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United States
Securities and Exchange Commission
--------------------------------
Washington, D.C. 20549
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Form 10-Q
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
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
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BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584
State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 Naches Ave., SW, 3rd Floor - Renton, Washington 98055
(Address of principal executive offices)
(425) 393-2914
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Common shares outstanding at August 12, 2002: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
to Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
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Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.......................................................................3
Consolidated Statements of Income.................................................................4
Consolidated Statements of Shareholder's Equity and Comprehensive Income..........................5
Consolidated Statements of Cash Flows.............................................................6
Notes to Consolidated Financial Statements........................................................8
Item 2. Management's Narrative Analysis of Results of Operations.........................................18
Part II Other Information
Item 1. Legal Proceedings................................................................................22
Item 5. Other Information................................................................................22
Item 6. Exhibits and Reports on Form 8-K.................................................................26
Signatures .....................................................................................................27
Part I
Item 1. Financial Statements
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in millions, except stated value and par value) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 91.2 $ 400.2
Receivables:
Financing leases 4,199.5 3,670.1
Notes and other receivables 2,802.4 2,121.2
------------------------------------
7,001.9 5,791.3
Allowance for losses on receivables (148.3) (139.5)
------------------------------------
6,853.6 5,651.8
Equipment under operating leases, net of accumulated depreciation 3,181.8 2,786.0
Investments 504.0 169.4
Equipment held for sale or re-lease, net of accumulated depreciation 457.1 415.2
Accounts due from Boeing and BCSC - 139.5
Other assets 398.3 260.8
------------------------------------
$ 11,486.0 $ 9,822.9
====================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses $ 100.5 $ 129.4
Accounts due to Boeing and BCSC 191.7 -
Other liabilities 238.7 220.2
Deferred income taxes 964.8 807.5
Debt:
Senior 8,357.0 7,271.2
Subordinated 24.0 24.1
------------------------------------
9,876.7 8,452.4
------------------------------------
Commitments and contingencies - Note 9
Shareholder's equity:
Preferred stock - no par value; authorized 100,000 shares: Series A;
$5,000 stated value; no shares issued and outstanding at June 30, 2002,
10,000 shares issued and outstanding at
December 31, 2001 - 50.0
Common stock - $100 par value; authorized 100,000
shares; issued and outstanding 50,000 shares 5.0 5.0
Capital in excess of par value 1,001.8 803.8
Accumulated other comprehensive loss, net of tax (15.1) (19.1)
Income retained for growth 617.6 530.8
------------------------------------
1,609.3 1,370.5
------------------------------------
$ 11,486.0 $ 9,822.9
====================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
REVENUES
Finance lease income $ 76.3 $ 66.3 $ 149.0 $ 103.9
Interest income on notes receivable 56.2 31.1 103.5 63.3
Operating lease income 98.9 82.3 192.7 162.0
Investment income 10.7 6.0 18.6 9.6
Net gain on disposal 5.5 25.6 6.5 28.2
Other 6.0 22.2 11.5 27.9
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253.6 233.5 481.8 394.9
-------------------------------------------------------------------
EXPENSES
Interest expense 98.7 91.9 189.1 165.6
Depreciation expense 50.8 36.3 97.4 69.4
Provision for losses 9.1 3.3 17.4 6.1
Operating expenses 14.8 11.5 27.5 21.3
Other 7.4 3.1 12.0 4.9
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180.8 146.1 343.4 267.3
-------------------------------------------------------------------
Income before provision for income taxes 72.8 87.4 138.4 127.6
Provision for income taxes 26.5 31.8 49.9 46.3
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Net income $ 46.3 $ 55.6 $ 88.5 $ 81.3
===================================================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity and Comprehensive Income
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Capital in Other Income
Preferred Common Excess of Comprehensive Retained Comprehensive
Stock Stock Par Value Income(Loss) for Growth Income
(Dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 50.0 $ 5.0 $ 234.5 $ - $ 382.6 $ -
-------------------------------------------------------------------=================
Capital contributions from Boeing - - 569.3 - -
Net income - - - - 151.7 $ 151.7
Cash dividend declared - - - - (3.5) -
Cumulative effect of accounting change,
net of tax of $3.3 million - - - (5.9) - (5.9)
Unrealized loss on derivative instruments,
net of tax of $0.2 million - - - (0.4) - (0.4)
Unrealized loss on investments,
net of tax of $7.2 million - - - (12.8) - (12.8)
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Balance at December 31, 2001 $ 50.0 $ 5.0 $ 803.8 $ (19.1) $ 530.8 $ 132.6
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Preferred stock redemption (50.0) - - - -
Capital contributions from Boeing and BCSC - - 198.0 - -
Net income - - - - 88.5 $ 88.5
Cash dividends declared - - - - (1.7) -
Unrealized gain on derivative instruments,
net of tax of $0.1 million - - - 0.2 - 0.2
Unrealized gain on investments,
net of tax of $1.7 million - - - 3.8 - 3.8
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Balance at June 30, 2002 $ - $ 5.0 $ 1,001.8 $ (15.1) $ 617.6 $ 92.5
====================================================================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
----------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(Dollars in millions) 2002 2001
----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 88.5 $ 81.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 100.5 71.7
Net gain on disposal (6.5) (28.2)
Provision for losses 17.4 6.1
Deferred executive compensation 3.1 -
Deferred income taxes 145.8 181.3
Change in assets and liabilities:
Accrued interest on notes receivable (3.1) (23.6)
Accrued interest on investments (17.6) (7.6)
Accounts with Boeing and BCSC 203.4 65.3
Other assets (138.9) (128.2)
Accounts payable and accrued expenses (29.5) 26.9
Other liabilities 18.5 28.9
Other, net 42.1 (2.2)
-------------------------------------
423.7 271.7
-------------------------------------
INVESTING ACTIVITIES
Net change in short-term leases, notes and other receivables 28.8 65.2
Transfer of net assets from Boeing (22.3) (859.5)
Purchase of available-for-sale investments (321.9) (3.0)
Principal reduction on available-for-sale investments 6.4 0.2
Principal reduction on held-to-maturity investments 8.3 4.5
Purchase of equipment for operating leases (425.5) (351.5)
Proceeds from disposition of equipment and receivables 56.3 88.7
Collection of leases, notes and other receivables 300.1 429.2
Origination of leases, notes and other receivables (1,280.6) (1,100.9)
-------------------------------------
(1,650.4) (1,727.1)
-------------------------------------
FINANCING ACTIVITIES
Net change in commercial paper and short-term bank debt 296.4 (504.1)
Intercompany debt issuance for transfer of net assets from Boeing - 395.6
Proceeds from issuance of debt 973.4 2,050.0
Repayment of debt (349.8) (621.9)
Payment of cash dividends (2.3) (1.8)
Capital contributions from Boeing - 191.2
-------------------------------------
917.7 1,509.0
-------------------------------------
Net increase/(decrease) in cash and cash equivalents (309.0) 53.6
Cash and cash equivalents at beginning of year 400.2 48.6
-------------------------------------
Cash and cash equivalents at end of period $ 91.2 $ 102.2
=====================================
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows, continued
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(Dollars in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of receivables (See Note 1) $(352.1) $ -
====================================
Addition to available-for-sale investments $ (5.0) $ -
====================================
Transfer of accounts with Boeing and BCSC $ 91.8 $ -
====================================
Assumption of debt (See Note 1) $ 115.3 $ -
====================================
Mark-to-market on underlying debt $ 52.2 $ 8.6
====================================
Transfer of net assets from Boeing $ (44.9) $ -
====================================
Capital contributions from Boeing and BCSC (See Note 1) $ 198.0 $ -
====================================
- -----------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(Dollars in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE FOR TRANSFER OF NET ASSETS
FROM BOEING:
Receivables $ (71.8) (859.5)
Allowance for losses on receivables 2.1 -
Accounts with Boeing and BCSC (9.0) -
Deferred income taxes 11.5 -
------------------------------------
Transfer of net assets from Boeing $ (67.2) (859.5)
====================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
Note 1 -- General
Boeing Capital Corporation (the "Company") is an indirect wholly owned
subsidiary of The Boeing Company ("Boeing"). The accompanying unaudited
consolidated financial statements have been prepared by the Company 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 footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of the Company, the accompanying consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) that are
necessary to present fairly the consolidated balance sheets and the related
consolidated statements of income, shareholder's equity and comprehensive income
and cash flows for the interim periods presented. Operating results for the
six-month period ended June 30, 2002, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. The
statements should be read in conjunction with the Notes to the Consolidated
Financial Statements included in the Company's Form 10-K for the year ended
December 31, 2001, which contains the latest available audited consolidated
financial statements and notes thereto.
