AIR LEASE CORP - Quarter Report: 2015 June (Form 10-Q)

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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 June 30, 2015

 

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 August 6, 2015, there were 102,580,955 shares of Air Lease Corporation’s Class A common stock outstanding.

 

 

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Air Lease Corporation and Subsidiaries

 

Form 10-Q

For the Quarterly Period Ended June 30, 2015

 

TABLE OF CONTENTS

 

		Page
Note About Forward-Looking Statements		3
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets—June 30, 2015 and December 31, 2014 (unaudited)	4
	Consolidated Statements of Income—Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	5
	Consolidated Statement of Shareholders’ Equity—Six Months Ended June 30, 2015 (unaudited)	6
	Consolidated Statements of Cash Flows—Six Months Ended June 30, 2015 and 2014 (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	26
Item 4	Controls and Procedures	27
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	27
Item 1A	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3	Defaults Upon Senior Securities	28
Item 4	Mine Safety Disclosures	28
Item 5	Other Information	28
Item 6	Exhibits	29
	Signatures	30
	Index of Exhibits	31

 

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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, 2014 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.

 

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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, 2015			December 31, 2014
		(unaudited)
Assets
Cash and cash equivalents		$	162,989		$	282,819
Restricted cash		8,533			7,469
Flight equipment subject to operating leases		11,082,068			9,832,421
Less accumulated depreciation		(1,012,674		)	(878,617		)
		10,069,394			8,953,804
Deposits on flight equipment purchases		1,024,945			1,144,603
Other assets		400,345			302,485
Total assets		$	11,666,206		$	10,691,180
Liabilities and Shareholders’ Equity
Accrued interest and other payables		$	362,250		$	190,952
Debt financing, net of discounts and issuance costs		7,220,460			6,630,758
Security deposits and maintenance reserves on flight equipment leases		763,765			698,172
Rentals received in advance		81,815			75,877
Deferred tax liability		376,055			323,359
Total liabilities		$	8,804,345		$	7,919,118
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 102,580,955 and 102,392,208 shares at June 30, 2015 and December 31, 2014, respectively		1,010			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		2,218,034			2,215,479
Retained earnings		642,817			555,573
Total shareholders’ equity		$	2,861,861		$	2,772,062
Total liabilities and shareholders’ equity		$	11,666,206		$	10,691,180

 

(See Notes to Consolidated Financial Statements)

 

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(unaudited)
Revenues
Rental of flight equipment		$	286,761		$	242,538		$	556,017		$	472,929
Aircraft sales, trading and other		17,941			13,787			27,000			29,681
Total revenues		304,702			256,325			583,017			502,610
Expenses
Interest		58,148			47,335			113,551			91,693
Amortization of debt discounts and issuance costs		7,681			6,989			15,363			13,479
Interest expense		65,829			54,324			128,914			105,172
Depreciation of flight equipment		98,402			81,475			189,414			159,617
Settlement		—			—			72,000			—
Selling, general and administrative		17,729			19,906			36,827			39,092
Stock-based compensation		4,578			4,940			7,724			8,340
Total expenses		186,538			160,645			434,879			312,221
Income before taxes		118,164			95,680			148,138			190,389
Income tax expense		(42,046		)	(33,643		)	(52,688		)	(66,955		)
Net income		$	76,118		$	62,037		$	95,450		$	123,434
Net income per share of Class A and Class B common stock:
Basic		$	0.74		$	0.61		$	0.93		$	1.21
Diluted		$	0.70		$	0.58		$	0.89		$	1.15
Weighted-average shares outstanding
Basic		102,571,600			101,934,815			102,513,642			101,896,210
Diluted		110,737,844			110,056,625			110,645,314			109,967,199

 

(See Notes to Consolidated Financial Statements)

 

