Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

Commission file number 0-10795

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value $100 per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  ¨  No  þ

No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at February 25, 2005: 50,000 shares

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

DOCUMENTS INCORPORATED BY REFERENCE:  None

Table of Contents

Table of Contents

*Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

Table of Contents

PART I

Item 1. Business

GENERAL

Boeing Capital Corporation (together with its subsidiaries, herein referred to as “us,” “we,” “our” or the “Company”) is an indirect wholly owned subsidiary of The Boeing Company (“Boeing”). Boeing Capital Services Corporation (“BCSC”) owns 100% of our stock and is an indirect wholly owned subsidiary of Boeing and a largely inactive holding company. We were incorporated in Delaware in 1968. For the commercial aircraft market, we facilitate, arrange, structure and/or provide selective financing solutions to Boeing’s Commercial Airplanes segment customers. For the defense and space markets, we primarily engage in arranging and structuring financing solutions for Boeing’s Integrated Defense Systems (“IDS”) segment government and commercial customers.

On May 24, 2004, we entered into a purchase and sale agreement with General Electric Capital Corporation (“GECC”) to sell substantially all of the assets related to our former Commercial Financial Services (“CFS”) business, which was primarily engaged in providing lease and loan financing to a broad range of commercial and industrial customers. The purchase agreement, as amended, called for the sale of the assets to take place in a series of closings, commencing on May 31, 2004, and ending no later than December 31, 2004. The final asset sale closed on December 27, 2004. As a result, the information presented in this report, including “Item 7. Management’s Narrative Analysis of the Results of Operations” and “Item 8. Financial Statements and Supplementary Data,” reflects the CFS business as discontinued operations for all periods.

In conjunction with the announced intent to dispose of our CFS business and consistent with our strategic priority to support the sale of Boeing products and services by facilitating, arranging, structuring and/or providing selective financing solutions, we reassessed our external segment reporting structure in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This reassessment included an evaluation of our internal operating structure, which took into account the level for which management makes operating decisions and assesses performance, as well as the economic characteristics shared by our internal operating segments. Accordingly, we determined that we have only one reportable segment for external segment reporting purposes, substantially consisting of our Aircraft Financial Services business. See “Item 8. Financial Statements and Supplementary Data,” for information relating to the operating results for this segment.

At December 31, 2004, our portfolio consisted of financing leases, notes and other receivables, equipment under operating leases, investments and assets held for sale or re-lease. At December 31, 2004, our portfolio totaled $9.7 billion, of which $9.3 billion was related to Boeing products, primarily commercial aircraft.

At December 31, 2004, we owned 340 commercial aircraft and four C-40 aircraft and had partial ownership or security interests in an additional 202 commercial aircraft, including those owned in joint ventures, Equipment Trust Certificates (“ETCs”), Enhanced Equipment Trust Certificates (“EETCs”) and other investment transactions.

RISK MANAGEMENT

In 2004, we created a formal risk management organization to evaluate, report, and mitigate the risk of providing equipment financing. This included adding new human resources and tools as well as establishing new processes. For example, we set a target level for the maximum level of income volatility that our portfolio may produce. We are now assessing that volatility, as well as the economic capital required to support our portfolio, using a statistical program that we developed during the year. Our new focus on risk led to the sale of several assets from our aircraft financing portfolio. Additional actions to reduce risk concentrations, not all involving asset sales, are currently being considered.

RELATIONSHIP WITH BOEING AND BCSC

We have agreements with Boeing that are significant to our operation. These agreements provide for financial support, and corporate services, among other things. For further discussion of these agreements, see “Item 8. Financial Statements and Supplementary Data,” Note 3. At December 31, 2004, Boeing provided us with various types of partial

1

Table of Contents

and full guarantees, including first loss deficiency guarantees, residual value guarantees and rental loss guarantees, with a maximum potential value of $2.9 billion with respect to portfolio assets totaling $4.4 billion. For further discussion of these guarantees, see “Item 8. Financial Statements and Supplementary Data,” Note 3.

For a further description of significant factors that may affect Boeing, see Boeing’s Annual Report on Form 10-K for the year ended December 31, 2004.

COMPETITIVE CONDITIONS

The markets in which we operate are highly competitive. Within the commercial aircraft market, we facilitate, arrange, structure and/or provide selective financing solutions for Boeing’s Commercial Airplanes segment customers. We provide similar solutions for Boeing’s IDS segment customers in the defense and space markets. Consequently, our primary competitors include the customer financing activities of other aerospace and defense companies offering in-house customer financing. The Boeing sales we finance are influenced by conditions prevailing in the aerospace and financial markets, and in business generally. The financing solutions we develop must be competitive as a part of the overall sales campaign in order for Boeing to win orders in either the commercial aircraft or space and defense markets. Since our preference is to facilitate and arrange financing solutions, we seek to work with other financial institutions whenever possible rather than compete with them. However, on occasion during campaigns we face competition from parties offering competing aircraft financing. In selling or re-leasing aircraft in our portfolio when they are returned to us, we compete with other leasing companies and financial institutions in the used aircraft market. We compete primarily on pricing, terms, structure and service. The prices at which we sell aircraft and lease rates are impacted by the number and type of aircraft that are parked and currently out of service. For further discussion on the airline industry environment, see “Item 7. Management’s Narrative Analysis of the Results of Operations,” “Business Environment and Trends.”

