10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended June 30, 2008

or

 

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

For the transition period from                      to                     

Commission file number 0-10795 

BOEING CAPITAL CORPORATION

 

(Exact name of registrant as specified in its charter)

 

 

Delaware      95-2564584

(State or other jurisdiction of

incorporation or organization)

     (I.R.S. Employer Identification No.)

 

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

(425) 965-4000

 

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer

  ¨      Accelerated filer  ¨

Non-accelerated filer

  x   

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

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

No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at July 22, 2008: 50,000 shares

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


Table of Contents

Table of Contents

 

                 Page  

Part I. Financial Information (Unaudited)

  
   Item 1.   

Financial Statements

   1
     

Condensed Consolidated Balance Sheets

   1
     

Condensed Consolidated Statements of Operations

   2
     

Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income

   3
     

Condensed Consolidated Statements of Cash Flows

   4
     

Notes to Condensed Consolidated Financial Statements

   5
     

Review Report of Independent Registered Public Accounting Firm

   12
   Item 2.   

Management’s Narrative Analysis of the Results of Operations

   13
   Item 4T.   

Controls and Procedures

   17

Part II. Other Information

  
   Item 1.   

Legal Proceedings

   18
   Item 6.   

Exhibits

   18
   Signatures    19


Table of Contents

PART I. FINANCIAL INFORMATION

Item  1. Financial Statements

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(Dollars in millions, except par value)    June 30,
2008
    December 31,
2007
 

ASSETS

    

Cash and cash equivalents

   $ 815     $ 463  

Receivables:

    

Finance leases

     2,206       2,273  

Notes and other

     660       714  
     2,866       2,987  

Allowance for losses on receivables

     (61 )     (74 )
     2,805       2,913  

Accounts with Boeing

     54        

Equipment under operating leases, net

     3,127       3,315  

Investments

     7       144  

Assets held for sale or re-lease, net

     216       86  

Other assets

     68       123  
   $ 7,092     $ 7,044  
   

LIABILITIES AND SHAREHOLDER’S EQUITY

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 82     $ 95  

Other liabilities

     352       340  

Accounts with Boeing

           23  

Deferred income taxes

     1,483       1,394  

Debt

     4,311       4,327  
       6,228       6,179  

Shareholder’s equity:

    

Common shares – $100 par value; authorized 100,000 shares; issued and outstanding 50,000 shares

     5       5  

Additional paid-in capital

     861       861  

Accumulated other comprehensive loss, net of tax

     (2 )     (1 )

Retained earnings

            
       864       865  
   $ 7,092     $ 7,044  
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(Dollars in millions)    2008    2007     2008     2007  

REVENUE

         

Finance lease income

   $ 43    $ 46     $ 85     $ 92  

Interest income on notes receivable

     14      37       28       73  

Operating lease income

     116      113       235       230  

Investment income

          6       2       12  

Other income

     6      7       14       15  
     179      209       364       422  

EXPENSES

         

Interest expense

     57      76       119       155  

Depreciation expense

     56      54       112       108  

Provision for (recovery of) losses

     4      (10 )     (2 )     (18 )

Operating expenses

     13      16       24       29  

Asset impairment expense

          2             2  

Other expense

     4      1       5       3  
       134      139       258       279  

Income from continuing operations before provision for income tax

     45      70       106       143  

Provision for income tax

     16      26       39       53  

Income from continuing operations

     29      44       67       90  

Net gain on disposal of discontinued operations, net of tax

     1      1       6       5  

Net income

   $ 30    $ 45     $ 73     $ 95  
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income

(Unaudited)

 

(Dollars in millions)   Total     Common
Shares
  Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Comprehensive
Income
 

Balance at January 1, 2007

  $ 1,113     $ 5   $ 1,101     $ 7     $          

Non-cash capital contributions from Boeing

    4           4                

Cash dividends to Boeing (including return of capital)

    (264 )         (169 )           (95 )  

Net income

    95                       95     $ 95  

Unrealized loss on investments, net of tax

    (3 )               (3 )           (3 )