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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, 2014		—		$	—		102,392,208		$	1,010		—		$	—		$	2,215,479		$	555,573		$	2,772,062
Issuance of common stock upon exercise of options and vesting of restricted stock units		—		—			319,681		—			—		—			133			—			133
Stock-based compensation expense		—		—			—		—			—		—			7,724			—			7,724
Cash dividends (declared $0.08 per share)		—		—			—		—			—		—			—			(8,206		)	(8,206		)
Tax withholding related to vesting of restricted stock units		—		—			(130,934	)	—			—		—			(5,302		)	—			(5,302		)
Net income		—		—			—		—			—		—			—			95,450			95,450
Balance at June 30, 2015		—		$	—		102,580,955		$	1,010		—		$	—		$	2,218,034		$	642,817		$	2,861,861

 

(See Notes to Consolidated Financial Statements)

 

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Six Months Ended June 30,
		2015			2014
		(unaudited)
Operating Activities
Net income		$	95,450		$	123,434
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of flight equipment		189,414			159,617
Settlement		36,000			—
Stock-based compensation		7,724			8,340
Deferred taxes		52,696			66,955
Amortization of discounts and debt issuance costs		15,363			13,479
Gain on aircraft sales, trading and other activity		(23,987		)	(27,735		)
Changes in operating assets and liabilities:
Other assets		21,124			15,492
Accrued interest and other payables		2,331			13,759
Rentals received in advance		5,938			4,125
Net cash provided by operating activities		402,053			377,466
Investing Activities
Acquisition of flight equipment under operating lease		(1,336,979		)	(728,702		)
Payments for deposits on flight equipment purchases		(362,578		)	(315,555		)
Proceeds from aircraft sales, trading and other activity		517,880			201,772
Deposits from aircraft held for sale		151,109			—
Acquisition of furnishings, equipment and other assets		(129,472		)	(107,795		)
Net cash used in investing activities		(1,160,040		)	(950,280		)
Financing Activities
Issuance of common stock upon exercise of options		40			756
Cash dividends paid		(8,198		)	(6,113		)
Tax withholdings on stock-based compensation		(5,302		)	(2,049		)
Net change in unsecured revolving facilities		126,000			181,000
Proceeds from debt financings		712,134			540,635
Payments in reduction of debt financings		(260,812		)	(296,149		)
Net change in restricted cash		(1,064		)	72,922
Debt issuance costs		(3,223		)	(4,324		)
Security deposits and maintenance reserve receipts		90,936			77,975
Security deposits and maintenance reserve disbursements		(12,354		)	(17,565		)
Net cash provided by financing activities		638,157			547,088
Net decrease in cash		(119,830		)	(25,726		)
Cash and cash equivalents at beginning of period		282,819			270,173
Cash and cash equivalents at end of period		$	162,989		$	244,447
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest, including capitalized interest of $20,702 and $21,225 at June 30, 2015 and 2014, respectively		$	121,767		$	96,828
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		$	664,128		$	314,794
Cash dividends declared, not yet paid		$	4,103		$	3,059

 

(See Notes to Consolidated Financial Statements)

 

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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 June 30, 2015, and for all periods presented. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the operating results expected for the year ending December 31, 2015. 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, 2014.

 

Note 3.         Recently Issued Accounting Standards

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03 (“ASU 2015-03”), “Interest-Imputation of Interest (Subtopic 835-30)”, that amends the presentation for debt issuance costs.  Upon adoption, such costs shall be presented on our Consolidated Balance Sheet as a direct deduction from the carrying amount of the related debt liability and not as a deferred charge presented in assets on our Consolidated Balance Sheet.  This new standard will be effective for interim and annual periods beginning on January 1, 2016, and is required to be retrospectively adopted.  Early adoption is permitted for financial statements that have not been previously issued.

 

The Company early adopted ASU 2015-03 as of March 31, 2015.  The Consolidated Balance Sheet as of December 31, 2014 has been adjusted to apply the change in accounting principle retrospectively.  Debt issuance costs of $83.6 million previously reported as assets on the Consolidated Balance Sheet as of December 31, 2014 have been reclassified as a direct deduction from the carrying amount of the related debt liability.

