United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _________________
BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other jurisdiction of (I.R.S. Employer (Commission File No.)
Incorporation or Organization) Identification No.)
4060 Lakewood Boulevard, 6th Floor o Long Beach, California 90808-1700
(Address of principal executive offices)
(562) 627-3000
(Registrant's telephone number, including area code)
McDonnell Douglas Finance Corporation
(Former name if changed since last report)
---------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Common shares outstanding at August 14, 1997: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
to Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements..........................................3
Item 2. Management's Analysis of Results of Operations *..............8
Part II Other Information
Item 1. Legal Proceedings.............................................9
Item 2. Changes in Securities **
Item 3. Defaults Upon Senior Securities **
Item 4. Submission of Matters to a Vote of Security Holders **
Item 5. Other Information.............................................9
Item 6. Exhibits and Reports on Form 8-K.............................12
- ----------------
* Management's Analysis of Results of Operations included in lieu of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which is omitted pursuant to General Instruction H(1)(a) to
Form 10-Q.
** Omitted pursuant to General Instruction H(1)(b) to Form 10-Q.
Part I
Item 1. Financial Statements
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheet
June 30, December 31,
(Dollars in millions, except stated value and par value) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Financing receivables:
Investment in finance leases $ 1,593.5 $ 1,631.2
Notes receivable 258.6 308.9
-------------------------------------------
1,852.1 1,940.1
Allowance for losses on financing receivables (52.4) (48.6)
-------------------------------------------
1,799.7 1,891.5
Cash and cash equivalents 13.9 16.9
Equipment under operating leases, net 692.3 689.5
Equipment held for sale or re-lease 26.8 14.0
Other assets 56.1 41.7
-------------------------------------------
$ 2,588.8 $ 2,653.6
===========================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 173.7 $ 161.3
Accounts payable and accrued expenses 34.0 47.7
Accounts with McDonnell Douglas Corporation 8.1 -
Other liabilities 100.9 90.0
Deferred income taxes 364.2 340.2
Long-term debt:
Senior 1,478.9 1,594.1
Subordinated 79.8 94.8
-------------------------------------------
2,239.6 2,328.1
-------------------------------------------
Commitments and contingencies -- Note 3
Shareholder's equity:
Preferred stock -- no par value; authorized 100,000 shares:
Series A; $5,000 stated value; authorized, issued and
outstanding 10,000 shares 50.0 50.0
Common stock-- $100 par value; authorized 100,000 shares;
issued and outstanding 50,000 shares 5.0 5.0
Capital in excess of par value 89.5 89.5
Income retained for growth 204.7 181.0
-------------------------------------------
349.2 325.5
===========================================
$ 2,588.8 $ 2,653.6
===========================================
See notes to consolidated financial statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 1997 1996 1997 1996
============================================================ ============= ============= ============= =============
OPERATING INCOME
Finance lease income $ 35.0 $ 29.1 $ 70.6 $ 57.3
Interest income on notes receivable 6.6 5.6 13.6 11.5
Operating lease income, net of depreciation expense 14.0 14.3 27.7 26.3
Net gain on disposal or re-lease of assets 1.3 2.2 4.1 10.3
Other 1.3 1.4 2.9 2.6
------------- ------------- ------------- -------------
58.2 52.6 118.9 108.0
------------- ------------- ------------- -------------
EXPENSES
Interest expense 31.0 30.1 64.2 57.0
Provision for losses 2.3 3.9 5.8 7.3
Operating expenses 2.6 3.0 5.7 6.1
Other 2.3 0.7 3.3 1.2
------------- ------------- ------------- -------------
38.2 37.7 79.0 71.6
------------- ------------- ------------- -------------
Income before taxes on income 20.0 14.9 39.9 36.4
Provision for income taxes 7.3 5.3 14.5 13.0
------------- ------------- ------------- -------------
Net income 12.7 9.6 25.4 23.4
Income retained for growth at beginning of period 192.9 148.6 181.0 135.7
Dividends (0.9) (0.8) (1.7) (1.7)
------------- ------------- ------------- -------------
Income retained for growth at end of period $ 204.7 $ 157.4 $ 204.7 $ 157.4
