10-Q 1 d321596d10q.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 March 31, 2012

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).                                                                                                          x  Yes    ¨   No

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

 

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 April 25, 2012: 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 Comprehensive Income      2
      Condensed Consolidated Statements of Shareholder’s Equity      3
      Condensed Consolidated Statements of Cash Flows      4
      Notes to Condensed Consolidated Financial Statements      5
      Review Report of Independent Registered Public Accounting Firm    15
   Forward-Looking Statements    16
   Item 2.    Management’s Narrative Analysis of the Results of Operations    17
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk    20
   Item 4.    Controls and Procedures    20

Part II. Other Information

  
   Item 1.    Legal Proceedings    22
   Item 1A.    Risk Factors    22
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    22
   Item 3.    Defaults Upon Senior Securities    22
   Item 4.    Mine Safety Disclosures    22
   Item 5.    Other Information    22
   Item 6.    Exhibits    24
   Signatures       25

 


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)    March 31,
2012
    December 31,
2011
 

ASSETS

    

Cash and cash equivalents

   $ 399      $ 941   

Short-term investments

     100        300   

Receivables:

    

Finance leases

     1,677        1,727   

Notes and other

     577        621   
     2,254        2,348   

Allowance for losses on receivables

     (50     (53
     2,204        2,295   

Equipment under operating leases, net

     1,400        1,439   

Investments

     10        7   

Assets held for sale or re-lease, net

     510        521   

Other assets

     57        63   
   $ 4,680      $ 5,566   

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

    

Liabilities:

    

Accounts payable and accrued expenses

   $ 41      $ 65   

Other liabilities

     220        256   

Accounts with Boeing

     62        76   

Deferred income taxes

     1,219        1,232   

Debt

     2,622        3,400   
       4,164        5,029   

Shareholder’s equity:

    

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

     5        5   

Additional paid-in capital

     510        523   

Accumulated other comprehensive income (loss), net of tax

     1        1   

Retained earnings

            8   
       516        537   
   $ 4,680      $ 5,566   

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

      Three Months Ended
March 31,
 
(Dollars in millions)    2012     2011  

REVENUE

    

Finance lease income

   $ 21      $ 35   

Interest income on notes receivable

     11        8   

Operating lease income

     69        90   

Net gain on disposal of assets

            5   

Other income

     24        5   
     125        143   

EXPENSES

    

Interest expense

     28        33   

Depreciation expense

     34        42   

Recovery of losses

     (3     (6

Operating expenses

     13        11   

Asset impairment expense

     14        9   

Other expense

     1        2   
       87        91   

Income from continuing operations before provision for income tax

     38        52   

Provision for income tax

     14        19   

Income from continuing operations

     24        33   

Net loss on disposal of discontinued operations, net of tax

            (2

Net income

     24        31   

OTHER COMPREHENSIVE INCOME, NET OF TAX

                

Other comprehensive income

              

Comprehensive income

   $ 24      $ 31   

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholder’s Equity

(Unaudited)

 

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

Balance at January 1, 2011

   $ 687      $ 5       $ 682      $       $   

Cash dividends to Boeing (including return of capital)

     (191             (160             (31

Net income

     31                               31   

Balance at March 31, 2011

   $ 527      $ 5       $ 522      $       $   

 

 

Balance at January 1, 2012

   $ 537      $ 5       $ 523      $ 1       $ 8   

Cash dividends to Boeing (including return of capital)

     (45             (13             (32

Net income

     24                               24   

Balance at March 31, 2012

   $ 516      $ 5       $ 510      $ 1       $   

 

 

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

      Three Months Ended March 31,  
(Dollars in millions)    2012     2011  

OPERATING ACTIVITIES

    

Net income

   $ 24      $ 31   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Non-cash items:

    

Depreciation and amortization expense

     33        39   

Net gain on disposal of assets

            (5

Recovery of losses

     (3     (6

Asset impairment expense and other charges

     15        9   

Net loss on disposal of discontinued operations, net of tax

            2   

Decrease in deferred income taxes

     (13     (17

Change in assets and liabilities:

    

Other assets

            3   

Accrued interest and rents

            1   

Accounts payable and accrued expenses

     (24     (38

Other liabilities

     (35     (11

Accounts with Boeing

     (15     17   

Net cash provided by (used in) operating activities

     (18     25   

INVESTING ACTIVITIES

    

Purchase of investments

     (3       

Purchase of short-term investments

     (100     (300

Proceeds from maturities of short-term investments

     300        900   

Proceeds from available-for-sale investments

            1   

Payment for capitalizable costs in process

     (3       

Proceeds from disposition of equipment

     9        24   

Payments of leases, notes and other receivables

     92        82   

Net cash provided by investing activities

     295        707   

FINANCING ACTIVITIES

    

Repayment of debt

     (774     (786

Payment of dividends (including return of capital)

     (45     (191

Net cash used in financing activities

     (819     (977

Net decrease in cash and cash equivalents

     (542     (245

Cash and cash equivalents at beginning of year

     941        425   

Cash and cash equivalents at end of period

   $ 399      $ 180   

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

    

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

   $ 10      $ (13
                  

Net transfer to (from) equipment under operating leases

   $ (4   $ 13   
                  

Transfer from other assets

   $ (6   $   
                  

Decrease in debt due to fair value hedge derivatives

   $ 3      $ 8   
                  

See Notes to the Condensed Consolidated Financial Statements.

