Item 1. Business
GENERAL
Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is a wholly owned subsidiary of Boeing. The Company was incorporated in Delaware in 1968. In the commercial aircraft market, we facilitate, arrange, structure and provide selective financing solutions for Boeing’s Commercial Airplanes customers. In the space and defense markets, we primarily arrange and structure financing solutions for Boeing’s Defense, Space & Security customers.
At December 31, 2010, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. At December 31, 2010, our portfolio totaled $4.7 billion, which was substantially collateralized by Boeing commercial aircraft. At December 31, 2010, we owned 257 commercial aircraft and had partial ownership or security interests in an additional 28 aircraft.
RISK MANAGEMENT
We monitor the potential volatility in the value of our portfolio and the amount of capital required to support our portfolio, using internally and externally developed statistical models. In addition, we track and analyze our exposure to potential net income fluctuations, analyze and assess transactional support and guarantees, and assess individual transaction values considering factors such as forecasted aircraft values and potential credit rating migrations. This analysis allows us to structure transactions that are designed to achieve our targeted balance of risks and rewards.
RELATIONSHIP WITH BOEING
We have agreements with Boeing that are significant to our operation. These agreements provide for financial support, among other things. At December 31, 2010, Boeing provided us with various types of partial and full guarantees, including first loss deficiency guarantees, residual value guarantees and rental loss guarantees, with a maximum potential value of $1.7 billion related to portfolio assets totaling $2.3 billion. For further discussion of these guarantees, agreements and other arrangements with Boeing, see Item 8. Financial Statements and Supplementary Data, Note 2.
For a further description of significant factors that may affect Boeing, see Boeing’s Annual Report on Form 10-K for the year ended December 31, 2010. That report is not incorporated by reference into this filing of Boeing Capital Corporation.
COMPETITIVE CONDITIONS
The Boeing products we finance are influenced by the aerospace and financial markets and general economic conditions. The financing solutions we develop are part of overall sales campaigns and can be integral to Boeing winning orders in the commercial aircraft and space and defense markets. During campaigns, Boeing competes against other companies also offering in-house customer financing. Some customers periodically require a financing commitment prior to ordering aircraft. Third party financiers are often unwilling to offer financing when orders are made since there may be a delay of several years between order and delivery. Therefore, we may provide a financing commitment when products are ordered and subsequently assist our customers in obtaining alternative financing from third parties.
When we sell or remarket used aircraft, we compete with other leasing companies and financial institutions primarily on the basis of pricing, terms, structure and service. The prices at which we sell aircraft or rental rates at which we lease aircraft are impacted by the demand for suitable aircraft and the quantity and type of aircraft that are available. For further discussion on the airline industry environment, see Item 7. Management’s Narrative Analysis of the Results of Operations, Business Environment and Trends.
SIGNIFICANT CONCENTRATIONS
For a discussion of our geographic and portfolio concentrations, see Item 8. Financial Statements and Supplementary Data, Note 15.
EMPLOYEES
At December 31, 2010, we had 151 employees, compared with 161 at December 31, 2009. While we believe that our current level of employment is adequate to support our current and projected business operations over the next year, our actual employment levels may vary from our current levels due to changes in the needs and requirements of our business operations and timing of filling open positions. No employees are covered by collective bargaining agreements. We believe our employee relations are satisfactory. As of February 1, 2011, we had 150 employees.
AVAILABLE INFORMATION
General information about us can be found at www.boeing.com. The information contained on or connected to Boeing’s web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed by the Company with the SEC. Our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q are available free of charge through Boeing’s website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Our SEC filings, including any amendments, and our Current Reports on Form 8-K may be obtained at the SEC’s public reference room at 100 F Street N.E. Washington, DC 20549. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC issuers, including Boeing and Boeing Capital Corporation.
Item 1A.
Item 1A. Risk Factors
An investment in our debt securities involves risks and uncertainties and our actual results and future trends may differ materially from our past or projected future performance due to a variety of factors. We urge investors to consider carefully the risk factors described below in evaluating the information contained in this report.
A substantial deterioration in the financial condition of the commercial airline industry may adversely impact us.
The financial condition of the airline industry is of particular importance to us because substantially all of our portfolio consists of lease and loan financing with commercial airline customers. If terrorist attacks; a serious health epidemic; significant regulatory actions in response to environmental, safety or other concerns; increases in fuel related costs or other exogenous events were to occur, a material adverse effect on the airline industry, increased requests for financing, significant defaults by airline customers, repossessions of aircraft or airline bankruptcies and restructurings could result. If this were to occur, aircraft values or lease rates could decline. These events could have a material adverse effect on our earnings, cash flows and/or financial position.
We may be unable to obtain debt to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms or in sufficient amounts.
We depend, in part, upon the issuance of debt to fund our operations and contractual commitments. If we were called upon to fund all outstanding financing commitments made by us and Boeing, our market liquidity may not be sufficient. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets, and a decline in Boeing’s or our own financial performance or outlook or credit ratings. The occurrence of any or all of these events may adversely affect our ability to fund our operations and contractual commitments or financing commitments made by us or Boeing.
Our allowance for losses on receivables may prove to be inadequate.
Our allowance for losses on receivables is intended to cover probable losses on notes receivable and finance leases. Unexpected adverse changes in the economy or other events adversely affecting our customers, the airline industry as a whole or collateral values could cause us to make additional provisions, which could have a material adverse effect on our earnings and/or financial position.
We may be required to recognize significant asset impairment charges on equipment under operating leases.
We periodically review our portfolio of equipment under operating leases for impairment. The cumulative undiscounted cash flows expected to result from the use and eventual disposition of these assets are greater than their carrying value. However, the fair value of certain of these assets as measured at their expected sale price is less than their carrying value. Expected undiscounted cash flows could be adversely affected by certain factors, including credit deterioration of a lessee, declines in future rental rates or by a change in our intention to hold or dispose of an asset. If, during our periodic reviews, we determine that the fair value of an asset is less than the carrying value and the revised expected undiscounted cash flows reflect an adverse change, we may recognize impairment charges, which could have a material adverse effect on our earnings and/or financial position.
We may be unable to maintain assets on lease at satisfactory lease rates.
Our profitability depends largely on our ability to maintain assets on lease at satisfactory lease rates. A number of factors can adversely affect utilization and lease rates, including, but not limited to, reduced demand or oversupply in the markets in which the company operates and changes in customer preferences for aircraft types. For example, bankruptcies or restructurings of our current or potential customers could lead to reduced demand for leased aircraft and reduced lease rates. If aircraft lease rates fall or if a significant number of our aircraft were to remain idle for an extended period, there could be a material adverse effect on our earnings, cash flows and/or financial position.
We face competition which could cause us to lower our lease rates and offer terms which may adversely affect our financial results.
Our primary competitors include other commercial aircraft, aerospace and defense companies offering in-house customer financing as well as other finance companies. Additionally, when selling or re-leasing used aircraft, we compete with other leasing companies and finance companies in the used aircraft market. We compete primarily based upon pricing, terms, structure, service and type of aircraft offered. Increased competition could have a material adverse effect on our earnings, cash flows and/or financial position.
We are a wholly owned subsidiary and therefore subject to strategic decisions of Boeing and affected by Boeing’s performance.
