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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended September 30, 2009

or

 

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

For the transition period from                      to                     

Commission file number 0-10795 

BOEING CAPITAL CORPORATION

 

(Exact name of registrant as specified in its charter)

 

 

Delaware      95-2564584

(State or other jurisdiction of

incorporation or organization)

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

 

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

(425) 965-4000

 

(Registrant’s telephone number, including area code)

 

 

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

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

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

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

 

Large accelerated filer

  ¨      Accelerated filer  ¨

Non-accelerated filer

  x   

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

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

No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at October 21, 2009: 50,000 shares

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


Table of Contents

Table of Contents

 

                 Page  

Part I. Financial Information (Unaudited)

  
   Item 1.   

Financial Statements

   1
     

Condensed Consolidated Balance Sheets

   1
     

Condensed Consolidated Statements of Operations

   2
     

Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income

   3
     

Condensed Consolidated Statements of Cash Flows

   4
     

Notes to Condensed Consolidated Financial Statements

   5
     

Review Report of Independent Registered Public Accounting Firm

   14
   Item 2.   

Management’s Narrative Analysis of the Results of Operations

   15
   Item 4.   

Controls and Procedures

   19

Part II. Other Information

  
   Item 1.   

Legal Proceedings

   20
   Item 1A.   

Risk Factors

   20
   Item 6.   

Exhibits

   20
  

Signatures

   21


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(Dollars in millions, except par value)    September 30,
2009
    December 31,
2008
 

ASSETS

    

Cash and cash equivalents

   $ 80      $ 305   

Receivables:

    

Finance leases

     2,055        2,142   

Notes and other

     1,159        697   
     3,214        2,839   

Allowance for losses on receivables

     (65     (59
     3,149        2,780   

Equipment under operating leases, net

     2,413        2,492   

Investments

     27        7   

Assets held for sale or re-lease, net

     460        685   

Other assets

     71        109   
   $ 6,200      $ 6,378   
   

LIABILITIES AND SHAREHOLDER’S EQUITY

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 42      $ 78   

Other liabilities

     343        385   

Accounts with Boeing

     133        11   

Deferred income taxes

     1,483        1,520   

Debt

     3,495        3,652   
       5,496        5,646   

Shareholder’s equity:

    

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

     5        5   

Additional paid-in capital

     700        730   

Accumulated other comprehensive income (loss), net of tax

     (1     (3

Retained earnings

              
       704        732   
   $ 6,200      $ 6,378   
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in millions)   2009     2008     2009     2008  

REVENUE

       

Finance lease income

  $ 35      $ 40      $ 112      $ 125   

Interest income on notes receivable

    19        13        53        41   

Operating lease income

    103        112        304        347   

Investment income

    1        1        1        3   

Other income

    8        5        26        19   
    166        171        496        535   

EXPENSES

       

Interest expense

    42        54        132        173   

Depreciation expense

    55        55        159        167   

Provision for (recovery of) losses

    3        (3     17        (5

Operating expenses

    11        14        35        38   

Asset impairment expense

    16        7        33        7   

Other expense

           7        8        12   
      127        134        384        392   

Income from continuing operations before provision for income tax

    39        37        112        143   

Provision for income tax

    15        14        42        53   

Income from continuing operations

    24        23        70        90   

Net gain (loss) on disposal of discontinued operations, net of tax

    (4     11        (8     17   

Net income

  $ 20      $ 34      $ 62      $ 107   
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income

(Unaudited)

 

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

Balance at January 1, 2008

   $ 865      $ 5    $ 861      $ (1   $           

Non-cash capital contributions from Boeing

     2             2                   

Cash dividends to Boeing (including return of capital)

     (220          (113            (107  

Net income

     107                           107      $ 107   

Reclassification adjustment for gain realized on investment in net income, net of tax