The Company's primary operations include two principal financial reporting
segments: Aircraft Financial Services and Commercial Financial Services. The
Company's portfolio consists of financing leases, notes and other receivables,
equipment under operating leases (net of accumulated depreciation), investments
and equipment held for sale or re-lease (net of accumulated depreciation).
In the second quarter of 2002, Boeing Capital Services Corporation ("BCSC"), an
indirect wholly owned subsidiary of Boeing and parent of the Company,
transferred 100% of the outstanding shares of its four other wholly owned
subsidiaries to the Company for $67.2 million. The Company received an equity
contribution of $44.9 million from BCSC and paid for the remaining balance of
$22.3 million in cash. This transfer was recorded in the Company's financial
statements at book value and was not accounted for as new business volume.
In the second quarter of 2002, Boeing transferred certain equipment under
operating leases (net of accumulated depreciation) and associated liabilities to
the Company in the net amount of $71.6 million, which the Company paid for in
cash. This transfer was recorded in the Company's financial statements at book
value and was not accounted for as new business volume.
In the first quarter of 2002, a subsidiary of Boeing transferred certain notes
receivable secured by commercial aircraft in the amount of $241.8 million to the
Company. The amount was paid in the form of a promissory note to Boeing in the
aggregate principal amount of $241.8 million. Subsequently, $150.0 million of
this note was forgiven by Boeing in the form of equity contributions from Boeing
and the remaining $91.8 million was paid in cash. This transfer was recorded in
the Company's financial statements at book value and was not accounted for as
new business volume.
In the first quarter of 2002, the Company acquired a note receivable secured by
commercial aircraft and assumed related debt each in the amount of $110.3
million. In connection with the acquisition of the note receivable, the Company
also received a specific reserve of $53.8 million from Boeing.
Certain reclassifications of previously reported amounts have been made in the
consolidated financial statements to conform to the 2002 presentation.
Note 2 -- Recent Accounting Pronouncements
In December 2001, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 01-6, "Accounting by Certain Entities (Including Entities
With Trade Receivables) That Lend to or Finance the Activities of Others." With
limited exception, SOP 01-6 applies to any entity that lends to or finances the
activities of others. This SOP provides specialized guidance for certain
transactions specific to financial institutions. Divergence in accounting
practices within the financial services industry for similar transactions has
resulted in the need for a reconciliation of the existing guidance. This SOP
reconciles and conforms, as appropriate, the accounting and financial reporting
guidance established by the American Institute of Certified Public Accountants.
SOP 01-6 is effective for annual and interim financial statements issued for
fiscal years beginning after December 15, 2001. The Company adopted SOP 01-6 on
January 1, 2002. The adoption of SOP 01-6 did not change any of the Company's
accounting policies, however certain additional financial statement disclosures
were required. Such disclosures have been included in the Notes to the
Consolidated Financial Statements as of and for the six months ended June 30,
2002.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that SFAS, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
Further, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or described their applicability under changed
conditions. This pronouncement requires gains and losses from extinguishment of
debt to be classified as an extraordinary item only if the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," have
been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material impact on the
Company's consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires costs associated with
exit or disposal activities to be recognized when they are incurred, and applies
prospectively to such activities that are initiated after December 31, 2002.
Note 3 -- Portfolio Quality
- ------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Receivables:
Financing leases $ 4,199.5 3,670.1
Notes and other receivables 2,802.4 2,121.2
---------------------------------------
7,001.9 5,791.3
Equipment under operating leases, net of accumulated depreciation 3,181.8 2,786.0
Investments 504.0 169.4
Equipment held for sale or re-lease, net of accumulated depreciation 457.1 415.2
---------------------------------------
$ 11,144.8 $ 9,161.9
=======================================
Nonearning Assets
Nonaccrual receivables $ 97.7 $ 163.0
Nonearning equipment under operating leases, net of accumulated
depreciation 46.8 73.7
Equipment held for sale or re-lease, net of accumulated depreciation 457.1 415.2
---------------------------------------
$ 601.6 $ 651.9
=======================================
Ratio of nonaccrual receivables to total receivables 1.4% 2.8%
Ratio of total nonearning assets to total portfolio 5.4% 7.1%
At June 30, 2002 and December 31, 2001, receivables greater than 90 days past
due with income still accruing were $86.1 million and $33.8 million,
respectively. For the six months ended June 30, 2002, the Company received cash
of $3.6 million related to the aforementioned receivables.