 

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Note 4.         Debt Financing

 

The Company’s consolidated debt as of June 30, 2015 and December 31, 2014 are summarized below (in thousands):

 

		June 30, 2015			December 31, 2014
Unsecured
Senior notes		$	5,177,769		$	4,579,194
Revolving credit facilities		695,000			569,000
Term financings		285,802			196,146
Convertible senior notes		200,000			200,000
Total unsecured debt financing		6,358,571			5,544,340
Secured
Term financings		520,853			636,411
Warehouse facility		374,595			484,513
Export credit financing		61,557			64,884
Total secured debt financing		957,005			1,185,808
Total debt financing		7,315,576			6,730,148
Less: Debt discounts and issuance costs		(95,116		)	(99,390		)
Debt financing, net of discounts and issuance costs		$	7,220,460		$	6,630,758

 

The Company’s secured obligations as of June 30, 2015 and December 31, 2014 are summarized below (in thousands, except number of aircraft which are reflected in units):

 

		June 30, 2015			December 31, 2014
Nonrecourse		$	374,595		$	484,513
Recourse		582,410			701,295
Total secured debt financing		$	957,005		$	1,185,808
Number of aircraft pledged as collateral		31			38
Net book value of aircraft pledged as collateral		$	1,625,065		$	1,935,711

 

Senior unsecured notes

 

As of June 30, 2015, the Company had $5.2 billion in senior unsecured notes outstanding.  As of December 31, 2014, the Company had $4.6 billion in senior unsecured notes outstanding.

 

In January 2015, the Company issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 3.75%.

 

Unsecured revolving credit facilities

 

In June 2015, the Company completed an amendment to its Syndicated Unsecured Revolving Credit Facility that increased its capacity to $2.7 billion and extended the final maturity to May 5, 2019 for certain commitments under the facility. As a result of the transaction, lenders hold revolving commitments totaling $2.5 billion that mature on May 5, 2019, and lenders hold revolving commitments totaling $175.0 million that mature on May 5, 2018. The facility continues to accrue interest at a rate of LIBOR plus 1.25% on drawn balances and includes a 0.25% facility fee, subject to reductions based on improvements in the Company’s credit ratings. The amendment also increased the uncommitted accordion feature of the facility, under which its aggregate principal amount can be increased up to $3.0 billion under certain circumstances.

 

The total amount outstanding under our unsecured revolving credit facilities was $695.0 million and $569.0 million as of June 30, 2015 and December 31, 2014, respectively.

 

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Unsecured term financings

 

In March 2015, the Company entered into a $100.0 million one year unsecured term facility bearing interest at a rate of LIBOR plus 1.00%.

 

The outstanding balance on our unsecured term facilities as of June 30, 2015 and December 31, 2014 was $285.8 million and $196.1 million, respectively.

 

Warehouse facility

 

As of June 30, 2015, the Company had borrowed $374.6 million under the 2010 Warehouse Facility and pledged 14 aircraft as collateral with a net book value of $591.0 million. As of December 31, 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 $729.5 million.

 

Maturities

 

Maturities of debt outstanding as of June 30, 2015 are as follows (in thousands):

 

Years ending December 31,
2015		$	64,854
2016		951,272
2017		1,383,910
2018		1,008,700
2019		1,762,518
Thereafter		2,144,322
Total		$	7,315,576

 

Note 5.     Commitments and Contingencies

 

As of June 30, 2015, the Company had commitments to acquire a total of 399 new aircraft scheduled to deliver through 2024.

 

During the quarter ended June 30, 2015, we amended existing definitive purchase agreements with Airbus S.A.S. (“Airbus”) to purchase an additional A330-200 aircraft and two additional A320-200 aircraft.  Deliveries of the aircraft are scheduled for 2016.

