10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $100 per share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

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.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

 

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  ¨    No  x

 

No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at January 30, 2009: 50,000 shares

 

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

 

DOCUMENTS INCORPORATED BY REFERENCE: None


Table of Contents

Table of Contents

 

            Page

Part I

           
    Item 1.   Business   1
    Item 1A.   Risk Factors   3
    Item 1B.   Unresolved Staff Comments   5
    Item 2.   Properties   5
    Item 3.   Legal Proceedings   5
    Item 4.   Submission of Matters to a Vote of Security Holders *   5

Part II

           
    Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

6

    Item 6.   Selected Financial Data   6
    Item 7.   Management’s Narrative Analysis of the Results of Operations   6
    Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   13
    Item 8.   Financial Statements and Supplementary Data   13
    Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

35

    Item 9A(T).   Controls and Procedures   35
    Item 9B.   Other Information   35

Part III

           
    Item 10.   Directors, Executive Officers and Corporate Governance *   36
    Item 11.   Executive Compensation *   36
    Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters *

 

36

    Item 13.   Certain Relationships and Related Transactions, and Director Independence *   36
    Item 14.   Principal Accounting Fees and Services   36

Part IV

           
    Item 15.   Exhibits, Financial Statement Schedules   37
    Signatures   39

*

Omitted pursuant to General Instruction I(2)(c) of Form 10-K.


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PART I

 

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,” “targets,” 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 following:

 

   

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

 

   

the impact of bankruptcies 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 necessary to support the sale of Boeing products, the level and types of transactional or other support made available to us by Boeing and the ending of production of certain aircraft programs,

 

   

the market acceptance of Boeing products,

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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).

 

This report includes important information as to these factors in Item 1. Business, Item 1A. Risk Factors, and in the Notes to our Consolidated Financial Statements. Additional important information as to these factors is included in Item 7. Management’s Narrative Analysis of the Results of Operations.

 

Item 1. Business

 

GENERAL

 

Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is an indirect 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 segment customers. In the space and defense markets, we primarily arrange and structure financing solutions for Boeing’s Integrated Defense Systems segment customers.

 

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At December 31, 2008, 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, 2008, our portfolio totaled $6.0 billion, which was substantially collateralized by Boeing commercial aircraft. At December 31, 2008, we owned 288 commercial aircraft, two C-40 aircraft and had partial ownership or security interests in an additional 43 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, 2008, 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 $2.1 billion related to portfolio assets totaling $2.8 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, 2008.

 

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 we compete with other aerospace and defense 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, 2008, we had 160 employees, compared with 171 at December 31, 2007. 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 January 30, 2009, we had 161 employees.

 

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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. 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 performance due to a variety of factors, including, without limitation, the following:

 

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 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, and therefore the assets are not impaired. However, the fair value of certain of these assets as measured at their expected sale price is less than their carrying value. Expected cash flows could be adversely affected by certain factors, including credit

 

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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, an economic downturn causing 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 an indirect 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 an indirect 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 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

 

   

our credit granting and financing activities,

 

   

the establishment of maximum interest rates,

 

   

financing transactions we enter into,

 

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our collection, foreclosure, repossession and claims-handling procedures and other trade practices,

 

   

the use and reporting of information related to a borrower’s or lessee’s credit experience and other data collection, and

 

   

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.

 

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. 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, 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. Unresolved Staff Comments

 

Not applicable.

 

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; London, England; and Moscow, Russia.

 

We believe that our properties are suitable and adequate to meet the requirements of our business.

 

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. Submission of Matters to a Vote of Security Holders

 

Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

We are an indirect wholly owned subsidiary of The Boeing Company (Boeing), and accordingly, there is no public trading market for our common stock. In 2008 and 2007, we declared and paid dividends (including return of capital) totaling $254 million and $408 million to Boeing.

 

A covenant in 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, 2008, as well as at each quarter end during the year, we were in compliance with this covenant.

 

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

 

     Years Ended December 31,
(Dollars in millions)    2008    2007    2006    2005    2004

New business volume (1)

   $ 155    $ 24    $ 250    $ 601    $ 606

Statement of operations data:

                                  

Revenue

   $ 703    $ 815    $ 1,025    $ 966    $ 959

Income from continuing operations

   $ 102    $ 147    $ 185    $ 146    $ 121

Dividends to Boeing (including return of capital)

   $ 254    $ 408    $ 344    $ 338    $ 705

Non-cash capital contributions from Boeing

   $ 3    $ 5    $ 9    $ 17    $ 9

Balance sheet data:

                                  

Cash and cash equivalents

   $ 305    $ 463    $ 589    $ 297    $ 642

Portfolio (2)

   $ 6,023    $ 6,532    $ 8,034    $ 9,206    $ 9,680

Total assets

   $ 6,378    $ 7,044    $ 8,584    $ 9,544    $ 10,320

Total debt

   $ 3,652    $ 4,327    $ 5,590    $ 6,322    $ 7,024

Debt to equity ratio

     5.0      5.0      5.0      5.0      5.0

Ratio of earnings to fixed charges (3)

     1.7      1.8      1.8      1.6      1.5

 

(1)

 

New business volume equals funded transactions that have been recorded as notes, leases or investments excluding transfers from Boeing.

 

(2)

 

Portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments.

 

(3)

 

For the purpose of computing the ratio of earnings to fixed charges, earnings consists of income from continuing operations before provision for income tax and fixed charges; and fixed charges consists of interest.

 

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

 

For the world’s airlines, 2008 was a challenging year characterized by volatility of several key operational factors including oil prices, economic growth, exchange rates and financing terms. In the first half of the year, airlines focused on adapting to spiking oil prices which peaked close to $150/barrel in July. In the second half of 2008, the focus turned to the implications of the global credit crisis and recession as fuel

 

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prices fell below $40/barrel for the first time since 2004. Air traffic growth declined rapidly toward the end of the year as higher fares to cover sharply higher fuel costs earlier in the year and the economic slowdown reduced demand for air travel.

 

The impact to airline operations and profitability was dramatic. Globally, over 25 airlines entered bankruptcy, and airlines curtailed capacity growth by cutting unprofitable routes and flights, reducing utilization, and parking older generation airplanes. Following its first profitable year since 2000 in 2007, the airline industry fell back into losses in 2008, led by U.S. airlines. U.S. airlines were most exposed to the fuel price shock due to limited hedging and a weakening dollar, but as the demand environment deteriorated airlines in all regions faced lower profit outlooks by the end of 2008.

 

The near-term outlook is highly uncertain due to the volatility of key drivers such as economic growth and fuel prices. Near-term air traffic growth forecasts vary significantly but generally indicate minimal to negative growth in 2009. Early 2009 airline schedules show a 2%-3% decline in world capacity as airlines attempt to match capacity with air travel demand. Profitability forecasts for 2009 also range widely both at the global as well as regional levels. Airlines continue to cut non-fuel costs including distribution, labor and overhead, but significant uncertainty remains around fuel prices and revenues.

 

A substantial portion of our portfolio is concentrated among U.S. commercial airlines customers. Continued problems in the airline industry could have a negative impact on lease rates, airline credit ratings and aircraft valuations, and BCC’s future results of operations could be adversely affected in the form of lower revenues, increased asset impairments, increased allowance for losses and increased redeployment costs.

