AIR LEASE CORP - Quarter Report: 2014 September (Form 10-Q)

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, 2014

 

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)

 

 

 

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):

 

 

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 6, 2014, there were 102,386,886 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, 2014

 

TABLE OF CONTENTS

 

			Page
Note About Forward-Looking Statements			3
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets—September 30, 2014 and December 31, 2013 (unaudited)		4
	Consolidated Statements of Income—Three and Nine months Ended September 30, 2014 and 2013 (unaudited)		5
	Consolidated Statement of Shareholders’ Equity—Nine months Ended September 30, 2014 (unaudited)		6
	Consolidated Statements of Cash Flows—Nine months Ended September 30, 2014 and 2013 (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		25
Item 4	Controls and Procedures		26
PART II—OTHER INFORMATION
Item 1	Legal Proceedings		26
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 sell aircraft on favorable terms, including to the Company’s recently formed joint venture;

 

·                                          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, 2013 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, 2014			December 31, 2013
		(unaudited)
Assets
Cash and cash equivalents		$	210,671		$	270,173
Restricted cash		8,198			87,308
Flight equipment subject to operating leases		9,727,770			8,234,315
Less accumulated depreciation		(829,159		)	(621,180		)
		8,898,611			7,613,135
Deposits on flight equipment purchases		1,142,962			1,075,023
Deferred debt issuance costs—less accumulated amortization of $67,024 and $51,578 as of September 30, 2014 and December 31, 2013, respectively		89,161			90,249
Other assets		195,960			196,716
Total assets		$	10,545,563		$	9,332,604
Liabilities and Shareholders’ Equity
Accrued interest and other payables		$	160,755		$	131,223
Debt financing, net of discounts		6,646,635			5,853,317
Security deposits and maintenance reserves on flight equipment leases		680,441			569,847
Rentals received in advance		68,580			61,520
Deferred tax liability		294,062			193,263
Total liabilities		$	7,850,473		$	6,809,170
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 102,385,013 and 101,822,676 shares at September 30, 2014 and December 31, 2013, respectively		1,010			1,009
Class B Non-Voting Common Stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding		—			—
Paid-in capital		2,204,543			2,209,566
Retained earnings		489,537			312,859
Total shareholders’ equity		$	2,695,090		$	2,523,434
Total liabilities and shareholders’ equity		$	10,545,563		$	9,332,604

 

(See Notes to Consolidated Financial Statements)

 

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,
		2014			2013			2014			2013
		(unaudited)						(unaudited)
Revenues
Rental of flight equipment		$	252,519		$	213,835		$	725,448		$	610,237
Aircraft sales, trading and other		9,420			2,070			39,101			5,537
Total revenues		261,939			215,905			764,549			615,774
Expenses
Interest		48,582			41,946			140,275			125,644
Amortization of discounts and deferred debt issuance costs		7,423			6,012			20,902			16,571
Interest expense		56,005			47,958			161,177			142,215
Depreciation of flight equipment		86,119			71,811			245,736			204,457
Selling, general and administrative		19,656			17,497			58,748			48,392
Stock-based compensation		3,882			3,751			12,222			17,839
Total expenses		165,662			141,017			477,883			412,903
Income before taxes		96,277			74,888			286,666			202,871
Income tax expense		(33,844		)	(26,310		)	(100,799		)	(71,307		)
Net income		$	62,433		$	48,578		$	185,867		$	131,564
Net income per share of Class A and Class B Common Stock:
Basic		$	0.61		$	0.48		$	1.82		$	1.30
Diluted		$	0.58		$	0.46		$	1.73		$	1.25
Weighted-average shares outstanding:
Basic		102,383,319			101,753,783			102,060,364			101,440,360
Diluted		110,457,170			109,227,709			109,997,159			108,784,560

 

(See Notes to Consolidated Financial Statements)

 

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, 2013		—		$	—		101,822,676		$	1,009		—		$	—		$	2,209,566		$	312,859		$	2,523,434
Issuance of common stock upon exercise of options and vesting of restricted stock units		—		—			1,021,459		1			—		—			844			—			845
Stock based compensation expense		—		—			—		—			—		—			12,222			—			12,222
Cash dividends (declared $0.09 per share)		—		—			—		—			—		—			—			(9,189		)	(9,189		)
Tax withholding related to vesting of restricted stock units		—		—			(459,122	)	—			—		—			(18,089		)	—			(18,089		)
Net income		—		—			—		—			—		—			—			185,867			185,867
Balance at September 30, 2014 (unaudited)		—		$	—		102,385,013		$	1,010		—		$	—		$	2,204,543		$	489,537		$	2,695,090

