United States
Securities and Exchange Commission
Washington, D.C. 20549
- --------------------------------------------------------------------------------
Form 10-K
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _________________
Commission File Number 0-10795
- --------------------------------------------------------------------------------
BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 Naches Ave., SW, 3rd Floor Renton, Washington 98055
(Address of principal executive offices)
(425) 393-2914
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $100 per share
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. |X|
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 12, 2002 was zero.
Common shares outstanding at March 12, 2002: 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.
Table of Contents
Page
Part I
Item 1. Business................................................................................................3
Item 2. Properties.............................................................................................20
Item 3. Legal Proceedings......................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders *..................................................20
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................21
Item 6. Selected Financial Data................................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................32
Item 8. Financial Statements and Supplementary Data............................................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................62
Part III
Item 10. Directors and Executive Officers of the Registrant *...................................................62
Item 11. Executive Compensation *...............................................................................62
Item 12. Security Ownership of Certain Beneficial Owners and Management *.......................................62
Item 13. Certain Relationships and Related Transactions *.......................................................62
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.........................................63
Signatures.............................................................................................66
Exhibits...............................................................................................67
- ----------------------------
*Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Part I
Item 1. Business
GENERAL
Boeing Capital Corporation (together with its subsidiaries, the "Company") is an
indirect wholly owned subsidiary of The Boeing Company ("Boeing"). The Company
was incorporated in Delaware in 1968 and provides equipment financing and
leasing arrangements to a diversified range of customers and industries. The
Company's primary operations at December 31, 2001 included two principal
financial reporting segments: Aircraft Financial Services (formerly commercial
aircraft financing) and Commercial Financial Services (formerly commercial
finance). Currently, Aircraft Financial Services is active in providing lease
and debt financing to domestic and international airlines and Commercial
Financial Services is active in providing lease and loan financing to a broad
range of commercial and industrial customers. The Company's principal executive
offices are located in Renton, Washington.
During 2001 and 2000, the Company acquired certain tangible assets and assumed
certain liabilities of Boeing and certain subsidiaries of Boeing. See discussion
of acquisitions under "Impact of Boeing's Customer Financing Consolidation" in
Item 7.
See "Impacts of the September 11, 2001 Terrorist Attacks" in Item 7 for
discussion related to the September 11, 2001 attacks.
Information on the Company's principal segments is included in the following
tables:
New Business Volume(1)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services $ 2,930.5 $ 1,001.7 $ 7.0 $ 201.6 $ 176.3
Commercial Financial Services 936.5 710.7 664.9 491.0 414.8
Other 39.4 - - - -
----------------------------------------------------------------------------
$ 3,906.4 $ 1,712.4 $ 671.9 $ 692.6 $ 591.1
============================================================================
(1) Excludes transfers from Boeing, unless new financing occurred in current
year.
Portfolio Balances(1)
- ---------------------------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services $ 6,101.6 $ 3,319.8 $ 1,410.8 $ 1,573.5 $ 1,711.5
Commercial Financial Services 2,435.0 1,870.1 1,497.6 1,225.0 976.6
Other 37.4 0.5 0.6 1.4 12.2
----------------------------------------------------------------------------
$ 8,574.0 $ 5,190.4 $ 2,909.0 $ 2,799.9 $ 2,700.3
============================================================================
(1) Excludes equipment held for sale or re-lease.
Other includes Space and Defense Financial Services and market segments in which
the Company is no longer active. Space and Defense Financial Services provides
lease and debt financing and advisory services for military-related products and
commercial space systems.
At December 31, 2001, $5,960.5 million (69.5%) of the total Company portfolio
consisted of Boeing product financings. Aircraft Financial Services accounted
for $5,795.9 million (67.6% of total Company portfolio) of Boeing product
financings in the total Company portfolio. Commercial Financial Services
accounted for $127.7 million (1.5% of total Company portfolio) of Boeing product
financings in the total Company portfolio. Other accounted for $36.9 million
(0.4% of total Company portfolio) of Boeing product financings in the total
Company portfolio. For financial information about the Company's segments, see
Note 15 of "Notes to Consolidated Financial Statements" included in Item 8.
AIRCRAFT FINANCIAL SERVICES (AFS) SEGMENT
Aircraft Financial Services, primarily located at the Company's headquarters in
Renton, Washington, specializes in secured financing for customers acquiring
commercial aircraft. This segment also operates in four international offices:
Stockholm, Sweden; Brussels, Belgium; Dublin, Ireland; and Hong Kong, China. The
Company's strategy is to generate and participate in finance transactions in
which the Company's structuring and analysis can provide satisfactory returns on
its invested capital and to assist in arranging financing for Boeing's
customers. Aircraft Financial Services also invests in used aircraft subject to
leases to commercial airlines where such investments can be structured to
provide a satisfactory return on invested capital.
The Company generally enters into agreements or commitments to purchase
commercial aircraft only when such aircraft are subject to a signed lease
contract or signed commitment letter from an airline. At December 31, 2001, the
Company owned or participated in the ownership of 265 leased commercial
aircraft.
- - Aircraft Financial Services Financing Assets and Other Assets
The Aircraft Financial Services financing and other assets were comprised of the
following aircraft types at December 31:
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Portfolio(1)
B-717 $ 1,518.8 $ 246.6 $ -
B-737 704.1 427.0 140.9
B-747 279.3 91.2 -
B-757 691.5 331.1 34.0
B-767 389.5 436.8 86.5
B-777 523.9 48.2 -
DC-9(2) 151.7 30.9 37.3
MD-80(2) 497.1 350.4 348.8
MD-90(2) 141.4 162.7 95.8
DC-10(2) 92.6 72.0 66.9
MD-11(2) 806.0 936.3 453.0
Other(3) 305.7 186.6 147.6
--------------------------------------------
6,101.6 3,319.8 1,410.8
--------------------------------------------
Held for Sale or Re-Lease
B-737 19.3 - -
B-757 36.3 - -
B-767 43.2 - -
DC-9(2) 1.1 6.6 0.3
MD-80(2) 13.0 12.6 -
MD-90(2) 20.6 - -
DC-10(2) 17.3 19.1 17.6
MD-11(2) 231.0 - -
Other(3) 17.4 20.2 25.5
--------------------------------------------
399.2 58.5 43.4
--------------------------------------------
Other Assets(4)
B-717 41.8 42.2 -
B-727(2) 35.8 - -
B-737 27.3 25.6 -
B-747 27.3 25.6 -
B-767 21.0 19.6 -
Other(3) 10.4 - -
--------------------------------------------
163.6 113.0 -
--------------------------------------------
$ 6,664.4 $ 3,491.3 $ 1,454.2
============================================
(1) Includes owned aircraft and aircraft collateralizing receivables, some of which are subordinated.
(2) Out of production, but currently supported by Boeing with respect to parts and other services.
(3) Some of these aircraft are out of production but are supported by the manufacturer or other third parties
with respect to parts and other services.
(4) Represents aircraft collateralizing enhanced equipment trust certificates
("EETC's"), equipment trust certificates ("ETC's") and other investments held
by the Company.
At December 31, 2001, 59.8% of the Aircraft Financial Services portfolio was
comprised of aircraft less than five years old, 21.1% was comprised of aircraft
between five and nine years old, 9.3% was comprised of aircraft between 10 and
14 years old, 5.1% was comprised of aircraft between 15 and 19 years old and
4.7% was comprised of aircraft 20 years and older.
- - Aircraft Financial Services Portfolio by Product Type
- ------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Financing leases:
Domestic $ 2,622.6 $ 844.8 $ 723.2
Foreign 271.1 240.1 141.3
---------------------------------------------
---------------------------------------------
2,893.7 1,084.9 864.5
---------------------------------------------
---------------------------------------------
Operating leases:
Domestic 491.2 355.1 297.8
Foreign 1,579.3 1,395.3 193.5
---------------------------------------------
2,070.5 1,750.4 491.3
---------------------------------------------
Notes receivable:
Domestic 746.5 134.4 31.4
Foreign 390.9 350.1 23.6
---------------------------------------------
1,137.4 484.5 55.0
---------------------------------------------
$ 6,101.6 $ 3,319.8 $ 1,410.8
=============================================
At December 31, 2001, the Company's Aircraft Financial Services portfolio was
comprised of financing leases to 30 customers (23 domestic and seven foreign)
with a carrying amount of $2,893.7 million (33.8% of total Company portfolio),
operating leases to 42 customers (ten domestic and 32 foreign) with a carrying
amount of $2,070.5 million (24.1% of total Company portfolio) and notes
receivable from 22 customers (six domestic and 16 foreign) with a carrying
amount of $1,137.4 million (13.3% of total Company portfolio).
At December 31, 2001, 67.6% of the Company's total portfolio consisted of
financings related to Boeing aircraft including aircraft manufactured by
McDonnell Douglas Corporation ("McDonnell Douglas"), a wholly owned subsidiary
of Boeing, compared with 60.4% and 43.4% at December 31, 2000 and 1999,
respectively. The portion of the Company's total portfolio attributed to
McDonnell Douglas aircraft was 19.7%, 29.9% and 34.4% at December 31, 2001, 2000
and 1999, respectively.
