United States
Securities and Exchange Commission
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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 September 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 November 6, 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.
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.............20
Item 4. Controls and Procedures..............................................27
Part II Other Information
Item 1. Legal Proceedings....................................................27
Item 5. Other Information....................................................28
Item 6. Exhibits and Reports on Form 8-K.....................................32
Signatures....................................................................33
Part I
Item 1. Financial Statements
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
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September 30, December 31,
(Dollars in millions, except stated value and par value) 2002 2001
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ASSETS
Cash and cash equivalents $ 231.6 $ 400.2
Receivables:
Financing leases 4,353.8 3,670.1
Notes and other receivables 2,851.5 2,121.2
------------------------------------
7,205.3 5,791.3
Allowance for losses on receivables (228.3) (139.5)
------------------------------------
6,977.0 5,651.8
Equipment under operating leases, net of accumulated depreciation 3,297.4 2,786.0
Investments 594.8 205.2
Equipment held for sale or re-lease, net of accumulated depreciation 438.3 415.2
Accounts due from Boeing and BCSC 16.1 139.5
Other assets 492.8 225.0
------------------------------------
$ 12,048.0 $ 9,822.9
====================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses $ 79.7 $ 129.4
Other liabilities 233.9 220.2
Deferred income taxes 987.6 807.5
Debt:
Senior 9,114.7 7,271.2
Subordinated 24.0 24.1
------------------------------------
10,439.9 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 September 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 1,057.7 803.8
Accumulated other comprehensive loss, net of tax (15.3) (19.1)
Income retained for growth 560.7 530.8
------------------------------------
1,608.1 1,370.5
------------------------------------
$ 12,048.0 $ 9,822.9
====================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
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Three months ended Nine months ended
September 30, September 30,
(Dollars in millions) 2002 2001 2002 2001
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REVENUES
Finance lease income $ 70.4 $ 72.8 $ 219.4 $ 176.7
Interest income on notes receivable 61.9 33.7 165.4 97.0
Operating lease income 109.3 68.1 302.0 230.1
Investment income (loss) (3.8) 5.1 14.8 14.7
Net gain on disposal - 2.4 6.5 30.6
Other (1.8) (15.1) 9.7 12.8
-------------------------------------------------------------------
236.0 167.0 717.8 561.9
Equity in income (loss) from joint venture (43.7) 1.7 (43.7) 1.7
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192.3 168.7 674.1 563.6
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EXPENSES
Interest expense 107.9 67.7 297.0 233.3
Depreciation expense 59.4 39.7 156.8 109.1
Provision for losses 83.2 4.5 100.6 10.6
Operating expenses 18.8 10.0 46.3 31.3
Other 15.8 6.9 27.8 11.8
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285.1 128.8 628.5 396.1
-------------------------------------------------------------------
Income (loss) before provision (benefit) for
income taxes (92.8) 39.9 45.6 167.5
Provision (benefit) for income taxes (35.9) 14.1 14.0 60.4
-------------------------------------------------------------------
Net income (loss) $ (56.9) $ 25.8 $ 31.6 $ 107.1
===================================================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity and Comprehensive Income
(Unaudited)
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Accumulated
Capital in Other Income
Preferred Common Excess of Comprehensive Retained Comprehensive
(Dollars in millions) Stock Stock Par Value Income (Loss) for Growth Income
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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)
---------------------------------------------------------------------------------------
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 - - 253.9 - -
Net income - - - - 31.6 $ 31.6
Cash dividends declared - - - - (1.7) -
Unrealized loss on derivative instruments,
net of tax of $0.1 million - - - (0.3) - (0.3)
Unrealized gain on investments,
net of tax of $1.7 million - - - 4.1 - 4.1
---------------------------------------------------------------------------------------
Balance at September 30, 2002 $ - $ 5.0 $ 1,057.7 $ (15.3) $ 560.7 $ 35.4
=======================================================================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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Nine months ended
September 30,
(Dollars in millions) 2002 2001
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OPERATING ACTIVITIES
Net income $ 31.6 $ 107.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 161.4 114.1
Net gain on disposal (6.5) (30.6)
Provision for losses 100.6 10.6
Non-cash investment/asset impairment charges 74.3 -
Share-based plans expense 5.0 -
Deferred income taxes 170.8 237.0
Change in assets and liabilities:
Accrued interest on notes receivable (18.6) (36.2)
Accrued interest on investments (29.9) (12.7)
Accounts with Boeing and BCSC 141.4 83.3
Other assets (89.8) 26.5
Accounts payable and accrued expenses (50.3) (1.8)
Other liabilities (17.4) 11.0
Other, net (8.4) (22.1)
-------------------------------------
464.2 486.2
-------------------------------------
INVESTING ACTIVITIES
Net change in short-term leases, notes and other receivables 6.7 83.7
Transfer of net assets from Boeing (185.7) (859.5)
Purchase of available-for-sale investments (427.2) (41.3)
Principal reduction on available-for-sale investments 0.2 0.2
Principal reduction on held-to-maturity investments 18.2 9.9
Purchase of equipment for operating leases (616.9) (539.1)
Proceeds from disposition of equipment and receivables 93.4 121.3
Collection of leases, notes and other receivables 636.6 476.6
Origination of leases, notes and other receivables (1,726.6) (1,826.0)
-------------------------------------
(2,201.3) (2,574.2)
-------------------------------------
FINANCING ACTIVITIES
Net change in commercial paper and short-term bank debt 586.6 (177.2)
Intercompany debt issuance for transfer of net assets from Boeing - 395.6
Proceeds from issuance of debt 1,851.6 2,390.0
Repayment of debt (867.4) (704.2)
Payment of cash dividends (2.3) (1.8)
Capital contributions from Boeing - 191.2
-------------------------------------
1,568.5 2,093.6
-------------------------------------
Net increase (decrease) in cash and cash equivalents (168.6) 5.6
Cash and cash equivalents at beginning of year 400.2 48.6
-------------------------------------
Cash and cash equivalents at end of period $ 231.6 $ 54.2
=====================================
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows, continued
(Unaudited)
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Nine months ended
September 30,
(Dollars in millions) 2002 2001
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NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of receivables (See Note 1) $(110.3) $ -
====================================
====================================
Addition to available-for-sale investments $ (5.0) $ -
====================================
====================================
Transfer of accounts with Boeing and BCSC $ 37.8 $ -
====================================
====================================
Assumption of debt (See Note 1) $ 115.3 $ -
====================================
====================================
Mark-to-market for derivatives on underlying debt $ 162.3 $92.0
====================================
====================================
Transfer of net assets from Boeing $(194.9) $ -
====================================
====================================
Capital contributions from Boeing and BCSC (See Note 1) $ 253.9 102.3
====================================
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Nine months ended
September 30,
(Dollars in millions) 2002 2001
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SUPPLEMENTAL DISCLOSURE FOR TRANSFER OF NET ASSETS
FROM BOEING:
Receivables $(385.6) $ 859.5)
Allowance for losses on receivables 2.1 -
Accounts with Boeing and BCSC (9.0) -
Other liabilities 0.4 -
Deferred income taxes 11.5 -
------------------------------------
Transfer of net assets from Boeing $(380.6) $(859.5)
====================================
See Notes to Consolidated Financial Statements.