SIGNIFICANT CONCENTRATIONS

See “Item 8. Financial Statements and Supplementary Data,” Note 16 for a discussion of our geographic and portfolio concentrations.

GOVERNMENT REGULATION

Certain aspects of our business are subject to regulation and require the oversight and regulation by state, federal and foreign governmental authorities. We are also subject to various laws and judicial and administrative decisions, mostly as a result of our activities as an asset-backed lender and lessor, that restrict or regulate (a) our credit granting activities; (b) the establishment of maximum interest rates, finance charges or other charges; (c) our disclosures to customers; (d) the secured transactions we enter into; (e) our collection, foreclosure, repossession and claims handling procedures and other trade practices; and (f) the use and reporting of information related to a borrower’s or lessee’s credit experience and other data collection. Existing laws and regulations have not had a material adverse effect on our business. However, it is not possible to forecast future changes to legislation, regulations, judicial decisions, orders or interpretations or their impact upon our future business, financial condition, results of operations and/or cash flows.

EMPLOYEES

At December 31, 2004, we had 183 employees, compared with 241 at December 31, 2003. The decrease was attributable to the sale of our CFS business and to the consolidation of our infrastructure in Renton, Washington to reduce cost, increase efficiency and improve productivity. While we believe that our current level of employment is adequate to support our current and projected business operations over the next year, our actual employment levels may vary from our current levels due to changes in the needs and requirements of our business operations. No employees are covered by collective bargaining agreements. We believe our employee relations are satisfactory. As of February 25, 2005, we have 174 employees.

AVAILABLE INFORMATION

General information about us can be found at www.boeing.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through Boeing’s website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (“SEC”). These reports may also be obtained at the SEC’s public reference room at 450 Fifth Street N.W., Washington, DC 20549.

2

Table of Contents

The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Boeing and Boeing Capital Corporation.

Item 2. Properties

We lease all of our office space under operating leases. Our corporate headquarters is located in Renton, Washington where we lease our main administrative and operational facility from a third party, with a second leased space in a building owned by Boeing. We also lease marketing and administrative office space in El Segundo and Irvine, California in buildings under lease to Boeing. In connection with the relocation of our corporate and administrative offices to Renton, Washington in 2004, we intend to vacate our Long Beach, California office in 2005 and in the interim will attempt to sublease it. During 2004, we also vacated space in Atlanta, Georgia with a lease that expires in December 2005.

Six regional marketing offices, formerly used by our CFS business, located throughout the United States in Chicago, Illinois; Detroit, Michigan; Austin, Texas; Boston, Massachusetts; Baltimore, Maryland; and New York, New York were closed during 2004.

We have five international offices in Stockholm, Sweden; Brussels, Belgium; Dublin, Ireland; Hong Kong, China; and Moscow, Russia.

We believe that our properties are suitable and adequate to meet the requirements of our business.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

3

Table of Contents

PART II

We are a wholly owned subsidiary of BCSC, an indirect wholly owned subsidiary of Boeing, and accordingly, there is no public trading market for our common stock. In 2004, we declared and paid cash dividends to BCSC of $705 million which ultimately were paid as dividends to Boeing. No dividends were paid in 2003.

The most restrictive provisions of our various debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At December 31, 2004, as well as during the year, we were in compliance with these and all of our various other debt covenants.

4

Table of Contents

Item 6. Selected Financial Data (Unaudited)

In 2004, we disposed of our CFS business. Accordingly, the information set forth in the table below, except for total assets, has been presented to exclude the CFS business as it has been deemed to be discontinued operations. The selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and with “Item 7. Management’s Narrative Analysis of the Results of Operations.”

5

Table of Contents

Item 7. Management’s Narrative Analysis of the Results of Operations

The following should be read in conjunction with our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”

Business Environment and Trends

At December 31, 2004, our portfolio consisted of financing leases, notes and other receivables, equipment under operating leases, investments and assets held for sale or re-lease.

Worldwide air travel experienced a strong rebound in 2004. This rebound is notable in that it represents a recovery from the levels of 2003 which were depressed by the Severe Acute Respiratory Syndrome outbreak in Asia, and represents a traffic level that exceeds the previous record which was set in 2000. It has taken the industry four years to exceed that level, indicating the difficulties faced by the world’s airlines as they have dealt with the effects of recession, terrorism, and disease. This traffic volume has been driven by strong worldwide economic growth, which stimulates demand and declining real airline yields which makes air travel more affordable to more people.

This increase in demand has produced high load factors, but not produced industrywide profitability due to a significant increase in the price of jet fuel. The world’s airlines have made great strides in cost efficiency, only to see those improvements be more than offset by price increases of jet fuel. The worldwide increases in the price of crude oil that began in mid-2003 and peaked in late 2004 have contributed to world airline losses that are estimated to be about $5 billion dollars in 2004 and represent the fourth consecutive year of losses for the world’s airlines.