- - Aircraft Financial Services Guarantees
At December 31, 2001, the Company was the beneficiary under $1,441.8 million of
guarantees with respect to its Aircraft Financial Services portfolio relating to
transactions with a carrying amount of $3,062.9 million (50.2% of Aircraft
Financial Services portfolio). Any guarantee calls by the Company would be net
of realization of underlying residual values, partial rent payments, re-lease
rental payments or other mitigating value received. The following table
summarizes such guarantees:
- ------------------------------------------------------------------------------------------------------------------------
Domestic Foreign
(Dollars in millions) Airlines Airlines Total
- ------------------------------------------------------------------------------------------------------------------------
Amounts guaranteed by:
Boeing $ 971.1 $ 269.7 $ 1,240.8
McDonnell Douglas 127.3 12.8 140.1
Other(1) 25.6 35.3 60.9
-----------------------------------------------------------
$ 1,124.0 $ 317.8 $ 1,441.8
===========================================================
(1) Excludes guarantees made by entities affiliated with the primary obligor.
Guarantee amounts by aircraft type at December 31, 2001:
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Guarantee Net Asset Value
- -------------------------------------------------------------------------------------------------------------------------
B-717 $ 816.7 $ 1,420.4
Out of production widebodies 368.6 819.8
Out of production narrowbodies 122.8 168.7
Other Boeing, McDonnell Douglas and regional aircraft 133.7 654.0
-----------------------------------------------------
$ 1,441.8 $ 3,062.9
=====================================================
In addition to the above guarantees, the Company has $77.4 million of guarantees
relating to investments reported in other assets, primarily from Boeing. The
guarantees in favor of the Company are both full and partial in nature and
include, but are not limited to, residual value guarantees, first loss
deficiency guarantees and rental guarantees. First loss deficiency guarantees
are guarantees covering a specified portion of the Company's losses on aircraft
financed by the Company in the event of a default by the lessee. Rental
guarantees are whole or partial guarantees covering the Company against the
lessee's failure to pay rent under the lease agreement.
- - Factors Affecting the Aircraft Financial Services Portfolio
Significant Concentrations
A substantial portion of the Company's total portfolio is concentrated among the
Aircraft Financial Services' customers. The five largest Aircraft Financial
Services' customers accounted for $2,967.6 million (34.6% of total Company
portfolio) and $1,108.6 million (21.4% of total Company portfolio) at December
31, 2001 and 2000, respectively. Three of the Aircraft Financial Services'
customers each account for more than 5.0% of the total Company portfolio at
December 31, 2001.
The Company's largest customer, American Airlines, Inc. ("American"), accounted
for $987.4 million (11.5% of total Company portfolio) and $115.7 million (2.2%
of total Company portfolio) at December 31, 2001 and 2000, respectively. Based
on publicly available reports, American experienced a significant loss of $798.0
million in the fourth quarter of 2001. Overall, American's full-year 2001 net
loss was $1.8 billion as compared to net earnings of $770.0 million in 2000. In
January 2002, American announced an agreement with Boeing to retire its B-717
aircraft fleet by June 2002.
See further discussion in "Current Commercial Aircraft Market Conditions."
The Company's second largest customer, United Airlines ("United"), accounted for
$666.1 million (7.8% of total Company portfolio) and $161.6 million (3.1% of
total Company portfolio) at December 31, 2001 and 2000, respectively. Based on
publicly available reports, United also experienced a significant loss of $308.0
million in the fourth quarter of 2001. United's loss for the full year 2001
totaled $2.1 billion. In addition, the Company also has investments of $75.7
million in United ETC's, which are included in other assets.
The Company's third largest customer, AirTran Holdings, Inc. ("AirTran"),
accounted for $605.1 million (7.1% of total Company portfolio) and $128.1
million (2.5% of total Company portfolio) at December 31, 2001 and 2000,
respectively. Based on publicly available reports, AirTran's loss for the fourth
quarter of 2001 was $14.2 million versus a $13.1 million profit for the same
time period in 2000. Results for the total year 2001 was a loss of $2.8 million
versus a $47.4 million profit in 2000. In addition, the Company also has
investments of $41.8 million in AirTran EETC's, which are included in other
assets.
Five Largest Customers
The following table includes the five largest Aircraft Financial Services
customers at December 31, 2001, with their related balances at December 31,
2000:
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value % Total Portfolio Net Asset Value % Total Portfolio
- ------------------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2001 December 31, 2000 December 31, 2000
(Dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------
American $ 987.4 11.5% $ 115.7 2.2%
United(1) 666.1 7.8 161.6 3.1
AirTran(1) 605.1 7.1 128.1 2.5
Viacao Aerea Rio- Grandense
378.7 4.4 339.4 6.5
Hawaiian Airlines 330.3 3.9 - -
---------------------- -----------------------
$ 2,967.6 $ 744.8
====================== =======================
(1) Excludes investments in EETC's and ETC's, which are included in other assets.
Restructuring Requests
The Company's fourth largest customer, Viacao Aerea Rio-Grandense ("VARIG"),
accounted for $378.7 million (4.4% of total Company portfolio) and $339.4
million (6.5% of total Company portfolio) at December 31, 2001 and 2000,
respectively. VARIG has defaulted on its obligations under leases with the
Company in recent years, which has resulted in deferrals and restructurings. The
Company and VARIG have entered into a memorandum of understanding to restructure
several existing leases. Certain leases will have their terms extended and rents
reduced. Definitive documentation has been entered into for the sale and
leaseback of several additional aircraft. Boeing has provided the Company with a
first loss deficiency and partial lease rental guarantees covering $241.5
million of the VARIG obligations. Taking into account these guarantees, the
Company does not expect the VARIG transactions to have a material adverse effect
on the Company's earnings, cash flows or financial position.
World Airways, Inc. ("World") accounted for $188.3 million (2.2% of total
Company portfolio) and $166.1 million (3.2% of total Company portfolio) at
December 31, 2001 and 2000, respectively. World has requested a reduction and
deferral of lease payments on two MD-11 aircraft and one DC-10 aircraft leased
from the Company. World is not current on its payments. The Company has
preliminarily agreed to restructure the two MD-11 aircraft lease agreements.
Boeing and McDonnell Douglas have provided the Company with first loss
deficiency guarantees covering $76.8 million of the World obligations. Taking
into account these guarantees, the Company does not expect the World
transactions to have a material adverse effect on the Company's earnings, cash
flows or financial position.
For discussion on customer restructuring requests related to the September 11,
2001 attacks, see "Impacts of the September 11, 2001 Terrorist Attacks" in Item
7.
- - Current Commercial Aircraft Market Conditions
The terrorist attacks of September 11, 2001 have had a significant negative
impact on U.S. and world economies that had been in a downturn at the time of
the attacks. In particular, the airline industry has been materially and
adversely impacted, especially the U.S. airlines and foreign airlines flying
routes to the U.S. Airlines have cut back their routes and frequencies of
flights to deal with the reduction in air traffic. The major U.S. airlines
reported significant financial losses in the fourth quarter of 2001 and profits
of European and Asian airlines also declined. Recent trends indicate that air
travel growth and airline revenue will gradually return to pre-September 11,
2001 levels. As this happens, the Company expects airlines to slowly expand
their routes and frequencies and return to profitability.
The Company's financial performance is dependent in part upon general economic
conditions, which may affect the profitability of the commercial airlines with
which the Company does business. The long-term worldwide market for commercial
aircraft is predominantly driven by long-term trends in airline passenger
traffic. The principal factors underlying the long-term traffic growth are
sustained economic growth, both in developed and emerging countries, and
political stability.
The Company believes that realizable values for its aircraft at lease maturity
are likely to remain at or above the residual values actually recorded by the
Company, but this valuation is subject to many uncertainties, including the
aftermath of the terrorist attacks of September 11, 2001. If the Company is
required, as a result of customer defaults, to repossess a substantial number of
aircraft prior to the expiration of the related lease or financing and the
airline industry has not recovered from the terrorist attacks, the Company could
incur substantial losses in remarketing the aircraft, which could have a
material adverse effect on the Company's earnings, cash flows or financial
position.
On October 18, 2001, Boeing announced that it was evaluating a range of
alternatives with respect to its B-717 commercial aircraft program, including
stopping production. Subsequently, on December 13, 2001, Boeing announced it had
decided to continue production of the B-717 aircraft but at a lower production
rate. On January 16, 2002, American announced that it would retire (and return
to the lessors) its fleet of B-717 aircraft by June 2002. Taking into account
certain long-term rental guarantees from Boeing in favor of the Company covering
the 24 B-717 aircraft the Company presently leases to American, the Company does
not expect that the return of these aircraft to the Company by American will
have a material adverse effect on the earnings, cash flows or financial position
of the Company.
For further discussion on the commercial aircraft market and the airline
industry, see "Competition and Economic Factors."
