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, 2010

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

Common stock shares outstanding at October 20, 2010: 50,000 shares, all of which were owned by The Boeing Company.

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


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   
     Forward-Looking Statements      15   
     Item 2.       Management’s Narrative Analysis of the Results of Operations      16   
     Item 4.       Controls and Procedures      19   

Part II. Other Information

  
     Item 1.       Legal Proceedings      21   
     Item 1A.       Risk Factors      21   
     Item 6.       Exhibits      21   
     Signatures            22   


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,
2010
    December 31,
2009
 

ASSETS

    

Cash and cash equivalents

   $ 207      $ 596   

Short-term investments

     900        500   

Receivables:

    

Finance leases

     1,958        2,024   

Notes and other

     469        865   
     2,427        2,889   

Allowance for losses on receivables

     (81     (71
     2,346        2,818   

Equipment under operating leases, net

     1,888        2,368   

Investments

     31        24   

Assets held for sale or re-lease, net

     621        385   

Other assets

     80        83   
   $ 6,073      $ 6,774   
   

LIABILITIES AND SHAREHOLDER’S EQUITY

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 59      $ 83   

Other liabilities

     339        380   

Accounts with Boeing

     64        85   

Deferred income taxes

     1,407        1,452   

Debt

     3,499        4,075   
       5,368        6,075   

Shareholder’s equity:

    

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

     5        5   

Additional paid-in capital

     697        696   

Accumulated other comprehensive income (loss), net of tax

     3        (2

Retained earnings

              
       705        699   
   $ 6,073      $ 6,774   
   

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)   2010     2009     2010     2009  

REVENUE

       

Finance lease income

  $ 36      $ 35      $ 109      $ 112   

Interest income on notes receivable

    27        19        61        53   

Operating lease income

    99        103        294        304   

Investment income

           1               1   

Net gain (loss) on disposal

    (4            2          

Other income

    12        8        28        26   
    170        166        494        496   

EXPENSES

       

Interest expense

    42        42        124        132   

Depreciation expense

    52        55        153        159   

Provision for losses

    9        3        11        17   

Operating expenses

    11        11        34        35   

Asset impairment expense

    10        16        20        33   

Other expense

    1               6        8   
      125        127        348        384   

Income from continuing operations before provision for income tax

    45        39        146        112   

Provision for income tax

    17        15        54        42   

Income from continuing operations

    28        24        92        70   

Net loss on disposal of discontinued operations, net of tax

           (4     (2     (8

Net income

  $ 28      $ 20      $ 90      $ 62   
   

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, 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   
   

Balance at January 1, 2010

   $ 699      $ 5       $ 696      $ (2   $           

Non-cash capital contributions from Boeing

     1                1                   

Cash dividends to Boeing

     (90                      (90  

Net income

     90                              90      $ 90   

Unrealized gain on investments, net of tax

     5                       5               5   

Balance at September 30, 2010

   $ 705      $ 5       $ 697      $ 3      $      $ 95   
   

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)    2010     2009  

OPERATING ACTIVITIES

    

Net income

   $ 90      $ 62   

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

    

Non-cash items:

    

Depreciation and amortization expense

     148        152   

Net gain on disposal of assets

     (2       

Provision for losses

     11        17   

Net gain on investments and derivative instruments

            (8

Asset impairment expense and other charges

     32        35   

Share-based plans expense

     1        1   

Adjustments related to discontinued operations, net of tax

     2        8   

Change in deferred income taxes

     (48     (37

Change in assets and liabilities:

    

Other assets

     22          

Accrued interest and rents

     (1     2   

Accounts payable and accrued expenses

     (24     (36

Other liabilities

     (26     (54

Accounts with Boeing

     (21     128   

Net cash provided by operating activities

     184        270   

INVESTING ACTIVITIES

    

Purchase of short-term investments

     (1,100       

Proceeds from maturities of short-term investments

     700          

Proceeds from available-for-sale investments

     1        1   

Payment for capitalizable costs in process

     (43     (56

Proceeds from disposition of equipment and receivables

     94        200   

Payments of leases, notes and other receivables

     486        249   

Origination of leases, notes and other receivables

            (655

Net cash provided by (used in) investing activities

     138        (261

FINANCING ACTIVITIES

    