Balance at June 30, 2007

  $ 945     $ 5   $ 936     $ 4     $     $ 92  
   

Balance at January 1, 2008

  $ 865     $ 5   $ 861     $ (1 )   $          

Non-cash capital contributions from Boeing

    1           1                

Cash dividends to Boeing (including return of capital)

    (74 )         (1 )           (73 )  

Net income

    73                       73     $ 73  

Reclassification adjustment for gain on investment realized, net of tax

    (1 )               (1 )           (1 )

Balance at June 30, 2008

  $ 864     $ 5   $ 861     $ (2 )   $     $ 72  
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

      Six Months Ended June 30,  
(Dollars in millions)    2008     2007  

OPERATING ACTIVITIES

    

Net income

   $ 73     $ 95  

Adjustments to reconcile net income to net cash provided by operating
activities:

    

Non-cash items:

    

Depreciation and amortization expense

     110       105  

Recovery of losses

     (2 )     (18 )

Asset impairment expense

           2  

Share-based plans expense

     1       4  

Other non-cash adjustments related to discontinued operations, net of tax

     (6 )     (5 )

Change in deferred income taxes

     88       35  

Change in assets and liabilities:

    

Other assets

     26       2  

Accrued interest and rents

     3       11  

Accounts payable and accrued expenses

     (13 )     (25 )

Other liabilities

     23       (11 )

Accounts with Boeing

     (80 )     22  

Net cash provided by operating activities

     223       217  

INVESTING ACTIVITIES

    

Proceeds from available-for-sale investments

     135        

Payment for capitalizable costs in process

     (16 )     (21 )

Proceeds from disposition of equipment and receivables

     19       17  

Principal payments of leases, notes and other receivables

     92       917  

Origination of leases, notes and other receivables

           (20 )

Net cash provided by investing activities

     230       893  

FINANCING ACTIVITIES

    

Repayment of debt

     (27 )     (832 )

Payment of cash dividends (including return of capital)

     (74 )     (264 )

Net cash used in financing activities

     (101 )     (1,096 )

Net increase in cash and cash equivalents

     352       14  

Cash and cash equivalents at beginning of year

     463       589  

Cash and cash equivalents at end of period

   $ 815     $ 603  
   

NON-CASH INVESTING AND FINANCING ACTIVITIES

    

Net transfer to (from) assets held for sale or re-lease

   $ 133     $ (137 )
   

Net transfer from notes receivable

   $     $ (1 )
   

Net transfer to (from) equipment under operating leases

   $ (78 )   $ 138  
   

Transfer from other assets

   $ (55 )   $  
   

(Increase) decrease in debt due to fair value hedge derivatives

   $ (12 )   $ 12  
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Dollars in millions)

Note 1 – Basis of Presentation

Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is an indirect wholly owned subsidiary of The Boeing Company (Boeing). We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the condensed consolidated financial statements. Operating results for the period ended June 30, 2008 are not necessarily indicative of the results for the full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2007 Annual Report on Form 10-K.

Note 2 – Transactions with Boeing

As an indirect 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 line of credit. We also have an intercompany borrowing arrangement with Boeing.

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

There can be no assurances that these intercompany agreements and arrangements will not be terminated or modified by us and Boeing. However, our and Boeing’s ability to terminate or modify the support agreement is subject to certain conditions. See Item 8. Financial Statements and Supplementary Data, Note 3 of our 2007 Annual Report on Form 10-K.

At June 30, 2008, we were the beneficiary under $2,172 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,875.

Intercompany guarantee amounts by aircraft type are summarized as follows:

 

      June 30, 2008    December 31, 2007
     

Guarantee

Amount

  

Carrying

Value

  

Guarantee

Amount

  

Carrying

Value

717 (out of production)

   $ 1,724    $ 2,310    $ 1,756    $ 2,356

Out of production twin-aisle aircraft

     208      280      267      348

Out of production single-aisle aircraft

     188      188      195      195

Other, including other Boeing aircraft

     52      97      54      98
   $ 2,172    $ 2,875    $ 2,272    $ 2,997
 

At June 30, 2008 and December 31, 2007, Accounts with Boeing included $97 and $103 for deferred revenue associated with guarantee and subsidy settlements and terminations.