 

In March 2015, the Company entered into definitive agreements with Airbus to purchase 57 aircraft which were previously subject to memorandums of understanding. We agreed to purchase 25 A330neo aircraft, 30 A321neo LR aircraft, an incremental A350 aircraft and an additional A321-200 aircraft. Deliveries of the aircraft are scheduled to commence in 2016 and continue through 2023.

 

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Scheduled deliveries of the 399 new aircraft the Company has committed to purchase are as follows:

 

Aircraft Type		2015		2016		2017		2018		2019		Thereafter		Total
Airbus A320/A321-200(1)		1		3		—		—		—		—		4
Airbus A320/321neo(2)		—		3		12		17		27		81		140
Airbus A330-200		—		1		—		—		—		—		1
Airbus A330-800/900neo		—		—		—		5		5		15		25
Airbus A350-900/1000		—		—		—		2		2		22		26
Boeing 737-800		10		15		11		—		—		—		36
Boeing 737-8/9 MAX		—		—		—		8		18		78		104
Boeing 777-300ER		2		6		2		—		—		—		10
Boeing 787-9/10		—		3		1		7		7		27		45
ATR 42/72-600		2		5		1		—		—		—		8
Total		15		36		27		39		59		223		399

 

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

(2)         Our Airbus A320/321neo aircraft orders include 30 long-range variants.

 

 

Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $31.8 billion at June 30, 2015 are as follows (in thousands):

 

Years ending December 31,
2015		$	845,017
2016		2,493,181
2017		1,952,942
2018		3,499,163
2019		4,603,331
Thereafter		18,441,943
Total		$	31,835,577

 

We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $1.0 billion and $1.1 billion as of June 30, 2015 and December 31, 2014, 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, 2015, the Company had a non-binding commitment to acquire up to five A350-1000 aircraft. Deliveries of these aircraft are scheduled to commence in 2022 and continue through 2023.

 

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, 2015, 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.  The Company excluded 982,769 and 953,865 shares related to restricted stock units for which the performance metric had yet to be achieved as of June 30, 2015 and 2014, respectively.

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Basic net income per share:
Numerator
Net income		$	76,118		$	62,037		$	95,450		$	123,434
Denominator
Weighted-average common shares outstanding		102,571,600			101,934,815			102,513,642			101,896,210
Basic net income per share		$	0.74		$	0.61		$	0.93		$	1.21
Diluted net income per share:
Numerator
Net income		$	76,118		$	62,037		$	95,450		$	123,434
Assumed conversion of convertible senior notes		1,446			1,447			2,877			2,880
Net income plus assumed conversions		$	77,564		$	63,484		$	98,327		$	126,314
Denominator
Number of shares used in basic computation		102,571,600			101,934,815			102,513,642			101,896,210
Weighted-average effect of dilutive securities		8,166,244			8,121,810			8,131,672			8,070,989
Number of shares used in per share computation		110,737,844			110,056,625			110,645,314			109,967,199
Diluted net income per share		$	0.70		$	0.58		$	0.89		$	1.15

 

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, 2015 or December 31, 2014.

 

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, 2015 was $7.5 billion compared to a book value of $7.3 billion. The estimated fair value of debt financing as of December 31, 2014 was $7.0 billion compared to a book value of $6.7 billion.

 

The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at June 30, 2015, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at June 30, 2015 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, 2015, the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) authorized under the 2014 Plan is approximately 6,648,524, which includes 1,648,524 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 three 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 and time based RSUs that vest ratably over a time period of three years. 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

 

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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 $4.6 million and $4.9 million of stock-based compensation expense for the three months ended June 30, 2015 and 2014, respectively.  Stock-based compensation expense for the six months ended June 30, 2015 and 2014 totaled $7.7 million and $8.3 million, respectively.