This large industry loss does not mean that all airlines are losing money in the current environment. We are seeing divergence in the profitability of different types of airlines as their different business models are proving to be vulnerable or robust to these environmental changes.The hardest hit have been the large U.S. network carriers. These airlines

6

Table of Contents

were the most damaged by the results of the 2001 terrorist attacks on the U.S. and have been the most vulnerable to increasing competition and technology changes that are changing the air travel business. The large network airlines outside the U.S. have been more successful in dealing with the challenges of 2004, most are profitable despite current fuel prices, and they continue to order new airplanes. The airlines that have fared best are the low-cost, low-fare airlines. They have been consistently profitable throughout the current challenges and their continued growth represents a real change in the air travel market. These airlines also continue to order and to take delivery of new airplanes.

Further recovery in profitability for the world’s airlines is highly dependent on the future movement in oil and fuel prices; as these prices fall the prospects of the world’s airlines will improve. As profitability improves and air travel demand continues to increase with increasing economic activity, we see an improvement in the prospects for future airplane orders and deliveries. Future profitability is also impacted by continued competitive fare pricing or a lack of improvement in yields. Future airline profitability may lead to an increase in demand for new and used aircraft resulting in overall increases in values and lease rates for the aircraft in our portfolio.

Aircraft values and lease rates are impacted by the number and type of aircraft that are currently out of service. The number of worldwide parked commercial jet aircraft has declined by approximately 100 aircraft from the number of aircraft parked at December 31, 2003, reaching a new post-September 11, 2001 low in terms of both the number of parked aircraft and the parked percentage of the active fleet. Approximately 1,900 commercial jet aircraft (10.6% of current world fleet) continue to be parked, including both in production and out-of-production aircraft types.

Our portfolio at December 31, 2004 totaled $9.7 billion, of which $9.3 billion was related to Boeing products, primarily commercial aircraft. While worldwide traffic levels exceed traffic levels carried by the airlines in 2000, the effects of declining yields and higher fuel prices on the airline industry continue to impact commercial aircraft values. Recently published sources and market transactions indicate that, while lease rates for aircraft are increasing, values for the various aircraft types serving as collateral in our portfolio generally have not increased. Aircraft valuations could decline materially if significant numbers of aircraft, particularly types with relatively few operators, are idled on account of further airline bankruptcies or restructurings. At the same time, the credit ratings of many airlines, particularly in the U.S., have remained at low levels. A substantial portion of our portfolio is concentrated among U.S. commercial airline customers. Certain customers have filed for bankruptcy protection or requested lease or loan restructurings; these negotiations were in various stages as of December 31, 2004. These bankruptcies or restructurings could have a material adverse effect on our earnings, cash flows and/or financial position. See “Item 8. Financial Statements and Supplementary Data,” Note 13 for a discussion on our restructurings and restructuring requests.

On January 12, 2005, Boeing decided to conclude production of the 717 program in 2006 due to the lack of overall market demand for the aircraft. While we continue to believe in the utility and marketability of the 717 aircraft, we are unable to predict whether or how the end of the 717 program, as well as overall market conditions, may impact 717 aircraft values and rental rates. At December 31, 2004, $2.4 billion of our portfolio was collateralized by 717 aircraft. At December 31, 2004, we were the beneficiary under $1.7 billion of guarantees from Boeing covering $2.3 billion of our 717 portfolio. Should the 717 aircraft suffer a significant decline in utility and market acceptance, the aircraft values may decline, which could result in an increase to the allowance for losses on receivables. While we are unable to predict the likelihood of these impacts occurring, such impacts could result in a potential material adverse effect on our earnings, cash flows and/or financial position.

In October 2003, Boeing announced the decision to end production of the 757 program, and the final 757 aircraft was produced in October 2004. We are unable to determine how much the decline in value of used 757 aircraft was attributable to the decision to end production of the 757 program. The impact of decline in value of used 757 aircraft was reflected in our allowance for losses on receivables at December 31, 2004. At December 31, 2004, $1.5 billion of our portfolio was collateralized by 757 aircraft of various vintages and variants. This included $1.2 billion of passenger aircraft (33 aircraft at 12 operators). The remainder of the 757 portfolio consisted of converted freighters on long-term lease. At December 31, 2004, we were the beneficiary under guarantees from Boeing covering $546 million of our 757 portfolio.

7

Table of Contents

Overview

During 2004, we focused on supporting Boeing’s major operating units and managing our overall corporate exposures. During the year ended December 31, 2004, we completed the sale of substantially all of our CFS business to GECC and relocated certain of our administrative operations from California to Washington.

Our portfolio at December 31, 2004 decreased to $9.7 billion from $10.1 billion at December 31, 2003 due to a significant reduction in new business volume in 2004 compared with 2003 which is primarily a reflection of our change in business strategy. We also sold $1.9 billion of assets related to our CFS business, which has been reflected as discontinued operations and therefore not part of the decrease described above. At December 31, 2004 and 2003, we had $37 million and $232 million of assets that were held for sale or re-lease, of which $25 million and $141 million were identified with firm contracts to be placed on lease.

Additionally, approximately $409 million of our portfolio currently represents scheduled lease terminations in 2005 for which the related aircraft will be remarketed, of which $109 million were identified with firm contracts in place at December 31, 2004 to be sold or placed on lease. Potential delays in selling or placing these assets on lease at reasonable rates may negatively affect our earnings, cash flows and/or financial position.

The following table summarizes the net change in our total portfolio over the last two years:

Our net income was $173 million for 2004 compared with $106 million for 2003. Our return on assets for the years ended December 31, 2004 and 2003 was 1.1% and 0.7%.