 

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

 

      2008     2007  

Applied to income

   $ 23     $ 35  

Net change in deferred revenue

     (6 )     (18 )

Guarantees receivable from Boeing

           (15 )

Net cash received under intercompany guarantee and subsidy agreements

   $ 17     $ 2  
   

For the six months ended June 30, 2008 and 2007, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies, of $17 and $18.

For the six months ended June 30, 2008 and 2007, we recorded new business volume of $33 and $20 related to aircraft and equipment recently manufactured by Boeing.

Note 3 – Allowance for Losses on Receivables

The following table reconciles the allowance for losses on receivables for the six months ended June 30:

 

      2008     2007

Allowance for losses on receivables at beginning of period

   $ 74     $ 102   

Recovery of losses

     (2 )     (18)  

Write-offs

     (11 )     (8)  

Recovery of write-offs

           6   

Allowance for losses on receivables at end of period

   $ 61     $ 82   
 

Allowance as a percentage of total receivables

     2.1 %     2.5%

The carrying value of impaired receivables consisted of the following:

 

      June 30,
2008
   December 31,
2007

Impaired receivables with specific impairment allowance

   $ 14    $ 39

Impaired receivables with no specific allowance

     174      197

Carrying value of impaired receivables

   $ 188    $ 236
 

At June 30, 2008 and December 31, 2007, allowance for losses on impaired receivables was $7 and $13.

Non-Performing Assets

Non-performing assets (assets either not earning income on an accrual basis or equipment without a purchase commitment or current contractual lease revenue) consisted of the following:

 

      June 30,
2008
    December 31,
2007

Assets placed on non-accrual status:

    

Receivables

   $ 6     $ 59   

Equipment under operating leases, net (1)

     31       184   
     37       243   

Assets held for sale or re-lease, net

     170       –   
   $ 207     $ 243   
 

Percent of non-performing receivables to total receivables

     0.2 %     2.0%

Percent of total non-performing assets to total portfolio

     3.3 %     3.7%

 

(1)

 

At June 30, 2008, equipment under operating leases with Midwest Airlines was $578, related to 25 717 aircraft. This amount is not included in non-performing assets due to intercompany guarantees provided by Boeing.

For the portfolio assets that were non-performing as of the six months ended June 30, 2008 and 2007, we recorded income of $5 and $8 based on cash received of $6 and $14.

 

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Note 4 – Debt

Debt, including the net effects of interest rate swap revaluation adjustments and unamortized deferred debt costs, consisted of the following:

 

(Interest rates are the contractual rates at June 30, 2008)    June 30,
2008
   December 31,
2007

3.60% - 7.58% fixed rate notes due through 2017

   $ 4,048    $ 4,050

3.88% - 4.01% floating rate notes due through 2023

     119      120

3.56% - 5.79% non-recourse notes due through 2013

     69      71

3.00% capital lease obligation due through 2015

     75      86
   $ 4,311    $ 4,327
 

At June 30, 2008, and December 31, 2007, we had interest rate swaps which effectively convert debt of $1,125 and $1,507 from fixed rate to floating rate and $92 and $92 from floating rate to fixed rate. During the second quarter of 2008 we terminated $375 of interest rate swaps that were used to convert debt from fixed rate to floating rate to improve alignment between fixed and floating rate assets and liabilities.

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 June 30, 2008, we were in compliance with these covenants.

Note 5 – Commitments and Contingencies

Litigation

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

Restructurings and Restructuring Requests

As of June 30, 2008, we have received a number of requests from both domestic and foreign airlines to reduce lease or rental payments or to otherwise restructure obligations. Whether such requests will result in a material adverse impact on our earnings, cash flow or financial position depends on a number of factors including whether the request is granted, the type of aircraft, the collateral value, market rental rates and guarantee coverage, if any.