- - Factors Affecting Aircraft Financial Services Volume
At December 31, 2001, the Company had commitments to provide leasing and other
financing related to commercial aircraft totaling $1,224.4 million.
Additionally, Boeing and Boeing Capital Services Corporation (see "Relationship
with Boeing, McDonnell Douglas and Boeing Capital Services Corporation") had
unfunded commercial aircraft financing commitments of $6,490.3 million at
December 31, 2001. The Company may ultimately fund a portion of such
commitments, subject to approval on a transaction by transaction basis by the
Company's investment committee, which may require credit enhancements from
Boeing or other parties or satisfaction of other conditions to meet the
Company's investment requirements.
The following table lists information on new business volume(1) by financing
type for the Company's Aircraft Financial Services segment:
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Financing leases $ 1,519.7 $ 25.8 $ -
Operating leases 423.5 745.1 -
Notes receivable 940.0 201.0 7.0
Investments in other assets 47.3 29.8 -
--------------------------------------------
$ 2,930.5 $ 1,001.7 $ 7.0
============================================
(1) Excludes transfers from Boeing, unless new financing occurred in current
year.
COMMERCIAL FINANCIAL SERVICES (CFS) SEGMENT
Commercial Financial Services offers lease and loan financing, secured primarily
by personal property. In addition, Commercial Financial Services participates in
senior secured bank loans. Commercial Financial Services seeks to obtain
business through direct solicitation by its marketing personnel and maintains
its principal operations in Long Beach, California with marketing offices in
Atlanta, Georgia; Chicago, Illinois; Detroit, Michigan; Long Beach, California;
Austin, Texas; and New York, New York. Commercial Financial Services specializes
in leasing and financing of commercial equipment such as executive aircraft,
machine tools and production equipment, containers and marine equipment,
chemical, oil and gas equipment and other types of equipment, which are expected
to maintain strong collateral and residual values. Terms are generally between
three and ten years and transaction sizes usually range between $5.0 million and
$50.0 million.
Portfolio balances for the Company's Commercial Financial Services segment are
summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Financing leases $ 776.4 $ 585.7 $ 508.3
Operating leases 715.5 400.7 336.9
Notes receivable 943.1 883.7 652.4
-------------------------------------------
$ 2,435.0 $ 1,870.1 $ 1,497.6
===========================================
- - Factors Affecting the Commercial Financial Services Portfolio
The Company's Commercial Financial Services portfolio is diversified among
executive aircraft, machine tools and production equipment, containers and
marine equipment, chemical, oil and gas equipment and other equipment types.
Executive aircraft represent the highest concentration, accounting for $865.8
million (10.1% of total Company portfolio) and $507.5 million (9.8% of total
Company portfolio) at December 31, 2001 and 2000, respectively. At December 31,
2001 and 2000, no single Commercial Financial Services customer represented a
significant portion of the Company's total portfolio. Executive aircraft
financing, as well as the rest of the Commercial Financial Services portfolio,
depends in part upon general economic conditions that may affect the
profitability of the Company's customers and the residual value of the equipment
financed. The Company believes that realizable values at lease maturity for its
commercial equipment are generally likely to remain at or above the values
actually recorded, but this valuation is subject to many uncertainties,
including changes in economic conditions.
- - Factors Affecting Commercial Financial Services Volume
The particular portion of the commercial finance market in which the Company
generally operates is highly competitive. The following table lists information
on new business volume for the Company's Commercial Financial Services segment:
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Financing leases $ 146.1 $ 151.0 $ 194.1
Operating leases 435.2 152.0 96.8
Notes receivable 355.2 407.7 374.0
---------------------------------------------
$ 936.5 $ 710.7 $ 664.9
=============================================
In 2001, of the $936.5 million in new business volume for Commercial Financial
Services, $332.5 million (35.5%) represented business with foreign lessees or
borrowers. In 2000, of the $710.7 million in new business volume for Commercial
Financial Services, $99.0 million (13.9%) represented business with foreign
lessees or borrowers. For discussion of additional risks associated with foreign
financing, see "Cross-Border Outstandings."
At December 31, 2001, Commercial Financial Services had commitments to provide
leasing and other financing of $322.0 million, compared to $406.6 million at
December 31, 2000. A key factor in the Company's ability to compete in the
commercial finance market is its comparative borrowing costs relative to its
competitors. See "Borrowing Operations" for further discussion on the Company's
borrowing activities.
CROSS-BORDER OUTSTANDINGS
The extension of credit to borrowers located outside of the United States is
called "cross-border" credit. In addition to the credit risk associated with any
borrower, these particular credits are also subject to "country risk" --
economic and political risk factors specific to the country of the borrower that
may affect the borrower's ability or willingness to pay principal and interest
or otherwise perform according to contractual terms. Other risks associated with
these credits include the possibility of insufficient foreign exchange and/or
restrictions on transfer.
At December 31, 2001, 29.0% of the total Company portfolio consisted of amounts
due from customers outside the United States. Substantially all of these amounts
are payable in U.S. dollars, and in the Company's opinion, related risks are
adequately covered by guarantees and allowance for losses. Overall, the Company
has not experienced materially adverse financial consequences as a result of
sales and financing activities outside the United States. The countries in which
the Company's cross-border outstandings (portfolio net of security deposits and
maintenance reserves) exceeded 0.75% of consolidated assets, net of domestic
guarantees of $274.2 million, $384.9 million and $45.5 million for the years
ended December 31, 2001, 2000 and 1999, respectively, consisted of the following
at December 31, 2001, 2000, and 1999:
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------------------------------------------------
Country Financing Leases Notes Operating % of Total
(Dollars in millions) Leases Receivable Leases Total Portfolio
- -------------------------------------------------------------------------------------------------------------------------------
2001
South Korea $ - $ 164.8 $ 277.5 $ 442.3 5.2%
United Kingdom - 166.5 216.8 383.3 4.5
Mexico 137.2 115.9 87.4 340.5 4.0
Brazil 50.4 14.2 238.8 303.4 3.5
Austria - - 143.4 143.4 1.7
China - - 142.0 142.0 1.7
Spain 68.4 4.8 16.2 89.4 1.0
-------------------------------------------------------------------------------
$ 256.0 $ 466.2 $ 1,122.1 $ 1,844.3 21.6%
===============================================================================
2000
Mexico $ 118.1 $ 80.6 $ 38.4 $ 237.1 4.6%
Austria - 76.6 153.9 230.5 4.4
Belgium - - 143.8 143.8 2.8
Brazil 51.5 16.3 71.6 139.4 2.7
Spain 70.1 24.7 25.3 120.1 2.3
South Korea - 67.2 41.0 108.2 2.1
Egypt - 31.3 39.9 71.2 1.4
United Kingdom - 26.4 37.5 63.9 1.2
India - 18.1 43.9 62.0 1.2
Germany - - 56.3 56.3 1.1
Australia - - 46.8 46.8 0.9
Sweden - - 44.2 44.2 0.9
China - - 43.8 43.8 0.8
-------------------------------------------------------------------------------
$ 239.7 $ 341.2 $ 786.4 $ 1,367.3 26.4%
===============================================================================
1999
Mexico $ 126.5 $ 34.2 $ - $ 160.7 5.5%
India - 18.1 46.2 64.3 2.2
Brazil 52.6 3.8 - 56.4 1.9
Sweden - - 46.5 46.5 1.6
Spain - - 34.0 34.0 1.2
Italy - 1.7 30.1 31.8 1.1
British West Indies - 8.2 17.4 25.6 0.9
Canada - 21.7 1.9 23.6 0.8
-------------------------------------------------------------------------------
$ 179.1 $ 87.7 $ 176.1 $ 442.9 15.2%
===============================================================================
Maturities and Sensitivity to Interest Rate Changes
The following table shows the maturity distribution and sensitivity to changes
in interest rates of the Company's domestic and foreign minimum lease payments
and principal payments for notes receivable at December 31, 2001:
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Domestic Foreign Total
- --------------------------------------------------------------------------------------------------------------------------------
2002 $ 1,238.2 $ 184.5 $ 1,422.7
2003 537.0 119.4 656.4
2004 494.6 135.0 629.6
2005 538.2 137.0 675.2
2006 507.9 114.4 622.3
2007 and thereafter 4,100.0 562.4 4,662.4
-----------------------------------------------------
$ 7,415.9 $ 1,252.7 $ 8,668.6
=====================================================
Financing Receivables Due 2002 and Thereafter
Fixed interest rates $ 6,524.4 $ 626.8 $ 7,151.2
Variable interest rates 891.5 625.9 1,517.4
-----------------------------------------------------
$ 7,415.9 $ 1,252.7 $ 8,668.6
=====================================================
Portfolio Quality
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Investment in Financing Assets
Financing receivables:
Financing leases $ 3,670.1 $ 1,670.7 $ 1,372.8
Notes receivable 2,117.9 1,368.7 708.0
-----------------------------------------------------
5,788.0 3,039.4 2,080.8
Equipment under operating leases, net of depreciation 2,786.0 2,151.0 828.2
Equipment held for sale or re-lease 418.5 101.2 66.0
-----------------------------------------------------
$ 8,992.5 $ 5,291.6 $ 2,975.0
=====================================================
Nonearning Assets
Nonaccrual financing receivables $ 159.7 $ 20.8 $ 26.1
Nonearning equipment under operating leases 73.7 2.0 2.9
Equipment held for sale or re-lease 418.5 101.2 66.0
-----------------------------------------------------
$ 651.9 $ 124.0 $ 95.0
=====================================================
Ratio of nonearning financing receivables to total financing
receivables 2.8 % 0.7 % 1.3 %
Ratio of total nonearning assets to total investment in
financing assets(1) 7.2 % 2.3 % 3.2 %
(1) Financing assets represent financing receivables, equipment under operating
leases and equipment held for sale or re-lease.