============= ============= ============= =============
-------------
See notes to consolidated financial statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Six months ended June 30,
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 25.4 $ 23.4
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation expense - equipment under operating leases 29.2 28.1
Net gain on disposal or re-lease of assets (4.1) (10.3)
Provision for losses 5.8 7.3
Change in assets and liabilities:
Accounts with McDonnell Douglas Corporation 8.1 16.7
Other assets (14.4) (9.6)
Accounts payable and accrued expenses (13.7) (1.5)
Other liabilities 10.9 2.8
Deferred income taxes 24.0 15.1
Other, net (0.3) (0.5)
------------------------------------------
70.9 71.5
------------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (0.1) (0.4)
Purchase of equipment for operating leases (62.0) (258.5)
Proceeds from disposition of equipment, notes and leases receivable 23.7 38.3
Collection of notes and leases receivable 147.9 90.9
Acquisition of notes and leases receivable (63.5) (179.7)
------------------------------------------
46.0 (309.4)
------------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings 12.4 38.3
Debt having maturities more than 90 days:
Proceeds 60.0 312.1
Repayments (190.6) (107.9)
Payment of cash dividend (1.7) (1.7)
------------------------------------------
(119.9) 240.8
------------------------------------------
Increase (decrease) in cash and cash equivalents (3.0) 2.9
Cash and cash equivalents at beginning of year 16.9 12.6
==========================================
Cash and cash equivalents at end of period $ 13.9 $ 15.5
==========================================
See notes to consolidated financial statements.
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 -- Basis of Presentation
Boeing Capital Corporation (formerly McDonnell Douglas Finance Corporation) (the
"Company") is a wholly-owned subsidiary of Boeing Capital Services Corporation
(formerly McDonnell Douglas Financial Services Corporation), a wholly-owned
subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas"), which in
turn, as of August 1, 1997, is wholly-owned by The Boeing Company ("Boeing").
The accompanying unaudited consolidated financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of the Company, the
accompanying consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) which are necessary to present fairly
the consolidated balance sheet and the related consolidated statements of income
and income retained for growth and cash flows for the interim periods presented.
Operating results for the six-month period ended June 30, 1997, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. The statements should be read in conjunction with the notes
to the consolidated financial statements included in the Company's Form 10-K for
the year ended December 31, 1996.
Certain 1996 amounts have been reclassified to conform to the 1997 presentation.
Note 2 -- Credit Agreements and Long-Term Debt
The provisions of various credit and debt agreements require the Company to
maintain a minimum net worth, restrict indebtedness, and limit cash dividends
and other distributions. Under the most restrictive provision, $91.6 million of
the Company's income retained for growth was available for dividends at June 30,
1997.
Note 3 -- Commitments and Contingencies
On November 1, 1996, The Allen Austin Harris Group, Inc. (the "Plaintiff") filed
a complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the Defendants, seeks more than $57.0 million in alleged damages (primarily
consisting of lost profits) based on various theories. The Company believes it
has meritorious defenses to all of the allegations and that the litigation will
have no material adverse effect on the Company's earnings, cash flow or
financial condition.
A number of other legal proceedings and claims are p or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by third parties, including insurance companies. The Company
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.
Trans World Airlines, Inc. ("TWA") accounted for $239.0 million (9.4% of total
Company portfolio) and $249.5 million (9.5% of total Company portfolio) at June
30, 1997, and December 31, 1996, respectively. TWA continues to operate under a
reorganization plan, confirmed by the United States Bankruptcy Court in 1995,
that restructured its indebtedness and leasehold obligations to its creditors.
