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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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 incorporation or organization)				(I.R.S. Employer Identification No.)

 

500 Naches Ave. SW, 3rd Floor • Renton, Washington		98057
(Address of principal executive offices)		(Zip Code)

(425) 965-4000

 

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                    x  Yes    ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                      x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨				Accelerated filer   ¨
Non-accelerated filer		x		(Do not check if a smaller reporting company)		Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                         ¨  Yes    x  No

Common stock shares outstanding at October 26, 2011: 50,000 shares, all of which were owned by The Boeing Company.

Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

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Table of Contents

 

						Page
Part I. Financial Information (Unaudited)
		Item 1.		Financial Statements			1
				Condensed Consolidated Balance Sheets			1
				Condensed Consolidated Statements of Operations			2
				Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income			3
				Condensed Consolidated Statements of Cash Flows			4
				Notes to Condensed Consolidated Financial Statements			5
				Review Report of Independent Registered Public Accounting Firm			14
		Forward-Looking Statements					15
		Item 2.		Management’s Narrative Analysis of the Results of Operations			15
		Item 4.		Controls and Procedures			20
Part II. Other Information
		Item 1.		Legal Proceedings			21
		Item 1A.		Risk Factors			21
		Item 6.		Exhibits			21
		Signatures					22

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(Dollars in millions, except par value)		September 30, 2011				December 31, 2010
ASSETS
Cash and cash equivalents		$	746			$	425
Short-term investments			600				900
Receivables:
Finance leases			1,779				1,907
Notes and other			540				375
			2,319				2,282
Allowance for losses on receivables			(56	)			(87	)
			2,263				2,195
Equipment under operating leases, net			1,476				1,821
Investments			6				8
Assets held for sale or re-lease, net			541				583
Other assets			61				54
		$	5,693			$	5,986
LIABILITIES AND SHAREHOLDER’S EQUITY
Liabilities:
Accounts payable and accrued expenses		$	47			$	88
Other liabilities			283				328
Accounts with Boeing			130				66
Deferred income taxes			1,278				1,371
Debt			3,407				3,446
			5,145				5,299
Shareholder’s equity:
Common shares – $100 par value; authorized 100,000 shares; issued and outstanding 50,000 shares			5				5
Additional paid-in capital			523				682
Accumulated other comprehensive income (loss), net of tax			–				–
Retained earnings			20				–
			548				687
		$	5,693			$	5,986

 

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in millions)		2011				2010				2011				2010
REVENUE
Finance lease income		$	32			$	36			$	101			$	109
Interest income on notes receivable			9				27				25				61
Operating lease income			78				99				259				294
Net gain (loss) on disposal of assets			3				(4	)			18				2
Other income			4				12				13				28
			126				170				416				494
EXPENSES
Interest expense			32				42				94				124
Depreciation expense			34				52				117				153
Provision for (recovery of) losses			(11	)			9				(20	)			11
Operating expenses			12				11				35				34
Asset impairment expense			39				10				53				20
Other expense			1				1				4				6
			107				125				283				348
Income from continuing operations before provision for income tax			19				45				133				146
Provision for income tax			8				17				49				54
Income from continuing operations			11				28				84				92
Net gain (loss) on disposal of discontinued operations, net of tax			7				–				4				(2	)
Net income		$	18			$	28			$	88			$	90

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income

(Unaudited)

 

(Dollars in millions)		Total				Common Shares				Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Comprehensive Income
Balance at January 1, 2010		$	699			$	5			$	696			$	(2	)		$	–
Non-cash capital contributions from Boeing			1				–				1				–				–
Cash dividends to Boeing			(90	)			–				–				–				(90	)
Net income			90				–				–				–				90			$	90
Unrealized gain on investments, net of tax			5				–				–				5				–				5
Balance at September 30, 2010		$	705			$	5			$	697			$	3			$	–			$	95
Balance at January 1, 2011		$	687			$	5			$	682			$	–			$	–
Non-cash capital contributions from Boeing			1				–				1				–				–
Cash dividends to Boeing (including return of capital)			(228	)			–				(160	)			–				(68	)
Net income			88				–				–				–				88			$	88
Balance at September 30, 2011		$	548			$	5			$	523			$	–			$	20			$	88