 

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Boeing Capital Corporation and Subsidiaries

Notes to the 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 March 31, 2012 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 2011 Annual Report on Form 10-K.

Immaterial Restatement

Subsequent to the issuance of our consolidated balance sheet as of December 31, 2011 we determined that it should have reflected Finance lease receivables of $1,727, as compared to the $1,739 reported, and the difference of $12 should have been reflected as a reduction in Finance lease income for the year ended December 31, 2011. In connection with the November 2011 bankruptcy filing by American Airlines, Inc. (American Airlines), certain lease payments by American Airlines beginning in May 2012, the first scheduled payments under the relevant leases since the bankruptcy filing, are required to be allocated exclusively to various non-recourse debt holders, at higher interest rates, until all such holders are paid in full, and only thereafter to us. The reallocation of payments required us to recalculate our investment in leveraged leases for the year ended December 31, 2011. This reallocation of payments does not affect amounts payable under these leases by American Airlines. The reallocation of payments also does not alter our expectation that we will not incur any losses related to American Airlines receivables as a result of the bankruptcy.

Management believes that the effect of this recalculation is not material to our previously issued consolidated financial statements for the year ended December 31, 2011. The impact on specific line items in the December 31, 2011 consolidated balance sheet is presented below:

 

      As of December 31, 2011  

Balance Sheet Items:

    

 

 

As

Previously

Reported

  

  

  

     Restated   

Finance leases

     $1,739         $1,727   

Total receivables, gross of allowance

     2,360         2,348   

Total receivables, net of allowance

     2,307         2,295   

Total assets

     5,578         5,566   

Accounts with Boeing

     77         76   

Deferred income taxes

     1,236         1,232   

Total liabilities

     5,034         5,029   

Retained earnings

     15         8   

Shareholder’s equity

     544         537   

Total liabilities and shareholder’s equity

     $5,578         $5,566   

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.

 

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

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

There can be no assurances that these intercompany 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 2011 Annual Report on Form 10-K.

At March 31, 2012, we were the beneficiary of up to a maximum of $1,556 under our guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $1,901.

Intercompany guarantee amounts by aircraft type are summarized as follows:

 

      March 31, 2012      December 31, 2011  
     

Guarantee

Amount

    

Carrying

Value

    

Guarantee

Amount

    

Carrying

Value

 

717 (out of production)

   $ 1,464       $ 1,766       $ 1,481       $ 1,790   

Out of production single-aisle aircraft

     52         52         55         55   

Other, including other Boeing aircraft

     40         83         41         83   
   $ 1,556       $ 1,901       $ 1,577       $ 1,928   

 

 

At March 31, 2012 and December 31, 2011, Accounts with Boeing included $36 and $38 for deferred revenue associated with guarantee and subsidy settlements and terminations.

We recorded the following activity under the intercompany guarantee and subsidy agreements for the three months ended March 31:

 

      2012      2011  

Operating lease income

   $ 12       $ 16   

For the three months ended March 31, 2012 and 2011, we recorded no new business volume related to Boeing aircraft, equipment or services we purchased or financed.

Note 3 – Portfolio Quality

Allowance for Losses on Receivables

The following table reconciles the activity in the allowance for losses on receivables for the three months ended March 31:

 

      2012     2011  

Allowance for losses on receivables at beginning of period

   $ 53      $ 87   

Recovery of losses

     (3     (6

Allowance for losses on receivables at end of period

   $ 50      $ 81   

 

 

Allowance as a percentage of total receivables

     2.2     3.7

Allowance for losses on receivables collectively evaluated for impairment

   $ 50      $ 81   

Of the $322 of financing receivables individually evaluated for impairment at March 31, 2012, $182 was classified as impaired. We recorded no allowance for losses on these impaired receivables.

 

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Credit Quality

We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon public information and information obtained directly from our customers. We utilize these credit ratings as one of the factors in assessing the adequacy of our allowance for losses on receivables. Our rating categories are comparable to those used by the major credit rating agencies.