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 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
nine-month period ended September 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 at book value 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 not treated as new business
volume.
In the second quarter of 2002, Boeing transferred certain aircraft under
operating leases 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 treated 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 treated 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. This acquisition
was recorded in the Company's financial statements at book value and $56.5
million was treated as new business volume.
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." 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 nine months ended September 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 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. 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
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September 30, December 31,
(Dollars in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Receivables:
Financing leases $ 4,353.8 $ 3,670.1
Notes and other receivables 2,851.5 2,121.2
---------------------------------------
Total receivables 7,205.3 5,791.3
Equipment under operating leases, net of accumulated depreciation 3,297.4 2,786.0
Investments 594.8 205.2
Equipment held for sale or re-lease, net of accumulated depreciation 438.3 415.2
---------------------------------------
Total portfolio $ 11,535.8 $ 9,197.7
=======================================
Non-performing assets:
Nonaccrual receivables $ 82.2 $ 163.0
Non-performing equipment under operating leases, net of
accumulated depreciation 87.6 73.7
Equipment held for sale or re-lease, net of accumulated depreciation 438.3 415.2
---------------------------------------
$ 608.1 $ 651.9
=======================================
Ratio of nonaccrual receivables to total receivables 1.1% 2.8%
Ratio of total non-performing assets to total portfolio 5.3% 7.1%
At September 30, 2002 and December 31, 2001, receivables greater than 90 days
past due with income still accruing, based on the strength of the collateral,
were $22.7 million and $33.8 million, respectively. For the nine months ended
September 30, 2002, the Company did not receive any significant cash related to
the aforementioned receivables. In addition, at September 30, 2002 and December
31, 2001, equipment under operating leases with a carrying amount of $224.9
million and $531.7 million, respectively, had amounts greater than 90 days past
due with income still accruing. For the nine months ended September 30, 2002,
the Company received cash of $14.3 million related to the aforementioned
operating leases.
Note 4 -- Analysis of Allowance for Losses on Receivables
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September 30, December 31,
(Dollars in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Allowance for losses on receivables at beginning of year $ 139.5 $ 136.4
Provision for losses 100.6 36.3
Write-offs, net of recoveries (13.9) (36.5)
Allowance transferred from Boeing 2.1 3.3
------------------------------------
Allowance for losses on receivables at end of period $ 228.3 $ 139.5
====================================
Allowance as percent of total receivables 3.2% 2.4%
Net write-offs as percent of average receivables 0.2% 0.8%
More than 90 days delinquent:
Amount of delinquent installments $ 16.1 $ 24.5
Total receivables due from delinquent obligors 71.2 156.1
Total receivables due from delinquent obligors
as percent of total receivables 1.0% 2.7%
In September 2002, the Company completed a quarterly assessment of its portfolio
assets. The Company's portfolio at the end of the third quarter totaled $11.5
billion, of which $8.8 billion was related to Boeing products, primarily
commercial aircraft. The continuing effects of the current airline industry
downturn have caused significant reductions in commercial aircraft values. Older
and/or out-of-production aircraft types have experienced the most significant
declines in value, while newer aircraft types have seen more moderate declines.
Published sources and recent market transactions indicate that values for
various aircraft types used as collateral in the Company's portfolio remain
depressed. At the same time, the credit ratings of many airlines, particularly
in the United States, have continued to deteriorate. Each quarter, the Company
reviews customer credit ratings, published historical credit default rates and
third-party aircraft valuations as a basis to validate the reasonableness of its
allowance for losses on receivables. Although there were no significant
airline-related receivable write-offs or any deterioration in airline
delinquency rates in the portfolio during the third quarter of 2002, the Company
determined that an increase in the allowance for losses on receivables was
warranted in these circumstances. In September 2002, the Company recorded an
additional provision for losses of $75.0 million to strengthen the allowance for
losses on receivables. As a result of this adjustment, the allowance at
September 30, 2002 increased to 3.2% of total receivables, up from 2.1% at
June 30, 2002.
Receivable Write-offs and Recoveries, by Segment
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Nine months ended Year ended
September 30, December 31,
(Dollars in millions) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services
Write-offs $ 2.6 $ 13.8
Recoveries - (5.0)
----------------------------------------------
2.6 8.8
----------------------------------------------
Commercial Financial Services
Write-offs 12.3 33.1
Recoveries (1.0) (5.4)
----------------------------------------------
11.3 27.7
----------------------------------------------
$ 13.9 $ 36.5
==============================================
At September 30, 2002, the carrying amount of impaired notes and other
receivables was $171.5 million. Impaired notes are notes on which the Company
estimates it may not be able to collect all amounts due under the contractual
terms, excluding insignificant delays and shortfalls. A specific impairment
allowance for losses of $8.6 million was allocated for $45.0 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, 3.8% of the Company's allowance for
losses on receivables was allocated to specific reserves. The remaining $219.7
million (96.2% of the allowance for losses on receivables) is designated for
general purposes and represents the Company's best estimate of 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 September 30, 2002,
the Company had $2,158.0 million of guarantees principally from Boeing with
respect to its portfolio relating to transactions totaling $4,241.5 million
(36.7% 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.
Note 5 -- Investments
Investments deemed available-for-sale and recorded at estimated fair value were
$11.0 million and $9.2 million at September 30, 2002 and December 31, 2001,
respectively. Investments in securities deemed held-to-maturity and recorded at
amortized cost were $571.4 million and $159.0 million at September 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. The majority
of the Company's securities are illiquid non-traded securities; therefore, the
fair values are generally based on pricing models. In order to use pricing
models, the Company requests spread levels over certain benchmark interest rates
from external sources to use for calculations in the pricing models. Those
spread levels over certain benchmark interest rates are estimates based on
similar public securities, superior tranches in the transaction or other
relevant pricing information.
