challenging environment, airlines are adapting their operations to meet the realities of the markets in which they operate. Airlines reduced global passenger capacity by 2% in 2009 through a combination of frequency and route cuts in unprofitable markets, lower daily airplane utilization (flight hours per day) and parking/scrapping of older generation airplanes. Airlines are also replacing older, less fuel efficient airplanes, reducing non-fuel costs and finding new ways to partner through alliances or mergers and acquisitions.
Near-term global airline industry indicators are improving although many uncertainties persist. Global economic recovery has begun. Although it is expected to vary significantly by region both in terms of speed and magnitude, world economic growth is forecast to grow moderately in 2010 following contraction in 2009. As a result, airline industry forecasts generally indicate global passenger traffic returning close to 2008 levels in 2010 with many emerging markets posting growth over 2009. Air cargo traffic is forecast to grow above the long-term trend rates in 2010 following two years of contraction which have taken traffic back to 2002 and 2003 levels. Due to these improving demand conditions, airlines are expected to see significantly smaller financial losses globally in 2010.
A substantial portion of our portfolio is concentrated among U.S. commercial airline customers. The weak global economic environment and capital market disruptions affected the availability of credit for the airline industry. While sources of financing available for aircraft deliveries improved during 2009, we provided limited financing to certain Boeing customers. To the extent capital market conditions continue to improve, we believe the overall aircraft financing market should improve as well and lessen the need for us to provide financing.
Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 2,400 western-built commercial jet aircraft (11.6% of current world fleet) were parked as of December 2009, including both in-production and out-of-production aircraft types. Over 36% of the parked aircraft are not expected to return to service. In December 2008 and 2007, 11.0% and 8.2% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of aircraft, particularly types with relatively few operators, are placed out of service.
Overview
During 2009, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.
Our portfolio at December 31, 2009 decreased to $5.7 billion from $6.0 billion at December 31, 2008. The following table summarizes the net change in our total portfolio for the years ended December 31:
| | | | | | | | |
| (Dollars in millions) | | 2009 | | | 2008 | |
New business volume | | $ | 766 | | | $ | 155 | |
Write-offs | | | (12 | ) | | | (11 | ) |
Recovery of write-offs | | | 1 | | | | – | |
Transfer of assets | | | 19 | | | | – | |
Asset impairment and other charges | | | (91 | ) | | | (35 | ) |
Asset run off and prepayments | | | (613 | ) | | | (329 | ) |
Asset dispositions | | | (220 | ) | | | (69 | ) |
Depreciation and amortization expense | | | (207 | ) | | | (220 | ) |
Net decrease in portfolio balance | | $ | (357 | ) | | $ | (509 | ) |
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At December 31, 2009 and 2008, we had $385 million and $685 million of assets that were held for sale or re-lease, of which $345 million and $305 million had either executed term sheets with deposits or firm
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contracts to be sold or placed on lease. In March 2009, Mexicana Group committed to lease 25 717 aircraft, including 13 of which were placed on lease and 12 that were held for sale or re-lease at December 31, 2009. Additionally, aircraft subject to leases with a carrying value of approximately $171 million are scheduled to be returned off lease during 2010. These aircraft are being remarketed or the leases are being extended and approximately $15 million of such aircraft had either executed term sheets with deposits or firm contracts at December 31, 2009.
Our net income was $57 million for 2009 compared with $120 million for 2008. For the years ended December 31, 2009 and 2008 our return on average assets calculated on Income from continuing operations was 1.2% and 1.5%.
Consolidated Results of Operations
Revenue
Revenue consists primarily of lease income from equipment under operating leases and interest from finance lease receivables and notes. Revenue was $660 million in 2009 compared with $703 million in 2008, a decrease of $43 million.
Finance lease income was $144 million in 2009, a decrease of $19 million compared with 2008 primarily due to residual value impairments and a decrease in the weighted average balance of finance leases as a result of normal run-off. Without the support from Boeing in the form of intercompany guarantees our Finance lease income would have been $10 million less than reported for 2009. For a discussion of our relationship with Boeing, see Item 8.Financial Statements and Supplementary Data, Note 2.
Interest income on notes receivable was $75 million in 2009, an increase of $19 million compared with 2008 primarily due to an increase in the notes receivable balance partially offset by a decrease in the weighted average annual effective interest rate to 7.8% from 8.2%.
Operating lease income was $404 million in 2009, a decrease of $53 million compared with 2008 primarily due to a decrease in the equipment under operating leases as a result of aircraft returns 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 $56 million less than reported, for the years ended December 31, 2009 and 2008. For a discussion of our relationship with Boeing, see Item 8.Financial Statements and Supplementary Data, Note 2.
Other income was $36 million in 2009, an increase of $12 million compared with 2008. The activity in 2009 consisted primarily of aircraft maintenance reserves taken to income from expired leases, income on increases in the fair value of warrants that we hold and income from a bankruptcy settlement. Other income in 2008 consisted primarily of short-term investment income.
Expenses
Expenses consist of interest expense, depreciation expense, provision for (recovery of) losses, operating expenses, asset impairment expense, and other expense. Expenses were $534 million in 2009 compared with $541 million in 2008, a decrease of $7 million.
Interest expense was $175 million in 2009, a decrease of $48 million compared with 2008 due to a decrease in the weighted average annual effective interest rate on all borrowings to 4.7% from 5.4% partially offset by an increase in the balance of debt outstanding as a result of our fourth quarter issuance of $1.0 billion principal amount of debt.
Depreciation expense was $207 million in 2009, a decrease of $13 million compared with 2008 due primarily to a lower depreciable balance of equipment under operating leases as a result of asset dispositions.
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The provision for losses was $23 million in 2009, compared with a recovery of $4 million in 2008. The increase in our allowance through a provision for losses was primarily due to the declines in aircraft collateral values exceeding the impact of run off of our finance leases and notes receivable.
Asset impairment expense was $75 million in 2009, an increase of $40 million compared with 2008 primarily due to reduced projected cash flows for certain aircraft.
Provision for income tax
Provision for income tax was $46 million in 2009, a decrease of $14 million compared with 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 $23 million for 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 with a gain of $18 million, net of tax, in 2008.
Liquidity and Capital Resources
Our cash and cash equivalents balance was $596 million at December 31, 2009, an increase from $305 million at December 31, 2008. The following is a summary of the change in our cash and cash equivalents for the years ended December 31:
| | | | | | | | |
| (Dollars in millions) | | 2009 | | | 2008 | |
Net cash provided by operating activities | | $ | 332 | | | $ | 549 | |
Net cash (used in) provided by investing activities | | | (414 | ) | | | 256 | |
Net cash provided by (used in) financing activities | | | 373 | | | | (963 | ) |
Net increase (decrease) in cash and cash equivalents | | $ | 291 | | | $ | (158 | ) |
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Operating activities
During 2009, net cash provided by operating activities included net income from operations of $57 million. We had net adjustments for non-cash items of $261 million, which primarily related to depreciation expense and asset impairment and other related charges. We also had a net increase in cash due to changes in assets and liabilities of $14 million.
During 2008, net cash provided by operating activities included net income from operations of $120 million. We had adjustments and non-cash items of $347 million, which primarily related to depreciation expense, deferred income taxes and asset impairment expense. We also had a net increase in cash due to changes in assets and liabilities of $82 million.
Investing activities
During 2009, net cash used in investing activities included the purchase of $500 million in short-term investments and $72 million related to the origination of leases, notes and other receivables net of repayments, partially offset by an increase in cash of $220 million from sale of aircraft.
During 2008, net cash provided by investing activities included a scheduled repayment of an investment in the amount of $135 million and principal payments of leases, notes and other receivables of $178 million. We also had a decrease in cash of $90 million related to the origination of notes.
Financing activities
In 2009, net cash provided by financing activities included $994 million of net proceeds from our debt issuances and $200 million of intercompany borrowings from Boeing. During 2009 and 2008, we made debt repayments of $728 million (including $200 million of intercompany debt) and $709 million and paid dividends (including return of capital) of $93 million and $254 million.
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Outstanding debt at December 31, 2009 and December 31, 2008 was $4.1 billion and $3.7 billion, of which $659 million (including $14 million for the effect of interest rate swaps) will be due during 2010. During 2009 and 2008, we had no commercial paper borrowings outstanding. Our leverage (ratio of debt to equity) at December 31, 2009 and 2008 was 5.8-to-1 and 5.0-to-1, respectively. The increase in leverage resulted from our issuance of debt in the fourth quarter of 2009, a significant portion of the proceeds of which we intend to use to repay our debt maturing in 2010. We expect our leverage to return to approximately 5.0-to-1 by the end of 2010.
We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. Financing commitments made by us and Boeing totaled $10.4 billion as of December 31, 2009. We anticipate that a significant portion of these commitments will not be exercised given alternative financing sources available to our customers. As a result of the challenging aircraft financing market, we financed a small number 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 or availability of funding sources to us will not be adversely impacted in the future.
On October 27, 2009, we issued notes totaling $1.0 billion under our $5.0 billion Securities and Exchange Commission (SEC) registration statement. During 2009, we also established under the registration statement a $750 million medium-term notes program and a $750 million retail notes program. We have not issued any securities under those programs. The availability of funding under these programs or otherwise pursuant to our SEC registration statement will depend on investor demand and market conditions.
We believe we have adequate borrowing capacity. We have $1.5 billion available 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.
For a discussion of our liquidity and debt programs, see Item 8.Financial Statements and Supplementary Data, Note 8.
Risks that could affect our sources of liquidity include among others,
| | – | | a downturn in the economy, |
| | – | | significant restructurings, defaults or bankruptcies by airlines, |
| | – | | disruptions to 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.
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 December 31, 2009, as well as at each quarter end during the year, we were in compliance with these covenants.
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 in addition to 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.
