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AIR LEASE CORP 10-Q 2017
al_Current Folio_10Q

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to        

 

Commission file number 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 ☒  No ☐

 

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

 

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

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

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

 

At August 2, 2017, there were 103,212,038 shares of Air Lease Corporation’s Class A common stock outstanding.



 

 

 


 

Air Lease Corporation and Subsidiaries

 

Form 10-Q

For the Quarterly Period Ended June 30, 2017

 

TABLE OF CONTENTS

 

 

Page

Note About Forward-Looking Statements 

3

PART I—FINANCIAL INFORMATION 

 

Item 1 

Financial Statements

4

 

Consolidated Balance Sheets—June 30, 2017 and December 31, 2016 (unaudited)

4

 

Consolidated Statements of Income—Three and Six Months Ended June 30, 2017 and 2016 (unaudited)

5

 

Consolidated Statement of Shareholders' Equity—Six Months Ended June 30, 2017 (unaudited)

6

 

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2017 and 2016 (unaudited)

7

 

Notes to Consolidated Financial Statements (unaudited)

8

Item 2 

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

16

Item 3 

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4 

Controls and Procedures

29

PART II—OTHER INFORMATION 

 

Item 1 

Legal Proceedings

29

Item 1A 

Risk Factors

29

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3 

Defaults Upon Senior Securities

29

Item 4 

Mine Safety Disclosures

30

Item 5 

Other Information

30

Item 6 

Exhibits

31

 

Signatures

33

 

Index of Exhibits

34

 

2


 

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 sell 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;

 

·

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, 2016, 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


 

PART I—FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

Air Lease Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value amounts)

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

239,710

 

$

274,802

 

Restricted cash

 

 

22,239

 

 

16,000

 

Flight equipment subject to operating leases

 

 

14,386,474

 

 

13,597,530

 

Less accumulated depreciation

 

 

(1,643,809)

 

 

(1,555,605)

 

 

 

 

12,742,665

 

 

12,041,925

 

Deposits on flight equipment purchases

 

 

1,440,449

 

 

1,290,676

 

Other assets

 

 

416,334

 

 

352,213

 

Total assets

 

$

14,861,397

 

$

13,975,616

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Accrued interest and other payables

 

$

274,353

 

$

256,775

 

Debt financing, net of discounts and issuance costs

 

 

9,303,312

 

 

8,713,874

 

Security deposits and maintenance reserves on flight equipment leases

 

 

851,220

 

 

856,335

 

Rentals received in advance

 

 

105,328

 

 

99,385

 

Deferred tax liability

 

 

768,980

 

 

667,060

 

Total liabilities

 

$

11,303,193

 

$

10,593,429

 

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 103,211,434 and 102,844,477 shares at June 30, 2017 and December 31, 2016, respectively

 

 

1,012

 

 

1,010

 

Class B non-voting common stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding

 

 

 

 

 —

 

Paid-in capital

 

 

2,243,038

 

 

2,237,866

 

Retained earnings

 

 

1,314,154

 

 

1,143,311

 

Total shareholders’ equity

 

$

3,558,204

 

$

3,382,187

 

Total liabilities and shareholders’ equity

 

$

14,861,397

 

$

13,975,616

 

 

(See Notes to Consolidated Financial Statements)

4


 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(unaudited)

 

Revenues

    

 

 

    

 

 

    

 

 

    

 

 

 

Rental of flight equipment

 

$

358,114

 

$

327,313

 

$

712,767

 

$

644,511

 

Aircraft sales, trading and other

 

 

22,843

 

 

22,826

 

 

28,377

 

 

48,956

 

Total revenues

 

 

380,957

 

 

350,139

 

 

741,144

 

 

693,467

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

63,014

 

 

63,190

 

 

130,077

 

 

124,150

 

Amortization of debt discounts and issuance costs

 

 

6,437

 

 

7,388

 

 

15,429

 

 

14,549

 

Interest expense

 

 

69,451

 

 

70,578

 

 

145,506

 

 

138,699

 

Depreciation of flight equipment

 

 

126,490

 

 

112,136

 

 

250,399

 

 

220,711

 

Selling, general and administrative

 

 

23,843

 

 

20,653

 

 

46,415

 

 

40,055

 

Stock-based compensation

 