The following table details our receivable balances by the internal rating category which was used as a factor in determining our allowance for losses on receivables:

 

      March 31, 2012      December 31, 2011  
Rating categories    Out-of-
Production
Aircraft
     In-
Production
Aircraft/Other
     Total      Out-of-
Production
Aircraft
     In-
Production
Aircraft/Other
     Total  

BBB

   $ 1,277       $       $ 1,277       $ 1,316       $       $ 1,316   

BB

             60         60                 67         67   

B

     61                 61         103                 103   

CCC

     227         307         534         194         318         512   

D

     171         151         322         171         179         350   

Total carrying value

   $ 1,736       $ 518       $ 2,254       $ 1,784       $ 564       $ 2,348   

 

 

At March 31, 2012, our recorded allowance primarily related to receivables with rating of CCC in the preceding table, and we applied default rates that averaged 47% to exposure associated with those receivables.

At March 31, 2012 and December 31, 2011, receivables of $977 and $1,032 were related to customers we believe have less than investment-grade credit.

Impaired Receivables

At March 31, 2012 we had impaired receivables with a carrying value and unpaid principal balance of $182, all of which related to out-of-production aircraft on lease to American Airlines. At December 31, 2011 we had impaired receivables with a carrying value and unpaid principal balance of $182, all of which related to out-of-production aircraft. We recorded no allowance for losses on these impaired receivables.

In the fourth quarter of 2011, American Airlines filed for Chapter 11 bankruptcy protection. We believe that our receivables from American Airlines of $322 are sufficiently collateralized such that we have not recorded an allowance for losses as of March 31, 2012 as a result of the bankruptcy. Our receivables from American Airlines include leveraged leases with a carrying value of $127 net of $269 non-recourse debt at March 31, 2012.

The following table details our average recorded investment and the related income recognized in the period of impairment on the impaired receivables for the three months ended March 31:

 

2012    Average
Carrying Value
     Income
Recognized
 

Out-of-production aircraft

   $ 182       $   

At March 31, 2011, we had no impaired receivables.

 

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Past Due Receivables

The aging analysis of receivables past due consisted of the following at:

 

March 31, 2012    31-60 Days
Past Due
     61-90 Days
Past Due
     Greater than
90 Days
     Total Past Due
> 30 Days
     Related
Carrying
Value
     Carrying
Amount > 90
Days and
Accruing
 

Out-of-production

   $ 2      $       $ 2      $ 4      $ 54      $   

Total

   $ 2      $       $ 2      $ 4      $ 54      $   

 

 

December 31, 2011

                                                     

In-production/other aircraft

   $ 1      $       $       $ 1      $ 46      $   

Total

   $ 1      $       $       $ 1      $ 46      $   

 

 

Non-Performing Assets

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

 

      March 31,
2012
    December 31,
2011
 

Assets placed on non-accrual status:

    

Receivables:

    

Out-of-production aircraft

   $ 171      $ 171   

Equipment under operating leases, net(1)

     9        14   

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

     120 (2)      50   
   $ 300      $ 235   

 

 

Percent of total non-performing assets to total portfolio

     7.2     5.4

 

(1)   

At March 31, 2012 and December 31, 2011, equipment under operating leases of $57 and $23 are not included in non-performing assets due to intercompany guarantees provided by Boeing. At March 31, 2012 and December 31, 2011, assets held for sale or re-lease of $390 and $471 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

 

(2)   

At March 31, 2012, non-performing assets held for sale or re-lease of $12 had either a purchase or lease commitment.

Note 4 – 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 March 31, 2012)    March 31,
2012
     December 31,
2011
 

2.13% - 7.58% fixed rate notes due through 2019

   $ 2,509       $ 3,283   

1.70% floating rate note due in 2023

     25         25   

1.34% - 5.79% non-recourse notes due through 2013

     48         49   

1.09% capital lease obligation due through 2015

     40         43   
   $ 2,622       $ 3,400   

 

 

At March 31, 2012, and December 31, 2011, we had interest rate swaps which effectively convert debt of $388 and $388 from fixed rates to floating rates.

 

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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 March 31, 2012, we were in compliance with these covenants.

Note 5 – 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 March 31, 2012 do not require collateral or other security from either party.

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

 

March 31, 2012    Other Assets      Other Liabilities  

Derivatives designated as hedging instruments - Interest rate swaps

   $ 27       $   
                   

December 31, 2011

                 

Derivatives designated as hedging instruments - Interest rate swaps

   $ 29       $   

 

 

The notional amount of our interest rate swaps is disclosed in Note 4 – Debt.

For our fair value hedges that qualify for hedge accounting treatment we use the shortcut method and thus there are no gains or losses recognized due to hedge ineffectiveness. Under shortcut hedge accounting treatment, the change in fair value of the interest rate swap is assumed to perfectly offset the change in fair value of the hedged debt. For the three months ended March 31, 2012 and 2011 losses from changes in the fair value of $(3) and $(8) were recognized in interest expense with a corresponding offset due to changes in the fair value of the hedged underlying debt, resulting in no impact to interest expense.

Note 6 – 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 effect on our earnings, cash flows and/or financial position.