The increase in 2001 in the ratio of nonearning assets to total investments in
financing assets is primarily a consequence of the general decline of the
aircraft industry, including several bankruptcies prior to the September 11,
2001 terrorist attacks, and the resulting difficulty in re-leasing assets that
are held for sale or re-lease.
ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES AND CREDIT LOSS EXPERIENCE
Analysis of Allowance for Losses on Financing Receivables
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 136.4 $ 60.7 $ 62.1 $ 55.9 $ 48.6
Provision for losses 36.3 10.2 7.4 7.4 11.5
Write-offs, net of recoveries (36.5) (12.4) (8.8) (2.5) (2.5)
Allowance acquired from Boeing 3.3 77.9 - - -
Other - - - 1.3 (1.7)
----------------------------------------------------------------------------
Balance, end of year $ 139.5 $ 136.4 $ 60.7 $ 62.1 $ 55.9
============================================================================
Allowance as percent of total receivables 2.4 % 4.5 % 2.9% 3.3 % 3.1 %
Net write-offs as percent of average
receivables 0.8 % 0.5 % 0.4% 0.1 % 0.1 %
More than 90 days delinquent:
Amount of delinquent installments $ 21.2 $ 8.7 $ 0.1 $ 0.1 $ 1.5
Total receivables due from delinquent
obligors $ 152.8 $ 129.2 $ 0.8 $ 1.0 $ 5.8
Total receivables due from delinquent
obligors as a percentage of total
receivables 2.6 % 4.3 % 0.1% 0.1 % 0.3 %
Receivable Write-Offs, Net of Recoveries, by Segment
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services $ 8.8 $ - $ - $ - $ -
Commercial Financial Services 27.7 12.4 8.2 2.3 -
Other - - 0.6 0.2 2.5
-----------------------------------------------------------------
$ 36.5 $ 12.4 $ 8.8 $ 2.5 $2.5
=================================================================
At December 31, 2001, the carrying amount of impaired loans was $192.0 million.
Impaired loans are loans that the Company estimates it will not be able to
collect all amounts due according to the contractual terms of the loan
agreement, excluding insignificant delays and shortfalls. A specific impairment
allowance for losses of $7.7 million was allocated for $52.0 million of impaired
loans. A specific impairment allowance is recorded for collateral dependent
loans based on the difference between the estimated net fair value of the
collateral and the carrying value of the loan As a result, 5.5% of the Company's
allowance for losses on financing receivables was allocated to specific
reserves. The remaining $131.8 million (94.5% of the allowance for losses on
financing receivables) is designated for general purposes and represents the
Company's best estimate of inherent losses in the remaining financing
receivables considering delinquencies, loss experience, collateral and
guarantees. As of December 31, 2001, the Company had $1,441.8 million of
guarantees with respect to its Aircraft Financial Services portfolio relating to
transactions with a carrying amount of $3,062.9 million (50.2% of Aircraft
Financial Services portfolio). At December 31, 2000, the carrying amount of
impaired loans was $126.8 million. The specific impairment allowance for losses
at December 31, 2000 was $8.6 million for $10.4 million of impaired loans.
Actual results could differ from estimates and values, and there can be no
assurance that the allowance for losses will be sufficient to cover losses on
financing receivables.
The portfolio at December 31, 2001 included three airline obligors to which
payment extensions had been granted. At December 31, 2001, payments so extended
amounted to $16.1 million, and the aggregate carrying amount of the related
receivables was $382.2 million.
BORROWING OPERATIONS
The Company principally relies on funds from operations and borrowings to
operate its business. Borrowings include commercial paper, secured and unsecured
senior and subordinated debt and bank borrowings. The Company also utilizes
interest rate swap agreements to manage interest costs and risk associated with
changing interest rates. See Note 9 of "Notes to Consolidated Financial
Statements" included in Item 8.
As of November 23, 2001, $2.0 billion of Boeing's 364-day revolving credit line
was made exclusively available to the Company. The agreements relating to the
new credit line are included with this Report on Form 10-K as Exhibit 10.1, 10.2
and 10.3. At December 31, 2001, there were no amounts outstanding under this
agreement.
At December 31, 2001 and 2000, borrowings under commercial paper, totaling $43.5
million and $652.9 million, respectively, were supported by unused commitments
available to the Company under Boeing's 364-day revolving credit line.
At December 31, 2001 and 2000, the Company also had available approximately
$60.0 million in uncommitted bank credit facilities whereby the Company may
borrow, at interest rates which are negotiated at the time of the borrowings,
upon such terms as the Company and the banks may mutually agree. At December 31,
2001 and 2000, the Company had no outstanding borrowings under these credit
facilities.
On July 7, 1999, the Company filed with the SEC a Form S-3 Registration
Statement (SEC File No. 333-82391) for a public shelf registration of $2.5
billion of debt securities. This Registration Statement was further amended in
the third quarter of 2000, increasing the amount to $2.64 billion. On September
27, 2000, the Company received proceeds from the issuance of $1.5 billion, in
aggregate, of senior notes consisting of $500.0 million of variable rate notes
due 2002 and $1.0 billion of fixed rate notes due 2005 and 2010, with interest
rates of 7.10% and 7.375%. The remaining $1.14 billion was allocated to the
Company's Series XI medium-term note program, which was issued in its entirety
prior to December 31, 2001. At December 31, 2001, these medium-term notes had
interest rates ranging from 1.90% to 6.68% and maturities ranging from one to
seven years.
On February 16, 2001, the Company filed with the SEC a Form S-3 Registration
Statement (SEC File No. 333-55846) for a public shelf registration of $5.0
billion of debt securities. As of December 31, 2001, the Company had received
proceeds from the issuance of $3.25 billion, in aggregate, of senior notes at
rates ranging from 5.65% to 6.50% and with maturities ranging from five to ten
years. Effective October 31, 2001, $1.0 billion was allocated to the Company's
Series XI medium-term note program. In March 2002, the Company issued $100.0
million of fixed rate medium-term notes due 2004 at an interest rate of 4.13%
and $120.0 million of variable rate medium-term notes due 2005. After the above
issuances, an aggregate amount of $1.53 billion remains available under this
Registration Statement for potential debt issuance.
On February 22, 2002, the Company filed with the SEC a Form S-3 Registration
Statement (SEC File No. 333-83208) for a public shelf registration of $5.0
billion of debt securities. On March 4, 2002, the SEC declared such Registration
Statement to be effective. No amounts have been allocated or issued under this
latest public shelf registration. The Company plans to allocate $1.0 billion of
this new public shelf registration to a new medium-term note program involving
the sale of notes with a minimum denomination of $1,000.
The following table sets forth the Company's average debt and weighted average
interest rates:
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Average short-term debt
outstanding $ 342.4 $ 410.8 $ 193.9 $ 134.6 $ 114.0
Weighted average interest rate for
issuances
during the year 4.38 % 5.99 % 5.24 % 5.83 % 5.72 %
Average long-term debt
outstanding $ 5,400.3 $ 2,846.5 $ 1,760.4 $ 1,646.2 $ 1,606.2
Weighted average interest
rate 5.78 % 7.19 % 6.81 % 7.21 % 7.34 %
Average total debt
outstanding $ 5,742.7 $ 3,257.3 $ 1,954.3 $ 1,780.8 $ 1,720.2
Weighted average interest
rate 5.70 % 7.04 % 6.65 % 7.12 % 7.25 %
The effective costs presented in the preceding table include costs of commitment
fees and related borrowing costs. They do not necessarily predict future costs
of funds. For further information on the Company's cost of funds, refer to
"Capital Resources and Liquidity" in Item 7.
The following are ratios of income to fixed charges for each of the past five
years:
-----------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------
1.73 1.72 1.93 1.79 1.67
Income consists of income from continuing operations before provision for income
taxes and fixed charges. Fixed charges include interest and related debt
expense, and preferred stock dividends grossed up to a pre-tax basis.
The Company generally attempts to follow an overall "matched funding" policy.