 

5,304

 

 

4,501

 

 

9,077

 

 

7,740

 

Total expenses

 

 

225,088

 

 

207,868

 

 

451,397

 

 

407,205

 

Income before taxes

 

 

155,869

 

 

142,271

 

 

289,747

 

 

286,262

 

Income tax expense

 

 

(54,944)

 

 

(50,468)

 

 

(103,885)

 

 

(101,601)

 

Net income

 

$

100,925

 

$

91,803

 

$

185,862

 

$

184,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share of Class A and Class B common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.98

 

$

0.89

 

$

1.80

 

$

1.80

 

Diluted

 

$

0.92

 

$

0.84

 

$

1.69

 

$

1.69

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

103,180,769

 

 

102,837,443

 

 

103,064,834

 

 

102,758,427

 

Diluted

 

 

111,564,483

 

 

110,839,180

 

 

111,490,683

 

 

110,710,174

 

 

(See Notes to Consolidated Financial Statements)

 

5


 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

Class B Non-Voting

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Common Stock

 

Paid-in

 

Retained

 

 

 

 

(unaudited)

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Total

 

Balance at December 31, 2016

 

 —

 

$

 —

 

102,844,477

 

$

1,010

 

 —

 

$

 —

 

$

2,237,866

 

$

1,143,311

 

$

3,382,187

 

Cumulative effect adjustment upon adoption of ASU 2016-09

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

458

 

 

458

 

Issuance of common stock upon vesting of restricted stock units and upon exercise of options and warrants

 

 —

 

 

 —

 

505,104

 

 

 2

 

 —

 

 

 —

 

 

1,695

 

 

 —

 

 

1,697

 

Stock-based compensation

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

9,077

 

 

 

 

9,077

 

Cash dividends (declared $0.15 per share)

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(15,477)

 

 

(15,477)

 

Tax withholding related to vesting of restricted stock units and exercise of stock options

 

 —

 

 

 —

 

(138,147)

 

 

 

 —

 

 

 —

 

 

(5,600)

 

 

 —

 

 

(5,600)

 

Net income

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

185,862

 

 

185,862

 

Balance at June 30, 2017

 

 —

 

$

 —

 

103,211,434

 

$

1,012

 

 —

 

$

 —

 

$

2,243,038

 

$

1,314,154

 

$

3,558,204

 

 

(See Notes to Consolidated Financial Statements)

 

6


 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended June 30,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Operating Activities

    

 

 

    

 

 

 

Net income

 

$

185,862

 

$

184,661

 

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

 

 

 

 

 

 

 

Depreciation of flight equipment

 

 

250,399

 

 

220,711

 

Stock-based compensation

 

 

9,077

 

 

7,740

 

Deferred taxes

 

 

103,885

 

 

101,601

 

Amortization of debt discounts and issuance costs

 

 

15,429

 

 

14,549

 

Gain on aircraft sales, trading and other activity

 

 

(17,160)

 

 

(37,713)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(86,712)

 

 

2,367

 

Accrued interest and other payables

 

 

31,240

 

 

7,298

 

Rentals received in advance

 

 

5,943

 

 

3,556

 

Net cash provided by operating activities

 

 

497,963

 

 

504,770

 

Investing Activities

 

 

 

 

 

 

 

Acquisition of flight equipment under operating lease

 

 

(1,142,367)

 

 

(1,138,130)

 

Payments for deposits on flight equipment purchases

 

 

(385,628)

 

 

(437,721)

 

Proceeds from aircraft sales, trading and other activity

 

 

433,284

 

 

507,202

 

Acquisition of aircraft furnishings, equipment and other assets

 

 

(84,874)

 

 

(117,132)

 

Net cash used in investing activities

 

 

(1,179,585)

 

 

(1,185,781)

 

Financing Activities

 

 

 

 

 

 

 

Issuance of common stock upon exercise of options and warrants

 

 

1,664

 

 

 —

 

Cash dividends paid

 

 

(15,450)

 

 

(10,271)

 

Tax withholdings on stock-based compensation

 

 

(5,600)

 

 

(5,890)

 

Net change in unsecured revolving facilities

 

 

711,000

 

 

938,000

 

Proceeds from debt financings

 

 

1,096,673

 

 

690,754

 