 

(See Notes to Consolidated Financial Statements)

 

6

Table of Contents

 

Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine Months Ended September 30,
		2014			2013
		(unaudited)
Operating Activities
Net income		$	185,867		$	131,564
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of flight equipment		245,736			204,457
Stock-based compensation		12,222			17,839
Deferred taxes		100,799			71,307
Amortization of discounts and deferred debt issue costs		20,902			16,571
Gain on aircraft sales, trading and other activity		(37,075		)	(2,851		)
Changes in operating assets and liabilities:
Other assets		12,702			10,768
Accrued interest and other payables		22,960			30,679
Rentals received in advance		7,060			12,452
Net cash provided by operating activities		571,173			492,786
Investing Activities
Acquisition of flight equipment under operating lease		(1,206,985		)	(955,587		)
Payments for deposits on flight equipment purchases		(480,791		)	(631,758		)
Proceeds from aircraft sales, trading and other activity		293,278			54,569
Acquisition of furnishings, equipment and other assets		(168,092		)	(134,795		)
Net cash used in investing activities		(1,562,590		)	(1,667,571		)
Financing Activities
Issuance of common stock upon exercise of options		845			—
Cash dividends paid		(9,171		)	(5,065		)
Tax withholdings on stock-based compensation		(18,089		)	(13,609		)
Net change in unsecured revolving facilities		(349,000		)	819,000
Proceeds from debt financings		1,656,395			615,871
Payments in reduction of debt financings		(526,984		)	(355,975		)
Net change in restricted cash		79,110			20,791
Debt issuance costs		(7,627		)	(29,020		)
Security deposits and maintenance reserve receipts		128,630			135,611
Security deposits and maintenance reserve disbursements		(22,194		)	(21,228		)
Net cash provided by financing activities		931,915			1,166,376
Net decrease in cash		(59,502		)	(8,409		)
Cash and cash equivalents at beginning of period		270,173			230,089
Cash and cash equivalents at end of period		$	210,671		$	221,680
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest, including capitalized interest of $31,907 at September 30, 2014 and capitalized interest of $23,124 at September 30, 2013		$	149,466		$	129,463
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		$	583,776		$	245,414
Cash dividends declared, not yet paid		$	3,072		$	2,544

 

(See Notes to Consolidated Financial Statements)

 

7

Table of Contents

 

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”).  We lease these aircraft to airlines throughout the world to generate attractive returns on equity. 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.

 

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, 2014, and for all periods presented. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the operating results expected for the year ending December 31, 2014. 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, 2013.

 

Note 3.         Debt Financing

 

The Company’s consolidated debt as of September 30, 2014 and December 31, 2013 are summarized below (in thousands):

 

		September 30, 2014			December 31, 2013
Unsecured
Senior notes		$	4,579,195		$	3,055,620
Revolving credit facilities		459,000			808,000
Term financings		214,395			247,722
Convertible senior notes		200,000			200,000
		5,452,590			4,311,342
Secured
Warehouse facilities		484,513			828,418
Term financings		659,736			654,369
Export credit financing		66,547			71,539
		1,210,796			1,554,326
Total secured and unsecured debt financing		6,663,386			5,865,668
Less: Debt discount		(16,751		)	(12,351		)
Total debt		$	6,646,635		$	5,853,317

 

8

Table of Contents

 

The Company’s secured obligations as of September 30, 2014 and December 31, 2013 are summarized below (in thousands, except number of aircraft which are reflected in units):

 

		September 30, 2014			December 31, 2013
Nonrecourse		$	484,513		$	847,684
Recourse		726,283			706,642
Total		$	1,210,796		$	1,554,326
Number of aircraft pledged as collateral		38			52
Net book value of aircraft pledged as collateral		$	1,955,711		$	2,454,350

 

Senior unsecured notes

 

On September 16, 2014, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes due 2018 that bear interest at a rate of 2.125%.

 

On September 16, 2014, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes due 2024 that bear interest at a rate of 4.25%.

 

On March 11, 2014, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes due 2021 that bear interest at a rate of 3.875%.

 

On January 22, 2014, the Company issued $25.0 million in aggregate principal amount of senior unsecured notes due 2024 that bear interest at a rate of 4.85%.