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended September 30,
(Dollars in millions)		2011				2010
OPERATING ACTIVITIES
Net income		$	88			$	90
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash items:
Depreciation and amortization expense			112				148
Net gain on disposal of assets			(18	)			(2	)
Provision for (recovery of) losses			(20	)			11
Asset impairment expense and other charges			53				32
Share-based plans expense			1				1
Adjustments related to discontinued operations, net of tax			(4	)			2
Change in deferred income taxes			(93	)			(48	)
Change in assets and liabilities:
Other assets			14				22
Accrued interest and rents			9				(1	)
Accounts payable and accrued expenses			(39	)			(24	)
Other liabilities			(29	)			(26	)
Accounts with Boeing			64				(21	)
Net cash provided by operating activities			138				184
INVESTING ACTIVITIES
Purchase of short-term investments			(1,000	)			(1,100	)
Proceeds from maturities of short-term investments			1,300				700
Proceeds from available-for-sale investments			2				1
Payment for capitalizable costs in process			(5	)			(43	)
Proceeds from disposition of equipment			62				94
Payments of leases, notes and other receivables			206				486
Origination of leases, notes and other receivables			(105	)			–
Net cash provided by investing activities			460				138
FINANCING ACTIVITIES
Proceeds from issuance of debt			745				–
Repayment of debt			(794	)			(621	)
Payment of dividends (including return of capital)			(228	)			(90	)
Net cash used in financing activities			(277	)			(711	)
Net increase (decrease) in cash and cash equivalents			321				(389	)
Cash and cash equivalents at beginning of year			425				596
Cash and cash equivalents at end of period		$	746			$	207
NON-CASH INVESTING AND FINANCING ACTIVITIES
Net transfer to (from) assets held for sale or re-lease		$	(16	)		$	321
Net transfer to notes receivable		$	193			$	24
Net transfer from equipment under operating leases		$	(164	)		$	(292	)
Net transfer to (from) finance leases		$	(40	)		$	6
Transfer from other assets		$	–			$	(59	)
Transfer to allowance for losses on receivables		$	11			$	–
Transfer to accounts with Boeing		$	2			$	–
Transfer to other liabilities		$	12			$	–
Transfer to accounts payable and accrued expenses		$	2			$	–
Increase in debt due to fair value hedge derivatives		$	(16	)		$	(51	)

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

(Dollars in millions)

Note 1 – Basis of Presentation

Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is a wholly owned subsidiary of The Boeing Company (Boeing). We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the condensed consolidated financial statements. Operating results for the period ended September 30, 2011 are not necessarily indicative of the results for the full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2010 Annual Report on Form 10-K.

Note 2 – Transactions with Boeing

As a wholly owned subsidiary of Boeing, our mission is to arrange for the financing of products manufactured by Boeing. When third party financing is not available, we may provide such financing directly.

We have a number of general contractual arrangements with Boeing to facilitate our operations including, among others, a support agreement, tax sharing agreement and an agreement allowing us to borrow under Boeing’s committed revolving lines of credit. We also have an intercompany borrowing and lending arrangement with Boeing.

In addition, we may require other forms of support from Boeing with respect to certain financing transactions we undertake. This support may take the form of intercompany guarantees, subsidies, remarketing agreements or other support arrangements.

There can be no assurances that these intercompany agreements and arrangements will not be terminated or modified by us or Boeing. However, our and Boeing’s ability to terminate or modify the support agreement is subject to certain conditions. See Item 8. Financial Statements and Supplementary Data, Note 2 of our 2010 Annual Report on Form 10-K.

During the third quarter of 2011, Boeing sold us a 100% participation in a $105 note receivable.

At September 30, 2011, we were the beneficiary under $1,659 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,038.

Intercompany guarantee amounts by aircraft type are summarized as follows:

 

		September 30, 2011								December 31, 2010
		Guarantee Amount				Carrying Value				Guarantee Amount				Carrying Value
717 (out of production)		$	1,510			$	1,830			$	1,586			$	2,099
Out of production single-aisle aircraft			58				58				66				66
Out of production twin-aisle aircraft			49				66				51				71
Other, including other Boeing aircraft			42				84				46				90
		$	1,659			$	2,038			$	1,749			$	2,326

At September 30, 2011 and December 31, 2010, Accounts with Boeing included $41 and $47 for deferred revenue associated with guarantee and subsidy settlements and terminations.

 

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We recorded the following activity under the intercompany guarantee and subsidy agreements for the nine months ended September 30:

 

		2011				2010
Finance lease income (1)		$	(2	)		$	5
Interest income on notes receivable			1				12
Operating lease income			49				34
Net gain on disposal of assets			2				9
Asset impairment expense			–				6
		$	50			$	66

 

(1)

For the nine months ended September 30, 2011 and 2010, finance lease income included $(2) and $(2) for fees paid to Boeing related to guarantee agreements.

For the nine months ended September 30, 2010, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies, of $6.

For the nine months ended September 30, 2011 and 2010, we recorded new business volume of $105 and $39 related to Boeing aircraft, equipment or services we purchased or financed.

Note 3 – Portfolio Quality

Allowance for Losses on Receivables

The following table reconciles the activity in the allowance for losses on receivables for the nine months ended September 30:

 

		2011				2010
Allowance for losses on receivables at beginning of period		$	87			$	71
Provision for (recovery of) losses			(20	)			11
Write-offs			(11	)			(1	)
Allowance for losses on receivables at end of period		$	56			$	81
Allowance as a percentage of total receivables			2.4	%			3.3	%
Allowance for losses on receivables collectively evaluated for impairment		$	56			$	81

Credit Quality

We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon public information and information obtained directly from our customers. We utilize these credit ratings as one of the factors in assessing the adequacy of our allowance for losses on receivables. Our rating categories are comparable to those used by the major credit rating agencies.