In addition, TWA continues to face financial and operational challenges due in
part to an airliner crash in July 1996 and turnover of key management, which
occurred during 1996. Additionally, TWA's independent auditors included an
explanatory paragraph in their "Independent Auditors' Report" for TWA's December
31, 1996 financial statements, expressing "substantial doubt" about TWA's
ability to continue as a going concern. McDonnell Douglas provides guaranties to
the Company for certain obligations of TWA under the various lease agreements
between the Company and TWA. At June 30, 1997, the maximum aggregate coverage
under such guaranties was $42.1 million. In addition, McDonnell Douglas provides
supplemental guaranties in favor of the Company for up to an additional $10.0
million of the Company's financings to TWA. These guaranties supplement
individual guaranties provided by McDonnell Douglas with respect to certain of
the Company's financings to TWA to the extent that the estimated fair market
value of the financings (after applying the individual guaranties) is less than
the net asset value of the financings on the Company's books. The supplemental
guaranties terminate in March 1998. TWA has reported relatively low cash
reserves of $102.6 million as of June 30, 1997, compared to $304.4 million at
June 30, 1996. The reorganization plan and TWA's current financial condition
have not had and, assuming TWA's financial condition does not further
deteriorate such that TWA ceases to make timely payments on its obligations to
the Company, are not expected to have a material adverse effect on the Company's
earnings, cash flow, or financial position.
A United States-based operator of commuter aircraft is in arrears in the payment
of rent under the lease of two Embraer Brasilia commuter aircraft. The Company
and the airline have agreed to a lease amendment which restructures repayment of
the delinquent sums as well as future lease rentals. The net asset value of the
aircraft leased to this airline at June 30, 1997, totaled $14.7 million. Taking
into account the available allowance for losses, the Company does not expect to
suffer a material adverse impact on its earnings, cash flow, or financial
condition on the account of this transaction.
At June 30, 1997, the Company had commitments to provide leasing and other
financing totaling $156.2 million.
The $50.0 million aircraft purchase bridge facility made available by the
Company to ValuJet Airlines, Inc. ("ValuJet") expires upon delivery to ValuJet
of the first scheduled new McDonnell Douglas MD-95 aircraft, presently expected
to occur in 1999. Borrowings under this agreement must be repaid within 180 days
and the interest rate is based on the London Interbank Offering Rate ("LIBOR").
There were no amounts outstanding under this agreement at June 30, 1997, or
December 31, 1996. In July 1997, ValuJet and Airways Corp. announced their
intent to merge. The transaction is expected to be completed in November 1997.
In conjunction with prior asset dispositions and certain guaranties, at June 30,
1997, the Company was subject to a maximum recourse of $69.8 million. Based on
trends to date, the Company's losses related to such exposure are not expected
by the Company to be significant.
The Company leases aircraft under capital leases which have been subleased to
others. At June 30, 1997, the Company had guaranteed the repayment of $6.4
million in capital lease obligations associated with a 50% partner.
Item 2. Management's Analysis of Results of Operations
From time to time, the Company may make certain statements that contain
projections or "forward- looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) and involve risk and uncertainty.
Certain statements in this Form 10-Q, and particularly in Note 3 to the
financial statements set forth in Item 1 of Part I, and in Item 1 of Part II,
may contain forward-looking information. The subject matter of such statements
may include, but not be limited to, the Boeing-McDonnell Douglas merger and its
possible effects, future earnings, costs, expenditures, losses, residual values,
and various business environment trends. In addition to those contained herein,
forward-looking statements and projections may be made by management of the
Company orally or in writing including, but not limited to, various sections of
the Company's filings with the Securities and Exchange Commission under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially from projections
depending on a variety of factors including, but not limited to, the impact of
the Boeing-McDonnell Douglas merger and the Company's relationship with
McDonnell Douglas as well as its new ultimate shareholder, decisions made by the
newly constituted Board of Directors, the capital equipment requirements of U.S.
and foreign businesses, capital availability and cost, changes in law and tax
benefits, competition from other financial institutions, the Company's
successful execution of internal operating plans, defaults by customers,
regulatory uncertainties, and legal proceedings.
As described under Item 5 below, the Board of Directors of the Company was
reconstituted following the consummation of the Boeing-McDonnell Douglas merger.
The new Board intends to conduct a detailed review of the Company and its
assets, corporate structure, strategy, capitalization, operations, properties,
policies, management and personnel and to consider what, if any, changes would
be desirable in light of the circumstances then existing, and may thereafter
determine to implement such changes.