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
- ------------------------------------------------------------------------------------------------------------------
September 30, 2002 Available-for-Sale:
Equity $ 2.4 $ - $ (0.2) $ 2.2
Debt(1) 9.3 0.1 (0.6) 8.8
Held-to-Maturity:
Debt(1) 571.4(2)(3) 4.5 (145.8) 430.1
----------------------------------------------------------------------------------
$ 583.1 $ 4.6 $ (146.6) $ 441.1
==================================================================================
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 $571.4 million at September 30, 2002, the Company has $92.6 million
in guarantees from Boeing and $1.7 million in guarantees from a third party.
(3) Included in the held-to-maturity debt investments are investments in United
Airlines ("United") equipment trust certificates, which are secured by
aircraft on lease to United. Due to declines in values for a period that is
now determined to be other than temporary, these investments were written
down during the third quarter of 2002 by $13.1 million to their estimated
fair value. This write-down was also based on the decline in credit ratings
of United, the long-term maturity of the investments, the decline in the
underlying aircraft collateral valuations and guarantees on these
investments. The Company's remaining amortized cost of these investments at
September 30, 2002 of $67.5 million represents the amount that is fully
guaranteed by Boeing and for which Boeing has reduced the investments
consolidated carrying value to zero. The ultimate realization of these
investments will depend upon United continuing to meet its related
contractual obligations. United remains current on all of its payment
obligations to the Company.
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
September 30, 2002, $1.1 million of that $20.1 million unrealized loss was
amortized from accumulated other comprehensive income/loss to investment income.
At July 1, 2002, two available-for-sale securities were transferred to
held-to-maturity at their fair values with $6.2 million of net unrealized gain
recorded as a component of accumulated other comprehensive income/loss. At
September 30, 2002, $0.5 million of that $6.2 million net unrealized gain was
amortized from accumulated other comprehensive income/loss to investment income.
The Company also has an investment in a joint venture with a carrying value of
$11.2 million and $35.8 million at September 30, 2002 and December 31, 2001,
respectively. The joint venture was established to lease and eventually convert
24 B-727 passenger aircraft to full cargo configuration. According to accounting
guidelines, long-lived assets held for use are deemed impaired when their
carrying value exceeds the sum of the undiscounted cash flows expected to result
from the current use and eventual disposition of the asset. Based on the
Company's assessment of current market conditions and the average age of the
aircraft (averaging over twenty years old), the resulting estimated future cash
flows generated from the aircraft in their current passenger configuration are
less than the joint venture's carrying value. Accordingly, the Company recorded
an impairment loss of $47.9 million for its share of the adjustment to estimated
fair market value for the joint venture's B-727 aircraft. The Company's
portfolio does not include any B-727 aircraft other than those held through this
joint venture.
In addition, the Company held an equity security accounted for under the cost
method of $1.2 million at September 30, 2002 and December 31, 2001, which was
recorded in investments and approximated the fair value of that investment.
At September 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 $ - $ - $ 30.1 $ 30.1
Due from one to five years 0.4 0.4 338.6 255.4
Due from six to ten years 5.0 5.0 56.6 56.6
Due after ten years 3.9 3.4 146.1 88.0
------------------------------------------------------------------------------------
$ 9.3 $ 8.8 $ 571.4 $ 430.1
====================================================================================
Note 6 -- Debt and Credit Agreements
- ----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------
Senior debt:
Commercial paper $ 630.1 $ 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 - 499.6
5.65% note due 2006 1,041.8 1,002.9
5.75% note due 2007 748.0 737.2
5.80% note due 2013 616.0 -
6.10% note due 2011 781.3 754.2
6.50% note due 2012 764.5 725.0
7.10% note due 2005 498.9 498.6
7.375% note due 2010 548.5 519.4
Non-recourse variable rate (one-month LIBOR plus 1.1%)
note due 2012 44.3 45.3
13.84% - 14.28% non-recourse notes due through 2003,
including a premium based on an imputed interest rate of 6.10% 7.7 14.2
3.15% - 6.75% retail medium-term notes due through 2017 298.3 -
1.85% - 7.64% medium-term notes due through 2017 2,770.3 2,039.2
Capital lease obligations due through 2008 360.0 392.2
------------------------------------------
9,114.7 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
------------------------------------------
$ 9,138.7 $ 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, the Company allocated $1.0 billion
to the Series XI medium-term note program. Effective June 20, 2002, the
remaining $750.0 million under the shelf registration was allocated to this
program. As of the filing date hereof, an aggregate amount of $781.5 million
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 establish 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 $4.0 billion remains available under this Registration
Statement for potential debt issuance, which takes into account the July 25,
2002 issuance of $600.0 million 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 September 30, 2002, as well as
during the period, the Company was in compliance with all its debt covenants.
As of November 4, 2002, $500.0 million of Boeing's five-year revolving credit
line expiring in 2005 was made exclusively available to the Company. As of the
above date, $1.5 billion of Boeing's 364-day revolving credit line continues to
be exclusively available to the Company. This lengthening of the average term of
the credit lines available to the Company improved the Company's liquidity
position. At September 30, 2002, there were no amounts outstanding under the
364-day 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 was
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 nine months ended September 30, 2002 and 2001, $2.2 million and $1.2
million, respectively, of gains related to the basis adjustment of certain
terminated interest rate swaps were recorded in interest expense. For the nine
months ended September 30, 2002 and 2001, $5.8 million of losses and $0.7
million of gains, respectively, related to ineffectiveness due to the
forward-starting interest rate swaps were recorded in interest expense.
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 September 30, 2002 and December 31, 2001, net unrecognized
losses of $10.3 million ($6.4 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 nine months ended September 30, 2002 and 2001, unrecognized losses (net
of tax) included in accumulated other comprehensive income/loss of $0.4 million
and $0.9 million, respectively, were reclassified to interest expense. During
the next twelve months, the Company expects to reclassify to interest expense 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 certain 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 related to 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 nine months ended
September 30, 2002 and 2001, the interest exchange agreements resulted in gains
of $8.4 million and $12.4 million, respectively, and the related interest rate
swaps resulted in losses of $9.9 million and $13.6 million, respectively. For
the nine months ended September 30, 2002 and 2001, unrecognized losses (net of
tax) of $0.8 million and $0.4 million, respectively, from accumulated other
comprehensive income/loss and gains of $3.0 million and $2.8 million,
respectively, from the basis adjustment to underlying liabilities was amortized
to interest expense. During the next twelve months, the Company expects to
amortize to interest expense a $0.8 million loss (net of tax) from the amount
recorded in accumulated other comprehensive income/loss and a $3.1 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 September 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 $3.8 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 nine months ended
September 30, 2002 and 2001, the Company amortized gains from the discount on
notes receivable to other income of $4.0 million and $1.2 million, respectively.