 

The global credit crisis has affected the availability of credit generally. While there are still sources of financing available for aircraft deliveries, the amount of third party financing available has declined. We expect to finance some new deliveries of Boeing aircraft in 2009 and expect our portfolio size to increase. Once capital market conditions improve, we believe the overall aircraft financing market should improve as well and lessen the need for us to provide financing for Boeing aircraft deliveries, although we can provide no assurance when that will occur.

 

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 (11.0% of current world fleet) were parked as of December 2008, including both in-production and out-of-production aircraft types, of which over 40% are not expected to return to service. In December 2007 and 2006, 8.2% and 9.9% of the western-built commercial jet aircraft were parked. Aircraft valuations could decline if significant numbers of aircraft, particularly types with relatively few operators, are placed out of service.

 

Overview

 

During 2008, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.

 

Our portfolio at December 31, 2008 decreased to $6.0 billion from $6.5 billion at December 31, 2007. The following table summarizes the net change in our total portfolio for the years ended December 31:

 

(Dollars in millions)    2008     2007  

New business volume

   $ 155     $ 24  

Write-offs

     (11 )     (2 )

Transfer of assets

           (53 )

Asset impairment

     (35 )     (33 )

Asset run off and prepayments

     (329 )     (1,126 )

Asset dispositions

     (69 )     (104 )

Depreciation and amortization expense

     (220 )     (208 )

Net change in portfolio balance

   $ (509 )   $ (1,502 )


 

At December 31, 2008 and 2007, we had $685 million and $86 million of assets that were held for sale or re-lease, of which $305 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 16 717 aircraft previously leased to Midwest Airlines and the return of four 757 aircraft previously leased to ATA Holdings Corp.,

 

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which filed for bankruptcy protection on April 2, 2008. Additionally, aircraft subject to leases with a carrying value of approximately $168 million are scheduled to be returned off lease in 2009. These aircraft are being remarketed or the leases are being extended and $64 million of these aircraft were committed at December 31, 2008.

 

Our net income was $120 million for 2008 compared with $163 million for 2007. For the years ended December 31, 2008 and 2007 our return on average assets calculated on Income from continuing operations was 1.5% and 1.9%.

 

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 $703 million in 2008 compared with $815 million in 2007, a decrease of $112 million.

 

Finance lease income was $163 million in 2008, a decrease of $16 million compared with 2007 primarily due to a decrease in the weighted average balance of finance leases as a result of normal run-off and asset dispositions.

 

Interest income on notes receivable was $56 million in 2008, a decrease of $50 million compared with 2007 primarily due to a decrease in the notes receivable balance as a result of the prepayment of certain notes in 2007.

 

Operating lease income was $457 million in 2008, a decrease of $13 million compared with 2007, primarily due to a decrease in the weighted average balance of equipment under operating leases due to the return of aircraft and reclassification to assets held for sale or re-lease in 2008. 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 $56 million and $55 million less than reported, for the years ended December 31, 2008 and 2007. For a discussion of our relationship with Boeing, see Item 8. Financial Statements and Supplementary Data, Note 2.

 

Investment income was $3 million in 2008, a decrease of $20 million compared with 2007 primarily due to a lower investment balance as a result of the scheduled repayment of an investment in January 2008.

 

Other income was $24 million in 2008, a decrease of $12 million compared with 2007 due to lower aircraft maintenance reserves taken into income from expired leases and lower short-term investment income as a result of a lower cash balance and lower market rates.

 

Expenses

 

Expenses consist of interest expense, depreciation expense, provision for (recovery of) losses, operating expenses, asset impairment expense, and other expense. Expenses were $541 million in 2008 compared with $581 million in 2007, a decrease of $40 million.

 

Interest expense was $223 million in 2008, a decrease of $74 million compared with 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 5.4% from 6.0%.

 

The recovery of losses was $4 million for 2008, a decrease in recovery of $22 million compared with 2007. During 2008 and 2007, 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.

 

Other expense was $17 million in 2008, an increase of $13 million compared with 2007 primarily due to higher aircraft delivery, maintenance and modification expenses.

 

Provision for income tax

 

Provision for income tax was $60 million in 2008, a decrease of $27 million compared with 2007, primarily due to a decrease in pre-tax income.

 

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Liquidity and Capital Resources

 

Our cash and cash equivalents balance was $305 million at December 31, 2008, a decrease from $463 million at December 31, 2007. The following is a summary of the change in our cash and cash equivalents for the years ended December 31:

 

(Dollars in millions)    2008     2007  

Net cash provided by operating activities

   $ 549     $ 456  

Net cash provided by investing activities

     256       1,135  

Net cash used in financing activities

     (963 )     (1,717 )

Net decrease in cash and cash equivalents

   $ (158 )   $ (126 )


 

Operating activities

 

During 2008, net cash provided by operating activities included net income from operations of $120 million. We had adjustments and non-cash items of $347 million, which primarily related to depreciation expense, deferred income taxes and asset impairment expense. We also had a net increase in cash due to changes in assets and liabilities of $82 million.

 

During 2007, net cash provided by operating activities included net income from operations of $163 million. We had adjustments and non-cash items of $247 million, which primarily related to depreciation expense and asset impairment expense. We also had a net increase in cash due to changes in assets and liabilities of $46 million.

 

Investing activities

 

During 2008, net cash provided by investing activities included a scheduled repayment of an investment in the amount of $135 million and principal payments of leases, notes and other receivables of $178 million. We also had a decrease in cash of $90 million related to the origination of notes.

 

During 2007, net cash provided by investing activities included $1.1 billion relating to customer pre-payments of certain notes receivable and asset run off.

 

Financing activities

 

During 2008 and 2007, we made debt repayments of $709 million and $1.3 billion and paid dividends (including return of capital) of $254 million and $408 million.

 

Outstanding debt at December 31, 2008 and December 31, 2007 was $3.7 billion and $4.3 billion, of which $528 million will be due in 2009. During 2008 and 2007, we did not incur any new debt (except for a borrowing and repayment of $175 million from Boeing during the first half of 2007) and had no commercial paper borrowings outstanding. Our leverage (ratio of debt to equity) at December 31, 2008 and 2007 was 5.0-to-1.

 

We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. We strive to generally match the timing of our debt maturities with that of our scheduled asset payoffs. Over the last few years our cash from operations and other receipts from our portfolio, including asset sales, has been sufficient to satisfy maturing debt, limited new business volume and other cash needs.

 

We expect to meet potential increased funding requirements by issuing commercial paper, term debt, obtaining funding from Boeing or limiting discretionary new business volume. At this point in time, our liquidity has not been materially impacted by the current credit environment and we do not expect that it will be materially impacted in the near future. There can be no assurance, however, that the cost or availability of future borrowings, if any, under our commercial paper program, in the debt markets or under Boeing’s credit facilities will not be materially impacted by disruptions in capital markets.

 

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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,

 

   

a severe or prolonged downturn in the economy,

   

significant restructurings, defaults or bankruptcies by airlines,

   

additional 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.

 

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, 2008, as well as at each quarter end during the year, we were in compliance with these covenants.

 

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 29, 2009, Standard & Poor’s confirmed Boeing’s A+ credit rating but changed its outlook from stable to negative, citing the challenging commercial aviation environment.