Proceeds from intercompany borrowing

            200   

Repayment of debt

     (621     (341

Payment of cash dividends (including return of capital)

     (90     (93

Net cash used in financing activities

     (711     (234

Net decrease in cash and cash equivalents

     (389     (225

Cash and cash equivalents at beginning of year

     596        305   

Cash and cash equivalents at end of period

   $ 207      $ 80   
   

NON-CASH INVESTING AND FINANCING ACTIVITIES

    

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

   $ 321      $ (1
   

Net transfer to notes receivable

   $ 24      $   
   

Net transfer to (from) equipment under operating leases

   $ (292   $ 88   
   

Transfer to (from) finance leases

   $ 6      $ (15
   

Transfer from other assets

   $ (59   $ (94
   

Transfer to accounts with Boeing

   $      $ 3   
   

Transfer to investments

   $      $ 19   
   

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

   $ (51   $ 10   
   

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 a wholly owned subsidiary of The Boeing Company (Boeing). We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the condensed consolidated financial statements. Operating results for the period ended September 30, 2010 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 2009 Annual Report on Form 10-K.

Note 2 – Transactions with Boeing

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

We have a number of general contractual arrangements with Boeing to facilitate our operations including, among others, a support agreement, a 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.

No amounts were outstanding under our intercompany borrowing and lending arrangement with Boeing at September 30, 2010.

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 2009 Annual Report on Form 10-K.

At September 30, 2010, we were the beneficiary under $1,780 of guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $2,380.

Intercompany guarantee amounts by type are summarized as follows:

 

 

      September 30, 2010      December 31, 2009  
     

Guarantee

Amount

    

Carrying

Value

    

Guarantee

Amount

    

Carrying

Value

 

717 (out of production)

   $ 1,612       $ 2,143       $ 1,637       $ 2,179   

Out of production single-aisle aircraft

     69         69         167         167   

Out of production twin-aisle aircraft

     52         72         78         113   

Other, including other Boeing aircraft

     47         96         47         91   
   $ 1,780       $ 2,380       $ 1,929       $ 2,550   
   

At September 30, 2010 and December 31, 2009, Accounts with Boeing included deferred revenue of $50 and $69 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:

 

      2010     2009  

Applied to income

   $ 69      $ 45   

Net change in deferred revenue

     (19     (13

Net cash received under intercompany guarantee and subsidy agreements

   $ 50      $ 32   
   

During the third quarter of 2010 the prepayment of third party notes receivable totaling $163 was facilitated through Boeing. Included in the $69 applied to income in the table above is $10 attributable to this prepayment.

For the nine months ended September 30, 2010 and 2009, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies, of $6 and $15. During the third quarter of 2010, we sold one C-40 aircraft at its carrying value to Boeing at its lease expiration for $26.

For the nine months ended September 30, 2010 and 2009, we recorded new business volume of $39 and $590 related to Boeing aircraft, equipment or services we purchased or financed.

Note 3 – Allowance for Losses on Receivables

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

 

      2010     2009  

Allowance for losses on receivables at beginning of period

   $ 71      $ 59      

Provision for losses

     11        17      

Write-offs

     (1     (12)     

Recovery of write-offs

            1      

Allowance for losses on receivables at end of period

   $ 81      $ 65      
   

Allowance as a percentage of total receivables

     3.3     2.0%   

At September 30, 2010, we had no impaired receivables. At December 31, 2009, the carrying value of impaired receivables with no specific allowance was $145.