Note 4 -- Analysis of Allowance for Losses on Receivables
- ------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Allowance for losses on receivables at beginning of year $ 139.5 $ 136.4
Provision for losses 17.4 36.3
Write-offs, net of recoveries (10.7) (36.5)
Allowance transferred from Boeing 2.1 3.3
------------------------------------
Allowance for losses on receivables at end of period $ 148.3 $ 139.5
====================================
Allowance as percent of total receivables 2.1% 2.4%
Net write-offs as percent of average receivables 0.2% 0.8%
More than 90 days delinquent:
Amount of delinquent installments $ 22.0 $ 24.5
Total receivables due from delinquent obligors 135.6 156.1
Total receivables due from delinquent obligors
as percent of total receivables 1.9% 2.7%
Receivable Write-offs, Net of Recoveries, by Segment
- ------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services $ 2.6 $ 8.8
Commercial Financial Services 8.1 27.7
------------------------------------
$10.7 $ 36.5
====================================
At June 30, 2002, the carrying amount of impaired notes and other receivables
was $200.3 million. Impaired notes are notes that the Company estimates it may
not be able to collect all amounts due according to the contractual terms of the
note agreement, excluding insignificant delays and shortfalls. A specific
impairment allowance for losses of $9.7 million was allocated for $43.0 million
of impaired notes and other receivables. A specific impairment allowance is
recorded for collateral dependent notes and other receivables based on the
difference between the estimated net fair value of the collateral and the
carrying value of the note and other receivables. As a result, 6.5% of the
Company's allowance for losses on receivables was allocated to specific
reserves. The remaining $138.6 million (93.5% of the allowance for losses on
receivables) is designated for general purposes and represents the Company's
best estimate of inherent losses in the remaining receivables considering
delinquencies, loss experience, collateral, guarantees, risk of individual
credits, results of periodic credit reviews and the general state of the economy
and airline industry. At June 30, 2002, the Company had $1,673.6 million of
guarantees principally from Boeing with respect to its portfolio relating to
transactions with a carrying amount of $3,770.9 million (33.8% of total Company
portfolio). At December 31, 2001, the carrying amount of impaired notes and
other receivables was $195.3 million. The specific impairment allowance for
losses at December 31, 2001 was $11.0 million for $55.3 million of impaired
notes and other receivables. Actual results could differ from estimates and
values, and there can be no assurance that the allowance for losses will be
sufficient to cover losses on receivables.
Receivables at June 30, 2002 included two airline obligors to which payment
extensions had been granted. At June 30, 2002, payments extended amounted to
$1.6 million, and the aggregate carrying amount of the related receivables was
$182.9 million.
Note 5 -- Investments
Investments deemed available-for-sale and recorded at estimated fair value were
$344.0 million and $9.2 million at June 30, 2002 and December 31, 2001,
respectively. Investments in securities deemed held-to-maturity and recorded at
amortized cost were $158.8 million and $159.0 million at June 30, 2002 and
December 31, 2001, respectively.
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
pricing models or quoted market prices of comparable instruments.
Available-for-sale and held-to-maturity investments consisted of the following:
- ------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(Dollars in millions) Cost Gain Loss Fair Value
- ------------------------------------------------------------------------------------------------------------------
June 30, 2002
Available-for-Sale:
Equity $ 4.9 $ 1.6 $ (2.8) $ 3.7
Debt(1) 334.2 7.3 (1.2) 340.3
Held-to-Maturity:
Debt(1) 158.8(2) 4.7 (73.1) 90.4
----------------------------------------------------------------------------------
$ 497.9 $ 13.6 $ (77.1) $ 434.4
==================================================================================
December 31, 2001
Available-for-Sale:
Equity $ 4.9 $ 1.6 $ (1.9) $ 4.6
Debt(1) 4.2 0.4 - 4.6
Held-to-Maturity:
Debt(1) 159.0 - (53.3) 105.7
----------------------------------------------------------------------------------
$ 168.1 $ 2.0 $ (55.2) 114.9
==================================================================================
(1) Primarily consists of pass-through trust certificates, commonly known as
enhanced equipment trust certificates ("EETC's"), equipment trust
certificates and other trust-related interests.
(2) Of the $158.8 million at June 30, 2002, the Company has $66.0 million in
guarantees from Boeing and $1.7 million in guarantees from a third party.
At December 31, 2001, an available-for-sale security was transferred to
held-to-maturity at its fair value with $20.1 million of unrealized loss
recorded as a component of accumulated other comprehensive income/loss. As of
June 30, 2002, $0.7 million of that $20.1 million unrealized loss was amortized
from accumulated other comprehensive income/loss to other income.
In addition, the Company held an equity security accounted for under the cost
method of $1.2 million at June 30, 2002 and December 31, 2001, which was
recorded in investments and approximated the fair value of that investment.
At June 30, 2002, maturities of debt investments are as follows:
- -----------------------------------------------------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
(Dollars in millions) Cost Fair Value Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
Due in less than one year $ - $ - $ - $ -
Due from one to five years 325.4 331.5 3.2 1.6
Due from six to ten years 5.0 5.0 - -
Due after ten years 3.8 3.8 155.6 88.8
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
$ 334.2 $ 340.3 $ 158.8 $ 90.4
====================================================================================
Note 6 -- Debt and Credit Agreements
- ----------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Senior debt:
Commercial paper $ 339.8 $ 43.4
Variable rate (three-month LIBOR plus 0.06%) note due 2012 5.0 -
Variable rate (three-month LIBOR plus 0.09%) note due 2002 472.9 499.6
5.65% note due 2006 1,017.8 1,002.9
5.75% note due 2007 745.2 737.2
6.10% note due 2011 765.8 754.2
6.50% note due 2012 737.2 725.0
7.10% note due 2005 498.8 498.6
7.375% note due 2010 527.2 519.4
Non-recourse variable rate (one-month LIBOR plus 1.1%)
note due 2012 44.7 45.3
13.84% - 14.28% Secured notes due through 2003, including
a premium based on an imputed interest rate of 6.10% 10.5 14.2
3.90% - 6.75% Retail medium-term notes due through 2017 211.7 -
1.92% - 7.64% Medium-term notes due through 2017 2,607.3 2,039.2
Capital lease obligations due through 2008 373.1 392.2
------------------------------------------
8,357.0 7,271.2
Subordinated debt:
8.31% medium-term note due 2004 20.0 20.0
Non-recourse variable rate note due 2012 (one-month LIBOR
plus 2.46%) 4.0 4.1
------------------------------------------
24.0 24.1
------------------------------------------
$ 8,381.0 $ 7,295.3
==========================================
On February 16, 2001, the Company filed with the Securities and Exchange
Commission ("SEC") a Form S-3 Registration Statement for a public shelf
registration of $5.0 billion of debt securities. As of December 31, 2001, the
Company had received proceeds from the issuance of $3.25 billion, in aggregate,
of senior notes. Effective October 31, 2001, $1.0 billion was allocated to the
Company's Series XI medium-term note program. Effective June 20, 2002, the
remaining $750.0 million was allocated to the Company's Series XI medium-term
note program. As of the filing date hereof, an aggregate amount of $1.0 billion
remains available under the Series XI medium-term program for potential debt
issuance.