Bankruptcies

On November 29, 2011, American Airlines filed for Chapter 11 bankruptcy protection. American Airlines retains certain rights by operating under Chapter 11 bankruptcy protection, including the right to reject executory contracts, such as aircraft leases. American Airlines has not rejected any of the leases related to our aircraft. At March 31, 2012 and December 31, 2011, American Airlines accounted for $322 and $350 of our total assets. We believe that our receivables from American Airlines are sufficiently collateralized such that we do not expect to incur losses related to those receivables as a result of the bankruptcy. Some possible outcomes that may occur as a result of the bankruptcy could cause a significant amount of deferred taxes to be accelerated which may impact our near-term cash requirements. We continue to monitor the American Airlines bankruptcy for potential impacts to our business.

Restructurings and Restructuring Requests

From time to time, certain customers have requested a restructuring of their transactions with us. Since December 31, 2011, we have not reached agreement on any restructuring requests that would have a material effect on our earnings, cash flows and/or financial position.

 

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Commitments

At March 31, 2012, we and Boeing had unfunded financing commitments of $19,607, primarily related to aircraft on order including options and those proposed in 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. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. 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 March 31, 2012) is as follows:

 

      Total  

April through December 2012

   $ 1,688   

2013

     1,280   

2014

     2,525   

2015

     3,813   

2016

     3,294   

Thereafter

     7,007   
   $ 19,607   

 

 

Note 7 – Fair Value Measurements

The following tables present our assets that are measured at fair value on a recurring basis and are categorized using the three levels of fair value hierarchy:

 

March 31, 2012    Total     

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

    

Significant Other
Observable
Inputs

(Level 2)

     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Money market funds

   $ 284       $ 284       $       $   

Available-for-sale investments:

           

EETC

     5                         5   

Interest rate swaps

     27                 27           

Total

   $ 316       $ 284       $ 27       $ 5   

 

 

 

December 31, 2011    Total     

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

    

Significant Other
Observable
Inputs

(Level 2)

    

Significant
Unobservable
Inputs

(Level 3)

 

Assets

           

Money market funds

   $ 218       $ 218       $       $   

Available-for-sale investments:

           

EETC

     5                         5   

Interest rate swaps

     29                 29           

Total

   $ 252       $ 218       $ 29       $ 5   

 

 

Money market funds. Money market funds are valued using a market approach based on the quoted market prices of identical instruments.

 

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Enhanced Equipment Trust Certificate (EETC). The fair value of our EETC is derived using cash flows discounted at market yield derived from trading prices for comparable debt securities. Unrealized gains (losses) are recorded in Accumulated Other Comprehensive Income (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 three months ended March 31:

 

2012

   Fair Value
Beginning
of Year
     Realized
Gains
Included
in  Income
     Accumulated
Other
Comprehensive
Income/(Loss)
     Settlements      Transfers
In/(Out)
     Fair Value
at End of
Period
 

Assets

                 

EETC

   $ 5       $       $       $       $       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5       $       $       $       $       $ 5   

 

 

2011

                 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Assets

                 

EETC

   $ 5       $       $       $       $       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5       $       $       $       $       $ 5   

 

 

We value the EETC on a recurring basis using a valuation technique of contractual cash flows discounted using the bond yield of a debt security with similar coupon and maturity, which is considered an unobservable input. As of March 31, 2012 the yield of 2.99% was used, having an inverse relationship to the fair value of the EETC.

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 three months ended March 31, and the fair value and asset classification of the related assets as of the impairment date:

 

      2012      2011  
      
 
Fair
Value
  
  
    
 
Total
Losses
  
  
    
 
Fair
Value
  
  
    
 
Total
Losses
  
  

Assets

           

Equipment under operating leases

     $12         $(2)         $43         $(5)   

Assets held for sale or re-lease

     13         (12)         8         (4)   

Total

     $25         $(14)         $51         $(9)   

 

 

When an asset is determined to be impaired, the amount of the asset impairment expense recorded is the excess of the carrying value less the fair value of the asset reduced by the consideration of asset value guarantees we hold, if applicable. The fair value of the impaired asset is derived by calculating a median collateral value from a consistent group of third party aircraft value publications. The values provided by the third party aircraft value publications are derived from their knowledge of market trades or other market factors taking into account estimated revenues and costs to operate the aircraft. Management reviews the publications quarterly to assess their continued appropriateness and consistency with market trends. The responsibility of these reviews resides principally within our risk management group. Under certain circumstances, we adjust values based on the attributes and condition of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by outside publications, or based on the expected net sales price for the aircraft.

 

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For level 3 assets that were measured at fair value on a non-recurring basis during the three months ended March 31, 2012, the following table presents the fair value of those assets as of the measurement date, valuation techniques and related unobservable inputs of those assets.