10
Our credit ratings are as follows:
| | | | | | |
| Debt | | Fitch | | Moody’s | | Standard & Poor’s |
Long-term | | A+ | | A2 | | A |
Outlook | | Negative | | Negative | | Stable |
Short-term | | F1 | | P-1 | | A-1 |
|
On April 30, 2009, Fitch Ratings affirmed Boeing’s and our A+ credit rating but changed its outlook from stable to negative. On July 29, 2009, Standard & Poor’s (S&P) lowered Boeing’s and our long-term ratings from A+ to A. On October 14, 2009, Moody’s affirmed Boeing’s and our A2 and P-1 ratings, but changed its outlook from neutral to negative.
Off-Balance Sheet Arrangements
We are a party to off-balance sheet arrangements as defined by the SEC, including guarantor obligations and variable interests in unconsolidated entities. For discussion of these arrangements, see Item 8.Financial Statements and Supplementary Data, Note 13.
Disclosures About Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations to make future payments, as well as an estimate of the timing in which we expect to satisfy these obligations at December 31, 2009:
Contractual Obligations
| | | | | | | | | | | | | | | |
| | | | | Payments due by period |
| (Dollars in millions) | | Total | | 2010 | | 2011- 2012 | | 2013- 2014 | | 2015- Thereafter |
Debt(1) | | $ | 3,989 | | $ | 636 | | $ | 1,656 | | $ | 1,157 | | $ | 540 |
Capital lease obligations(1) | | | 62 | | | 9 | | | 20 | | | 21 | | | 12 |
Interest(2) | | | 709 | | | 178 | | | 250 | | | 123 | | | 158 |
Purchase obligations(3) | | | 65 | | | 33 | | | 32 | | | – | | | – |
| | | $ | 4,825 | | $ | 856 | | $ | 1,958 | | $ | 1,301 | | $ | 710 |
|
| (1) | | Debt and Capital lease obligations reflect principal payments. |
| (2) | | Interest includes the effect of our interest rate swaps. We have assumed LIBOR forward rates at December 31, 2009 on floating rate debt. |
| (3) | | Purchase obligations due in 2010 includes $1 million which is covered by our guarantees from Boeing. |
We expect to meet our existing obligations through internally generated cash flows and from future borrowings.
The following table summarizes our commercial commitments outstanding at December 31, 2009:
Commercial Commitments
| | | | | | | | | | | | | | | |
| | | | | Total Amounts Committed/
Maximum Amount of Loss |
| (Dollars in millions) | | Total | | 2010 | | 2011- 2012 | | 2013- 2014 | | 2015- Thereafter |
Guarantor obligations(1) | | $ | 21 | | $ | 21 | | $ | – | | $ | – | | $ | – |
Financing commitments(2) | | | 328 | | | 120 | | | 163 | | | 45 | | | – |
| | | $ | 349 | | $ | 141 | | $ | 163 | | $ | 45 | | $ | – |
|
| (1) | | Primarily consists of residual value guarantees provided by us based on expected maturity date. For a discussion of our guarantor obligations, see Item 8.Financial Statements and Supplementary Data, Note 13. |
| (2) | | Represents our commitments to provide leasing and other financing based on estimated earliest potential funding dates. |
11
In addition to our financing commitments of $328 million at December 31, 2009, Boeing had unfunded financing commitments of $10.1 billion, 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 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. If there were requirements to fund all Boeing commitments, the timing in which these commitments may be funded (based on estimated earliest potential funding dates) is as follows:
| | | |
| | | Total |
2010 | | $ | 1,753 |
2011 | | | 657 |
2012 | | | 493 |
2013 | | | 1,178 |
2014 | | | 1,530 |
Thereafter | | | 4,470 |
| | | $ | 10,081 |
|
Critical Accounting Estimates
For the discussion on our accounting policies, see Item 8.Financial Statements and Supplementary Data, Note 1. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Each of these assumptions is subject to uncertainties and changes in those assumptions or judgments can affect our results of operations. The accounting policies below are those we believe are the most critical to the preparation of our financial statements and require significant judgment and estimation. Actual results may differ from these estimates.
Impairment Review for Equipment under Operating Leases and Held for Re-lease
We evaluate equipment under operating lease or assets held for re-lease for impairment at least annually, and also when events or changes in circumstances indicate that the expected undiscounted cash flow from the equipment may be less than the carrying value. We use various assumptions when determining the expected undiscounted cash flow including our intentions for how long we will hold equipment subject to operating lease before we sell the equipment, expected future lease rates, lease terms, residual value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the remaining economic life of the asset. When we determine that impairment is indicated for an asset, the amount of the asset impairment expense recorded is the excess of the carrying value less residual value guarantees, if applicable, over the fair value of the asset.
Had future lease rates on assets evaluated for impairment been 10% lower, we estimate that we would have incurred additional impairment expense of $8 million for the year ended December 31, 2009.
12
Allowance for Losses on Receivables
The allowance for losses on receivables is a valuation account used to provide for potential impairment of receivables in our portfolio. The balance represents an estimate of probable but unconfirmed losses in the receivables portfolio. The estimate is based on many qualitative and quantitative factors, including historical loss experience, collateral values, intercompany guarantees and results of individual credit and collectability reviews. The adequacy of the allowance is assessed quarterly.
Three primary factors influencing the level of our allowance are customer credit ratings, collateral values and default rates. If each customer’s credit rating were upgraded or downgraded by one major rating category at December 31, 2009, the allowance would have decreased by $34 million or increased by $74 million. If the collateral values were 10% higher or lower at December 31, 2009, the allowance would have decreased by $20 million or increased by $22 million. If the cumulative default rates used for each rating category were increased or decreased by 1%, the allowance would have increased by $1 million or decreased by $1 million.
Lease Residual Values
Equipment under operating leases and assets held for sale or re-lease are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the period that we project we will hold the asset for lease. Estimates used in determining residual values significantly impact the amount and timing of depreciation expense for equipment under operating leases and assets held for sale or re-lease. If the estimated residual values declined 10% at December 31, 2009, this would result in a future cumulative pre-tax earnings impact of approximately $180 million recognized over the remaining depreciable periods, of which approximately $45 million would be recognized in 2010.
Additional Disclosures Regarding Allowance for Losses on Receivables
The following table reconciles the changes in the allowance for losses on receivables for the years ended December 31, 2009 and 2008. Column 3 presents this information, calculated in accordance with our accounting policy (see Item 8.Financial Statements and Supplementary Data, Note 1), 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 year | | $ | 59 | | $ | 210 | | $ | 269 |
Provision for losses | | | 23 | | | 21 | | | 44 |
Write-offs | | | (12) | | | – | | | (12) |
Recovery of write-offs | | | 1 | | | – | | | 1 |
Allowance for losses on receivables at end of year | | $ | 71 | | $ | 231 | | $ | 302 |
|
Allowance as a percentage of total receivables | | | 2.5% | | | | | | 10.5% |
2008 | | | | | | | | | |
Allowance for losses on receivables at beginning of year | | $ | 74 | | $ | 121 | | $ | 195 |
Provision for (recovery of) losses | | | (4) | | | 88 | | | 84 |
Write-offs | | | (11) | | | 1 | | | (10) |
Allowance for losses on receivables at end of year | | $ | 59 | | $ | 210 | | $ | 269 |
|
Allowance as a percentage of total receivables | | | 2.1% | | | | | | 9.5% |
13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
A key function of a finance company is to manage market risk. One of our principal sources of market risk relates to interest rate changes. Exposure to this risk is managed by generally matching the profile of our liabilities with that of our assets in relation to amount and terms such as expected maturities and fixed versus floating interest rates. Interest rate derivatives are tools used to assist with this matching and are not used for speculative purposes or trading. Matching is a dynamic process affected by changes in our assets that may require adjusting our liabilities and/or derivatives.
In the fourth quarter of 2009, we elected to change from a fair value sensitivity disclosure to a future earnings sensitivity disclosure. The principal reason for the change is to provide greater alignment with the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows than our previous analysis.
In order to properly manage our sensitivity to changes in interest rates, we measure the potential impact of interest rate changes on our pre-tax earnings. In our analysis, we include balance sheet instruments whose income or interest expense would be impacted by changes in floating interest rates, which consists of Cash and cash equivalents, Short-term investments, Receivables, and Debt. We assume that the level of floating rate assets and debt (including the impact of derivatives) remain unchanged from year end 2009 and that they are all subject to immediate re-pricing. As of December 31, 2009, the impact to pre-tax earnings of a 100 basis point immediate and sustained rise in interest rates would be insignificant for the year ending December 31, 2010.
Using the same methodology as above, as of December 31, 2008, the impact of a 100 basis point immediate and sustained rise in interest rates would have resulted in a $3 million decrease to pre-tax earnings for the year ended December 31, 2009.
This analysis does not necessarily represent our current outlook of future market interest rate movements, nor does it consider any actions management could undertake in response to changes in interest rates. Accordingly, no assurance can be given that actual results would be consistent with our sensitivity analysis.
Additional risks include credit risk and lease residual risk, which are discussed in Item 7.Critical Accounting Estimates.
Item 8. Financial Statements and Supplementary Data
The following pages include our Consolidated Financial Statements as described in Item 15 (a)1 and (a)2 of Part IV herein.
14
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Boeing Capital Corporation
Renton, Washington
We have audited the accompanying consolidated balance sheets of Boeing Capital Corporation and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholder’s equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Boeing Capital Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 8, 2010
15
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | |
| | | December 31, | |
| (Dollars in millions, except par value) | | 2009 | | | 2008 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 596 | | | $ | 305 | |
Short-term investments | | | 500 | | | | – | |
Receivables: | | | | | | | | |
Finance leases | | | 2,024 | | | | 2,142 | |
Notes and other | | | 865 | | | | 697 | |
| | | | 2,889 | | | | 2,839 | |
Allowance for losses on receivables | | | (71 | ) | | | (59 | ) |
| | | | 2,818 | | | | 2,780 | |
Equipment under operating leases, net | | | 2,368 | | | | 2,492 | |
Investments | | | 24 | | | | 7 | |
Assets held for sale or re-lease, net | | | 385 | | | | 685 | |
Other assets | | | 83 | | | | 109 | |
| | | $ | 6,774 | | | $ | 6,378 | |
|
|
LIABILITIES AND SHAREHOLDER’S EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 83 | | | $ | 78 | |
Other liabilities | | | 380 | | | | 385 | |
Accounts with Boeing | | | 85 | | | | 11 | |
Deferred income taxes | | | 1,452 | | | | 1,520 | |
Debt | | | 4,075 | | | | 3,652 | |
| | | | 6,075 | | | | 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 | | | 696 | | | | 730 | |
Accumulated other comprehensive income (loss), net of tax | | | (2 | ) | | | (3 | ) |
Retained earnings | | | – | | | | – | |
| | | | 699 | | | | 732 | |
| | | $ | 6,774 | | | $ | 6,378 | |
|
|
See Notes to Consolidated Financial Statements.