Non-Performing Assets

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

 

      September 30,
2010
    December 31,
2009
 

Assets placed on non-accrual status:

    

Equipment under operating leases, net

   $ 41      $ 86(1)    

Assets held for sale or re-lease, net(1) (2)

     76        114      
   $ 117      $ 200      
   

Percent of total non-performing assets to total portfolio

     2.4     3.5%   

 

(1)  

At December 31, 2009, equipment under operating leases of $295 are not included in non-performing assets due to intercompany guarantees provided by Boeing. At September 30, 2010 and December 31, 2009, assets held for sale or re-lease of $545 and $271 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

 

(2)  

At September 30, 2010 and December 31, 2009, non-performing assets held for sale or re-lease of $54 and $74 had either a purchase or lease commitment.

 

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Note 4 – Investments

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

 

September 30, 2010    Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair
Value
 

Available-for-sale investments:

          

Marketable equity securities

   $ 20       $ 4       $      $ 24   

EETC

     5                        5   

Total

   $ 25       $ 4       $      $ 29   
   

December 31, 2009

                                  

Available-for-sale investments:

          

Marketable equity securities

   $ 20       $ 1       $ (4   $ 17   

EETC(1)

     6                 (1     5   

Total

   $ 26       $ 1       $ (5   $ 22   

 

(1)  

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

The contractual maturities of available-for-sale debt securities at September 30, 2010, were as follows:

 

      Cost      Fair
Value
 

Due in one year or less

   $ 1       $ 1   

Due from one to five years

     3         3   

Due from five to ten years

     1         1   

Total

   $ 5       $ 5   
   

Note 5 – Debt

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

 

(Interest rates are the contractual rates at September 30, 2010)    September 30,
2010
     December 31,
2009
 

3.25% - 7.58% fixed rate notes due through 2019

   $ 3,362       $ 3,927   

1.52% floating rate note due in 2023

     25         25   

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

     57         61   

0.92% capital lease obligation due through 2015

     55         62   
   $ 3,499       $ 4,075   
   

At September 30, 2010, and December 31, 2009, we had interest rate swaps which effectively convert debt of $875 and $1,475 from fixed rates to floating rates. During the nine months ended September 30, 2010 we terminated $250 of interest rate swaps in order to improve our expected alignment between fixed and floating rate assets and liabilities. An additional $350 of swaps matured as scheduled concurrently with corresponding debt maturities.

The most restrictive covenants in our debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At September 30, 2010, we were in compliance with these covenants.

 

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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. Our contracts entered into as of September 30, 2010 do not require collateral or other security from either party to the contract.

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

 

September 30, 2010    Other Assets      Other Liabilities  

Derivatives designated as hedging instruments - Interest rate swaps

   $ 50       $   
   

December 31, 2009

                 

Derivatives designated as hedging instruments - Interest rate swaps

   $ 32       $ (17
   

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

For the three and nine months ended September 30, 2010, we did not hold any derivatives in cash flow hedging relationships, resulting in no effect to Accumulated other comprehensive income (loss) (AOCI) or the Statement of Operations.

For the nine months ended September 30, 2009, we recognized a gain in AOCI of $2 related to our interest rate swaps in cash flow hedging relationships. In addition, for the three and nine months ended September 30, 2009 we reclassified a loss of $1 and $2 from AOCI into Interest expense.

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.

Bankruptcies

In August 2010, Compania Mexicana de Aviacion S.A. de C.V. (Mexicana) filed for bankruptcy protection in Mexico and in the United States. At the time of those filings, we had leased 19 717 aircraft to Aevovías Caribe S.A. de C.V. (Click), an affiliate of Mexicana, and six additional 717 aircraft were scheduled for delivery to Click under executed leases. On August 27, 2010, we served Click a notice of termination of all 25 leases as a result of non-payment. On or about August 28, 2010, Click ceased flight operations. In September 2010, Click filed for bankruptcy protection. We are currently seeking recovery of the 19 aircraft that had been delivered to Click. As a result of guarantees from Boeing that limit our risk for non-payment under the leases, we do not expect that the bankruptcy will have a material adverse effect on our earnings, cash flows and/or financial position.

Restructurings and Restructuring Requests

From time to time, certain customers have requested a restructuring of their transactions with us. As of September 30, 2010, we have not reached agreement on any restructuring requests that would have a material adverse effect on our earnings, cash flows and/or financial position.