 

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Commitments

At June 30, 2008, we and Boeing had unfunded financing commitments of $9,200, 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. 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 funding dates as of June 30, 2008) is as follows:

 

      Total

July through December 2008

   $ 650

2009

     1,400

2010

     1,900

2011

     450

2012

     700

Thereafter

     4,100
   $ 9,200
 

Note 6 – Fair Value of Financial Instruments

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157) for our assets and liabilities shown in the table below. SFAS No. 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about the use of fair value measurements.

Financial Accounting Standards Board (FASB) Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), permits adoption of SFAS No. 157 to be deferred for nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. At June 30, 2008, we did not have any nonfinancial assets or nonfinancial liabilities that are recognized or disclosed at fair value.

The adoption of SFAS No. 157 did not have a material impact on our fair value measurements.

 

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

 

      June 30, 2008
Assets    Total    

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant Other
Observable
Inputs

(Level 2)

    Significant
Unobservable
Inputs
(Level 3)

Available-for-sale debt investments:

         

Enhanced Equipment Trust Certificate

(EETC)

   $ 6     $    $ 6     $

Derivatives

     21            21      

Total

   $ 27     $    $ 27     $
 

Liabilities

                             

Derivatives

   $ (1 )   $    $ (1 )   $

Total

   $ (1 )   $    $ (1 )   $
 

The EETC is valued based on trading prices of similar instruments. Our derivatives consist of United States dollar denominated interest rate swaps, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close.

Certain assets are measured at fair value on a non-recurring basis. For the six months ended June 30, 2008, impaired receivables with a carrying amount of $14 were written down to their fair value of $7, which was determined using observable inputs (Level 2). The fair value of impaired receivables is based on the market value for the related aircraft collateral.

Note 7 – 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:

 

      June 30, 2008     December 31, 2007
      Carrying Value    % of Total
Portfolio
    Carrying Value    % of Total
Portfolio

AirTran

   $ 1,489    24.0 %   $ 1,518    23.2%

American

     587    9.4       618    9.5   

Midwest

     578    9.3       591    9.0   

Hawaiian

     419    6.7       422    6.5   

Continental

     389    6.3       403    6.2   
   $ 3,462    55.7 %   $ 3,552    54.4%
 

For the six months ended June 30, 2008 and 2007, AirTran Holdings, Inc. accounted for 18% and 15% of our revenue.

 

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Portfolio carrying values were represented in the following regions:

 

      June 30, 2008     December 31, 2007
      Carrying Value    % of Total
Portfolio
    Carrying Value    % of Total
Portfolio

United States (1)

   $ 4,400    70.8 %   $ 4,687    71.7%

Europe

     1,075    17.3       1,050    16.1   

Asia/Australia

     403    6.5       425    6.5   

Latin America

     269    4.3       298    4.6   

Other

     69    1.1       72    1.1   
   $ 6,216    100.0 %   $ 6,532    100.0%
 

 

(1)

 

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

Portfolio carrying values were represented by the following product types:

 

      June 30,
2008
   December 31,
2007

717

   $ 2,416    $ 2,464

757

     1,030      1,067

767

     585      611

MD-11(1)

     577      540

737

     508      542

747

     401      419

MD-80

     319      343

777

     89      96

Other (2)

     291      450
   $ 6,216    $ 6,532
 

 

(1)

 

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

 

(2)

 

Other includes aircraft 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:

 

      June 30,
2008
    December 31,
2007

2003 and newer

   28.5 %   28.7%

1998 - 2002

   47.1     47.3   

1993 - 1997

   13.7     13.0   

1992 and older

   10.7     11.0   
   100.0 %   100.0%
 

Note 8 – Discontinued Operations

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

Part of the purchase and sale agreement with GECC includes a loss sharing arrangement for losses that may exist at the end of the initial and subsequent financing periods of the transferred portfolio assets, or in some instances, prior to the end of the financing period, such as certain events of default and repossession. The loss sharing arrangement provides that cumulative net losses (if any) are to be shared between us and GECC. The

 

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provisions effectively limit our exposure to any losses to $245. At June 30, 2008, our maximum exposure to loss associated with the loss sharing arrangement was $228, for which we have accrued a liability of $53.

