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AIR LEASE CORP 10-Q 2013

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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, 2013

 

OR

 

o         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 001-35121

 

AIR LEASE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-1840403

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

2000 Avenue of the Stars, Suite 1000N
Los Angeles, California

 

90067

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (310) 553-0555

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

At November 7, 2013, there were 101,754,302 shares of Air Lease Corporation’s Class A Common Stock outstanding.

 

 

 



Table of Contents

 

Air Lease Corporation and Subsidiaries

 

Form 10-Q

For the Quarterly Period Ended September 30, 2013

 

TABLE OF CONTENTS

 

 

Page

Note About Forward-Looking Statements

3

PART I—FINANCIAL INFORMATION

 

Item 1

Financial Statements

 

 

Consolidated Balance Sheets—September 30, 2013 and December 31, 2012 (unaudited)

4

 

Consolidated Statements of Income—Three and Nine months Ended September 30, 2013 and 2012 (unaudited)

5

 

Consolidated Statement of Shareholders’ Equity—Nine months Ended September 30, 2013 (unaudited)

6

 

Consolidated Statements of Cash Flows—Nine months Ended September 30, 2013 and 2012 (unaudited)

7

 

Notes to Consolidated Financial Statements (unaudited)

8

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4

Controls and Procedures

26

PART II—OTHER INFORMATION

 

Item 1

Legal Proceedings

27

Item 1A

Risk Factors

27

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3

Defaults Upon Senior Securities

27

Item 4

Mine Safety Disclosures

27

Item 5

Other Information

27

Item 6

Exhibits

28

 

Signatures

29

 

Index of Exhibits

30

 

2



Table of Contents

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

Statements in this quarterly report on Form 10-Q that are not historical facts may constitute “forward-looking statements,” including any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in such statements, including as a result of the following factors, among others:

 

·                                          our inability to make acquisitions of, or lease, aircraft on favorable terms;

 

·                                          our inability to obtain additional financing on favorable terms, if required, to complete the acquisition of sufficient aircraft as currently contemplated or to fund the operations and growth of our business;

 

·                                          our inability to obtain refinancing prior to the time our debt matures;

 

·                                          impaired financial condition and liquidity of our lessees;

 

·                                          deterioration of economic conditions in the commercial aviation industry generally;

 

·                                          increased maintenance, operating or other expenses or changes in the timing thereof;

 

·                                          changes in the regulatory environment;

 

·                                          our inability to effectively deploy the net proceeds from our capital raising activities;

 

·                                          potential natural disasters and terrorist attacks and the amount of our insurance coverage, if any, relating thereto; and

 

·                                          the factors discussed under “Part I — Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2012 and other SEC filings.

 

All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. You are therefore cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

3



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.            FINANCIAL STATEMENTS

 

Air Lease Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value amounts)

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

221,680

 

$

230,089

 

Restricted cash

 

85,516

 

106,307

 

 

 

 

 

 

 

Flight equipment subject to operating leases

 

7,791,520

 

6,598,898

 

Less accumulated depreciation

 

(551,432

)

(347,035

)

 

 

7,240,088

 

6,251,863

 

 

 

 

 

 

 

Deposits on flight equipment purchases

 

966,674

 

564,718

 

Deferred debt issue costs—less accumulated amortization of $46,489 and $32,288 as of September 30, 2013 and December 31, 2012, respectively

 

88,118

 

74,219

 

Other assets

 

206,225

 

126,428

 

Total assets

 

$

8,808,301

 

$

7,353,624

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Accrued interest and other payables

 

$

123,604

 

$

90,169

 

Debt financing, net of discounts

 

5,466,278

 

4,384,732

 

Security deposits and maintenance reserves on flight equipment leases

 

539,975

 

412,223

 

Rentals received in advance

 

53,589

 

41,137

 

Deferred tax liability

 

164,049

 

92,742

 

Total liabilities

 

$

6,347,495

 

$

5,021,003

 

Shareholders’ Equity

 

 

 

 

 

Preferred Stock, $0.01 par value; 50,000,000 shares authorized; no shares issued or outstanding

 

$

 

$

 

Class A Common Stock, $0.01 par value; authorized 500,000,000 shares; issued and outstanding 99,924,963 and 99,417,998 shares at September 30, 2013 and December 31, 2012, respectively

 

991

 

991

 

Class B Non-Voting Common Stock, $0.01 par value; authorized 10,000,000 shares; issued and outstanding 1,829,339 shares at September 30, 2013 and December 31, 2012

 

18

 

18

 

Paid-in capital

 

2,202,731

 

2,198,501

 

Retained earnings

 

257,066

 

133,111

 

Total shareholders’ equity

 

$

2,460,806

 

$

2,332,621

 

Total liabilities and shareholders’ equity

 

$

8,808,301

 

$

7,353,624

 

 

See accompanying notes

 

4



Table of Contents

 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

Rental of flight equipment

 

$

213,835

 

$

172,856

 

$

610,237

 

$

459,643

 

Interest and other

 

2,070

 

2,069

 

5,537

 

6,008

 

Total revenues

 

215,905

 

174,925

 

615,774

 

465,651

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Interest

 

41,946

 

35,248

 

125,644

 

91,308

 

Amortization of discounts and deferred debt issue costs

 

6,012

 

4,595

 

16,571

 

11,553

 

Interest expense

 

47,958

 

39,843

 

142,215

 

102,861

 

 

 

 

 

 

 

 

 

 

 

Depreciation of flight equipment

 

71,811

 

57,932

 

204,457

 

154,805

 

Selling, general and administrative

 

17,497

 

12,833

 

48,392

 

40,750

 

Stock-based compensation

 

3,751

 

7,124

 

17,839

 

24,548

 

Total expenses

 

141,017

 

117,732

 

412,903

 

322,964

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

74,888

 

57,193

 

202,871

 

142,687

 

Income tax expense

 

(26,310

)

(20,182

)

(71,307

)

(50,577

)

Net income

 

$

48,578

 

$

37,011

 

$

131,564

 

$

92,110

 

 

 

 

 

 

 

 

 

 

 

Net income per share of Class A and Class B Common Stock:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

$

0.37

 

$

1.30

 

$

0.91

 

Diluted

 

$

0.46

 

$

0.36

 

$

1.25

 

$

0.90

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

101,753,783

 

101,247,337

 

101,440,360

 

100,906,094

 

Diluted

 

109,227,709

 

107,875,105

 

108,784,560

 

107,574,616

 

 

See accompanying notes

 

5



Table of Contents

 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

Preferred Stock

 

Class A Common Stock

 

Class B Non-Voting
Common Stock

 

Paid-in

 

Retained

 

 

 

(unaudited)

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

 

Balance at December 31, 2012

 

 

$

 

99,417,998

 

$

991

 

1,829,339

 

$

18

 

$

2,198,501

 

$

133,111

 

$

2,332,621

 

Issuance of restricted stock units

 

 

 

954,980

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

167

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

 

 

17,839

 

 

17,839

 

Cash dividends

 

 

 

 

 

 

 

 

(7,609

)

(7,609

)

Tax withholding related to vesting of restricted stock units

 

 

 

(448,182

)

 

 

 

(13,609

)

 

(13,609

)

Net income

 

 

 

 

 

 

 

 

131,564

 

131,564

 

Balance at September 30, 2013

 

 

$

 

99,924,963

 

$

991

 