We are fundamentally affected by our relationship with Boeing. As a wholly owned subsidiary of Boeing we are subject to a wide range of possible strategic decisions which Boeing may make from time to time. Those strategic decisions could include the level and types of financing provided to support the sale of Boeing products, the level and types of transactional or other support made available to us by Boeing, and the ending of production of certain aircraft programs. In addition, circumstances affecting Boeing can significantly affect us. For example, our debt ratings are closely tied to those of Boeing, and when rating agencies take actions regarding Boeing’s ratings, they may take the same actions with respect to our ratings. Significant changes in Boeing’s overall strategy or its relationship with us or material adverse changes in Boeing’s performance could have a material adverse effect on us.
We may experience volatility and decreases in our earnings due to a reduced asset base.
From time to time, we may sell notes, leases, investments or other assets from our portfolio. The timing of these sales could affect our earnings due to the resulting gains or losses. If we sell assets from our portfolio or if normal portfolio runoff or prepayments from customers occur and we do not replace those assets, our income may decline.
We operate in a highly regulated industry and changes in laws or regulations may adversely affect us.
Aspects of our business are regulated by state, federal and foreign governmental authorities. We are also subject to various laws and judicial and administrative decisions, mostly as a result of our activities as a lender and lessor, that restrict or regulate, among other things,
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our credit granting and financing activities,
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the establishment of maximum interest rates,
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financing transactions we enter into,
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our collection, foreclosure, repossession and claims-handling procedures and other trade practices,
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the use and reporting of information related to a borrower’s or lessee’s credit experience and other data collection, and
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disclosure requirements.
We may not be able to forecast changes to legislation; tax, accounting and other regulations; and judicial and administrative decisions and orders or interpretations, and these changes could have a material adverse effect on our earnings, cash flows and/or financial position. Our operations and results could also be materially impacted by financial regulatory reform.
We may act to mitigate certain risk in our portfolio assets.
When market conditions permit, we may consider asset sales or other risk reduction initiatives which may involve adjustments in our capital structure, portfolio size and portfolio risk. If we pursue any of those actions our future earnings could be impacted.
A significant portion of our portfolio is concentrated among certain customers based in the United States, and in certain types of Boeing aircraft, which exposes us to concentration risks.
A significant portion of our portfolio is concentrated among certain customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably Boeing 717 aircraft. Our concentration risk is mitigated in part by intercompany guarantees from Boeing with respect to certain portfolio assets, which primarily relate to 717 aircraft. Nonetheless, if one or more customers holding a significant portion of our portfolio assets experiences financial difficulties, defaults or does not renew its leases with us at their expiration and we are unable to redeploy the aircraft on reasonable terms, or if the types of aircraft that are concentrated in our portfolio suffer greater than expected declines in value, our earnings, cash flows and/or financial position could be materially adversely affected.
Circumstances and conditions may change. Accordingly, additional risks and uncertainties not currently known, or that we currently deem not material, may also adversely affect our business operations.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
Our headquarters, which is our main administrative and operational facility, is located in Renton, Washington, and is leased by Boeing. We also have offices in greater Los Angeles, California; Hong Kong, China; and Moscow, Russia.
We believe that our properties are suitable and adequate to meet the requirements of our business.
Item 3.
Item 3. Legal Proceedings
Various legal proceedings and claims are pending or have been asserted against us. We believe that the final outcome of these proceedings and claims will not have a material adverse effect on our earnings, cash flows and/or financial position.
Item 4.
Item 4. Removed and Reserved
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We are a wholly owned subsidiary of The Boeing Company (Boeing), and accordingly, there is no public trading market for our common stock. In 2010 and 2009, we declared and paid dividends (including return of capital) totaling $108 million and $93 million to Boeing.
A covenant in one of our debt agreements requires us to limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments. At December 31, 2010, as well as at each quarter end during the year, we were in compliance with this covenant.
Item 6.
Item 6. Selected Financial Data (Unaudited)
The selected consolidated financial data should be read in conjunction with our audited Consolidated Financial Statements and with Item 7.
Item 7. Management’s Narrative Analysis of the Results of Operations
The following should be read in conjunction with our Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Business Environment and Trends
Global passenger traffic exceeded initial expectations in 2010 growing an estimated 8% for the year and showing growth over prior 2008 peak levels. Significant variation existed between regions and airline business models with emerging markets and low cost carriers leading recovery and growth into 2011. Air cargo traffic also rebounded in 2010 after two years of contraction. Led by strong growth in Asian exports, air cargo traffic recovered to peak 2007 levels and is poised to resume growth in 2011.
Airlines cut capacity in 2009 to match the demand environment which allowed them to boost yields as demand recovered in 2010. Airlines have also pursued new revenue sources by expanding alliances and building ancillary revenue streams. In addition, airlines continued to focus on cutting costs and pursued consolidation opportunities, particularly in mature markets, to improve market positioning. These airline tactics, combined with improving demand and relatively stable fuel prices, have driven a strong turnaround in airline industry profitability. Airlines are forecast to earn $15 billion in 2010 following a $10 billion net loss in 2009. The 2011 outlook is for continued profitability which should allow airlines to rebuild balance sheets that suffered from fuel price spikes and recession in 2008-2009.
A substantial portion of our portfolio is concentrated among certain U.S. commercial airline customers. We provided greater amounts of financing to Boeing customers during 2009 than in any of the preceding five years. Sources of financing available for aircraft deliveries improved during 2010 and as a result, we provided no financing for Boeing aircraft deliveries.
On September 26, 2010, Southwest Airlines Co. (Southwest) and AirTran Holdings, Inc. (AirTran) entered into an Agreement and Plan of Merger, whereby Southwest will acquire, subject to certain conditions, all of the outstanding common stock of AirTran. As disclosed in Item 8. Financial Statements, Note 15 - Concentrations, AirTran, together with its subsidiaries, is our largest customer in terms of revenue and portfolio carrying value.
Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. Approximately 2,200 western-built commercial jet aircraft (10.5% of current world fleet) were parked at the end of 2010, including both in-production and out-of-production aircraft types. Of these parked aircraft over 30% are not expected to return to service. At the end of 2009 and 2008, 11.6% and 11.0% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of additional aircraft, particularly types with relatively few operators, are placed out of service.
Overview
During 2010, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.
Our portfolio at December 31, 2010 decreased to $4.7 billion from $5.7 billion at December 31, 2009. The following table summarizes the net change in our total portfolio for the years ended December 31:
At December 31, 2010 and 2009, we had $583 million and $385 million of assets that were held for sale or re-lease, of which $28 million and $345 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. The increase was primarily due to our termination of aircraft leases with Aevovias Caribe S.A. de C.V. (Click), an affiliate of Compania Mexicana de Aviacion S.A. de C.V. (Mexicana), in August 2010. See Item 8. Financial Statements, Note 12 - Commitments and Contingencies. Additionally, aircraft subject to leases with a carrying value of approximately $174 million are scheduled to be returned off lease during 2011. These aircraft are being remarketed or we are seeking to have the leases extended.
Our net income was $92 million for 2010 compared with $57 million for 2009. For the years ended December 31, 2010 and 2009, our return on average assets calculated on Income from continuing operations was 1.5% and 1.2%.
Consolidated Results of Operations
Revenue
Revenue consists primarily of lease income from equipment under operating leases and interest from finance lease receivables and notes. Revenue was $639 million in 2010 compared with $660 million in 2009, a decrease of $21 million.
Finance lease income was $139 million in 2010, a decrease of $5 million compared with 2009, primarily due to a decrease in the weighted average balance of finance leases as a result of normal run-off. Without the support of Boeing in the form of intercompany guarantees our Finance lease income would have been $19 million and $7 million less than reported for the years ended December 31, 2010 and 2009. For a discussion of our relationship with Boeing, see Item 8. Financial Statements and Supplementary Data, Note 2.