The increase in our net income and return on assets in 2004 compared with 2003 was principally driven by substantial decreases in the provision for losses from a provision of $151 million in 2003 to a recovery of $38 million in 2004. This decrease was due to receivable recoveries and asset sales during 2004, lower charges relating to receivable restructuring in 2004 compared with 2003, cross-collateralization (reducing collateral exposure), refinements in portfolio measurements in 2004 and a decline in our receivables portfolio. The increase in our net income was partially offset by a decrease in our total revenue and increases in operating expenses, asset impairment expense and debt redemption costs. In addition, our income from discontinued operations declined due to the sale of a substantial portion of our CFS business to GECC. We recognized a gain on the sale related to the CFS assets sold to GECC.

8

Table of Contents

Consolidated Results of Operations

The following table presents our operating results for the years ended December 31:

9

Table of Contents

Results of Operations

Finance revenue (revenue from finance leases, notes and other receivables and equipment under operating leases) for the years ended December 31 was as follows:

The fluctuations in finance lease income and operating lease income closely follow the change in mix of finance and operating leases in our portfolio in 2004 compared with 2003.

The decrease in finance lease income for 2004 compared with 2003 was due to a decrease in finance lease assets, as portfolio run-off exceeded the new leases entered into during 2004. Additionally, we restructured some finance leases in late 2003 that were reclassified to operating leases, resulting in reduced finance lease income in 2004.

The increase in interest income on notes receivable for 2004 compared with 2003 was due to an increase in the size of our notes receivable portfolio during most of the year (prior to some asset sales in the last half of the year) along with marginal increases in the underlying rates on our variable rate loans.

The increase in operating lease income in 2004 reflects the increased number of operating leases. This was partially offset by lower rental rates due to the commercial airline industry decline and the increased age of aircraft leased during the year.

Investment income.  The decrease in investment income in 2004 compared with 2003 was primarily due to the reduction in our investment balance to $326 million at December 31, 2004 from $475 million at December 31, 2003, the failure of ATA Holdings Corp. (“ATA”) to pay dividends on preferred stock in the second half of 2004, and the three month transfer of a Delta Air Lines, Inc. (“Delta”) EETC investment to Boeing in the third quarter of 2004. In addition, there was a gain of $6 million on the sale of common stock in 2003 that was not repeated in 2004. See “Item 8. Financial Statements and Supplementary Data,” Note 8.

Net gain on disposal.  We sold approximately $280 million of our portfolio during 2004 for a net gain of $31 million compared with a $38 million gain on sale of assets having a book value of $17 million in 2003. Although the principal value sold increased in 2004, the net gain decreased because of a sale in 2003 of a note receivable which had previously been written down to zero. These types of gains are intermittent in nature and depend in part on market conditions at the time of disposal and our decision to sell or re-lease when equipment is returned. There can be no assurance that we will recognize such gains in the future.

Other income.  The decrease in other income was primarily due to a $35 million gain in 2003 on the revaluation and sale of two-thirds of the warrants received in connection with a financing transaction compared with a $2 million realized derivative loss and $15 million of income related to the approval of our bankruptcy claim relating to Hawaiian Airlines, Inc. (“Hawaiian”) in 2004.

Interest expense.  The decrease in interest expense was primarily due to a reduction in average debt balances in 2004 compared with 2003 as a result of debt repayments of $2.1 billion and a decrease in the weighted average annual effective interest rate incurred on all borrowings to 4.31% in 2004 from 4.68% in 2003.

Depreciation expense  (on equipment under operating leases and equipment held for re-lease). The higher depreciation expense was primarily due to the increase in equipment under operating leases from 2003 to 2004 offset by the effect of dispositions and write-downs.

10

Table of Contents

Provision (recovery) for losses.  During 2004, we had a recovery of $38 million primarily due to the following: a benefit of $53 million as a result of recognizing the full effect of certain collateral agreements; a benefit of $28 million due to refinements in the methodology for measuring collateral values by changing from an averaging method to a median value and changing from a portfolio based weighted average life to the weighted average life of each receivable; a benefit of $11 million due to the sale of various notes (thus decreasing collateral exposure); a $49 million increase of additional exposure for ATA; and a $17 million increase to cover normal exposure due to changes in portfolio assets and changes in aircraft collateral values.

The provision for losses in 2003 was $151 million, principally attributable to a provision of $130 million recorded in the first quarter of 2003 as a result of an overall decline in the credit quality of our customers and in aircraft collateral values. The remainder of the provision recorded in 2003 related to a general provision to cover normal exposure due to portfolio asset run-off and changes in aircraft collateral values.

The provision for losses maintains the allowance for losses on receivables at a level we deem to be adequate to cover anticipated losses. Any additional provision to be taken in the future 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 make it difficult to sell or redeploy the aircraft. Aircraft valuations could decline materially if significant numbers of aircraft, particularly types with relatively few operators, are idled on account of further airline bankruptcies or restructurings.