On February 22, 2002, the Company filed with the SEC a Form S-3 Registration
Statement for a public shelf registration of $5.0 billion of debt securities,
which was declared effective on March 4, 2002. The Company allocated $1.0
billion to a new retail medium-term note program involving the sale of notes
with a minimum denomination of $1,000. As of the filing date hereof, an
aggregate amount of $4.1 billion remains available under this Registration
Statement for potential debt issuance which takes into account the $600.0
million issuance on July 25, 2002 of the Company's 5.80% senior notes due 2013.
On June 6, 2002, the Company established a $1.5 billion Euro medium-term note
program. As of the filing date hereof, the full amount remains available for
potential debt issuance.
The provisions of the most restrictive debt covenant prohibit the payment of
cash dividends by the Company to the extent that the Company's consolidated
assets would be less than 115% of its consolidated liabilities (excluding
deferred taxes) after dividend payments. At June 30, 2002, as well as during the
period, the Company was in compliance with all its debt covenants.
As of November 23, 2001, $2.0 billion of Boeing's 364-day revolving credit line
was made exclusively available to the Company. At June 30, 2002, there were no
amounts outstanding under this agreement.
Note 7 -- Preferred Stock
In the second quarter of 2002, the Company redeemed all 10,000 outstanding
shares of its Series A Preferred Stock at a price of $5,000 per share, which is
the stock's stated value, plus accrued and unpaid dividends. The Series A
Preferred Stock was owned entirely by BCSC.
Note 8 -- Derivative Financial Instruments
As adopted January 1, 2001, the Company accounts for derivatives pursuant to
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. This standard requires that all derivative instruments be recognized in
the financial statements and measured at fair value regardless of the purpose or
intent for holding them.
The Company is exposed to a variety of market risks, including the effects of
changes in interest rates. This exposure is managed, in part, with the use of
derivatives. Interest rate swap contracts are entered into with a number of
major financial institutions in order to minimize counterparty credit risk. The
Company generally does not require collateral or other security supporting
derivative contracts with its counterparties. The Company believes that it is
unlikely that any of its counterparties will be unable to perform under the
terms of derivative financial instruments. The following is a summary of the
Company's risk management strategies and the effect of these strategies on the
consolidated financial statements.
Fair Value Hedges
Interest rate swaps under which the Company agrees to pay variable rates of
interest are designated as fair value hedges of fixed-rate debt. The Company
also holds forward-starting interest rate swap agreements to fix the cost of
funding a firmly committed lease for which payment terms are determined in
advance of funding. This hedge relationship mitigates the changes in fair value
of the hedged portion of the firm commitment caused by changes in interest
rates. The net change in fair value of the swap and the hedged portion of the
firm commitment is reported in earnings.
For the six months ended June 30, 2002 and 2001, $1.6 million and $3.1 million,
respectively, of losses related to the basis adjustment of certain terminated
interest rate swaps and ineffectiveness due to the forward-starting interest
rates swaps were recorded in other income.
Cash Flow Hedges
Cash flow hedges used by the Company include certain interest rate swaps.
Interest rate swap contracts under which the Company agrees to pay fixed rates
of interest are designated as cash flow hedges of variable-rate debt
obligations. As of June 30, 2002 and December 31, 2001, net unrecognized losses
of $9.5 million ($6.0 million net of tax) and $9.8 million ($6.3 million net of
tax), respectively, were recorded in accumulated other comprehensive income/loss
associated with the Company's cash flow hedging transactions. Of these amounts,
a net unrecognized loss of $9.2 million ($5.9 million net of tax) was due to the
Company's transition adjustment upon implementation of SFAS No. 133, at January
1, 2001.
For the six months ended June 30, 2002 and 2001, unrecognized losses (net of
tax) included in accumulated other comprehensive income/loss of $0.3 million and
$0.8 million, respectively, were reclassified to other income. During the next
twelve months, the Company expects to reclassify to other income a loss (net of
tax) of $0.5 million from the amount recorded in accumulated other comprehensive
income/loss.
Non-hedging Derivative Instruments
The Company holds interest exchange agreements and related interest rate swaps.
The intent of these interest rate swaps is to economically hedge the exposures
created by the interest exchange agreements. However, because the exposures
being hedged are derivative instruments, this relationship does not qualify for
hedge accounting. As a result, changes in fair value of both instruments are
immediately recognized in income. For the six months ended June 30, 2002 and
2001, the interest exchange agreements resulted in gains of $1.1 million and
$1.4 million, respectively, and the related interest rate swaps resulted in
losses of $2.2 million and $2.3 million, respectively. For the six months ended
June 30, 2002 and 2001, unrecognized losses (net of tax) of $0.5 million and
$0.1 million, respectively, from accumulated other comprehensive income/loss and
gains of $2.1 million and $1.7 million, respectively, from the basis adjustment
to underlying liabilities was amortized to other income. During the next twelve
months, the Company expects to amortize to other income a $0.9 million loss (net
of tax) from the amount recorded in accumulated other comprehensive income/loss
and a $3.4 million gain from the basis adjustment to underlying liabilities.
The Company received a conversion option on notes and warrants in connection
with a certain financing transaction. As of June 30, 2002 and December 31, 2001,
the conversion features of certain convertible debt and warrants were reflected
in other assets at their combined fair values of $9.4 million and $12.3 million,
respectively. The initial fair values of the conversion option on notes and
warrants were recorded as a discount to notes receivable of $19.9 million and
are being amortized to other income. For the six months ended June 30, 2002 and
2001, the Company amortized gains from the discount on notes receivable to other
income of $3.1 million and $0.6 million, respectively. For the six months ended
June 30, 2002 and 2001, the conversion feature of the convertible debt and
warrants recorded in other assets had changes in fair value, resulting in a
reduction of other income of $2.9 million and an addition to other income of
$17.6 million, respectively.
Note 9 -- Commitments and Contingencies
Litigation
Various legal proceedings and claims are pending or have been asserted against
the Company, many of which are covered by third parties, including insurance
companies. The Company believes that the final outcome of such proceedings and
claims will not have a material adverse effect on its earnings, cash flows or
financial position.
Restructuring Requests
Viacao Aerea Rio-Grandense ("VARIG") accounted for $467.5 million and $378.7
million (4.4% and 4.3% of total Company portfolio, excluding equipment held for
sale or re-lease, net of accumulated depreciation) at June 30, 2002 and December
31, 2001, respectively. VARIG has defaulted on its obligations under leases with
the Company in recent years, which has resulted in deferrals and restructurings.
Boeing, on behalf of its affiliates, and VARIG have entered into a memorandum of
understanding to restructure several existing leases. The parties, including the
Company, are currently finalizing the amendments to document the restructure
agreement. Certain leases will have their terms extended and rents reduced.
Boeing has provided the Company with first loss deficiency and partial lease
rental guarantees covering $313.5 million of the VARIG obligations. Taking into
account these guarantees, the Company does not expect the VARIG transactions,
including the impact of any restructurings, to have a material adverse effect on
the Company's earnings, cash flows or financial position.