16
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (Dollars in millions) | | 2009 | | | 2008 | | | 2007 | |
REVENUE | | | | | | | | | | | | |
Finance lease income | | $ | 144 | | | $ | 163 | | | $ | 179 | |
Interest income on notes receivable | | | 75 | | | | 56 | | | | 106 | |
Operating lease income | | | 404 | | | | 457 | | | | 470 | |
Investment income | | | 1 | | | | 3 | | | | 23 | |
Net gain on disposal of assets | | | – | | | | – | | | | 1 | |
Other income | | | 36 | | | | 24 | | | | 36 | |
| | | | 660 | | | | 703 | | | | 815 | |
EXPENSES | | | | | | | | | | | | |
Interest expense | | | 175 | | | | 223 | | | | 297 | |
Depreciation expense | | | 207 | | | | 220 | | | | 216 | |
Provision for (recovery of) losses | | | 23 | | | | (4 | ) | | | (26 | ) |
Operating expenses | | | 45 | | | | 50 | | | | 57 | |
Asset impairment expense | | | 75 | | | | 35 | | | | 33 | |
Other expense | | | 9 | | | | 17 | | | | 4 | |
| | | | 534 | | | | 541 | | | | 581 | |
Income from continuing operations before provision for income tax | | | 126 | | | | 162 | | | | 234 | |
Provision for income tax | | | 46 | | | | 60 | | | | 87 | |
Income from continuing operations | | | 80 | | | | 102 | | | | 147 | |
Net gain (loss) on disposal of discontinued operations, net of tax | | | (23 | ) | | | 18 | | | | 16 | |
Net income | | $ | 57 | | | $ | 120 | | | $ | 163 | |
|
|
See Notes to Consolidated Financial Statements.
17
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Shareholder’s Equity and Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions, except stated
value) | | Total | | | Common
Shares | | Additional
Paid-In
Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Retained
Earnings | | | Comprehensive
Income | |
Balance at December 31, 2006 | | $ | 1,113 | | | $ | 5 | | $ | 1,101 | | | $ | 7 | | | $ | – | | | $ | 192 | |
Non-cash capital contributions from Boeing | | | 5 | | | | – | | | 5 | | | | – | | | | – | | | | | |
Cash dividends to Boeing (including return of capital) | | | (408 | ) | | | – | | | (245 | ) | | | – | | | | (163 | ) | | | | |
Net income | | | 163 | | | | – | | | – | | | | – | | | | 163 | | | $ | 163 | |
Unrealized loss on derivative instruments, net of tax of $1 | | | (2 | ) | | | – | | | – | | | | (2 | ) | | | – | | | | (2 | ) |
Unrealized loss on investments, net of tax of $3 | | | (6 | ) | | | – | | | – | | | | (6 | ) | | | – | | | | (6 | ) |
Balance at December 31, 2007 | | $ | 865 | | | $ | 5 | | $ | 861 | | | $ | (1 | ) | | $ | – | | | $ | 155 | |
|
|
Non-cash capital contributions from Boeing | | | 3 | | | | – | | | 3 | | | | – | | | | – | | | | | |
Cash dividends to Boeing (including return of capital) | | | (254 | ) | | | – | | | (134 | ) | | | – | | | | (120 | ) | | | | |
Net income | | | 120 | | | | – | | | – | | | | – | | | | 120 | | | $ | 120 | |
Reclassification adjustment for gain realized on investments, net of tax of $1 | | | 1 | | | | – | | | – | | | | 1 | | | | – | | | | 1 | |
Unrealized loss on derivative instruments, net of tax of $1 | | | (1 | ) | | | | | | | | | | (1 | ) | | | | | | | (1 | ) |
Unrealized loss on investments, net of tax of $1 | | | (2 | ) | | | – | | | – | | | | (2 | ) | | | – | | | | (2 | ) |
Balance at December 31, 2008 | | $ | 732 | | | $ | 5 | | $ | 730 | | | $ | (3 | ) | | $ | – | | | $ | 118 | |
|
|
Non-cash capital contributions from Boeing | | | 2 | | | | – | | | 2 | | | | – | | | | – | | | | | |
Cash dividends to Boeing (including return of capital) | | | (93 | ) | | | – | | | (36 | ) | | | – | | | | (57 | ) | | | | |
Net income | | | 57 | | | | – | | | – | | | | – | | | | 57 | | | $ | 57 | |
Unrealized gain on derivative instruments, net of tax of $1 | | | 2 | | | | – | | | – | | | | 2 | | | | – | | | | 2 | |
Unrealized loss on investments, net of tax (1) | | | (1 | ) | | | – | | | – | | | | (1 | ) | | | – | | | | (1 | ) |
Balance at December 31, 2009 | | $ | 699 | | | $ | 5 | | $ | 696 | | | $ | (2 | ) | | $ | – | | | $ | 58 | |
|
|
| (1) | | At December 31, 2009, the tax amount related to the unrealized loss on investments was less than $1. |
We have authorized 100,000 shares of Series A preferred stock with no par value and a $5,000 stated value. No shares were issued and outstanding at December 31, 2009, 2008 and 2007.
See Notes to Consolidated Financial Statements.
18
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (Dollars in millions) | | 2009 | | | 2008 | | | 2007 | |
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 57 | | | $ | 120 | | | $ | 163 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Non-cash items: | | | | | | | | | | | | |
Depreciation and amortization expense | | | 198 | | | | 215 | | | | 208 | |
Net gain on disposal of assets | | | – | | | | – | | | | (1 | ) |
Provision for (recovery of) losses | | | 23 | | | | (4 | ) | | | (26 | ) |
Net gain on investments and derivative instruments | | | (8 | ) | | | (10 | ) | | | – | |
Asset impairment expense and other charges | | | 91 | | | | 35 | | | | 33 | |
Share-based plans expense | | | 2 | | | | 3 | | | | 5 | |
Other non-cash adjustments related to discontinued operations, net of tax | | | 23 | | | | (18 | ) | | | (16 | ) |
Change in deferred income taxes | | | (68 | ) | | | 126 | | | | 44 | |
Change in assets and liabilities: | | | | | | | | | | | | |
Other assets | | | (16 | ) | | | 32 | | | | 5 | |
Accrued interest and rents | | | 3 | | | | 16 | | | | 17 | |
Accounts payable and accrued expenses | | | 5 | | | | (17 | ) | | | (27 | ) |
Other liabilities | | | (57 | ) | | | 73 | | | | 17 | |
Accounts with Boeing | | | 79 | | | | (22 | ) | | | 34 | |
Net cash provided by operating activities | | | 332 | | | | 549 | | | | 456 | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Purchase of investment | | | (500 | ) | | | (1 | ) | | | – | |
Proceeds from available-for-sale investments | | | 1 | | | | 136 | | | | 9 | |
Purchase of equipment for operating leases | | | – | | | | (10 | ) | | | – | |
Payment for capitalizable costs in process | | | (63 | ) | | | (26 | ) | | | (46 | ) |
Proceeds from disposition of equipment and receivables | | | 220 | | | | 69 | | | | 105 | |
Principal payments of leases, notes and other receivables | | | 608 | | | | 178 | | | | 1,087 | |
Origination of leases, notes and other receivables | | | (680 | ) | | | (90 | ) | | | (20 | ) |
Net cash (used in) provided by investing activities | | | (414 | ) | | | 256 | | | | 1,135 | |
FINANCING ACTIVITIES | | | | | | | | | | | | |
Proceeds from issuance of debt | | | 994 | | | | – | | | | – | |
Proceeds from intercompany borrowing | | | 200 | | | | – | | | | – | |
Repayment of debt (including intercompany) | | | (728 | ) | | | (709 | ) | | | (1,309 | ) |
Payment of dividends (including return of capital) | | | (93 | ) | | | (254 | ) | | | (408 | ) |
Net cash provided by (used in) financing activities | | | 373 | | | | (963 | ) | | | (1,717 | ) |
Net increase (decrease) in cash and cash equivalents | | | 291 | | | | (158 | ) | | | (126 | ) |
Cash and cash equivalents at beginning of year | | | 305 | | | | 463 | | | | 589 | |
Cash and cash equivalents at end of year | | $ | 596 | | | $ | 305 | | | $ | 463 | |
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | | | |
Net transfer (from) to assets held for sale or re-lease | | $ | (68 | ) | | $ | 629 | | | $ | (161 | ) |
Net transfer to (from) notes receivable | | $ | 9 | | | $ | – | | | $ | (1 | ) |
Net transfer to (from) equipment under operating leases | | $ | 150 | | | $ | (553 | ) | | $ | 213 | |
Net transfer from finance leases | | $ | (6 | ) | | $ | (20 | ) | | $ | (99 | ) |
Transfer from other assets | | $ | (98 | ) | | $ | (56 | ) | | $ | (5 | ) |
Transfer (from) to accounts with Boeing | | $ | (6 | ) | | $ | – | | | $ | 53 | |
Transfer to investments | | $ | 19 | | | $ | – | | | $ | – | |
Decrease/(increase) in debt due to fair value hedge derivatives | | $ | 34 | | | $ | (40 | ) | | $ | (46 | ) |
|
|
See Notes to Consolidated Financial Statements.