     1                    1               1   

Unrealized loss on investments, net of tax

     (1                    (1             (1

Balance at September 30, 2008

   $ 754      $ 5    $ 750      $ (1   $      $ 107   
   

Balance at January 1, 2009

   $ 732      $ 5    $ 730      $ (3   $           

Non-cash capital contributions from Boeing

     1             1                   

Cash dividends to Boeing (including return of capital)

     (93          (31            (62  

Net income

     62                           62      $ 62   

Unrealized gain on derivative instruments, net of tax

     1                    1               1   

Unrealized gain on investments, net of tax

     1                    1               1   

Balance at September 30, 2009

   $ 704      $ 5    $ 700      $ (1   $      $ 64   
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

      Nine Months Ended September 30,  
(Dollars in millions)    2009     2008  

OPERATING ACTIVITIES

    

Net income

   $ 62      $ 107   

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

    

Non-cash items:

    

Depreciation and amortization expense

     152        163   

Provision for (recovery of) losses

     17        (5

Net gain on investments and derivative instruments

     (8       

Asset impairment expense and other charges

     35        7   

Share-based plans expense

     1        2   

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

     8        (17

Change in deferred income taxes

     (37     128   

Change in assets and liabilities:

    

Other assets

            36   

Accrued interest and rents

     2        7   

Accounts payable and accrued expenses

     (36     (50

Other liabilities

     (54     43   

Accounts with Boeing

     128        (126

Net cash provided by operating activities

     270        295   

INVESTING ACTIVITIES

    

Purchase of investment

            (1

Proceeds from available-for-sale investments

     1        135   

Payment for capitalizable costs in process

     (56     (21

Proceeds from disposition of equipment and receivables

     200        69   

Principal payments of leases, notes and other receivables

     249        130   

Origination of leases, notes and other receivables

     (655       

Net cash (used in) provided by investing activities

     (261     312   

FINANCING ACTIVITIES

    

Proceeds from intercompany borrowing

     200          

Repayment of debt (including intercompany)

     (341     (589

Payment of cash dividends (including return of capital)

     (93     (220

Net cash used in financing activities

     (234     (809

Net decrease in cash and cash equivalents

     (225     (202

Cash and cash equivalents at beginning of year

     305        463   

Cash and cash equivalents at end of period

   $ 80      $ 261   
   

NON-CASH INVESTING AND FINANCING ACTIVITIES

    

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

   $ (1   $ 254   
   

Net transfer to (from) equipment under operating leases

   $ 88      $ (179
   

Transfer from finance leases

   $ (15   $ (20
   

Transfer from other assets

   $ (94   $ (55
   

Transfer to accounts with Boeing

   $ 3      $   
   

Transfer to investments

   $ 19      $   
   

Decrease/(increase) in debt due to fair value hedge derivatives

   $ 10      $ (14
   

See Notes to Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Dollars in millions)

Note 1 – Basis of Presentation

Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is an indirect wholly owned subsidiary of The Boeing Company (Boeing). We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the condensed consolidated financial statements. We have evaluated subsequent events through October 21, 2009, which is the date that these financial statements were issued. Operating results for the period ended September 30, 2009 are not necessarily indicative of the results for the full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2008 Annual Report on Form 10-K.

Note 2 – Transactions with Boeing

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

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

During the first quarter of 2009, under our intercompany borrowing and lending arrangement with Boeing, we loaned Boeing $150, which was repaid in the same quarter. During the second quarter of 2009, we borrowed from Boeing $200, of which we repaid $100 in the third quarter, as reflected in Note 5 – Debt.

In April 2009, Boeing sold us a 100% participation in a $100 note receivable.

There can be no assurances that these intercompany agreements and arrangements will not be terminated or modified by us or Boeing. However, our and Boeing’s ability to terminate or modify the support agreement is subject to certain conditions. See Item 8. Financial Statements and Supplementary Data, Note 2 of our 2008 Annual Report on Form 10-K.

At September 30, 2009, we were the beneficiary under $1,946 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,575.