 

Off-Balance Sheet Arrangements

 

We are a party to off-balance sheet arrangements as defined by the Securities and Exchange Commission (SEC), including guarantor obligations and variable interests in unconsolidated entities. For discussion of these arrangements, see Item 8. Financial Statements and Supplementary Data, Note 13.

 

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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, 2008:

 

Contractual Obligations

 

          Payments due by period
(Dollars in millions)    Total    2009   

2010-

2011

  

2012-

2013

  

2014-

Thereafter

Debt (1)

   $ 3,483    $ 519    $ 1,424    $ 1,510    $ 30

Capital lease obligations (1)

     71      9      19      21      22

Interest (2)

     581      199      287      91      4

Purchase obligations (3)

     122      60      62          
     $ 4,257    $ 787    $ 1,792    $ 1,622    $ 56

 

(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, 2008 on floating rate debt.

 

(3)

 

Purchase obligations due in 2009 includes $5 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 as well as an estimate of the timing in which we expect these commitments to mature at December 31, 2008:

 

Commercial Commitments

 

          Total Amounts Committed/
Maximum Amount of Loss
(Dollars in millions)    Total    2009   

2010-

2011

  

2012-

2013

  

2014-

Thereafter

Guarantor obligations (1)

   $ 21    $    $ 21    $    $

Financing commitments (2)

     138      50      34      54     
     $ 159    $ 50    $ 55    $ 54    $

 

(1)

 

Primarily consists of residual value guarantees provided by us. For a discussion of our guarantor obligations, see Item 8. Financial Statements and Supplementary Data, Note 13.

 

(2)

 

Represents our commitments to provide leasing and other financing based on estimated earliest funding dates.

 

In addition to our financing commitments of $138 million at December 31, 2008, Boeing had unfunded financing commitments of $10.0 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 given the current capital market disruptions 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

 

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exercised. If there were requirements to fund all Boeing commitments, the timing in which these commitments may be funded (based on estimated earliest funding dates) is as follows:

 

     Total

2009

   $ 2,395

2010

     1,774

2011

     812

2012

     317

2013

     2,684

Thereafter

     2,025
     $ 10,007

 

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 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 $8 million for the year ended December 31, 2008.

 

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, 2008, the allowance would have decreased by $20 million or increased by $47 million. If the collateral values were 10% higher or lower at December 31, 2008, the allowance would have decreased by $19 million or increased by $30 million. If the cumulative default rates used for each rating category were increased or decreased by 1%, the allowance would have increased by $1 million or decreased by $1 million.

 

Lease Residual Values

 

Equipment under operating leases is carried at cost less accumulated depreciation and is 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. If the estimated residual values declined 5% at December 31, 2008, this would result in a future cumulative pre-tax earnings impact of $75 million recognized over the remaining depreciable periods, of which $7 million would be recognized in 2009.

 

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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 years ended December 31, 2008 and 2007. 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 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 year

   $ 74       $ 121       $ 195   

Provision for (recovery of) losses

     (4)        88         84   

Write-offs

     (11)        1         (10)  

Allowance for losses on receivables at end of year

   $ 59       $ 210       $ 269   

Allowance as a percentage of total receivables

     2.1%             9.5%

2007

                    

Allowance for losses on receivables at beginning of year

   $ 102       $ 152       $ 254   

Recovery of losses

     (26)        (34)        (60)  

Write-offs

     (8)        9         1   

Recovery of write-offs

     6         (6)        –   

Allowance for losses on receivables at end of year

   $ 74       $ 121       $ 195   

Allowance as a percentage of total receivables

     2.5%             6.5%

 

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. Matching is a dynamic process affected by changes in our assets that may require adjusting our liabilities and/or derivatives. In addition, we may from time to time be exposed to foreign exchange risk in which case we may use currency derivatives to manage that risk.

 

Every quarter we measure the estimated impact to the fair value of our assets, liabilities and derivatives that may result from potential changes in interest rates. Impacts to the net fair value of these items are calculated based on the amount and timing of projected cash flows. It is important to note that these measures are estimates that depend on the assumptions and parameters used in the related models. The sensitivity analysis conducted influences future asset, liability and derivative adjustments.

 

Although many of the assets, liabilities and derivatives affected by a change in interest rates are not traded, if we had an immediate, one-time, 100 basis-point increase in market interest rates at December 31, 2008, we estimate that the tax-adjusted net fair value of these items would have decreased by $1 million compared with a decrease of $12 million at December 31, 2007. The lower estimated impact at year-end 2008 is principally due to two factors taking place during the year: the reduced contractual remaining life of our assets and the adjustment of our derivatives portfolio.

 

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.

 

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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 audited the accompanying consolidated balance sheets of Boeing Capital Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ DELOITTE & TOUCHE LLP

 

Seattle, Washington

February 9, 2009

 

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Boeing Capital Corporation and Subsidiaries

 

Consolidated Balance Sheets

 

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

ASSETS

                

Cash and cash equivalents

   $ 305     $ 463  

Receivables:

                

Finance leases

     2,142       2,273  

Notes and other

     697       714  
       2,839       2,987  

Allowance for losses on receivables

     (59 )     (74 )
       2,780       2,913  

Equipment under operating leases, net

     2,492       3,315  

Investments

     7       144  

Assets held for sale or re-lease, net

     685       86  

Other assets

     109       123  
     $ 6,378     $ 7,044  


LIABILITIES AND SHAREHOLDER’S EQUITY

                

Liabilities:

                

Accounts payable and accrued expenses

   $ 78     $ 95  

Other liabilities

     385       340  

Accounts with Boeing

     11       23  

Deferred income taxes

     1,520       1,394  

Debt

     3,652       4,327  
       5,646       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

     730       861  

Accumulated other comprehensive loss, net of tax

     (3 )     (1 )

Retained earnings

            
       732       865  
     $ 6,378     $ 7,044  


 

See Notes to Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

 

Consolidated Statements of Operations

 

     Years Ended December 31,
(Dollars in millions)    2008     2007     2006

REVENUE

                      

Finance lease income

   $ 163     $ 179     $ 190

Interest income on notes receivable

     56       106       181

Operating lease income

     457       470       498

Investment income

     3       23       73

Net gain on disposal of assets

           1       48

Other income

     24       36       35
       703       815       1,025

EXPENSES

                      

Interest expense

     223       297       353

Depreciation expense

     220       216       241

Provision for (recovery of) losses

     (4 )     (26 )     8

Operating expenses

     50       57       60

Asset impairment expense

     35       33       53

Other expense

     17       4       19
       541       581       734

Income from continuing operations before provision for income tax

     162       234       291

Provision for income tax

     60       87       106

Income from continuing operations

     102       147       185

Net gain on disposal of discontinued operations, net of tax

     18       16       9

Net income

   $ 120     $ 163     $ 194

 

See Notes to Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

 

Consolidated Statements of Shareholder’s Equity and Comprehensive Income

 

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

Balance at December 31, 2005

  $ 1,256     $ 5   $ 1,242     $ 9     $     $ 173  

Non-cash capital contributions from Boeing

    9           9                      

Cash dividends to Boeing (including return of capital)

    (344 )         (150 )           (194 )        

Net income

    194                       194     $ 194  

Reclassification adjustment for gain realized in net income, net of tax of $5

    (9 )               (9 )           (9 )

Unrealized gain on investments, net of tax of $(4)