 

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The following table details our receivable balances by the internal rating category which was used as a factor in determining our allowance for losses on receivables:

 

		September 30, 2011												December 31, 2010
Rating categories		Out-of- Production Aircraft				In- Production Aircraft/Other				Total				Out-of- Production Aircraft				In- Production Aircraft/Other				Total
BBB		$	121			$	–			$	121			$	–			$	–			$	–
BB			1,231				67				1,298				–				–				–
B			107				–				107				135				72				207
CCC			382				411				793				1,658				417				2,075
Total carrying value		$	1,841			$	478			$	2,319			$	1,793			$	489			$	2,282

At September 30, 2011, our allowance primarily related to receivables with ratings of BB and CCC in the preceding table, and we applied default rates that averaged 11% and 49% to exposure associated with those receivables. On May 2, 2011, Southwest Airlines Co. (Southwest) completed its acquisition of AirTran Holdings, Inc. and AirTran Holdings, Inc. became a wholly owned subsidiary of Southwest. AirTran Holdings, LLC (AirTran) became the successor to AirTran Holdings, Inc. We concluded that AirTran’s subsidiary relationship with Southwest warranted an increased weighting in determining the internal rating category. As of September 30, 2011, we assigned the internal rating category of BB to the receivables with AirTran for the purpose of assigning default rates discussed above. We had previously assigned an internal rating category of CCC as of December 31, 2010, and CCC+ as of June 30, 2011. As a result of the improved rating, the allowance for losses on receivables was reduced by $13 and $16 for the three-month and nine-month periods ended September 30, 2011.

At September 30, 2011 and December 31, 2010, our receivables were primarily related to customers we believe have less than investment-grade credit.

Impaired Receivables

At September 30, 2011 and December 31, 2010, we had no impaired receivables.

For the nine months ended September 30, 2010, our average recorded investment, interest income recognized and cash received on the income recognized related to the impaired receivables, all of which related to out-of-production aircraft, were $117, $8 and $8, respectively.

Past Due Receivables

At September 30, 2011 and December 31, 2010, we had no past due receivables.

Non-Performing Assets

Non-performing assets (assets not earning income on an accrual basis) consisted of the following:

 

		September 30, 2011				December 31, 2010
Assets placed on non-accrual status:
Equipment under operating leases, net		$	14			$	29
Assets held for sale or re-lease, net (1)			20				43	(2)
		$	34			$	72
Percent of total non-performing assets to total portfolio			0.8	%			1.5	%

 

(1)

At September 30, 2011 and December 31, 2010, assets held for sale or re-lease of $521 and $540 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

 

(2)

At December 31, 2010, non-performing assets held for sale or re-lease of $28 had either a purchase or lease commitment.

 

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Note 4 – Debt

The carrying value of debt, including the net effect of interest rate swap revaluation adjustments and unamortized deferred debt costs, consisted of the following:

 

(Interest rates are the contractual rates at September 30, 2011)		September 30, 2011				December 31, 2010
2.125% - 7.58% fixed rate notes due through 2019		$	3,286			$	3,314
1.58% floating rate note due in 2023			25				25
1.32% - 5.79% non-recourse notes due through 2013			51				55
0.98% capital lease obligation due through 2015			45				52
		$	3,407			$	3,446

At September 30, 2011, and December 31, 2010, we had interest rate swaps which effectively convert debt of $388 and $875 from fixed rates to floating rates. During the first nine months of 2011 we terminated $187 of interest rate swaps in order to improve our expected alignment between fixed and floating rate assets and liabilities. An additional $300 of swaps matured as scheduled concurrently with corresponding debt maturities.

On August 1, 2011, we issued notes totaling $750, which included $500 bearing an interest rate of 2.125% due August 15, 2016 and $250 bearing an interest rate of 2.90% due August 15, 2018. The net proceeds after deducting the discount, underwriting fees and issuance costs were $745. The notes are unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness.

The most restrictive covenants in our debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At September 30, 2011, we were in compliance with these covenants.

Note 5 – Derivative Financial Instruments

We primarily use derivative instruments to manage exposures to interest rate risk. We enter into interest rate swap contracts to hedge interest rate risk associated with our debt obligations. These interest rate swap contracts are designated as cash flow hedges or fair value hedges. Our contracts entered into as of September 30, 2011 do not require collateral or other security from either party.

The fair values of derivative instruments included in the Consolidated Balance Sheets were as follows:

 

September 30, 2011		Other Assets				Other Liabilities
Derivatives designated as fair value hedging instruments - Interest rate swaps		$	31			$	–
December 31, 2010
Derivatives designated as fair value hedging instruments - Interest rate swaps		$	24			$	–

The notional amount of our interest rate swaps is disclosed in Note 4 – Debt.