Intercompany guarantee amounts by type are summarized as follows:

 

      September 30, 2009    December 31, 2008
     

Guarantee

Amount

  

Carrying

Value

  

Guarantee

Amount

  

Carrying

Value

717 (out of production)

   $ 1,649    $ 2,199    $ 1,693    $ 2,264

Out of production single-aisle aircraft

     171      171      182      182

Out of production twin-aisle aircraft

     79      112      182      244

Other, including other Boeing aircraft

     47      93      51      94
   $ 1,946    $ 2,575    $ 2,108    $ 2,784
 

At September 30, 2009 and December 31, 2008, Accounts with Boeing included deferred revenue of $72 and $85 associated with guarantee and subsidy settlements and terminations.

 

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

 

      2009     2008  

Applied to income

   $ 45      $ 41   

Net change in deferred revenue

     (13     (12

Net cash received under intercompany guarantee and subsidy agreements

   $ 32      $ 29   
   

For the nine months ended September 30, 2009 and 2008, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies, of $15 and $25.

For the nine months ended September 30, 2009 and 2008, we recorded new business volume of $590 and $50 related to Boeing aircraft, equipment or services we purchased or financed.

Note 3 – Allowance for Losses on Receivables

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

 

      2009     2008  

Allowance for losses on receivables at beginning of period

   $ 59      $ 74  

Provision for (recovery of) losses

     17        (5 )

Write-offs

     (12     (11 )

Recovery of write-offs

     1          

Allowance for losses on receivables at end of period

   $ 65      $ 58  
   

Allowance as a percentage of total receivables

     2.0     2.1

The carrying value of impaired receivables consisted of the following:

 

      September 30,
2009
   December 31,
2008

Impaired receivables with specific impairment allowance

   $    $ 16

Impaired receivables with no specific allowance

     149      163

Carrying value of impaired receivables

   $ 149    $ 179
 

At December 31, 2008, allowance for losses on impaired receivables was $8.

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:

 

      September 30,
2009
    December 31,
2008
 

Assets placed on non-accrual status:

    

Receivables

   $ 1      $ 5  

Equipment under operating leases, net (1)

     90        57  
     91        62  

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

     29        19  
   $ 120      $ 81  
   

Percent of non-performing receivables to total receivables

         0.2

Percent of total non-performing assets to total portfolio

     2.0     1.3

 

(1)  

At September 30, 2009 and December 31, 2008, equipment under operating leases of $317 and $205 and assets held for sale or re-lease of $246 and $361 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

 

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Note 4 – Investments

Our investments in available-for-sale debt and equity securities consisted of the following:

 

September 30, 2009    Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
    Fair
Value

Available-for-sale investments:

          

Marketable equity securities (1)

   $ 20    $ 1    $ (1   $ 20

EETC (2)

     6           (1     5

Total

   $ 26    $ 1    $ (2   $ 25
 
December 31, 2008                         

Available-for-sale investments:

          

EETC (2)

   $ 8    $    $ (3   $ 5

Total

   $ 8    $    $ (3   $ 5
 

 

(1)  

During the third quarter of 2009, we exchanged warrants of $19 held in Other Assets for common stock.

 

(2)  

At September 30, 2009 and December 31, 2008, the Enhanced Equipment Trust Certificate (EETC) has been in a continuous unrealized loss position for more than 12 months.

We believe that the unrealized losses related to our debt and equity securities are not other-than-temporary. The unrealized losses are driven by market liquidity that has caused price deterioration. We do not have a foreseeable need to liquidate these securities and anticipate recovering the full cost of these securities either as market conditions improve, or as the security matures.