 

      Fair Value    Valuation
Techniques
     Unobservable
Input
     Quantitative
Inputs Used
 

Equipment under operating leases & Assets held for sale or re-lease

   $25      Market approach        
 
Aircraft value
publications
  
  
    

 

$24 - $53(1)

Median $35

  

  

          
 
Aircraft condition
adjustments
  
  
    
 
$(10) - $0(2)
Net $(10)
 
  
   

 

(1)   

The range represents the sum of the highest and lowest values for all aircraft subject to fair value measurement, according to the third party aircraft valuation publications that we use in our valuation process.

 

(2)   

The negative amount represents the sum for all aircraft subject to fair value measurement, of all downward adjustments based on consideration of individual aircraft attributes and condition. The positive amount represents the sum of all such upward adjustments.

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:

 

      March 31, 2012     December 31, 2011  
     Carrying        Fair Value                  Carrying         Fair   
     Value       
 
Level
1
  
  
    Level 2        Value         Value   
   

Assets

           

Notes and other

     $      552 (1)    $        $     611        $  594(1)       $ 639   

Liabilities

           

Debt, excluding capital lease obligations

     $(2,582)      $        $(2,717     $(3,357)       $ (3,497
                                           

 

(1)   

At March 31, 2012 and December 31, 2011, net of allowance for losses of $25 and $27.

Items not included in the above disclosure are cash (Level 1), time deposits (Level 2), and accounts payable (Level 2). The carrying value of those items approximate their fair value at March 31, 2012 and December 31, 2011 as reflected in the Consolidated Balance Sheets.

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

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

Debt. The fair value of our debt that is actively traded in the secondary market is classified as a level 2 valuation and is based on current market yields. For our debt that is not actively traded in the secondary market, the fair value is classified as a level 2 valuation and is estimated using discounted cash flows analysis using our indicative borrowing cost derived from dealer quotes.

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

 

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Note 8 – 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:

 

      March 31, 2012     December 31, 2011  
      Carrying
Value
     % of Total
Portfolio
    Carrying
Value
     % of Total
Portfolio
 

AirTran/Southwest

     $1,245         29.8   $ 1,261         29.2%   

Continental

     408         9.8        415         9.6     

Hawaiian

     406         9.7        374         8.7     

American

     322         7.7        350         8.1     

Korean

     155         3.8        159         3.7     
     $2,536         60.8   $ 2,559         59.3%   

 

 

For the three months ended March 31, 2012 and 2011, AirTran Holdings, Inc., a wholly owned subsidiary of Southwest Airlines Co., accounted for 17% and 21% of our revenue.

Portfolio carrying values were represented in the following regions:

 

      March 31, 2012     December 31, 2011  
      
 
Carrying
Value
  
  
    
 
% of Total
Portfolio
  
  
   
 
Carrying
Value
  
  
    
 
% of Total
Portfolio
  
  

United States(1)

     $3,083         73.9     $3,186         73.8%   

Europe

     672         16.1        693         16.1     

Asia/Australia

     228         5.5        241         5.6     

Latin America

     77         1.8        79         1.8     

Other

     114         2.7        116         2.7     
     $4,174         100.0     $4,315         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:

 

      March 31,
2012
     December 31,
2011
 

717

   $ 1,974       $ 2,001   

757

     598         631   

737

     383         408   

MD-11

     303         311    

767

     292         316   

747

     219         225   

MD-80

     171         171   

777

     125         134   

Other(1)

     109         118   
   $ 4,174       $ 4,315   

 

 

 

(1)  

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.

 

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Our aircraft portfolio by vintage, based on carrying value (excluding investments and pooled assets), are categorized as follows:

 

      March 31,
2012
    December 31,
2011
 

2007 and newer

     3.5     3.5%   

2002 – 2006

     45.5        45.3     

1997 – 2001

     39.3        38.8     

1996 and older

     11.7        12.4     
     100.0     100.0%   

 

 

Note 9 – Discontinued Operations

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

Part of the purchase and sale agreement with GECC includes a loss sharing arrangement for losses that may exist at the end of the initial and subsequent financing periods of the transferred portfolio assets, or in some instances, prior to the end of the financing period. Such losses may result from asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. The loss sharing arrangement provides that cumulative net losses (if any) are to be shared between us and GECC. The provisions effectively limit our exposure to any losses to $245. At March 31, 2012, our maximum future cash exposure to loss associated with the loss sharing arrangement was $205, for which we have accrued a liability of $46.

The following table reconciles the reserve under the loss sharing arrangement, which is included in Other liabilities for the three months ended March 31:

 

      2012     2011  

Reserve at beginning of period

   $ 53      $ 82   

Increase in reserve

            3   

Payments to GECC

     (7       

Reserve at end of period

   $ 46      $ 85   

 

 

 

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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 March 31, 2012, and the related condensed consolidated statements of comprehensive income, shareholder’s equity, and cash flows for the three-month periods ended March 31, 2012 and 2011. 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, 2011, 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, 2012, 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, 2011 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

April 25, 2012

 

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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,” “should,” “expects,” “intends,” “projects,”, “plans,” “believes,” “estimates,” “targets,” “anticipates” and similar expressions are used to identify these forward-looking statements. Examples of forward-looking statements include statements relating to our future financial condition and operating results, future portfolio size, amounts of new aircraft financing, future levels of indebtedness and debt-to-equity ratios, the outcome of contingencies as well as any other statement that does not directly relate to any historical or current fact.