Asset impairment expense.  We recognized asset impairment expense of $106 million in 2004 compared with $92 million in 2003. Asset impairment expense during 2004 included $47 million related to an other-than-temporary impairment of a held-to-maturity investment with ATA, $32 million related to a write-down of an investment in an EETC which finances aircraft with Delta, $16 million of specific impairment charges related primarily to aircraft trading and $11 million of valuation loss on one Boeing Business Jet (“BBJ”) reclassified from discontinued operations to continuing operations as a result of Boeing’s decision to retain the aircraft on lease from us in its executive fleet. The BBJ is now under an operating lease agreement with Boeing. The asset impairment expense in 2003 was due to a decline in values of aircraft equipment under operating leases and held for sale or re-lease.

Any additional impairment charges to be taken in the future 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 make it difficult to sell or redeploy such aircraft. Aircraft valuations could decline materially if significant numbers of aircraft, particularly types with relatively few operators, are idled on account of further airline bankruptcies or restructurings.

Debt redemption costs.  Debt redemption costs were a result of our early debt redemption of $1.0 billion face value of outstanding senior notes in 2004 which consisted of a $52 million prepayment penalty for early redemption offset by $10 million of benefit derived from fair value hedges of the redeemed debt.

Other expenses.  The decrease in other expenses was primarily attributable to a $20 million expense recovery related to the approval of our Hawaiian bankruptcy claim settlement, partially offset by an increase of $36 million in aircraft maintenance and modification expenses due to the growth in the market for older and used aircraft in 2004. Additionally, we recorded a $21 million write-off in the first quarter of 2003 of forward-starting interest rate swaps that no longer qualified for fair value hedge accounting treatment.

Minority interest.   Minority interest in 2004 and 2003 was related to our interest in the BATA Leasing, LLC (“BATA”) joint venture (a joint venture arrangement between us and ATA).

Provision for income taxes.  The effective income tax rate was 33.9% in 2004 compared with 19.8% in 2003. The increase in the effective income tax rate is primarily due to lower Foreign Sales Corporation (“FSC”) and Extraterritorial Income (“ETI”) exclusion tax benefits of $7 million in 2004 compared with $16 million in 2003. The effective income tax rates for both years vary from the federal statutory tax rate of 35% primarily due to the FSC and ETI benefits and state income taxes.

Income from discontinued operations, net of tax.  Income from discontinued operations includes the operating results of our CFS business. Revenue from this business was $96 million in 2004 compared with $229 million for 2003, a decrease of $133 million.

11

Table of Contents

Net gain on disposal of discontinued operations, net of tax.  In 2004 we recognized a gain of $72 million ($46 million net of tax) related to the sale of assets of our CFS business to GECC and a loss of $6 million ($4 million net of tax) related to the revaluation of discontinued operations assets held for sale at December 31, 2004, to their fair value less costs to sell.

LIQUIDITY AND CAPITAL RESOURCES

Our total cash and cash equivalents were $642 million at December 31, 2004, down from $716 million at December 31, 2003. Net income in 2004 generated $284 million in net cash from operating activities in addition to the $2.0 billion proceeds from the sale of our CFS business. This source of cash in combination with our cash on hand and with a reduction of new business volume of $1.1 billion, allowed for repayment of our debt by $2.1 billion and payment of cash dividends to Boeing of $705 million.

Liquidity

We have liquidity requirements primarily to fund ongoing financing commitments, meet debt obligations and fund our operating expenses. We expect to satisfy these liquidity needs from the following sources:

-    cash from operations and other receipts from our portfolio,

-    issuance of commercial paper and other debt,

-    asset sales and securitization, and

-    fundings from Boeing

Outstanding debt at December 31, 2004 decreased to $7.0 billion from $9.2 billion at December 31, 2003 while the weighted average annual effective interest rates declined to 4.31% from 4.68%. During 2004, we did not issue any new debt and had no commercial paper borrowings outstanding. During 2004, we repaid $2.1 billion of debt, including the redemption of $1.0 billion face value of our outstanding senior notes in July 2004 ahead of their scheduled redemption. For more information about our debt redemption, see “Item 8. Financial Statements and Supplementary Data,” Note 10.

We attempt to schedule our debt payments to correspond to scheduled receipts from our portfolio. We have historically satisfied a significant portion of our cash requirements from diversified global funding sources and are not dependent on any one lender. We believe we have adequate liquidity sources and access to the capital markets to allow us to fulfill our current commitments. If this belief does not prove to be correct, we would be required to restrict our new business volume, unless we obtained access to other sources of capital at rates that allow for a reasonable return on new business.

Risks that could affect our sources of liquidity include among others:

-    a severe or prolonged downturn in the economy,

-    significant restructurings, defaults or bankruptcies by airlines, and

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

We continually assess our leverage, generally as measured by our debt to equity ratio, in light of the risks in our business. These risks include, among others, the exposure in our portfolios; general market conditions, especially those associated with our customers; future financing commitments; and our ability to access the capital markets.

We have a significant degree of borrowing capacity. We have $2.0 billion of unused borrowing limits under Boeing’s committed revolving credit line agreements with a syndicate of leading banks. We have a Commercial Paper (“CP”) program with a nominal value of $2.0 billion that serves as a potential low-cost source of short-term liquidity subject to market conditions. Any CP program usage would be backed by an equivalent amount of unused credit lines. There are no amounts outstanding under the CP program. We have $3.4 billion in available shelf registrations filed with the SEC.