For the nine months ended September 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 to other income of $8.4 million and $3.7
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
United accounted for $1,266.5 million and $741.8 million (11.4% and 8.4% of
total Company portfolio, excluding equipment held for sale or re-lease, net of
accumulated depreciation) at September 30, 2002 and December 31, 2001,
respectively. United is current on all of its payment obligations to the
Company. However, United is experiencing significant financial difficulties as
they have disclosed publicly and United has applied to the Airline
Transportation Stabilization Board ("ATSB") for $1.8 billion in Federal loan
guarantees as part of United's attempt to raise $2.0 billion in new financing.
On October 22, 2002, United filed an updated business plan with the ATSB that
reportedly contained additional cost reductions beyond that considered in its
initial business plan; United also indicated that it was working with its
vendors, lessors and lenders on additional measures to improve its financial
position. United has recently requested the Company to consider restructuring
the payment terms of its existing transactions together with participating in
the non-guaranteed portion of the secured ATSB loan. Although the Company has
had some discussions with United on its request, it cannot predict whether those
discussions will lead to a mutually acceptable restructuring and whether United
ultimately will be successful in obtaining the approval for the ATSB loan. While
the Company cannot predict the outcome of such discussions, the Company
continues to believe that the allowance for losses on receivables is maintained
at a level adequate to cover losses in receivables. However, in the event that
United defaults on a substantial number of aircraft, there could be a material
adverse effect on the Company's earnings, cash flows or financial position until
such time as the aircraft are successfully redeployed.
Viacao Aerea Rio-Grandense ("VARIG") accounted for $456.6 million and $378.7
million (4.1% and 4.3% of total Company portfolio, excluding equipment held for
sale or re-lease, net of accumulated depreciation) at September 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. While some
of the lease amendments contemplated by the memorandum of understanding have
been executed, others are currently being finalized. 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 $340.9
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.
Commitments
At September 30, 2002, the Company had commitments to provide leasing and other
financing totaling $1,299.2 million, of which $860.2 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 September 30, 2002 of an additional $4,020.2 million. It is expected that the
Company will ultimately fund a portion of such commitments. Certain of those
funded may be subject to receiving such credit enhancements from Boeing as the
Company may require in order to meet its investment criteria.
In conjunction with prior asset dispositions and certain guarantees, at
September 30, 2002, the Company was subject to a maximum contingent liability of
$139.4 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, net of
collateral, are not expected to be significant to the Company.
Note 10 -- Segment Information
The Company evaluates the performance of its reporting segments based on results
of operations. Information about the Company's operations in its different
financial reporting segments is summarized as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(Dollars in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
Aircraft Financial Services $ 538.7 $ 401.0
Commercial Financial Services 174.3 160.1
Other 4.8 0.8
--------------------------------------
$ 717.8 $ 561.9
======================================
Interest expense (allocated):
Aircraft Financial Services $ 230.2 $ 174.9
Commercial Financial Services 63.7 58.3
Other 3.1 0.1
--------------------------------------
$ 297.0 $ 233.3
======================================
Depreciation expense:
Aircraft Financial Services $ 120.5 $ 82.1
Commercial Financial Services 35.1 27.0
Other 1.2 -
--------------------------------------
$ 156.8 $ 109.1
======================================
Income (loss) before provision (benefit) for income taxes:
Aircraft Financial Services $ 13.7 $ 112.1
Commercial Financial Services 33.1 55.5
Other (1.2) (0.1)
--------------------------------------
$ 45.6 $ 167.5
======================================
- ---------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
(Dollars in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services
Financing leases $ 3,460.8 $ 2,893.7
Notes and other receivables 1,923.4 1,140.5
Equipment under operating leases, net of accumulated depreciation 2,437.2 2,070.5
Investments 594.8 205.2
Equipment held for sale or re-lease, net of accumulated depreciation 417.9 396.1
-------------------------------------
8,834.1 6,706.0
-------------------------------------
Commercial Financial Services
Financing leases 893.0 776.4
Notes and other receivables 891.4 943.3
Equipment under operating leases, net of accumulated depreciation 790.9 715.5
Equipment held for sale or re-lease, net of accumulated depreciation 20.4 19.1
-------------------------------------
2,595.7 2,454.3
-------------------------------------
Other 106.0 37.4
-------------------------------------
$ 11,535.8 $ 9,197.7
=====================================
Included in the portfolio balances above are $449.0 million and $452.3 million
at September 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 nine months ended September 30, 2002
and 2001, the Company recognized income, net of fees, of $41.4 million and $7.3
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 nine months ended September 30, 2002 and 2001, the Company
recognized income of $34.4 million and $2.4 million, respectively, under such
subsidies.
During the second quarter of 2002, American Airlines returned 24 B-717 aircraft.
Boeing guarantees a substantial portion of the rental streams of these aircraft;
thus, in effect Boeing became the lessee under these leases. For the nine months
ended September 30, 2002, the Company recognized $18.2 million of rental income
under the guarantee agreement, which amount is included in the $41.4 million of
intercompany guarantee agreements mentioned above. On October 23, 2002, Boeing
announced that AirTran Holdings, Inc. ("AirTran") signed an agreement with the
Company to lease 22 of the 24 aircraft returned by American Airlines. The
aircraft are scheduled for delivery in 2003. The remaining two aircraft were
placed on lease during October 2002.
Additionally, for the nine months ended September 30, 2002 and 2001, the Company
recorded revenues of $22.0 million and $10.1 million, respectively, relating to
financings made to Boeing by the Company.
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, Item 1 of Part II, and Item 5 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 and their
continuing impact on the airline industry, 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.
- --------------------------------------------------------------------------------
Airline Industry Conditions
The terrorist attacks of September 11, 2001 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 U.S. airlines and foreign airlines with significant operations in the
U.S. While there were significant reductions in traffic subsequent to September
11, 2001, trends through the second quarter of 2002 indicated that air travel
growth was improving. However, that trend stalled in the third quarter and
airlines, especially major U.S. domestic airlines, continued to incur
significant losses during the third quarter even in light of efforts to mitigate
the impacts of reduced travel demands.
In addition, in the third quarter of 2002, a number of major U.S. domestic
airlines announced that they were undertaking additional significant capacity
reductions involving numerous aircraft types. Additional downgrades by rating
agencies impacted several key domestic airlines included in the Company's
portfolio. U.S. Airways filed for bankruptcy protection and United, the
Company's largest customer, announced that it might also seek protection in
bankruptcy under certain conditions.
The continuing effects of the current airline industry downturn have caused
significant reductions in commercial aircraft values. Older and/or
out-of-production aircraft types have experienced the most significant declines
in value, while newer aircraft types have seen more moderate declines. Similar
declines in aircraft lease rates have also occurred as a result of reduced
demand and excess aircraft.