19
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
Note 1 –Summary of Significant Accounting Policies
Organization Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our”, “BCC” or the “Company”) is a wholly owned subsidiary of The Boeing Company (Boeing). The Company was incorporated in Delaware in 1968. In the commercial aircraft market, we facilitate, arrange, structure and provide selective financing solutions for Boeing’s Commercial Airplanes customers. In the space and defense markets, we primarily arrange and structure financing solutions for Boeing’s Defense, Space & Security (formerly Integrated Defense Systems) customers.
Principles of ConsolidationThe accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these notes to the Consolidated Financial Statements.
Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments, such as time deposits and money market instruments, which have original maturities of less than three months.
Short-Term Investments Short-term investments consist of liquid investments such as time deposits, which have original maturities greater than three months, but less than one year.
Portfolio Our portfolio consists of direct finance leases, leveraged leases, notes and other receivables, equipment under operating leases (net of accumulated depreciation), investments and assets held for sale or re-lease (net of accumulated depreciation).
Direct Finance Leases At lease inception, we record an asset (net investment) representing the aggregate future minimum lease payments, estimated residual value of the leased equipment, and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are periodically reviewed, represent the estimated amount we expect to receive at lease termination from the disposition of the leased equipment. Actual residual values realized could differ from these estimates. Declines in estimated residual value that are deemed other than temporary are recognized in the period in which the decline occurs as a reduction to Finance lease income.
Leveraged Leases Direct finance leases that are financed by non-recourse borrowings and meet certain criteria are classified as leveraged leases. For leveraged leases, aggregate rental receivables are reduced by the related non-recourse debt service obligation including interest (net rental receivables). The difference of the net rental receivables and the cost of the asset less estimated residual value at the end of the lease term is recorded as unearned income. Unearned income is recognized over the life of the lease at a constant rate of return applied to any positive net investment, which includes the effect of deferred income taxes.
Notes and Other Receivables Notes receivable are recorded net of any unamortized deferred fees and incremental direct costs. Interest income and amortization of any fees are recorded ratably over the related term of the note.
Equipment Under Operating Leases, Net of Accumulated Depreciation Equipment under operating leases is recorded at cost and depreciated over the period that we project that we will hold the asset to an estimated residual value, using the straight-line method. We periodically review our estimates of residual value and recognize forecasted changes by prospectively adjusting depreciation expense.
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Revenue on the leased equipment is recorded using the straight-line method over the term of the lease. Operating lease income may include amounts due to intercompany guarantees and subsidies, including amounts associated with equipment classified as assets held for sale or re-lease.
Investments Available-for-sale debt securities in the form of Enhanced Equipment Trust Certificates (EETCs) are recorded at their fair values, with unrealized gains and losses reported as part of Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The fair value of non-publicly traded securities, in the form of EETCs, is based on discounted cash flows at market yield and estimated trading prices for comparable debt securities. Debt securities are assessed for impairment quarterly. To determine if an impairment is other-than-temporary we consider the duration and severity of the loss position, the strength of the underlying collateral, the term to maturity, credit reviews and analyses of the counterparties. For investments that are deemed other-than-temporarily impaired, losses are recorded as asset impairment expense and payments received on these investments are recorded using the cost recovery method. Available-for-sale equity securities are recorded at fair value using quoted prices in active markets for identical assets. Unrealized gains (losses) are recorded in Accumulated other comprehensive income (loss).
Assets Held for Sale or Re-lease, Net of Accumulated Depreciation When aircraft collateral related to a finance lease or note receivable is repossessed, returned in satisfaction of the receivable or returned at the end of the finance lease and when aircraft are made available for sale, the asset is carried at the lower of cost or estimated fair value less costs to sell. We calculate a median collateral value from multiple third party aircraft value publications based on the type and age of the aircraft to estimate the fair value of aircraft. Under certain circumstances, we adjust values based on the attributes of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by outside publications, or based on the expected net sales price for the aircraft. Aircraft assets held for re-lease are carried at cost less accumulated depreciation and depreciated over the remaining period that we project that we will hold the asset to an estimated residual value, on a straight-line basis.
Impairment Review for Equipment Under Operating Leases and Assets Held for Re-lease We evaluate equipment under operating lease or assets held for re-lease for impairment at least annually, and also when events or changes in circumstances indicate that the expected undiscounted cash flow from the equipment may be less than the carrying value. We use various assumptions when determining the expected undiscounted cash flow including our intentions for how long we will hold equipment subject to operating lease before we sell the equipment, expected future lease rates, lease terms, residual value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs, and the remaining economic life of the asset.
When we determine that impairment is indicated for an asset, the amount of the asset impairment expense recorded is the excess of the carrying value less asset value guarantees, if applicable, over the fair value of the asset.
Allowance for Losses on Receivables We record the potential impairment of receivables in our portfolio in a valuation account, the balance of which is an accounting estimate of probable but unconfirmed losses in the receivables portfolio. The allowance for losses on receivables relates to two components of receivables: (a) specifically identified receivables that are evaluated individually for impairment and (b) all other receivables.
We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectability include, but are not limited to, a customer’s extended delinquency, requests for restructuring and filings for bankruptcy. We determine a specific impairment allowance based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral, taking into account Boeing and other guarantees.
We review the adequacy of the allowance attributable to the remaining receivables (after excluding receivables subject to a specific impairment allowance) by assessing both the collateral exposure and the
21
applicable cumulative default rate. Collateral exposure for a particular receivable is the excess of the carrying value of the receivable over the fair value of the related collateral taking into account Boeing and other guarantees. A receivable with an estimated fair value in excess of the carrying value is considered to have no collateral exposure. The applicable cumulative default rate is determined using two components: customer credit ratings and weighted average remaining contract term. Credit ratings are determined for each customer in the portfolio. Those ratings are updated based upon public information and information obtained directly from our customers.
We have entered into agreements with certain customers that entitle us to look beyond the specific collateral underlying the receivable for purposes of determining the collateral exposure as described above. Should the proceeds from the sale of the underlying collateral asset resulting from a default condition be insufficient to cover the carrying value of our receivable (creating a shortfall condition), these agreements would, for example, permit us to take the actions necessary to sell or retain certain other assets in which the customer has an equity interest and use the proceeds to cover the shortfall.
Each quarter, we review customer credit ratings, published historical credit default rates for different rating categories, Boeing and other guarantees (if applicable), multiple third party aircraft value publications, and the general state of the economy and airline industry as a basis to validate the reasonableness of the allowance for losses on receivables. There can be no assurance that actual results will not differ from estimates or that the consideration of these factors in the future will not result in an increase or decrease to the allowance for losses on receivables.
Non-accrual Receivables Income recognition on an accrual basis is generally suspended for leases and notes and other receivables at the date when a full recovery of income and principal, including the effect of intercompany guarantees, become doubtful. We also typically place accounts greater than 90 days past due on non-accrual status. Income recognition on accrual basis is resumed when leases or notes and other receivables become contractually current and performance is demonstrated to be resumed.
Derivative Financial Instruments All derivative instruments are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. We record our interest rate swaps at fair value based on a discounted cash flow analysis. For derivatives designated as hedges of the exposure to changes in fair value of the recognized asset or liability or a firm commitment (referred to as fair value hedges), the gain or loss is recognized in earnings in the period of change together with an offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of this accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For our cash flow hedges, all of which are related to debt, the effective portion of the derivative’s gain or loss is initially reported in shareholder’s equity (as a component of Accumulated other comprehensive income (loss)) and is subsequently reclassified into income, as an increase or decrease to interest expense, in the same period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss is reported in earnings immediately. We also hold certain instruments for economic purposes that do not qualify for hedge accounting treatment. For these derivative instruments, the changes in their fair value are recorded in Other income.
Income Tax Our operations are included in the consolidated federal income tax return of Boeing. Under an agreement with Boeing, we pay or receive our allocated share of income taxes or credits.
Federal, state and foreign income taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes. The current provision for state income tax is based on an agreed upon rate and paid to Boeing. The state income tax deferred asset or liability is carried on Boeing’s Consolidated Financial Statements.
The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We
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record income tax related interest expense and interest income in the Provision for income tax in our Consolidated Statements of Operations. Tax-related interest and penalties, if any, are recorded as a component of income tax expense.
Note 2 –Relationship and Transactions with Boeing
As a 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.
There can be no assurances that these intercompany arrangements will not be terminated or modified by us or Boeing.
Support Agreement
We have a support agreement dated December 23, 2003 with Boeing with these principal features:
| | – | | Boeing will maintain 51% or greater ownership of us, |
| | – | | Boeing will make contributions to us if our fixed-charge coverage ratio falls below 1.05-to-1 on a four-quarter rolling basis, and |
| | – | | Boeing will make contributions to us, if needed, to maintain our tangible net worth at a level of at least $50. |
The support agreement may not be modified or terminated unless (a) the holders of at least two-thirds of the aggregate principal amount of our debt then outstanding consent or (b) the modification or termination does not adversely affect the credit ratings of our debt (as determined by each of Moody’s, Standard & Poor’s, and Fitch that rates our debt at the time of the modification or termination). “Debt” for purposes of the support agreement means all present or future indebtedness of BCC for borrowed money, evidenced by bonds, debentures, notes or similar instruments, excluding intercompany indebtedness. The support agreement is not a guarantee of any of our indebtedness, and is not directly enforceable against Boeing by third parties. The holders of more than 50% of the aggregate principal amount of all our debt have the right to demand that we enforce our rights with respect to the obligations of Boeing listed above.
Intercompany Credit Arrangements
The 364-day credit facility between Boeing and its banks was renewed on November 13, 2009, and Boeing’s five-year credit facility expiring in 2012 remains outstanding. Boeing has allocated $500 of the $1,525 364-day line and $1,000 of the $2,000 five-year revolving credit line expiring in 2012 exclusively to BCC. Both the 364-day and 5-year credit facilities have a one-year term out option which allows the borrower to extend the maturity of any borrowings one year beyond the aforementioned expiration dates. At December 31, 2009 and 2008, we had no amounts outstanding under these credit facilities. Any borrowings by us under these agreements will be guaranteed by Boeing.