 

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Commitments

At September 30, 2010, we and Boeing had unfunded financing commitments of $10,770, primarily resulting from firm contracts, options for deliveries or proposals as part of sales campaigns. These commitments are provided to give Boeing customers reasonable assurance of financing in connection with orders of Boeing products in advance of delivery. However, customers typically seek lower cost financing from other sources prior to actual delivery. In addition, we continue to work with third party financiers to provide alternative financing to customers and eliminate the need for our financing. Based on historical experience and anticipated capital market acceptance of Boeing aircraft covered by Boeing’s and our current commitments, we anticipate that a significant portion of these commitments will not be exercised by the customer or will expire without being fully drawn upon. However, there can be no assurance that we will not be required to fund greater amounts than historically required. To the extent we are obligated to provide financing, such financing generally includes participation by engine manufacturers which further reduces our obligation. Therefore, the reported amount of commitments does not necessarily represent a future net cash requirement. However, we expect to ultimately provide funding for those commitments which are exercised, whether they are Boeing’s or our commitments. If there were requirements to fund all Boeing’s and our commitments, the timing in which these commitments may be funded (based on estimated earliest potential funding dates as of September 30, 2010) is as follows:

 

      Total  

October through December 2010

   $ 386   

2011

     1,464   

2012

     1,344   

2013

     955   

2014

     1,508   

Thereafter

     5,113   
   $ 10,770   
   

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, 2010 and December 31, 2009, and are categorized using the three levels of fair value hierarchy.

 

September 30, 2010    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

   $ 24      $ 24       $      $   

EETC

     5                       5   

Interest rate swaps

     50                50          

Total

   $ 79      $ 24       $ 50      $ 5   
   
         

December 31, 2009

                                 

Assets

         

Available-for-sale investments:

         

Marketable equity securities

   $ 17      $ 17       $      $   

EETC

     5                       5   

Interest rate swaps

     32                32          

Total

   $ 54      $ 17       $ 32      $ 5   
   

Liabilities

         

Interest rate swaps

   $ (17   $       $ (17   $   

Total

   $ (17   $       $ (17   $   
   

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

 

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

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

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

 

2010    Fair Value
Beginning
of Year
     Unrealized
Gains
Included
in Income
     Accumulated
Other
Comprehensive
Income (Loss)
     Purchases,
Sales, and
Settlements
    Transfers
In (Out)
     Fair Value
at End of
Period
 

Assets

                

EETC

   $ 5       $       $ 1       $ (1   $       $ 5   

Total

   $ 5       $       $ 1       $ (1   $       $ 5   
   
2009                                               

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:

 

      2010     2009  
      Carrying
Value
     Total
Losses
    Carrying
Value
     Total
Losses
 

Assets

          

Receivables (1)

   $       $      $ 1       $ (6

Equipment under operating leases (2)

     105         (22     91         (26

Assets held for sale or re-lease (2)

     22         (4     33         (7

Total

   $ 127       $ (26   $ 125       $ (39
   

 

(1)  

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

 

(2)  

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

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

 

      September 30, 2010     December 31, 2009  
     

Carrying

Value

   

Fair

Value

   

Carrying

Value

   

Fair

Value

 

Assets

        

Notes and other

   $ 469      $ 493      $ 865      $ 892   

Liabilities

        

Debt, excluding capital lease obligations

   $ (3,444   $ (3,637   $ (4,013   $ (4,197

Off-Balance Sheet Arrangements

        

Guarantor obligations from us

   $      $      $ (3   $ (3

Items not included in the above disclosures are Cash and cash equivalents and Short-term investments. The carrying value of those items approximate their fair value at September 30, 2010 and December 31, 2009 as reflected in the Consolidated Balance Sheets.

 

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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 value. The fair value of fixed rate notes is estimated using discounted cash flows analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality.