12

Table of Contents

In addition, we have short-term access to off-shore funding sources under a Euro medium-term note program in the amount of $1.5 billion that is currently inactive but available with updated registration statements. We believe our internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and also provide adequate financial flexibility to meet potential business funding requirements should they arise within the next year.

We have a support agreement with Boeing that includes a liquidity provision. Under this provision, Boeing has committed itself to make contributions to us to the extent our fixed charge coverage falls below 1.05-to-1 on a four-quarter rolling basis.

The most restrictive provisions of our various debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At December 31, 2004, as well as during the year, we were in compliance with these and all of our various other debt covenants.

Ratio of Income to Fixed Charges

Our ratios of income to fixed charges for the years ended December 31, 2004 and 2003 were 1.52 and 1.25.

Income consists of income from continuing operations before provision for income taxes and fixed charges. Fixed charges include interest and related debt expense. The increase in the ratio in 2004 compared with 2003 was attributable to higher net income and lower interest expense in 2004.

Credit Ratings

Our access to capital at rates that allow for a reasonable return on new business can be affected by credit rating agencies’ ratings of our debt. Our credit ratings are closely tied to those of Boeing.

We have the following credit ratings as of the filing date of this report:

Although credit ratings may impact the rate at which we can borrow funds, a credit rating is not a recommendation to buy, sell or hold securities. In addition, a credit rating is subject to revision or withdrawal at any time by the assigning rating organization.

Given our current ratings and ratings outlook from the various credit rating agencies, we believe we have ready access to the capital markets. Our credit ratings are tied to those of Boeing due to the support agreement entered into between Boeing and us in December 2003. Our ratings and spreads could be impacted positively or negatively by changing perceptions of Boeing, which in turn may reflect changing views of the airline industry or the defense industry or of Boeing’s competitive positions in them. It is always possible that such changes could affect our access to the capital markets.

Off-Balance Sheet Arrangements

We are a party to off-balance sheet arrangements as defined by the SEC, including guarantor obligations and variable interests in unconsolidated entities.

13

Table of Contents

Guarantor Obligations

The following table provides quantitative data regarding our third-party guarantees. The maximum potential payment amounts represent a “worst-case scenario,” and do not necessarily reflect results that we expect. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payment obligations under guarantees. The carrying value of liabilities recorded on the consolidated balance sheets reflects fees received for extending those guarantees.

We have issued various residual value guarantees. Under these arrangements, we are obligated to make payments to a guaranteed party if the related aircraft or equipment fair values fall below a specified amount at a future time. These obligations are collateralized principally by commercial aircraft.

We have issued credit and deficiency guarantees. Under these arrangements, we are obligated to make payments to a guaranteed party if the original debtor or lessee does not make payments. Current outstanding credit and deficiency guarantees expire within the next eight years.

Material Variable Interests in Unconsolidated Entities

Our investments in ETCs, EETCs and Special Purpose Entities (“SPEs”) are included within the scope of Revised Interpretation No. 46 (“FIN 46(R)”), “Consolidation of Variable Interest Entities.” All entities that were required to be consolidated under FIN 46(R) had been previously consolidated and therefore, the adoption of FIN 46(R) had no impact on our consolidated financial statements.

From 1999 through 2004 we invested in ETCs and EETCs, which are trusts that passively hold debt investments for a large number of aircraft to enhance liquidity for investors, who in turn pass this liquidity benefit directly to airlines in the form of lower coupon and/or greater debt capacity. ETCs and EETCs provide investors with tranched rights to cash flows from a financial instrument, as well as a collateral position in the related asset. Our investments in ETCs and EETCs do not require consolidation under FIN 46(R). We believe that our maximum exposure to economic loss from ETCs and EETCs is $321 million, which represents our investment balance. Accounting losses, if any, from period to period could differ. At December 31, 2004, the ETC and EETC transactions we participated in had total assets of $3.9 billion and total debt (which is non-recourse to us) of $3.6 billion. During 2004, we recorded revenue of $28 million and cash flows of $70 million related to these investments.

From 1998 through 2004 we provided subordinated loans to certain SPEs that are utilized by the airlines, lenders and loan guarantors, including, for example, the Export-Import Bank of the United States. All of these SPEs are included in the scope of FIN 46(R); however, only certain SPEs require consolidation. SPE arrangements are utilized to isolate individual transactions for legal liability or tax purposes, or to perfect security interests from our perspective, as well as, in some cases, that of a third-party lender in certain leveraged lease transactions. We believe that our maximum exposure to economic loss from non-consolidated SPE arrangements that are VIEs is $43 million, which represents our investment balance. Accounting losses, if any, from period to period could differ. At December 31, 2004, these SPE arrangements

14

Table of Contents

had total assets of $451 million and total debt (which is non-recourse to us) of $408 million. During 2004, we recorded revenue of $3 million and cash flows of $28 million related to these SPEs.

Capital lease obligations

We have off-balance sheet items that relate to capital lease obligations for four cross-border financing transactions each involving an MD-11 aircraft leased by us and subleased to our commercial aircraft customers. At December 31, 2004 these transactions included restricted cash deposits denominated in yen for the equivalent of $115 million and an equal amount of liabilities reflecting our obligations to purchase underlying aircraft with these deposits by 2008. These liabilities and corresponding deposits are considered defeased based upon their structure.