 

As of September 30, 2014, the Company had $4.6 billion in senior unsecured notes outstanding.  As of December 31, 2013, the Company had $3.1 billion in senior unsecured notes outstanding.

 

Unsecured revolving credit facilities

 

On May 5, 2014, the Company completed an amendment to its $2.0 billion senior unsecured revolving credit facility (the “Syndicated Unsecured Revolving Credit Facility”). Pursuant to the amendment, we have increased the aggregate capacity by $100.0 million to $2.1 billion and extended the final maturity to May 2018. The facility continues to accrue interest at a rate of LIBOR plus 1.25% on drawn balances and include a 0.25% facility fee.

 

The total amount outstanding under our unsecured revolving credit facilities was $459.0 million and $808.0 million as of September 30, 2014 and December 31, 2013, respectively.

 

Warehouse facilities

 

On July 23, 2014, a wholly-owned subsidiary of the Company, entered into an amendment to its amended and restated $1.0 billion senior secured revolving credit facility (the “2010 Warehouse Facility”). The 2010 Warehouse Facility, as amended, provides the Company with financing of up to $750 million, modified from the previous facility size of $1.0 billion. The interest rate on the 2010 Warehouse Facility, as amended, was reduced from LIBOR plus 2.25% to LIBOR plus 2.00% on drawn balances and continues to bear interest at a rate of 0.50% on undrawn balances.  The Company is able to draw on the 2010 Warehouse Facility, as amended, during an availability period that was extended from June 2015 to June 2016 and the maturity date was extended from June 2019 to June 2020.

 

As of September 30, 2014, the Company had borrowed $484.5 million under the 2010 Warehouse Facility and pledged 18 aircraft as collateral with a net book value of $737.5 million. As of December 31, 2013, the Company had borrowed $656.8 million under the 2010 Warehouse Facility and pledged 24 aircraft as collateral with a net book value of $985.2 million. During the second quarter, the Company substituted letters of credit for cash collateral and lessee deposits pledged under the 2010 Warehouse Facility, reducing the total amount of restricted cash from $87.3 million at December 31, 2013 to $8.2 million at September 30, 2014.

 

9

Table of Contents

 

On March 27, 2014, the Company refinanced a portfolio of secured debt facilities including our non-recourse $192.8 million senior secured warehouse facility (the “2012 Warehouse Facility”). We reduced the aggregate principal amount outstanding under the portfolio of loans from $178.5 million to $101.0 million, reduced the interest rate from LIBOR plus 2.25% to LIBOR plus 1.55% and modified the amortization schedule of the loans, which now have final maturities in March 2019.

 

Maturities

 

Maturities of debt outstanding as of September 30, 2014 are as follows (in thousands):

 

Years ending December 31,
2014		$	40,243
2015		178,413
2016		874,822
2017		1,414,419
2018		1,431,706
Thereafter		2,723,783
Total(1)(2)		$	6,663,386

 

(1)         As of September 30, 2014, the Company had $484.5 million of debt outstanding under the 2010 Warehouse Facility, as amended.  The Company is able to draw on the facility during an availability period that ends in June 2016 with a subsequent term out option, through the maturity date of the facility, which is reflected in the maturity schedule above.

(2)         As of September 30, 2014, the Company had $459.0 million of debt outstanding under our unsecured revolving credit facilities. The outstanding drawn balances may be rolled until the final maturity date of each respective facility and have been presented as such in the maturity schedule above.

 

4.                                  Commitments and Contingencies

 

As of September 30, 2014, the Company had commitments to acquire a total of 372 new aircraft scheduled to deliver through 2023.

 

In July 2014, the Company entered into definitive agreements with Airbus and Boeing to purchase 76 additional aircraft. From Airbus, we agreed to purchase 60 additional A321neo aircraft. From Boeing, we agreed to purchase six additional 777-300ER aircraft and confirmed the purchase of 10 737-8/9 MAX aircraft which were previously subject to reconfirmation. Deliveries of the aircraft are scheduled to commence in 2016 and continue through 2023.

 

In March 2014, the Company entered into definitive agreements with Airbus, Boeing and Avions de Transport Régional (“ATR”) to purchase 19 additional aircraft. From Airbus, we agreed to purchase one Airbus A330-300 aircraft.  From Boeing, we agreed to purchase an additional 737-800 aircraft and confirmed the purchase of 10 737-8/9 MAX aircraft which were previously subject to reconfirmation. From ATR, we agreed to purchase seven additional ATR 72-600 aircraft. Deliveries of the aircraft are scheduled to commence in 2014 and continue through 2017.