The contractual maturities of available-for-sale debt securities at September 30, 2009, were as follows:

 

      Cost    Fair
Value

Due in one year or less

   $ 1    $ 1

Due from one to five years

     4      3

Due from five to ten years

     1      1

Total

   $ 6    $ 5
 

Note 5 – Debt

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

 

(Interest rates are the contractual rates at September 30, 2009)    September 30,
2009
   December 31,
2008

0.24% intercompany borrowing due through 2009

   $ 100    $

4.00% - 7.58% fixed rate notes due through 2017

     3,149      3,396

1.53% - 2.24% floating rate notes due through 2023

     120      120

1.36% - 5.79% non-recourse notes due through 2013

     62      66

0.94% capital lease obligation due through 2015

     64      70
   $ 3,495    $ 3,652
 

At September 30, 2009, and December 31, 2008, we were a party to interest rate swaps, which effectively convert debt of $725 and $725 from fixed rate to floating rate and $92 and $92 from floating rate to fixed rate.

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

 

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taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At September 30, 2009, we were in compliance with these covenants.

Note 6 – Derivative Financial Instruments

We primarily use derivative instruments to manage exposures to interest rate risk. We enter into interest rate swap contracts to hedge interest rate risk associated with our debt obligations. These interest rate swap contracts are designated as cash flow hedges or fair value hedges.

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

 

      September 30, 2009
      Other Assets    Other Liabilities

Derivatives designated as hedging instruments - Interest rate swaps

   $ 38    $
 

The notional amount of our interest rate swaps is disclosed in Note 5 – Debt.

The following table summarizes the effect of our derivative instruments on Accumulated Other Comprehensive Income (AOCI) and the Statement of Operations for the nine months ended September 30:

 

      2009  
      Gain Recognized
in AOCI
   Loss Reclassified from
AOCI into Income
 
            Location    Amount  

Derivatives in cash flow hedging relationships

        

Interest rate swaps (effective portion)

   $ 2    Interest Expense    $ (2
   

For the three and nine months ended September 30, 2009, we recognized a gain of $1 and $9 in Other Income related to warrants to purchase common stock of an unaffiliated third party. At September 30, 2009 we no longer held these warrants.

Note 7 – 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 September 30, 2009, 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 May 2009, we agreed to a restructuring of lease terms with Midwest Airlines (Midwest), under which Midwest is scheduled to return the remaining six 717 aircraft currently on lease by the end of the current year. We have firm contracts for these aircraft to be placed on lease with Mexicana Group. 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.

Commitments

At September 30, 2009, we and Boeing had unfunded financing commitments of $9,599, primarily resulting from firm contracts, options for deliveries or proposals as part of sales campaigns. These commitments are provided to give

 

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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 September 30, 2009) is as follows:

 

      Total

October through December 2009

   $ 626

2010

     2,153

2011

     543

2012

     158

2013

     1,444

Thereafter

     4,675
   $ 9,599
 

Note 8 – Fair Value Measurements

The following tables present our assets and liabilities that are measured at fair value on a recurring basis, as of September 30, 2009 and December 31, 2008, and are categorized using the three levels of fair value hierarchy.

 

      September 30, 2009
      Total   

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant Other
Observable
Inputs

(Level 2)

   Significant
Unobservable
Inputs
(Level 3)

Assets

           

Available-for-sale investments:

           

Marketable equity securities

   $ 20    $ 20    $    $

EETC

     5                5

Interest rate swaps

     38           38     

Total

   $ 63    $ 20    $ 38    $ 5
 

 

      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 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   $
 

 

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Marketable equity securities. The fair value of our marketable equity securities is determined using quoted prices in active markets for identical assets. Unrealized gains (losses) are recorded in Accumulated other comprehensive income (loss).

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.

The following table presents a reconciliation of Level 3 assets measured at fair value on a recurring basis at September 30, 2009. At September 30, 2008, there were no Level 3 assets valued on a recurring basis.

 

      September 30, 2009
      Fair Value
Beginning
of Year
   Unrealized
Gains
Included
in Income
   Accumulated
Other
Comprehensive
Gain/(Loss)
   Purchases,
Sales, and
Settlements
    Transfers
In/(Out)
   Fair Value
at End of
Period

Assets

                

EETC

   $ 5    $    $ 1    $ (1   $    $ 5

Warrants

     10      9           (19         

Total

   $ 15    $ 9    $ 1    $ (20   $    $ 5
 

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

 

      2009     2008  
      Carrying
Value
   Total
Losses
    Carrying
Value
   Total
Losses
 

Assets

          

Receivables (1)

   $ 1    $ (6   $ 8    $ (5

Equipment under operating leases (2)

     91      (26            

Assets held for sale or re-lease (2)

     33      (7            

Total

   $ 125    $ (39   $ 8    $ (5
   

 

(1)  

Represents carrying value and related write downs of receivables which were based on the fair value for the related aircraft collateral.