Payments in reduction of debt financings

 

 

(1,229,690)

 

 

(962,403)

 

Net change in restricted cash

 

 

(6,239)

 

 

(7,862)

 

Debt issuance costs

 

 

(3,964)

 

 

(3,157)

 

Security deposits and maintenance reserve receipts

 

 

110,766

 

 

93,261

 

Security deposits and maintenance reserve disbursements

 

 

(12,630)

 

 

(35,362)

 

Net cash provided by financing activities

 

 

646,530

 

 

697,070

 

Net increase/(decrease) in cash

 

 

(35,092)

 

 

16,059

 

Cash and cash equivalents at beginning of period

 

 

274,802

 

 

156,675

 

Cash and cash equivalents at end of period

 

$

239,710

 

$

172,734

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for interest, including capitalized interest of $21,931 and $19,521 at June 30, 2017 and 2016, respectively

 

$

159,269

 

$

151,165

 

Supplemental Disclosure of Noncash Activities

 

 

 

 

 

 

 

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

 

$

312,837

 

$

525,991

 

Cash dividends declared, not yet paid

 

$

7,741

 

$

5,142

 

 

(See Notes to Consolidated Financial Statements)

 

7


 

Air Lease Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.Company Background and Overview

 

Air Lease Corporation, together with its subsidiaries (the “Company”, “ALC”, “we”, “our” or “us”), is a leading aircraft leasing company that was founded by aircraft leasing industry pioneer, Steven F. Udvar-Házy. We are principally engaged in purchasing new commercial jet transport aircraft directly from the manufacturers, such as The Boeing Company (“Boeing”) and Airbus S.A.S. (“Airbus”), and leasing them to airlines throughout the world.   In addition to our leasing activities, we sell aircraft from our fleet to leasing companies, financial services companies and airlines. We also provide fleet management services to investors and owners of aircraft portfolios for a management fee. As of June 30, 2017, we owned a fleet of 240 aircraft, managed 48 aircraft and had 373 aircraft on order with the manufacturers.

 

Note 2.Basis of Preparation and Critical Accounting Policies

 

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 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 June 30, 2017, and for all periods presented. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the operating results expected for the year ending December 31, 2017. 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, 2016.

 

Stock-based compensation

 

Effective as of January 1, 2017, the Company adopted a change in accounting policy in accordance with Accounting Standards Update (“ASU”) 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718),” wherein all excess tax benefits and tax deficiencies related to employee stock compensation will be recognized within income tax expense on the Consolidated Statement of Income. Previously, only net tax deficiencies were recognized as tax expense. As a result of adopting ASU 2016-09, we recognized $1.7 million as a discrete item in income tax expense relating to stock-based compensation expense for tax deficiencies incurred during the three months ended March 31, 2017. We did not recognize any additional income tax expense for the three months ended June 30, 2017 from the adoption of ASU 2016-09. Additionally, in connection with the adoption of ASU 2016-09, the Company recorded excess tax benefits relating to prior periods of $0.5 million on a modified retrospective basis through a cumulative effect adjustment to retained earnings.

 

In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be classified as operating activities on the Statement of Cash Flow. Previously, these items were classified as financing activities. We have elected to present the cash flow statement on a prospective transition method and there were no adjustments to the Consolidated Statement of Cash Flows for the six months ended June 30, 2017 as a result of this adoption.

 

Finally, ASU 2016-09 provides an accounting policy election to account for forfeitures as they occur or to account for forfeitures on an estimated basis. We elected to change our policy from estimating forfeitures to accounting for forfeitures as they are incurred. This change in accounting policy was made on a prospective basis.

8


 

Note 3.Recently Issued Accounting Standards

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-01 (“ASU 2017-01”), “Business Combinations (Topic 805).”  The amendments in ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  ASU 2017-01 will be effective for annual reporting periods beginning after December 15, 2017 for public entities. Early adoption is permitted. We are currently evaluating this guidance to determine the impact it will have on our financial statements.