Interest income on notes receivable was $76 million in 2010, an increase of $1 million compared with 2009 primarily due to recognition of deferred intercompany revenue of $10 million on early payment of notes, offset by a decrease in income related to a lower weighted average notes receivable balance during 2010.
Operating lease income was $384 million in 2010, a decrease of $20 million compared with 2009, 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 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 $50 million and $46 million less than reported, for the years ended December 31, 2010 and 2009. For a discussion of our relationship with Boeing, see Item 8. Financial Statements and Supplementary Data, Note 2.
Investment income was $5 million in 2010, an increase of $4 million compared with 2009, primarily due to the gain on sale of certain available-for-sale marketable equity securities in 2010.
Expenses
Expenses consist of interest expense, depreciation expense, provision for (recovery of) losses, operating expenses, asset impairment expense, and other expense. Expenses were $487 million in 2010 compared with $534 million in 2009, a decrease of $47 million.
Interest expense was $160 million in 2010, a decrease of $15 million compared with 2009, due to a decrease in the weighted average annual effective interest rate on all borrowings to 4.2% from 4.7%, partially offset by an increase in the weighted average balance of debt outstanding.
Depreciation expense was $200 million in 2010, a decrease of $7 million compared with 2009, primarily due to a lower depreciable balance of equipment under operating leases as a result of asset dispositions and asset sales, partially offset by an increase in depreciation resulting from lower estimated residual values.
The provision for losses was $16 million in 2010, compared with $23 million in 2009. The provision for losses for both years was primarily due to the effects of declines in aircraft collateral values and increases in default rates exceeding the impact of run off of our finance leases and notes receivable.
Asset impairment expense was $51 million in 2010, a decrease of $24 million compared with 2009. The asset impairment expense in 2010 was primarily due to reduced expected undiscounted cash flows on certain aircraft.
Provision for income tax
Provision for income tax was $56 million in 2010, an increase of $10 million compared with 2009, primarily due to an increase in pre-tax income.
Loss on disposal of discontinued operations
Loss on disposal of discontinued operations, net of tax, was $4 million for 2010 due to an increase in our expected losses under our loss sharing agreement with General Electric Capital Corporation related to the sale of certain assets of our Commercial Financial Services business in 2004. This compared with a loss of $23 million, net of tax, in 2009. These increases in expected losses resulted primarily from claims associated with specific assets subject to the loss sharing agreement.
Liquidity and Capital Resources
Our cash and cash equivalents balance was $425 million at December 31, 2010, a decrease from $596 million at December 31, 2009. The following is a summary of the change in our cash and cash equivalents for the years ended December 31:
Operating activities
During 2010, net cash provided by operating activities included net income from operations of $92 million. We had net adjustments for non-cash items of $214 million, which primarily related to depreciation expense. We also had a net decrease in cash due to changes in assets and liabilities of $33 million.
During 2009, net cash provided by operating activities included net income from operations of $57 million. We had net adjustments for non-cash items of $261 million, which primarily related to depreciation expense and asset impairment and other related charges. We also had a net increase in cash due to changes in assets and liabilities of $14 million.
Investing activities
During 2010, net cash provided by investing activities included payments of leases, notes and other receivables of $612 million, which included early payments from customers, and proceeds from sale of aircraft of $126 million, primarily offset by the net purchase of $400 million in short-term investments.
During 2009, net cash used in investing activities included the purchase of $500 million in short-term investments and $72 million related to the origination of leases, notes and other receivables net of repayments, partially offset by an increase in cash of $220 million from sale of aircraft.
Financing activities
During 2010 and 2009, we made debt repayments of $645 million and $728 million (including $200 million of intercompany debt) and paid dividends (including return of capital) of $108 million and $93 million. In 2009, net cash provided by financing activities included $994 million of net proceeds from our debt issuances and $200 million of intercompany borrowings from Boeing.
Outstanding debt at December 31, 2010 and 2009 was $3.4 billion and $4.1 billion, of which $801 million (including $3 million due to interest rate swaps) will be due during 2011. During 2010 and 2009, we had no commercial paper borrowings outstanding. Our leverage (ratio of Debt to Shareholder’s equity) at December 31, 2010 and 2009 was 5.0-to-1 and 5.8-to-1, respectively.
We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. Financing commitments made by us and Boeing totaled $9.9 billion as of December 31, 2010. We anticipate that a significant portion of these commitments will not be exercised due to alternative financing sources we expect to be available to our customers. We expect that any future borrowing needs would be met by issuing commercial paper or term debt, or obtaining funding from Boeing. There can be no assurance that the cost or availability of funding sources to us will not be adversely impacted in the future.
As of December 31, 2010, we have $4.0 billion remaining under our $5.0 billion Securities and Exchange Commission (SEC) shelf registration statement for issuance of debt securities. During 2009, we established under the registration statement a $750 million medium-term notes program and a $750 million retail notes program. We have not issued any securities under those programs. The availability of such funding under those programs or otherwise pursuant to our SEC registration statement will depend on investor demand and market conditions.
We believe we have adequate borrowing capacity. We have $1.5 billion available under Boeing’s committed revolving credit line agreements for general corporate purposes. In addition, we have a support agreement with Boeing under which Boeing has committed to make contributions to us if our fixed-charge coverage ratio, as defined in the support agreement, falls below 1.05-to-1 on a four-quarter rolling basis.
For a discussion of our liquidity and debt programs, see Item 8. Financial Statements and Supplementary Data, Note 8.
Risks that could affect our sources of liquidity include among others,
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a downturn in the economy,
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significant restructurings, defaults or bankruptcies by airlines,
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disruptions in the global capital markets, and
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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.
The most restrictive covenants in our debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At December 31, 2010, as well as at each quarter end during the year, we were in compliance with these covenants.
Off-Balance Sheet Arrangements
We are a party to off-balance sheet arrangements as defined by the SEC, consisting of variable interests in unconsolidated entities. For discussion of these arrangements, see Item 8. Financial Statements and Supplementary Data, Note 13.
Disclosures About Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations to make future payments, as well as an estimate of the timing in which we expect to satisfy these obligations at December 31, 2010:
Contractual Obligations
(1)
Debt and Capital lease obligations reflect principal payments.
(2)
Interest includes the effect of our interest rate swaps. We have assumed LIBOR forward rates at December 31, 2010 on floating rate debt.
(3)
Purchase obligations due in 2011 includes $1 million which is covered by our guarantees from Boeing.
We expect to meet our existing obligations through internally generated cash flows and from future borrowings.
The following table summarizes our commercial commitments outstanding at December 31, 2010:
Commercial Commitments
(1)
Represents our commitments to provide leasing and other financing based on estimated earliest potential funding dates.
(2)
Does not reflect the revision of the 787 program schedule announced in January 2011.