 

(2)  

Represents carrying value and related write downs which were based on the fair value for the related aircraft.

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

 

      September 30, 2009     December 31, 2008  
     

Carrying

Value

   

Fair

Value

   

Carrying

Value

   

Fair

Value

 

ASSETS

        

Notes and other

   $ 1,159      $ 1,189      $ 697      $ 701   

LIABILITIES

        

Debt, excluding capital lease obligations

   $ (3,431   $ (3,613   $ (3,582   $ (3,646

OFF-BALANCE SHEET ARRANGEMENTS

        

Guarantor obligations from us

   $ (3   $ (3   $ (3   $ (3

 

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Items not included in the above disclosures are Cash and cash equivalents. The carrying value of those items approximate their fair value at September 30, 2009, as reflected in the Consolidated Balance Sheets.

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

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

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

Guarantees. For residual value guarantees where we are the guarantor, the carrying value approximates fair value.

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

Note 9 – 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:

 

      September 30, 2009
     

Carrying

Value

  

% of Total

Portfolio

AirTran

   $ 1,586    25.9%

American

     546    8.9   

Hawaiian

     458    7.5   

Delta

     412    6.7   

Continental

     351    5.8   
   $ 3,353    54.8%
 

 

      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%
 

For the nine months ended September 30, 2009 and 2008, AirTran Holdings, Inc. accounted for 19% and 18% of our revenue.

 

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Portfolio carrying values were represented in the following regions:

 

      September 30, 2009     December 31, 2008
      Carrying Value    % of Total
Portfolio
    Carrying Value    % of Total
Portfolio

United States (1)

   $ 4,542    74.3   $ 4,457    74.0%

Europe

     825    13.5        1,037    17.2   

Asia/Australia

     341    5.6        341    5.7   

Latin America

     285    4.6        122    2.0   

Other

     121    2.0        66    1.1   
   $ 6,114    100.0   $ 6,023    100.0%
 

 

(1)  

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

Portfolio carrying values were represented by the following product types:

 

      September 30,
2009
   December 31,
2008

717

   $ 2,298    $ 2,365

757

     920      991

737

     602      475

767

     497      550

MD-11 (1)

     431      560

777

     399      81

747

     354      383

MD-80

     249      298

Other (2)

     364      320
   $ 6,114    $ 6,023
 

 

(1)  

MD-11 aircraft are currently in 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:

 

      September 30,
2009
    December 31,
2008

2004 and newer

   20.9   12.8%

1999 – 2003

   57.2      60.4   

1994 – 1998

   8.5      11.3   

1993 and older

   13.4      15.5   
   100.0   100.0%
 

Note 10 – Discontinued Operations

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

Part of the purchase and sale agreement with GECC includes a loss sharing arrangement for losses that may exist at the end of the initial and subsequent financing periods of the transferred portfolio assets, or in some instances, prior to the end of the financing period. Such losses may result from asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. The loss sharing arrangement provides that

 

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cumulative net losses (if any) are to be shared between us and GECC. The provisions effectively limit our exposure to any losses to $245. At September 30, 2009, our maximum exposure to loss associated with the loss sharing arrangement was $220, for which we have accrued a liability of $55.