Under the policy, the Company endeavors to fund assets that mature or reprice in
a given period with liabilities having similar characteristics. Mismatches occur
because the Company's assets generally amortize on a monthly or quarterly basis
while, responding to preferences among fixed-income investors, borrowings of the
Company generally do not amortize monthly or quarterly, but are due in full on
stated maturity dates. Furthermore, liabilities are usually issued for
maturities preferred by debt investors (e.g., for five or ten years but not,
say, eight years). The Company tries to maintain, and believes it is largely
successful at maintaining, the effective average term (the duration) of its
assets and liabilities in close-enough harmony so as to avoid significant risk
due to funding mismatches. To some extent, in order to modify the pricing
characteristics of the portfolio to achieve better alignment of assets and
liabilities, interest rate derivative instruments may be employed.
CREDIT RATINGS
The Company's access to capital at rates that allow for a reasonable return on
new business can be affected by credit rating agencies' ratings of the Company's
debt.
On December 17, 2001, Moody's lowered the credit ratings of the Company's senior
unsecured, subordinated debt and short-term debt ("commercial paper") from A2 to
A3, A3 to Baa1 and P-1 to P-2, respectively. Moody's ratings outlook for the
Company is stable.
On February 5, 2002, Standard & Poor's lowered the credit ratings on the
Company's senior unsecured debt, subordinated debt and commercial paper from AA-
to A+, A+ to A and A-1+ to A-1, respectively. Standard & Poor's ratings outlook
for the Company is stable.
Although security ratings may 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.
COMPETITION AND ECONOMIC FACTORS
The Company is subject to competition from other financial institutions,
including commercial banks, finance companies and leasing companies, some of
which are larger than the Company and have greater financial resources, greater
leverage ability and lower effective borrowing costs. These factors permit many
competitors to provide financing at lower rates than the Company. In its
Aircraft Financial Services and Commercial Financial Services segments, the
ability of the Company to compete in the marketplace is principally based on
rates which the Company charges its customers, which rates are related to the
Company's access to and cost of funds and the ability of the Company to utilize
tax benefits attributed to leasing. See "Aircraft Financial Services Segment -
Factors Affecting Aircraft Financial Services Volume," "Commercial Financial
Services Segment - Factors Affecting Commercial Financial Services Volume,"
"Relationship With Boeing, McDonnell Douglas and Boeing Capital Services
Corporation" and "Borrowing Operations." Competitive factors also include, among
other things, the Company's ability to be relatively flexible in its structuring
arrangements with new and existing customers. Although the Company is
particularly subject to risks inherent in the airline and aircraft manufacturing
industries, the ability of the Company to generate new business is also
dependent upon, among other factors, the capital equipment requirements of
domestic and foreign businesses and the availability of capital.
Aircraft owned or financed by the Company may become significantly less valuable
because of the discontinuation of existing aircraft models or the introduction
of new aircraft models which may be more economical to operate, the aging of
particular aircraft, technological obsolescence such as that caused by
legislation and regulations for noise abatement which now prohibit the use of
older, noisier (Stage 2) aircraft in the United States, or a near-term
oversupply of the number or type of aircraft for sale. Additionally, legislation
and regulations may in the future prohibit use in certain parts of the world
(e.g., Europe) of certain types of aircraft with hushkits. At December 31, 2001,
the Company's financing assets included Stage 2 aircraft with an aggregate net
asset value of $26.5 million (0.4% of Company's total Aircraft Financial
Services portfolio, including any aircraft held for sale or re-lease).
Boeing's 20-year forecast of the average long-term growth rate in passenger
traffic is 4.7% annually, based on projected average worldwide annual economic
real growth of 3.0% over the 20-year period.
Based on global economic growth projections over the long term and taking into
consideration increasing utilization levels of the worldwide aircraft fleet and
requirements to replace older aircraft, Boeing projects almost a $5.0 trillion
market for new aircraft and services over the next 20 years.
RELATIONSHIP WITH BOEING, MCDONNELL DOUGLAS AND BOEING CAPITAL SERVICES
CORPORATION
Boeing operates in the following principal areas: commercial aircraft, military
aircraft and missile systems, space and communications and customer and
commercial financing. For the year ended December 31, 2001, Boeing recorded
revenues of $58.2 billion and net earnings of $2.8 billion. At December 31,
2001, Boeing had assets of $48.3 billion and shareholders' equity of $10.8
billion.
At December 31, 2001, Boeing and McDonnell Douglas provided various types of
partial and full guarantees of $1,240.8 million and $140.1 million,
respectively, on the Company's Aircraft Financial Services portfolio, including
first loss guarantees, residual value guarantees and rental loss guarantees. In
addition, McDonnell Douglas is the lessee under one of the Company's commercial
aircraft transactions, which accounted for $17.5 million of the Company's
Aircraft Financial Services portfolio at December 31, 2001.
Boeing Capital Services Corporation ("BCSC") is a largely inactive holding
company, which owns 100% of the Company and is an indirect wholly owned
subsidiary of Boeing.
For a further description of significant factors that may affect Boeing, see
Boeing's Form 10-K for the year ended December 31, 2001 (SEC File No.
001-00442). See further discussion in Notes 3 and 13 in the "Notes to
Consolidated Financial Statements" included in Item 8.
- - Operating Agreement
An operating agreement (the "Operating Agreement") governs certain important
aspects of the relationship between the Company, BCSC and Boeing relating to the
purchase and sale of commercial aircraft receivables, the leasing of commercial
aircraft, the remarketing of such aircraft returned to or repossessed by the
Company under leases or secured loans and the allocation of federal income taxes
between the companies. The Operating Agreement between the Company, BCSC and
Boeing was executed on September 13, 2000 and replaces the previous operating
agreement between the Company and McDonnell Douglas. The Operating Agreement was
filed with the SEC on Form 8-K, dated September 13, 2000.
The Operating Agreement provides, subject to certain exceptions, that Boeing
will make available to the Company the opportunity to provide financing of
Boeing products including commercial aircraft. Additionally, under certain
limited circumstances, the Company is given the option to tender to Boeing
commercial aircraft it is attempting to remarket at a price equal to the fair
market value of the aircraft less 5%.
- - Federal Income Taxes
The Company and Boeing presently file a consolidated federal income tax return
with the tax payments, if any, being made by Boeing. The Operating Agreement
provides that so long as consolidated federal tax returns are filed, payments
shall be made by Boeing to the Company or by the Company to Boeing, as
appropriate, equal to the difference between the consolidated tax liability and
Boeing's tax liability computed without consolidation with the Company. If,
subsequent to any such payments by Boeing, it incurs tax losses that may be
carried back to the year for which such payments were made, the Company
nevertheless will not be obligated to repay to Boeing any portion of such
payments. Furthermore, the Company and McDonnell Douglas have been operating
since 1975 under an informal arrangement, which has entitled the Company to rely
upon the realization of tax benefits for the portion of projected taxable
earnings of the parent allocated to the Company. This has been important in
planning the volume of and pricing for the Company's leasing activities. This
arrangement continues with Boeing. Under the informal arrangement, alternative
minimum taxes are disregarded and intercompany payments are made when such taxes
are due or tax benefits are realized by Boeing based on the assumption that
taxes are due or tax benefits are realized up to 100% of the amounts forecasted
by the Company with the amounts varying from such forecast settled in the year
realized by Boeing. There can be no assurance that this (and other) intercompany
arrangements will not change from time to time.
The Company's ability to price its business competitively and obtain new
business volume is significantly dependent on its ability to realize the tax
benefits generated by its leasing business. To the extent that Boeing would be
unable on a long-term basis to utilize such tax benefits, or if the informal
arrangement is not continued in its present form, the Company would be required
to restructure its financing activities and to reprice its new financing
transactions so as to make them generate satisfactory returns without regard to
Boeing's utilization of tax benefits since there can be no assurance that the
Company would be able to utilize such benefits currently. See "Competition and
Economic Factors."
- - Intercompany Services
Boeing provides to the Company certain payroll, employee benefit, facilities and
other services, for which the Company generally pays the actual cost. See Note
13 of "Notes to Consolidated Financial Statements" included in Item 8.
- - Intercompany Credit Arrangements
As of November 23, 2001, $2.0 billion of Boeing's 364-day revolving credit line
was made exclusively available to the Company. At December 31, 2001, the Company
had no borrowings under the credit line. Any borrowings under the credit line
would be guaranteed by Boeing.
The Company may borrow from Boeing, and Boeing and its subsidiaries may borrow
from the Company, short-term funds at agreed upon rates and maturities. Under
this arrangement, neither the Company nor Boeing had borrowings outstanding at
December 31, 2001 or 2000. During 2001, the Company's highest level of
borrowings from Boeing was $147.0 million under this arrangement. During 2001,
Boeing's highest level of borrowings from the Company was $409.8 million.
The Company may borrow from BCSC, and BCSC and its subsidiaries may borrow from
the Company, short-term funds at agreed upon rates and maturities. Under this
arrangement, the Company had no borrowings outstanding at December 31, 2001 and
2000, respectively. BCSC had borrowings of $59.3 million and $11.7 million
outstanding from the Company at December 31, 2001 and 2000, respectively. During
2001, the Company's highest level of borrowings from BCSC was $12.1 million.