    7                 7             7  

Balance at December 31, 2006

  $ 1,113     $ 5   $ 1,101     $ 7     $     $ 192  


Non-cash capital contributions from Boeing

    5           5                      

Cash dividends to Boeing (including return of capital)

    (408 )         (245 )           (163 )        

Net income

    163                       163     $ 163  

Unrealized loss on derivative instruments, net of tax of $1

    (2 )               (2 )           (2 )

Unrealized loss on investments, net of tax of $3

    (6 )               (6 )           (6 )

Balance at December 31, 2007

  $ 865     $ 5   $ 861     $ (1 )   $     $ 155  


Non-cash capital contributions from Boeing

    3           3                      

Dividends to Boeing (including return of capital)

    (254 )         (134 )           (120 )        

Net income

    120                       120     $ 120  

Reclassification adjustment for gain realized on investments, net of tax of $1

    1                 1             1  

Unrealized loss on derivative instruments, net of tax of $1

    (1 )                   (1 )             (1 )

Unrealized loss on investments, net of tax of $1

    (2 )               (2 )           (2 )

Balance at December 31, 2008

  $ 732     $ 5   $ 730     $ (3 )   $     $ 118  


 

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, 2008, 2007 and 2006.

 

See Notes to Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows

 

     Years Ended December 31,  
(Dollars in millions)    2008     2007     2006  

OPERATING ACTIVITIES

                        

Net income

   $ 120     $ 163     $ 194  

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

                        

Non-cash items:

                        

Depreciation and amortization expense

     215       208       240  

Net gain on disposal of assets

           (1 )     (48 )

Provision for (recovery of) losses

     (4 )     (26 )     8  

Net gain on investments and derivative instruments

     (10 )           (56 )

Asset impairment expense

     35       33       53  

Share-based plans expense

     3       5       9  

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

     (18 )     (16 )     (9 )

Change in deferred income taxes

     126       44       83  

Change in assets and liabilities:

                        

Other assets

     32       5       2  

Accrued interest and rents

     16       17       31  

Accounts payable and accrued expenses

     (17 )     (27 )     (35 )

Other liabilities

     73       17       (3 )

Accounts with Boeing

     (22 )     34       (106 )

Other

                 (1 )

Net cash provided by operating activities

     549       456       362  

INVESTING ACTIVITIES

                        

Purchase of investment

     (1 )            

Proceeds from available-for-sale investments

     136       9       217  

Purchase of equipment for operating leases

     (10 )           (92 )

Payment for capitalizable costs in process

     (26 )     (46 )     (35 )

Proceeds from disposition of equipment and receivables

     69       105       576  

Principal payments of leases, notes and other receivables

     178       1,087       441  

Origination of leases, notes and other receivables

     (90 )     (20 )     (100 )

Net cash provided by investing activities

     256       1,135       1,007  

FINANCING ACTIVITIES

                        

Repayment of debt

     (709 )     (1,309 )     (713 )

Payment of dividends (including return of capital)

     (254 )     (408 )     (344 )

Repayment of note payable with Boeing

                 (20 )

Net cash used in financing activities

     (963 )     (1,717 )     (1,077 )

Net increase (decrease) in cash and cash equivalents

     (158 )     (126 )     292  

Cash and cash equivalents at beginning of year

     463       589       297  

Cash and cash equivalents at end of year

   $ 305     $ 463     $ 589  


NON-CASH INVESTING AND FINANCING ACTIVITIES:

                        

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

   $ 629     $ (161 )   $ 711  

Net transfer from notes receivable

   $     $ (1 )   $ (279 )

Net transfer to (from) equipment under operating leases

   $ (553 )   $ 213     $ (354 )

Net transfer from finance leases

   $ (20 )   $ (99 )   $ (15 )

Transfer from other assets

   $ (56 )   $ (5 )   $ (101 )

Transfer to (from) accounts with Boeing

   $     $ 53     $ (5 )

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

   $ (40 )   $ (46 )   $ 14  


 

See Notes to Consolidated Financial Statements.

 

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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 an indirect 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 segment customers. In the space and defense markets, we primarily arrange and structure financing solutions for Boeing’s Integrated Defense Systems segment 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.

 

Portfolio Our portfolio consists of direct finance leases, leveraged leases, notes and other receivables, equipment under operating leases (net of accumulated depreciation), investments and assets held for sale or re-lease (net of accumulated depreciation).

 

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.

 

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Investments Available-for-sale 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) on the Consolidated Balance Sheets. The fair value of non-publicly traded securities, in the form of EETCs, is based on discounted cash flows at market yield and estimated trading prices for comparable debt securities. In cases where we determine that it is probable that recovery of our investment will come from liquidation of collateral, the fair value is based on the value of the underlying collateral. Debt securities are assessed for impairment quarterly. To determine if an impairment is other-than-temporary we consider the duration and severity of the loss position, the strength of the underlying collateral, the term to maturity, credit reviews and analyses of the counterparties. For investments that are deemed other-than-temporarily impaired, losses are recorded as asset impairment expense and payments received on these investments are recorded using the cost recovery method.

 

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 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 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. 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 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.

 

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:

 

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customer credit ratings and weighted average remaining contract term. Credit ratings are determined for each customer in the portfolio. Those ratings are 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. Income recognition on accrual basis is resumed when leases or notes and other receivables become contractually current and performance is demonstrated to be resumed.

 

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 Other income 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 Accumulated other comprehensive income (loss)) 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 Other income immediately. We 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.

 

Effective January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes 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 (See Note 7). In conjunction with the adoption of FIN 48, we began recording income tax related interest expense and interest income in the Provision for income tax in our Condensed Consolidated Statements of Operations. In prior periods, such interest income or expense was recorded in Operating expenses. Penalties, if any, will be recorded as a component of income tax expense.

 

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Note 2 – Relationship and 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 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 (“Support Agreement”) dated December 23, 2003, with Boeing with these principal features:

 

   

Boeing will maintain 51% or greater ownership of us,

   

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

   

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. This 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 14, 2008, and Boeing’s five-year credit facility expiring in 2012 remains outstanding. Boeing has allocated $500 of the $1,000 364-day line and $1,000 of the $2,000 five-year revolving credit line expiring in 2012 exclusively to BCC. At December 31, 2008 and 2007, we had no amounts outstanding under these credit facilities. Any borrowings by us under these agreements will be guaranteed by Boeing.

 

We have an intercompany borrowing and lending arrangement with Boeing. During the first quarter of 2007, we borrowed $175, which was repaid in the second quarter. There were no amounts outstanding at December 31, 2008 and 2007 under this arrangement. For the years ended December 31, 2007 and 2006, total interest paid to Boeing was $3 and $1.

 

Federal Income Tax

 

Our operations are included in the consolidated federal income tax return of Boeing. Our tax sharing agreement, which is included in our Operating 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 difference between the consolidated tax liability and Boeing’s tax liability computed excluding us. Under this agreement, alternative minimum taxes are disregarded and an intercompany payable/receivable is recorded when federal income taxes are due or federal income tax benefits are generated.

 

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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. 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, 2008, we were the beneficiary under $2,108 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,784.