For our fair value hedges that qualify for hedge accounting treatment we use the short-cut method and thus there are no gains or losses recognized due to hedge ineffectiveness. Under short-cut hedge accounting treatment, the change in fair value of the interest rate swap is assumed to perfectly offset the change in fair value of the hedged debt. For the nine months ended September 30, 2011 and 2010 gains from changes in the fair value of $16 and $51 were recognized in interest expense with a corresponding offset due to changes in the fair value of the hedged underlying debt, resulting in zero net impact to interest expense.

 

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Note 6 – Commitments and Contingencies

Litigation

Various legal proceedings and claims are pending or have been asserted against us. We believe that the final outcome of these proceedings and claims will not have a material effect on our earnings, cash flows and/or financial position.

Restructurings and Restructuring Requests

From time to time, certain customers have requested a restructuring of their transactions with us. As of September 30, 2011, we have not reached agreement on any restructuring requests that would have a material effect on our earnings, cash flows and/or financial position.

Commitments

As of September 30, 2011, we and Boeing had unfunded financing commitments of $15,624, primarily resulting from firm contracts, options for deliveries or proposals as part of sales campaigns. These commitments are provided to give Boeing customers reasonable assurance of financing in connection with orders of Boeing products in advance of delivery. However, customers typically seek lower cost financing from other sources prior to actual delivery. In addition, we continue to work with third party financiers to provide alternative financing to customers and eliminate the need for our financing. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. However, there can be no assurances that we will not be required to fund greater amounts than historically required. To the extent we are obligated to provide financing, such financing generally includes participation by engine manufacturers which further reduces our obligation. Therefore, the reported amount of commitments does not necessarily represent a future net cash requirement. However, we expect to ultimately provide funding for those commitments which are exercised, whether they are Boeing’s or our commitments. If there were requirements to fund all Boeing’s and our commitments, the timing in which these commitments may be funded (based on estimated earliest potential funding dates as of September 30, 2011) is as follows:

 

		Total
October through December 2011		$	202
2012			1,483
2013			1,786
2014			2,872
2015			3,319
Thereafter			5,962
		$	15,624

 

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Note 7 – Fair Value Measurements

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the three levels of fair value hierarchy.

 

September 30, 2011		Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale investments:
EETC		$	4			$	–			$	–			$	4
Interest rate swaps			31				–				31				–
Total		$	35			$	–			$	31			$	4
December 31, 2010
Assets
Available-for-sale investments:
Marketable equity securities		$	1			$	1			$	–			$	–
EETC			5				–				–				5
Interest rate swaps			24				–				24				–
Total		$	30			$	1			$	24			$	5

Marketable equity securities. The fair value of our marketable equity securities is determined using quoted prices in active markets for identical assets. Unrealized gains (losses) are recorded in Accumulated Other Comprehensive Income (AOCI).

Enhanced Equipment Trust Certificate (EETC). The fair value of our EETC is derived using discounted cash flows at market yield based on estimated trading prices for comparable debt securities. Unrealized gains (losses) are recorded in AOCI.

Interest rate swaps. The fair values of our interest rate swaps are determined using cash flows discounted at market interest rates in effect at the period close.

The following tables present a reconciliation of Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30:

 

2011		Fair Value Beginning of Year				Unrealized Gains Included in Income				Accumulated Other Comprehensive Income/(Loss)				Purchases, Sales, and Settlements				Transfers In/(Out)				Fair Value at End of Period
Assets
EETC		$	5			$	–			$	–			$	(1	)		$	–			$	4
Total		$	5			$	–			$	–			$	(1	)		$	–			$	4
2010
Assets
EETC		$	5			$	–			$	1			$	(1	)		$	–			$	5
Total		$	5			$	–			$	1			$	(1	)		$	–			$	5

 

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Certain assets are measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3). The table below presents the non-recurring losses recognized for the nine months ended September 30, and the carrying value and asset classification of the related assets still held as of September 30:

 

		2011								2010
		Carrying Value				Total Losses				Carrying Value				Total Losses
Assets
Equipment under operating leases (1)		$	55			$	(49	)		$	105			$	(22	)
Assets held for sale or re-lease (1)			15				(4	)			22				(4	)
Total		$	70			$	(53	)		$	127			$	(26	)

 

(1)

Represents carrying value and related write downs which were based on the fair value for the related aircraft. For the nine months ended September 30, 2010, losses on equipment under operating leases includes $6 which were offset by intercompany guarantees.

The following table presents the carrying values and estimated fair values of our financial instruments for which we did not elect the fair value option:

 

		September 30, 2011								December 31, 2010
		Carrying Value				Fair Value				Carrying Value				Fair Value
Assets
Notes and other		$	540			$	567			$	375			$	395
Liabilities
Debt, excluding capital lease obligations		$	(3,362	)		$	(3,491	)		$	(3,394	)		$	(3,528	)

Items not included in the above disclosures are Cash and cash equivalents and Short-term investments. The carrying value of those items approximate their fair value at September 30, 2011 and December 31, 2010 as reflected in the Consolidated Balance Sheets.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Notes and other. The fair value of our variable rate notes that reprice frequently approximate their carrying values. The fair values of fixed rate notes are estimated using discounted cash flows analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality.