 

Stock Options

 

A summary of stock option activity for the six month period ended June 30, 2015 follows:

 

		Shares		Exercise Price			Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)(1)
Balance at December 31, 2014		3,312,158		$	20.40		5.49		$	46,077
Granted		—		$	—		—		$	—
Exercised		(2,000	)	$	20.00		—		$	35
Forfeited/canceled		—		$	—		—		$	—
Balance at June 30, 2015		3,310,158		$	20.40		4.99		$	44,691
Vested and exercisable as of June 30, 2015		3,310,158		$	20.40		4.99		$	44,691

 

(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, 2015.  As a result, there was no stock-based compensation expense related to Stock Options for the three and six months ended June 30, 2015 and 2014.

 

The following table summarizes additional information regarding exercisable and vested stock options at June 30, 2015:

 

		Stock options exercisable and vested
Range of exercise prices		Number of Shares		Weighted- Average Remaining Life (in years)
$20.00		3,160,158		4.96
$28.80		150,000		5.82
$20.00 - $28.80		3,310,158		4.99

 

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 book value and time based 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.

 

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During the six months ended June 30, 2015, the Company granted 427,194 RSUs of which 181,350 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the six months ended June 30, 2015:

 

		Unvested Restricted Stock Units
		Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2014		969,225		$	33.51
Granted		427,194		$	44.95
Vested		(315,315	)	$	27.98
Forfeited/canceled		(87,010	)	$	25.39
Unvested at June 30, 2015		994,094		$	41.62
Expected to vest after June 30, 2015(1)		982,769		$	41.62

 

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

 

The Company recorded $4.6 million and $4.9 million of stock-based compensation expense related to RSUs for the three months ended June 30, 2015 and 2014, respectively.  The Company recorded $7.7 million and $8.3 million of stock-based compensation expense related to RSUs for the six months ended June 30, 2015 and 2014, respectively.

 

As of June 30, 2015, there was $23.6 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 2.1 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 to participate in a joint venture formed as a Delaware limited liability company—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.  During the six months ended June 30, 2015, the Company recognized $2.1 million of gains on the sale of aircraft to Blackbird. As of June 30, 2015 and December 31, 2014, the amounts due from Blackbird to the Company were $574,000 and $454,000, respectively. The Company’s investment in Blackbird was $15.5 million and $10.1 million as of June 30, 2015 and December 31, 2014, respectively.

 

Note 10. Flight Equipment Held for Sale

 

Management evaluates all contemplated aircraft sale transactions to determine whether all the required criteria have been met under GAAP to classify aircraft as flight equipment held for sale. Management uses judgment in evaluating these criteria. Due to the significant uncertainties of potential sale transactions, the held for sale criteria generally will not be met unless the aircraft is subject to a signed sale agreement, or management has made a specific determination and obtained appropriate approvals to sell a particular aircraft or group of aircraft. Aircraft classified as flight equipment held for sale are recognized at the lower of their carrying amount or estimated fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. At the time aircraft are sold, or classified as flight equipment held for sale, the cost and accumulated depreciation are removed from the related accounts and depreciation expense is no longer recognized.

 

As of June 30, 2015, we had four aircraft that were classified as flight equipment held for sale, with a carrying value of $145.8 million which is included in other assets on the Consolidated Balance Sheet. We received deposits of $151.1 million for these aircraft during the second quarter ended June 30, 2015 which are included in accrued interest and other payables on the Consolidated Balance Sheet. We expect the sale of all four aircraft to be completed in 2015 and result in a gain of approximately $5.3 million. We ceased recognition of depreciation expense on these aircraft subsequent to transferring them from flight equipment subject to operating leases.

 

Note 11. 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 “AIG/ILFC Complaint”). The complaint also named as defendants certain executive officers and employees of the Company.  AIG withdrew as a plaintiff on all but one cause of action that was not asserted against the Company. Among other things, the complaint, as amended, alleged breach of fiduciary duty, misappropriation of trade secrets, the wrongful recruitment of ILFC

 

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employees, and the wrongful diversion of potential ILFC leasing opportunities. The complaint sought an unspecified amount of damages and injunctive relief.