 

10

Table of Contents

 

Scheduled deliveries of the 372 new aircraft the Company has committed to purchase are as follows:

 

Aircraft Type		2014		2015		2016		2017		2018		Thereafter		Total
Airbus A321-200(1)		4		8		—		—		—		—		12
Airbus A320/321neo		—		—		3		12		17		78		110
Airbus A330-300		1		—		—		—		—		—		1
Airbus A350-900/1000		—		—		—		—		1		24		25
Boeing 737-800		3		21		15		11		—		—		50
Boeing 737-8/9 MAX		—		—		—		—		8		96		104
Boeing 777-300ER		—		8		6		2		—		—		16
Boeing 787-9/10		—		—		—		1		7		37		45
ATR 72-600		1		2		5		1		—		—		9
Total		9		39		29		27		33		235		372

 

(1)         All of our Airbus A321-200 aircraft will be equipped with sharklets.

 

Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $29.0 billion at September 30, 2014 are as follows (in thousands):

 

Years ending December 31,
2014		$	501,188
2015		2,294,623
2016		2,010,670
2017		1,918,637
2018		3,005,956
Thereafter		19,302,313
Total		$	29,033,387

 

We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $1.14 billion and $1.08 billion as of September 30, 2014 and December 31, 2013, 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 September 30, 2014, the Company had memorandums of understanding and other non-binding commitments to acquire up to 40 additional aircraft comprised of 25 A330neo aircraft, 10 A321neo aircraft and five A350-1000 aircraft. Deliveries of these aircraft are scheduled to commence in 2018 and continue through 2023.

 

In July 2014, the Company entered into a non-binding memorandum of understanding with Airbus to purchase 25 A330neo aircraft and we amended an existing definitive purchase agreement to provide the Company with the option to purchase 10 additional A321neo aircraft.

 

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.  As of September 30, 2014, we do not have any Class B Non-Voting Common Stock outstanding.

 

11

Table of Contents

 

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, 2014, the Company did not exclude any shares related to stock options.  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.  In addition, the Company excluded 973,107 and 1,573,280 shares related to restricted stock units for which the performance metric had yet to be achieved as of September 30, 2014 and 2013, 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,
		2014			2013			2014			2013
Basic net income per share:
Numerator
Net income		$	62,433		$	48,578		$	185,867		$	131,564
Denominator
Weighted-average common shares outstanding		102,383,319			101,753,783			102,060,364			101,440,360
Basic net income per share		$	0.61		$	0.48		$	1.82		$	1.30
Diluted net income per share:
Numerator
Net income		$	62,433		$	48,578		$	185,867		$	131,564
Assumed conversion of convertible senior notes		1,465			1,458			4,346			4,326
Net income plus assumed conversions		$	63,898		$	50,036		$	190,213		$	135,890
Denominator
Number of shares used in basic computation		102,383,319			101,753,783			102,060,364			101,440,360
Weighted-average effect of dilutive securities		8,073,851			7,473,926			7,936,795			7,344,200
Number of shares used in per share computation		110,457,170			109,227,709			109,997,159			108,784,560
Diluted net income per share		$	0.58		$	0.46		$	1.73		$	1.25

 

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, 2014 or December 31, 2013.

 

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, 2014 was $6.9 billion compared to a book value of $6.6 billion. The estimated fair value of debt financing as of December 31, 2013 was $6.1 billion compared to a book value of $5.9 billion.

 

The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at September 30, 2014, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at September 30, 2014 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.

 

12

Table of Contents

 

Note 7.         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 September 30, 2014, the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) authorized under the 2014 Plan is approximately 6,717,262, which includes 1,717,262 shares which were previously reserved for issuance under the 2010 Plan. Options are generally granted for a term of 10 years and generally vest over a three year period. The Company has issued RSUs with two different vesting criteria: those RSUs that vest based on the attainment of book value goals and those RSUs 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 $3.9 million and $3.8 million of stock-based compensation expense for the three months ended September 30, 2014 and 2013, respectively. Stock-based compensation expense for the nine months ended September 30, 2014 and 2013 totaled $12.2 million and $17.8 million, respectively.