In addition to our financing commitments of $345 million at December 31, 2010, Boeing had unfunded financing commitments of $9.5 billion, resulting from firm contracts, options for deliveries or proposals as part of sales campaigns. These commitments are provided to give Boeing customers reasonable assurance of financing in connection with orders of Boeing products in advance of delivery. However, customers typically seek lower cost financing from other sources prior to actual delivery. In addition, we continue to work with third party financiers to provide alternative financing to customers and eliminate the need for our financing. Based on historical experience and anticipated capital market acceptance of Boeing aircraft covered by Boeing’s and our current commitments, we anticipate that a significant portion of these commitments will not be exercised by the customer or will expire without being fully drawn upon. However, there can be no assurance that we will not be required to fund greater amounts than historically required. To the extent we are obligated to provide financing, such financing generally includes participation by engine manufacturers which further reduces our obligation. Therefore, the reported amount of commitments does not necessarily represent a future net cash requirement. However, we expect to ultimately provide funding for those commitments which are exercised. If there were requirements to fund
all Boeing commitments, the timing in which these commitments may be funded (based on estimated earliest potential funding dates as of December 31, 2010) is as follows:
(1)
Does not reflect the revision of the 787 program schedule announced in January 2011.
Critical Accounting Estimates
For the discussion on our accounting policies, see Item 8. Financial Statements and Supplementary Data, Note 1. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Each of these assumptions is subject to uncertainties and changes in those assumptions or judgments can affect our results of operations. The accounting policies below are those we believe are the most critical to the preparation of our financial statements and require significant judgment and estimation. Actual results may differ from these estimates.
Impairment Review for Equipment under Operating Leases and Held for Re-lease
We evaluate equipment under operating lease or assets held for re-lease for impairment at least annually, and also when events or changes in circumstances indicate that the expected undiscounted cash flow from the equipment may be less than the carrying value. We use various assumptions when determining the expected undiscounted cash flow including our intentions for how long we will hold equipment subject to operating lease before we sell the equipment, expected future lease rates, lease terms, residual value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the remaining economic life of the asset. When we determine that impairment is indicated for an asset, the amount of the asset impairment expense recorded is the excess of the carrying value less residual value guarantees, if applicable, over the fair value of the asset.
Had future lease rates on assets evaluated for impairment been 10% lower, we estimate that we would have incurred additional impairment expense of $20 million for the year ended December 31, 2010.
Allowance for Losses on Receivables
The allowance for losses on receivables is a valuation account used to provide for potential impairment of receivables in our portfolio. The balance represents an estimate of probable but unconfirmed losses in the receivables portfolio. The estimate is based on many qualitative and quantitative factors, including historical loss experience, collateral values, intercompany guarantees and results of individual credit and collectability reviews. The adequacy of the allowance is assessed quarterly.
Three primary factors influencing the level of our allowance are customer credit ratings, collateral values and default rates. If each customer’s credit rating were upgraded or downgraded by one major rating category at December 31, 2010, the allowance would have decreased by $42 million or increased by $88 million. If the collateral values were 20% higher or lower at December 31, 2010, the allowance would have decreased by $33 million or increased by $24 million. If the cumulative default rates used for each rating category were increased or decreased by 1%, the allowance would have increased by $2 million or decreased by $2 million.
Residual Values
Equipment under operating leases and assets held for sale or re-lease are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the period that we project we will hold the asset for lease. Estimates used in determining residual values significantly impact the amount and timing of depreciation expense for equipment under operating leases and assets held for sale or re-lease. If the estimated residual values declined 20% at December 31, 2010, we estimate that we would have incurred additional impairment expense of $31 million for the year ended December 31, 2010, and a future cumulative pre-tax earnings reduction of approximately $132 million recognized over the remaining depreciable periods, of which approximately $30 million would be recognized in 2011.
Direct finance leases are recorded at inception as the net investment representing the aggregate future minimum lease payments, estimated residual value of the leased equipment and deferred incremental direct costs less unearned income. Declines in estimated residual value that are deemed other than temporary are recognized in the period in which the decline occurs. If the estimated residual values declined 20% at December 31, 2010, we estimate that we would have reduced pre-tax income by $17 million 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 years ended December 31, 2010 and 2009. Column 3 presents this information, calculated in accordance with our accounting policy (see Item 8. Financial Statements and Supplementary Data, Note 1), if the impact of intercompany guarantees from Boeing were excluded. The exclusion of the net impact of intercompany guarantees shown in column 2 would increase the applicable exposure for various receivables 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
A key function of a finance company is to manage market risk. One of our principal sources of market risk relates to interest rate changes. Exposure to this risk is managed by generally matching the profile of our liabilities with that of our assets in relation to amount and terms such as expected maturities and fixed versus floating interest rates. Interest rate derivatives are tools used to assist with this matching and are not used for speculative purposes or trading. Matching is a dynamic process affected by changes in our assets that may require adjusting our liabilities and/or derivatives.
In order to properly manage our sensitivity to changes in interest rates, we measure the potential impact of interest rate changes on our pre-tax earnings over the next 12 months. In our analysis, we include balance sheet instruments whose income or interest expense would be impacted by changes in interest rates, which consists of Cash and cash equivalents, Short-term investments, Receivables, and Debt. For the purposes of our analysis, we assume that the level of floating rate assets and debt (including the impact of derivatives) remain unchanged from year end 2010 and that they are all subject to immediate re-pricing. As of December 31, 2010, the impact over the next 12 months of a 100 basis point immediate and sustained rise in interest rates would be a $5 million increase to pre-tax earnings.
This analysis does not necessarily represent our current outlook of future market interest rate movements, nor does it consider any actions management could undertake in response to changes in interest rates. Accordingly, no assurance can be given that actual results would be consistent with our sensitivity analysis.
Additional risks include credit risk and residual value risk, which are discussed in Item 7. Critical Accounting Estimates.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following pages include our Consolidated Financial Statements as described in Item 15 (a)1 and (a)2 of Part IV herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Boeing Capital Corporation
Renton, Washington
We have audited the accompanying consolidated balance sheets of Boeing Capital Corporation and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholder’s equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Boeing Capital Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 9, 2011
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Operations
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Shareholder’s Equity and Comprehensive Income
(1)
At December 31, 2009, the tax amount related to the unrealized loss on investments was less than $1.
We have authorized 100,000 shares of Series A preferred stock with no par value and a $5,000 stated value. No shares were issued and outstanding at December 31, 2010, 2009 and 2008.
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
Note 1 - Summary of Significant Accounting Policies
Organization Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our”, “BCC” or the “Company”) is a wholly owned subsidiary of The Boeing Company (Boeing). The Company was incorporated in Delaware in 1968. In the commercial aircraft market, we facilitate, arrange, structure and provide selective financing solutions for Boeing’s Commercial Airplanes customers. In the space and defense markets, we primarily arrange and structure financing solutions for Boeing’s Defense, Space & Security customers.
Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these notes to the Consolidated Financial Statements.
Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments, such as time deposits and money market instruments, which have original maturities of less than three months.
Short-Term Investments Short-term investments consist of liquid investments such as time deposits, which have original maturities greater than three months, but less than one year.
Portfolio Our portfolio consists of direct finance leases, leveraged leases, notes and other receivables, equipment under operating leases, investments and assets held for sale or re-lease.
Direct Finance Leases At lease inception, we record an asset (net investment) representing the aggregate future minimum lease payments, estimated residual value of the leased equipment, and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are periodically reviewed, represent the estimated amount we expect to receive at lease termination from the disposition of the leased equipment. Actual residual values realized could differ from these estimates. Declines in estimated residual value that are deemed other than temporary are recognized in the period in which the decline occurs as a reduction to Finance lease income.
Leveraged Leases Direct finance leases that are financed by non-recourse borrowings and meet certain criteria are classified as leveraged leases. For leveraged leases, aggregate rental receivables are reduced by the related non-recourse debt service obligation including interest (net rental receivables). The difference of the net rental receivables and the cost of the asset less estimated residual value at the end of the lease term is recorded as unearned income. Unearned income is recognized over the life of the lease at a constant rate of return applied to any positive net investment, which includes the effect of deferred income taxes.