Finance lease income increased $13.3 million (23.2%) from the first half of
1996, primarily attributable to the financings of two MD-11 aircraft funded in
late December 1996 and the March 1996 financing of two MD-90 aircraft under
finance lease agreements.
Interest on notes receivable increased $2.1 million (18.3%) from the first half
of 1996, primarily attributable to increased volume in 1996 within the
commercial equipment leasing portfolio.
Net gain on disposal or re-lease of assets decreased $6.2 million (60.2%) from
the first half of 1996, attributable primarily to decreased equipment sales
within the commercial equipment leasing portfolio.
Interest expense increased $7.2 million (12.6%) from the first half of 1996,
attributable to a higher level of borrowings in 1997, resulting from increased
financing activity in 1996.
Provision for losses decreased $1.5 million (20.5%) in the first half of 1997
primarily attributable to the Company's determination that additional provisions
for losses relating to the commercial aircraft portfolio in excess of those
previously provided were not necessary or appropriate during that period and to
a decrease in new aircraft lease volume, which aggregated $1.6 million in the
first half of 1997, compared to aircraft lease volume of $270.4 million in the
first half of 1996.
Other expenses increased $2.1 million (175.0%) primarily attributable to
maintenance expenses equal to approximately $1.8 million on an airplane that was
repossessed in March 1997.
Part II
Item 1. Legal Proceedings
On November 1, 1996, The Allen Austin Harris Group, Inc. (the "Plaintiff") filed
a complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the Defendants, seeks more than $57.0 million in alleged damages (primarily
consisting of lost profits) based on various theories. The Company believes it
has meritorious defenses to all of the allegations and that the litigation will
have no material adverse effect on the Company's earnings, cash flow or
financial condition.
A number of other legal proceedings and claims are pending or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by third parties, including insurance companies. The Company
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.
Item 5. Other Information
Summarized below is information on the effects of the Boeing-McDonnell Douglas
merger, the Company's borrowing operations, portfolio balances, new business
volume, analysis of allowance for losses on financing receivables and credit
loss experience, and receivable write-offs, net of recoveries by business unit.
The Effects of the Boeing-McDonnell Douglas Merger
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated. An
immediate result is that McDonnell Douglas is now a wholly-owned subsidiary of
Boeing and in turn the Company's new ultimate shareholder is Boeing. Following
the merger, on August 8, 1997, the Board of Directors of the Company was
reconstituted by the resignations of F. Mark Kuhlmann, Walter J. Orlowski and
James F. Palmer, and by the election of Theodore J. Collins, Boyd E. Givan and
David A. Jaeger as new members of the Board. On that same date the new Board of
Directors adopted a resolution to change the name of the Company to Boeing
Capital Corporation. The name change became effective on August 12, 1997, upon
the filing of the amendment to the Company's certificate of incorporation with
the Secretary of State of Delaware. As of the date hereof, Boeing and the
Company have not entered into an operating agreement and the Operating Agreement
between the Company and McDonnell Douglas remains in effect. Likewise, the
informal arrangement which entitles the Company to rely upon the realization of
tax benefits for the portion of projected taxable earnings of McDonnell Douglas
allocated to the Company remains in effect. There can be no assurance, however,
that these (and other) intercompany arrangements will not change as time permits
the Company's new Board members and ultimate shareholder to study and become
more familiar with these working arrangements. The many possible longer term
effects of the merger on the Company (for example, decisions regarding the
strategic value of the Company to Boeing, the impact of the merger on residual
values of aircraft in the Company's portfolio, and the effect of decisions
relating to the financing of Boeing aircraft) are currently unknown and,
therefore, cannot be quantified at this time.
Borrowing Operations - Updated Credit Ratings
Under the discussion of Borrowing Operations, the Company's Report on Form 10-K
dated December 31, 1996 states that on December 16, 1996, as a result of the
Boeing-McDonnell Douglas merger, the rating agencies placed the Company on
review with positive implications. On July 17, 1997, Moody's Investors Service
said that it upgraded the ratings of Boeing and McDonnell Douglas but that the
ratings for the Company remain under review for possible upgrade because
"critical questions regarding the strategic value and future business plan for
the Company remain unanswered."