The continuing decline in airline credit condition, increased exposure in the
Company's portfolio resulting from the decline in value of collateral and
decreasing lease rates were primarily responsible for the Company recognizing
certain non-cash charges that reduced earnings by $149.0 million on a pre-tax
basis in the third quarter of 2002.
Any additional impacts may be dependent upon the duration of the current
economic and airline industry decline, or any significant defaults,
repossessions or restructurings at a time when depressed aircraft values and
lease rates will make it difficult to sell or redeploy such aircraft. The
Company intends to closely monitor factors impacting its aircraft portfolio.
Overview
The Company's net income was $31.6 million for the nine months ended September
30, 2002, compared with net income of $107.1 million for the same period in
2001, a decrease of 70.5%. The decrease is primarily attributable to pre-tax
non-cash charges of $149.0 million recorded to strengthen the allowance for
losses on receivables and to recognize impairment of certain assets in the
Company's portfolio. These charges reflect continuing pressure on airline credit
ratings as well as collateral values, particularly for older and/or
out-of-production aircraft types in the Company's financing portfolio. Excluding
the $149.0 million pre-tax charge, net income for the nine months ended
September 30, 2002 would have increased by $94.2 million to $125.8 million. A
43.6% increase in financing assets and lower interest expense - caused by lower
leverage and lower interest rates - is primarily responsible for this increase.
Offsetting the increase are lower net gains on disposals and higher depreciation
related to the growth in equipment under operating leases and equipment held for
re-lease.
The $149.0 million consists of:
- A pre-tax provision for losses of $75.0 million to increase the allowance
for losses on receivables,
- A $47.9 million pre-tax impairment loss on an investment in a joint
venture that recorded an impairment of equipment held for re-lease,
- A specific pre-tax impairment of $13.1 million related to a long-held
investment in equipment trust certificates securitized by aircraft on
lease to United, and
- Additional pre-tax charges totaling $13.0 million primarily attributable
to valuations of certain regional turboprops and other portfolio assets.
The Company's portfolio at September 30, 2002 totaled $11.5 billion, compared
with $8.0 billion at September 30, 2001. New business volume of $4.2 billion and
net asset transfers from Boeing of $719.5 million, offset by portfolio runoff,
are responsible for the increase in the portfolio between September 30, 2001 and
September 30, 2002. New business volume was $2.8 billion for the nine months
ended September 30, 2002 compared with $2.5 billion during the same period in
2001. New business volume was $742.7 million for the third quarter of 2002, down
from $890.3 million for the previous quarter. New business volume is expected to
be moderate through 2003 as a result of reduced demand for commercial aircraft
financings.
Results of Operations
Revenue from financing leases, notes and other receivables and equipment under
operating leases, net of accumulated depreciation is as follows:
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(Dollars in millions) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Finance lease income $ 219.4 $ 176.7
Interest income on notes receivable 165.4 97.0
Operating lease income 302.0 230.1
-------------------------------------
$ 686.8 $ 503.8
=====================================
Revenue from financing leases, notes and other receivables and equipment under
operating leases, net of accumulated depreciation increased by $183.0 million or
36.3% for the nine months ended September 30, 2002, compared with the nine
months ended September 30, 2001. New business volume and portfolio transfers
from Boeing over the last twelve months are primarily responsible for the
increased revenues. The increase is partially offset by lower interest earned on
floating rate assets as well as on new business recorded at lower rates that
reflect the current low interest rate environment.
Investment income (loss) increased by $0.1 million or 1.0% for the nine months
ended September 30, 2002, compared with the nine months ended September 30,
2001. The investment portfolio grew by $367.4 million over the last twelve
months. The increase in earnings from this growth was primarily offset by an
impairment of $13.1 million related to a long-held investment in equipment trust
certificates securitized by aircraft on lease to United. These debt investments
were classified as held-to-maturity and declined in value for a period that was
determined to be other than temporary. The write-down was based on the decline
in credit ratings of United, the long-term maturity of the investments, the
decline in the underlying aircraft collateral valuations and guarantees on these
investments. The ultimate realization of these investments will depend upon
United continuing to meet its related contractual obligations. United remains
current on all of its payment obligations to the Company. Additionally, the
Company recognized a $2.5 million write-down on a common stock investment.
Excluding the $15.6 million pre-tax charges, investment income for the nine
months ended September 30, 2002 would have increased by $15.7 million or 106.8%,
compared with the nine months ended September 30, 2001.
Net gain on disposal decreased by $24.1 million or 78.8% for the nine months
ended September 30, 2002, compared with the nine months ended September 30,
2001. This decrease is primarily attributable to a $24.0 million gain on 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 and the Company's decision to sell or re-lease when
equipment is returned. 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 $3.1 million or 24.2% for the nine months ended
September 30, 2002, compared with the nine months ended September 30, 2001.
Lower intercompany interest income and higher realized losses on derivatives,
offset by higher commitment and broker fee income are primarily responsible for
the decrease.
Equity in income (loss) from joint venture decreased by $45.4 million for the
nine months ended September 30, 2002, compared with the nine months ended
September 30, 2001. The Company holds an investment in a joint venture that was
established to lease and eventually convert 24 B-727 passenger aircraft to full
cargo configuration. According to accounting guidelines, long-lived assets held
for use are deemed impaired when their carrying value exceeds the sum of the
undiscounted cash flows expected to result from use in the current configuration
and eventual disposition of the asset. Based on the Company's assessment of
current market conditions and the average age of the aircraft (averaging over
twenty years old), the resulting estimated future cash flows generated from the
aircraft in their current passenger configuration are less than the joint
venture's carrying value. Accordingly, the Company recorded an impairment loss
of $47.9 million for its share of the adjustment to estimated fair market value
for the joint venture's B-727 aircraft. Additionally, a $1.2 million loss from
operations in the joint venture was recognized and $5.5 million of fees received
were applied as a basis adjustment to the carrying amount of the investment. The
Company's portfolio does not include any B-727 aircraft other than those held
through this joint venture.
Interest expense increased by $63.7 million or 27.3% for the nine months ended
September 30, 2002, compared with the nine months ended September 30, 2001.
Higher debt associated with the growth in the portfolio, offset by lower
effective interest rates and lower leverage, is primarily responsible for the
increase.
Depreciation expense (on equipment under operating leases and equipment held for
re-lease) increased by $47.7 million or 43.7% for the nine months ended
September 30, 2002, compared with the nine months ended September 30, 2001.
Growth in equipment under operating leases and equipment held for re-lease is
primarily responsible for the increase.