We have an intercompany borrowing and lending arrangement with Boeing. During the first quarter of 2009, we loaned Boeing $150, which was repaid in the same quarter. During the second quarter of 2009, we borrowed from Boeing $200, which we repaid during the last half of the year. There were no amounts outstanding at December 31, 2009 and 2008 under this arrangement. For the year ended December 31, 2009, total interest paid to and received from Boeing was insignificant. For the year ended December 31, 2007, total interest paid to Boeing was $3.
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Federal Income Tax
Our operations are included in the consolidated federal income tax return of Boeing. Our tax sharing agreement with Boeing provides that so long as consolidated federal tax returns are filed, Boeing will pay us, or we will pay Boeing, as appropriate, an amount equal to the BCC’s taxable income or loss times the statutory tax rate applicable to Boeing. Under this agreement an intercompany payable/receivable is recorded when federal income taxes are due or federal income tax benefits are generated.
Intercompany Transactions
We are the beneficiary of certain intercompany guarantees and other subsidies from Boeing in respect of specific financing transactions we undertake.
Intercompany guarantees primarily relate to residual value guarantees, first loss deficiency guarantees and rental loss guarantees. Residual value guarantees cover a specified asset value at the end of a lease agreement in the event of a decline in market value of the financed aircraft. First loss deficiency guarantees cover a specified portion of our losses on aircraft that we finance in the event of a loss upon disposition of the aircraft following a default by the lessee. Rental loss guarantees are full or partial guarantees covering us against the lessee’s failure to pay rent under the lease agreement or our inability to re-lease these aircraft at or above a specified rent level.
Due to intercompany guarantees from Boeing, our accounting classification of certain third party leases may differ from the accounting classification in Boeing’s Consolidated Financial Statements. As a result of these intercompany guarantees, the required balance for the allowance for losses on receivables and the required provision for losses we recognized have been mitigated. Receipts under Boeing guarantees would be net of realization of underlying residual values, partial rent receipts, re-lease rental receipts or other mitigating value received. We also have subsidy agreements which typically cover us for the difference between the contractual rate and the rate required by us.
At December 31, 2009, we were the beneficiary under $1,929 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,550.
Intercompany guarantee amounts by aircraft type are summarized as follows at December 31:
| | | | | | | | | | | | |
| | | 2009 | | 2008 |
| | | Guarantee
Amount | | Carrying
Value | | Guarantee
Amount | | Carrying
Value |
717 (out of production) | | $ | 1,637 | | $ | 2,179 | | $ | 1,693 | | $ | 2,264 |
Out of production single-aisle aircraft | | | 167 | | | 167 | | | 182 | | | 182 |
Out of production twin-aisle aircraft | | | 78 | | | 113 | | | 182 | | | 244 |
Other, including other Boeing aircraft | | | 47 | | | 91 | | | 51 | | | 94 |
| | | $ | 1,929 | | $ | 2,550 | | $ | 2,108 | | $ | 2,784 |
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At December 31, 2009 and 2008, Accounts with Boeing included $69 and $85 for deferred revenue associated with guarantee and subsidy settlements and terminations.
We recorded the following activity under the intercompany guarantee and subsidy agreements for the years ended December 31:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Applied to income | | $ | 56 | | | $ | 60 | | | $ | 63 | |
Net change in finance lease receivables | | | – | | | | – | | | | 53 | |
Net change in deferred revenue | | | (16 | ) | | | (18 | ) | | | (38 | ) |
Net cash received under intercompany guarantee and subsidy agreements | | $ | 40 | | | $ | 42 | | | $ | 78 | |
|
|
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Additionally, under the terms of the intercompany guarantee agreements, for the years ended December 31, 2009, 2008 and 2007, Boeing recorded charges of $12, $20, and $155, respectively, related to asset impairment and accrued expenses and $21, $88 and $(34) respectively, related to provision for (recovery of) losses.
For the years ended December 31, 2009, 2008 and 2007, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies of $20, $30 and $36, respectively. During the fourth quarter of 2009 we sold one C-40 aircraft at its carrying value to Boeing at its lease expiration for $28. During the third quarter of 2008 we sold two C-40 aircraft at their carrying value to Boeing at their lease expiration for $48. At December 31, 2009 and 2008, the carrying value of our C-40 aircraft under a head lease structure with Boeing which has a concurrent sublease with the U.S. Government was $30 and $69.
For the years ended December 31, 2009, 2008 and 2007, we recorded new business volume of $618, $50 and $21, respectively, related to Boeing aircraft, equipment or services we purchased or financed.
Other Intercompany Transactions
Accounts with Boeing consisted of the following at December 31:
| | | | | | |
| | | 2009 | | 2008 |
Federal income tax payable | | $ | 27 | | $ | 7 |
Other payable | | | 58 | | | 4 |
| | | $ | 85 | | $ | 11 |
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For the years ended December 31, 2009 and 2008, we paid dividends (including return of capital) totaling $93 and $254.
We also receive support services from Boeing. Eligible employees are members of Boeing’s defined benefit pension plans, insurance plans, savings plan and executive compensation programs. Boeing generally charges us with the actual costs of these plans attributable to our employees and these expenses are reflected in Operating expenses. For each of the years ended December 31, 2009, 2008 and 2007, the charge for these services was $11, $12, and $11.
Note 3– Investment in Receivables
The investment in receivables consisted of the following at December 31:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Investment in finance leases: | | | | | | | | |
Direct finance leases: | | | | | | | | |
Minimum lease payments | | $ | 2,391 | | | $ | 2,635 | |
Estimated residual value | | | 645 | | | | 679 | |
Unearned income and deferred net incremental direct costs | | | (1,169 | ) | | | (1,345 | ) |
Leveraged leases (1): | | | | | | | | |
Minimum lease payments | | | 756 | | | | 815 | |
Less principal and interest payable on non-recourse debt | | | (502 | ) | | | (547 | ) |
Estimated residual value | | | 32 | | | | 56 | |
Unearned income and deferred net incremental direct costs | | | (129 | ) | | | (151 | ) |
Notes and other: | | | | | | | | |
Principal | | | 868 | | | | 703 | |
Accrued interest | | | 5 | | | | 5 | |
Unamortized deferred fees and net incremental direct costs | | | (8 | ) | | | (11 | ) |
Total investment in finance leases and notes and other | | | 2,889 | | | | 2,839 | |
Less allowance for losses on receivables | | | (71 | ) | | | (59 | ) |
| | | $ | 2,818 | | | $ | 2,780 | |
|
|
| (1) | | For the years ended December 31, 2009 and 2008, net investment in leveraged leases, less deferred income taxes of $238 and $253 was $(81) and $(80). |
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Scheduled minimum lease payments on finance leases and scheduled principal payments on Notes and other receivables are as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | |
| | | 2010 | | 2011 | | 2012 | �� | 2013 | | 2014 | | Thereafter |
Finance leases (1) | | $ | 234 | | $ | 226 | | $ | 284 | | $ | 233 | | $ | 225 | | $ | 1,443 |
Notes and other | | $ | 240 | | $ | 141 | | $ | 124 | | $ | 90 | | $ | 53 | | $ | 220 |
| (1) | | Includes both direct finance leases and leveraged leases (less principal and interest payable on non-recourse debt). |
Note 4– Allowance for Losses on Receivables
The following table reconciles the activity in the allowance for losses on receivables at December 31:
| | | | | | | | | |
| | | 2009 | | 2008 | | 2007 |
Allowance for losses on receivables at beginning of year | | $ | 59 | | $ | 74 | | $ | 102 |
Provision for (recovery of) losses | | | 23 | | | (4) | | | (26) |
Write-offs | | | (12) | | | (11) | | | (8) |
Recovery of write-offs | | | 1 | | | – | | | 6 |
Allowance for losses on receivables at end of year | | $ | 71 | | $ | 59 | | $ | 74 |
|
Allowance as a percentage of total receivables | | | 2.5% | | | 2.1% | | | 2.5% |
The carrying value of impaired receivables consisted of the following at December 31:
| | | | | | |
| | | 2009 | | 2008 |
Impaired receivables with specific impairment allowance | | $ | – | | $ | 16 |
Impaired receivables with no specific allowance | | | 145 | | | 163 |
Carrying value of impaired receivables | | $ | 145 | | $ | 179 |
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At December 31, 2009, we had no allowance for losses on impaired receivables. At December 31, 2008, allowance for losses on impaired receivables was $8.
Our average recorded investment in impaired receivables, calculated on a quarterly weighted average, was $162, $197 and $589 in 2009, 2008 and 2007, respectively. In 2009, 2008 and 2007, we recognized income of $9, $14 and $50, respectively, on these impaired receivables during the periods in which they were considered impaired, of which $9, $14 and $48, respectively, we received in cash.
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 at December 31:
| | | | | | |
| | | 2009 | | 2008 |
Assets placed on non-accrual status: | | | | | | |
Receivables | | $ | – | | $ | 5 |
Equipment under operating leases, net(1) | | | 86 | | | 57 |
| | | | 86 | | | 62 |
Assets held for sale or re-lease, net(1) | | | 40 | | | 19 |
| | | $ | 126 | | $ | 81 |
|
Percent of non-performing receivables to total receivables | | | –% | | | 0.2% |
Percent of total non-performing assets to total portfolio | | | 2.2% | | | 1.3% |
| (1) | | At December 31, 2009 and 2008, equipment under operating leases of $295 and $205 and assets held for sale or re-lease of $271 and $361 are not included in non-performing assets due to intercompany guarantees provided by Boeing. |
At December 31, 2009, we had no accrued income on receivables with amounts past due greater than 90 days.