 

In February 2017, the FASB issued ASU No. 2017-05 (“ASU 2017-05”), “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).”  The amendments in ASU 2017-05 clarifies the guidance in Subtopic 610-20 on accounting for derecognition of a nonfinancial asset.  ASU 2017-05 will be effective at the same time the Company applies ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  We are currently evaluating this guidance to determine the impact it will have on our financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09 (“ASU 2017-09”), “Compensation - Stock Compensation (Topic 718).” This ASU clarifies when changes to share-based payment awards must be accounted for as modifications. ASU 2017-09 will be effective for interim and annual reporting periods beginning after December 15, 2017.  Early adoption is permitted.  We are currently evaluating this guidance to determine the impact it will have on our financial statements.

 

Note 4.Debt Financing

 

The Company’s debt financing was comprised of the following at June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Unsecured

 

 

 

 

 

 

 

Senior notes

 

$

6,919,871

 

$

6,953,343

 

Revolving credit facility

 

 

1,477,000

 

 

766,000

 

Term financings

 

 

213,760

 

 

211,346

 

Convertible senior notes

 

 

199,985

 

 

199,995

 

Total unsecured debt financing

 

 

8,810,616

 

 

8,130,684

 

Secured

 

 

 

 

 

 

 

Term financings

 

 

539,462

 

 

619,767

 

Export credit financing

 

 

48,247

 

 

51,574

 

Total secured debt financing

 

 

587,709

 

 

671,341

 

 

 

 

 

 

 

 

 

Total debt financing

 

 

9,398,325

 

 

8,802,025

 

Less: Debt discounts and issuance costs

 

 

(95,013)

 

 

(88,151)

 

Debt financing, net of discounts and issuance costs

 

$

9,303,312

 

$

8,713,874

 

 

The Company’s secured obligations as of June 30, 2017 and December 31, 2016 are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Nonrecourse

 

$

225,368

 

$

245,155

 

Recourse

 

 

362,341

 

 

426,186

 

Total secured debt financing

 

$

587,709

 

$

671,341

 

Number of aircraft pledged as collateral

 

 

21

 

 

25

 

Net book value of aircraft pledged as collateral

 

$

1,210,534

 

$

1,421,657

 

 

Senior unsecured notes

 

As of June 30, 2017, the Company had $6.9 billion in senior unsecured notes outstanding.  As of December 31, 2016, the Company had $7.0 billion in senior unsecured notes outstanding.

 

On June 12, 2017, the Company issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 2.625%.

9


 

 

On March 8, 2017, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes due 2027 that bear interest at a rate of 3.625%.

 

Unsecured revolving credit facility

 

In May 2017, the Company amended and extended its unsecured revolving credit facility whereby, among other things, the Company extended the final maturity date from May 5, 2020 to May 5, 2021 and increased the total revolving commitments to approximately $3.7 billion from approximately $3.5 billion with an interest rate of LIBOR plus 1.05% with a 0.20% facility fee. Lenders hold revolving commitments totaling approximately $3.1 billion that mature on May 5, 2021, commitments totaling approximately $217.7 million that mature on May 5, 2020, commitments totaling $290.0 million that mature on May 5, 2019, and commitments totaling $55.0 million that mature on May 5, 2018.

 

The total amount outstanding under our unsecured revolving credit facility was approximately  $1.5 billion and $766.0 million as of June 30, 2017 and December 31, 2016, respectively.

 

Maturities

 

Maturities of debt outstanding as of June 30, 2017 are as follows (in thousands):

 

 

 

 

 

 

Years ending December 31,

 

 

 

 

 

 

 

 

2017

    

$

77,404

 

2018

 

 

1,565,857

 

2019

 

 

1,093,900

 

2020

 

 

1,258,585

 

2021

 

 

2,378,952

 

Thereafter

 

 

3,023,627

 

Total

 

$

9,398,325

 

 

 

Note 5.Commitments and Contingencies

 

As of June 30, 2017 and through August 3, 2017, the Company had commitments to acquire a total of 373 new aircraft scheduled to deliver through 2023 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aircraft Type

    

2017

    

2018

    

2019

    

2020

    

2021

    

Thereafter

    

Total

Airbus A320/321neo(1)

 

 5

 

17

 

32

 

26

 

22

 

44

 

146

Airbus A330-900neo

 

 —

 

 7

 

 5

 

 5

 

 5

 

 5

 

27

Airbus A350-900/1000

 

 2

 

 4

 

 2

 

 7

 

 9

 

 —

 

24

Boeing 737-7/8/9 MAX

 

 2

 

12

 

 26

 

 28

 

35

 

 27

 

 130

Boeing 787-9/10

 

 3

 

 7

 

 12

 

 9

 

 7

 

 8

 

 46

Total(2)

 

12

 

47

 

 77

 

 75

 

 78

 

 84

 

 373


(1)

Our Airbus A320/321neo aircraft orders include 55 long-range variants.