 

Intercompany guarantee amounts by aircraft type are summarized as follows at December 31:

 

     2008    2007
     Guarantee
Amount
   Carrying
Value
   Guarantee
Amount
   Carrying
Value

717 (out of production)

   $ 1,693    $ 2,264    $ 1,756    $ 2,356

Out of production single-aisle aircraft

     182      182      195      195

Out of production twin-aisle aircraft

     182      244      267      348

Other, including other Boeing aircraft

     51      94      54      98
     $ 2,108    $ 2,784    $ 2,272    $ 2,997

 

At December 31, 2008 and 2007, Accounts with Boeing included $85 and $103 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:

 

     2008     2007     2006  

Applied to income

   $ 60     $ 63     $ 75  

Net change in finance lease receivables

           53       96  

Net change in deferred revenue

     (18 )     (38 )     34  

Write down of notes receivable

                 29  

Guarantees receivable from Boeing

                 (27 )

Net cash received under intercompany guarantee and subsidy agreements

   $ 42     $ 78     $ 207  


 

Additionally, under the terms of the intercompany guarantee agreements, for the years ended December 31, 2008, 2007 and 2006, Boeing recorded charges of $20, $155, and $22, respectively, related to asset impairment and accrued expenses and $88, $(34) and $24 respectively, related to provision for (recovery of) losses.

 

For the years ended December 31, 2008, 2007 and 2006, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies of $30, $36 and $48, respectively. During the third quarter

 

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of 2008 we sold two C-40 aircraft at their carrying value to Boeing at their lease expiration for $48. At December 31, 2008 and 2007, the carrying value of our C-40 aircraft under a head lease structure with Boeing which has a concurrent sublease with the U.S. Government was $69 and $138.

 

For the years ended December 31, 2008, 2007 and 2006, we recorded new business volume of $50, $21 and $202, respectively, related to aircraft and equipment recently manufactured by Boeing.

 

Other Intercompany Transactions

 

Accounts with Boeing consisted of the following at December 31:

 

     2008    2007  

Federal income tax payable

     7      46  

Other payable (receivable)

     4      (23 )
     $ 11    $ 23  


 

For the years ended December 31, 2008 and 2007, we paid dividends (including return of capital) totaling $254 and $408.

 

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, 2008, 2007 and 2006, the charge for these services was $12, $11, and $11.

 

Note 3 – Investment in Receivables

 

The investment in receivables consisted of the following at December 31:

 

     2008     2007  

Investment in finance leases:

                

Direct finance leases

   $ 1,969     $ 2,100  

Leveraged leases

     173       173  
       2,142       2,273  

Notes and other

     697       714  

Total investment in finance leases and notes and other

     2,839       2,987  

Less allowance for losses on receivables

     (59 )     (74 )
     $ 2,780     $ 2,913  


 

The net investment in finance leases consisted of the following at December 31:

 

         2008         2007         2008         2007  
     Direct Finance Leases     Leveraged Leases  

Minimum lease payments

   $ 2,635     $ 2,944     $ 815     $ 869  

Less principal and interest payable on non-recourse debt

                 (547 )     (601 )

Estimated residual value

     679       695       56       56  

Unearned income and deferred net incremental direct costs

     (1,345 )     (1,539 )     (151 )     (151 )

Less deferred income taxes

                 (253 )     (267 )

Net investment in finance leases

   $ 1,969     $ 2,100     $ (80 )   $ (94 )


 

Scheduled minimum lease payments on finance leases including both direct finance leases and leveraged leases (less principal and interest payable on non-recourse debt) are as follows for the years ended December 31:

 

     2009    2010    2011    2012    2013    Thereafter

Finance leases

   $ 247    $ 240    $ 230    $ 285    $ 233    $ 1,668

 

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At December 31, 2008 and 2007, finance lease receivables of $34 and $54 were assigned as collateral to secure senior debt.

 

The investment in notes and other receivables consisted of the following at December 31:

 

     2008     2007  

Principal

   $ 703     $ 712  

Accrued interest

     5       6  

Unamortized deferred fees and net incremental direct costs

     (11 )     (4 )
     $ 697     $ 714  


 

Scheduled principal payments on Notes and other receivables are as follows for the years ended December 31:

 

     2009    2010    2011    2012    2013    Thereafter

Notes and other

   $ 183    $ 101    $ 126    $ 108    $ 76    $ 109

 

Note 4 – Allowance for Losses on Receivables

 

The following table reconciles the activity in the allowance for losses on receivables at December 31:

 

     2008       2007       2006   

Allowance for losses on receivables at beginning of year

   $ 74       $ 102       $ 101   

Provision for (recovery of) losses

     (4)        (26)        8   

Write-offs

     (11)        (8)        (7)  

Recovery of write-offs

     –         6         –   

Allowance for losses on receivables at end of year

   $ 59       $ 74       $ 102   

Allowance as a percentage of total receivables

     2.1%      2.5%      2.4%

 

The carrying value of impaired receivables consisted of the following at December 31:

 

     2008    2007

Impaired receivables with specific impairment allowance

   $ 16    $ 39

Impaired receivables with no specific allowance

     163      197

Carrying value of impaired receivables

   $ 179    $ 236

 

Allowance for losses on impaired receivables was $8 and $13 at December 31, 2008 and 2007.

 

Our average recorded investment in impaired receivables, calculated on a quarterly weighted average, was $197, $589 and $1,191 in 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006, we recognized income of $14, $50 and $104, respectively, on these impaired receivables during the periods in which they were considered impaired, of which $14, $48 and $99, respectively, we received in cash.

 

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 at December 31:

 

     2008       2007   

Assets placed on non-accrual status:

             

Receivables

   $ 5       $ 59   

Equipment under operating leases, net (1)

     57         184   
       62         243   

Assets held for sale or re-lease, net (1)

     19         –   
     $ 81       $ 243   

Percent of non-performing receivables to total receivables

     0.2%      2.0%

Percent of total non-performing assets to total portfolio

     1.3%      3.7%

 

(1)

 

At December 31, 2008, equipment under operating leases with Midwest Airlines (Midwest) of $205 and assets held for sale or re-lease of $361 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

 

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At December 31, 2008, we had no accrued income on receivables with amounts past due greater than 90 days.

 

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:

 

     2008     2007  

Cost

   $ 3,416     $ 4,257  

Accumulated depreciation

     (924 )     (942 )
     $ 2,492     $ 3,315  


 

Scheduled minimum lease payments to be received under the non-cancelable portion of operating leases are as follows at December 31, 2008:

 

     2009    2010    2011    2012    2013    Thereafter

Operating leases

   $ 365    $ 316    $ 256    $ 204    $ 156    $ 537

 

At December 31, 2008 and 2007, equipment under operating leases of $179 and $193 were assigned as collateral to secure senior debt. At December 31, 2007 equipment under operating leases of $43 related to commercial aircraft leased by us under capital lease obligations and subleased to third parties.

 

Note 6 – Investments

 

At December 31, 2008 and 2007, our available-for-sale investments included investments with a carrying value of $5 and $143. During 2008, an available-for-sale investment in the amount of $135 was fully repaid. At December 31, 2008 and 2007, the unrealized loss on these investments was $3 and $2.

 

During 2006, an investment was fully repaid at maturity for $42 and we recognized Investment income of $26. We also sold certain investments for total proceeds of $138 and recognized Investment income of $30.