During 2001, BCSC's highest level of borrowings from the Company was $94.2
million.
EMPLOYEES
At December 31, 2001, the Company had 201 employees, compared to 143 at December
31, 2000. The increase is related to the growth in the business. None of these
employees is covered by collective bargaining agreements. The Company believes
its employee relations are satisfactory. As of the filing date, the Company had
208 employees.
Item 2. Properties
The Company leases all of its office space and other facilities under operating
leases. The Company's headquarters is located in Renton, Washington, with a
principal office located in Long Beach, California. The Company also has seven
regional marketing offices located throughout the United States and four
international offices in Stockholm, Sweden; Brussels, Belgium; Dublin, Ireland;
and Hong Kong, China. The Company believes that its properties, including the
equipment located therein, are suitable and adequate to meet the requirements of
its business.
Item 3. Legal Proceedings
Various legal proceedings and claims are pending or have been asserted against
the Company, many of which 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 flows 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.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
All of the Company's preferred and common stock is owned by BCSC. Accordingly,
there is no public trading market for the Company's stock. In 2001 and 2000, the
Company did not declare or pay dividends on its common stock to BCSC. The
Company paid $3.5 million in dividends on its preferred stock in both 2001 and
2000.
The provisions of the most restrictive debt covenant prohibit the payment of
cash dividends by the Company to the extent that the Company's consolidated
assets would be less than 115% of its consolidated liabilities after dividend
payments. At December 31, 2001, as well as during the year, the Company was in
compliance with all its debt covenants.
Item 6. Selected Financial Data
The selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements at December 31, 2001 and for the
year then ended and with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The following table sets forth
selected consolidated financial data for the Company:
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Financing volume(1) $ 3,906.4 $ 1,712.4 $ 671.9 $ 692.6 $ 591.1
Statement of income data:
Revenues $ 663.1 $ 447.9 $ 285.2 $ 260.1 $ 246.4
Expenses 424.9 280.0 158.5 155.5 158.6
Net income 151.7 107.2 78.2 71.5 56.1
Dividends paid $ 3.5 $ 3.5 $ 35.5 $ 43.9 $ 28.5
Ratio of income to fixed charges(2) 1.73 1.72 1.93 1.79 1.67
Balance sheet data:
Total assets $ 9,823.0 $ 5,655.9 $ 3,043.6 $ 2,861.4 $ 2,722.8
Total debt 7,295.4 4,317.5 2,057.7 1,970.3 1,797.9
Shareholder's equity 1,370.5 672.1 423.4 380.7 353.1
Ratio of debt-to-equity 5.32 6.42 4.86 5.18 5.09
(1) Excludes transfers from Boeing, unless new financing occurred in current
year.
(2) For the purpose of computing the ratio of income from continuing operations
to fixed charges, income consists of income before provision for income
taxes and fixed charges; and fixed charges consist of interest expense and
preferred stock dividend requirement (grossed up to a pre-tax basis).
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the consolidated financial
statements included in Item 8.
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) that involve risk and uncertainty. The
words "aim", "believe", "expect", "anticipate", "intend", "estimate", "will",
"should", "could", and other expressions that indicate future events and trends
identify forward-looking statements. Certain statements in this Form 10-K and
particularly in Items 1, 3, 7, 7A and 8 may contain forward-looking information.
The subject matter of such statements may include, but not be limited to, the
effects of the September 11, 2001 terrorist attacks, the impact on the Company
of strategic decisions by Boeing, the level of new financing opportunities made
available to the Company by Boeing, 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 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 Company's
relationship with Boeing, McDonnell Douglas and BCSC, as well as strategic
decisions by Boeing relating to the Company, the effects of the September 11,
2001 terrorist attacks, the capital equipment requirements of domestic and
foreign businesses, capital availability and cost, changes in laws and tax
benefits, the tax position of Boeing (including the applicability of the
alternative minimum tax), competition from other financial institutions, the
Company's successful execution of internal operating plans, defaults by
customers, regulatory uncertainties and legal proceedings.
Impacts of the September 11, 2001 Terrorist Attacks
The terrorist attacks of September 11, 2001 have had a significant negative
impact on U.S. and world economies that had been in a downturn at the time of
the attacks. In particular, the airline industry has been materially and
adversely impacted, especially the U.S. airlines and foreign airlines flying
routes to the U.S. Airlines have cut back their routes and frequencies of
flights to deal with the reduction in air traffic. The major U.S. airlines
reported significant financial losses in the fourth quarter of 2001 and profits
of European and Asian airlines also declined. Recent trends indicate that air
travel growth and airline revenue will gradually return to pre-September 11,
2001 levels. As this happens, the Company expects airlines to slowly expand
their routes and frequencies of flights and return to profitability.
Following the September 11, 2001 attacks, the Company initially received a
number of requests of both domestic and foreign airlines to reduce lease or
rental payments or to otherwise restructure obligations. Following the initial
round of requests after September 11, 2001, the Company has received some
additional requests although at a reduced amount and rate of request.
Furthermore, some of the requests have been denied, withdrawn or substantially
reduced by the requestor. Restructurings, including those discussed in
"Restructuring Requests" in Item 1 and restructurings still being received and
discussed, are not expected to materially impact the Company's future earnings,
cash flows or financial position.
Subsequent to September 11, 2001, the Company has not experienced a significant
increase in airline delinquencies or defaults. In assessing the adequacy of the
Company's allowance for losses of financing receivables, values of aircraft
securing such receivables were reviewed. Historically, airline values have
recovered to normal levels after significant events such as the Gulf War or
severe economic recessions. In determining impacts on the aircraft values, the
Company estimated which aircraft types would likely be permanently retired from
active fleets and which types would remain active as passenger or freighter
aircraft to estimate which aircraft would suffer a permanent decline in value.
Aircraft in the former category are generally estimated to be older and Stage 2
aircraft and represent approximately 4.8% of total Aircraft Financial Services
portfolio at December 31, 2001. The Company believes that underlying residual
values of such aircraft are fully recoverable upon sale, re-lease or scrapping.
Aircraft types estimated to remain active as passenger or freighter aircraft
were deemed to have no permanent diminution in value. Aircraft scheduled to come
off lease in the near term were reviewed individually to estimate their current
value.
In assessing the adequacy of the allowance for losses on financing receivables,
the Company took into consideration, among other things, the following major
factors in relation to aircraft receivables: the credit quality and payment
history of its obligors, the values of the aircraft collateralizing such
receivables, guarantees from Boeing or other substantive third parties of the
receivables or value of the collateral, prior write-off experience and the
general state of the airline industry.
Residual values of the aircraft in the portfolio expected to be realized at the
end of the lease term were also reviewed and were determined to be realizable
based on current valuations and estimated yearly reductions in the value based
on historical amortization factors. Residual realizations of aircraft sold (at
end of lease term or during lease term) as a percent of net asset values were
206%, 120% and 212% for the years ended December 31, 2001, 2000 and 1999,
respectively.
The effects of the September 11, 2001 terrorist attacks have not had, and the
Company believes they are not likely to have, a material adverse impact on the
Company's earnings, cash flows or financial position. However, no assurance can
be given that such impact will not become material if the economy and the
airlines do not recover as the Company currently expects, resulting in
significant defaults, repossessions or restructurings at a time when aircraft
values or lease rates are significantly lower than currently estimated by the
Company. In addition, if the economy and the airlines fail to recover as
expected, the Company may find it more difficult to sell or re-lease previously
leased aircraft or aircraft that come off lease or are returned prior to lease
termination and may be required to hold such aircraft for an extended time.
Diminished availability or increased cost of sufficient insurance could cause
aircraft to be grounded, or increase risk, if allowed to fly.
Given the potential impacts of the September 11, 2001 terrorist attacks and the
additional risks inherent in the airline industry, in the third and fourth
quarter of 2001, the Company and Boeing elected to reduce the Company's debt
leverage (ratio of debt-to-equity) through additional equity contributions from
Boeing. These contributions reduced the Company's debt-to-equity ratio from 6.0
to 1 at June 30, 2001 to 5.3 to 1 at December 31, 2001.
Critical Accounting Policies
The following is a summary of accounting policies the Company believes are most
critical to help put in context a discussion concerning the results of
operations.
Direct Finance Leases At lease commencement, the Company records the aggregate
future minimum lease payments, estimated residual value of the leased equipment,
deferred initial direct costs and unearned income. Income is recognized over the
life of the lease so as to approximate a level rate of return on the net
investment. Residual values, which are reviewed periodically, represent the
estimated amount to be received at lease termination from the disposition of
leased equipment. Actual residual values realized could differ from these
estimates.
Leveraged Leases 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 (a) the net rental receivables and (b) 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 Receivable At note commencement, the Company records the note receivable
and unamortized discounts. Interest income is accrued and related discounts are
amortized at a constant rate over the related term of the loan. Impaired loans
are loans that the Company estimates it will not be able to collect all amounts
due according to the contractual terms of the loan agreement, excluding
insignificant delays and shortfalls. A specific impairment allowance is recorded
for collateral dependent loans based on the difference between the estimated net
fair value of the collateral and the carrying value of the loan.