Disclosures About Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations to make future payments or consideration under certain contracts at December 31, 2004, as well as an estimate of the timing in which we expect to satisfy these obligations:

We expect to meet our current obligations through internally generated cash flows (which include scheduled receipts from our portfolio and sales of portfolio assets) and from future borrowings.

The following table summarizes our commercial commitments outstanding at December 31, 2004, as well as an estimate of the timing in which we expect these commitments to mature:

Additionally, Boeing and its indirect wholly owned subsidiary, BCSC had unfunded commercial aircraft financing commitments of $6.0 billion at December 31, 2004. Based on historical experience, it is not anticipated that all of these commitments will be exercised by the customer. However, if there were requirements to fund all of these commitments:

-    up to $464 million may be funded in less than one year,

-    an additional $3.2 billion may be funded in one to three years,

-    an additional $2.3 billion may be funded in three to five years, and

-    an additional $91 million may be funded after five years.

We expect to ultimately provide funding for those commitments which are exercised.

Critical Accounting Policies and Estimates

The following is a summary of accounting policies we believe are most critical to help put in context a discussion concerning the results of operations. We believe our interpretation and application related to these accounting policies are appropriate.

15

Table of Contents

Asset Valuation  We periodically assess the fair value of assets we own, including equipment under operating leases, assets held for sale or re-lease, and collateral underlying receivables to determine if their fair values are less than the related assets’ carrying value. Differences between carrying values and fair values of finance leases and notes and other receivables, as determined by collateral values, are considered in determining the allowance for losses on receivables.

We use a median calculated from published collateral values from multiple external equipment appraisers based on the type and age of the aircraft to determine the fair value of aircraft. Under certain circumstances, we apply judgment based on the attributes of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by outside publications.

Impairment Review for Equipment Under Operating Leases and Held for Sale or Re-lease  When events or circumstances indicate (and no less than annually), we review the carrying value of all aircraft and equipment under operating lease and held for sale or re-lease for potential impairment. In 2004, we reviewed all aircraft and equipment under operating lease and held for sale or re-lease. We evaluate assets under operating lease or held for re-lease for impairment when the expected undiscounted cash flow over the remaining useful life is less than the carrying value. We use various assumptions when determining the expected undiscounted cash flow. These assumptions include expected future lease rates, lease terms, end of economic life value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the remaining economic life of the asset. We state assets held for sale at the lower of carrying value or fair value less costs to sell.

When we determine that impairment is indicated for an asset, the amount of the asset impairment expense recorded is the excess of the carrying value less asset value guarantees, if applicable, over the fair value of the asset. For aircraft assets, we use a median calculated from published fair values from multiple external equipment appraisers based on the type and age of the asset to determine the fair value. However, if the features or use of the aircraft varies significantly from the generic aircraft attributes covered by outside publications, we apply judgment based on the attributes of the specific aircraft to determine fair value.

Had the fair value of these assets deemed impaired during 2004 been 10% lower at the time each specific impairment had been taken, we estimate that asset impairment expense would have increased by approximately $9 million. We are unable to predict the magnitude or likelihood of any future impairments.

Allowance for Losses on Receivables  The allowance for losses on receivables is a valuation account used to provide for potential impairment of receivables in our portfolio. The balance represents an estimate of probable but unconfirmed losses in the receivables portfolio. We estimate our allowance for losses on receivables on the basis of two components of receivables: (a) specifically identified receivables that are evaluated individually for impairment and (b) pools of receivables that are evaluated for impairment.

In accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended, we determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectibility include, but are not limited to, a customer’s extended delinquency, requests for restructuring and filings for bankruptcy. We determine a specific impairment allowance based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral. Each quarter, we review customer credit ratings, published historical credit default rates for different rating categories, Boeing and other guarantees (if applicable) and third-party aircraft valuations as a basis to validate the reasonableness of the allowance for losses on receivables. There can be no assurance that actual results will not differ from estimates and values or that the consideration of these factors in the future will not result in an increase/decrease to the allowance for losses on receivables.

The allocation for general purposes represents our best estimate of losses existing in the remaining receivables considering delinquencies, loss experience, collateral values, guarantees, risk of individual customer credits, published historical default rates for different rating categories, results of periodic credit reviews and the general state of the economy and airline industry.

We review the adequacy of the general allowance attributable to the remaining pool of receivables (after excluding receivables subject to a specific allowance) by assessing both the collateral exposure and the applicable cumulative default rate. Collateral exposure for a particular receivable is the excess of the carrying value of the receivable over the fair value of the related collateral. A receivable with an estimated fair value in excess of the carrying value is considered to have no collateral exposure.

16

Table of Contents

Prior to the third quarter of 2004, the collateral value was determined by averaging collateral values obtained from third-party equipment appraisers’ industry data. In the third quarter of 2004, we began determining the collateral value by calculating the median of those appraised values. The median value method provides a better weighted measure of aircraft collateral values. The applicable cumulative default rate is determined using two components: customer credit ratings and weighted average remaining contract term. Internal credit ratings are identified for each customer in the portfolio. Those ratings are updated based upon public information and information obtained directly from our customers. Prior to the third quarter of 2004, we based the cumulative default rate on the weighted average remaining life of the entire portfolio. In the third quarter of 2004, we began determining the cumulative default rate for each receivable based on its weighted average remaining life. By measuring each receivable’s weighted average remaining life as opposed to using a portfolio average, we have increased the overall accuracy of this measurement.