Forward-looking statements are based on our current expectations and assumptions, which may not prove to be accurate. These statements are not guarantees 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 risks related to:

 

   

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, restructurings or mergers and acquisitions 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, which can be affected by a number of factors, including global economic conditions, economic and monetary crises, legislative and regulatory changes, and availability of and policies regarding governmental export finance support;

 

   

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, fluctuations in our portfolio size and changes in interest rates.

Additional information concerning these and other factors can be found in our filings with the Securities and Exchange Commission (SEC), including the “Risk Factors” on pages 3 through 5 of our most recent Annual Report on Form 10-K, Item 1A. “Risk Factors,” “Management’s Narrative Analysis of the Results of Operations” and Note 6 to our condensed Financial Statements included in this report and our Current Reports on Form 8-K. Any forward-looking statement herein 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 three months ended March 31, 2012, we continued to focus on supporting Boeing’s major businesses and managing our overall financial exposures.

Sources of financing continued to be sufficient for aircraft deliveries and as a result we provided no financing for Boeing aircraft deliveries during the first quarter of 2012.

At March 31, 2012, our portfolio consisted of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. At March 31, 2012, we owned 225 commercial aircraft and had partial ownership or security interest in an additional 50 aircraft. Our portfolio at March 31, 2012 decreased to $4.2 billion from $4.3 billion at December 31, 2011. The following table summarizes the net change in our total portfolio:

 

(Dollars in millions)   

Three Months Ended
March 31,

2012

    Year Ended
December 31,
2011
 

New business volume

   $ 3      $ 239   

Write-offs

            (11

Transfer of assets

     6          

Asset impairment and other charges

     (15     (117

Asset run off and prepayments

     (92     (257

Asset dispositions

     (9     (82

Depreciation and amortization expense

     (34     (151

Net change in portfolio balance

   $ (141   $ (379

 

 

At March 31, 2012 and December 31, 2011, we had $510 million and $521 million of assets that were held for sale or re-lease, of which $402 million and $476 million had either executed term sheets with deposits or firm contracts to be sold or placed on lease. Additionally, aircraft subject to leases with a carrying value of approximately $89 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 $24 million for the three months ended March 31, 2012 compared with $31 million for the same period in 2011, a decrease of $7 million.

Consolidated Results of Operations

Revenue

Revenue was $125 million for the three months ended March 31, 2012 compared with $143 million for the same period in 2011, a decrease of $18 million.

Finance lease income was $21 million for the three months ended March 31, 2012, a decrease of $14 million compared with the same period in 2011, primarily due to lower negotiated rents on certain finance leases.

Interest income on notes receivables was $11 million for the three months ended March 31, 2012, an increase of $3 million compared with the same period in 2011, primarily due to higher weighted average notes receivable balance partially offset by a decrease in the weighted average effective interest rate during the three months ended March 31, 2012.

Operating lease income was $69 million for the three months ended March 31, 2012, a decrease of $21 million compared with the same period in 2011, primarily due to a decrease in the equipment under operating leases as a result of the return of 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 $12 million and $16 million less than reported, for the three months ended March 31, 2012 and 2011. For a discussion of our relationship with Boeing, see Item 1. Financial Statements, Note 2 – Transactions with Boeing.

 

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Other income was $24 million for the three months ended March 31, 2012, an increase of $19 million compared with the same period in 2011, primarily due to higher aircraft maintenance reserves taken to income from expired leases.

Expenses

Expenses were $87 million for the three months ended March 31, 2012 compared with $91 million for the same period in 2011, a decrease of $4 million.

Interest expense was $28 million for the three months ended March 31, 2012, a decrease of $5 million compared with the same period in 2011, primarily due to a decrease in the weighted average effective interest rate and in the weighted average balance of debt outstanding as a result of scheduled debt repayments.

Depreciation expense was $34 million for the three months ended March 31, 2012, a decrease of $8 million compared with the same period in 2011, primarily due to a lower depreciable balance of equipment as a result of asset dispositions.

The recovery of losses was $3 million for the three months ended March 31, 2012, compared with a recovery of $6 for the same period in 2011. The decrease in our allowance through a recovery of losses for the three months ended March 31, 2012 was due to the effect of run-off of our finance leases offset by declines in aircraft collateral value.