(2)

In addition to the aircraft from our orderbook, we have commitments to purchase five used Boeing 737-800 aircraft from an airline which are scheduled for delivery in 2017.

 

Airbus has informed us to expect several month delivery delays relating to aircraft scheduled for delivery in 2017 and 2018. The delays have been reflected in our commitment schedules above. We have signed leases for all of the delayed aircraft on order. Our leases contain lessee cancellation clauses related to aircraft delivery delays, typically for aircraft delays greater than one year. Our purchase agreements contain similar clauses. As of August 3, 2017, none of our lease contracts are subject to cancellation.

 

10


 

Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $28.5 billion at June 30, 2017 and through August 3, 2017 are as follows (in thousands):

 

 

 

 

 

Years ending December 31,

 

 

 

    

 

 

2017

 

$

1,528,931

2018

 

 

4,246,763

2019

 

 

5,703,782

2020

 

 

6,048,859

2021

 

 

5,886,385

Thereafter

 

 

 5,088,935

Total

 

$

 28,503,655

 

We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $1.4 billion and $1.3 billion as of June 30, 2017 and December 31, 2016, 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.

 

As of June 30, 2017, the Company had a non-binding commitment to acquire up to five A350-1000 aircraft.  Deliveries of these aircraft are scheduled to commence in 2023 and continue through 2024.

 

Note 6.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.  As of June 30, 2017, we did not have any Class B Non-Voting common stock outstanding.

 

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 six months ended June 30, 2017, the Company did not have any potentially anti-dilutive securities which would require exclusion from the computation of dilutive earnings per share.  The Company excluded 1,086,653 and 1,006,647 shares related to restricted stock units for which the performance metric had yet to be achieved as of June 30, 2017 and 2016, respectively.

 

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

 

2017

 

2016

 

2017

 

2016

 

Basic net income per share:

 

 

    

 

 

    

 

 

    

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

100,925

 

$

91,803

 

$

185,862

 

$

184,661

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

103,180,769

 

 

102,837,443

 

 

103,064,834

 

 

102,758,427

 

Basic net income per share

$

0.98

 

$

0.89

 

$

1.80

 

$

1.80

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

100,925

 

$

91,803

 

$

185,862

 

$

184,661

 

Assumed conversion of convertible senior notes

 

1,431

 

 

1,455

 

 

2,847

 

 

2,909

 

Net income plus assumed conversions

$

102,356

 

$

93,258

 

$

188,709

 

$

187,570

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in basic computation

 

103,180,769

 

 

102,837,443

 

 

103,064,834

 

 

102,758,427

 

Weighted-average effect of dilutive securities

 

8,383,714

 

 

8,001,737

 

 

8,425,849

 

 

7,951,747

 

Number of shares used in per share computation

 

111,564,483

 

 

110,839,180

 

 

111,490,683

 

 

110,710,174

 

Diluted net income per share

$

0.92

 

$

0.84

 

$

1.69

 

$

1.69

 

 

 

Note 7.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 June 30, 2017 or December 31, 2016.

 

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 June 30, 2017 was $9.6 billion compared to a book value of $9.4 billion. The estimated fair value of debt financing as of December 31, 2016 was $8.9 billion compared to a book value of $8.8 billion.

 

The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at June 30, 2017, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at June 30, 2017 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 8.Stock-based Compensation

 

On May 7, 2014, the stockholders of the Company approved the Air Lease Corporation 2014 Equity Incentive Plan (the “2014 Plan”). Upon approval of the 2014 Plan, no new awards may be granted under the Amended and Restated 2010 Equity Incentive Plan (the “2010 Plan”). As of June 30, 2017, the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) remaining under the 2014 Plan is approximately 5,768,763, which includes 768,763 shares which were previously reserved for issuance under the 2010 Plan. Stock Options are generally granted for a term of 10 years and generally vest over a three year period. The Company has issued RSUs with four different vesting criteria: those RSUs that vest based on the attainment of book value goals, those RSUs that vest based on the attainment of Total Shareholder Return (“TSR”) goals, time based RSUs that vest ratably over a time period of three years and RSUs that cliff-vest at the end of a one or two year period. The book value RSUs generally vest ratably over three 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

12


 

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 $5.3 million and $4.5 million of stock-based compensation expense related to RSUs for the three months ended June 30, 2017 and 2016, respectively. The Company recorded $9.1 million and $7.7 million of stock-based compensation expense related to RSUs for the six months ended June 30, 2017 and 2016, respectively.