1,829,339

 

$

18

 

$

2,202,731

 

$

257,066

 

$

2,460,806

 

 

See accompanying notes

 

6



Table of Contents

 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

Operating Activities

 

 

 

 

 

Net income

 

$

131,564

 

$

92,110

 

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

 

 

 

 

 

Depreciation of flight equipment

 

204,457

 

154,805

 

Stock-based compensation

 

17,839

 

24,548

 

Deferred taxes

 

71,307

 

50,573

 

Amortization of discounts and deferred debt issue costs

 

16,571

 

11,553

 

Changes in operating assets and liabilities:

 

 

 

 

 

Other assets

 

7,917

 

(20,114

)

Accrued interest and other payables

 

30,679

 

48,085

 

Rentals received in advance

 

12,452

 

10,936

 

Net cash provided by operating activities

 

492,786

 

372,496

 

Investing Activities

 

 

 

 

 

Acquisition of flight equipment under operating lease

 

(955,587

)

(1,651,831

)

Payments for deposits on flight equipment purchases

 

(631,758

)

(185,373

)

Acquisition of furnishings, equipment and other assets

 

(80,226

)

(71,484

)

Net cash used in investing activities

 

(1,667,571

)

(1,908,688

)

Financing Activities

 

 

 

 

 

Issuance of common stock

 

 

43

 

Cash dividends paid

 

(5,065

)

 

Tax withholdings related to vesting of restricted stock units

 

(13,609

)

(7,312

)

Net change in unsecured revolving facilities

 

819,000

 

(28,000

)

Proceeds from debt financings

 

615,871

 

2,042,389

 

Payments in reduction of debt financings

 

(355,975

)

(344,912

)

Restricted cash

 

20,791

 

(15,627

)

Debt issue costs

 

(29,020

)

(39,487

)

Security deposits and maintenance reserve receipts

 

135,611

 

108,968

 

Security deposits and maintenance reserve disbursements

 

(21,228

)

(21,994

)

Net cash provided by financing activities

 

1,166,376

 

1,694,068

 

Net increase/(decrease) in cash

 

(8,409

)

157,876

 

Cash and cash equivalents at beginning of period

 

230,089

 

281,805

 

Cash and cash equivalents at end of period

 

$

221,680

 

$

439,681

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for interest, including capitalized interest of $23,124 and $13,698 for the nine months ended September 30, 2013 and 2012

 

$

129,463

 

$

68,307

 

Supplemental Disclosure of Noncash Activities

 

 

 

 

 

Buyer furnished equipment, capitalized interest, deposits on flight equipment purchases and seller financing applied to acquisition of flight equipment

 

$

245,414

 

$

136,850

 

Cash dividends declared, not yet paid

 

$

2,544

 

$

 

 

See accompanying notes

 

7



Table of Contents

 

Air Lease Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.         Company Background and Overview

 

Air Lease Corporation (the “Company”, “ALC”, “we”, “our” or “us”) is incorporated in the State of Delaware and licensed to operate in the State of California. The Company is principally engaged in the leasing of commercial aircraft to airlines throughout the world. We supplement our leasing revenues by providing management services to investors and owners of aircraft portfolios, for which we receive fee-based revenue. These services include leasing, remarketing, and lease management and sales services, with the goal of helping our clients maximize lease and sale revenues. In addition to our leasing activities and management services, and depending on market conditions, we sell aircraft from our fleet to other leasing companies, financial services companies and airlines.

 

Note 2.         Basis of Preparation

 

The Company consolidates financial statements of all entities in which we have a controlling financial interest, including the accounts of any Variable Interest Entity in which we have a controlling financial interest and for which we are determined to be the primary beneficiary. All material intercompany balances are eliminated in consolidation. The accompanying Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and in accordance 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 GAAP for complete financial statements.

 

The accompanying unaudited consolidated financial statements include all adjustments, including only normal, recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows at September 30, 2013, and for all periods presented. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results expected for the year ending December 31, 2013. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Note 3.         Debt Financing

 

The Company’s consolidated debt as of September 30, 2013 and December 31, 2012 are summarized below (in thousands):

 

 

 

September 30,
2013

 

December 31,
2012

 

Unsecured

 

 

 

 

 

Senior notes

 

$

2,170,620

 

$

1,775,000

 

Revolving credit facilities

 

1,239,000

 

420,000

 

Term financings

 

265,155

 

248,916

 

Convertible senior notes

 

200,000

 

200,000

 

 

 

3,874,775

 

2,643,916

 

Secured

 

 

 

 

 

Warehouse facilities

 

839,000

 

1,061,838

 

Term financings

 

691,329

 

688,601

 

Export credit financing

 

73,203

 

 

 

 

1,603,532

 

1,750,439

 

 

 

 

 

 

 

Total secured and unsecured debt financing

 

5,478,307

 

4,394,355

 

Less: Debt discount

 

(12,029

)

(9,623

)

Total debt

 

$

5,466,278

 

$

4,384,732

 

 

At September 30, 2013, we were in compliance in all material respects with the covenants in our debt agreements, including our financial covenants concerning debt-to-equity, tangible net equity, unencumbered assets and interest coverage ratios.

 

8



Table of Contents

 

The Company’s secured obligations as of September 30, 2013 and December 31, 2012 are summarized below (in thousands, except number of aircraft which are reflected in units):

 

 

 

September 30,
2013

 

December 31,
2012

 

Nonrecourse

 

$

859,494

 

$

1,085,941

 

Recourse

 

744,038

 

664,498

 

Total

 

$

1,603,532

 

$

1,750,439

 

Number of aircraft pledged as collateral

 

52

 

55

 

Net book value of aircraft pledged as collateral

 

$

2,479,319

 

$

2,728,636

 

 

Senior Unsecured Notes

 

On October 1, 2013, the Company issued $185.0 million in aggregate amount of senior unsecured notes in a private placement to institutional investors.  The notes are comprised of $53.0 million of 3.64% senior unsecured notes due 2016 and $132.0 million of 4.49% senior unsecured notes due 2019.

 

On August 26, 2013, the Company received an investment grade corporate credit rating of BBB- from Standard and Poor’s Ratings Services (“S&P”) with a stable outlook.  The BBB- rating was also assigned to the Company’s $2.0 billion senior unsecured notes due 2016, 2017, and 2020.  Effective August 26, 2013, the additional interest of 0.50% per annum assessed on the senior unsecured notes due 2017 was eliminated due to the rating of the notes by S&P.

 

On June 26, 2013, the Company concluded its offer to exchange up to $151.6 million aggregate principal amount of new notes for any and all of its outstanding 7.375% senior unsecured notes due January 30, 2019, pursuant to a Senior Notes Indenture, dated as of March 16, 2012, as supplemented by a Supplemental Indenture, dated as of June 26, 2013.  The Company issued $132.0 million aggregate principal amount of its 5.625% senior notes due 2017 in exchange for $125.4 million aggregate principal amount of the old notes.

 

On February 5, 2013, the Company issued $400.0 million in aggregate principal amount of senior unsecured notes due 2020 pursuant to the Company’s effective shelf registration statement previously filed with the SEC. The notes are senior unsecured obligations of the Company and bear interest at a rate of 4.75% per annum.