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

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

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

Note 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, 2010  
     

Carrying

Value

    

% of Total

Portfolio

 

AirTran

   $ 1,366         27.5%   

Continental

     459         9.2      

American

     452         9.1      

Hawaiian

     434         8.7      

Virgin Atlantic

     177         3.6      
   $ 2,888         58.1%   
   

 

      December 31, 2009  
     

Carrying

Value

    

% of Total

Portfolio

 

AirTran

   $ 1,573         27.8%   

American

     517         9.1     

Continental

     450         8.0     

Hawaiian

     449         7.9     

Mexicana

     295         5.2     
   $ 3,284         58.0%   
   

For the nine months ended September 30, 2010 and 2009, AirTran Holdings, Inc. and its subsidiaries accounted for 20% and 19% of our revenue.

 

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Portfolio carrying values were represented in the following regions:

 

      September 30, 2010     December 31, 2009  
      Carrying Value      % of Total
Portfolio
    Carrying Value      % of Total
Portfolio
 

United States (1)

   $ 3,824         77.0   $ 4,073         71.9%   

Europe

     654         13.2        762         13.4     

Asia/Australia

     294         5.9        319         5.6     

Latin America

     91         1.8        394         7.0     

Other

     104         2.1        118         2.1     
   $ 4,967         100.0   $ 5,666         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,
2010
     December 31,
2009
 

717

   $ 2,212       $ 2,277   

757

     762         902   

737

     463         559   

767

     412         474   

MD-11(1)

     364         401   

747

     265         343   

MD-80

     211         231   

777

     129         147   

Other(2)

     149         332   
   $ 4,967       $ 5,666   
   

 

(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:

 

      September 30
2010
    December 31,
2009
 

2005 and newer

     11.5     11.5%   

2000 – 2004

     64.6        63.1     

1995 – 1999

     11.1        11.3     

1994 and older

     12.8        14.1     
     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 cumulative net losses (if any) are to be shared between us and GECC. The provisions effectively limit our

 

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exposure to any losses to $245. At September 30, 2010, our maximum future cash exposure to loss associated with the loss sharing arrangement was $234, for which we have accrued a liability of $80.

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

 

      2010      2009  

Reserve at beginning of period

   $ 77       $ 39   

Increase in reserve

     3         14   

Payments received from GECC

             2   

Reserve at end of period

   $ 80       $ 55   
   

 

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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, 2010, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2010 and 2009, and of shareholder’s equity and comprehensive income, and cash flows for the nine-month periods ended September 30, 2010 and 2009. 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, 2009, 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 8, 2010, 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, 2009 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 20, 2010

 

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Forward-Looking Statements

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

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

 

   

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, and

 

   

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

Additional information concerning these and other factors can be found in our filings with the Securities and Exchange Commission (SEC), including, but not limited to, the “Risk Factors” on pages 3 through 5 of our most recent Annual Report on Form 10-K, “Management’s Narrative Analysis of the Results of Operations” and Note 7 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Current Reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.

 

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

Overview

During the nine months ended September 30, 2010, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.

In 2009, a weak global economic environment and capital market disruptions affected the availability of credit for the airline industry and we provided limited financing to certain Boeing customers. During the second half of 2009, sources of financing available for aircraft deliveries started to show signs of improvement, which continued through the third quarter of 2010. 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.

At September 30, 2010, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. At September 30, 2010, we owned 262 commercial aircraft and had partial ownership or security interest in an additional 31 aircraft. Our portfolio at September 30, 2010 decreased to $5.0 billion from $5.7 billion at December 31, 2009. The following table summarizes the net change in our total portfolio:

 

(Dollars in millions)   

Nine Months Ended
September 30,

2010

    Year Ended
December 31,
2009
 

New business volume

   $ 56      $ 766   

Write-offs

     (1     (12

Recovery of write-offs

            1   

Transfer of assets

     3        19   

Asset impairment and other charges

     (32     (91

Asset run off and prepayments

     (474     (613

Asset dispositions

     (97     (220

Depreciation and amortization expense

     (154     (207

Net change in portfolio balance

   $ (699   $ (357
   

At September 30, 2010 and December 31, 2009, we had $621 million and $385 million of assets that were held for sale or re-lease, of which $54 million and $345 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. The increase was primarily due to our termination of aircraft leases with Aevovias Caribe S.A. de C.V. (Click), an affiliate of Compania Mexicana de Aviacion S.A. de C.V. (Mexicana), in August 2010. See Item 1. Financial Statements, Note 7 – Commitments and Contingencies. Additionally, aircraft subject to leases with a carrying value of approximately $115 million are scheduled to be returned off lease in the next 12 months. These aircraft are being remarketed or we are seeking to have the leases extended.