We have entered into agreements with certain customers that would entitle us to look beyond the specific collateral underlying the receivable for purposes of determining the collateral exposure as described above. Should the proceeds from the sale of the underlying collateral asset resulting from a default condition be insufficient to cover the carrying value of our receivable (creating a shortfall condition), these agreements, would, for example, permit us to take the actions necessary to sell or retain certain other assets in which the customer has an equity interest and use the proceeds to cover the shortfall.

Prior to the third quarter of 2004, the calculation of the general allowance did not take into account collateral exposure mitigation for certain receivables that could arise from enforcing the agreements described in the previous paragraph because we concluded it was not probable that we would take the actions necessary to realize such exposure mitigation for those receivables. Such actions could include making significant investments in securities with a senior collateral position. During the third quarter of 2004, we reassessed the feasibility of enforcing such agreements in the event of default. We determined that it was appropriate to now realize the impact of these agreements on certain receivables for purposes of determining the general allowance because of our intention and ability to protect the value of the underlying collateral.

In recognition of the uncertainty of the ultimate loss experience and relatively long duration of the portfolio, a range of reasonably possible outcomes of the portfolio’s credit-adjusted collateral exposure is calculated by varying the applicable default rate by approximately plus and minus 15%. The resulting range of allowance necessary to cover credit-adjusted collateral exposure as of December 31, 2004, was approximately $235 million to $240 million. We adjusted the valuation allowance to $240 million at December 31, 2004.

Lease Residual Values  Operating leases are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. We recognize changes to the estimated residual values for equipment under operating leases by adjusting depreciation expense in periods subsequent to the review. At December 31, 2004, the residual value of our total equipment under operating leases was $2.2 billion. Estimates used in determining residual values significantly impact the amount and timing of depreciation expense for equipment under operating leases. If future residual values were to decrease 5% from our present estimates, it would increase our depreciation on equipment under operating leases by approximately $15 million in 2004. These amounts would be charged to depreciation expense during the remaining lease terms such that the net investment in operating leases at the end of the lease terms would be equal to the revised residual values.

Finance leases are recorded at the aggregated future minimum lease payments plus estimated residual values less unearned finance income. We perform periodic reviews of the estimated residual values and, for finance leases, recognize permanent impairments in the current period as a reduction to finance lease income. At December 31, 2004, our aggregate finance lease residual balance was $882 million. Estimates used in determining residual values significantly impact the amount and timing of impairment for our finance leases. If future market values were to decrease 5% from our present estimates, it would not significantly change the impairment charges on our finance leases. Any impairment charges would be recorded as a reduction to finance lease income in the current year.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our assets and liabilities, both fixed-rate and floating-rate, may be subject to interest rate and foreign exchange risk to the extent that the currency denominations, maturities and repricing characteristics of the liabilities do not perfectly match those of the assets. Nearly all of our assets and liabilities are denominated in U.S. dollars. The types and terms of borrowing and hedging instruments that are available to us in the market and possible changes in assets terms limit our ability to match assets and liabilities. This exposure to mismatch risk is managed through the use of interest rate and currency swaps, and we do not believe that we are exposed to material gains or losses due to interest rate or currency changes.

17

Table of Contents

We have used public market information and common valuation methods to determine the fair value of our assets and liabilities. Our estimates are not necessarily indicative of the amounts we could realize in a current market exchange, and the use of different assumptions or valuation methods could have a material effect on the estimated fair value amounts.

At December 31, 2004, the carrying value of our assets was $10.3 billion and the carrying value of our liabilities was $8.9 billion. We use duration gap analysis to estimate the impact of changes in interest rates. Potential changes in twelve-month net interest income and in the current discounted value of the assets and liabilities are calculated based on the amount and timing of cash flows projected from each.

At December 31, 2004 and 2003, we estimated that if market interest rates for all maturities were affected by an immediate, one-time, 100-basis-point increase, our net earnings, taking into account increases in both revenue and interest expense, would have changed by an amount that is immaterial to the results of operations. Additionally, although the assets and liabilities affected by a change in interest rates are generally not traded, we estimated that the net present value of these assets and liabilities would have changed by an amount that is immaterial to our financial position.

Item 8. Financial Statements and Supplementary Data

The following pages include our consolidated financial statements as described in Item 14 (a)1 and (a)2 of Part IV herein.

18

Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholder

Boeing Capital Corporation

Renton, Washington

We have audited the accompanying consolidated balance sheets of Boeing Capital Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholder’s equity, and comprehensive income and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Boeing Capital Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company has discontinued a significant portion of its Commercial Financial Services business in May 2004. The gain on sale and results prior to the sale are included in income from discontinued operations in the accompanying consolidated financial statements.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

February 25, 2005

19

Table of Contents

Boeing Capital Corporation and Subsidiaries

Consolidated Balance Sheets

See Notes to Consolidated Financial Statements.

20

Table of Contents

Boeing Capital Corporation and Subsidiaries

Consolidated Statements of Operations

See Notes to Consolidated Financial Statements.

21

Table of Contents

Boeing Capital Corporation and Subsidiaries

Consolidated Statements of Shareholder’s Equity and Comprehensive Income