 

Stock Options

 

A summary of stock option activity for the six month period ended June 30, 2017 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Remaining

    

Aggregate

 

 

 

 

 

Exercise

 

Contractual Term

 

Intrinsic Value

 

 

 

Shares

 

Price

 

(in years)

 

(in thousands)(1)

 

Balance at December 31, 2016

 

3,308,158

 

$

20.40

 

3.50

 

$

46,086

 

Granted

 

 —

 

$

 

 

$

 

Exercised

 

(70,000)

 

$

23.77

 

 

$

1,036

 

Forfeited/canceled

 

 —

 

$

 

 

$

 

Balance at June 30, 2017

 

3,238,158

 

$

20.33

 

2.99

 

$

55,158

 

Vested and exercisable as of June 30, 2017

 

3,238,158

 

$

20.33

 

2.99

 

$

55,158

 


(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.

 

The Company’s outstanding stock options fully vested on June 30, 2013 and there were no unrecognized compensation costs related to outstanding stock options as of June 30, 2017.  As a result, there was no stock-based compensation expense related to Stock Options for the three and six months ended June 30, 2017 and 2016.

 

The following table summarizes additional information regarding exercisable and vested stock options at June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options Exercisable

 

 

 

and Vested

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Remaining Life

 

Range of exercise prices

 

Shares

 

(in years)

 

$20.00

 

3,118,158

 

2.96

 

$28.80

 

120,000

 

3.82

 

$20.00 - $28.80

 

3,238,158

 

2.99

 

 

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 time based and 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.

 

13


 

During the six months ended June 30, 2017, the Company granted 505,545 RSUs of which 228,938 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

Unvested Restricted Stock Units

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant-Date

 

 

    

Number of Shares

     

Fair Value

 

Unvested at December 31, 2016

 

1,129,045

 

$

37.47

 

Granted

 

505,545

 

$

45.05

 

Vested

 

(311,259)

 

$

37.43

 

Forfeited/canceled

 

(102,270)

 

$

48.38

 

Unvested at June 30, 2017

 

1,221,061

 

$

39.70

 

 

The Company recorded $5.3 million and $4.5 million of stock-based compensation expense related to RSUs for the three months ended June 30, 2017 and 2016, respectively. The Company recorded $9.1 million and $7.7 million of stock-based compensation expense related to RSUs for the six months ended June 30, 2017 and 2016, respectively.

 

As of June 30, 2017, there was $27.0 million of unrecognized compensation cost related to unvested RSUs granted to employees. Total unrecognized compensation cost will be recognized over a weighted-average remaining period of 2.04 years.

 

Note 9. Investments

 

On November 4, 2014, a wholly owned subsidiary of the Company entered into an agreement with a co-investment vehicle arranged by Napier Park Global Capital (US) LP (‘‘Napier Park’’) to participate in a joint venture and formed Blackbird Capital I, LLC (‘‘Blackbird’’) for the purpose of investing in commercial aircraft and leasing them to airlines around the globe. We provide management services to the joint venture for a fee based upon aircraft assets under management. The Company’s non-controlling interest in Blackbird is 9.5% and it is accounted for as an investment under the equity method of accounting.  The Company incurred $0.3 million of losses and recognized $0.8 million of gains on the sale of aircraft to Blackbird during the six months ended June 30, 2017 and June 30, 2016, respectively.  As of June 30, 2017 and December 31, 2016, the amounts due from Blackbird to the Company were $0.6 million and $0.7 million, respectively. The Company's investment in Blackbird was $30.8 million and $25.1 million as of June 30, 2017 and December 31, 2016, respectively, and is recorded in other assets on the Consolidated Balance Sheet.