 

Unsecured Revolving Credit Facilities

 

On November 4, 2013, the Company increased the maximum amount for which it can borrow under its Syndicated Unsecured Revolving Credit Facility by $300.0 million to $2.0 billion. The Company previously amended its Syndicated Unsecured Revolving Credit Facility on May 7, 2013. Pursuant to the amendment, we increased the maximum amount for which we can borrow under this facility by $607.0 million to $1.7 billion, extended the availability period from 3 years to 4 years to May 2017, and reduced the pricing from LIBOR plus a margin of 1.75% with no LIBOR floor and an undrawn fee of 0.375% to LIBOR plus 1.45% with no LIBOR floor and a 0.30% facility fee.

 

Effective August 26, 2013, the pricing of our Syndicated Unsecured Revolving Credit Facility has been further reduced to LIBOR plus 1.25% with no LIBOR floor and a 0.25% facility fee as a result of the investment grade corporate credit rating of BBB- obtained from S&P.

 

The total amount outstanding under our unsecured revolving credit facilities was $1.2 billion and $420.0 million as of September 30, 2013 and December 31, 2012, respectively.

 

Secured Warehouse Facilities

 

On June 21, 2013, a wholly-owned subsidiary of the Company entered into an amendment and restatement of the “2010 Warehouse Facility”. The 2010 Warehouse Facility, as amended, provides the Company with financing of up to $1.0 billion, modified from the original facility size of $1.5 billion. The Company is able to draw on the 2010 Warehouse Facility, as amended, during an availability period that was extended from June 2013 to June 2015 with a subsequent four year term out option. The interest rate on the 2010 Warehouse Facility, as amended, was reduced from LIBOR plus 2.50% to LIBOR plus 2.25% on drawn balances and from 0.75% to 0.50% per annum on undrawn balances.

 

9



Table of Contents

 

As of September 30, 2013, the Company had borrowed $839.0 million under our Warehouse Facilities and pledged 32 aircraft as collateral with a net book value of $1.2 billion. As of December 31, 2012, the Company had borrowed $1.1 billion under the Warehouse Facilities and pledged 38 aircraft as collateral with a net book value of $1.6 billion. The Company had pledged cash collateral and lessee deposits of $75.8 million and $104.3 million at September 30, 2013 and December 31, 2012, respectively.

 

Secured Term Financings

 

In September 2013, the Company amended a portfolio of six secured term loans aggregating $168.3 million with one of its lenders. Pursuant to the amendments, we reduced the composite interest rate of the loans by 40 basis-points, extended certain loan maturities and improved the principal amortization profiles of the loans.

 

Maturities

 

Maturities of debt outstanding as of September 30, 2013 are as follows (in thousands):

 

Years ending December 31,

 

 

 

2013

 

$

46,270

 

2014

 

217,220

 

2015

 

267,209

 

2016

 

894,114

 

2017

 

2,645,140

 

Thereafter

 

1,408,354

 

Total(1)(2)

 

$

5,478,307

 

 


(1)         As of September 30, 2013, the Company had $664.3 million of debt outstanding under the 2010 Warehouse Facility, as amended, for which the availability period expires in June 2015. The outstanding drawn balance at the end of the availability period may be converted at the Company’s option to an amortizing, four-year term loan and has been presented as such in the maturity schedule above.

(2)         As of September 30, 2013, the Company had $1.2 billion of debt outstanding under our unsecured revolving credit facilities. The outstanding drawn balances may be rolled until the maturity date of each respective facility and have been presented as such in the maturity schedule above.

 

Note 4.         Commitments and Contingencies

 

Aircraft Acquisition

 

As of September 30, 2013 we had commitments to acquire a total of 338 new aircraft for delivery as follows:

 

Aircraft Type

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Airbus A320/321-200

 

4

 

13

 

6

 

 

 

 

23

 

Airbus A320/321 NEO

 

 

 

 

3

 

12

 

35

 

50

 

Airbus A350-900/1000(1)

 

 

 

 

 

 

30

 

30

 

Boeing 737-800

 

6

 

13

 

18

 

17

 

11

 

 

65

 

Boeing 737-8/9 MAX(2)

 

 

 

 

 

 

104

 

104

 

Boeing 777-300ER

 

 

5

 

9

 

1

 

 

 

15

 

Boeing 787-9/10

 

 

 

 

 

1

 

44

 

45

 

ATR 72-600

 

1

 

4

 

1

 

 

 

 

6

 

Total

 

11

 

35

 

34

 

21

 

24

 

213

 

338

 

 


(1)         As of September 30, 2013, five of the Airbus A350-1000 aircraft were subject to reconfirmation.

(2)         As of September 30, 2013, 20 of the Boeing 737-8 MAX aircraft were subject to reconfirmation.

 

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Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $28.1 billion at September 30, 2013 are as follows (in thousands):

 

Years ending December 31,

 

 

 

2013

 

$

609,148

 

2014

 

2,311,910

 

2015

 

2,235,724

 

2016

 

1,312,001

 

2017

 

1,625,100

 

Thereafter

 

20,020,467

 

Total

 

$

28,114,350

 

 

We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $966.7 million and $564.7 million as of September 30, 2013 and December 31, 2012, respectively, which are subject to manufacturer performance commitments. If we are unable to satisfy our purchase commitments, we may forfeit our deposits. Further, we would be subject to breach of contract claims by our lessees and manufacturers.

 

Note 5.        Net Earnings Per Share

 

Basic net earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if the effect of including these shares would be anti-dilutive. The Company’s two classes of common stock, Class A and Class B Non-Voting, have equal rights to dividends and income, and therefore, basic and diluted earnings per share are the same for each class of common stock.

 

Diluted net earnings per share takes into account the potential conversion of stock options, restricted stock units, and warrants using the treasury stock method and convertible notes using the if-converted method.  For the three and nine months ended September 30, 2013, the Company excluded 150,000 shares related to stock options which were potentially dilutive securities from the computation of diluted earnings per share because including these shares would be anti-dilutive.  For the three and nine months ended September 30, 2012, the Company excluded 3,358,408 shares related to stock options which were potentially dilutive securities from the computation of diluted earnings per share because including these shares would be anti-dilutive.  In addition, the Company excluded 1,573,280 and 2,114,957 shares related to restricted stock units for which the performance metric had yet to be achieved as of September 30, 2013 and 2012, respectively.

 

The following table sets forth the reconciliation of basic and diluted net income per share (in thousands, except share amounts):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

Net income

 

$

48,578

 

37,011

 

131,564

 

92,110

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

101,753,783

 

101,247,337

 

101,440,360

 

100,906,094

 

Basic net income per share

 

$

0.48

 

0.37

 

1.30

 

0.91

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

Net income

 

$

48,578

 

37,011

 

131,564

 

92,110

 

Assumed conversion of convertible senior notes

 

1,458

 

1,448

 

4,326

 

4,261

 

Net income plus assumed conversions

 

$

50,036

 

38,459

 

135,890

 

96,371

 

Denominator

 

 

 

 

 

 

 

 

 

Number of shares used in basic computation

 

101,753,783

 

101,247,337

 

101,440,360

 

100,906,094

 

Weighted-average effect of dilutive securities

 

7,473,926

 

6,627,768

 

7,344,200

 

6,668,522

 

Number of shares used in per share computation

 

109,227,709

 

107,875,105

 

108,784,560

 

107,574,616

 

Diluted net income per share

 

$

0.46

 

0.36

 

1.25

 

0.90

 

 

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Note 6.         Fair Value Measurements

 

Assets and Liabilities Measured at Fair Value on a Recurring and Non-recurring Basis

 

The Company had no assets or liabilities which are measured at fair value on a recurring or non-recurring basis as of September 30, 2013 or December 31, 2012.