 

Note 7 – Income Tax

 

The components of the provision (benefit) for tax on income were as follows at December 31:

 

     2008     2007    2006

Current:

                     

Federal

   $ (52 )   $ 36    $ 12

State

     5       7      11
       (47 )     43      23

Deferred:

                     

Federal

     107       44      83
     $ 60     $ 87    $ 106

 

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:

 

     2008     2007  

Deferred tax assets:

                

Allowance for losses on receivables

   $ 139     $ 146  

Other

     22       42  
       161       188  

Deferred tax liabilities:

                

Leased assets

     (1,682 )     (1,571 )

Other

     (1 )     (12 )
       (1,683 )     (1,583 )
       (1,522 )     (1,395 )

Deferred tax on accumulated other comprehensive loss

     2       1  

Net deferred tax liability

   $ (1,520 )   $ (1,394 )


 

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Income tax computed at the United States federal income tax rate and the provision (benefit) for tax on income differ as follows for the years ended December 31:

 

     2008      2007      2006  

Tax computed at federal statutory rate

   $ 57    35.0 %    $ 82    35.0 %    $ 102     35.0 %

State income taxes, net of federal tax benefit

     3    2.0        5    2.2        7     2.4  

Foreign sales corporation/extraterritorial income tax benefit

                         (5 )   (1.7 )

Foreign sales corporation/extraterritorial income basis adjustment

                         7     2.4  

Other

                         (5 )   (1.7 )
     $ 60    37.0 %    $ 87    37.2 %    $ 106     36.4 %


 

We, as part of the consolidated Boeing organization, have completed Internal Revenue Service (IRS) examinations through 2003. Boeing has filed appeals with the IRS for the 1998-2001 and 2002-2003 audit periods. During 2006, Boeing settled the appeal related to McDonnell Douglas Corporation, a subsidiary of Boeing, covering the years in appeal for 1993 through 1997. The settlement did not have a material adverse effect on our earnings, cash flows and/or financial position.

 

Pursuant to our tax sharing agreement with Boeing, we received (made) payments with respect to tax benefits from (obligations to) Boeing of $17, $52 and $(126) in 2008, 2007 and 2006 respectively. We received (made) income tax payments from (to) other federal, state and foreign tax agencies, of $1, $(1) and $(1) in 2008, 2007 and 2006, respectively.

 

FASB Interpretation No. 48

 

FIN 48 provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The cumulative effect of applying this interpretation did not result in any adjustments to retained earnings as of January 1, 2007.

 

As of December 31, 2008 and 2007, we did not have any unrecognized tax benefits.

 

For the years ended December 31, 2008, 2007 and 2006, we did not incur any income tax related interest income, interest expense or penalties.

 

Note 8 – Debt and Credit Agreements

 

Debt, including the net effects of interest rate swap revaluation adjustments and unamortized deferred debt costs, consisted of the following at December 31:

 

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

3.80% – 7.58% fixed rate notes due through 2017

   $ 3,396    $ 4,050

2.41% – 3.23% floating rate notes due through 2023

     120      120

3.01% – 5.79% non-recourse notes due through 2013

     66      71

2.58% – capital lease obligations due through 2015

     70      86
     $ 3,652    $ 4,327

 

At December 31, 2008 and 2007, we had interest rate swaps, which effectively convert debt of $725 and $1,507 from fixed rate to floating rate and $92 and $92 from floating rate to fixed rate. During the year ended December 31, 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 and an additional $407 was retired through scheduled 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. This shelf registration statement expires on November 12, 2011. We have not issued any debt securities under the new registration statement, and the entire $5,000 remains available for issuance. The availability of funding under the shelf registration statement is dependent on investor demand and market conditions. Our previously outstanding registration statements expired during 2008.

 

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We have a $1,500 Commercial Paper (CP) program that serves as a potential source of short-term liquidity subject to market conditions. Throughout 2008 and at December 31, 2008, 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, 2008, as well as at each quarter end during the year, we were in compliance with these covenants.

 

Maturities of principal payments for debt and capital lease obligations are as follows at December 31:

 

     Debt    Capital Lease
Obligations

2009

   $ 519    $ 9

2010

     636      9

2011

     788      10

2012

     868      10

2013

     642      11

Thereafter

     30      22
     $ 3,483    $ 71

 

In 2008, 2007 and 2006, interest payments were $231, $319 and $353, respectively.

 

Note 9 – Derivative Financial Instruments

 

We manage interest rate risk through the use of derivatives. We enter into interest rate swap contracts with a number of major financial institutions. Our contracts entered into as of December 31, 2008 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. In addition, the transition adjustment related to fair value hedges that did not qualify for hedge accounting treatment under SFAS No. 133, as amended, is being reclassified into interest income over the remaining maturity of the hedged debt.

 

For the years ended December 31, 2008, 2007 and 2006, we recorded $9, $5 and $8, 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.

 

For our cash flow 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. We record unrealized gains or losses from changes in the fair value of cash flow hedges in Accumulated other comprehensive income (loss). We also reclassify into income, as an increase or decrease to interest expense, over the remaining maturity of the hedged variable rate debt the transition adjustment related to cash flow hedges that were recorded in Accumulated other comprehensive income as they did not qualify for hedge accounting treatment under SFAS No. 133, as amended.

 

The amount expected to be reclassified to interest expense in 2009 is immaterial.

 

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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. For the year ended December 31, 2008, we held warrants which were recorded in Other assets and the changes in their fair value resulted in an addition to Other income of $1. For the year ended December 31, 2007, we did not record any gains or losses on these derivatives.

 

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 $220 and $178 as of December 31, 2008 and 2007.

 

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, 2008, 2007 and 2006 we recorded income of $3, $9 and $5, respectively.

 

Note 11 – Share-Based Plans Expense

 

Share-based plans expense principally relates to stock options and Performance Shares, which are stock units that are convertible to Boeing stock, on a one-to-one basis, contingent upon the Boeing stock price performance. Share-based plans expense is included in Operating expenses since it is incentive compensation issued primarily to our executives.

 

For Performance Shares granted in 2005, the fair value of each award was estimated on the date of grant using a Monte Carlo simulation model. For stock option awards granted in 2008, 2007 and 2006, the fair value was estimated using the Black-Scholes option-pricing model.

 

For the years ended December 31, 2008, 2007 and 2006 we recorded $3, $5 and $9 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.

 

Restructurings and Restructuring Requests

 

As of December 31, 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 flows and/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.

 

In September 2008, we agreed to a restructuring of lease terms with Midwest, under which Midwest has returned 16 of 25 717 aircraft. Additionally, the agreement provides us with options to require Midwest to return the remaining nine 717 aircraft with varying notice periods. We are pursuing remarketing options for the aircraft returned to date and expected to be returned in the future. As a result of guarantees from Boeing that limit our risk of loss for non-payment by Midwest under our existing leases, we do not expect that the return of these aircraft as a result of this restructuring will have a material effect on our financial position, results of operations or cash flow.

 

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Commitments

 

At December 31, 2008, we and Boeing had unfunded financing commitments of $10,145, 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 given the current capital market disruptions 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 funding dates as of December 31, 2008) is as follows:

 

     Total

2009

   $ 2,445

2010

     1,790

2011

     830

2012

     326

2013

     2,729

Thereafter

     2,025
     $ 10,145

 

Note 13 – Off-Balance Sheet Arrangements

 

We are a party to off-balance sheet arrangements, including guarantor obligations and variable interests in unconsolidated entities.