Equipment Under Operating Leases Equipment leased under operating leases is
recorded at cost and depreciated over the lease term to an estimated residual or
salvage value, on a straight-line basis. Revenue from rentals is recorded to
income on a straight-line basis over the term of the lease.
Equipment Held for Sale or Re-lease Collateral repossessed in satisfaction of a
receivable is written down against the allowance for losses to estimated fair
value of the asset less costs to sell and transferred to equipment held for sale
or re-lease. Equipment held for sale is subsequently carried at the lower of
cost or estimated fair value less costs to sell. Fair value for equipment held
for sale is determined by using both internal and external equipment valuations,
including information developed from the sale of similar equipment in the
secondary market. The Company reviews equipment held for sale for impairment
when events or circumstance indicate that the carrying amount of these assets
may not be recoverable. When impairment is indicated for an asset, the amount of
the impairment loss is the excess of net book value over fair value.
Impairment Review for Equipment Under Operating Leases, Held for Sale or
Re-lease The Company reviews these assets for impairment when events or
circumstances indicate that the carrying amount of these assets may not be
recoverable. An asset is considered impaired when the expected undiscounted cash
flows over the remaining useful life is less than the book value. When
impairment is indicated for an asset, the amount of impairment loss is the
excess of net book value over fair value.
Available-for-Sale Securities The Company holds certain investments that are
treated as "available-for-sale" securities under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These investments are classified as other assets, at their
quoted market values. Unrealized gains and losses are reported in accumulated
other comprehensive income/loss. Realized gains and losses are included in other
income.
Held-to-Maturity Securities Held-to-maturity securities, classified as other
assets, include mandatorily redeemable preferred airline stock, EETC's, ETC's
and debentures for which the Company has the positive intent and ability to hold
to maturity and are reported at amortized cost. Declines in the fair value of
individual held-to-maturity securities below carrying value that are other than
temporary result in write-downs through earnings to fair value as a new cost
basis.
Other Investments Partnership and joint venture interests in which the Company
does not have a controlling interest or a majority ownership are generally
recorded using the equity method of accounting.
Nonaccrual Receivables Income recognition is generally suspended for leases,
loans and other financing receivables at the date when a full recovery of income
and principal becomes doubtful in the opinion of the Company. Income recognition
is resumed when the loan, lease or other financing receivables becomes
contractually current and performance is demonstrated to be resumed.
Allowance for Losses on Financing Receivables The allowance for losses is
available to absorb losses on notes receivable and financing leases and is not
provided for equipment held for sale or re-lease, equipment under operating
leases and residuals. The provision for losses results in a charge to operating
income and increases the allowance for losses to the level the Company estimates
is adequate considering delinquencies, loss experience, collateral and
guarantees. Other factors considered include risk of individual credits,
economic and political conditions, prior loss experience and results of periodic
credit reviews. Amounts are either written off or written down when a loss is
considered probable and determinable, after giving consideration to the
customer's financial condition and the value of the underlying collateral,
including any guarantees. See "Impacts of the September 11, 2001 Terrorist
Attacks" for further discussion of the allowance for losses on financing
receivables.
Derivative Financial Instruments As more fully described in Note 10 of "Notes to
Consolidated Financial Statements" included in Item 8, the Company uses
derivative financial instruments as part of its interest risk management policy.
The derivative instruments used include interest rate swaps, which are generally
subject to hedge accounting determination. Swap agreements are generally held to
maturity and the Company does not use derivative financial instruments for
trading or speculative purposes.
Investment Valuation The Company records certain investment securities at fair
market value based on either quoted market prices or discounted cash flow
analysis. Also, the Company records its interest rate swaps at fair market value
based on discounted cash flow analysis and for warrants and other option type
instruments based on option pricing models.
Off-Balance Sheet Risk The Company has utilized certain special purpose entities
in connection with certain aircraft financing transactions. The Company believes
it has appropriately followed accounting pronouncements regarding consolidation
of such entities. If accounting pronouncements are amended in accordance with
recent public comments made by the Financial Accounting Standards Board, it is
possible that an additional $1.2 billion of assets and non-recourse liabilities
could be added to the Consolidated Balance Sheets.
Impact of Boeing's Customer Financing Consolidation
In 1999, Aircraft Financial Services had negligible new business volume largely
due to the fact that the Company was awaiting the decision made by Boeing in the
fourth quarter of 1999 that the Company should grow its financing business.
Since such decision was made, the Company has been pursuing new business
opportunities.
As of March 31, 2000, the Company acquired certain tangible assets and assumed
certain liabilities of Boeing and certain subsidiaries of Boeing, pursuant to a
Term Sheet dated as of January 1, 2000, as well as the various definitive asset
transfer agreements dated as of March 31, 2000 (collectively referred to as the
"Transfer Agreements"). Under the terms of the Transfer Agreements, the Company
acquired, effective as of January 1, 2000, a significant portion of Boeing's
aircraft customer financing portfolio, including lease and loan agreements and
the related receivables and assets (the "Portfolio"). This transfer was not
accounted for as new business volume. The purchase price was paid in the form of
promissory notes, dated January 1, 2000, in the aggregate principal amount of
$1,261.9 million, together with an equity contribution to the Company of $50.1
million. The Company recorded an intercompany receivable for $17.3 million from
Boeing in consideration for which the Company assumed Boeing's deferred taxes
with respect to the Portfolio. The promissory notes were paid in full during the
third quarter of 2000.
On April 9, 2001, the Company acquired a portfolio of aircraft that were
previously operated by Trans World Airlines, Inc. ("TWA") from Boeing and
entered into amended and restated leases with American or a subsidiary of
American (whose obligations are guaranteed by American), for 51 aircraft,
consisting of 34 MD-80, two B-757 and 15 B-717 aircraft. These acquired assets
were recorded at $859.5 million, which is net of non-recourse financing of
$425.0 million. This non-recourse financing was repaid on May 24, 2001 from
proceeds received on that day from the issuance by American of $1,319.6 million
of EETC's, which is also non-recourse to the Company. Of the proceeds of such
issuance, $634.8 million related to the 32 aircraft in which the Company has an
interest and the proceeds thereof were used by the Company to pay off the
original non-recourse financing and the remainder was applied to general
corporate purposes. Additionally, the Company recorded $143.5 million in
deferred taxes in conjunction with this acquisition. This transfer was not
accounted for as new business volume. After giving effect to this acquisition,
American became the Company's largest customer, accounting for 11.5% and 2.2% of
the total Company portfolio at December 31, 2001 and 2000, respectively. The
Company has received long-term rental guarantees from Boeing on certain of these
shorter-term leases to ensure that the leases meet the Company's minimum
investment requirements. These guarantees represent 6.8% of the total Company
portfolio as of December 31, 2001.
In September 2001, the Company acquired certain tangible assets of Boeing and
certain subsidiaries of Boeing in the amount of $102.3 million through an equity
contribution. $86.7 million of this transfer was accounted for as new business
volume.
On December 1, 2001, the Company acquired certain tangible assets and assumed
certain liabilities of Boeing and certain subsidiaries of Boeing in the net
amount of $340.3 million. The Company received an equity contribution of $272.8
million from Boeing and paid the remaining purchase of $67.5 million in cash.
$272.8 million of this transfer was accounted for as new business volume.
On October 18, 2001, Boeing announced that it was evaluating a range of
alternatives with respect to its B-717 commercial aircraft program, including
stopping production. Subsequently, on December 13, 2001, Boeing announced it had
decided to continue production of the B-717 aircraft but at a lower production
rate. On January 16, 2002, American announced that it would retire (and return
to the lessors) its fleet of B-717 aircraft by June 2002. Taking into account
certain long-term rental guarantees from Boeing in favor of the Company covering
the 24 B-717 aircraft the Company presently leases to American, the Company does
not expect that the return of these aircraft to the Company by American will
have a material adverse effect on the earnings, cash flows or financial position
of the Company.
Boeing and BCSC had unfunded aircraft financing commitments of $6,490.3 million
at December 31, 2001. The Company may ultimately fund a portion of such
commitments, subject to approval on a transaction by transaction basis by the
Company's investment committee, which may require credit enhancements from
Boeing or other parties or satisfaction of other conditions to meet the
Company's investment requirements.
Capital Resources and Liquidity
The growth in assets and funds required for operations is generally financed by
internally generated cash flows and borrowing. The Company attempts to fund its
business such that scheduled receipts from the portfolio will generally
correspond to its expenses and debt payments as they become due. During 2001,
the Company issued $3.9 billion in new senior debt, primarily to finance new
business.