 

Financial Instruments Not Measured at Fair Value

 

The fair value of debt financing is estimated based on the quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities, which would be categorized as a Level 2 measurement in the fair value hierarchy. The estimated fair value of debt financing as of September 30, 2013 was $5,615.9 million compared to a book value of $5,466.3 million. The estimated fair value of debt financing as of December 31, 2012 was $4,517.6 million compared to a book value of $4,384.7 million.

 

The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at September 30, 2013, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at September 30, 2013 approximates their carrying value as reported on the consolidated balance sheet.  The fair value of all these instruments would be categorized as Level 1 of the fair value hierarchy.

 

Note 7.         Stock-based Compensation

 

In accordance with the Amended and Restated Air Lease Corporation 2010 Equity Incentive Plan (“Plan”), the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) authorized under the Plan is approximately 8,193,088 as of September 30, 2013. Options are generally granted for a term of 10 years and generally vest over a three year period. There are two kinds of RSUs: those that vest based on the attainment of book-value goals and those that vest based on the attainment of Total Shareholder Return (“TSR”) goals. The book-value RSUs generally vest ratably over three to four years, if the performance condition has been met. Book-value RSUs for which the performance metric has not been met are forfeited.  The TSR RSUs vest at the end of a three year period.  The number of TSR RSUs that will ultimately vest is based upon the percentile ranking of the Company’s TSR among a peer group. The number of shares that will ultimately vest will range from 0% to 200% of the RSUs initially granted depending on the extent to which the TSR metric is achieved.

 

The Company recorded $3.8 million and $7.1 million of stock-based compensation expense for the three months ended September 30, 2013 and 2012, respectively. Stock-based compensation expense for the nine months ended September 30, 2013 and 2012 totaled $17.8 million and $24.5 million, respectively.

 

Stock Options

 

A summary of stock option activity in accordance with the Company’s stock option plan as of September 30, 2013, and changes for the nine month period then ended, follows:

 

 

 

Shares

 

Exercise
Price

 

Remaining
Contractual Term
(in years)

 

Aggregate
Intrinsic Value
(in thousands)(1)

 

Balance at December 31, 2012

 

3,358,408

 

$

20.39

 

7.49

 

$

4,813

 

Granted

 

 

 

 

 

Exercised

 

(500

)

20.00

 

6.79

 

5

 

Forfeited/canceled

 

(250

)

20.00

 

 

2

 

Balance at September 30, 2013

 

3,357,658

 

$

20.39

 

6.75

 

$

24,571

 

Vested and exercisable as of September 30, 2013

 

3,357,658

 

$

20.39

 

6.75

 

$

24,571

 

 


(1)         The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of our Class A Common Stock as of the respective date.

 

As of June 30, 2013, all of the Company’s outstanding employee stock options had fully vested.  As a result, there was no stock-based compensation expense related to employee stock options for the three months ended September 30, 2013, compared to $3.0

 

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million for the three months ended September 30, 2012.  Stock-based compensation expense related to employee stock options for the nine months ended September 30, 2013 and 2012 totaled $5.4 million and $8.8 million, respectively.

 

The following table summarizes additional information regarding exercisable and vested options at September 30, 2013:

 

 

 

Options exercisable
and vested

 

Range of exercise prices

 

Number of
Shares

 

Weighted-
Average
Remaining Life
(in years)

 

$20.00

 

3,207,658

 

6.7

 

$28.80

 

150,000

 

7.6

 

$20.00 - $28.80

 

3,357,658

 

6.7

 

 

Restricted Stock Units

 

Compensation cost for stock awards is measured at the grant date based on fair value and recognized over the vesting period.  The fair value of book-value RSUs is determined based on the closing market price of the Company’s Class A Common Stock on the date of grant, while the fair value of TSR RSUs is determined at the grant date using a Monte Carlo simulation model. Included in the Monte Carlo simulation model were certain assumptions regarding a number of highly complex and subjective variables, such as expected volatility, risk-free interest rate and expected dividends. To appropriately value the award, the risk-free interest rate is estimated for the time period from the valuation date until the vesting date and the historical volatilities were estimated based on a historical timeframe equal to the time from the valuation date until the end date of the performance period. Due to our limited stock history since the completion of our initial public offering on April 25, 2011, historical volatility was estimated based on all available information.

 

During the nine months ended September 30, 2013, the Company granted 418,484 RSUs of which 201,058 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the nine months ended September 30, 2013:

 

 

 

Unvested Restricted Stock Units

 

 

 

Number of
Shares

 

Weighted-Average
Grant-Date
Fair Value

 

Unvested at December 31, 2012

 

2,117,510

 

$

21.40

 

Granted

 

418,484

 

31.97

 

Vested

 

(954,980

)

20.86

 

Forfeited/canceled

 

(7,734

)

28.22

 

Unvested at September 30, 2013

 

1,573,280

 

24.51

 

Expected to vest after September 30, 2013(1)

 

1,561,321

 

24.50

 

 


(1)         RSUs expected to vest reflect an estimated forfeiture rate.

 

The Company recorded $3.8 million and $4.1 million of stock-based compensation expense related to RSUs for the three months ended September 30, 2013 and 2012, respectively. The Company recorded $12.5 million and $15.7 million of stock-based compensation expense related to RSUs for the nine months ended September 30, 2013 and 2012, respectively.

 

As of September 30, 2013, there was $16.1 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs granted to employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted-average remaining period of 1.35 years.

 

Note 8. Litigation

 

On April 24, 2012, the Company was named as a defendant in a complaint filed in Superior Court of the State of California for the County of Los Angeles by American International Group, Inc. and ILFC (the “AIG/ILFC Complaint”). The complaint also names as defendants certain executive officers and employees of the Company. American International Group withdrew as a plaintiff on all but one cause of action that is not asserted against the Company.

 

Among other things, the complaint, as amended, alleges breach of fiduciary duty, misappropriation of trade secrets, the wrongful recruitment of ILFC employees, and the wrongful diversion of potential ILFC leasing opportunities. The complaint seeks an

 

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unspecified amount of damages and injunctive relief. The Company believes that it has meritorious defenses to these claims and intends to defend this matter vigorously. The amount or range of loss, if any, is not estimable at this time.

 

On August 15, 2013, the Company filed a cross-complaint against ILFC and AIG.   Among other things, the cross-complaint, as amended, alleges breach of contract for the sale of goods in connection with an agreement entered into by AIG, acting on behalf of ILFC, in January 2010 to sell 25 aircraft to the entity that became Air Lease Corporation.  It also alleges unfair competition by ILFC and AIG. The cross-complaint seeks compensatory damages in excess of $500 million.

 

Note 9. Related Party Transactions

 

In September 2013, the Company, through a limited liability company of which it is the sole member, entered into a purchase agreement to acquire a corporate aircraft.  The right to purchase the corporate aircraft was formerly held by an entity controlled by Mr. Udvar-Házy, our Chairman and CEO, and not otherwise affiliated with the Company.  The parties conducted this transaction on an arm’s-length basis.  The Company believes, based on independent expert advice, that at the time the Company entered into the purchase agreement, the purchase price of the aircraft was significantly below the then-current fair market value for such aircraft.  The Company reimbursed Mr. Udvar-Házy $6.8 million for deposits he paid to the manufacturer plus interest at a rate of 3.9% per annum.