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

 

      2009    2008  

Reserve at beginning of period

   $ 39    $ 59   

Increase (reduction) in reserve

     14      (28

Payments received from GECC

     2      8   

Reserve at end of period

   $ 55    $ 39   
   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Boeing Capital Corporation

Renton, Washington

We have reviewed the accompanying condensed consolidated balance sheet of Boeing Capital Corporation and subsidiaries (the “Company”) as of September 30, 2009, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2009 and 2008, and of shareholder’s equity and comprehensive income, and of cash flows for the nine-month periods ended September 30, 2009 and 2008. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Boeing Capital Corporation and subsidiaries as of December 31, 2008, and the related consolidated statements of operations, shareholder’s equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

October 21, 2009

 

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

Forward-Looking Information is Subject to Risk and Uncertainty

Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “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 availability of commercial and governmental financing and the extent to which we are called upon to fund Boeing’s and our outstanding financing commitments or satisfy other financing requests, and our ability to satisfy those requirements,

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

Please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2008, for a description of risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements.

Overview

During the nine months ended September 30, 2009, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.

During the nine months ended September 30, 2009, a weak global economic environment and capital market disruptions affected the availability of credit for the airline industry. While sources of financing available for aircraft deliveries have improved during the year, we provided limited financing to certain Boeing customers. To the extent capital market conditions continue to improve, we believe the overall aircraft financing market should improve as well and lessen the need for us to provide financing.

 

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The weak economic environment has adversely affected the airline industry and our customers’ operations and financial performance. This in turn has impacted our revenues, earnings and cash flows.

At September 30, 2009, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. At September 30, 2009, we owned 277 commercial aircraft and two C-40 aircraft and had partial ownership or security interest in an additional 47 aircraft. Our portfolio at September 30, 2009 increased to $6.1 billion from $6.0 billion at December 31, 2008. The following table summarizes the net change in our total portfolio:

 

(Dollars in millions)   

Nine Months Ended
September 30,

2009

    Year Ended
December 31,
2008
 

New business volume

   $ 736      $ 155   

Write-offs

     (12     (11

Recovery of write-offs

     1          

Transfer of assets

     19          

Asset impairment and other charges

     (35     (35

Asset run off and prepayments

     (260     (329

Asset dispositions

     (199     (69

Depreciation and amortization expense

     (159     (220
   

Net change in portfolio balance

   $ 91      $ (509
   

At September 30, 2009 and December 31, 2008, we had $460 million and $685 million of assets that were held for sale or re-lease, of which $431 million and $305 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. In March 2009, Mexicana Group committed to lease 25 717 aircraft, including eight of which were placed on lease and 11 that were held for re-lease at September 30, 2009. The remaining six aircraft are currently on lease to Midwest Airlines as of September 30, 2009 and are scheduled to return by the end of the current year. Additionally, aircraft subject to leases with a carrying value of approximately $346 million are scheduled to be returned off lease in the next 12 months. These aircraft are being remarketed or the leases are being extended and aircraft subject to leases with a carrying value of approximately $179 million had either executed term sheets with deposits or firm contracts at September 30, 2009.

Our net income was $62 million for the nine months ended September 30, 2009 compared with $107 million for the same period in 2008, a decrease of $45 million.

Consolidated Results of Operations

Revenue

Revenue was $496 million for the nine months ended September 30, 2009 compared with $535 million for the same period in 2008, a decrease of $39 million.

Finance lease income was $112 million for the nine months ended September 30, 2009, a decrease of $13 million compared with the same period in 2008, primarily due to a decrease in the weighted average balance of finance leases as a result of normal run-off, reclassification to equipment under operating lease and asset dispositions. Without the support from Boeing in the form of intercompany guarantees our Finance lease income, would have been $9 million less than reported, for the nine months ended September 30, 2009. For a discussion of our relationship with Boeing, see Item 1. Financial Statements, Note 2 – Transactions with Boeing.

Interest income on notes receivable was $53 million for the nine months ended September 30, 2009, an increase of $12 million compared with the same period in 2008, due to an increase in the notes receivables balance partially offset by a decrease in the weighted average annual effective interest rate to 7.4% from 8.2%.