The Company satisfies a significant portion of its cash requirements from
diversified global funding sources and is not dependent on any one lender. The
Company also relies on the issuance of commercial paper as a short-term funding
source. During 2001, the Company issued $11.5 billion of commercial paper, at a
weighted average cost of 4.47% (with average daily outstandings of $336.2
million during the year). Commercial paper and short-term bank borrowings
totaled $43.5 million at December 31, 2001, and were supported by available
unused commitments under Boeing's 364-day revolving credit line.
For discussions related to the Company's borrowing activities, see "Borrowing
Operations" in Item 1. The Company has significant liquidity requirements. The
Company believes that, absent a severe or prolonged economic downturn resulting
in defaults materially in excess of those provided for, receipts from the
portfolio will cover the payment of expenses and debt payments when due. If cash
provided by operations, issuance of commercial paper, borrowings under bank
credit lines and term borrowings do not provide the necessary liquidity, the
Company would be required to restrict its new business volume, unless it
obtained access to other sources of capital at rates that allow for a reasonable
return on new business.
In addition to Boeing and BCSC's unfunded aircraft financing commitments
discussed in "Impact of Boeing's Customer Financing Consolidation," at December
31, 2001, the Company had commitments to provide leasing and other financing
totaling $1,568.7 million, of which $1,224.4 million related to financing new
Boeing commercial aircraft.
Disclosures About Contractual Obligations and Commercial Commitments
The following tables give additional information related to the contractual
obligations and commercial commitments of the Company:
- ----------------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments By Period
- ----------------------------------------------------------------------------------------------------------------------------
Less Than
(Dollars in millions) Total 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------------------------------------------------------------------------------------------------------------
Debt $ 6,903.2 $ 800.3 $ 1,135.1 $ 1,731.2 $ 3,236.6
Capital lease obligations 392.2 40.9 177.8 109.8 63.7
Minimum future rental
commitments 9.8 2.2 4.4 2.7 0.5
--------------------------------------------------------------------------------
$7,305.2 $ 843.4 $1,317.3 $ 1,843.7 $ 3,300.8
================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Commercial Commitments Amount By Period
- -----------------------------------------------------------------------------------------------------------------------------
Less Than
(Dollars in millions) Total 1 Year 1-3 Years 4-5 Years After 5 Years
- -----------------------------------------------------------------------------------------------------------------------------
Contingent liabilities(1) $ 121.9 $ 10.8 $ 12.9 $ 6.9 $91.3
Financing commitments 1,568.7 1,269.0 299.7 - -
---------------------------------------------------------------------------------
$1,690.6 $ 1,279.8 $ 312.6 $ 6.9 $91.3
=================================================================================
(1) Primarily comprised of residual value and other guarantees provided by the Company.
Financing commitments represent commitments to provide leasing and other
financing. These are discussed in Notes 9 and 11 of "Notes to Consolidated
Financial Statements" included in Item 8.
Results of Operations
The following table summarizes the Company's operating results for the years
ended December 31:
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Financing lease income $ 247.6 $ 144.1 $ 114.9
Interest income on notes receivable 142.2 110.2 52.3
Operating lease income, net of depreciation 193.3 135.4 64.2
--------------------------------------------------
Revenue from financing assets 583.1 389.7 231.4
Net gain on disposal 34.0 31.5 51.7
Other 46.0 26.7 2.1
--------------------------------------------------
663.1 447.9 285.2
--------------------------------------------------
Interest expense 321.5 229.2 130.0
Provision for losses 36.3 10.2 7.4
Operating expenses 47.3 34.2 13.8
Other 19.8 6.4 7.3
--------------------------------------------------
424.9 280.0 158.5
--------------------------------------------------
Income before provision for income taxes 238.2 167.9 126.7
Provision for income taxes 86.5 60.7 48.5
--------------------------------------------------
Net income $ 151.7 $ 107.2 $ 78.2
==================================================
2001 Compared to 2000
Net income for 2001 increased 41.5% to $151.7 million from $107.2 million in
2000. A 69.9% growth in investment in financing assets is primarily responsible
for the increase. Higher income earned on investments also contributed. The
increase was partially offset by higher provision for losses, and higher
operating and other expenses.
Investment in financing assets, which represents financing receivables for
leases, notes receivable, equipment under operating leases (net of depreciation)
and equipment held for sale or re-lease, increased to $9.0 billion at December
31, 2001 from $5.3 billion at December 31, 2000. New business volume of $3.9
billion in 2001, up from $1.7 billion in 2000, is primarily responsible for the
increase. The Company also acquired net assets of $1,302.1 million from Boeing.
For further discussion on the Company's portfolio transfers, see "Impact of
Boeing's Customer Financing Consolidation." The increase was partially offset by
normal amortization of the portfolio during the year.
Revenue from Financing Assets
Revenue from financing assets increased 49.6% to $583.1 million in 2001,
compared to $389.7 million in 2000. The record new business volume is primarily
responsible for the increased revenue, partially offset by the increase in
nonearning assets and lower interest earned on variable interest rates on notes
receivable.
Net Gain on Disposal
Net gain on disposal increased 7.9% to $34.0 million in 2001, compared to $31.5
million in 2000. Gains in 2001 included $20.4 million from the sale of equipment
coming off lease, $9.2 million from sale of equipment from early terminations
and $4.3 million from sale of equipment that was classified as equipment held
for sale or re-lease. There can be no assurance that the Company will recognize
such gains in the future. These gains are sporadic in nature and depend in part
on market conditions at the time of disposal. The range of gain activity is
dependent upon the level of residuals on equipment coming off lease, market
activity and conditions and the Company's discretion whether to sell.
Other Income
Other income increased 72.3% to $46.0 million in 2001, compared to $26.7 million
in 2000. The increase in other income is primarily due to $8.3 million in
intercompany interest between the Company and Boeing, dividend income of $4.3
million, $2.5 million of additional interest income from short-term investments,
$2.4 million of income from securities and $1.4 million gains on derivative
instruments.
Interest Expense
Interest expense increased 40.3% to $321.5 million in 2001, compared to $229.2
million in 2000. A higher level of debt outstanding in 2001 to finance new
business volume is primarily responsible for the increase, offset by lower cost
of funds.
Provision for Losses
The provision for losses increased 255.9% to $36.3 million in 2001, compared to
$10.2 million in 2000. The provision for losses was higher in 2001 than in 2000
as the result of a higher level of net write-offs ($36.5 million in 2001 and
$12.4 million in 2000) primarily recorded in the Commercial Financial Services
segment coupled with the growth in investment in financing receivables. The
provision for losses is taken to maintain the allowance for losses at a level
deemed by the Company to be adequate to cover inherent losses in financing
receivables.
Over 70% of the Company's portfolio consists of financing receivables and
operating leases to airline customers. The effects of the September 11, 2001
terrorist attacks have not had, and the Company believes it is not likely to
have, a material adverse impact on the Company and the provision for losses in
future years. See "Impacts of the September 11, 2001 Terrorist Attacks."
However, no assurance can be given that such impact will not become material if
the economy and the airlines do not recover as the Company currently expects,
resulting in significant defaults, repossessions or restructurings at a time
when aircraft values or lease rates are significantly lower than currently
estimated by the Company.
Operating Expenses
Operating expenses increased 38.3% to $47.3 million in 2001, compared to $34.2
million in 2000. Increased staffing (40.6%) is related to the growth in the
business. Additionally, outside legal services and depreciation of non-financing
assets increased, offset by amortization of initial direct costs during 2001.
Other Expenses
Other expenses increased 209.4% to $19.8 million in 2001, compared to $6.4
million in 2000. Other expenses totaling $15.7 million were primarily incurred
to maintain and refurbish aircraft held for sale or re-lease.
2000 Compared to 1999
Revenue from Financing Assets
Financing lease income increased 25.4% to $144.1 million in 2000, compared to
$114.9 million in 1999, primarily attributable to new volume of financing leases
within the Commercial Financial Services portfolio and an increase in financing
leases as a result of the Portfolio acquisition (see "Impact of Boeing's
Customer Financing Consolidation").
Interest on notes receivable increased 110.7% to $110.2 million in 2000,
compared to $52.3 million in 1999, primarily attributable to new volume of
Commercial Financial Services notes receivable and an increase in notes
receivable as a result of the Portfolio acquisition.
Net operating lease income increased 110.9% to $135.4 million in 2000, compared
to $64.2 million in 1999, primarily attributable to new volume of Aircraft
Financial Services operating leases and an increase in operating leases as a
result of the Portfolio acquisition.
Net Gain on Disposal
Gain on disposal decreased 39.1% to $31.5 million in 2000, compared to $51.7
million in 1999, primarily attributable to $28.9 million of income from the
early termination of leases and the buyout of four MD-82 aircraft in December
1999, offset with other sales within the Aircraft Financial Services portfolio
in 2000, as compared to 1999.
Other Income
Other income increased 1,171.4% to $26.7 million in 2000, compared to $2.1
million in 1999, primarily attributable to $12.5 million in income from
securities, $6.3 million of fee income, $1.2 million in intercompany interest
income earned on cash received by Boeing on the Company's behalf for payments on
leases and loans included in the Portfolio acquisition, $1.1 million in
inte