Provision for losses increased by $90.0 million for the nine months ended
September 30, 2002, compared with the nine months ended September 30, 2001. In
addition to the general provision related to portfolio growth, the increase
includes a $75.0 million provision to increase and strengthen the allowance for
losses on receivables. The provision for losses maintains the allowance for
losses at a level deemed by the Company to be adequate for covering losses in
receivables.
Each quarter, the Company reviews customer credit ratings, published historical
credit default rates and third-party aircraft valuations as a basis to validate
the reasonableness of its allowance for losses on receivables. As previously
noted, airline credit ratings have deteriorated. Published sources and recent
market transactions also indicate that values for various aircraft types used as
collateral in the Company's portfolio remain depressed. Although there were no
significant airline-related receivable write-offs or any deterioration in
airline delinquency rates in the portfolio during the third quarter of 2002, the
Company determined that an increase in the allowance for losses on receivables
was warranted in these circumstances.
Operating expenses, which consists of general and administrative expenses,
increased $15.0 million or 47.9% for the nine months ended September 30, 2002,
compared with the nine months ended September 30, 2001. Increased compensation
and travel expenses of $13.7 million resulting from an increase in headcount to
support the Company's growth is primarily responsible for the increase.
Other expenses increased by $16.0 million or 135.6% for the nine months ended
September 30, 2002, compared with the nine months ended September 30, 2001. The
increase is primarily attributable to an $11.6 million charge for the impairment
of long-lived assets. A $2.3 million increase in aircraft remarketing expenses
and expenses to maintain and refurbish aircraft held for sale or re-lease also
contributed to the increase.
Provision (benefit) for income taxes decreased by $46.4 million or 76.8% for the
nine months ended September 30, 2002, compared with the nine months ended
September 30, 2001. Lower pre-tax income and increased extraterritorial income
and foreign sales corporation benefits are primarily responsible for the
decrease.
Segment Operations
The Company provides financial services through two primary reporting segments:
Aircraft Financial Services and Commercial Financial Services. Other is
comprised of Space and Defense Financial Services. The determination of
segments is based upon the Company's internal organization.
Aircraft Financial Services provides financing to buy or lease commercial jet
airplanes and represents 76.6% of the Company's total 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 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 22.5% of the Company's total
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. This portfolio represents less than 1.0% of
the Company's total portfolio.
Aircraft Financial Services
Revenues increased $137.7 million or 34.3% for the nine months ended September
30, 2002, compared with the nine months ended September 30, 2001. A larger
portfolio, resulting from new business volume and portfolio transfers from
Boeing over the last twelve months, is primarily responsible for the increased
revenues. The increase was offset by lower gains on disposal, impairment related
to a long-held investment in equipment trust certificates securitized by
aircraft on lease to United, lower gains on warrants and convertible securities,
increased non-performing assets, write-down of residual values, lower interest
earned on floating rate assets as well as on new business recorded at lower
rates that reflect the current low interest rate environment.
Interest expense (allocated) increased by $55.3 million or 31.6% for the nine
months ended September 30, 2002, compared with the nine months ended September
30, 2001. Higher debt associated with the growth in the portfolio, offset by
lower effective interest rates and lower leverage, is primarily responsible for
the increase.
Depreciation expense increased by $38.4 million or 46.8% for the nine months
ended September 30, 2002, compared with the nine months ended September 30,
2001. Growth in equipment under operating leases and equipment held for re-lease
is primarily responsible for the increase.
Income (loss) before provision (benefit) for income taxes decreased $98.4
million or 87.8% for the nine months ended September 30, 2002, compared with the
nine months ended September 30, 2001. In addition to the aforementioned items,
income before provision (benefit) for income taxes was reduced by:
- $9.1 million general provision for portfolio growth and $67.6 million of
provision for losses to increase and strengthen the allowance for losses
on receivables,
- $47.9 million pre-tax impairment loss on an investment in a joint venture
that recorded an impairment of equipment held for re-lease,
- $6.4 million charge for impairment of long-lived assets related to
certain regional turboprops,
- $2.3 million increase in aircraft remarketing expenses and expenses to
maintain and refurbish aircraft held for sale or re-lease, and
- Increased compensation and travel expenses resulting from an increase in
headcount to support growth.
Commercial Financial Services
Revenues increased by $14.2 million or 8.9% for the nine months ended September
30, 2002, compared with the nine months ended September 30, 2001. A larger
portfolio, resulting from new business volume, is primarily responsible for the
increased revenues. This increase was partially offset by lower interest earned
on floating rate assets as well as on new business recorded at lower rates that
reflect the current low interest rate environment.
Interest expense (allocated) increased by $5.4 million or 9.3% for the nine
months ended September 30, 2002, compared with the nine months ended September
30, 2001. Higher debt associated with the growth in the portfolio, offset by
lower effective interest rates and lower leverage is primarily responsible for
the increase.
Depreciation expense increased by $8.1 million or 30.0% for the nine months
ended September 30, 2002, compared with the nine months ended September 30,
2001. The increase is attributable to higher equipment under operating leases.
Income (loss) before provision (benefit) for income taxes decreased $22.4
million or 40.4% for the nine months ended September 30, 2002, compared with the
nine months ended September 30, 2001. In addition to the aforementioned items,
income before provision (benefit) for income taxes was reduced by:
- $6.9 million general provision for portfolio growth and $7.4 million of
provision for losses to increase and strengthen the allowance for losses
on receivables
- $5.2 million charges for impairment of equipment under operating leases
and equipment held for re-lease, and - Increased compensation and travel
expenses resulting from an increase in headcount to support growth.
Capital Resources and Liquidity
The Company attempts to fund its business such that scheduled receipts from the
portfolio will generally correspond to its expenses and debt payments as they
become due. The Company satisfies a significant portion of its cash requirements
from diversified global funding sources and is not dependent on any one lender.
The Company increased the diversification of its borrowing this year by adding
retail medium-term note and foreign medium-term note programs as funding
sources.
During the first three quarters of 2002, the Company issued $1.9 billion in new
senior debt, primarily to finance new business. The Company also relies on the
issuance of commercial paper as a short-term funding source. During 2002, the
Company's commercial paper balances ranged from zero outstanding to $631.0
million, with a weighted average yield of 1.93% and a daily average outstanding
balance for the period of $239.0 million. Commercial paper borrowings totaled
$630.1 million at September 30, 2002, and were supported by the Company's $2.0
billion of unused credit facility.
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments, fixed-rate notes receivable attributable to
customer financing, and debt obligations issued at a fixed rate. Historically,
the Company has not experienced material gains or losses due to interest rate
changes when selling short-term investments or fixed-rate notes receivable.