Our net income was $90 million for the nine months ended September 30, 2010 compared with $62 million for the same period in 2009, an increase of $28 million.

On September 26, 2010, Southwest Airlines Co. (Southwest) and AirTran Holdings, Inc. (AirTran) entered into an Agreement and Plan of Merger, whereby Southwest will acquire, subject to certain conditions, all of the outstanding common stock of AirTran. As disclosed in Item 1. Financial Statements, Note 9 – Concentrations, AirTran, together with its subsidiaries, is our largest customer in terms of revenue and portfolio carrying value. We are evaluating the planned merger and its potential impacts on our business.

Consolidated Results of Operations

Revenue

Revenue was $494 million for the nine months ended September 30, 2010 compared with $496 million for the same period in 2009, a decrease of $2 million.

 

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Interest income on notes receivable was $61 million for the nine months ended September 30, 2010, an increase of $8 million compared with the same period in 2009, primarily due to recognition of deferred intercompany revenue of $10 million on early payment of notes during the three months ended September 30, 2010.

Operating lease income was $294 million for the nine months ended September 30, 2010, a decrease of $10 million compared with the same period in 2009, primarily due to a decrease in the equipment under operating leases as a result of the return of aircraft and lower lease rates on re-leased aircraft. Without the support from Boeing in the form of intercompany guarantees our Operating lease income, which includes income applied to assets classified as held for re- lease, would have been $40 million and $36 million less than reported, for the nine months ended September 30, 2010 and 2009. For a discussion of our relationship with Boeing, see Item 1. Financial Statements, Note 2 – Transactions with Boeing.

Expenses

Expenses were $348 million for the nine months ended September 30, 2010 compared with $384 million for the same period in 2009, a decrease of $36 million.

Interest expense was $124 million for the nine months ended September 30, 2010, a decrease of $8 million compared with the same period in 2009, primarily due to a decrease in the weighted average annual effective interest rate on all borrowings to 4.1% from 4.9%.

Depreciation expense was $153 million for the nine months ended September 30, 2010, a decrease of $6 million compared with the same period in 2009, primarily due to updated estimated residual values and lower depreciable balance of equipment under operating leases as a result of asset dispositions.

The provision for losses was $11 million for the nine months ended September 30, 2010, compared with $17 million for the same period in 2009. The increase in our allowance through a provision for losses for the nine months ended September 30, 2010 was due to the effects of declines in aircraft collateral values and increases in default rates exceeding the effect of run off of our finance leases and notes receivable.

Asset impairment expense was $20 million for the nine months ended September 30, 2010, a decrease of $13 million compared with the same period in 2009. The asset impairment expense during the first nine months of 2010 was primarily due to reduced projected cash flows on certain aircraft.

Provision for income tax

Provision for income tax was $54 million for the nine months ended September 30, 2010, an increase of $12 million compared with the same period in 2009, primarily due to an increase in pre-tax income.

Loss on disposal of discontinued operations

Loss on disposal of discontinued operations, net of tax, was $2 million for the nine months ended September 30, 2010, primarily due to an increase in our expected losses under our loss sharing agreement with General Electric Capital Corporation related to the sale of certain assets of our Commercial Financial Services business in 2004. This compared with a loss of $8 million, net of tax, for the same period in 2009.