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Note 5 –Equipment Under Operating Leases, Net of Accumulated Depreciation
Equipment under operating leases, net of accumulated depreciation, consisted of the following at December 31:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Cost | | $ | 3,297 | | | $ | 3,416 | |
Accumulated depreciation | | | (929 | ) | | | (924 | ) |
| | | $ | 2,368 | | | $ | 2,492 | |
|
|
Scheduled minimum lease payments to be received under the non-cancelable portion of operating leases are as follows at December 31, 2009:
| | | | | | | | | | | | | | | | | | |
| | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | Thereafter |
Operating leases | | $ | 339 | | $ | 287 | | $ | 228 | | $ | 178 | | $ | 129 | | $ | 332 |
Note 6 –Investments
Our investments in available-for-sale debt and marketable equity securities consisted of the following:
| | | | | | | | | | | | | |
| December 31, 2009 | | Amortized
Cost | | Gross
Unrealized
Gain | | Gross
Unrealized
Loss | | | Fair
Value |
Available-for-sale investments: | | | | | | | | | | | | | |
Marketable equity securities (1) | | $ | 20 | | $ | 1 | | $ | (4 | ) | | $ | 17 |
EETC(2) | | | 6 | | | – | | | (1 | ) | | | 5 |
Total | | $ | 26 | | $ | 1 | | $ | (5 | ) | | $ | 22 |
|
December 31, 2008 | | | | | | | | | | | | | |
Available-for-sale investments: | | | | | | | | | | | | | |
EETC(2) | | $ | 8 | | $ | – | | $ | (3 | ) | | $ | 5 |
Total | | $ | 8 | | $ | – | | $ | (3 | ) | | $ | 5 |
|
| (1) | | During 2009 we exchanged warrants of $19 held in Other Assets for common stock. |
| (2) | | At December 31, 2009 and 2008, the EETC has been in a continuous unrealized loss position for more than 12 months. |
We believe that the unrealized losses related to our debt investment and equity securities are not other-than-temporary. Both the debt and equity securities in an unrealized loss position relate to investments in the airline industry. The unrealized loss related to our debt investment is driven by investors’ current required returns being higher than the coupon rate. The unrealized loss on our equity securities is due to the decrease in share price. We do not have a foreseeable need to liquidate these securities and anticipate recovering the full cost of these securities either as market conditions improve, or as the security matures.
The contractual maturities of available-for-sale debt securities at December 31, 2009, were as follows:
| | | | | | |
| | | Cost | | Fair Value |
Due in one year or less | | $ | 1 | | $ | 1 |
Due from one to five years | | | 4 | | | 3 |
Due from five to ten years | | | 1 | | | 1 |
Total | | $ | 6 | | $ | 5 |
|
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Note 7 –Income Tax
The components of the provision (benefit) for tax on income were as follows at December 31:
| | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 |
Current: | | | | | | | | | | | |
Federal | | $ | 110 | | | $ | (52 | ) | | $ | 36 |
State | | | 4 | | | | 5 | | | | 7 |
| | | | 114 | | | | (47 | ) | | | 43 |
Deferred: | | | | | | | | | | | |
Federal | | | (68 | ) | | | 107 | | | | 44 |
| | | $ | 46 | | | $ | 60 | | | $ | 87 |
|
The tax impact of temporary differences constitute our net deferred income tax liability. The components of the net deferred income tax liability consisted of the following at December 31:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Deferred tax assets: | | | | | | | | |
Allowance for losses on receivables | | $ | 142 | | | $ | 139 | |
Other | | | 33 | | | | 22 | |
| | | | 175 | | | | 161 | |
Deferred tax liabilities: | | | | | | | | |
Leased assets | | | (1,627 | ) | | | (1,682 | ) |
Other | | | (1 | ) | | | (1 | ) |
| | | | (1,628 | ) | | | (1,683 | ) |
| | | | (1,453 | ) | | | (1,522 | ) |
Deferred tax on accumulated other comprehensive loss | | | 1 | | | | 2 | |
Net deferred tax liability | | $ | (1,452 | ) | | $ | (1,520 | ) |
|
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Income tax computed at the United States federal income tax rate and the provision for tax on income differ as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Tax computed at federal statutory rate | | $ | 44 | | 35.0 | % | | $ | 57 | | 35.0 | % | | $ | 82 | | 35.0 | % |
State income taxes, net of federal tax benefit | | | 2 | | 1.5 | | | | 3 | | 2.0 | | | | 5 | | 2.2 | |
| | | $ | 46 | | 36.5 | % | | $ | 60 | | 37.0 | % | | $ | 87 | | 37.2 | % |
|
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We, as part of the consolidated Boeing organization, have completed Internal Revenue Service (IRS) examinations through 2003. The years 2004-2006 are currently being examined by the IRS. Boeing has filed appeals with the IRS for the 1998-2001 and 2002-2003 audit periods.
Pursuant to our tax sharing agreement with Boeing, we made payments with respect to tax obligations to Boeing of $83 in 2009, and we received payments with respect to tax benefits from Boeing of $17 and $52 in 2008 and 2007, respectively. In 2009, we did not receive or make income tax payments from or to other federal, state and foreign tax agencies. We received income tax payments of $1 from other federal, state and foreign tax agencies in 2008 and made income tax payments of $1 to other federal, state and foreign tax agencies in 2007.
As of December 31, 2009 and 2008, we did not have any unrecognized tax benefits.
For the years ended December 31, 2009, 2008 and 2007, we did not incur any income tax related interest income, interest expense or penalties.
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Note 8 –Debt and Credit Agreements
The carrying value of debt, including the net effect of interest rate swap revaluation adjustments and unamortized deferred debt costs, consisted of the following at December 31:
| | | | | | |
| (Interest rates are the contractual rates at December 31, 2009) | | 2009 | | 2008 |
3.25% – 7.58% fixed rate notes due through 2019 | | $ | 3,927 | | $ | 3,396 |
1.48% – floating rate notes due through 2023 | | | 25 | | | 120 |
1.33% – 5.79% non-recourse notes due through 2013 | | | 61 | | | 66 |
0.87% – capital lease obligations due through 2015 | | | 62 | | | 70 |
| | | $ | 4,075 | | $ | 3,652 |
|
At December 31, 2009 and 2008, we had interest rate swaps, which effectively convert debt of $1,475 and $725 from fixed rate to floating rate. At December 31, 2008 we had interest rate swaps, which effectively converted $92 from floating rate to fixed rate.
On October 30, 2008 we filed a public shelf registration for up to $5,000 of debt securities with the Securities and Exchange Commission (SEC) that became effective on November 12, 2008. On October 27, 2009, we issued notes totaling $1,000, which included $500 bearing an interest rate of 3.25% due October 27, 2014 and $500 bearing an interest rate of 4.70% due October 27, 2019. The net proceeds after deducting the discount, underwriting fees and issuance costs were $994. The remaining $4,000 remains available for potential debt issuance. The availability of funding under the shelf registration statement is dependent on investor demand and market conditions.
We have a $1,500 Commercial Paper (CP) program that serves as a potential source of short-term liquidity subject to market conditions. Throughout 2009 and at December 31, 2009, there were no amounts outstanding under the CP program.
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 December 31, 2009, as well as at each quarter end during the year, we were in compliance with these covenants.
At December 31, 2009, $123 of our debt (non-recourse notes and capital lease obligations) was collateralized by portfolio assets and underlying equipment totaling $209.
Maturities of principal payments for debt and capital lease obligations are as follows at December 31:
| | | | | | |
| | | Debt | | Capital Lease
Obligations |
2010 | | $ | 636 | | $ | 9 |
2011 | | | 788 | | | 10 |
2012 | | | 868 | | | 10 |
2013 | | | 642 | | | 10 |
2014 | | | 515 | | | 11 |
Thereafter | | | 540 | | | 12 |
| | | $ | 3,989 | | $ | 62 |
|
In 2009, 2008 and 2007, interest payments were $188, $231 and $319, respectively.
Note 9 –Derivative Financial Instruments
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. Our contracts entered into as of December 31, 2009 do not require collateral or other security from either party.
29
Fair Value Hedges
Interest rate swaps, under which we agree to pay variable rates of interest, are designated as fair value hedges of fixed-rate debt. For our fair value hedges that qualify for hedge accounting treatment we use the short-cut method and thus there are no gains or losses recognized due to hedge ineffectiveness. Unrealized gains or losses from changes in the value of fair value hedges are offset by changes in the fair value of the hedged underlying debt.
For the years ended December 31, 2009, 2008 and 2007, we recorded $12, $9 and $5, respectively, of income related to the amortized basis adjustment of certain terminated swaps as a reduction of Interest expense.
Cash Flow Hedges
Interest rate swap contracts under which we agree to pay a fixed rate of interest are designated as cash flow hedges of variable-rate debt obligations.
For our cash flow hedges that qualify for hedge accounting treatment we use the short-cut method, and thus there are no gains or losses recognized due to hedge ineffectiveness. We record unrealized gains or losses from changes in the fair value of cash flow hedges in Accumulated other comprehensive income (loss).
Other Derivative Instruments
At times, we may hold certain derivatives that do not receive hedge accounting treatment. These may include interest rate derivatives as well as warrants. For the years ended December 31, 2009, and 2008 we recognized gains of $9 and $1 in Other Income related to warrants to purchase common stock of an unaffiliated third party. At December 31, 2009 we no longer held these warrants. For the year ended December 31, 2007, we did not record any gains or losses on derivatives that did not qualify for hedge accounting treatment.
The fair values of derivative instruments included in the Consolidated Balance Sheet were as follows:
| | | | | | | |
| | | December 31, 2009 | |
| | | Other Assets | | Other Liabilities | |
Derivatives designated as hedging instruments – Interest rate swaps | | $ | 32 | | $ | (17 | ) |
|
|
The notional amount of our interest rate swaps is disclosed in Note 8 – Debt.
The following table summarizes the effect of our derivative instruments on Accumulated Other Comprehensive Income (AOCI) and the Statement of Operations for the year ended December 31:
| | | | | | | | | |
| | | 2009 | |
| | | Gain Recognized
in AOCI | | Loss Reclassified from
AOCI into Income | |
| | | | | Location | | Amount | |
Derivatives in cash flow hedging relationships Interest rate swaps (effective portion) | | $ | 3 | | Interest Expense | | $ | (2 | ) |
|
|
Note 10 –Maintenance Payment Liability
Cash collected from lessees under the terms of the lease agreements for future maintenance of aircraft are recorded as maintenance payment liabilities. Maintenance payment liabilities are attributable to specific aircraft leases. Upon occurrence of a qualified maintenance event, the lessee requests reimbursement and upon disbursement of the funds, the liability is relieved. The balance, which is included in Other liabilities, was $191 and $220 as of December 31, 2009 and 2008.