 

On August 15, 2013, the Company filed a cross-complaint against ILFC and AIG (the “Cross-Complaint”). The Cross-Complaint, as amended, alleged 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 sought compensatory damages in excess of $500 million.

 

The matters set forth in the AIG/ILFC Complaint and the Cross-Complaint are collectively referred to as the “litigation.”

 

On April 22, 2015, the Company and certain executive officers and employees of the Company entered into a settlement agreement and release (the “Settlement Agreement”) with AIG, ILFC, and ILFC’s parent, AerCap Holdings N.V., to settle all ongoing litigation. Pursuant to the terms of the Settlement Agreement, (i) all claims and counterclaims asserted in the litigation will be dismissed with prejudice, (ii) each of the parties to the litigation will receive full releases of all claims and counterclaims asserted in the litigation, and (iii)  the Company will pay AIG the sum of $36.0 million no later than June 30, 2015, and will pay an additional sum of $36.0 million no later than September 30, 2015. The Company paid AIG $36.0 million in June 2015 and has accrued for the remaining payment in accrued interest and other payables on the Consolidated Balance Sheet as of June 30, 2015. The Company recorded settlement expense of $72.0 million on the Consolidated Statement of Income for the six months ended June 30, 2015. The parties to the Settlement Agreement agreed that the settlement was intended solely as a compromise of disputed claims, and that no party admits any wrongdoing or liability with respect to any matter alleged in the litigation.  On April 24, 2015, the parties filed a request for dismissal which was entered on April 29, 2015.

 

Note 12. Related Party Transactions

 

The Company has a Master Servicing Agreement dated October 25, 2013 (“Master Servicing Agreement”) with Commonwealth Bank of Australia and/or its subsidiaries (collectively “Commonwealth Bank”). Under the Master Servicing Agreement, we consolidated all of our prior aircraft servicing agreements for the aircraft we manage for Commonwealth Bank. Commonwealth Bank beneficially owns more than 5% of our Class A common stock.

 

Under the Master Servicing Agreement we manage on behalf of Commonwealth Bank or its subsidiaries, the leasing and remarketing of aircraft for subsequent leases or for sale. For these services, Commonwealth Bank pays us a percentage of the rent for the aircraft and will pay us a percentage of the proceeds if the aircraft is sold. During the six months ended June 30, 2015, we agreed to manage the lease of an additional aircraft to a third-party pursuant to the Master Servicing Agreement.  We may earn an aggregate of approximately $0.1 million in fees under the Master Servicing Agreement in connection with the management of the additional lease.  As of June 30, 2015, the Company managed a total of 12 aircraft for Commonwealth Bank.

 

In addition, Commonwealth Bank is a participant lender in the Syndicated Unsecured Revolving Credit Facility and the 2010 Warehouse Facility. See Note 4 of Notes to Consolidated Financial Statements for further details regarding the terms of the financings.

 

Note 13.  Subsequent Events

 

On August 5, 2015, 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 October 6, 2015 to holders of record of our common stock as of September 10, 2015.

 

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

 

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

 

Overview

 

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.

 

During the quarter ended June 30, 2015, we took delivery of 18 aircraft from our new order pipeline, sold 14 aircraft from our operating lease portfolio and transferred four aircraft to flight equipment held for sale, ending the quarter with a total of 223 aircraft. We leased and managed aircraft on lease to a globally diversified customer base comprised of 84 airlines in 47 countries. The weighted average lease term remaining on our operating lease portfolio was 7.5 years and the weighted average age of our fleet was 3.4 years as of June 30, 2015. Our fleet grew by 12.5% based on net book value to $10.1 billion as of June 30, 2015 compared to $9.0 billion as of December 31, 2014. All of the aircraft in our fleet were leased as of June 30, 2015 and December 31, 2014.  In addition, we increased our managed fleet to 24 aircraft as of June 30, 2015 from 17 aircraft as of December 31, 2014.