 

Guarantor Obligations

 

At December 31, 2008 and 2007, under our third party residual value guarantees, the maximum potential payments were $21 and $75, and estimated proceeds from collateral and recourse were $21 and $75. The maximum potential payment amounts represent a “worst-case scenario,” and do not necessarily reflect results that we expect. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payment obligations under guarantees. The carrying value of liabilities recorded on the Consolidated Balance Sheets reflects fees received for extending these guarantees. At December 31, 2008 and 2007, the carrying value of liabilities relating to residual value guarantees, included in Other liabilities, was $3 and $3.

 

Under these residual value guarantees, we are obligated to make payments to a guaranteed party if the related aircraft or equipment fair values fall below a specified amount at a future time. These obligations are collateralized principally by commercial aircraft and expire within the next two years.

 

Variable Interest in Unconsolidated Entities

 

Our investments in the form of EETCs and other Variable Interest Entities (VIEs) are included within the scope of Revised Interpretation No. 46 (FIN 46(R)), Consolidation of Variable Interest Entities.

 

We have an investment in the form of an EETC which was acquired in 1999. In January 2008, an EETC investment was fully repaid in the amount of $135. 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 under FIN 46(R). At December 31, 2008, our maximum exposure to

 

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economic loss from our EETC is $5. At December 31, 2008, the EETC investments had total assets of $97 ($507 at December 31, 2007) and total non-BCC debt of $92 ($364 at December 31, 2007). This debt is non-recourse to us and includes $92 that is senior to our investment. During 2008, we recorded investment income of $3 and received cash of $140 related to our investments.

 

Note 14 – Fair Value Measurements

 

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). 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.

 

The adoption of SFAS No. 157 did not have a material impact on our fair value measurements. We do not expect that the implementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities will have a material impact on our fair value measurements.

 

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.

 

     December 31, 2008
     Total    

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant Other
Observable
Inputs

(Level 2)

    Significant
Unobservable
Inputs
(Level 3)

ASSETS

                             

Available-for-sale debt investments: EETC

   $ 5     $  –    $     $ 5

Interest rate swaps

     48            48      

Warrants

     10                  10

Total

   $ 63     $    $ 48     $ 15

LIABILITIES

                             

Interest rate swaps

   $ (3 )   $    $ (3 )   $

Total

   $ (3 )   $    $ (3 )   $

 

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 Accumulated other comprehensive income (loss).

 

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.

 

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The following table presents a reconciliation of Level 3 assets measured at fair value on a recurring basis at December 31, 2008. During the fourth quarter of 2008, our EETC investment was transferred from Level 2 to Level 3 due to the lack of current observable market activity.

 

    2008
Assets   Fair Value
Beginning
of Year
  Unrealized
Gains
Included in
Income
  Accumulated
Other
Comprehensive
(Loss)
    Purchases,
Sales, and
Issuances
  Transfers
In/(Out)
  Fair Value
at End of
Year

Available-for-sale debt Investments: EETC

  $   $   $ (1 )   $   $ 6   $ 5

Warrants

        1           9         10

Total

  $   $ 1   $ (1 )   $ 9   $ 6   $ 15

 

Certain assets are measured at fair value on a non-recurring basis. For the twelve months ended December 31, 2008, impaired receivables with a carrying amount of $16 were written down to their fair value of $8, based on the fair value for the related aircraft collateral which were determined using observable inputs (Level 2).

 

SFAS No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107), requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which we did not elect the fair value option.

 

The carrying values and estimated fair values of our financial instruments were as follows at December 31:

 

     2008     2007  
    

Carrying

Value

   

Fair

Value

   

Carrying

Value

   

Fair

Value

 

ASSETS

                                

Notes and other

   $ 697     $ 701     $ 714     $ 766  

LIABILITIES

                                

Debt, excluding capital lease obligations

   $ (3,582 )   $ (3,646 )   $ (4,241 )   $ (4,377 )

OFF-BALANCE SHEET ARRANGEMENTS

                                

Guarantor obligations from us

   $ (3 )   $ (3 )   $ (3 )   $ (3 )

 

Items not included in the above disclosures are Cash and cash equivalents and Investments. The estimated fair value of those items approximate their fair value at December 31, 2008 and 2007 as reflected in the Consolidated Balance Sheets.

 

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

 

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

 

Debt. The fair value of debt is based on current market yields for BCC 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.

 

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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:

 

     2008
    

Carrying

Value

  

% of Total

Portfolio

AirTran

   $ 1,529    25.4%

American

     552    9.2   

Hawaiian

     467    7.8   

Continental

     374    6.2   

Virgin Atlantic

     223    3.7   
     $ 3,145    52.3%

 

     2007
    

Carrying

Value

  

% of Total

Portfolio

AirTran

   $ 1,518    23.2%

American

     618    9.5   

Midwest

     591    9.0   

Hawaiian

     422    6.5   

Continental

     403    6.2   
     $ 3,552    54.4%

 

For the years ended December 31, 2008 and 2007, AirTran Holdings, Inc. accounted for 19% and 16% of our revenue.

 

Portfolio carrying values were represented in the following regions at December 31:

 

     2008    2007
    

Carrying

Value

  

% of Total

Portfolio

  

Carrying

Value

  

% of Total

Portfolio

United States (1)

   $ 4,457    74.0%    $ 4,687    71.7%

Europe

     1,037    17.2         1,050    16.1   

Asia/Australia

     341    5.7         425    6.5   

Latin America

     122    2.0         298    4.6   

Other

     66    1.1         72    1.1   
     $ 6,023    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.

 

Revenue from customers by geographic region was as follows for the years ended December 31:

 

     2008    2007    2006

United States

   $ 446    $ 564    $ 740

Europe

     152      143      136

Asia/Australia

     56      55      75

Latin America

     39      38      60

Other

     10      15      14
     $ 703    $ 815    $ 1,025

 

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Portfolio carrying values were represented by the following product types at December 31:

 

     2008    2007

717

   $ 2,365    $ 2,464

757

     991      1,067

MD-11 (1)

     560      540

767

     550      611

737

     475      542

747

     383      419

MD-80

     298      343

777

     81      96

Other (2)

     320      450
     $ 6,023    $ 6,532

 

(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:

 

     2008       2007   

2004 and newer

   12.8%    12.5%

1999 - 2003

   60.4       60.5   

1994 - 1998

   11.3       11.5   

1993 and older

   15.5       15.5   
     100.0%    100.0%

 

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 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 provisions effectively limit our exposure to any losses to $245. At December 31, 2008, our maximum exposure to loss associated with the loss sharing arrangement was $232, for which we have accrued a liability of $39.

 

The reserve under the loss sharing arrangement, which is included in Other liabilities, was as follows for the year ended December 31:

 

     2008     2007  

Reserve at beginning of period

   $ 59     $ 78  

Reduction in reserve

     (29 )     (25 )

Payments received from GECC

     9       6  

Reserve at end of period

   $ 39     $ 59  


 

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Operating results of the discontinued operations were as follows for the years ended December 31:

 

     2008    2007    2006

Net gain on disposal of discontinued operations

   $ 29    $ 25    $ 14

Provision for income tax

     11      9      5

Net gain on disposal of discontinued operations, net of tax

   $ 18    $ 16    $ 9

 

Note 17 – Quarterly Financial Information (Unaudited)

 

     Three Months Ended
     March 31    June 30    September 30    December 31

2008

                           

Revenue

   $ 185    $ 179    $ 171    $ 168

Income from continuing operations

   $ 38    $ 29    $ 23    $ 12

Net income

   $ 43    $ 30    $ 34    $ 13

2007

                           

Revenue

   $ 213    $ 209    $ 197    $ 196

Income from continuing operations

   $ 46    $ 44    $ 38    $ 19

Net income

   $ 50    $ 45    $ 43    $ 25

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A(T). Controls and Procedures

 

(a) 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 Annual Report on Form 10-K, 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.