Asset impairment expense was $14 million for the three months ended March 31, 2012, an increase of $5 million compared with the same period in 2011. The asset impairment expense during the first three months of 2012 was primarily due to a reduction in expected sales price of certain aircraft.

Provision for income tax

Provision for income tax was $14 million for the three months ended March 31, 2012, a decrease of $5 million compared with the same period in 2011, 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 $2 million for the three months ended March 31, 2011 due to an increase in our expected losses from claims associated with specific assets subject to the loss sharing agreement with General Electric Capital Corporation related to the sale of certain assets of our Commercial Financial Services business in 2004.

Liquidity and Capital Resources

Our cash and cash equivalents balance was $399 million at March 31, 2012, a decrease from $941 million at December 31, 2011. The following is a summary of the change in our cash and cash equivalents for the three months ended March 31:

 

(Dollars in millions)    2012     2011  

Net cash provided by (used in) operating activities

   $ (18   $ 25   

Net cash provided by investing activities

     295        707   

Net cash used in financing activities

     (819     (977

Net decrease in cash and cash equivalents

   $ (542   $ (245

 

 

Operating activities

During the three months ended March 31, 2012, net cash used in operating activities included net income from operations of $24 million. We had net adjustments for non-cash items of $32 million, which primarily related to depreciation expense and asset impairment expense, partially offset by a reduction in deferred income taxes. We also had a net decrease in cash due to changes in assets and liabilities of $74 million.

 

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During the three months ended March 31, 2011, net cash provided by operating activities included net income from operations of $31 million. We had net adjustments for non-cash items of $22 million, which primarily related to depreciation expense. We also had a net decrease in cash due to changes in assets and liabilities of $28 million.

Investing activities

During the three months ended March 31, 2012, net cash provided by investing activities primarily included net proceeds of $200 million from short-term investment maturities and payments of leases, notes and other receivables of $92 million.

During the three months ended March 31, 2011, net cash provided by investing activities primarily included net proceeds of $600 million from short-term investment maturities and payments of leases, notes and other receivables of $82 million.

Financing activities

During the three months ended March 31, 2012 and 2011, we made debt repayments of $774 million and $786 million and paid dividends (including return of capital) of $45 million and $191 million.

Outstanding debt at March 31, 2012 and December 31, 2011 was $2.6 billion and $3.4 billion, of which $708 million will be due in the next 12 months. During the three months ended March 31, 2012, we had no commercial paper borrowings outstanding. Our leverage (ratio of Debt to Shareholder’s equity) at March 31, 2012 and December 31, 2011 was 5.1-to-1 and 6.3-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 $19.6 billion as of March 31, 2012. We anticipate that we will not be required to fund a significant portion of our financing commitments as we continue to work with third party financiers to provide alternative financing to customers. However, there can be no assurances that we will not be required to fund greater amounts than historically required. In addition, many of Boeing’s non-U.S. customers finance aircraft purchases through the Export-Import Bank of the United States. The bank’s charter is set to expire on May 31, 2012 and its authorized funding limit may be reached prior to that date. If the bank’s charter is not renewed or if the bank’s existing or future funding authority is insufficient to meet our customers’ needs, we may fund additional commitments and/or enter into new financing arrangements with customers.

On November 29, 2011, American Airlines filed for Chapter 11 bankruptcy protection. Some possible outcomes that may occur as a result of the bankruptcy could cause a significant amount of deferred taxes to be accelerated which may impact our near-term cash requirements.

We expect that any future liquidity 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 March 31, 2012, we have a Securities and Exchange Commission (SEC) shelf registration statement for issuance of debt securities. During the first quarter of 2012, we established under the registration statement a $1 billion medium-term notes program. We have not issued any securities under that program. The availability of funding pursuant to the medium-term note program otherwise under our SEC registration statement will depend on investor demand and market conditions.

We believe we have adequate borrowing capacity. We have a commercial paper program that continues to serve as a potential source of short-term liquidity. We have $1.5 billion available exclusively for us under Boeing’s committed revolving credit line agreements for general corporate purposes. We anticipate that these credit lines will primarily serve as backup liquidity to support possible commercial paper borrowings. 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 sources of 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, 2011.

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 three months ended March 31, 2012 and 2011. 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)  
2012    Allowance
for losses
    Impact of
intercompany
guarantees
from Boeing
    Allowance
excluding
intercompany
guarantees
 

Allowance for losses on receivables at beginning of period

   $ 53      $ 19      $ 72   

Recovery of losses

     (3            (3

Allowance for losses on receivables at end of period

   $ 50      $ 19      $ 69   

 

 

Allowance as a percentage of total receivables

     2.2       3.1

2011

        

Allowance for losses on receivables at beginning of period

   $ 87      $ 266      $ 353   

Recovery of losses

     (6     (9     (15

Allowance for losses on receivables at end of period

   $ 81      $ 257      $ 338   

 

 

Allowance as a percentage of total receivables

     3.7       15.4

 