Additionally, the Company uses interest rate swaps to manage exposure to
interest rate changes. Based on the current holdings of short-term investments
and fixed-rate notes, as well as related swaps, the unhedged exposure to
interest rate risk is not material. Fixed-rate debt obligations issued by the
Company are generally not callable until maturity. The Company also utilizes
interest rate swap agreements to manage interest costs and risk associated with
changing interest rates.
As of November 4, 2002, $500.0 million of Boeing's five-year revolving credit
line expiring in 2005 was made exclusively available to the Company. As of the
above date, $1.5 billion of Boeing's 364-day revolving credit line continues to
be exclusively available to the Company. This lengthening of the average term of
the credit lines available to the Company improved the Company's liquidity
position. At September 30, 2002, there were no amounts outstanding under the
364-day agreement.
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, the Company allocated $1.0 billion
to the Series XI medium-term note program. Effective June 20, 2002, the
remaining $750.0 million under the shelf registration was allocated to this
program. As of the filing date hereof, an aggregate amount of $781.5 million
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 establish 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 $4.0 billion remains available under this Registration
Statement for potential debt issuance, which takes into account the July 25,
2002 issuance of $600.0 million 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 September 30, 2002, as well as
during the period, the Company was in compliance with all its debt covenants.
The Company has the following Moody's Investors Service credit ratings:
short-term, P-2; senior debt, A3. The Company has the following Fitch Ratings'
credit ratings: short-term, F-1; senior debt, A+. The Company has the following
Standard & Poor's credit ratings: short-term, A-1; senior debt, A+. On October
4, 2002, Standard & Poor's affirmed its single A+ rating for the Company.
Financing-related interest expense for the nine months ended September 30, 2002
was $297.0 million, compared with $233.3 million in the prior year. Leverage
(debt-to-equity ratio) at September 30, 2002 was 5.7-to-1, down from 5.9-to-1 at
the end of the third quarter of 2001, but up from 5.2-to-1 at the end of the
second quarter of 2002. The ratio at September 30, 2002 was higher than
previously expected primarily due to the pre-tax charges of $149.0 million taken
in the third quarter of 2002.
The Company has significant liquidity requirements. The Company believes that,
absent a severe or prolonged economic downturn resulting in defaults materially
in excess of those provided for, receipts from the portfolio, together with the
committed credit facility, are expected to cover expenses and debt payments when
due. If cash provided by operations, issuance of commercial paper, borrowings
under bank credit lines and term borrowings does not provide the necessary
liquidity, the Company would be required to restrict its new business volume,
unless it obtained access to other sources of capital at rates that allow for a
reasonable return on new business.
At September 30, 2002, the Company had commitments to provide leasing and other
financing totaling $1,299.2 million, of which $860.2 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 September 30, 2002 of an additional $4,020.2 million. It is expected that the
Company will ultimately fund a portion of such commitments. Certain of those
funded may be subject to receiving such credit enhancements from Boeing as the
Company may require in order to meet its investment criteria.
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. In June 2002, the FASB issued 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." Public FASB meetings since June 2002 indicate that there likely
will be substantive changes made to the published exposure draft prior to
finalization. Any revision to the current treatment of these special purpose
entities will be determined when the final pronouncement is issued.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a -14 (c)) as of a date within 90 days prior
to the filing of this Quarterly Report on Form 10-Q, have concluded that the
Company's disclosure controls and procedures are adequate and effective for the
purposes set forth in the definition in Exchange Act rules.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation.
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:
- -----------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(Dollars in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Aircraft Financial Services(2) $ 2,214.9 $ 1,887.7
Commercial Financial Services 474.8 619.2
Other 86.0 3.6
-----------------------------------
$ 2,775.7 $ 2,510.5
===================================
(1) Excludes transfers from Boeing.
(2) Includes investments of $432.2 million and $15.1 million for the nine months
ended September 30, 2002 and 2001, respectively.
Five Largest Customers
The following table includes the five largest customers at September 30, 2002,
with their related portfolio balances at December 31, 2001:
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value % Total Net Asset Value % Total
Portfolio(1) Portfolio(1)
- -----------------------------------------------------------------------------------------------------------------------------
September 30, September 30, December 31, December 31,
(Dollars in millions) 2002 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------------------
United $ 1,266.5 11.4% $ 741.8 8.4%
AirTran 928.6 8.4 651.5 7.4
Boeing 907.9 8.2 217.9 2.5
American Trans Air
Holdings Corp. 600.0 5.4 311.0 3.5
Korean Airlines 463.6 4.2 295.6 3.4
---------------------- -----------------------
$ 4,166.6 $ 2,217.8
====================== =======================
(1) Excludes equipment held for sale or re-lease, net of accumulated depreciation.
Significant Concentrations
The Company's largest customer, United, accounted for $1,266.5 million and
$741.8 million (11.4% and 8.4% of total Company portfolio, excluding equipment
held for sale or re-lease, net of accumulated depreciation) at September 30,
2002 and December 31, 2001, respectively. Investments in United equipment trust
certificates and other trust-related interests of $67.5 million and $75.7
million at September 30, 2002 and December 31, 2001, respectively, are included
in the United portfolio. These investments, securitized by aircraft on lease to
United, have declined in value for a period that is now determined to be other
than temporary. As a result, during the third quarter of 2002, these investments
were written down by $13.1 million to their estimated fair value. This
write-down was based on the decline in credit ratings of United, the long-term
maturity of the investments, the decline in the underlying aircraft collateral
valuations and guarantees on these investments. The ultimate realization of
these investments will depend upon United continuing to meet its related
contractual obligations. The remaining investments of $67.5 million at September
30, 2002 are fully guaranteed by Boeing. Based on publicly available reports,
United experienced a net loss of $889.0 million for the nine months ended
September 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. As of the filing
date hereof, United is current on all of its payment obligations to the Company.
However, United is experiencing significant financial difficulties as they have
disclosed publicly and United has applied to the Airline Transportation
Stabilization Board ("ATSB") for $1.8 billion in Federal loan guarantees as part
of United's attempt to raise $2.0 billion in new financing. On October 22, 2002,
United filed an updated business plan with the ATSB that reportedly contained
additional cost reductions beyond that considered in its initial business plan;
United also indicated that it was working with its vendors, lessors and lenders
on additional measures to improve its financial position. United has recently
requested the Company to consider restructuring the payment terms of its
existing transactions together with participating in the non-guaranteed portion
of the secured ATSB loan. Although the Company has had some discussions with
United on its request, it cannot predict whether those discussions will lead to
a mutually acceptable restructuring and whether United ultimately will be
successful in obtaining the approval for the ATSB loan. While the Company cannot
predict the outcome of such discussions, the Company continues to believe that
the allowance for losses on receivables is maintained at a level adequate to
cover losses in receivables. However, in the event that United defaults on a
substantial number of aircraft, there could be a material adverse effect on the
Company's earnings, cash flows or financial position until such time as the
aircraft are successfully redeployed.