 

Stock Options

 

A summary of Stock Option activity for the nine month period ended September 30, 2014 follows:

 

		Shares		Exercise Price			Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)(1)
Balance at December 31, 2013		3,357,658		$	20.39		6.49		$	35,883
Granted		—		$	—		—		$	—
Exercised		(44,000	)	$	20.00		—		$	789
Forfeited/canceled		—		$	—		—		$	—
Balance at September 30, 2014		3,313,658		$	20.40		5.75		$	40,101
Vested and exercisable as of September 30, 2014		3,313,658		$	20.40		5.75		$	40,101

 

(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 September 30, 2014.  As a result, there was no stock-based compensation expense related to Stock Options for the three and nine months ended September 30, 2014 and the three months ended September 30, 2013. The Company recorded stock-based compensation expense related to Stock Options of $5.4 million for the nine months ended September 30, 2013.

 

The following table summarizes additional information regarding exercisable and vested Stock Options at September 30, 2014:

 

		Stock Options exercisable and vested
Range of exercise prices		Number of Shares		Weighted- Average Remaining Life (in years)
$20.00		3,163,658		5.82
$28.80		150,000		6.57
$20.00 - $28.80		3,313,658		5.85

 

13

Table of Contents

 

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 stock history information.

 

During the nine months ended September 30, 2014, the Company granted 384,225 RSUs of which 182,476 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the nine months ended September 30, 2014:

 

		Unvested Restricted Stock Units
		Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2013		1,569,005		$	24.50
Granted		384,225		$	39.70
Vested		(977,953	)	$	21.49
Forfeited/canceled		(2,170	)	$	35.07
Unvested at September 30, 2014		973,107		$	34.24
Expected to vest after September 30, 2014(1)		962,120		$	34.24

 

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

 

The Company recorded $3.9 million and $3.8 million of stock-based compensation expense related to RSUs for the three months ended September 30, 2014 and 2013, respectively. The Company recorded $12.2 million and $12.5 million of stock-based compensation expense related to RSUs for the nine months ended September 30, 2014 and 2013, respectively.

 

As of September 30, 2014, 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 1.86 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. (“AIG”) and International Lease Finance Corporation (“ILFC”). The complaint also names as defendants certain executive officers and employees of, and an initial investor in, the Company. AIG 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 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. 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. The cross complaint seeks compensatory damages in excess of $500 million.

 

14

Table of Contents

 

Note 9. Related Party Transactions

 

In March 2014, we entered into Servicing Agreements with Commonwealth Bank of Australia and its subsidiaries at terms no more favorable than would be negotiated with an unrelated third party.  Commonwealth Bank of Australia beneficially owns more than 5% of our Class A Common Stock, and one of our directors, Ian M. Saines, was Group Executive of the Institutional Banking and Markets division of Commonwealth Bank through December 2013.  Pursuant to the Servicing Agreements, we agreed to manage the lease of seven additional aircraft to third parties, and if requested by Commonwealth Bank of Australia and its subsidiaries, to remarket the aircraft for subsequent leases or for sale. In connection with these transactions, Commonwealth Bank of Australia will pay us a percentage of the rent actually paid by the lessees. We may earn up to an aggregate of approximately $3.1 million in fees under the Servicing Agreements in connection with the management of the additional leases.  As of September 30, 2014, the Company managed a total of 11 aircraft for Commonwealth Bank of Australia.

 

In addition, Commonwealth Bank of Australia is a participant lender in the Syndicated Unsecured Revolving Credit Facility and the 2010 Warehouse Facility. See note 3 of Notes to Consolidated Financial Statements for further details regarding the terms of the financings.

 

Note 10.  Subsequent Events

 

On November 4, 2014, a wholly owned subsidiary of the Company entered into a joint venture with a co-investment vehicle arranged by Napier Park Global Capital (US) LP for the purpose of investing in commercial aircraft and leasing them to airlines around the globe.  The Company’s minority interest in the joint venture is 9.5%.  The joint venture is expected to acquire total aircraft assets of approximately $2.0 billion by year-end 2016, financed with up to $500 million in equity and the remainder financed by a committed warehouse credit facility and other forms of debt financing.  The Company expects to sell aircraft from its portfolio to the joint venture with an aggregate value of approximately $500.0 million by year-end 2016.  The Company will also provide management services to the joint venture for a fee based upon aircraft assets under management.

 

On November 4, 2014, our board of directors approved a quarterly cash dividend of $0.04 per share on our outstanding common stock. The dividend will be paid on January 5, 2015 to holders of record of our common stock as of December 12, 2014.