World Airways, Inc. ("World") accounted for $182.3 million and $188.3 million
(1.7% and 2.2% of total Company portfolio, excluding equipment held for sale or
re-lease, net of accumulated depreciation) at June 30, 2002 and December 31,
2001, respectively. The Company and World have entered into amendments that
restructure two MD-11 aircraft lease agreements. Boeing and McDonnell Douglas
Corporation have provided the Company with first loss deficiency guarantees
covering $66.4 million of the World obligations. Taking into account these
guarantees, the Company does not expect the World transactions to have a
material adverse effect on the Company's earnings, cash flows or financial
position.
Commitments
At June 30, 2002, the Company had commitments to provide leasing and other
financing totaling $1,536.8 million, of which $931.6 million related to
commercial aircraft financing commitments. The Company anticipates that not all
of these commitments will be utilized.
Boeing and BCSC had unfunded commercial aircraft financing commitments existing
at June 30, 2002 of an additional $3,565.8 million. It is expected that the
Company will ultimately fund a portion of such commitments, subject to receiving
any credit enhancements that the Company may require.
In conjunction with prior asset dispositions and certain guarantees, at June 30,
2002, the Company was subject to a maximum contingent liability of $139.3
million; however, $7.4 million of such amount has been indemnified by Boeing and
is included in the amounts guaranteed by Boeing. Contingent liabilities are
primarily comprised of residual value and other guarantees provided by the
Company. Losses, if any, related to such exposure are not expected to be
significant to the Company.
Note 10 -- Segment Information
The Company evaluates the performance of its operating segments based on results
of operations. Information about the Company's operations in its different
financial operating segments is summarized as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(Dollars in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
Aircraft Financial Services $ 362.5 $ 287.9
Commercial Financial Services 117.7 107.0
Other 1.6 -
--------------------------------------
$ 481.8 $ 394.9
======================================
Interest expense (allocated):
Aircraft Financial Services $ 145.0 $ 115.5
Commercial Financial Services 43.4 50.1
Other 0.7 -
--------------------------------------
$ 189.1 $ 165.6
======================================
Depreciation expense:
Aircraft Financial Services $ 74.6 $ 52.5
Commercial Financial Services 22.8 16.9
--------------------------------------
$ 97.4 $ 69.4
======================================
Income before provision for income taxes:
Aircraft Financial Services $ 109.8 $ 102.7
Commercial Financial Services 28.6 24.9
--------------------------------------
$ 138.4 $ 127.6
======================================
- ---------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services
Financing leases $ 3,269.4 $ 2,893.7
Notes and other receivables 1,872.7 1,140.5
Equipment under operating leases, net of accumulated depreciation 2,391.2 2,070.5
Investments 504.0 169.4
Equipment held for sale or re-lease, net of accumulated depreciation 434.7 396.1
-------------------------------------
8,472.0 6,670.2
-------------------------------------
Commercial Financial Services
Financing leases 930.1 776.4
Notes and other receivables 892.5 943.3
Equipment under operating leases, net of accumulated depreciation 790.6 715.5
Equipment held for sale or re-lease, net of accumulated depreciation 22.4 19.1
-------------------------------------
2,635.6 2,454.3
-------------------------------------
Other 37.2 37.4
-------------------------------------
$ 11,144.8 $ 9,161.9
=====================================
Included in the portfolio balances above are $415.3 million and $452.3 million
at June 30, 2002 and December 31, 2001, respectively, of investments in entities
engaged in financing accounted for under the equity method.
Note 11 -- Transactions with Boeing
The Company entered into certain transactions with Boeing in the form of
intercompany guarantees and other subsidies. Intercompany guarantees primarily
relate to residual value guarantees and credit guarantees (first loss deficiency
guarantees and rental guarantees). For the six months ended June 30, 2002 and
2001, the Company recognized income, net of fees, of $26.1 million and $2.5
million, respectively, under the intercompany guarantee agreements. Other
subsidies were also provided by Boeing in the form of interest rate subsidies,
non-guarantee concessions and rental payments on restructured third party
leases. For the six months ended June 30, 2002 and 2001, the Company recognized
income of $21.3 million and $1.8 million, respectively, under such subsidies.
Additionally, for the six months ended June 30, 2002 and 2001, the Company
recorded revenues of $11.5 million and $7.0 million, respectively, from Boeing,
relating to financings.
During the second quarter of 2002, American Airlines returned 24 B-717 aircraft.
Boeing guarantees the rental streams of these leases; thus, in effect Boeing
became the lessee under these leases. For the six months ended June 30, 2002,
the Company recognized $6.5 million of rental income under the guarantee
agreement, which amount is included in the $26.1 million of intercompany
guarantee agreements mentioned above. Boeing and the Company are in the process
of remarketing these aircraft.
Item 2. Management's Narrative Analysis of Results of Operations
- -------------------------------------------------------------------------------
Forward-Looking Information Is Subject to Risk and Uncertainty
From time to time, the Company may make certain statements that contain
projections or "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty. The
words "aim", "believe", "expect", "anticipate", "intend", "estimate", "will",
"should", "could", and other expressions that indicate future events and trends
identify forward-looking statements. Certain statements in this Form 10-Q, and
particularly in the Notes to Consolidated Financial Statements in Item 1 of Part
I, Item 2 of Part I and Item 1 of Part II, may contain forward-looking
information. The subject matter of such statements may include, but not be
limited to, the effects of the September 11, 2001 terrorist attacks, the impact
on the Company of strategic decisions of Boeing, the level of new financing
opportunities made available to the Company by Boeing, future earnings, costs,
expenditures, losses, residual values and various business environment trends.
In addition to those contained herein, forward-looking statements and
projections may be made by the Company orally or in writing including, but not
limited to, various sections of the Company's filings with the SEC under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially from projections
depending on a variety of factors including, but not limited to, the Company's
relationship with Boeing, as well as strategic decisions of Boeing relating to
the Company, the effects of the September 11, 2001 terrorist attacks, the
capital equipment requirements of United States domestic and foreign businesses,
capital availability and cost, changes in laws and tax benefits, the tax
position of Boeing (including the applicability of the alternative minimum tax),
competition from other financial institutions, the Company's successful
execution of internal operating plans, defaults by customers, regulatory
uncertainties and legal proceedings.
- -------------------------------------------------------------------------------
Overview
The Company's net income was $88.5 million for the six months ended June 30,
2002, compared with net income of $81.3 million for the same period in 2001, an
increase of 8.9%. The comparable 2001 results included $42.2 million of revenues
and pre-tax earnings on asset sales, and the valuation of warrants and
convertible securities in the portfolio. Excluding these items, net income
increased this year by 62.7%. The increase in net income is mainly attributable
to a 50.9% increase in financing assets and a lower effective interest rate on
borrowings, partially offset by the increase in equipment held for sale or
re-lease (net of accumulated depreciation) and a higher provision for losses,
operating expenses and other expenses.