Notes and Other Receivables Notes receivable are recorded net of any unamortized deferred fees and incremental direct costs. Interest income and amortization of any fees are recorded ratably over the related term of the note.
Equipment Under Operating Leases, Net of Accumulated Depreciation Equipment under operating leases is recorded at cost and depreciated over the period that we project that we will hold the asset to an estimated residual value, using the straight-line method. We periodically review our estimates of residual value and recognize forecasted changes by prospectively adjusting depreciation expense. Revenue on the leased equipment is recorded using the straight-line method over the term of the lease. Operating lease income may include amounts due to intercompany guarantees and subsidies, including amounts associated with equipment classified as assets held for sale or re-lease.
Investments Available-for-sale debt securities in the form of Enhanced Equipment Trust Certificates (EETCs) are recorded at their fair values, with unrealized gains and losses reported as part of Accumulated other comprehensive income (loss) (AOCI) on the Consolidated Balance Sheets. Available-for-sale equity securities are recorded at fair value using quoted prices in active markets for identical assets. Unrealized gains (losses) are recorded in Accumulated other comprehensive income (loss).
Assets Held for Sale or Re-lease, Net of Accumulated Depreciation When aircraft collateral related to a finance lease or note receivable is repossessed, returned in satisfaction of the receivable or returned at the end of the finance lease and when aircraft are made available for sale, the asset is carried at the lower of cost or estimated fair value less costs to sell. We calculate a median collateral value from multiple third party aircraft value publications based on the type and age of the aircraft to estimate the fair value of aircraft. Under certain circumstances, we adjust values based on the attributes of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by outside publications, or based on the expected net sales price for the aircraft. Aircraft assets held for re-lease are carried at cost less accumulated depreciation and depreciated over the remaining period that we project that we will hold the asset to an estimated residual value, on a straight-line basis.
Impairment Review for Equipment Under Operating Leases and Assets Held for Re-lease We evaluate equipment under operating lease or assets held for re-lease for impairment at least annually, and also when events or changes in circumstances indicate that the expected undiscounted cash flows from the equipment may be less than the carrying value. We use various assumptions when determining the expected undiscounted cash flows including our intentions for how long we will hold equipment subject to operating lease before we sell the equipment, expected future lease rates, lease terms, residual value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs, and the remaining economic life of the asset.
When we determine that impairment is indicated for an asset, the amount of the asset impairment expense recorded is the excess of the carrying value less asset value guarantees, if applicable, over the fair value of the asset.
Allowance for Losses on Receivables We record the potential impairment of receivables in our portfolio in a valuation account, the balance of which is an accounting estimate of probable but unconfirmed losses in the receivables portfolio. We have one portfolio segment that consists of direct finance leases and leverage leases (Finance leases) and notes receivable (Notes and other). The risk characteristics of this portfolio segment relate primarily to collateral exposure and can be segregated by class between out-of-production aircraft and other (including in-production aircraft). Generally, out-of-production aircraft have had greater percentage decreases in collateral value than those associated with in-production aircraft. Declines in collateral value impact our collateral exposure, a significant driver of our allowance for losses. The methods for monitoring and assessing credit risk are the same for both types of receivables. The allowance for losses on receivables relates to two components of receivables: (a) specifically identified receivables that are evaluated individually for impairment and (b) all other receivables.
We review all receivables for impairment and determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectability include, but are not limited to, a customer’s extended delinquency, requests for restructuring and filings for bankruptcy. We determine a specific impairment allowance based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral, taking into account Boeing and other guarantees. A receivable determined to be uncollectible is written-off against the allowance.
We review the adequacy of the allowance attributable to the remaining receivables (after excluding receivables subject to a specific impairment allowance) by assessing both the collateral exposure and the applicable cumulative default rate. Collateral exposure for a particular receivable is the excess of the carrying value of the receivable over the fair value of the related collateral taking into account Boeing and other guarantees. A receivable with an estimated fair value in excess of the carrying value is considered to
have no collateral exposure. The applicable cumulative default rate is determined using two components: customer credit ratings and weighted average remaining contract term. Internally assigned credit ratings, our credit quality indicator, are determined for each customer in the portfolio. Those ratings are reviewed quarterly and updated based upon public information and information obtained directly from our customers.
We have entered into agreements with certain customers that entitle us to look beyond the specific collateral underlying the receivable for purposes of determining the collateral exposure as described above. Should the proceeds from the sale of the underlying collateral asset resulting from a default condition be insufficient to cover the carrying value of our receivable (creating a shortfall condition), these agreements would, for example, permit us to take the actions necessary to sell or retain certain other assets in which the customer has an equity interest and use the proceeds to cover the shortfall.
Each quarter, we review customer credit ratings, published historical credit default rates for different rating categories, Boeing and other guarantees (if applicable), multiple third party aircraft value publications, and the general state of the economy and airline industry as a basis to validate the reasonableness of the allowance for losses on receivables. There can be no assurance that actual results will not differ from estimates or that the consideration of these factors in the future will not result in an increase or decrease to the allowance for losses on receivables.
Non-accrual Receivables Income recognition on an accrual basis is generally suspended for leases and notes and other receivables at the date when a full recovery of income and principal, including the effect of intercompany guarantees, become doubtful. We also typically place accounts greater than 90 days past due on non-accrual status. A receivable is considered past due when one or more payments are not received in full by its contractual due date. Income recognition on accrual basis is resumed when leases or notes and other receivables become contractually current and performance is demonstrated to be resumed. Cash received while on non-accrual is applied first to the principal balance due until our receivables are made current.
Derivative Financial Instruments All derivative instruments are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. We record our interest rate swaps at fair value based on a discounted cash flow analysis. For derivatives designated as hedges of the exposure to changes in fair value of the recognized asset or liability or a firm commitment (referred to as fair value hedges), the gain or loss is recognized in earnings in the period of change together with an offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of this accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For our cash flow hedges, all of which are related to debt, the effective portion of the derivative’s gain or loss is initially reported in shareholder’s equity (as a component of AOCI) and is subsequently reclassified into income, as an increase or decrease to interest expense, in the same period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss is reported in earnings immediately. We may also hold certain instruments for economic purposes that do not qualify for hedge accounting treatment. For these derivative instruments, the changes in their fair value are recorded in Other income.
Income Tax Our operations are included in the consolidated federal income tax return of Boeing. Under an agreement with Boeing, we pay or receive our allocated share of income taxes or credits.
Federal, state and foreign income taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes. The current provision for state income tax is based on an agreed upon rate and paid to Boeing. The state income tax deferred asset or liability is carried on Boeing’s Consolidated Financial Statements.
The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We record income tax related interest expense and interest income in the Provision for income tax in our Consolidated Statements of Operations. Tax-related interest and penalties, if any, are recorded as a component of income tax expense.
Note 2 - Relationship and Transactions with Boeing
As a wholly owned subsidiary of Boeing, our mission is to arrange for the financing of products manufactured by Boeing. When third party financing is not available, we may provide such financing directly.
We have a number of general contractual arrangements with Boeing to facilitate our operations including, among others, a support agreement, tax sharing agreement and an agreement allowing us to borrow under Boeing’s committed revolving lines of credit. We also have an intercompany borrowing and lending arrangement with Boeing.