The Company's second largest customer, AirTran, accounted for $928.6 million and
$651.5 million (8.4% and 7.4% of total Company portfolio, excluding equipment
held for sale or re-lease, net of accumulated depreciation) at September 30,
2002 and December 31, 2001, respectively. Investments in AirTran EETC's and
common stock of $41.7 million and $46.4 million at September 30, 2002 and
December 31, 2001, respectively, are included in the AirTran portfolio. On
October 23, 2002, Boeing announced that AirTran signed an agreement with the
Company to lease 22 of the 24 aircraft returned by American Airlines. The
aircraft are scheduled for delivery in 2003.
The Company's third largest customer, Boeing, accounted for $907.9 million and
$217.9 million (8.2% and 2.5% of total Company portfolio, excluding equipment
held for sale or re-lease, net of accumulated depreciation) at September 30,
2002 and December 31, 2001, respectively. During the second quarter of 2002,
American Airlines returned 24 B-717 aircraft. Boeing guarantees a substantial
portion of the rental streams of these aircraft; thus, in effect Boeing became
the lessee under these leases. On October 23, 2002, Boeing announced that
AirTran signed an agreement with the Company to lease 22 of the 24 aircraft
returned by American Airlines. The aircraft are scheduled for delivery in 2003.
The remaining two aircraft were placed on lease during October 2002.
The Company's fourth largest customer, American Trans Air Holdings Corp.
("ATA"), accounted for $600.0 million and $311.0 million (5.4% and 3.5% of total
Company portfolio, excluding equipment held for sale or re-lease, net of
accumulated depreciation) at September 30, 2002 and December 31, 2001,
respectively. An investment in ATA preferred stock (including accrued dividends)
of $31.3 million and $30.1 million at September 30, 2002 and December 31, 2001,
respectively, is included in the ATA portfolio. Based on publicly available
reports, ATA experienced a net loss of $114.1 million for the nine months ended
September 30, 2002. As of the filing date hereof, ATA is current on all of its
payment obligations to the Company. ATA has applied for a loan administered by
the ATSB and expects to meet the conditions set by the ATSB to fund this loan.
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
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 2002
B-717 $ 1,669.0 $ 124.5 $ - $ - $ 1,793.5
B-737 98.8 670.8 - 19.4 789.0
B-747 216.7 248.6 - - 465.3
B-757 801.1 295.2 - 35.1 1,131.4
B-767 158.9 270.9 - 69.4 499.2
B-777 1,087.2 - - - 1,087.2
DC-9(3) 120.7 6.6 - 1.2 128.5
MD-80(3) 396.4 121.8 - 18.2 536.4
MD-90(3) 119.5 - - 37.4 156.9
DC-10(3) 76.2 62.4 - 3.5 142.1
MD-11(3) 267.2 576.2 - 224.2 1,067.6
Other Aircraft(4) 372.5 60.2 - 9.5 442.2
Asset Pools(6) - - 551.3 - 551.3
Other(7) - - 43.5 - 43.5
---------------------------------------------------------------------------------------------
$ 5,384.2 $ 2,437.2 $ 594.8 $ 417.9 $ 8,834.1
=============================================================================================
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) - - 164.7 - 164.7
Other(7) - - 40.5 - 40.5
---------------------------------------------------------------------------------------------
$ 4,034.2 $2,070.5 $ 205.2 $ 396.1 $ 6,706.0
=============================================================================================
(1) Excludes executive aircraft of $987.5 million and $865.8 million at
September 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 party part and service providers.
(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 asset pools secured by various commercial
aircraft types.
(7) Represents investments in mandatorily redeemable
preferred stock, common stock and bonds.
At September 30, 2002, 59.1% of the Aircraft Financial Services portfolio
(excluding investments) was comprised of aircraft vintages 2002 through 1998,
15.8% was comprised of aircraft vintages 1997 through 1993, 14.3% was comprised
of aircraft vintages 1992 through 1988, 6.0% was comprised of aircraft vintages
1987 through 1983, 3.7% was comprised of aircraft vintages 1982 and older, and
1.1% of portfolio is unsecured.
US Airways Group, Inc. filed for bankruptcy-court protection under Chapter 11
in August 2002. The Company does not have any significant exposure related to
US Airways Group, Inc.
Guarantees
At September 30, 2002, the Company was the beneficiary under $2,158.0 million of
guarantees with respect to its portfolio relating to transactions totaling
$4,241.5 million (36.8% 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 Domestic
(Dollars in millions) Airlines Airlines Equipment Total
- ------------------------------------------------------------------------------------------------------------------------
Amounts guaranteed by:
Boeing $ 1,572.4 $ 392.8 $ 36.9 $ 2,002.1
McDonnell Douglas Corporation 100.4 15.6 - 116.0
Other(1) 25.7 14.2 - 39.9
--------------------------------------------------------------
$ 1,698.5 $ 422.6 $ 36.9 $ 2,158.0
==============================================================
(1) Excludes guarantees made by entities affiliated with the primary obligor.
Guarantee amounts by aircraft type or equipment at September 30, 2002 are
summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------
Net Asset
(Dollars in millions) Guarantee Value
- --------------------------------------------------------------------------------------------------------------------------
B-717 $ 1,022.3 $ 1,726.8
Out of production twin-aisle aircraft 417.1 860.3
Out of production single-aisle aircraft 110.7 156.4
Other Boeing and regional aircraft 571.0 1,461.1
Other equipment 36.9 36.9
-------------------------------------
$ 2,158.0 $ 4,241.5
=====================================
During the nine months ended September 30, 2002, the Company recognized income
of $41.4 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 September 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 $ 6,120.9 $ 2,093.4 $ 106.0 $ 8,320.3 72.1%
Europe 956.7 83.4 - 1,040.1 9.0
Latin America 757.7 269.4 - 1,027.1 8.9
Asia 817.7 132.2 - 949.9 8.2
Africa 88.9 - - 88.9 0.8
Australia 66.8 - - 66.8 0.6
Canada 25.4 17.3 - 42.7 0.4
-------------------------------------------------------------------------------------------------
$ 8,834.1 $ 2,595.7 $ 106.0 $ 11,535.8 100.0%
=================================================================================================
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 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.4 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
1. Form 8-K dated July 17, 2002, to release earnings for the quarterly
period ended June 30, 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
November 6, 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)