On July 31, 1997, Standard & Poor's raised its ratings on Boeing, McDonnell
Douglas and the Company. The Company's senior unsecured debt rating was raised
to AA from A- and its subordinated debt rating was raised to AA- from BBB+. The
Company's commercial paper rating was raised to A-1+ from A-2. Standard & Poor's
stated that "The upgrade on McDonnell Douglas Finance Corporation reflects the
benefits of the merger, including the 100% indirect ownership by Boeing."
Standard & Poor's also stated that "the finance unit's ratings are not equalized
with those of Boeing because there is some uncertainty about the strategic fit
of financial services in Boeing's long-term business mix."
As of July 25, 1997, the Company is no longer rated by Duff & Phelps Credit
Rating Company because McDonnell Douglas is no longer rated as a result of the
Boeing-McDonnell Douglas merger.
Although security ratings impact the rate at which the Company can borrow funds,
a security rating is not a recommendation to buy, sell or hold securities. In
addition, a security rating is subject to revision or withdrawal at any time by
the assigning rating organization and each rating should be evaluated
independently of any other rating.
Portfolio Balances
Portfolio balances for the Company's two business segments are summarized as
follows:
June 30, December 31,
(Dollars in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Aircraft Financing
McDonnell Douglas aircraft financing
Finance leases $ 1,110.2 $ 1,132.6
Operating leases 361.6 402.0
Notes receivable 61.9 82.9
---------------------------------------
1,533.7 1,617.5
---------------------------------------
Other commercial aircraft financing
Finance leases 133.5 136.9
Operating leases 53.8 56.0
Notes receivable 4.5 4.5
---------------------------------------
191.8 197.4
---------------------------------------
Commercial Equipment Leasing
Finance leases 349.8 361.7
Operating leases 276.9 231.5
Notes receivable 163.6 176.6
---------------------------------------
790.3 769.8
---------------------------------------
Other 28.6 44.9
---------------------------------------
$ 2,544.4 $ 2,629.6
=======================================
New Business Volume
New business volume for the Company's two business segments is summarized as
follows:
Six months ended Six months ended
June 30, June 30,
------------------------------------------
(Dollars in millions) 1997 1996
McDonnell Douglas aircraft financing $ 1.6 $ 270.4
Commercial equipment leasing 111.0 167.5
------------------------------------------
$ 112.6 $ 437.9
==========================================
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
June 30, December 31,
----------------------------------------
(Dollars in millions) 1997 1996
Allowance for losses on financing receivables at beginning
of year $ 48.6 $ 42.3
Provision for losses 5.8 14.2
Write-offs, net of recoveries (0.8) (6.0)
Other (1.2) (1.9)
----------------------------------------
Allowance for losses on financing receivables at end of
period $ 52.4 $ 48.6
========================================
Allowance as percent of total portfolio 2.1% 1.8%
Net write-offs (recoveries) as percent of financing receivables 0.1% 0.3%
More than 90 days delinquent:
Amount of delinquent installments $ 2.7 $ 2.1
Total receivables due from delinquent obligors 16.2 23.4
Total receivables due from delinquent obligors
as a percentage of total portfolio 0.6% 0.9%
Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the writeoffs (recoveries) of each of the
Company's continuing businesses:
Six months ended Six months ended
June 30, June 30,
(Dollars in millions) 1997 1996
Commercial aircraft financing $ - $ -
Commercial equipment leasing $ (0.3) $ 0.6
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 3(i) Amendment to Certificate of Incorporation of the Company,
dated August 11, 1997.
Exhibit 12 Computation of ratio of income to fixed charges.
Exhibit 27 Financial Data Schedule.
B. Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal financial officer and by its principal accounting
officer, thereunto duly authorized.
Boeing Capital Corporation
August 14, 1997 /s/ STEVEN W. VOGEDING
----------------------------------
Steven W. Vogeding
Vice President and Chief Financial
Officer (Principal Financial Officer) and
Registrant's Authorized Officer
/s/ MAURA R. MIZUGUCHI
----------------------------------
Maura R. Mizuguchi
Controller (Principal Accounting Officer)