In addition, we may require other forms of support from Boeing with respect to certain financing transactions we undertake. This support may take the form of intercompany guarantees, subsidies, remarketing agreements or other support arrangements.
There can be no assurances that these intercompany arrangements will not be terminated or modified by us or Boeing.
Support Agreement
We have a support agreement dated December 23, 2003 with Boeing with these principal features:
-
Boeing will maintain 51% or greater ownership of us,
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Boeing will make contributions to us if our fixed-charge coverage ratio falls below 1.05-to-1 on a four-quarter rolling basis, and
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Boeing will make contributions to us, if needed, to maintain our tangible net worth at a level of at least $50.
The support agreement may not be modified or terminated unless (a) the holders of at least two-thirds of the aggregate principal amount of our debt then outstanding consent or (b) the modification or termination does not adversely affect the credit ratings of our debt (as determined by each of Moody’s, Standard & Poor’s, and Fitch that rates our debt at the time of the modification or termination). “Debt” for purposes of the support agreement means all present or future indebtedness of BCC for borrowed money, evidenced by bonds, debentures, notes or similar instruments, excluding intercompany indebtedness. The support agreement is not a guarantee of any of our indebtedness, and is not directly enforceable against Boeing by third parties. The holders of more than 50% of the aggregate principal amount of all our debt have the right to demand that we enforce our rights with respect to the obligations of Boeing listed above.
Intercompany Credit Arrangements
The 364-day credit facility between Boeing and its banks was renewed on November 12, 2010, and Boeing’s five-year credit facility expiring in 2012 remains outstanding. Boeing has allocated $500 of the $2,376 364-day line and $1,000 of the $2,000 five-year revolving credit line expiring in 2012 exclusively to BCC. Both the 364-day and 5-year credit facilities have a one-year term out option which allows the borrower to extend the maturity of any borrowings one year beyond the aforementioned expiration dates. At December 31, 2010 and 2009, we had no amounts outstanding under these credit facilities. Any borrowings by us under these agreements will be guaranteed by Boeing.
No amounts were outstanding under our intercompany borrowing and lending arrangement with Boeing at December 31, 2010 and 2009. For the year ended December 31, 2009, total interest paid to and received from Boeing was insignificant.
Federal Income Tax
Our operations are included in the consolidated federal income tax return of Boeing. Our tax sharing agreement with Boeing provides that so long as consolidated federal tax returns are filed, Boeing will pay us, or we will pay Boeing, as appropriate, an amount equal to the BCC’s taxable income or loss times the statutory tax rate applicable to Boeing. Under this agreement an intercompany payable/receivable is recorded when federal income taxes are due or federal income tax benefits are generated.
Intercompany Transactions
We are the beneficiary of certain intercompany guarantees and other subsidies from Boeing in respect of specific financing transactions we undertake.
Intercompany guarantees primarily relate to residual value guarantees, first loss deficiency guarantees and rental loss guarantees. Residual value guarantees cover a specified asset value at the end of a lease agreement in the event of a decline in market value of the financed aircraft. We typically call on intercompany residual value guarantees upon recognition of an other-than-temporary decline in residual value of direct finance leases. We recognize the benefit of the guarantee through Finance lease income. First loss deficiency guarantees cover a specified portion of our losses on aircraft that we finance in the event of a loss upon disposition of the aircraft following a default by the lessee. Rental loss guarantees are full or partial guarantees covering us against the lessee’s failure to pay rent under the lease agreement or our inability to re-lease these aircraft at or above a specified rent level.
Due to intercompany guarantees from Boeing, our accounting classification of certain third party leases may differ from the accounting classification in Boeing’s Consolidated Financial Statements. As a result of these intercompany guarantees, the required balance for the allowance for losses on receivables and the required provision for losses we recognized have been mitigated. Receipts under Boeing guarantees would be net of realization of underlying residual values, partial rent receipts, re-lease rental receipts or other mitigating value received. We also have subsidy agreements which typically cover us for the difference between the contractual rate and the rate required by us.
At December 31, 2010, we were the beneficiary under $1,749 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,326.
Intercompany guarantee amounts by aircraft type are summarized as follows at December 31:
At December 31, 2010 and 2009, Accounts with Boeing included $47 and $69 for deferred revenue associated with guarantee and subsidy settlements and terminations.
We recorded the following activity under the intercompany guarantee and subsidy agreements for the years ended December 31:
(1)
During 2010 the prepayment of third party notes receivable totaling $163 was facilitated through Boeing. Included in interest income on notes receivable is $10 attributable to this prepayment.
Additionally, under the terms of the intercompany guarantee agreements, for the years ended December 31, 2010, 2009 and 2008, Boeing recorded charges of $87, $12, and $20, respectively, related to asset impairment and accrued expenses and $34, $21 and $88 respectively, related to provision for (recovery of) losses.
For the years ended December 31, 2010, 2009 and 2008, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies of $6, $20 and $30, respectively. During 2010 and 2009, we sold C-40 aircraft at their carrying value to Boeing at lease expiration for $26 and $28.
For the years ended December 31, 2010, 2009 and 2008, we recorded new business volume of $39, $618 and $50, respectively, related to Boeing aircraft, equipment or services we purchased or financed.
Other Intercompany Transactions
Accounts with Boeing consisted of the following at December 31:
For the years ended December 31, 2010 and 2009, we paid dividends (including return of capital) totaling $108 and $93.
We also receive support services from Boeing. Eligible employees are members of Boeing’s defined benefit pension plans, insurance plans, savings plan and executive compensation programs. Boeing generally charges us with the actual costs of these plans attributable to our employees and these expenses are reflected in Operating expenses. For each of the years ended December 31, 2010, 2009 and 2008, the charge for these services was $19, $11, and $12.
Note 3 - Investment in Receivables
The investment in receivables consisted of the following at December 31:
(1)
For the years ended December 31, 2010 and 2009, net investment in leveraged leases, less deferred income taxes of $223 and $238, was $(81) and $(81).
Scheduled minimum lease payments on finance leases and scheduled principal payments on Notes and other receivables are as follows for the years ended December 31:
(1)
Includes both direct finance leases and leveraged leases (less principal and interest payable on non-recourse debt).
Note 4 - Allowance for Losses on Receivables
The following table reconciles the activity in the allowance for losses on receivables at December 31:
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. Credit risk profile by internally assigned creditworthiness category for our receivables consisted of the following at December 31:
At December 31, 2010 and 2009, all of our receivables were related to customers we believe have less than investment-grade credit. We utilize default rates as one of the factors in determining our allowance for losses. At December 31, 2010, we applied default rates that averaged 11% and 50% for customers with internally assigned B and CCC ratings.
Impaired Receivables
At December 31, 2010, we had no impaired receivables. At December 31, 2009, the carrying value and the unpaid principal balance, for out-of-production aircraft were $145.
The following table details our average recorded investment and the related income recognized on the impaired receivables segregated by class for the years ended December 31:
(1)
For the years ended December 31, 2010, 2009 and 2008, of the income recognized we received in cash $9, $9 and $14, respectively.
Past Due Receivables
As of December 31, 2010, we had no past due receivables. As of December 31, 2009, total past due receivables was $1 related to other aircraft which was greater than 90 days.
At December 31, 2010, we had no accrued income on receivables with amounts past due greater than 90 days.