 

15

Table of Contents

 

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 the manufacturers, such as Boeing and Airbus, and leasing those aircraft to airlines throughout the world 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 indebtedness and the terms of our aircraft sales and trading activities.

 

We took delivery of nine aircraft from our order book and sold four aircraft from our operating lease portfolio during the three months ended September 30, 2014, ending the third quarter with 212 owned aircraft and 12 managed aircraft.  Our fleet of 212 owned aircraft is comprised of 161 single-aisle narrowbody jet aircraft, 34 twin-aisle widebody jet aircraft and 17 turboprop aircraft, with a weighted average age of 3.5 years. We ended 2013 with 193 owned aircraft, comprised of 146 single-aisle narrowbody jet aircraft, 31 twin-aisle widebody jet aircraft and 16 turboprop aircraft, with a weighted average age of 3.7 years years. Our fleet grew by 16.9% based on net book value to $8.9 billion as of September 30, 2014 compared to $7.6 billion as of December 31, 2013. All of the aircraft in our fleet were leased as of September 30, 2014 and December 31, 2013.

 

The acquisition and lease of additional aircraft led to an increase of $38.7 million, or 18.1%, in our rental revenue to $252.5 million for the quarter ended September 30, 2014, compared to $213.8 million for the quarter ended September 30, 2013.  Rental revenue for the nine months ended September 30, 2014 increased 18.9%, totaling $725.4 million compared to $610.2 million for the nine months ended September 30, 2013.  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 $96.3 million for the quarter ended September 30, 2014 compared to $74.9 million for the quarter ended September 30, 2013, an increase of $21.4 million or 28.6%.  Earnings before income taxes for the nine months ended September 30, 2014 increased 41.3%, totaling $286.7 million compared to $202.9 million for the nine months ended September 30, 2013.

 

Our profitability increased year over year as our pretax profit margin increased to 36.8% for the quarter ended September 30, 2014, compared to 34.7% for the quarter ended September 30, 2013.  Diluted earnings per share increased to $0.58 for the quarter ended September 30, 2014, compared to $0.46 for the quarter ended September 30, 2013, an increase of 26.1%.  Our pretax profit margin increased to 37.5% for the nine months ended September 30, 2014 compared to 32.9% for the nine months ended September 30, 2013.  Diluted earnings per share increased to $1.73 for the nine months ended September 30, 2014 compared to $1.25 for the nine months ended September 30, 2013, an increase of 38.4%.

 

In July 2014, the Company entered into definitive agreements with Airbus and Boeing to purchase 76 additional aircraft. From Airbus, we agreed to purchase 60 additional A321neo aircraft. From Boeing, we agreed to purchase six additional 777-300ER aircraft and confirmed the purchase of 10 737-8/9 MAX aircraft which were previously subject to reconfirmation. Deliveries of the aircraft are scheduled to commence in 2016 and continue through 2023.  Additionally, the Company entered into a non-binding memorandum of understanding with Airbus to purchase 25 A330neo aircraft and we amended an existing definitive purchase agreement to provide the Company with the option to purchase 10 additional A321neo aircraft.

 

In March 2014, the Company entered into definitive agreements with Airbus, Boeing and ATR to purchase 19 additional aircraft. From Airbus, we agreed to purchase one Airbus A330-300 aircraft.  From Boeing, we agreed to purchase an additional 737-800 aircraft and confirmed the purchase of 10 737-8/9 MAX aircraft which were previously subject to reconfirmation. From ATR, we agreed to purchase seven additional ATR 72-600 aircraft. Deliveries of the aircraft are scheduled to commence in 2014 and continue through 2017.

 

16

Table of Contents

 

On November 4, 2014, a wholly owned subsidiary of the Company entered into a joint venture with a co-investment vehicle arranged by Napier Park Global Capital (US) LP for the purpose of investing in commercial aircraft and leasing them to airlines around the globe.  The Company’s minority interest in the joint venture is 9.5%.  The joint venture is expected to acquire total aircraft assets of approximately $2.0 billion by year-end 2016, financed with up to $500 million in equity and the remainder financed by a committed warehouse credit facility and other forms of debt financing.  The Company expects to sell aircraft from its portfolio to the joint venture with an aggregate value of approximately $500.0 million by year-end 2016.  The Company will also provide management services to the joint venture for a fee based upon aircraft assets under management.