The Company's portfolio as of June 30, 2002 totaled $11.1 billion, compared with
$7.2 billion at the end of the same period in 2001. New business volume totaled
$2.0 billion for the six months ended June 30, 2002, compared with the same
period in 2001 of $1.5 billion. However, new business volume totaled $890.3
million for the second quarter of 2002, down from the first quarter level of
$1.1 billion. As expected, a decline in commercial aircraft financing was partly
offset by increased commercial finance activity. Portfolio growth is expected to
be moderate in the second half of 2002, and in 2003, as a result of fewer
commercial aircraft deliveries.
The Company continues to access multiple funding sources at favorable borrowing
rates. Financing-related interest expense for the six months ended June 30, 2002
was $189.1 million, compared with $165.6 million in the prior year. Leverage
(debt-to-equity ratio) at June 30, 2002 was 5.2-to-1, down from 6.0-to-1 at the
end of the second quarter of 2001 (in line with the decision to lower the
Company's debt-to-equity ratio following the terrorist attacks of September 11,
2001 and the resultant impact on the airline industry).
Results of Operations
Revenue from financing assets (financing leases, notes and other receivables and
equipment under operating leases, net of accumulated depreciation) increased by
$116.0 million or 35.2% for the six months ended June 30, 2002, compared with
the six months ended June 30, 2001. New business volume and portfolio transfers
from Boeing over the last twelve months are primarily responsible for the
increased revenues, partially offset by the increase in equipment held for sale
or re-lease (net of accumulated depreciation), lower interest earned on floating
rate assets and on new business recorded at lower yields reflecting the low
interest rate environment.
Investment income increased by $9.0 million or 93.8% for the six months ended
June 30, 2002, compared with the six months ended June 30, 2001, primarily as a
result of new investment volume.
Net gain on disposal decreased by $21.7 million or 77.0% for the six months
ended June 30, 2002, compared with the six months ended June 30, 2001. This
decrease is primarily attributable to $24.0 million of income from a sale within
the Aircraft Financial Services portfolio during the second quarter of 2001.
These gains are sporadic in nature and depend in part on market conditions at
the time of disposal. The range of gain activity is dependent upon the level of
residuals on equipment coming off lease, market activity and conditions and the
Company's discretion whether to sell. There can be no assurance that the Company
will recognize such gains in the future.
Other income decreased by $16.4 million or 58.8% for the six months ended June
30, 2002, compared with the six months ended June 30, 2001, primarily due to
revaluation gains of $18.2 million on certain warrants and convertible
securities in the portfolio recorded in 2001.
Interest expense increased by $23.5 million or 14.2% for the six months ended
June 30, 2002, compared with the six months ended June 30, 2001. The increase is
primarily attributable to higher debt associated with the growth in the
portfolio, offset by lower effective interest rates and lower leverage.
Depreciation expense (on equipment under operating leases and equipment held for
sale or re-lease) increased by $28.0 million or 40.3% for the six months ended
June 30, 2002, compared with the six months ended June 30, 2001. This increase
was primarily attributable to the growth in equipment under operating leases and
equipment held for sale or re-lease.
Provision for losses increased by $11.3 million or 185.2% for the six months
ended June 30, 2002, compared with the six months ended June 30, 2001, primarily
as a result of growth in receivables. The provision for losses maintains the
allowance for losses at a level deemed by the Company to be adequate to cover
inherent losses in receivables.
Operating expenses increased by $6.2 million or 29.1% for the six months ended
June 30, 2002, compared with the six months ended June 30, 2001. This increase
is primarily due to an increase in salaries and training expenses resulting from
a 26.1% increase in headcount to support the Company's growth.
Other expenses increased by $7.1 million or 144.9% for the six months ended June
30, 2002, compared with the six months ended June 30, 2001. This increase is
primarily attributable to a $4.6 million charge for the impairment of long-lived
assets and expenses of $1.3 million incurred to maintain and/or refurbish
aircraft held for sale or re-lease.
Segment Operations
The Company provides financial services through two primary operating segments:
Aircraft Financial Services and Commercial Financial Services. A third segment,
Other, consists of Space and Defense Financial Services. Segment data is based
upon the Company's internal organization. Segment financial data is reported
based on management responsibility, which is the basis used internally to
measure segment performance.
Aircraft Financial Services provides financing to both buy and lease commercial
jet airplanes and represents 76.0% of the Company's portfolio. Services provided
by Aircraft Financial Services extend to new and used Boeing and non-Boeing
airplanes. Aircraft Financial Services also assists Boeing commercial aircraft
customers with financial alternatives and advice in support of Boeing products
and services, including spare parts, modification and freighter conversions.
Commercial Financial Services' portfolio encompasses multiple industries and a
wide range of equipment, including business aircraft, ocean-going vessels,
machine tools, shipping containers, printing presses, paper and cardboard
manufacturing equipment and a wide variety of other industrial and manufacturing
equipment. Commercial Financial Services represents 23.6% of the Company's
portfolio.
While Boeing has long been in the business of assisting its space and defense
customers in finding financing, Space and Defense Financial Services was formed
in 2000 to handle funding arrangements for satellites, military airplanes and
other advanced technology products. The portfolio represents less than 1.0% of
the Company's portfolio.
Aircraft Financial Services
Revenues increased $74.6 million or 25.9% for the six months ended June 30,
2002, compared with the six months ended June 30, 2001. The increase was
primarily due to a 60.1% growth in financing assets. Part of this growth is
attributable to transfers from Boeing. The increase was partially offset by
increased equipment held for sale or re-lease (net of accumulated depreciation),
lower gains on disposal, gains on warrants and convertible securities recognized
in 2001, lower interest earned on floating rate assets and new business recorded
at lower yields reflecting the low interest rate environment.
Interest expense (allocated) increased by $29.5 million or 25.5% for the six
months ended June 30, 2002, compared with the six months ended June 30, 2001.
The increase is primarily attributable to higher debt associated with the growth
in the portfolio, offset by lower effective interest rates and lower leverage.
Depreciation expense increased by $22.1 million or 42.1% for the six months
ended June 30, 2002, compared with the six months ended June 30, 2001. The
increase is attributable to higher equipment under operating leases and
equipment held for sale or re-lease.
Income before provision for income taxes increased $7.1 million or 6.9% for the
six months ended June 30, 2002, compared with the six months ended June 30,
2001. The net effect of changes in revenues, interest expense and depreciation
expense increased income before provision for income taxes by $23.0 million.
Commercial Financial Services
Revenues increased by $10.7 million or 10.0% for the six months ended June 30,
2002, compared with the six months ended June 30, 2001. The increase was
primarily due to a 28.0% growth in financing assets. This increase was partially
offset by new business recorded at lower yields reflecting the low interest rate
environment.