Non-Performing Assets
Non-performing assets (assets not earning income on an accrual basis) consisted of the following at December 31:
(1)
At December 31, 2009, equipment under operating leases of $295 are not included in non-performing assets due to intercompany guarantees provided by Boeing. At December 31, 2010 and 2009, assets held for sale or re-lease of $540 and $271 are not included in non-performing assets due to intercompany guarantees provided by Boeing.
(2)
At December 31, 2010 and 2009, non-performing assets held for sale or re-lease of $28 and $74 had either a purchase or lease commitment.
Note 5 - Equipment Under Operating Leases, Net of Accumulated Depreciation
Equipment under operating leases, net of accumulated depreciation, consisted of the following at December 31:
(1)
Advanced rent receipts, net is the total cash received for all operating leases in excess of the total operating lease income recognized to date.
Scheduled minimum lease payments to be received under the non-cancelable portion of operating leases are as follows at December 31, 2010:
Note 6 - Investments
Our investments in available-for-sale debt and marketable equity securities consisted of the following:
(1)
At December 31, 2009 the EETC had been in a continuous unrealized loss position for more than 12 months.
During 2010, we sold certain available-for-sale marketable equity securities for total proceeds of $24 and recognized investment income of $4.
The contractual maturities of available-for-sale debt securities at December 31, 2010, were as follows:
Note 7 - Income Tax
The components of the provision (benefit) for tax on income were as follows at December 31:
The tax impact of temporary differences constitute our net deferred income tax liability. The components of the net deferred income tax liability consisted of the following at December 31:
Income tax computed at the United States federal income tax rate and the provision for tax on income differ as follows for the years ended December 31:
Our tax return is currently being examined by the Internal Revenue Service (IRS) for the years 2007-2008 as part of the IRS review of the Boeing consolidated tax return and Boeing has filed appeals with the IRS for years 2004-2006. During the fourth quarter, Boeing settled its appeal for 1998-2003. We are also subject to examination in major state and international jurisdictions for the years 2001-2010.
Pursuant to our tax sharing agreement with Boeing, we made payments with respect to tax obligations to Boeing of $99 and $83 in 2010 and 2009, respectively and we received payments with respect to tax benefits from Boeing of $17 in 2008. In 2010 and 2009, we did not receive or make income tax payments from or to other federal, state and foreign tax agencies. We received income tax payments of $1 from other federal, state and foreign tax agencies in 2008.
As of December 31, 2010 and 2009, we did not have any unrecognized tax benefits.
For the years ended December 31, 2010, 2009 and 2008, we did not incur any income tax related interest income, interest expense or penalties.
Note 8 - Debt and Credit Agreements
The carrying value of debt, including the net effect of interest rate swap revaluation adjustments and unamortized deferred debt costs, consisted of the following at December 31:
At December 31, 2010 and 2009, we had interest rate swaps which effectively convert debt of $875 and $1,475 from fixed rate to floating rate. During 2010 we terminated $250 of interest rate swaps in order to improve our expected alignment between fixed and floating rate assets and liabilities. An additional $350 of swaps matured as scheduled concurrently with corresponding debt maturities.
On October 30, 2008 we filed a public shelf registration for up to $5,000 of debt securities with the Securities and Exchange Commission (SEC) that became effective on November 12, 2008. Following the issuance of an aggregate principal amount of indebtedness of $1,000 under the registration statement in 2009, $4,000 remains available for potential debt issuance. The availability of funding under the shelf registration statement is dependent on investor demand and market conditions.
We have a $1,500 Commercial Paper (CP) program that serves as a potential source of short-term liquidity subject to market conditions. Throughout 2010 and at December 31, 2010, there were no amounts outstanding under the CP program.
The most restrictive covenants in our debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At December 31, 2010, as well as at each quarter end during the year, we were in compliance with these covenants.
At December 31, 2010, $107 of our debt (non-recourse notes and capital lease obligations) was collateralized by portfolio assets and underlying equipment totaling $186.
Scheduled principal payments for debt and capital lease obligations are as follows at December 31:
In 2010, 2009 and 2008, interest payments were $174, $188 and $231, respectively.
Note 9 - Derivative Financial Instruments
We primarily use derivative instruments to manage exposures to interest rate risk. We enter into interest rate swap contracts to hedge interest rate risk associated with our debt obligations. These interest rate swap contracts are designated as cash flow hedges or fair value hedges. Our contracts entered into as of December 31, 2010 do not require collateral or other security from either party.
Fair Value Hedges
Interest rate swaps, under which we agree to pay variable rates of interest, are designated as fair value hedges of fixed-rate debt. For our fair value hedges that qualify for hedge accounting treatment we use the short-cut method and thus there are no gains or losses recognized due to hedge ineffectiveness. Unrealized gains or losses from changes in the value of fair value hedges are offset by changes in the fair value of the hedged underlying debt.
For the years ended December 31, 2010, 2009 and 2008, we recorded $12, $12 and $9, respectively, of income related to the amortized basis adjustment of certain terminated swaps as a reduction of Interest expense.
Cash Flow Hedges
Interest rate swap contracts under which we agree to pay a fixed rate of interest are designated as cash flow hedges of variable-rate debt obligations.
At times, we may hold cash flow hedges that qualify for hedge accounting treatment for which we use the short-cut method, and thus there are no gains or losses recognized due to hedge ineffectiveness. We record unrealized gains or losses from changes in the fair value of cash flow hedges in AOCI.
Other Derivative Instruments
At times, we may hold certain derivatives that do not receive hedge accounting treatment. These may include interest rate derivatives as well as warrants. During 2010 we did not hold derivatives that did not qualify for hedge accounting treatment. For the years ended December 31, 2009 and 2008, we recognized gains of $9 and $1 in Other income related to warrants to purchase common stock of an unaffiliated third party.
The fair values of derivative instruments included in the Consolidated Balance Sheet were as follows:
The notional amount of our interest rate swaps is disclosed in Note 8 - Debt.
For the year ended December 31, 2010, we did not hold any derivatives in cash flow hedging relationships, resulting in no effect to AOCI or the Statement of Operations.
For the year ended December 31, 2009, we recognized a gain in AOCI of $3 related to our interest rate swaps in cash flow hedging relationships. In addition, for the year ended December 31, 2009 we reclassified $2 from AOCI into interest expense.
Note 10 - Maintenance Payment Liability
Cash collected from lessees under the terms of the lease agreements for future maintenance of aircraft are recorded as maintenance payment liabilities. Maintenance payment liabilities are attributable to specific aircraft leases. Upon occurrence of a qualified maintenance event, the lessee requests reimbursement and upon disbursement of the funds, the liability is relieved. The balance, which is included in Other liabilities, was $172 and $191 as of December 31, 2010 and 2009.
To the extent that no maintenance obligation relating to an aircraft remains, the balance is recognized as Other income. For the years ended December 31, 2010, 2009 and 2008 we recorded income of $17, $11 and $3, respectively.
Note 11 - Share-Based Plans Expense
Share-based plans expense principally relates to stock options. Share-based plans expense is included in Operating expenses since it is incentive compensation issued primarily to our executives. The fair value of stock options was estimated using the Black-Scholes option-pricing model.
For the years ended December 31, 2010, 2009 and 2008 we recorded $2, $2 and $3 attributable to share-based plans expense.
Note 12 - Commitments and Contingencies
Litigation
Various legal proceedings and claims are pending or have been asserted against us. We believe that the final outcome of these proceedings and claims will not have a material adverse effect on our earnings, cash flows and/or financial position.