(Dollars in millions)    (1)      (2)      (3)  
2012    Asset
impairment
expense
     Impact of
intercompany
guarantees
from Boeing
     Impairment
excluding
intercompany
guarantees
 

Asset impairment expense

   $ 14       $       $ 14   

 

 

2011

        

Asset impairment expense

   $ 9       $       $ 9   

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

 

(a)  

Disclosure Controls and Procedures

 

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Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures as of March 31, 2012 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)  

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the first quarter of 2012 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 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, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Immaterial Restatement

Subsequent to the issuance of our consolidated balance sheet as of December 31, 2011 we determined that it should have reflected Finance lease receivables of $1,727 million, as compared to the $1,739 million reported, and the difference of $12 million should have been reflected as a reduction in Finance lease income for the year ended December 31, 2011. In connection with the November 2011 bankruptcy filing by American Airlines, Inc. (American Airlines), certain lease payments by American Airlines beginning in May 2012, the first scheduled payments under the relevant leases since the bankruptcy filing, are required to be allocated exclusively to various non-recourse debt holders, at higher interest rates, until all such holders are paid in full, and only thereafter to us. The reallocation of payments required us to recalculate our investment in leveraged leases for the year ended December 31, 2011. This reallocation of payments does not affect amounts payable under these leases by American Airlines. The reallocation of payments also does not alter our expectation that we will not incur any losses related to American Airlines receivables as a result of the bankruptcy.

Management believes that the effect of this recalculation is not material to our previously issued consolidated financial statements for the year ended December 31, 2011. We will prospectively correct in our 2012 Annual Report on Form 10-K the previously presented consolidated balance sheet as of December 31, 2011 and the consolidated statement of operations, shareholder’s equity and comprehensive income, and cash flows for the year ended December 31, 2011.

 

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The impact on specific line items in the December 31, 2011 balance sheet, and the consolidated statement of operations and statement of cash flows for the year ended December 31, 2011 and certain disclosures in Note 3 of our Annual Report on Form 10-K are presented below (in millions):

 

      As of December 31, 2011  
Balance Sheet Items:    As Previously Reported      Restated  

Finance leases

   $ 1,739       $ 1,727   

Total receivables, gross of allowance

     2,360         2,348   

Total receivables, net of allowance

     2,307         2,295   

Total assets

     5,578         5,566   

Accounts with Boeing

     77         76   

Deferred income taxes

     1,236         1,232   

Total liabilities

     5,034         5,029   

Retained earnings

     15         8   

Shareholder’s equity

     544         537   

Total liabilities and shareholder’s equity

   $ 5,578       $ 5,566   

 

      Year ended December 31, 2011  
Statement of Operations Items:    As Previously Reported      Restated  

Finance lease income

   $ 125       $ 113   

Total revenue

     532         520   

Income from continuing operations before provision for income tax

     123         111   

Provision for income tax

     45         40   

Income from continuing operations

     78         71   

Net income

   $ 83       $ 76   

 

      Year ended December 31, 2011  
Statement of Cash Flows Items:    As Previously Reported     Restated  

OPERATING ACTIVITIES

    

Net income

   $ 83      $ 76   

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

    

Non-cash items:

    

Asset impairment expense and other charges

     105        117   

Decrease in deferred income taxes

     (135     (139

Changes in assets and liabilities:

    

Accounts with Boeing

   $ 9      $ 8   

Scheduled minimum lease payments on Finance leases as previously reported in Note 3 of our 2011 Annual Report on Form 10-K and as restated are as follows for the years ended December 31:

 

As Previously Reported    2012      2013      2014      2015      2016      Thereafter  

Finance leases (1)

   $ 292       $ 244       $ 178       $ 172       $ 174       $ 837   
Restated    2012      2013      2014      2015      2016      Thereafter  

Finance leases (1)

   $ 266       $ 229       $ 170       $ 170       $ 170       $ 910   

 

(1)  

Includes both direct finance leases and leveraged leases (less principal and interest payable on non-recourse debt).

 

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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.
  Exhibit 101.INS       XBRL Instance Document
  Exhibit 101.SCH       XBRL Taxonomy Extension Schema Document
  Exhibit 101.CAL       XBRL Taxonomy Extension Calculation Linkbase Document
  Exhibit 101.DEF       XBRL Taxonomy Extension Definition Linkbase Document
  Exhibit 101.LAB       XBRL Taxonomy Extension Label Linkbase Document
  Exhibit 101.PRE       XBRL Taxonomy Extension Presentation Linkbase Document

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

April 25, 2012

 

/s/ KELVIN E. COUNCIL

 

Kelvin E. Council

Vice President and Chief Financial Officer

(Principal Financial Officer) and Registrant’s

Authorized Officer

April 25, 2012

 

/s/ KEVIN J. MURPHY

 

Kevin J. Murphy

Controller (Principal Accounting Officer)

 

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