 

(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, 2008.

 

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 temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

 

(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. Other Information

 

None.

 

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Table of Contents

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

 

Item 11. Executive Compensation

 

Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

 

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. Certain Relationships and Related Transactions, and Director Independence

 

Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

 

Item 14. Principal Accounting Fees and Services

 

The aggregate fees billed by Deloitte & Touche LLP, our Independent Registered Public Accounting Firm, were as follows during the years ended 2008 and 2007:

 

Services Rendered / Fees

(Dollars in millions)

   2008    2007

Audit fees (1)

   $ 1.7    $ 2.0

 

(1)

 

For professional services rendered for the audit of our annual financial statements, the reviews of the financial statements included in our Form 10-Qs for the years ended 2008 and 2007, 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 (Boeing), audit and non-audit services provided by our independent auditor are subject to Boeing’s Audit Committee (Committee) pre-approval policies and procedures. The Committee pre-approved all services provided by, and all fees of, our independent auditor.

 

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Table of Contents

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a)    1.    

  

Financial Statements:

    

All Consolidated Financial Statements of the Company as set forth under Item 8 of this Annual Report on Form 10-K.

2.    

  

Financial Statement Schedule

    

None.

3.    

  

Exhibits

3.1  

  

Restated Certificate of Incorporation of the Company dated June 29, 1989, incorporated herein by reference to Exhibit 3.1 to our Form 10-K for the year ended December 31, 1993.

3.2  

  

Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated August 11, 1997, incorporated herein by reference to Exhibit 3(i) to our Form 10-Q, for the period ended June 30, 1997.

3.3  

  

By-Laws of the Company dated July 22, 1993, incorporated herein by reference to Exhibit 3.2 to our Form 10-K for the year ended December 31, 1993.

4.1  

  

First Supplemental Indenture, dated June 12, 1995, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(b) to our Form S-3 Registration Statement (File No. 33-58989).

4.2  

  

Indenture, dated April 15, 1987, incorporated herein by reference to Exhibit 4 to our Form S-3 Registration Statement (File No. 33-26674).

4.3  

  

Senior Indenture, dated August 31, 2000, incorporated by reference to Exhibit 4(a) to our Amendment No. 2 to Form S-3 Registration Statement, dated August 30, 2000 (File No. 333-82391).

4.4  

  

Subordinated Indenture, dated August 31, 2000, incorporated by reference to Exhibit 4(b) to our Amendment No. 2 to Form S-3 Registration Statement, dated August 30, 2000 (File No. 333-82391).

4.5  

  

Form of Series X Senior Fixed Rate Medium-Term Note, incorporated herein by reference to Exhibit 4(e) to our Form S-3 Registration Statement (File No. 33-58989).

4.6  

  

Form of Series X Senior Floating Rate Medium-Term Note, incorporated herein by reference to Exhibit 4(h) to our Form S-3 Registration Statement (File No. 33-58989).

4.7  

  

Form of Series X Senior Fixed Rate Medium-Term Note, incorporated by reference to Exhibit 4(e) to our Form S-3 Registration Statement (File No. 333-37635).

4.8  

  

Form of Series X Senior Floating Rate Medium-Term Note, incorporated by reference to Exhibit 4(g) to our Form S-3 Registration Statement (File No. 333-37635).

4.9  

  

Form of Series XI Senior Fixed Rate Medium-Term Note, incorporated by reference to Exhibit 4(c) to our Form S-3 Registration Statement (File No. 333-82391).

4.10

  

Form of Series XI Senior Floating Rate Medium-Term Note, incorporated by reference to Exhibit 4(e) to our Form S-3 Registration Statement (File No. 333-82391).

 

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Table of Contents

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.

 

10.1  

  

364-Day Credit Agreement dated as of November 14, 2008, between Boeing and the banks listed therein, incorporated by reference to Exhibit 10.1 to The Boeing Company Form 8-K filed November 20, 2008 (File No. 001-00442).

10.2  

  

Five-Year Credit Agreement dated as of November 16, 2007, between Boeing and the banks listed therein, incorporated by reference to Exhibit 10(ii) to The Boeing Company Form 10-K filed February 15, 2008 (File No. 001-00442).

10.3  

  

Borrower Subsidiary Letter dated November 14, 2008 relating to 364-Day Credit Agreement, incorporated by reference to Exhibit 10.2 to our Form 8-K filed November 20, 2008.

10.4  

  

Borrower Subsidiary Letter dated November 14, 2008 relating to Five-Year Credit Agreement, incorporated by reference to Exhibit 10.3 to our Form 8-K filed November 20, 2008.

10.5  

  

Letter agreement relating to the 364-Day Credit Agreement and the Five-Year Credit Agreement, dated November 14, 2008, between Boeing and us, incorporated by reference to Exhibit 10.4 to our Form 8-K filed November 20, 2008.

10.6  

  

Operating Agreement, dated September 13, 2000, by and between us, Boeing Capital Services Corporation and Boeing, incorporated herein by reference to Exhibit 10.1 to our Form 8-K filed September 19, 2000.

10.7  

  

Operating Agreement, dated September 13, 2000, by and between Boeing Capital Services Corporation and Boeing, incorporated herein by reference to Exhibit 10.2 to our Form 8-K filed September 19, 2000.

10.8  

  

Support Agreement, dated December 23, 2003, by and between us and Boeing, incorporated herein by reference to Exhibit 99.1 to our Form 8-K filed December 24, 2003.

10.9  

  

Purchase and Sale Agreement dated May 24, 2004, among Boeing Capital Corporation, BCC Equipment Leasing Corporation, McDonnell Douglas Overseas Finance Corporation, Boeing Capital Loan Corporation and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.1 to our 8-K dated June 24, 2004.

10.10

  

Amendment and Joint Waiver dated May 31, 2004, among Boeing Capital Corporation, BCC Equipment Leasing Corporation, McDonnell Douglas Overseas Finance Corporation, Boeing Capital Loan Corporation and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.2 to our Form 8-K dated June 24, 2004.

12     

  

Computation of Ratio of Earnings to Fixed Charges.

23     

  

Consent of Independent Registered Public Accounting Firm.

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.

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.

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.

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 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, 2009

 

/s/ KEVIN R. MILLISON


    Kevin R. Millison
   

Vice President and Chief Financial Officer

(Principal Financial Officer) and Registrant’s

Authorized Officer

February 9, 2009

 

/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.

 

    Boeing Capital Corporation

February 9, 2009

 

/s/ JAMES A. BELL


   

James A. Bell

Chairman and Director

February 9, 2009

 

/s/ DAVID A. DOHNALEK


   

David A. Dohnalek

Director

February 9, 2009

 

/s/ JAMES C. JOHNSON


   

James C. Johnson

Director

February 9, 2009

 

/s/ WALTER E. SKOWRONSKI


   

Walter E. Skowronski

President and Director (Principal Executive Officer)

 

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