Bankruptcies
In August 2010, Compania Mexicana de Aviacion S.A. de C.V. (Mexicana) filed for bankruptcy protection in Mexico and in the United States. At the time of those filings, we had leased 19 717 aircraft to Aevovías Caribe S.A. de C.V. (Click), an affiliate of Mexicana, and six additional 717 aircraft were scheduled for delivery to Click under executed leases. On August 27, 2010, we served Click a notice of termination of all 25 leases as a result of non-payment. On or about August 28, 2010, Click ceased flight operations. In September 2010, Click filed for bankruptcy protection. We have recovered all of the aircraft that had been delivered to Click. As a result of guarantees from Boeing that limit our risk for non-payment under the leases, we do not expect that the bankruptcy will have a material adverse effect on our earnings, cash flows and/or financial position.
Restructurings and Restructuring Requests
From time to time, certain customers have requested a restructuring of their transactions with us. As of December 31, 2010, we have not reached agreement on any restructuring requests that would have a material adverse effect on our earnings, cash flows and/or financial position.
Commitments
At December 31, 2010, we and Boeing had unfunded financing commitments of $9,865, primarily resulting from firm contracts, options for deliveries or proposals as part of sales campaigns. These commitments are provided to give Boeing customers reasonable assurance of financing in connection with orders of Boeing products in advance of delivery. However, customers typically seek lower cost financing from other sources prior to actual delivery. In addition, we continue to work with third party financiers to provide alternative financing to customers and eliminate the need for our financing. Based on historical experience and anticipated capital market acceptance of Boeing aircraft covered by Boeing’s and our current commitments, we anticipate that a significant portion of these commitments will not be exercised by the customer or will expire without being fully drawn upon. However, there can be no assurance that we will not be required to fund greater amounts than historically required. To the extent we are obligated to provide financing, such financing generally includes participation by engine manufacturers which further reduces our obligation. Therefore, the reported amount of commitments does not necessarily represent a future net cash requirement. However, we expect to ultimately provide funding for those commitments which are exercised, whether they are Boeing’s or our commitments. If there were requirements to fund all Boeing’s
and our commitments, the timing in which these commitments may be funded (based on estimated earliest potential funding dates as of December 31, 2010) is as follows:
(1)
Does not reflect the revision of the 787 program schedule announced in January 2011.
Note 13 - Off-Balance Sheet Arrangements
We are a party to off-balance sheet arrangements consisting of variable interests in unconsolidated entities.
We have an investment in the form of an EETC which was acquired in 1999. EETCs are interests in a trust that passively holds investments in aircraft or pools of aircraft. EETCs provide investors with a collateral position in the related assets and tranched rights to cash flows from a financial instrument. Our investment in the form of EETC does not require consolidation. At December 31, 2010, our maximum exposure to economic loss from our EETC is $5.
Note 14 - Fair Value Measurements
The following tables present our assets and liabilities that are measured at fair value on a recurring basis, as of December 31, and are categorized using the three levels of fair value hierarchy.
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 AOCI.
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.
Warrants. The fair value of warrants is determined using a third party options model. Principal inputs to the model include stock price, volatility and time to expiry. Unrealized gains (losses) are recorded in Other income.
The following tables present a reconciliation of Level 3 assets measured at fair value on a recurring basis for the years ended December 31.
Certain assets are measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3). The table below presents the non-recurring losses recognized for the years ended December 31, and the carrying value and asset classification of the related assets still held as of December 31:
(1)
Represents carrying value and related write downs of receivables which were based on the fair value for the related aircraft collateral.
(2)
Represents carrying value and related write downs which were based on the fair value for the related aircraft. For the year ended December 31, 2010, losses on equipment under operating leases includes $7 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 as of December 31:
Items not included in the above disclosures are Cash and cash equivalents and Short-term investments. The carrying value of those items approximate their fair value at December 31, 2010 and 2009 as reflected in the Consolidated Balance Sheets.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Notes and other. The fair value of our variable rate notes that reprice frequently approximate their carrying values. The fair value of fixed rate notes is estimated using discounted cash flows analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality.
Debt. The fair value of debt is based on current market yields for our debt traded in the secondary market.
Guarantees. For residual value guarantees where we are the guarantor, the carrying value approximates fair value.
Financing commitments. It is not practicable to estimate the fair value of future financing commitments because the amount and timing of funding those commitments are uncertain.
Note 15 - Concentrations
A significant portion of our portfolio is concentrated among a few customers and in distinct geographic regions, particularly in the United States. Our portfolio is also concentrated by varying degrees across aircraft product types and vintages. Our concentration risk is mitigated in part by intercompany guarantees from Boeing with respect to certain portfolio assets, which primarily relate to 717 aircraft.
Portfolio carrying values for our five largest customers were as follows at December 31:
For the years ended December 31, 2010 and 2009, AirTran Holdings, Inc. accounted for 18% and 20% of our revenue.
Portfolio carrying values were represented in the following regions at December 31:
(1)
United States includes assets held for sale or re-lease that may be physically located in another region.
Revenue by geographic region was as follows for the years ended December 31:
Portfolio carrying values were represented by the following product types at December 31:
(1)
MD-11 aircraft are currently in freighter configuration or are committed to be modified into freighter configuration.
(2)
Other includes aircraft, equipment, notes and stock. Some of these aircraft are out of production, but are supported by the manufacturer or other third party parts and service providers.
Our aircraft portfolio by vintage, based on carrying value (excluding investments and pooled assets), are categorized as follows at December 31:
Note 16 - Discontinued Operations
On May 24, 2004, we entered into a purchase and sale agreement with General Electric Capital Corporation (GECC) to sell substantially all of the assets related to our Commercial Financial Services business. The final asset sale closed December 27, 2004.
Part of the purchase and sale agreement with GECC includes a loss sharing arrangement for losses that may exist at the end of the initial and subsequent financing periods of the transferred portfolio assets, or in some instances, prior to the end of the financing period. Such 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 December 31, 2010, our maximum future cash exposure to losses associated with the loss sharing arrangement was $232 for which we have accrued a liability of $82.
The following table reconciles the reserve under the loss sharing arrangement, which is included in Other liabilities for the years ended December 31:
Operating results of the discontinued operations were as follows for the years ended December 31:
Note 17 - Quarterly Financial Information (Unaudited)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures as of December 31, 2010 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) Management’s Annual Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11.
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 14.
Item 14. Principal Accounting Fees and Services
The following table sets forth the aggregate fees billed to us by Deloitte & Touche LLP, our independent auditor, in 2010 and 2009:
(1)
For professional services rendered for the audit of our 2010 and 2009 annual financial statements, the reviews of the financial statements included in our Forms 10-Q for fiscal years 2010 and 2009, fees for issuance of consents related to Securities and Exchange Commission filings and other statutory audits.
As a wholly owned subsidiary of The Boeing Company, audit and non-audit services provided by our independent auditor are subject to Boeing’s Audit Committee pre-approval policies and procedures. The Committee pre-approved all services provided by, and all fees of, our independent auditor.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, we are not filing certain instruments with respect to our debt, as the total amount of securities currently provided for under each of such instruments does not exceed 10 percent of our total assets on a consolidated basis. We hereby agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Boeing Capital Corporation
February 9, 2011
/s/ KELVIN E. COUNCIL
Kelvin E. Council
Vice President and Chief Financial Officer
(Principal Financial Officer) and Registrant’s
Authorized Officer
February 9, 2011
/s/ KEVIN J. MURPHY
Kevin J. Murphy
Controller (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.