 

Note 10. Flight Equipment Held for Sale

 

On May 3, 2017, we entered into an agreement to sell 19 aircraft to Thunderbolt Aircraft Lease Limited (‘‘Thunderbolt’’), a group of third party investors. We have no ownership in Thunderbolt. During the quarter ended June 30, 2017, we completed sales of 16 aircraft to Thunderbolt. We expect the sale of the remaining three aircraft to be completed in the third quarter of 2017.

 

As of June 30, 2017, we had four aircraft, with a carrying value of $77.5 million, which were held for sale and included in flight equipment subject to operating leases on the Consolidated Balance Sheet.  We cease recognition of depreciation expense once an aircraft is classified as held for sale.  As of December 31, 2016, we had six aircraft, with a carrying value of $163.4 million, held for sale and included in flight equipment subject to operating leases on the Consolidated Balance Sheet.

 

Note 11.  Subsequent Events

 

On August 1, 2017, a wholly owned subsidiary of the Company entered into an agreement with a co-investment vehicle arranged by Napier Park to participate in a joint venture and formed Blackbird Capital II, LLC (‘‘Blackbird II’’) for the purpose of investing in commercial aircraft and leasing them to airlines around the globe. We provide management services to the joint venture for a fee based upon aircraft assets under management. The Company’s non-controlling interest in Blackbird II is 9.5% and will be accounted for as an investment under the equity method of accounting.  As of August 3, 2017, Blackbird II had $230.8 million in equity commitments. 

 

14


 

On August 2, 2017, our board of directors approved a quarterly cash dividend of $0.075 per share on our outstanding common stock. The dividend will be paid on October 6, 2017 to holders of record of our common stock as of September 13, 2017.

 

15


 

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

 

Air Lease Corporation is a leading aircraft leasing company that was founded by aircraft leasing industry pioneer, Steven F. Udvar-Házy. We are principally engaged in purchasing new commercial jet transport aircraft directly from aircraft manufacturers, such as Boeing and Airbus, and leasing those aircraft to airlines throughout the world with the intention to generate attractive returns on equity. In addition to our leasing activities, we sell aircraft from our operating lease portfolio to third-parties, including other leasing companies, financial services companies and airlines. We also provide fleet management services to investors and owners of aircraft portfolios for a management fee. Our operating performance is driven by the growth of our fleet, the terms of our leases, the interest rates on our debt, and the aggregate amount of our indebtedness, supplemented by the gains from our aircraft sales and trading activities and our management fees.

 

During the six months ended June 30, 2017, we purchased and took delivery of 19 aircraft from our new order pipeline, purchased six incremental aircraft and sold 22 aircraft, ending the period with a total of 240 aircraft with a net book value of $12.7 billion. The weighted average lease term remaining on our operating lease portfolio was 6.9 years and the weighted average age of our fleet was 3.6 years as of June 30, 2017. Our fleet grew by 5.8% based on net book value of $12.7 billion as of June 30, 2017 compared to $12.0 billion as of December 31, 2016. In addition, our managed fleet increased to 48 aircraft as of June 30, 2017 from 30 aircraft as of December 31, 2016. We have a globally diversified customer base comprised of 88 airlines in 54 countries.  All of the aircraft in our operating lease portfolio were subject to lease as of June 30, 2017.

 

In 2017, we entered into amendments and supplemental agreements to existing agreements with Airbus and Boeing to purchase 28 additional aircraft, consisting of 12 incremental A321neo aircraft, two A330-900 aircraft, 12 737 MAX aircraft and two 787-9 aircraft. Deliveries of the aircraft are scheduled to commence in 2018 and continue through 2023. As of June 30, 2017, we had, in the aggregate, 373 aircraft on order with Boeing and Airbus for delivery through 2023.

 

On May 3, 2017, we entered into an agreement to sell 19 aircraft to Thunderbolt Aircraft Lease Limited (‘‘Thunderbolt’’), a group of third party investors. We have no ownership in Thunderbolt. All of the aircraft in Thunderbolt's portfolio will be managed by the Company. During the quarter ended June 30, 2017, we completed the sale of 16 aircraft to Thunderbolt. We expect the sale of the remaining three aircraft to be completed in the third quarter of 2017.