 

During the three months ended September 30, 2013, the Company completed a marketed secondary public offering of 8,000,000 shares of its Class A Common Stock held by affiliates of Ares Management LLC, Leonard Green & Partners, L.P. and WL Ross & Co. LLC. The shares of Class A Common Stock were offered to the public at $26.75 per share. The Company did not issue any additional shares of Class A Common Stock and did not receive any proceeds in this transaction. The total number of shares of the Company’s Class A Common Stock outstanding did not change as a result of this offering.

 

As of September 30, 2013, one of our directors, Ian M. Saines, is Group Executive of the Institutional Banking and Markets division of Commonwealth Bank of Australia, a lender under the Syndicated Unsecured Revolving Credit Facility and the 2010 Warehouse Facility.

 

Note 10.  Subsequent Events

 

On October 15, 2013, the Company entered into an exchange agreement with an existing security holder of the Company, pursuant to which the Company agreed to issue 1,829,339 shares of its Class A Common Stock to such security holder in exchange for an equal number of shares of the Company’s Class B Non-Voting Common Stock in a transaction (the “Exchange”) exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. Following the satisfaction of certain closing conditions, the Exchange closed on October 17, 2013. No commission or other remuneration was paid or given directly or indirectly for solicitation of the Exchange, and no cash consideration was paid for the shares of Class A Common Stock issued in the Exchange.

 

The Class A Common Stock and the Class B Non-Voting Common Stock are treated equally and identically, except with respect to voting rights and conversion rights. The Class A Common Stock and the Class B Non-Voting Common Stock have equal rights to dividends and income, and, therefore, the Company uses the total number of shares of outstanding common stock to compute basic net earnings per share and diluted earnings per share. As a result of the Exchange, the total number of outstanding shares of Class A Common Stock increased by 1,829,339 shares, and no shares of Class B Non-Voting Common Stock are issued or outstanding. The Exchange did not increase the total number of outstanding shares of the Company’s common stock.

 

On November 7, 2013, our board of directors approved our fourth consecutive quarterly cash dividend of $0.03 per share on our outstanding common stock. The dividend will be paid on January 7, 2014 to holders of record of our common stock as of December 17, 2013.

 

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ITEM 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Overview

 

During the quarter ended September 30, 2013, the Company continued to execute on our primary business plan to acquire new, fuel-efficient commercial aircraft from aircraft manufacturers and to lease those aircraft to airlines around the world. We grew our fleet through the acquisition of eight aircraft from our new order pipeline. We continued to supplement our leasing revenues by providing management services to investors and owners of aircraft portfolios, for which we receive fee-based revenue. These services include leasing, remarketing, and lease management and sales services, with the goal of helping our clients maximize lease and sale revenues. As of September 30, 2013, we managed four aircraft compared to three aircraft as of September 30, 2012. In addition to our leasing activities and management services, and depending on market conditions, we sell aircraft from our fleet to other leasing companies, financial services companies and airlines.

 

We ended the third quarter of 2013 with 182 aircraft comprised of 136 single-aisle narrowbody jet aircraft, 31 twin-aisle widebody jet aircraft and 15 turboprop aircraft, with a weighted average age of 3.6 years. We ended 2012 with 155 aircraft, comprised of 118 single-aisle narrowbody jet aircraft, 27 twin-aisle widebody jet aircraft and 10 turboprop aircraft, with a weighted average age of 3.5 years. Our fleet grew by 14.3% based on net book value to $7.2 billion as of September 30, 2013 compared to $6.3 billion as of December 31, 2012. All of the aircraft in our fleet were leased as of September 30, 2013 and December 31, 2012.

 

The acquisition and lease of additional aircraft resulted in a 23.7% increase in our rental revenue to $213.8 million for the quarter ended September 30, 2013 compared to $172.9 million for the quarter ended September 30, 2012. Rental revenue for the nine months ended September 30, 2013 increased 32.8% to $610.2 million, compared to $459.6 million for the nine months ended September 30, 2012. Due to the timing of aircraft deliveries the full impact on rental revenue for aircraft acquired during a given period will be reflected in subsequent periods.

 

We recorded earnings before income taxes of $74.9 million for the quarter ended September 30, 2013 compared to $57.2 million for the quarter ended September 30, 2012, an increase of $17.7 million or 30.9%. We recorded earnings before income taxes of $202.9 million for the nine months ended September 30, 2013 compared to $142.7 million for the nine months ended September 30, 2012, an increase of $60.2 million, or 42.2%.  Our profitability increased year over year as our pretax profit margin increased to 34.7% for the quarter ended September 30, 2013 compared to 32.7% for the quarter ended September 30, 2012.  Our pretax profit margin increased to 32.9% for the nine months ended September 30, 2013 compared to 30.6% for the nine months ended September 30, 2012.  Diluted earnings per share increased to $0.46 for the quarter ended September 30, 2013 compared to $0.36 for the quarter ended September 30, 2012, an increase of 27.8%. Diluted earnings per share increased to $1.25 for the nine months ended September 30, 2013 compared to $0.90 for the nine months ended September 30, 2012, an increase of 38.9%.

 

During the quarter ended September 30, 2013, the Company received an investment grade corporate credit rating of BBB- from S&P, further broadening our access to attractively priced capital.  Our financing plans remain focused on raising unsecured debt in the global bank and capital markets, reinvesting cash flow from operations and, to a limited extent, export credit financing. During the quarter ended September 30, 2013 and through November 7, 2013, we entered into additional unsecured debt facilities aggregating $517.0 million. The Company’s unsecured debt as a percentage of total debt increased to 70.7% as of September 30, 2013 from 60.2% as of December 31, 2012, while reducing our composite cost of funds to 3.46% from 3.94% as of December 31, 2012.

 

During the quarter ended September 30, 2013, the Company entered into a definitive purchase agreement with Boeing for the purchase of 30 787-10 aircraft and three additional 787-9 aircraft.  Deliveries of these aircraft are scheduled to commence in 2019 and continue through 2023.

 

Our fleet

 

Portfolio metrics of our fleet as of September 30, 2013 and December 31, 2012 are as follows (dollars in thousands):

 

 

 

September 30, 2013

 

December 31, 2012

 

Fleet size

 

182

 

155

 

Weighted-average fleet age(1)

 

3.6 years

 

3.5 years

 

Weighted-average remaining lease term(1)

 

7.0 years

 

6.8 years

 

Aggregate fleet net book value

 

$

7,240,088

 

$

6,251,863

 

 


(1)         Weighted-average fleet age and remaining lease term calculated based on net book value.