Operating lease income was $304 million for the nine months ended September 30, 2009, a decrease of $43 million compared with the same period in 2008, primarily due to a decrease in the equipment under operating leases as a result of the return of aircraft and asset dispositions. 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 $36 million and $39 million less than reported, for the nine months ended September 30, 2009 and 2008. For a discussion of our relationship with Boeing, see Item 1. Financial Statements, Note 2 – Transactions with Boeing.

 

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Expenses

Expenses were $384 million for the nine months ended September 30, 2009 compared with $392 million for the same period in 2008, a decrease of $8 million.

Interest expense was $132 million for the nine months ended September 30, 2009, a decrease of $41 million compared with the same period in 2008, primarily 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 4.9% from 5.4%.

Depreciation expense was $159 million for the nine months ended September 30, 2009, a decrease of $8 million compared with the same period in 2008, due in part to a lower depreciable balance of equipment under operating leases.

The provision for losses was $17 million for the nine months ended September 30, 2009, compared with a recovery of $5 million for the same period in 2008. The increase in our allowance through a provision for losses was primarily due to declines in aircraft collateral values exceeding run off of our finance leases and notes receivable.

Asset impairment expense was $33 million for the nine months ended September 30, 2009, an increase of $26 million compared with the same period in 2008, primarily due to reduced projected cash flows for certain aircraft.

Other expense was $8 million for the nine months ended September 30, 2009, a decrease of $4 million compared with the same period in 2008 primarily due to lower aircraft delivery, maintenance and modification expense.

Provision for income tax

Provision for income tax was $42 million for the nine months ended September 30, 2009, a decrease of $11 million compared with the same period in 2008, primarily due to a decrease in pre-tax income.

Loss on disposal of discontinued operations

Loss on disposal of discontinued operations, net of tax, was $8 million for the nine months ended September 30, 2009, due to an increase in our expected losses under our loss sharing agreement with General Electric Capital Corporation related to the sale of certain assets of our Commercial Financial Services business in 2004. This compared to a gain of $17 million, net of tax, for the nine months ended September 30, 2008.

Liquidity and Capital Resources

Our cash and cash equivalents balance was $80 million at September 30, 2009, a decrease from $305 million at December 31, 2008. The following is a summary of the change in our cash and cash equivalents for the nine months ended September 30:

 

(Dollars in millions)    2009     2008  

Net cash provided by operating activities

   $ 270      $ 295   

Net cash (used in) provided by investing activities

     (261     312   

Net cash used in financing activities

     (234     (809
   

Net decrease in cash and cash equivalents

   $ (225   $ (202
   

Operating activities

During the nine months ended September 30, 2009, net cash provided by operating activities included net income from operations of $62 million. We had net adjustments for non-cash items of $168 million which primarily related to depreciation expense. We also had a net decrease in cash due to changes in assets and liabilities of $40 million.

During the nine months ended September 30, 2008, net cash provided by operating activities included net income from operations of $107 million. We had net adjustments for non-cash items of $278 million which primarily related to depreciation expense and an increase in deferred income taxes. We also had a net decrease in cash of $90 million due to changes in assets and liabilities.

 

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Investing activities

During the nine months ended September 30, 2009, net cash used in investing activities primarily included $655 million relating to the origination of notes receivable offset by asset run off.

During the nine months ended September 30, 2008, net cash provided by investing activities primarily resulted from asset run off.

Financing activities

During the nine months ended September 30, 2009, net cash used in financing activities included scheduled debt repayments of $341 million (including $100 million of intercompany debt) and cash dividends (including return of capital) to Boeing of $93 million offset by intercompany borrowings of $200 million from Boeing.

During the nine months ended September 30, 2008, net cash used in financing activities included scheduled debt repayments of $589 million and cash dividends (including return of capital) to Boeing of $220 million.

Outstanding debt at September 30, 2009 and December 31, 2008 was $3.5 billion and $3.7 billion, of which $1.0 billion will be due in the next 12 months. During the nine months ended September 30, 2009, we had no commercial paper borrowings outstanding. Our leverage (ratio of debt to equity) at September 30, 2009 and December 31, 2008 was 5.0-to-1.