Interest expense (allocated) decreased by $6.7 million or 13.4% for the six
months ended June 30, 2002, compared with the six months ended June 30, 2001.
The decrease is primarily attributable to lower effective interest rates and
lower leverage, offset by higher debt associated with the growth in the
portfolio.
Depreciation expense increased by $5.9 million or 34.9% for the six months ended
June 30, 2002, compared with the six months ended June 30, 2001. The increase is
attributable to higher equipment under operating leases.
Income before provision for income taxes increased $3.7 million or 14.9% for the
six months ended June 30, 2002, compared with the six months ended June 30,
2001. The net effect of changes in revenues, interest expense and depreciation
expense increased income before provision for income taxes by $11.5 million.
Impacts of the September 11, 2001 Terrorist Attacks
The terrorist attacks of September 11, 2001 have had a significant negative
impact on U.S. and world economies that had been in a downturn at the time of
the attacks. In particular, the airline industry has been materially and
adversely impacted, especially the U.S. airlines and foreign airlines flying
routes to the U.S. Airlines have cut back their routes and frequencies of
flights to deal with the reduction in air traffic.
Over 75% of the Company's portfolio is supported by commercial aircraft and 8.6%
of the Company's portfolio is supported by executive aircraft. The effects of
the September 11, 2001 terrorist attacks have not had, and the Company believes
they are not likely to have, a material adverse impact on the Company's
earnings, cash flows or financial position. However, no assurance can be given
that such impact will not become material if the economy and the airlines do not
recover as the Company presently expects, resulting in significant defaults,
repossessions or restructurings at a time when aircraft values or lease rates
are significantly depressed. In addition, if the economy and the airlines fail
to recover as the Company expects, the Company may find it more difficult to
sell or re-lease previously leased aircraft or aircraft that come off lease or
are returned prior to lease termination and may be required to hold such
aircraft for an extended time. Diminished availability or increased cost of
sufficient insurance could cause aircraft to be grounded, or increase risk, if
allowed to fly.
Off-Balance Sheet Transactions
The Company has utilized certain special purpose entities in connection with
certain aircraft financing transactions. The Company believes it has
appropriately followed accounting pronouncements regarding consolidation of such
entities. If accounting pronouncements are amended in accordance with recent
public comments made by the FASB in an exposure draft of a proposed
interpretation of SFAS No. 94, "Consolidation of all Majority-Owned
Subsidiaries" and Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," it is possible that an estimated $1.1 billion of assets and
non-recourse liabilities could be added to the Consolidated Balance Sheet. Other
transactions are subject to this exposure draft but the Company's interpretation
and analysis is that these transactions will not qualify for consolidation. The
actual treatment is subject to change once the final pronouncement is published.
Part II
Item 1. Legal Proceedings
Various legal proceedings and claims are pending or have been asserted against
the Company, many of which are covered by third parties, including insurance
companies. The Company believes that the final outcome of such proceedings and
claims will not have a material adverse effect on its earnings, cash flows or
financial position.
Item 5. Other Information
New Business Volume(1)
New business volume is summarized as follows:
- -----------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
(Dollars in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services(2) $ 1,668.3 $ 1,110.9
Commercial Financial Services 362.6 356.6
Other 2.1 15.8
-----------------------------------
$ 2,033.0 $ 1,483.3
===================================
(1) Excludes transfers from Boeing.
(2) Includes investments of $326.9 million and $3.0 million for the six months
ended June 30, 2002 and 2001, respectively.
Five Largest Customers
The following table includes the five largest customers at June 30, 2002, with
their related portfolio balances at December 31, 2001:
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value % Total Portfolio(1) Net Asset Value % Total Portfolio (1)
- -----------------------------------------------------------------------------------------------------------------------------
June 30, June 30, December 31, December 31,
(Dollars in millions) 2002 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------------------
United Airlines $ 1,273.6 11.9% $ 741.8 8.5%
Boeing 835.4 7.8 217.9 2.5
AirTran Holdings, Inc. 819.9 7.7 651.5 7.5
American Trans Air, Inc. 479.0 4.5 311.0 3.6
Korean Airlines 471.0 4.4 295.6 3.4
---------------------- -----------------------
$ 3,878.9 $ 2,217.8
====================== =======================
(1) Excludes equipment held for sale or re-lease, net of accumulated depreciation.
Significant Concentrations
The Company's largest customer, United Airlines ("United"), accounted for
$1,273.6 million and $741.8 million (11.9% and 8.5% of total Company portfolio,
excluding equipment held for sale or re-lease, net of accumulated depreciation)
at June 30, 2002 and December 31, 2001, respectively. Investments in United
equipment trust certificates and other trust-related interests of $79.1 million
and $75.7 million at June 30, 2002 and December 31, 2001, respectively, are
included in the United portfolio. Based on publicly available reports, United
experienced a net loss of $850.0 million for the six months ended June 30, 2002.
As a result of continued losses and scheduled debt repayments at United, the
Company will continue to assess its exposure based on underlying collateral
values supporting transactions, available guarantees from Boeing and the general
allowance for losses on receivables. United has applied for a $2.0 billion loan
administered by the Airline Transportation Stabilization Board. As of the filing
date hereof, United is current on all of its payment obligations to the Company.
There could be a material adverse effect on the Company's earnings, cash flows
or financial position if United were to default on its obligations to the
Company.
The Company's second largest customer, Boeing, accounted for $835.4 million and
$217.9 million (7.8% and 2.5% of total Company portfolio, excluding equipment
held for sale or re-lease, net of accumulated depreciation) at June 30, 2002 and
December 31, 2001, respectively. During the second quarter of 2002, American
Airlines returned 24 B-717 aircraft. Boeing guarantees the rental streams of
these leases; thus, in effect Boeing became the lessee under these leases.
Boeing and the Company are in the process of remarketing these aircraft.
The Company's third largest customer, AirTran Holdings, Inc. ("AirTran"),
accounted for $819.9 million and $651.5 million (7.7% and 7.5% of total Company
portfolio, excluding equipment held for sale or re-lease, net of accumulated
depreciation) at June 30, 2002 and December 31, 2001, respectively. Investments
in AirTran EETC's and common stock of $42.1 million and $46.4 million at
June 30, 2002 and December 31, 2001, respectively, are included in the AirTran
portfolio.