 

On August 1, 2017, a wholly owned subsidiary of the Company entered into an agreement with a co-investment vehicle arranged by Napier Park Global Capital (US) LP (‘‘Napier Park’’) to participate in a joint venture and formed Blackbird Capital II, LLC (‘‘Blackbird II’’) for the purpose of investing in commercial aircraft and leasing them to airlines around the globe. We provide management services to the joint venture for a fee based upon aircraft assets under management. The Company’s non-controlling interest in Blackbird II is 9.5%.  As of August 3, 2017, Blackbird II had $230.8 million in equity commitments. 

 

During the six months ended June 30, 2017, we issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 2.625% and $500.0 million in aggregate principal amount of senior unsecured notes due 2027 that bear interest at a rate of 3.625%. We also paid down $1.1 billion in aggregate principal amount of senior unsecured notes that bear interest at a rate of 5.625% during the quarter ended June 30, 2017. In addition, we amended and extended our unsecured revolving credit facility whereby, among other things, we extended the final maturity date from May 5, 2020 to May 5, 2021 and increased the total revolving commitments to approximately $3.7 billion from approximately $3.5 billion with an interest rate of LIBOR plus 1.05% with a 0.20% facility fee. We ended the second quarter of 2017 with total debt outstanding, net of discounts and issuance costs, of $9.3 billion, of which 77.5% was at a fixed rate and 93.7% of which was unsecured. Our composite cost of funds decreased to 3.08% as of June 30, 2017 from 3.42% as of December 31, 2016.

 

16


 

The minimum future rental payments that our airline customers have committed to increased to $23.9 billion as of June 30, 2017 from $23.8 billion as of December 31, 2016. This includes $9.8 billion in contracted minimum rental payments on the aircraft in our existing fleet and $14.1 billion in minimum future rental payments related to aircraft which will deliver during the remainder of 2017 through 2021.

 

Our total revenues for the quarter ended June 30, 2017 increased by 8.8% to $381.0 million, compared to the quarter ended June 30, 2016. This is comprised of rental revenues on our operating lease portfolio of $358.1 million and aircraft sales, trading and other revenue of $22.8 million. 

 

Our net income for the quarter ended June 30, 2017 was $100.9 million compared to $91.8 million for the quarter ended June 30, 2016. Our diluted earnings per share for the quarter ended June 30, 2017 was $0.92 compared to $0.84 for the quarter ended June 30, 2016. Our pre-tax profit margin for the quarter ended June 30, 2017 was 40.9% compared to 40.6% for the quarter ended June 30, 2016. The increase in net income in the second quarter of 2017 as compared to 2016 was primarily due to an increase in our rental revenue resulting from an increase in the net book value of our fleet of aircraft subject to operating lease.

 

Excluding the effects of certain non-cash items, one-time or non-recurring items, such as settlement expense, net of recoveries, that are not expected to continue in the future and certain other items, our adjusted net income before income taxes was $166.7 million for the three months ended June 30, 2017 compared to $152.2 million for the three months ended June 30, 2016. Our adjusted margin before income taxes for the three months ended June 30, 2017 was 43.9% compared to 43.7% for the three months ended June 30, 2016. Adjusted diluted earnings per share before income taxes for the three months ended June 30, 2017 was $1.51 compared to $1.39 for the three months ended June 30, 2016. Adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the "Results of Operations" table for a discussion of adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income.

 

Our fleet

 

Portfolio metrics of our aircraft portfolio as of June 30, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Owned fleet

 

 

240

 

 

237

 

Managed fleet

 

 

48

 

 

30

 

Order book

 

 

373

 

 

363

 

 

 

 

 

 

 

 

 

Weighted-average fleet age(1)

 

 

3.6

years  

 

3.8

years  

Weighted-average remaining lease term(1)

 

 

6.9

years  

 

6.9

years  

Aggregate fleet net book value

 

$

12.7

billion  

$

12.0

billion  

 

 

 

 

 

 

 

 

Current fleet contracted rentals

 

$

9.8

billion  

$

9.4

billion  

Committed fleet rentals

 

$

14.1

billion  

$

14.4

billion  

Total committed rentals

 

$

23.9

billion  

$

23.8

billion  


(1)

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

 

17


 

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 June 30, 2017 and December 31, 2016 (dollars in thousands):