The reserve under the loss sharing arrangement, which is included in Other liabilities was as follows:

 

     

Six Months
Ended

June 30,
2008

   

Six Months
Ended

June 30,
2007

 

Reserve at beginning of period

   $ 59     $ 78  

Reduction in reserve

     (10 )     (9 )

Payments received from GECC

     4       2  

Reserve at end of period

   $ 53     $ 71  
   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Boeing Capital Corporation

Renton, Washington

We have reviewed the accompanying condensed consolidated balance sheet of Boeing Capital Corporation and subsidiaries (the “Company”) as of June 30, 2008, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2008 and 2007, and of shareholder’s equity and comprehensive income, and of cash flows for the six-month periods ended June 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Boeing Capital Corporation and subsidiaries as of December 31, 2007, and the related consolidated statements of operations, shareholder’s equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 13, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

July 22, 2008

 

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

Forward-Looking Information is Subject to Risk and Uncertainty

Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by federal securities laws. Our actual results and future trends may differ materially depending on a variety of factors, including:

 

   

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

 

   

the impact of bankruptcies or restructurings on commercial airline customers;

 

   

the impact of changes in aircraft valuations;

 

   

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

 

   

the impact on us of strategic decisions by The Boeing Company (Boeing), including the amount of financing 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;

 

   

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

 

   

our ability to meet our contractual obligations, including outstanding financing commitments;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

other risk factors listed from time to time in our filings with the Securities and Exchange Commission (SEC).

Please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2007, for a description of risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements.

Overview

During the six months ended June 30, 2008, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.

During the first six months of 2008, rising fuel prices have severely impacted United States (U.S.) airlines, a number of which represent the majority of our portfolio. Several airlines have announced plans to reduce the size of their operating fleet, and a number of airlines have entered bankruptcy proceedings. The credit ratings of most major U.S. airlines have been placed on negative watch by credit agencies. Our results of operations, which included the impact of intercompany guarantees, were not significantly impacted by these factors during the six

 

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months ended June 30, 2008. Continued problems in the airline industry could have a negative impact on lease rates, airline credit ratings and aircraft valuations, and our future results of operations could be adversely affected in the form of lower revenues, increased asset impairments, increased allowance for losses and increased other expenses consisting of redeployment costs. We are continuing to monitor the environment and the potential impacts to our business.

At June 30, 2008, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, investments and assets held for sale or re-lease. At June 30, 2008, we owned 291 commercial aircraft and four C-40 aircraft and had partial ownership or security interest in an additional 44 aircraft.

Our portfolio at June 30, 2008 decreased to $6.2 billion from $6.5 billion at December 31, 2007. The following table summarizes the net change in our total portfolio:

 

(Dollars in millions)   

Six Months Ended
June 30,

2008

    Year Ended
December 31,
2007
 

New business volume

   $ 36     $ 24  

Write-offs

     (11 )     (2 )

Transfer of assets

     18       (53 )

Asset impairment

           (33 )

Asset run off and prepayments

     (229 )     (1,126 )

Asset dispositions

     (19 )     (104 )

Depreciation and amortization expense

     (111 )     (208 )

Net change in portfolio balance

   $ (316 )   $ (1,502 )
   

At June 30, 2008 and December 31, 2007, we had $216 million and $86 million of assets that were held for sale or re-lease, of which $46 million and $86 million had firm contracts to be sold or placed on lease. The increase in assets held for sale or re-lease primarily resulted from the return of four aircraft previously leased to ATA Holdings Corp., which filed for bankruptcy protection on April 2, 2008. Additionally, aircraft subject to leases with a carrying value of approximately $412 million are scheduled to be returned off lease in the next 12 months. These aircraft are being remarketed or the leases are being extended and $299 million were committed at June 30, 2008.