Liquidity and Capital Resources

Our cash and cash equivalents balance was $207 million at September 30, 2010, a decrease from $596 million at December 31, 2009. The following is a summary of the change in our cash and cash equivalents for the nine months ended September 30:

 

(Dollars in millions)    2010     2009  

Net cash provided by operating activities

   $ 184      $ 270   

Net cash provided by (used in) investing activities

     138        (261

Net cash used in financing activities

 

     (711     (234

Net decrease in cash and cash equivalents

   $ (389   $ (225
   

 

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Operating activities

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

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.

Investing activities

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

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.

Financing activities

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

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.

Outstanding debt at September 30, 2010 and December 31, 2009 was $3.5 billion and $4.1 billion, of which $825 million will be due in the next 12 months. During the nine months ended September 30, 2010, we had no commercial paper borrowings outstanding. Our leverage (ratio of Debt to Shareholder’s equity) at September 30, 2010 and December 31, 2009 was 5.0-to-1 and 5.8-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 $10.8 billion as of September 30, 2010. We anticipate that a significant portion of these commitments will not be exercised given alternative financing sources available to our customers. As a result of the challenging aircraft financing market, we financed a small number of new aircraft deliveries in 2009 and we may 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 or availability of funding sources to us will not be adversely impacted in the future.

As of September 30, 2010, we have $4.0 billion remaining under our $5.0 billion Securities and Exchange Commission (SEC) shelf registration statement for issuance of debt securities. During 2009, we established under the registration statement a $750 million medium-term notes program and a $750 million retail notes program. We have not issued any securities under those programs. The availability of such funding under those programs or otherwise pursuant to our SEC registration statement will depend on investor demand and market conditions.

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

 

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Risks that could affect our liquidity include among others:

 

   

a downturn in the economy,

   

significant restructurings, defaults or bankruptcies by airlines,

   

disruptions in the global capital markets, and

   

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

We continually assess our leverage, as measured by our Debt to Shareholder’s equity ratio, in light of the risks in our business, including those set forth in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009.

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

The following tables reconcile the changes in the allowance for losses on receivables and asset impairment expense for the nine months ended September 30, 2010 and 2009. Column 3 presents this information, calculated in accordance with our accounting policy, if the impact of intercompany guarantees from Boeing were excluded. The exclusion of the net impact of intercompany guarantees shown in Column 2 would increase the applicable exposure for various receivables and would increase asset impairment expense. Management believes that the presentation of this information provides more complete information on the effect of intercompany guarantees provided by Boeing.

 

(Dollars in millions)    (1)     (2)      (3)  
2010    Allowance
for losses
    Impact of
intercompany
guarantees
from Boeing
     Allowance
excluding
intercompany
guarantees
 

Allowance for losses on receivables at beginning of period

   $ 71      $ 231       $ 302     

Provision for losses

     11        13         24     

Write-offs

 

     (1             (1)    

Allowance for losses on receivables at end of period

   $ 81      $ 244       $ 325     
   

Allowance as a percentage of total receivables

     3.3        13.4%   

2009

        

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%   

 

(Dollars in millions)    (1)      (2)      (3)  
2010    Asset
impairment
expense
     Impact of
intercompany
guarantees
from Boeing
     Impairment
excluding
intercompany
guarantees
 

Asset impairment expense

   $ 20       $ 91       $ 111  
   

2009

 

                          

Asset impairment expense

   $ 33       $       $ 33  
   

Item 4. Controls and Procedures

 

(a)  

Disclosure Controls and Procedures

Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures as of September 30, 2010 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the

 

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Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)  

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the third quarter of 2010 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, 2009.

Item 6. Exhibits

A. Exhibits

 

  Exhibit 12      

Computation of Ratio of Earnings to Fixed Charges.

  Exhibit 15      

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

  Exhibit 31.1      

Certification of President pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  Exhibit 31.2      

Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  Exhibit 32.1      

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

  Exhibit 32.2      

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

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 20, 2010

 

/s/ KELVIN E. COUNCIL

 

Kelvin E. Council

Vice President and Chief Financial Officer

(Principal Financial Officer) and Registrant’s

Authorized Officer

October 20, 2010

 

/s/ KEVIN J. MURPHY

 

Kevin J. Murphy

Controller (Principal Accounting Officer)

 

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