 

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The following table sets forth the net book value and percentage of the net book value of our aircraft portfolio operating in the indicated regions as of September 30, 2013 and December 31, 2012 (dollars in thousands):

 

 

 

September 30, 2013

 

December 31, 2012

 

Region

 

Net Book
Value

 

% of Total

 

Net Book
Value

 

% of Total

 

Asia/Pacific

 

$

3,007,887

 

41.5

%

$

2,245,002

 

35.9

%

Europe

 

2,573,881

 

35.6

 

2,398,531

 

38.4

 

Central America, South America and Mexico

 

844,121

 

11.7

 

788,189

 

12.6

 

U.S. and Canada

 

441,876

 

6.1

 

457,546

 

7.3

 

The Middle East and Africa

 

372,323

 

5.1

 

362,595

 

5.8

 

Total

 

$

7,240,088

 

100.0

%

$

6,251,863

 

100.0

%

 

The following table sets forth the number of aircraft we leased by aircraft type as of September 30, 2013 and December 31, 2012:

 

 

 

September 30, 2013

 

December 31, 2012

 

Aircraft type

 

Number of
Aircraft

 

% of Total

 

Number of
Aircraft

 

% of Total

 

Airbus A319-100

 

7

 

3.8

%

7

 

4.5

%

Airbus A320-200

 

39

 

21.4

 

29

 

18.7

 

Airbus A321-200

 

6

 

3.3

 

5

 

3.2

 

Airbus A330-200

 

16

 

8.8

 

14

 

9.0

 

Airbus A330-300

 

5

 

2.7

 

3

 

1.9

 

Boeing 737-700

 

8

 

4.4

 

8

 

5.2

 

Boeing 737-800

 

44

 

24.2

 

38

 

24.5

 

Boeing 767-300ER

 

3

 

1.7

 

3

 

1.9

 

Boeing 777-200ER

 

1

 

0.6

 

1

 

0.7

 

Boeing 777-300ER

 

6

 

3.3

 

6

 

3.9

 

Embraer E175

 

8

 

4.4

 

8

 

5.2

 

Embraer E190

 

24

 

13.2

 

23

 

14.8

 

ATR 72-600

 

15

 

8.2

 

10

 

6.5

 

Total

 

182

 

100.0

%

155

 

100.0

%

 

As of September 30, 2013 we had commitments to acquire a total of 338 new aircraft for delivery as follows:

 

Aircraft Type

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Airbus A320/321-200

 

4

 

13

 

6

 

 

 

 

23

 

Airbus A320/321 NEO

 

 

 

 

3

 

12

 

35

 

50

 

Airbus A350-900/1000(1)

 

 

 

 

 

 

30

 

30

 

Boeing 737-800

 

6

 

13

 

18

 

17

 

11

 

 

65

 

Boeing 737-8/9 MAX(2)

 

 

 

 

 

 

104

 

104

 

Boeing 777-300ER

 

 

5

 

9

 

1

 

 

 

15

 

Boeing 787-9/10

 

 

 

 

 

1

 

44

 

45

 

ATR 72-600

 

1

 

4

 

1

 

 

 

 

6

 

Total

 

11

 

35

 

34

 

21

 

24

 

213

 

338

 

 


(1)         As of September 30, 2013, five of the Airbus A350-1000 aircraft were subject to reconfirmation.

(2)         As of September 30, 2013, 20 of the Boeing 737-8 MAX aircraft were subject to reconfirmation.

 

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Our current lease placements are in line with expectations and are progressing well. As of September 30, 2013 we have entered into contracts for the lease of new aircraft scheduled to be delivered as follows:

 

Delivery year

 

Number of
Aircraft

 

Number
Leased

 

% Leased

 

2013

 

11

 

11

 

100.0

%

2014

 

35

 

35

 

100.0

%

2015

 

34

 

28

 

82.4

 

2016

 

21

 

5

 

23.8

 

2017

 

24

 

4

 

16.7

 

Thereafter

 

213

 

7

 

3.3

 

Total

 

338

 

90

 

 

 

 

Aircraft industry and sources of revenues

 

Our revenues are principally derived from operating leases with scheduled and charter airlines and we derive more than 90% of our revenues from airlines domiciled outside of the United States. As of September 30, 2013, we had 182 aircraft leased under operating leases to 79 airlines based in 45 countries and we anticipate that most of our revenues in the future will be generated from foreign lessees.

 

The airline industry is cyclical, economically sensitive, and highly competitive. Airlines and related companies are affected by fuel price volatility and fuel shortages, political and economic instability, natural disasters, terrorist activities, changes in national policy, competitive pressures, labor actions, pilot shortages, insurance costs, recessions, health concerns and other political or economic events adversely affecting world or regional trading markets. Our airline customers’ ability to react to and cope with the volatile competitive environment in which they operate, as well as our own competitive environment, will affect our revenues and income.

 

Despite industry cyclicality and current stresses, we remain optimistic about the long-term future of commercial aviation and the growing role that ALC will have in the fleet transactions which will facilitate its continued growth.

 

Liquidity and Capital Resources

 

Overview

 

As we grow our business, our financing strategy remains focused on raising unsecured debt in the global bank and capital markets, reinvesting cash flow from operations and limited utilization of export credit financing. In May 2013, the Company received a corporate credit rating of A- from Kroll Bond Ratings, followed by a second investment grade corporate credit rating of BBB- from S&P in August 2013 further broadening our access to attractively priced capital.

 

Our substantial cash requirements will continue as we expand our fleet through the existing aircraft purchase commitments in our pipeline. We will need to obtain additional financing to fund our commitments. However, we believe that we will have sufficient liquidity to satisfy the operating requirements of our business through the next twelve months.

 

Our liquidity plans are subject to a number of risks and uncertainties, including those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  In addition, macro-economic conditions could hinder our business plans, which could, in turn, adversely affect our financing strategy.

 

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Debt

 

Our debt financing was comprised of the following at September 30, 2013 and December 31, 2012 (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

Senior notes

 

$

2,170,620

 

$

1,775,000

 

Revolving credit facilities

 

1,239,000

 

420,000

 

Term financings

 

265,155

 

248,916

 

Convertible senior notes

 

200,000

 

200,000

 

 

 

3,874,775

 

2,643,916

 

Secured

 

 

 

 

 

Warehouse facilities

 

839,000

 

1,061,838

 

Term financings

 

691,329

 

688,601

 

Export credit financing

 

73,203

 

 

 

 

1,603,532

 

1,750,439

 

 

 

 

 

 

 

Total secured and unsecured debt financing

 

5,478,307

 

4,394,355

 

Less: Debt discount

 

(12,029

)

(9,623

)

Total debt

 

$

5,466,278

 

$

4,384,732

 

Selected interest rates and ratios:

 

 

 

 

 

Composite interest rate(1)

 

3.46

%

3.94

%

Composite interest rate on fixed debt(1)

 

4.86

%

5.06

%

Percentage of total debt at fixed rate

 

50.99

%

53.88

%

 


(1)         This rate does not include the effect of upfront fees, undrawn fees or issuance cost amortization

 

Senior Unsecured Notes

 

On October 1, 2013, the Company issued an aggregate $185.0 million of senior unsecured notes in a private placement to institutional investors.  The notes are comprised of $53.0 million of 3.64% senior unsecured notes due 2016 and $132.0 million of 4.49% senior unsecured notes due 2019.

 

On August 26, 2013, the Company received an investment grade corporate credit rating of BBB- from Standard and Poor’s Ratings Services (“S&P”) with a stable outlook.  The BBB- rating was also assigned to the Company’s $2.0 billion senior unsecured notes due 2016, 2017, and 2020.  Effective August 26, 2013, the special interest of 0.50% per annum assessed on the senior unsecured notes due 2017 was eliminated due to the rating of the notes by S&P.