Debt. The fair value of debt is based on current market yields for our debt traded in the secondary market.

Financing commitments. It is not practicable to estimate the fair value of future financing commitments because the amount and timing of funding those commitments are uncertain.

Note 8 – Concentrations

A significant portion of our portfolio is concentrated among a few customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across aircraft product types and vintages. Our concentration risk is mitigated in part by intercompany guarantees from Boeing with respect to certain portfolio assets, which primarily relate to 717 aircraft.

 

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Portfolio carrying values for our five largest customers were as follows:

 

		September 30, 2011								December 31, 2010
		Carrying Value				% of Total Portfolio				Carrying Value				% of Total Portfolio
AirTran		$	1,294				29.8	%		$	1,364				29.0%
Continental			423				9.8				447				9.5
American			362				8.3				426				9.1
Hawaiian			357				8.2				422				9.0
Korean			162				3.7				172				3.7
		$	2,598				59.8	%		$	2,831				60.3%

For the nine months ended September 30, 2011 and 2010, AirTran accounted for 22% and 20% of our revenue.

Portfolio carrying values were represented in the following regions:

 

		September 30, 2011								December 31, 2010
		Carrying Value				% of Total Portfolio				Carrying Value				% of Total Portfolio
United States (1)		$	3,288				75.7	%		$	3,604				76.8%
Europe			630				14.5				619				13.2
Asia/Australia			260				6.0				280				5.9
Latin America			81				1.9				89				1.9
Other			83				1.9				102				2.2
		$	4,342				100.0	%		$	4,694				100.0%

 

(1)

United States includes assets held for sale or re-lease that may be physically located in another region.

Portfolio carrying values were represented by the following product types:

 

		September 30, 2011				December 31, 2010
717		$	2,041			$	2,163
757			659				720
767			329				383
737			328				386
MD-11 (1)			311				359
747			231				256
MD-80			184				200
777			138				47
Other (2)			121				180
		$	4,342			$	4,694

 

(1)

MD-11 aircraft are currently in freighter configuration or are committed to be modified into freighter configuration.

 

(2)

Other includes aircraft, equipment, notes and stock. Some of these aircraft are out of production, but are supported by the manufacturer or other third party parts and service providers.

 

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Our aircraft portfolio by vintage, based on carrying value (excluding investments and pooled assets), are categorized as follows:

 

		September 30, 2011				December 31, 2010
2006 and newer			6.3	%			3.8%
2001 – 2005			63.3				64.1
1996 – 2000			19.5				20.0
1995 and older			10.9				12.1
			100.0	%			100.0%

Note 9 – Discontinued Operations

On May 24, 2004, we entered into a purchase and sale agreement with General Electric Capital Corporation (GECC) to sell substantially all of the assets related to our Commercial Financial Services business. The final asset sale closed December 27, 2004.

Part of the purchase and sale agreement with GECC includes a loss sharing arrangement for losses that may exist at the end of the initial and subsequent financing periods of the transferred portfolio assets, or in some instances, prior to the end of the financing period. Such losses may result from asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. The loss sharing arrangement provides that cumulative net losses (if any) are to be shared between us and GECC. The provisions effectively limit our exposure to any losses to $245. At September 30, 2011, our maximum future cash exposure to loss associated with the loss sharing arrangement was $224, for which we have accrued a liability of $69.

The following table reconciles the reserve under the loss sharing arrangement, which is included in Other liabilities for the nine months ended September 30:

 

		2011				2010
Reserve at beginning of period		$	82			$	77
Increase (decrease) in reserve			(5	)			3
Payments to GECC			(8	)			–
Reserve at end of period		$	69			$	80

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Boeing Capital Corporation

Renton, Washington

We have reviewed the accompanying condensed consolidated balance sheet of Boeing Capital Corporation and subsidiaries (the “Company”) as of September 30, 2011, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2011 and 2010, and of shareholder’s equity and comprehensive income, and cash flows for the nine-month periods ended September 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Boeing Capital Corporation and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, shareholder’s equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

October 26, 2011

 

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Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “expects,” “intends,” “projects,”, “plans,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, future portfolio size, amounts of new aircraft financing, future levels of indebtedness and debt-to-equity ratios, the outcome of contingencies as well as any other statement that does not directly relate to any historical or current fact.

Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees and are subject to risks, uncertainties and changes in circumstances that are difficult to predict. Many factors could cause actual results to differ materially and adversely from these forward-looking statements. Among these factors are risks related to:

 

–

the financial condition of the airline industry, which could be adversely affected by changes in general economic conditions, credit ratings, increases in fuel-related costs, the liquidity of the global financial markets, responses to increasing environmental concerns, as well as events such as war, terrorist attacks or a serious health epidemic;

 

–

the impact of bankruptcies, restructurings or mergers and acquisitions on commercial airline customers;

 

–

the impact of changes in aircraft valuations;

 

–

the sufficiency of our liquidity, including access to capital markets;

 

–

the impact on us of strategic decisions by The Boeing Company (Boeing), including the amount of financing necessary to support the sale of Boeing products, the level and types of transactional or other support made available to us by Boeing and the ending of production of certain aircraft programs;

 

–

the market acceptance of Boeing products;

 

–

a decline in Boeing’s or our financial performance, outlook or credit ratings;

 

–

the availability of commercial and governmental financing and the extent to which we are called upon to fund Boeing’s and our outstanding financing commitments or satisfy other financing requests, and our ability to satisfy those requirements;

 

–

reduced lease rates as a result of competition in the used aircraft market, or the inability to maintain aircraft on lease at satisfactory lease rates;

 

–

financial, legal, tax, regulatory, legislative and accounting changes or actions that may affect the overall performance of our business;

 

–

the adequacy of coverage of our allowance for losses on receivables; and

 

–

volatility in our earnings due to the timing of asset sales, other risk mitigation activities, fluctuations in our portfolio size and changes in interest rates.

Additional information concerning these and other factors can be found in our filings with the Securities and Exchange Commission (SEC), including the “Risk Factors” on pages 3 through 5 of our most recent Annual Report on Form 10-K, Item 1A. “Risk Factors”, “Management’s Narrative Analysis of the Results of Operations” and Note 6 to our condensed Financial Statements included in this report and our Current Reports on Form 8-K. Any forward-looking statement herein speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.

Item 2. Management’s Narrative Analysis of the Results of Operations

Overview

During the nine months ended September 30, 2011, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.

 

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While sources of financing continue to be available for aircraft deliveries we did provide financing for new Boeing aircraft during the third quarter of 2011.

On May 2, 2011, Southwest Airlines Co. (Southwest) completed its acquisition of AirTran Holdings, Inc., and AirTran Holdings, Inc. became a wholly owned subsidiary of Southwest. As disclosed in Item 1. Financial Statements, Note 8 – Concentrations, AirTran Holdings, LLC (AirTran), the successor to AirTran Holdings, Inc., together with its subsidiaries, is our largest customer in terms of revenue and portfolio carrying value. We continue to evaluate the impact of the AirTran/Southwest merger, and Southwest’s continuing efforts to integrate the two operations, on our business.

At September 30, 2011, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. At September 30, 2011, we owned 234 commercial aircraft and had partial ownership or security interest in an additional 42 aircraft. Our portfolio at September 30, 2011 decreased to $4.3 billion from $4.7 billion at December 31, 2010. The following table summarizes the net change in our total portfolio:

 

(Dollars in millions)		Nine Months Ended September 30, 2011				Year Ended December 31, 2010
New business volume		$	105			$	72
Write-offs			(11	)			(1	)
Recovery of write-offs			–				1
Asset impairment and other charges			(53	)			(85	)
Asset run off and prepayments			(204	)			(605	)
Asset dispositions			(71	)			(153	)
Depreciation and amortization expense			(118	)			(201	)
Net change in portfolio balance		$	(352	)		$	(972	)

At September 30, 2011 and December 31, 2010, we had $541 million and $583 million of assets that were held for sale or re-lease, of which $485 million and $28 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. Additionally, aircraft subject to leases with a carrying value of approximately $105 million are scheduled to be returned off lease in the next 12 months. These aircraft are being remarketed or we are seeking to have the leases extended.

Our net income was $88 million for the nine months ended September 30, 2011 compared with $90 million for the same period in 2010, a decrease of $2 million.

Consolidated Results of Operations

Revenue

Revenue was $416 million for the nine months ended September 30, 2011 compared with $494 million for the same period in 2010, a decrease of $78 million.

Finance lease income was $101 million for the nine months ended September 30, 2011, a decrease of $8 million compared with the same period in 2010, primarily due to a decrease in the weighted average balance of finance leases as a result of the sale of aircraft previously accounted for as Finance leases, which was partially financed by us through notes receivable, and normal run-off.

Interest income on notes receivables was $25 million for the nine months ended September 30, 2011, a decrease of $36 million compared with the same period in 2010, primarily due to lower weighted average notes receivable balance and a decrease in the weighted average annual effective interest rate during the nine months ended September 30, 2011.

Operating lease income was $259 million for the nine months ended September 30, 2011, a decrease of $35 million compared with the same period in 2010, primarily due to a decrease in the equipment under operating leases as a result of the return of aircraft and lower lease rates on re-leased aircraft. Without the support from

 

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Boeing in the form of intercompany guarantees our Operating lease income, which includes income applied to assets classified as held for re-lease, would have been $49 million and $34 million less than reported, for the nine months ended September 30, 2011 and 2010. For a discussion of our relationship with Boeing, see Item 1. Financial Statements, Note 2 – Transactions with Boeing.