 

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.  In May 2014, the Company amended its Syndicated Unsecured Revolving Credit Facility increasing the capacity by $100.0 million to $2.1 billion and extended the availability period to May 2018.  In July 2014, the Company amended its 2010 Warehouse Facility reducing the capacity by $250.0 million to $750.0 million, extended the availability to June 2016 and reduced the interest rate by 0.25% to LIBOR plus 2.00%.  In September 2014, the Company issued $1.0 billion in aggregate principal amount of senior unsecured notes comprised of $500.0 million in aggregate principal amount of senior unsecured notes due 2018 that bear interest at a rate of 2.125% and $500.0 million in aggregate principal amount of senior unsecured notes due 2024 that bear interest at a rate of 4.25%. We ended the third quarter of 2014 with total debt outstanding of $6.6 billion, of which 76.3% was at a fixed rate and 81.8% was unsecured, with a composite cost of funds of 3.67%.

 

Our fleet

 

Portfolio metrics of our fleet owned aircraft as of September 30, 2014 and December 31, 2013 are as follows (dollars in thousands):

 

		September 30, 2014			December 31, 2013
Fleet size		212			193
Weighted-average fleet age(1)		3.5 years			3.7 years
Weighted-average remaining lease term(1)		7.3 years			7.1 years
Aggregate fleet net book value		$	8,898,611		$	7,613,135

 

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

 

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, 2014 and December 31, 2013 (dollars in thousands):

 

		September 30, 2014					December 31, 2013
Region		Net Book Value			% of Total		Net Book Value			% of Total
Asia		$	3,700,017		41.6	%	$	3,165,367		41.6	%
Europe		3,039,546			34.2	%	2,656,816			34.9	%
Central America, South America and Mexico		740,778			8.3	%	829,930			10.9	%
The Middle East and Africa		524,938			5.9	%	372,618			4.9	%
Pacific, Australia, New Zealand		475,750			5.3	%	151,751			2.0	%
U.S. and Canada		417,582			4.7	%	436,653			5.7	%
Total		$	8,898,611		100.0	%	$	7,613,135		100.0	%

 

17

Table of Contents

 

The following table sets forth the number of aircraft we leased by aircraft type as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014				December 31, 2013
Aircraft type		Number of Aircraft		% of Total		Number of Aircraft		% of Total
Airbus A319-100		6		2.8	%	6		3.1	%
Airbus A320-200		41		19.3	%	42		21.8	%
Airbus A321-200		16		7.6	%	7		3.6	%
Airbus A330-200		16		7.6	%	16		8.3	%
Airbus A330-300		5		2.4	%	5		2.6	%
Boeing 737-700		8		3.8	%	10		5.2	%
Boeing 737-800		59		27.8	%	50		25.9	%
Boeing 767-300ER		2		0.9	%	3		1.6	%
Boeing 777-200ER		1		0.5	%	1		0.5	%
Boeing 777-300ER		10		4.7	%	6		3.1	%
Embraer E175		8		3.8	%	8		4.1	%
Embraer E190		23		10.8	%	23		11.9	%
ATR 72-600		17		8.0	%	16		8.3	%
Total		212		100.0	%	193		100.0	%

 

As of September 30, 2014, we had commitments to acquire a total of 372 new aircraft for delivery as follows:

 

Aircraft Type		2014		2015		2016		2017		2018		Thereafter		Total
Airbus A321-200(1)		4		8		—		—		—		—		12
Airbus A320/321neo		—		—		3		12		17		78		110
Airbus A330-300		1		—		—		—		—		—		1
Airbus A350-900/1000		—		—		—		—		1		24		25
Boeing 737-800		3		21		15		11		—		—		50
Boeing 737-8/9 MAX		—		—		—		—		8		96		104
Boeing 777-300ER		—		8		6		2		—		—		16
Boeing 787-9/10		—		—		—		1		7		37		45
ATR 72-600		1		2		5		1		—		—		9
Total		9		39		29		27		33		235		372

 

(1)         All of our Airbus A321-200 aircraft will be equipped with sharklets

 

Our lease placements are progressing in line with expectations. As of September 30, 2014 and through November 6, 2014, 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
2014		9		9		100.0	%
2015		39		39		100.0	%
2016		29		19		65.5	%
2017		27		16		59.3	%
2018		33		11		33.3	%
Thereafter		235		5		2.1	%
Total		372		99

 

18