30
To the extent that no maintenance obligation relating to an aircraft remains, the balance is recognized as Other income. For the years ended December 31, 2009, 2008 and 2007 we recorded income of $11, $3 and $9, respectively.
Note 11 –Share-Based Plans Expense
Share-based plans expense principally relates to stock options and Performance Shares, which are stock units that are convertible to Boeing stock, on a one-to-one basis, contingent upon the Boeing stock price performance. Share-based plans expense is included in Operating expenses since it is incentive compensation issued primarily to our executives.
For Performance Shares granted in 2005, the fair value of each award was estimated on the date of grant using a Monte Carlo simulation model. For stock option awards granted subsequent to 2005, the fair value was estimated using the Black-Scholes option-pricing model.
For the years ended December 31, 2009, 2008 and 2007 we recorded $2, $3 and $5 attributable to share-based plans expense.
Note 12 –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
From time to time, certain customers have requested a restructuring of their transactions with us. As of December 31, 2009, we have not reached agreement on any restructuring requests that would have a material adverse effect on our earnings, cash flows and/or financial position.
Commitments
At December 31, 2009, we and Boeing had unfunded financing commitments of $10,409, 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 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 potential funding dates as of December 31, 2009) is as follows:
| | | |
| | | Total |
2010 | | $ | 1,873 |
2011 | | | 811 |
2012 | | | 502 |
2013 | | | 1,223 |
2014 | | | 1,530 |
Thereafter | | | 4,470 |
| | | $ | 10,409 |
|
31
Note 13 –Off-Balance Sheet Arrangements
We are a party to off-balance sheet arrangements, including guarantor obligations and variable interests in unconsolidated entities.
Guarantor Obligations
At December 31, 2009 and 2008, under our third party residual value guarantees, the maximum potential payments were $21 and $21, and estimated proceeds from collateral and recourse were $21 and $21. The maximum potential payment amounts represent a “worst-case scenario,” and do not necessarily reflect results that we expect. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payment obligations under guarantees. The carrying value of liabilities recorded on the Consolidated Balance Sheets reflects fees received for extending these guarantees. At December 31, 2009 and 2008, the carrying value of liabilities relating to residual value guarantees, included in Other liabilities, was $3 and $3.
Under these residual value guarantees, we are obligated to make payments to a guaranteed party if the related aircraft or equipment fair values fall below a specified amount at a future time. These obligations are collateralized principally by commercial aircraft and expire within the next year.
Variable Interest in Unconsolidated Entities
We have an investment in the form of an EETC which was acquired in 1999. EETCs are interests in a trust that passively holds investments in aircraft or pools of aircraft. EETCs provide investors with a collateral position in the related assets and tranched rights to cash flows from a financial instrument. Our investment in the form of EETC does not require consolidation. At December 31, 2009, our maximum exposure to economic loss from our EETC is $5. At December 31, 2009, the EETC investments had total assets of $92 ($97 at December 31, 2008) and total non-BCC debt of $87 ($92 at December 31, 2008). This debt is non-recourse to us and includes $87 that is senior to our investment. During 2009, we recorded investment income of $1 and received cash of $2 related to these investments.
Note 14 –Fair Value Measurements
The following tables present our assets and liabilities that are measured at fair value on a recurring basis, as of December 31, and are categorized using the three levels of fair value hierarchy.
| | | | | | | | | | | | | | |
| | | 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 equity securities | | $ | 17 | | | $ | 17 | | $ | – | | | $ | – |
EETC | | | 5 | | | | – | | | – | | | | 5 |
Interest rate swaps | | | 32 | | | | – | | | 32 | | | | – |
Total | | $ | 54 | | | $ | 17 | | $ | 32 | | | $ | 5 |
|
| | | | |
Liabilities | | | | | | | | | | | | | | |
Interest rate swaps | | $ | (17 | ) | | $ | – | | $ | (17 | ) | | $ | – |
Total | | $ | (17 | ) | | $ | – | | $ | (17 | ) | | $ | – |
|
32
| | | | | | | | | | | | | | |
| | | 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 debt 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 equity securities.The fair value of our marketable equity securities is determined using quoted prices in active markets for identical assets. Unrealized gains (losses) are recorded in Accumulated other comprehensive income (loss).
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.
The following tables present a reconciliation of Level 3 assets measured at fair value on a recurring basis at December 31.
| | | | | | | | | | | | | | | | | | | |
| | | 2009 |
| | | Fair Value
Beginning
of Year | | Unrealized
Gains
Included in
Income | | Accumulated
Other
Comprehensive
Income/(Loss) | | Purchases,
Sales, and
Issuances | | | Transfers
In/(Out) | | Fair Value
at End of
Year |
Assets | | | | | | | | | | | | | | | | | | | |
EETC | | $ | 5 | | $ | – | | $ | 2 | | $ | (2 | ) | | $ | – | | $ | 5 |
Warrants | | | 10 | | | 9 | | | – | | | (19 | ) | | | – | | | – |
Total | | $ | 15 | | $ | 9 | | $ | 2 | | $ | (21 | ) | | $ | – | | $ | 5 |
|
| | | | | | | | | | | | | | | | | | | |
| | | 2008 |
| | | Fair
Value
Beginning
of Year | | Unrealized
Gains
Included in
Income | | Accumulated
Other
Comprehensive
Income/(Loss) | | | Purchases,
Sales, and
Issuances | | Transfers
In/(Out) | | Fair Value
at End of
Year |
Assets | | | | | | | | | | | | | | | | | | | |
EETC | | $ | – | | $ | – | | $ | (1 | ) | | $ | – | | $ | 6 | | $ | 5 |
Warrants | | | – | | | 1 | | | – | | | | 9 | | | – | | | 10 |
Total | | $ | – | | $ | 1 | | $ | (1 | ) | | $ | 9 | | $ | 6 | | $ | 15 |
|
33
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 years ended December 31, and the carrying value and asset classification of the related assets still held as of December 31:
| | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | Carrying
Value | | Total
Losses | | | Carrying
Value | | Total
Losses | |
Assets | | | | | | | | | | | | | | |
Receivables (1) | | $ | 1 | | $ | (6 | ) | | $ | 8 | | $ | (8 | ) |
Equipment under operating leases (2) | | | 164 | | | (57 | ) | | | – | | | – | |
Assets held for sale or re-lease (2) | | | 35 | | | (18 | ) | | | – | | | – | |
Total | | $ | 200 | | $ | (81 | ) | | $ | 8 | | $ | (8 | ) |
|
|
| (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. |
The following table presents the carrying values and estimated fair values of our financial instruments for which we did not elect the fair value option:
| | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
Assets | | | | | | | | | | | | | | | | |
Notes and other | | $ | 865 | | | $ | 892 | | | $ | 697 | | | $ | 701 | |
| | | | |
Liabilities | | | | | | | | | | | | | | | | |
Debt, excluding capital lease obligations | | $ | (4,013 | ) | | $ | (4,197 | ) | | $ | (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 and Short-term investments. The carrying value of those items approximate their fair value at December 31, 2009 and 2008 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.
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 15 –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.
34
Portfolio carrying values for our five largest customers were as follows at December 31:
| | | | | |
| | | 2009 |
| | | Carrying Value | | % of Total Portfolio |
AirTran | | $ | 1,573 | | 27.8% |
American | | | 517 | | 9.1 |
Continental | | | 450 | | 8.0 |
Hawaiian | | | 449 | | 7.9 |
Mexicana | | | 295 | | 5.2 |
| | | $ | 3,284 | | 58.0% |
|
| | | | | |
| | | 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 years ended December 31, 2009 and 2008, AirTran Holdings, Inc. accounted for 20% and 19% of our revenue.
Portfolio carrying values were represented in the following regions at December 31:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | Carrying Value | | % of Total Portfolio | | | Carrying Value | | % of Total Portfolio | |
United States(1) | | $ | 4,073 | | 71.9 | % | | $ | 4,457 | | 74.0 | % |
Europe | | | 762 | | 13.4 | | | | 1,037 | | 17.2 | |
Latin America | | | 394 | | 7.0 | | | | 122 | | 2.0 | |
Asia/Australia | | | 319 | | 5.6 | | | | 341 | | 5.7 | |
Other | | | 118 | | 2.1 | | | | 66 | | 1.1 | |
| | | $ | 5,666 | | 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. |
Revenue from customers by geographic region was as follows for the years ended December 31:
| | | | | | | | | |
| | | 2009 | | 2008 | | 2007 |
United States | | $ | 430 | | $ | 446 | | $ | 564 |
Europe | | | 138 | | | 152 | | | 143 |
Asia/Australia | | | 51 | | | 56 | | | 55 |
Latin America | | | 30 | | | 39 | | | 38 |
Other | | | 11 | | | 10 | | | 15 |
| | | $ | 660 | | $ | 703 | | $ | 815 |
|
35
Portfolio carrying values were represented by the following product types at December 31:
| | | | | | |
| | | 2009 | | 2008 |
717 | | $ | 2,277 | | $ | 2,365 |
757 | | | 902 | | | 991 |
737 | | | 559 | | | 475 |
767 | | | 474 | | | 550 |
MD-11(1) | | | 401 | | | 560 |
747 | | | 343 | | | 383 |
MD-80 | | | 231 | | | 298 |
777 | | | 147 | | | 81 |
Other(2) | | | 332 | | | 320 |
| | | $ | 5,666 | | $ | 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 at December 31:
| | | | |
| | | 2009 | | 2008 |
2005 and newer | | 11.5% | | 6.9% |
2000 - 2004 | | 63.1 | | 63.2 |
1995 - 1999 | | 11.3 | | 14.1 |
1994 and older | | 14.1 | | 15.8 |
| | | 100.0% | | 100.0% |
|
Note 16 –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 as certain events of default and repossession. 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 December 31, 2009, our maximum future cash exposure to losses associated with the loss sharing arrangement was $234, for which we have accrued a liability of $77.