Net gain on disposal of assets was $18 million for the nine months ended September 30, 2011, an increase of $16 million compared with the same period in 2010, primarily due to a gain recognized upon signing a sales type lease agreement for aircraft previously held as Equipment under operating leases.

Other income was $13 million for the nine months ended September 30, 2011, a decrease of $15 million compared with the same period in 2010, primarily due to higher aircraft maintenance reserves taken to income from expired leases, income from a bankruptcy settlement and residual value guarantee fees earned during the nine months ended September 30, 2010.

Expenses

Expenses were $283 million for the nine months ended September 30, 2011 compared with $348 million for the same period in 2010, a decrease of $65 million.

Interest expense was $94 million for the nine months ended September 30, 2011, a decrease of $30 million compared with the same period in 2010, primarily due to a decrease in the weighted average balance of debt outstanding as a result of scheduled debt repayments.

Depreciation expense was $117 million for the nine months ended September 30, 2011, a decrease of $36 million compared with the same period in 2010, primarily due to a lower depreciable balance of equipment under operating leases as a result of a change in our intention to hold or sell equipment and asset dispositions.

The recovery of losses was $20 million for the nine months ended September 30, 2011, compared with a provision of $11 million for the same period in 2010. The decrease in our allowance for the nine months ended September 30, 2011 was primarily due to a $16 million recovery of losses which was caused by a decrease in default rates resulting from a change in the internal rating category to BB at September 30, 2011 from CCC at December 31, 2010 associated with our receivables with AirTran.

Asset impairment expense was $53 million for the nine months ended September 30, 2011, an increase of $33 million compared with the same period in 2010. The asset impairment expense during the first nine months of 2011 was primarily due to reduced expected undiscounted cash flows on certain aircraft.

Provision for income tax

Provision for income tax was $49 million for the nine months ended September 30, 2011, a decrease of $5 million compared with the same period in 2010, primarily due to a decrease in pre-tax income.

Gain on disposal of discontinued operations

Gain on disposal of discontinued operations, net of tax, was $4 million for the nine months ended September 30, 2011 due to a decrease in our expected losses from claims associated with specific assets subject to the loss sharing agreement with General Electric Capital Corporation related to the sale of certain assets of our Commercial Financial Services business in 2004.

Liquidity and Capital Resources

Our cash and cash equivalents balance was $746 million at September 30, 2011, an increase from $425 million at December 31, 2010. The following is a summary of the change in our cash and cash equivalents for the nine months ended September 30:

 

(Dollars in millions)		2011				2010
Net cash provided by operating activities		$	138			$	184
Net cash provided by investing activities			460				138
Net cash used in financing activities			(277	)			(711	)
Net increase (decrease) in cash and cash equivalents		$	321			$	(389	)

 

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Operating activities

During the nine months ended September 30, 2011, net cash provided by operating activities included net income from operations of $88 million. We had net adjustments for non-cash items of $31 million, which primarily related to depreciation expense partially offset by deferred income taxes. We also had a net increase in cash due to changes in assets and liabilities of $19 million.

During the nine months ended September 30, 2010, net cash provided by operating activities included net income from operations of $90 million. We had net adjustments for non-cash items of $144 million, which primarily related to depreciation expense. We also had a net decrease in cash due to changes in assets and liabilities of $50 million.

Investing activities

During the nine months ended September 30, 2011, net cash provided by investing activities primarily included net proceeds of $300 million from short-term investment maturities and payments of leases, notes and other receivables of $206 million, partially offset by a decrease in cash of $105 million related to the origination of notes receivable.

During the nine months ended September 30, 2010, net cash provided by investing activities included payments of leases, notes and other receivables of $486 million and proceeds from sale of aircraft of $94 million, primarily offset by the net purchase of $400 million in short-term investments.

Financing activities

During the nine months ended September 30, 2011, net cash used in financing activities included $745 million of net proceeds from our debt issuances offset by scheduled debt repayments of $794 million and cash dividends (including return of capital) to Boeing of $228 million.

During the nine months ended September 30, 2010, net cash used in financing activities included scheduled debt repayments of $621 million and cash dividends to Boeing of $90 million.

Outstanding debt at September 30, 2011 and December 31, 2010 was $3.4 billion and $3.4 billion, of which $834 million will be due in the next 12 months. During the nine months ended September 30, 2011, we had no commercial paper borrowings outstanding. Our leverage (ratio of Debt to Shareholder’s equity) at September 30, 2011 and December 31, 2010 was 6.2-to-1 and 5.0-to-1. The increase in our leverage resulted from our issuance of debt in the third quarter of 2011, a significant portion of the proceeds of which we intend to use to repay our debt maturing in 2012. We expect our leverage to return to approximately 5.0-to-1 by the end of the first quarter of 2012.