 

On June 26, 2013, the Company concluded its offer to exchange up to $151.6 million aggregate principal amount of new notes for any and all of its outstanding 7.375% Senior Unsecured Notes due January 30, 2019, pursuant to a Senior Notes Indenture, dated as of March 16, 2012, as supplemented by a Supplemental Indenture, dated as of June 26, 2013.  The Company issued $132.0 million aggregate principal amount of its 5.625% Senior Notes due 2017 in exchange for $125.4 million aggregate principal amount of the old notes.

 

On February 5, 2013, the Company issued $400.0 million in aggregate principal amount of senior unsecured notes due 2020 pursuant to the Company’s effective shelf registration statement previously filed with the SEC. The notes are senior unsecured obligations of the Company and bear interest at a rate of 4.75% per annum.

 

Unsecured Revolving Credit Facilities

 

On November 4, 2013, the Company increased the maximum amount for which it can borrow under its Syndicated Unsecured Revolving Credit Facility by $300.0 million to $2.0 billion. The Company previously amended its Syndicated Unsecured Revolving Credit Facility on May 7, 2013. Pursuant to the amendment, we increased the maximum amount for which we can borrow under this facility by $607.0 million to $1.7 billion, extended the availability period from 3 years to 4 years to May 2017, and reduced the pricing from LIBOR plus a margin of 1.75% with no LIBOR floor and an undrawn fee of 0.375% to LIBOR plus 1.45% with no LIBOR floor and a 0.30% facility fee.

 

Effective August 26, 2013, the pricing of our Syndicated Unsecured Revolving Credit Facility has been further reduced to LIBOR plus 1.25% with no LIBOR floor and a 0.25% facility fee as a result of the investment grade corporate credit rating of BBB- obtained from S&P.

 

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The total amount outstanding under our unsecured revolving credit facilities was $1.2 billion and $420.0 million as of September 30, 2013 and December 31, 2012, respectively.

 

Secured Warehouse Facilities

 

On June 21, 2013, a wholly-owned subsidiary of the Company entered into an amendment and restatement to the “2010 Warehouse Facility”. The 2010 Warehouse Facility, as amended, provides the Company with financing of up to $1.0 billion, modified from the original facility size of $1.5 billion. The Company is able to draw on the 2010 Warehouse Facility, as amended, during an availability period that was extended from June 2013 to June 2015 with a subsequent four year term out option. The interest rate on the 2010 Warehouse Facility, as amended, was reduced from LIBOR plus 2.50% to LIBOR plus 2.25% on drawn balances and from 0.75% to 0.50% per annum on undrawn balances.

 

As of September 30, 2013, the Company had borrowed $839.0 million under our Warehouse Facilities and pledged 32 aircraft as collateral with a net book value of $1.2 billion. As of December 31, 2012, the Company had borrowed $1.1 billion under the Warehouse Facilities and pledged 38 aircraft as collateral with a net book value of $1.6 billion. The Company had pledged cash collateral and lessee deposits of $75.8 million and $104.3 million at September 30, 2013 and December 31, 2012, respectively.

 

Secured Term Financings

 

In September 2013, the Company amended a portfolio of six secured term loans aggregating $168.3 million with one of its lenders. Pursuant to the amendments, we reduced the composite interest rate of the loans by 40 basis-points, extended certain loan maturities and improved the principal amortization profiles of the loans.

 

Credit Ratings

 

In May 2013, the Company received a corporate credit rating of A- from Kroll Bond Ratings, followed by a second investment grade corporate credit rating of BBB- from S&P in August 2013.

 

The following table summarizes our current credit ratings:

 

Rating Agency

 

Long-term Debt

 

Corporate Rating

 

Outlook

 

Date of Last Ratings Action

 

S&P

 

BBB-

 

BBB-

 

Stable Outlook

 

August 26, 2013

 

Kroll Bond Ratings

 

A-

 

A-

 

Stable Outlook

 

May 9, 2013

 

 

While a ratings downgrade would not result in a default under any of our debt agreements, it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the cost of such financings.

 

Liquidity

 

During the quarter ended September 30, 2013 and through November 7, 2013 we entered into additional unsecured debt facilities aggregating $517.0 million. We ended the third quarter of 2013 with total debt outstanding of $5.5 billion compared to $4.4 billion as of December 31, 2012. We continued to focus on diversifying our banking group to broaden our access to capital and as of September 30, 2013 and through November 7, 2013 had developed a 43 member, globally diversified banking group, which has provided us in excess of $4.5 billion in financing. We ended the third quarter of 2013 with total unsecured debt outstanding of $3.9 billion compared to $2.6 billion as of December 31, 2012, increasing the Company’s unsecured debt as a percentage of total debt to 70.7% as of September 30, 2013 compared to 60.2% as of December 31, 2012, while reducing our composite cost of funds to 3.46% from 3.94% as of December 31, 2012.

 

We increased our cash flows from operations by 32.3% to $492.8 million for the nine months ended September 30, 2013 compared to $372.5 million for the nine months ended September 30, 2012. Our cash flows from operations contributed significantly to our liquidity position. As of September 30, 2013 and through November 7, 2013, we have available liquidity of $1.5 billion which is comprised of unrestricted cash of $221.7 million, undrawn balances under our Warehouse Facilities and unsecured revolving credit facilities of $826.7 million, and other facilities arranged through November 7, 2013 of $485.0 million. We believe that we have sufficient liquidity to satisfy the operating requirements of our business through the next twelve months.

 

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Table of Contents

 

Our financing plan for the remainder of 2013 is focused on continuing to raise unsecured debt in the global bank market and through international and domestic capital markets transactions, reinvesting cash flow from operations and to a limited extent through export credit financing.

 

Our liquidity plans are subject to a number of risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2012, some of which are outside of our control.

 

Results of Operations

 

The following table presents our historical operating results for the three and nine month periods ended September 30, 2013 and 2012 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September, 30

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

Rental of flight equipment

 

$

213,835

 

$

172,856

 

$

610,237

 

$

459,643

 

Interest and other

 

2,070

 

2,069

 

5,537

 

6,008

 

Total revenues

 

215,905

 

174,925

 

615,774

 

465,651

 

Expenses

 

 

 

 

 

 

 

 

 

Interest

 

41,946

 

35,248

 

125,644

 

91,308

 

Amortization of discounts and deferred debt issue costs

 

6,012

 

4,595

 

16,571

 

11,553

 

Interest expense

 

47,958

 

39,843

 

142,215

 

102,861

 

Depreciation of flight equipment

 

71,811

 

57,932

 

204,457

 

154,805

 

Selling, general and administrative

 

17,497

 

12,833

 

48,392

 

40,750

 

Stock-based compensation

 

3,751

 

7,124

 

17,839

 

24,548

 

Total expenses

 

141,017

 

117,732

 

412,903

 

322,964

 

Income before taxes

 

74,888

 

57,193

 

202,871

 

142,687

 

Income tax expense

 

(26,310

)

(20,182

)

(71,307

)

(50,577

)

Net income

 

$

48,578

 

$

37,011

 

$

131,564

 

$

92,110

 

 

 

 

 

 

 

 

 

 

 

Net income per share of Class A and B Common Stock

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

$

0.37

 

$

1.30

 

$

0.91

 

Diluted

 

$

0.46

 

$

0.36

 

$

1.25

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data

 

 

 

 

 

 

 

 

 

Adjusted net income(1)

 

$

54,911

 

$

44,602

 

$

153,879

 

$

115,415

 

Adjusted EBITDA(2)

 

$

197,933

 

$

161,467

 

$

565,939

 

$

422,683

 

 


(1)         Adjusted net income (defined as net income before stock-based compensation expense and non-cash interest expense, which includes the amortization of discounts and debt issuance costs) is a measure of both operating performance and liquidity that is not defined by GAAP and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted net income is presented as a supplemental disclosure because management believes that it may be a useful performance measure that is used within our industry. We believe adjusted net income provides useful information on our earnings from ongoing operations, our ability to service our long-term debt and other fixed obligations, and our ability to fund our expected growth with internally generated funds. Set forth below is additional detail as to how we use adjusted net income as a measure of both operating performance and liquidity, as well as a discussion of the limitations of adjusted net income as an analytical tool and a reconciliation of adjusted net income to our GAAP net income and cash flow from operating activities.