Our net income was $73 million for the six months ended June 30, 2008 compared with $95 million for the same period in 2007, a decrease of $22 million. The decrease in our net income was primarily due to lower interest income on notes receivable and lower investment income partially offset by lower interest expense during the first six months of 2008.

Consolidated Results of Operations

Revenue

Revenue was $364 million for the six months ended June 30, 2008 compared with $422 million for the same period in 2007, a decrease of $58 million.

Interest income on notes receivable was $28 million for the six months ended June 30, 2008, a decrease of $45 million compared with the same period in 2007 primarily due to a decrease in the notes receivable balance as a result of the prepayment of certain notes in 2007.

Investment income was $2 million for the six months ended June 30, 2008, a decrease of $10 million compared with the same period in 2007 primarily due to a lower investment balance as a result of the scheduled repayment of an investment in January 2008.

Expenses

Expenses were $258 million for the six months ended June 30, 2008 compared with $279 million for the same period in 2007, a decrease of $21 million.

 

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Interest expense was $119 million for the six months ended June 30, 2008, a decrease of $36 million compared with the same period in 2007 due to a decrease in the balance of debt outstanding as a result of scheduled debt repayments and a decrease in the weighted average annual effective interest rate on all borrowings to 5.5% in 2008 from 6.0% in 2007.

The recovery of losses was $2 million for the six months ended June 30, 2008, compared with a recovery of losses of $18 million for the same period in 2007. During the first six months of 2007 and 2008, the impact of finance leases and notes receivable run off exceeded the impact of declines in aircraft collateral values, thus resulting in a recovery of losses. Potential future declines in aircraft valuations in excess of portfolio run off, or declines in the credit ratings of our airline customers could result in an increased provision for losses in the second half of 2008.

Provision for income tax

Provision for income tax was $39 million for the six months ended June 30, 2008, a decrease of $14 million compared with the same period in 2007, primarily due to a decrease in pre-tax income.

Liquidity and Capital Resources

Our cash and cash equivalents balance was $815 million at June 30, 2008, an increase from $463 million at December 31, 2007. The following is a summary of the change in our cash and cash equivalents for the six months ended June 30:

 

(Dollars in millions)    2008     2007  

Net cash provided by operating activities

   $ 223     $ 217  

Net cash provided by investing activities

     230       893  

Net cash used in financing activities

     (101 )     (1,096 )

Net increase in cash and cash equivalents

   $ 352     $ 14  
   

Operating activities

During the six months ended June 30, 2008, net cash provided by operating activities included net income from operations of $73 million. We had net adjustments for non-cash items of $191 million which primarily related to depreciation expense and an increase in deferred income taxes. We also had a net decrease in cash of $41 million due to changes in assets and liabilities.

During the six months ended June 30, 2007, net cash provided by operating activities included net income from operations of $95 million. We had net adjustments for non-cash items of $123 million which primarily related to depreciation expense. We also had a net decrease in cash of $1 million due to changes in assets and liabilities.

Investing activities

During the six months ended June 30, 2008, net cash provided by investing activities primarily included a scheduled repayment of an investment in the amount of $135 million and principal payments of leases, notes and other receivables of $92 million.

During the six months ended June 30, 2007, net cash provided by investing activities included $917 million relating to customer prepayments of certain notes receivable and asset run off.

Financing activities

During the six months ended June 30, 2008, net cash used for financing activities included scheduled debt repayments of $27 million and cash dividends (including return of capital) to Boeing of $74 million.

During the six months ended June 30, 2007, net cash used for financing activities included scheduled debt repayments of $832 million and cash dividends (including return of capital) to Boeing of $264 million.

 

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Outstanding debt at June 30, 2008 and December 31, 2007 was $4.3 billion and $4.3 billion, of which $886 million will be due in the next 12 months. During the six months ended June 30, 2008, we had no commercial paper borrowings outstanding. Our leverage (ratio of debt to equity) at June 30, 2008 and December 31, 2007 was 5.0-to-1.