We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. Financing commitments made by us and Boeing totaled $15.6 billion as of September 30, 2011. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. However, there can be no assurances that we will not be required to fund greater amounts than historically required. We expect that any future liquidity needs would be met by issuing commercial paper or term debt, or obtaining funding from Boeing. There can be no assurance that the cost or availability of funding sources to us will not be adversely impacted in the future.

As of September 30, 2011, we have $3.25 billion remaining under our $5.0 billion Securities and Exchange Commission (SEC) shelf registration statement for issuance of debt securities. The availability of funding pursuant to our SEC registration statement will depend on investor demand and market conditions.

We believe we have adequate borrowing capacity. We have $1.5 billion available exclusively for us under Boeing’s committed revolving credit line agreements for general corporate purposes. In addition, we have a support agreement with Boeing under which Boeing has committed to make contributions to us if our fixed-charge coverage ratio, as defined in the support agreement, falls below 1.05-to-1 on a four-quarter rolling basis.

 

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Risks that could affect our sources of liquidity include, among others;

 

–

a downturn in the economy,

–

significant restructurings, defaults or bankruptcies by airlines,

–

disruptions in the global capital markets, and

–

a decrease in our and/or Boeing’s credit ratings and/or financial performance.

We continually assess our leverage, as measured by our Debt to Shareholder’s equity ratio, in light of the risks in our business, including those set forth in Item 1A. Risk Factors in this report and Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010.

Additional Disclosures Regarding Allowance for Losses on Receivables and Asset Impairment Expense

The following tables reconcile the changes in the allowance for losses on receivables and asset impairment expense for the nine months ended September 30, 2011 and 2010. Column 3 presents this information, calculated in accordance with our accounting policy, if the impact of intercompany guarantees from Boeing were excluded. The exclusion of the net impact of intercompany guarantees shown in Column 2 would increase the applicable exposure for various receivables and would increase asset impairment expense. Management believes that the presentation of this information provides more complete information on the effect of intercompany guarantees provided by Boeing.

 

(Dollars in millions)		(1)				(2)				(3)
2011		Allowance for losses				Impact of intercompany guarantees from Boeing				Allowance excluding intercompany guarantees
Allowance for losses on receivables at beginning of period		$	87			$	266			$	353
Recovery of losses			(20	)			(200	)			(220	)
Write-offs			(11	)			(3	)			(14	)
Allowance for losses on receivables at end of period		$	56			$	63			$	119
Allowance as a percentage of total receivables			2.4	%							5.1	%
2010
Allowance for losses on receivables at beginning of period		$	71			$	231			$	302
Provision for losses			11				13				24
Write-offs			(1	)			–				(1	)
Allowance for losses on receivables at end of period		$	81			$	244			$	325
Allowance as a percentage of total receivables			3.3	%							13.4	%

 

(Dollars in millions)		(1)				(2)				(3)
2011		Asset impairment expense				Impact of intercompany guarantees from Boeing				Impairment excluding intercompany guarantees
Asset impairment expense		$	53			$	–			$	53
2010
Asset impairment expense		$	20			$	91			$	111

 

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Item 4. Controls and Procedures

 

(a)

Disclosure Controls and Procedures

Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures as of September 30, 2011 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the third quarter of 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Various legal proceedings and claims are pending or have been asserted against us. We believe that the final outcome of these proceedings and claims will not have a material effect on our earnings, cash flows and/or financial position.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010, except for the addition of the following:

Our portfolio and indebtedness may significantly increase if we are required to fund greater amounts than historically required.

Boeing’s and BCC’s outstanding financing commitments have increased in 2011. Financing commitments may continue to increase in future periods as a result of general market conditions, customer requirements or as a result of competition in the marketplace. While we work with third party financiers to provide alternative financing to customers, there can be no assurances that we will not be required to fund greater amounts than historically required. Such requirements could significantly increase our capital requirements and level of indebtedness.

Item 6. Exhibits

A. Exhibits

 

Exhibit 12		Computation of Ratio of Earnings to Fixed Charges.
Exhibit 15		Letter From Independent Registered Public Accounting Firm Regarding Unaudited Interim Financial Information.
Exhibit 31.1		Certification of President pursuant to Rules 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1		Certification of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with Securities and Exchange Commission Release Nos. 33-8212 and 34-47551.
Exhibit 32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with Securities and Exchange Commission Release Nos. 33-8212 and 34-47551.
Exhibit 101.INS		XBRL Instance Document
Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

In accordance with Item 601(b)(4)(iii) of Regulation S-K, we are not filing certain instruments with respect to our debt, as the total amount of securities currently provided for under each of the instruments does not exceed 10 percent of our total assets on a consolidated basis. We hereby agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		Boeing Capital Corporation
October 26, 2011		/s/ KELVIN E. COUNCIL
		Kelvin E. Council Vice President and Chief Financial Officer (Principal Financial Officer) and Registrant’s Authorized Officer
October 26, 2011		/s/ KEVIN J. MURPHY
		Kevin J. Murphy Controller (Principal Accounting Officer)

 

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