 

The acquisition and lease of additional aircraft, partially offset by the sale of aircraft, led to an increase of $44.2 million, or 18.2%, in our rental revenue to $286.8 million for the quarter ended June 30, 2015, compared to $242.5 million for the quarter ended June 30, 2014.  Due to the timing of aircraft deliveries and sales, the full impact on rental revenue for aircraft acquired during a given period will be reflected in subsequent periods.  During the quarter ended June 30, 2015, we recorded gains of $16.5 million from the sale of 14 aircraft from our operating lease portfolio, compared to gains of $13.6 million from the sale of two aircraft from our operating lease portfolio and the trading of two aircraft for the quarter ended June 30, 2014.

 

During the quarter ended June 30, 2015, we amended existing definitive purchase agreements with Airbus to purchase an additional A330-200 aircraft and two additional A320-200 aircraft.  Deliveries of the aircraft are scheduled for 2016.

 

In March 2015, we entered into a definitive agreement and amendments to existing agreements with Airbus to purchase 57 aircraft which were previously subject to memorandums of understanding. We agreed to purchase 25 A330neo aircraft, 30 A321neo LR aircraft, an incremental A350 aircraft and an additional A321-200 aircraft. Deliveries of the aircraft are scheduled to commence in 2016 and continue through 2023.

 

In June 2015, the Company amended its Syndicated Unsecured Revolving Credit Facility which increased its capacity to $2.7 billion and extended its availability period to May 2019 with an interest rate of LIBOR plus 1.25%.  In January 2015, the Company issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 3.75%. We ended the second quarter of 2015 with total debt outstanding of $7.2 billion, of which 77.1% was at a fixed-rate and 86.9% was unsecured, with a composite cost of funds of 3.61%.

 

On April 22, 2015, the Company and certain executive officers and employees of the Company entered into the Settlement Agreement with AIG, ILFC, and ILFC’s parent, AerCap Holdings N.V., to settle all ongoing litigation as set forth in Note 11: Litigation, in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.  In connection with the settlement, we recorded an expense of $72.0 million before taxes for the six months ended June 30, 2015.  The Company paid $36.0 million to AIG in June 2015 and will pay an additional sum of $36.0 million no later than September 30, 2015.

 

We recorded income before taxes of $118.2 million for the quarter ended June 30, 2015 compared to $95.7 million for the quarter ended June 30, 2014. Income before taxes for the six months ended June 30, 2015 decreased 22.2%, totaling $148.1 million compared to $190.4 million for the six months ended June 30, 2014.

 

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Our net income for the quarter ended June 30, 2015 was $76.1 million compared to $62.0 million for the quarter ended June 30, 2014. Net income for the six months ended June 30, 2015 decreased 22.7%, to $95.5 million compared to $123.4 million for the six months ended June 30, 2014.  Our diluted earnings per share for the quarter ended June 30, 2015 was $0.70 compared to $0.58 for the quarter ended June 30, 2014.  Diluted earnings per share decreased to $0.89 for the six months ended June 30, 2015 compared to $1.15 for the six months ended June 30, 2014.  Our pretax profit margin for the three months ended June 30, 2015 was 38.8%, compared to 37.3% for the three months ended June 30, 2014. Reported income before taxes, net income and diluted earnings per share for the six months ended June 30, 2015 were negatively impacted by $72.0 million, $46.4 million and $0.42 per share, respectively, for the litigation settlement discussed above.

 

Excluding the litigation settlement expense, our adjusted income before income taxes was $220.1 million for the six months ended June 30, 2015 compared to $190.4 million for the six months ended June 30, 2014, an increase of $29.7 million or 15.6%. Our adjusted pretax profit margin for the six months ended June 30, 2015 was 37.8%, compared to 37.9% for the six months ended June 30, 2014. Adjusted diluted earnings per share increased to $1.31 for the six months ended June 30, 2015, compared to $1.15 for the six months ended June 30, 2014.  Adjusted income before taxes and adjusted diluted earnings per share are measures of financial and operational performance that are not defined by GAAP.  See note 1 under the “Results of Operations” table below for a discussion of adjusted earnings before income taxes and adjusted diluted earnings per share as non-GAAP measures and reconciliation of these measures to net income.