We require liquidity, primarily to fund financing commitments, meet debt obligations and fund our operating expenses. Financing commitments made by us and Boeing totaled $9.6 billion as of September 30, 2009. We anticipate that a significant portion of these commitments will not be exercised given alternative financing sources available to our customers. Given the challenges faced by the aircraft financing market we have been financing a small number of new aircraft deliveries in 2009 and we expect to continue to do so into the foreseeable future. We expect that any future borrowing needs would be met by issuing commercial paper or term debt, or obtaining funding from Boeing. There can be no assurance that the cost of funding or availability of funding sources to us will not be adversely impacted in the future.

During the third quarter of 2009, we established a $750 million medium-term notes program and a $750 million retail notes program, each pursuant to our $5.0 billion SEC registration statement for debt securities that became effective on November 12, 2008. We have not issued any securities under those programs or otherwise used this registration statement. In the event we choose to pursue funding under these programs or otherwise pursuant to our SEC registration statement, the availability of such funding will depend on investor demand and market conditions.

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

Risks that could affect our liquidity include among others:

 

   

continuance or worsening of the 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 of our Annual Report on Form 10-K for the year ended December 31, 2008.

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.

 

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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 (S&P) affirmed Boeing’s and our A+ credit rating but changed its outlook from stable to negative, citing the challenging commercial aviation environment. On April 10, 2009, S&P placed Boeing’s and our A+ credit ratings on credit watch with negative implications. The rating for short-term borrowings was reaffirmed at A-1. On April 30, 2009, Fitch Ratings affirmed Boeing’s and our A+ credit rating but changed its outlook from stable to negative. On July 29, 2009, S&P lowered Boeing’s and our long-term ratings from A+ to A. On October 14, 2009, Moody’s affirmed Boeing’s and our A2 and P-1 ratings, but changed its outlook from neutral to negative.

Additional Disclosures Regarding Allowance for Losses on Receivables

The following table reconciles the changes in the allowance for losses on receivables for the nine months ended September 30, 2009 and 2008. Column 3 presents this information, calculated in accordance with our accounting policy, if the impact of intercompany guarantees from Boeing were excluded. The exclusion of the net impact of intercompany guarantees shown in Column 2 would increase the applicable exposure for various receivables. 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)
2009    Allowance
for losses
    Impact of
intercompany
guarantees
from Boeing
   Allowance
excluding
intercompany
guarantees

Allowance for losses on receivables at beginning of period

   $ 59      $ 210    $ 269   

Provision for losses

     17        13      30   

Write-offs

     (12          (12)  

Recovery of write-offs

     1             1   
 

Allowance for losses on receivables at end of period

   $ 65      $ 223    $ 288   
 

Allowance as a percentage of total receivables

     2.0        9.0%

2008

      

Allowance for losses on receivables at beginning of period

   $ 74      $ 121    $ 195   

Provision for (recovery of) losses

     (5     80      75   

Write-offs

     (11          (11)  

Allowance for losses on receivables at end of period

   $ 58      $ 201    $ 259   
 

Allowance as a percentage of total receivables

     2.1        9.2%

Item 4. Controls and Procedures

 

(a)  

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer have evaluated our disclosure controls as of September 30, 2009 and concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed 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)  

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 6. Exhibits

A. Exhibits

 

Exhibit 15   

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

Exhibit 31.1   

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

Exhibit 31.2   

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

Exhibit 32.1   

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

Exhibit 32.2   

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

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

 

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Signatures

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

 

 

 

Boeing Capital Corporation

October 21, 2009

 

/s/ KEVIN R. MILLISON

 

Kevin R. Millison

Vice President and Chief Financial Officer

(Principal Financial Officer) and Registrant’s

Authorized Officer

October 21, 2009

 

/s/ KEVIN J. MURPHY

 

Kevin J. Murphy

Controller (Principal Accounting Officer)

 

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