 

Operating Performance:  Management and our board of directors use adjusted net income in a number of ways to assess our consolidated financial and operating performance, and we believe this measure is helpful in identifying trends in our performance. We use adjusted net income as a measure of our consolidated operating performance exclusive of income and expenses that relate to the financing, income taxes, and capitalization of the business. Also, adjusted net income assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure and stock-based compensation expense from our operating results. In addition, adjusted net income helps management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance. Accordingly, we believe this metric

 

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Table of Contents

 

measures our financial performance based on operational factors that we can influence in the short term, namely the cost structure and expenses of the organization.

 

Liquidity:  In addition to the uses described above, management and our board of directors use adjusted net income as an indicator of the amount of cash flow we have available to service our debt obligations, and we believe this measure can serve the same purpose for our investors.

 

Limitations:  Adjusted net income has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are as follows:

 

·    adjusted net income does not reflect (i) our cash expenditures or future requirements for capital expenditures or contractual commitments, or (ii) changes in or cash requirements for our working capital needs; and

 

·    our calculation of adjusted net income may differ from the adjusted net income or analogous calculations of other companies in our industry, limiting its usefulness as a comparative measure.

 

The following tables show the reconciliation of net income and cash flows from operating activities, the most directly comparable GAAP measures of performance and liquidity, to adjusted net income (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Reconciliation of cash flows from operating activities to adjusted net income:

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

184,906

 

$

132,276

 

$

492,786

 

$

372,496

 

Depreciation of flight equipment

 

(71,811

)

(57,932

)

(204,457

)

(154,805

)

Stock-based compensation

 

(3,751

)

(7,124

)

(17,839

)

(24,548

)

Deferred taxes

 

(26,310

)

(20,182

)

(71,307

)

(50,573

)

Amortization of discounts and deferred debt issue costs

 

(6,012

)

(4,595

)

(16,571

)

(11,553

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Other assets

 

637

 

11,727

 

(7,917

)

20,114

 

Accrued interest and other payables

 

(25,216

)

(16,924

)

(30,679

)

(48,085

)

Rentals received in advance

 

(3,865

)

(235

)

(12,452

)

(10,936

)

Net income

 

48,578

 

37,011

 

131,564

 

92,110

 

Amortization of discounts and deferred debt issue costs

 

6,012

 

4,595

 

16,571

 

11,553

 

Stock-based compensation

 

3,751

 

7,124

 

17,839

 

24,548

 

Tax effect

 

(3,430

)

(4,128

)

(12,095

)

(12,796

)

Adjusted net income

 

$

54,911

 

$

44,602

 

$

153,879

 

$

115,415

 

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Reconciliation of net income to adjusted net income:

 

 

 

 

 

 

 

 

 

Net income

 

$

48,578

 

$

37,011

 

$

131,564

 

$

92,110

 

Amortization of discounts and deferred debt issue costs

 

6,012

 

4,595

 

16,571

 

11,553

 

Stock-based compensation

 

3,751

 

7,124

 

17,839

 

24,548

 

Tax effect

 

(3,430

)

(4,128

)

(12,095

)

(12,796

)

Adjusted net income

 

$

54,911

 

$

44,602

 

$

153,879

 

$

115,415

 

 


(2)         Adjusted EBITDA (defined as net income before net interest expense, stock-based compensation expense, income tax expense, and depreciation and amortization expense) is a measure of both operating performance and liquidity that is not defined by GAAP and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted EBITDA is presented as a supplemental disclosure because management believes that it may be a useful performance measure that is used within our industry. We believe adjusted EBITDA provides useful information on our earnings from ongoing operations, our ability to service our long-term debt and other fixed obligations, and our ability to fund our expected growth with internally generated funds. Set forth below is additional detail as to how we use adjusted EBITDA as a measure of both operating performance and liquidity, as well as a discussion of the limitations of adjusted EBITDA as an analytical tool and a reconciliation of adjusted EBITDA to our GAAP net income and cash flow from operating activities.

 

21



Table of Contents

 

Operating Performance:  Management and our board of directors use adjusted EBITDA in a number of ways to assess our consolidated financial and operating performance, and we believe this measure is helpful in identifying trends in our performance. We use adjusted EBITDA as a measure of our consolidated operating performance exclusive of income and expenses that relate to the financing, income taxes, and capitalization of the business. Also, adjusted EBITDA assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure and stock-based compensation expense from our operating results. In addition, adjusted EBITDA helps management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance. Accordingly, we believe this metric measures our financial performance based on operational factors that we can influence in the short term, namely the cost structure and expenses of the organization.

 

Liquidity: In addition to the uses described above, management and our board of directors use adjusted EBITDA as an indicator of the amount of cash flow we have available to service our debt obligations, and we believe this measure can serve the same purpose for our investors.

 

Limitations:  Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are as follows:

 

·    adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

·    adjusted EBITDA does not reflect changes in or cash requirements for our working capital needs;

 

·    adjusted EBITDA does not reflect interest expense or cash requirements necessary to service interest or principal payments on our debt; and

 

·    other companies in our industry may calculate this measure differently from how we calculate this measure, limiting its usefulness as a comparative measure.

 

The following tables show the reconciliation of net income and cash flows from operating activities, the most directly comparable GAAP measures of performance and liquidity, to adjusted EBITDA (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Reconciliation of cash flows from operating activities to adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

184,906

 

$

132,276

 

$

492,786

 

$

372,496

 

Depreciation of flight equipment

 

(71,811

)

(57,932

)

(204,457

)

(154,805

)

Stock-based compensation

 

(3,751

)

(7,124

)

(17,839

)

(24,548

)

Deferred taxes

 

(26,310

)

(20,182

)

(71,307

)

(50,573

)

Amortization of discounts and deferred debt issue costs

 

(6,012

)

(4,595

)

(16,571

)

(11,553

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Other assets

 

637

 

11,727

 

(7,917

)

20,114

 

Accrued interest and other payables

 

(25,216

)

(16,924

)

(30,679

)

(48,085

)

Rentals received in advance

 

(3,865

)

(235

)

(12,452

)

(10,936

)

Net income

 

48,578

 

37,011

 

131,564

 

92,110

 

Net interest expense

 

47,483

 

39,218

 

140,772

 

100,643

 

Income taxes

 

26,310

 

20,182

 

71,307

 

50,577

 

Depreciation

 

71,811

 

57,932

 

204,457

 

154,805

 

Stock-based compensation

 

3,751

 

7,124

 

17,839

 

24,548

 

Adjusted EBITDA

 

$

197,933

 

$