We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. In the near term, we believe that our cash from operations and other receipts from our portfolio, which may include asset sales and securitizations, will be sufficient to satisfy existing commitments and plans. To the extent we require financial flexibility to meet potential business funding requirements we also have the ability to issue commercial paper and other debt, obtain funding from Boeing or limit new business volume.

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.

Risks that could affect our sources of liquidity include among others:

 

   

a severe or prolonged downturn in the economy,

   

significant restructurings, defaults or bankruptcies by airlines,

   

further disruptions in the global capital markets, and

   

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

We continually assess our leverage, as measured by our debt to equity ratio, in light of the risks in our business, including those set forth in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2007.

Credit Ratings

Our access to capital is affected by ratings of our debt by credit rating agencies. As a wholly owned finance company, our credit ratings are closely tied to those of Boeing due to the Support Agreement entered into between Boeing and us in December 2003 and transactional support and guarantees. Our ratings and spreads could be impacted positively or negatively by changing perceptions of Boeing, the airline industry, the defense industry or of Boeing’s competitive position. It is possible that these changes could affect our access to the capital markets. We believe our access to the capital markets is adequate.

Our credit ratings are as follows:

 

Debt

  Standard & Poor’s  

Moody’s Investors

Service

  Fitch Ratings

Short-term

  A-1   P-1   F1

Senior

  A+   A2   A+

On January 16, 2008, Fitch Ratings changed their outlook on the A+ rating to stable from positive.

 

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Additional Disclosures Regarding Allowance for Losses on Receivables

The following table reconciles the changes in the allowance for losses on receivables for the six months ended June 30, 2008 and 2007. Column 3 presents this information, calculated in accordance with our accounting policies, if the impact of intercompany guarantees from Boeing were excluded. The exclusion of the impact of intercompany guarantees shown in Column 2 would increase the applicable exposure for various receivables. Management believes that the presentation of this information provides more complete information on the effect of intercompany guarantees provided by Boeing.

 

(Dollars in millions)    (1)     (2)     (3)
2008    Allowance
for losses
    Impact of
intercompany
guarantees
from Boeing
    Allowance
excluding
intercompany
guarantees

Allowance for losses on receivables at beginning of period

   $ 74     $ 121     $ 195   

Provision for (recovery of losses)

     (2 )     82       80   

Write-offs

     (11 )           (11)  

Allowance for losses on receivables at end of period

   $ 61     $ 203     $ 264   
 

Allowance as a percentage of total receivables

     2.1 %       9.2%
2007      

Allowance for losses on receivables at beginning of period

   $ 102     $ 152     $ 254   

Recovery of losses

     (18 )     (24 )     (42)  

Write-offs

     (8 )     8       –    

Recovery of write-offs

     6       (6 )     –    

Allowance for losses on receivables at end of period

   $ 82     $ 130     $ 212   
 

Allowance as a percentage of total receivables

     2.5 %       6.3%

For the six months ended June 30, 2008, the provision for losses in Column 3 included $85 million related to changes in U.S. airline customer credit ratings.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our President and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits

 

A.  

Exhibits

 

Exhibit 15   

Letter From Independent Registered Public Accounting Firm Regarding Unaudited Interim Financial Information.

Exhibit 31.1   

Certification of President pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2   

Certification of Chief Financial Officer pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1   

Certification of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with Securities and Exchange Commission Release Nos. 33-8212 and 34-47551.

Exhibit 32.2   

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with Securities and Exchange Commission Release Nos. 33-8212 and 34-47551.

 

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Signatures

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

 

   

Boeing Capital Corporation

July 23, 2008

 

/s/ KEVIN R. MILLISON

 

Kevin R. Millison

 

Vice President and Chief Financial Officer

(Principal Financial Officer) and Registrant’s

Authorized Officer

July 23, 2008

 

/s/ KEVIN J. MURPHY

 

Kevin J. Murphy

 

Controller (Principal Accounting Officer)

 

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