The reserve under the loss sharing arrangement, which is included in Other liabilities, was as follows for the year ended December 31:
| | | | | | | |
| | | 2009 | | 2008 | |
Reserve at beginning of period | | $ | 39 | | $ | 59 | |
Increase (reduction) in reserve | | | 36 | | | (29 | ) |
Payments received from GECC | | | 2 | | | 9 | |
Reserve at end of period | | $ | 77 | | $ | 39 | |
|
|
36
Operating results of the discontinued operations were as follows for the years ended December 31:
| | | | | | | | | | |
| | | 2009 | | | 2008 | | 2007 |
Net gain (loss) on disposal of discontinued operations | | $ | (36 | ) | | $ | 29 | | $ | 25 |
Provision (benefit) for income tax | | | (13 | ) | | | 11 | | | 9 |
Net gain (loss) on disposal of discontinued operations, net of tax | | $ | (23 | ) | | $ | 18 | | $ | 16 |
|
Note 17 –Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31 | | June 30 | | September 30 | | December 31 | |
2009 | | | | | | | | | | | | | |
Revenue | | $ | 163 | | $ | 167 | | $ | 166 | | $ | 164 | |
Income from continuing operations | | $ | 23 | | $ | 23 | | $ | 24 | | $ | 10 | |
Net income | | $ | 18 | | $ | 24 | | $ | 20 | | $ | (5 | ) |
| | | | |
2008 | | | | | | | | | | | | | |
Revenue | | $ | 185 | | $ | 179 | | $ | 171 | | $ | 168 | |
Income from continuing operations | | $ | 38 | | $ | 29 | | $ | 23 | | $ | 12 | |
Net income | | $ | 43 | | $ | 30 | | $ | 34 | | $ | 13 | |
|
|
37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A(T). Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have evaluated our disclosure controls as of December 31, 2009 and concluded that our disclosure controls and procedures are effective to ensure 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 Commission’s rules and forms and is accumulated and communicated to our management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
(c) 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.
Item 9B. Other Information
None.
38
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 14. Principal Accounting Fees and Services
The aggregate fees billed by Deloitte & Touche LLP, our Independent Registered Public Accounting Firm, were as follows during the years ended 2009 and 2008:
| | | | | | |
Services Rendered / Fees (Dollars in millions) | | 2009 | | 2008 |
Audit fees(1) | | $ | 2.1 | | $ | 1.7 |
|
| (1) | | For professional services rendered for the audit of our annual financial statements, the reviews of the financial statements included in our Form 10-Qs for the years ended 2009 and 2008, fees for issuance of consents related to Securities and Exchange Commission filings and other statutory audits. |
As a wholly owned subsidiary of The Boeing Company (Boeing), audit and non-audit services provided by our independent auditor are subject to Boeing’s Audit Committee (Committee) pre-approval policies and procedures. The Committee pre-approved all services provided by, and all fees of, our independent auditor.
39
PART IV
Item 15. Exhibits, Financial Statement Schedules
| | |
(a) 1. | | Financial Statements: |
| |
| | | All Consolidated Financial Statements of the Company as set forth under Item 8 of this Annual Report on Form 10-K. |
| |
2. | | Financial Statement Schedule |
| |
| | | None. |
| |
3. | | Exhibits |
| |
3.1 | | Restated Certificate of Incorporation of the Company dated June 29, 1989, incorporated herein by reference to Exhibit 3.1 to our Form 10-K for the year ended December 31, 1993. |
| |
3.2 | | Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated August 11, 1997, incorporated herein by reference to Exhibit 3(i) to our Form 10-Q, for the period ended June 30, 1997. |
| |
3.3 | | By-Laws of the Company dated July 22, 1993, incorporated herein by reference to Exhibit 3.2 to our Form 10-K for the year ended December 31, 1993. |
| |
4.1 | | First Supplemental Indenture, dated June 12, 1995, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(b) to our Form S-3 Registration Statement (File No. 33-58989). |
| |
4.2 | | Indenture, dated April 15, 1987, incorporated herein by reference to Exhibit 4 to our Form S-3 Registration Statement (File No. 33-26674). |
| |
4.3 | | Senior Indenture, dated August 31, 2000, incorporated by reference to Exhibit 4(a) to our Amendment No. 2 to Form S-3 Registration Statement, dated August 30, 2000 (File No. 333-82391). |
| |
4.4 | | Subordinated Indenture, dated August 31, 2000, incorporated by reference to Exhibit 4(b) to our Amendment No. 2 to Form S-3 Registration Statement, dated August 30, 2000 (File No. 333-82391). |
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4.5 | | Form of Series X Senior Fixed Rate Medium-Term Note, incorporated herein by reference to Exhibit 4(e) to our Form S-3 Registration Statement (File No. 33-58989). |
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4.6 | | Form of Series X Senior Floating Rate Medium-Term Note, incorporated herein by reference to Exhibit 4(h) to our Form S-3 Registration Statement (File No. 33-58989). |
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4.7 | | Form of Series X Senior Fixed Rate Medium-Term Note, incorporated by reference to Exhibit 4(e) to our Form S-3 Registration Statement (File No. 333-37635). |
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4.8 | | Form of Series X Senior Floating Rate Medium-Term Note, incorporated by reference to Exhibit 4(g) to our Form S-3 Registration Statement (File No. 333-37635). |
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4.9 | | Form of Series XI Senior Fixed Rate Medium-Term Note, incorporated by reference to Exhibit 4(c) to our Form S-3 Registration Statement (File No. 333-82391). |
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4.10 | | Form of Series XI Senior Floating Rate Medium-Term Note, incorporated by reference to Exhibit 4(e) to our Form S-3 Registration Statement (File No. 333-82391). |
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4.11 | | Form of Senior Medium-Term Note, Series XII (Fixed Rate), incorporated by reference to Exhibit 4(a) to our Form 8-K filed September 4, 2009. |
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4.12 | | Form of Senior Medium-Term Note, Series XII (Floating Rate), incorporated by reference to Exhibit 4(b) to our Form 8-K filed September 4, 2009. |
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4.13 | | Form of Subordinated Medium-Term Note, Series XII (Fixed Rate), incorporated by reference to Exhibit 4(c) to our Form 8-K filed September 4, 2009. |
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4.14 | | Form of Subordinated Medium-Term Note, Series XII (Floating Rate), incorporated by reference to Exhibit 4(d) to our Form 8-K filed September 4, 2009. |
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4.15 | | Form of InterNote® (Fixed Rate), incorporated by reference to Exhibit 4(e) to our Form 8-K filed September 4, 2009. |
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4.16 | | Form of InterNote® (Floating Rate), incorporated by reference to Exhibit 4(f) to our Form 8-K filed September 4, 2009. |
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, we are not filing certain instruments with respect to our debt, as the total amount of securities currently provided for under each of such instruments does not exceed 10 percent of our total assets on a consolidated basis. We hereby agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
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10.1 | | 364-Day Credit Agreement dated as of November 13, 2009, between Boeing and the banks listed therein, incorporated by reference to Exhibit 10.1 to The Boeing Company Form 8-K filed November 13, 2009 (File No. 001-00442). |
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10.2 | | Five-Year Credit Agreement dated as of November 16, 2007, between Boeing and the banks listed therein, incorporated by reference to Exhibit 10(ii) to The Boeing Company Form 10-K filed February 15, 2008 (File No. 001-00442). |
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10.3 | | Borrower Subsidiary Letter dated November 13, 2009 relating to 364-Day Credit Agreement, incorporated by reference to Exhibit 10.2 to our Form 8-K filed November 13, 2009. |
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10.4 | | Borrower Subsidiary Letter dated November 14, 2008 relating to Five-Year Credit Agreement, incorporated by reference to Exhibit 10.3 to our Form 8-K filed November 20, 2008. |
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10.5 | | Letter agreement relating to the 364-Day Credit Agreement and the Five-Year Credit Agreement, dated November 13, 2009, between Boeing and us, incorporated by reference to Exhibit 10.4 to our Form 8-K filed November 13, 2009. |
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10.6 | | Support Agreement, dated December 23, 2003, by and between us and Boeing, incorporated herein by reference to Exhibit 99.1 to our Form 8-K filed December 24, 2003. |
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10.7 | | Purchase and Sale Agreement dated May 24, 2004, among Boeing Capital Corporation, BCC Equipment Leasing Corporation, McDonnell Douglas Overseas Finance Corporation, Boeing Capital Loan Corporation and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.1 to our 8-K dated June 24, 2004. |
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10.8 | | Amendment and Joint Waiver dated May 31, 2004, among Boeing Capital Corporation, BCC Equipment Leasing Corporation, McDonnell Douglas Overseas Finance Corporation, Boeing Capital Loan Corporation and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.2 to our Form 8-K dated June 24, 2004. |
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12 | | Computation of Ratio of Earnings to Fixed Charges. |
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23 | | Consent of Independent Registered Public Accounting Firm. |
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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. |
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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. |
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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. |
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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. |
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | Boeing Capital Corporation |
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February 8, 2010 | | /s/ KEVIN R. MILLISON
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| | | Kevin R. Millison |
| | | Vice President and Chief Financial Officer (Principal Financial Officer) and Registrant’s Authorized Officer |
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February 8, 2010 | | /s/ KEVIN J. MURPHY
|
| | | Kevin J. Murphy |
| | | Controller (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| | | Boeing Capital Corporation |
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February 8, 2010 | | /s/ JAMES A. BELL
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| | | James A. Bell Chairman and Director |
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February 8, 2010 | | /s/ MICHAEL J. CAVE
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| | | Michael J. Cave President and Director (Principal Executive Officer) |
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February 8, 2010 | | /s/ DAVID A. DOHNALEK
|
| | | David A. Dohnalek Director |
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February 8, 2010 | | /s/ J. MICHAEL LUTTIG
|
| | | J. Michael Luttig Director |
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