Aircraft Financial Services Portfolio
The Aircraft Financial Services portfolio consisted of the following commercial
aircraft types(1):
- --------------------------------------------------------------------------------------------------------------------------
Held for
Operating Sale or
(Dollars in millions Receivables(2) Leases(2) Investments(5) Re-Lease Total
- --------------------------------------------------------------------------------------------------------------------------
June 30, 2002
B-717 $ 1,569.8 $ 125.9 $ - $ - $ 1,695.7
B-737 129.3 681.8 - 19.1 830.2
B-747 172.1 270.8 - - 442.9
B-757 675.9 273.4 - 35.5 984.8
B-767 158.9 192.0 - 69.7 420.6
B-777 1,067.6 - - - 1,067.6
DC-9(3) 128.4 6.6 - - 135.0
MD-80(3) 404.2 128.2 - 18.5 550.9
MD-90(3) 123.4 - - 37.6 161.0
DC-10(3) 80.5 66.0 - 3.5 150.0
MD-11(3) 269.5 588.7 - 229.6 1,087.8
Other Aircraft(4) 362.5 57.8 - 21.2 441.5
Asset Pools(6) - - 459.8 - 459.8
Other(7) - - 44.2 - 44.2
------------------------------------------------------------------------------------------
$ 5,142.1 $ 2,391.2 $ 504.0 $ 434.7 $ 8,472.0
==========================================================================================
December 31, 2001
B-717 $ 1,390.4 $ 128.4 $ - $ - $ 1,518.8
B-737 121.2 583.0 - 19.2 723.4
B-747 135.7 143.6 - - 279.3
B-757 505.5 186.8 - 35.5 727.8
B-767 162.3 227.2 - 43.2 432.7
B-777 523.9 - - - 523.9
DC-9(3) 151.7 - - 1.1 152.8
MD-80(3) 360.9 136.2 - 13.0 510.1
MD-90(3) 124.2 18.7 - 19.1 162.0
DC-10(3) 42.7 50.6 - 16.6 109.9
MD-11(3) 272.0 534.0 - 231.0 1,037.0
Other Aircraft(4) 243.7 62.0 - 17.4 323.1
Asset Pools(6) - - 128.9 - 128.9
Other(7) - - 40.5 - 40.5
----------------------------------------------------------------------------------------------
$ 4,034.2 $ 2,070.5 $ 169.4 $ 396.1 $ 6,670.2
==============================================================================================
(1) Excludes executive aircraft of $961.8 million and $865.8 million at June 30,
2002 and December 31, 2001, respectively, which is included in the
Commercial Financial Services portfolio.
(2) Includes owned aircraft and aircraft collateralizing receivables, some of
which are subordinated. (3) Out of production, but currently supported by
Boeing with respect to parts and other services.
(4) Some of these aircraft are out of production, but are supported by the
manufacturer or other third parties with respect to parts and other
services.
(5) Represents aircraft collateralizing EETC's, equipment trust certificates and
other trust-related interests and other investments held by the Company.
(6) Investments are supported by pools of assets secured by various commercial
aircraft types. (7) Represents investments in mandatorily redeemable
preferred stock, common stock and bonds.
At June 30, 2002, 58.6% of the Aircraft Financial Services portfolio (excluding
investments) was comprised of aircraft vintages 2002 through 1998, 16.7% was
comprised of aircraft vintages 1997 through 1993, 14.0% was comprised of
aircraft vintages 1992 through 1988, 6.6% was comprised of aircraft vintages
1987 through 1983 and 4.1% was comprised of aircraft vintages 1982 and older.
US Airways Group, Inc. filed for bankruptcy-court protection under Chapter 11
in August 2002. This event is not expected to have a material adverse effect on
the Company's earnings, cash flows or financial position.
Guarantees
At June 30, 2002, the Company was the beneficiary under $1,673.6 million of
guarantees with respect to its portfolio relating to transactions with a
carrying amount of $3,770.9 million (33.8% of total Company portfolio). Any
guarantee call by the Company would be net of realization of underlying residual
values, partial rent payments, re-lease rental payments or other mitigating
value received. The following table summarizes such guarantees:
- ------------------------------------------------------------------------------------------------------------------------
Domestic Foreign
(Dollars in millions) Airlines Airlines Total
- ------------------------------------------------------------------------------------------------------------------------
Amounts guaranteed by:
Boeing $ 1,017.1 $ 494.4 $ 1,511.5
McDonnell Douglas Corporation 107.5 12.0 119.5
Other(1) 26.9 15.7 42.6
-----------------------------------------------------------
$ 1,151.5 $ 522.1 $ 1,673.6
===========================================================
(1) Excludes guarantees made by entities affiliated with the primary obligor.
Guarantee amounts by aircraft type at June 30, 2002 are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------
Net Asset
Guarantee Value
(Dollars in millions)
- -------------------------------------------------------------------------------------------------------------------------
B-717 $ 762.2 $ 1,628.1
Out of production twin-aisle aircraft 423.0 876.8
Out of production single-aisle aircraft 113.4 159.8
Other Boeing and regional aircraft 375.0 1,106.2
------------------------------------
$ 1,673.6 $ 3,770.9
====================================
During the six months ended June 30, 2002, the Company recognized income of
$26.1 million, net of fees, under these guarantees, all of which were from
Boeing.
The guarantees in favor of the Company are both full and partial in nature and
include, but are not limited to, residual value guarantees, first loss
deficiency guarantees and rental guarantees. Residual value guarantees provide a
specified asset value at the end of a lease agreement with a third party in the
event of a decline in market value of the financed aircraft. First loss
deficiency guarantees cover a specified portion of the Company's losses on
aircraft financed by the Company in the event of a loss upon disposition of the
aircraft following a default by the lessee. Rental guarantees are whole or
partial guarantees covering the Company against the lessee's failure to pay rent
under the lease agreement.
Portfolio by Region
At June 30, 2002, portfolio net asset values were represented in the following
regions:
- ------------------------------------------------------------------------------------------------------------------------
Aircraft Commercial
Financial Financial % of Total
(Dollars in millions) Services Services Other Total Portfolio
- ------------------------------------------------------------------------------------------------------------------------
Region
United States $ 5,834.3 $ 2,123.5 $ 37.2 $ 7,995.0 71.7%
Europe 926.9 82.9 - 1,009.8 9.1
Latin America 774.7 278.8 - 1,053.5 9.5
Asia 766.6 133.3 - 899.9 8.1
Africa 92.1 - - 92.1 0.8
Australia 67.7 - - 67.7 0.6
Canada 9.7 17.1 - 26.8 0.2
-------------------------------------------------------------------------------------------------
$ 8,472.0 $ 2,635.6 $ 37.2 $ 11,144.8 100.0%
=================================================================================================
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 12 Computation of Ratio of Income to Fixed Charges.
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
B. Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2002.
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, its principal financial officer and by its principal accounting
officer, thereunto duly authorized.
Boeing Capital Corporation
August 12,2002 /S/ STEVEN W. VOGEDING
----------------------------------
Steven W. Vogeding
Vice President and Chief Financial
Officer (Principal Financial Officer) and
Registrant's Authorized Officer
/S/ JILL C. RICHLING
----------------------------------
Jill C. Richling
Controller (Principal Accounting Officer)