 

Our fleet

 

Portfolio metrics of our aircraft portfolio as of June 30, 2015 and December 31, 2014 are as follows (dollars in thousands):

 

		June 30, 2015			December 31, 2014
Owned fleet		223			213
Managed fleet		24			17
Weighted-average fleet age(1)		3.4 years			3.5 years
Weighted-average remaining lease term(1)		7.5 years			7.3 years
Aggregate fleet net book value		$	10,069,394		$	8,953,804

 

(1)   Weighted-average fleet age and remaining lease term calculated based on net book value of ALC’s owned fleet.

 

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, 2015 and December 31, 2014 (dollars in thousands):

 

		June 30, 2015					December 31, 2014
Region		Net Book Value			% of Total		Net Book Value			% of Total
Asia		$	4,250,508		42.2	%	$	3,838,523		42.9	%
Europe		3,101,858			30.8	%	2,953,232			33.0	%
The Middle East and Africa		1,021,634			10.1	%	498,896			5.6	%
Central America, South America and Mexico		881,165			8.8	%	778,991			8.7	%
Pacific, Australia, New Zealand		431,136			4.3	%	471,630			5.2	%
U.S. and Canada		383,093			3.8	%	412,532			4.6	%
Total		$	10,069,394		100.0	%	$	8,953,804		100.0	%

 

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The following table sets forth the number of aircraft we leased by aircraft type as of June 30, 2015 and December 31, 2014:

 

		June 30, 2015				December 31, 2014
Aircraft type		Number of Aircraft		% of Total		Number of Aircraft		% of Total
Airbus A319-100		4		1.8	%	5		2.3	%
Airbus A320-200		38		17.0	%	39		18.3	%
Airbus A321-200		26		11.7	%	20		9.4	%
Airbus A330-200		16		7.2	%	16		7.5	%
Airbus A330-300		5		2.2	%	5		2.3	%
Boeing 737-700		8		3.6	%	8		3.8	%
Boeing 737-800		65		29.2	%	61		28.6	%
Boeing 767-300ER		1		0.4	%	1		0.5	%
Boeing 777-200ER		1		0.4	%	1		0.5	%
Boeing 777-300ER		15		6.7	%	9		4.2	%
Embraer E175		5		2.2	%	7		3.3	%
Embraer E190		21		9.5	%	23		10.8	%
ATR 42/72-600		18		8.1	%	18		8.5	%
Total		223		100.0	%	213		100.0	%

 

As of June 30, 2015, we had commitments to acquire a total of 399 new aircraft for delivery as follows:

 

Aircraft Type		2015		2016		2017		2018		2019		Thereafter		Total
Airbus A320/A321-200(1)		1		3		—		—		—		—		4
Airbus A320/321neo(2)		—		3		12		17		27		81		140
Airbus A330-200		—		1		—		—		—		—		1
Airbus A330-800/900neo		—		—		—		5		5		15		25
Airbus A350-900/1000		—		—		—		2		2		22		26
Boeing 737-800		10		15		11		—		—		—		36
Boeing 737-8/9 MAX		—		—		—		8		18		78		104
Boeing 777-300ER		2		6		2		—		—		—		10
Boeing 787-9/10		—		3		1		7		7		27		45
ATR 42/72-600		2		5		1		—		—		—		8
Total		15		36		27		39		59		223		399

 

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

(2)  Our Airbus A320/321neo aircraft orders include 30 long-range variants.

 

Our lease placements are progressing in line with expectations. As of June 30, 2015 and through August 6, 2015, 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
2015		15		15		100.0	%
2016		36		34		94.4	%
2017		27		17		63.0	%
2018		39		17		43.6	%
2019		59		16		27.1	%
Thereafter		223		7		3.1	%
Total		399		106

 

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