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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 March 31, 2013

 

OR

 

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

 

For the transition period from                   to                 

 

Commission file number 001-35121

 

AIR LEASE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		27-1840403
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

2000 Avenue of the Stars, Suite 1000N Los Angeles, California		90067
(Address of principal executive offices)		(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer  x		Accelerated filer  ¨
Non-accelerated filer  o		Smaller reporting company  o
(Do not check if a smaller reporting company)

 

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

 

At May 9, 2013, there were 99,455,339 shares of Air Lease Corporation’s Class A Common Stock outstanding and 1,829,339 shares of Air Lease Corporation’s Class B Non-Voting Common Stock outstanding.

 

 

Table of Contents

 

Air Lease Corporation and Subsidiaries

 

Form 10-Q

For the Quarterly Period Ended March 31, 2013

 

TABLE OF CONTENTS

 

		Page
Note About Forward-Looking Statements		3
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets—March 31, 2013 and December 31, 2012 (unaudited)	4
	Consolidated Statements of Income—Three Months Ended March 31, 2013 and 2012 (unaudited)	5
	Consolidated Statement of Shareholders’ Equity—Three Months Ended March 31, 2013 (unaudited)	6
	Consolidated Statements of Cash Flows—Three Months Ended March 31, 2013 and 2012 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4	Controls and Procedures	24
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3	Defaults Upon Senior Securities	25
Item 4	Mine Safety Disclosures	25
Item 5	Other Information	25
Item 6	Exhibits	28
	Signatures	29
	Index of Exhibits	30

 

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

 

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

 

·                                           impaired financial condition and liquidity of our lessees;

 

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

 

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

 

·                                           changes in the regulatory environment;

 

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

 

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

 

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

 

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

 

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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)

 

		March 31, 2013			December 31, 2012
		(unaudited)
Assets
Cash and cash equivalents		$	217,623		$	230,089
Restricted cash		110,558			106,307
Flight equipment subject to operating leases		6,981,975			6,598,898
Less accumulated depreciation		(410,898		)	(347,035		)
		6,571,077			6,251,863
Deposits on flight equipment purchases		776,472			564,718
Deferred debt issue costs—less accumulated amortization of $36,891 and $32,288 as of March 31, 2013 and December 31, 2012, respectively		80,161			74,219
Other assets		199,784			126,428
Total assets		$	7,955,675		$	7,353,624
Liabilities and Shareholders’ Equity
Accrued interest and other payables		$	104,045		$	90,169
Debt financing		4,861,201			4,384,732
Security deposits and maintenance reserves on flight equipment leases		453,922			412,223
Rentals received in advance		46,971			41,137
Deferred tax liability		114,418			92,742
Total liabilities		$	5,580,557		$	5,021,003
Shareholders’ Equity
Preferred Stock, $0.01 par value; 50,000,000 shares authorized; no shares issued or outstanding		—			—
Class A Common Stock, $0.01 par value; authorized 500,000,000 shares; issued and outstanding 99,455,339 and 99,417,998 shares at March 31, 2013 and December 31, 2012, respectively		991			991
Class B Non-Voting Common Stock, $0.01 par value; authorized 10,000,000 shares; issued and outstanding 1,829,339 shares		18			18
Paid-in capital		2,203,534			2,198,501
Retained earnings		170,575			133,111
Total shareholders’ equity		2,375,118			2,332,621
Total liabilities and shareholders’ equity		$	7,955,675		$	7,353,624

 

See accompanying notes

 

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share amounts)

 

		Three Months Ended March 31,
		2013			2012
		(unaudited)
Revenues
Rental of flight equipment		$	190,103		$	131,737
Interest and other		1,894			816
Total revenues		191,997			132,553
Expenses
Interest		40,230			21,914
Amortization of discounts and deferred debt issue costs		5,210			2,867
Interest expense		45,440			24,781
Depreciation of flight equipment		63,863			44,336
Selling, general and administrative		14,247			13,609
Stock-based compensation		6,775			8,217
Total expenses		130,325			90,943
Income before taxes		61,672			41,610
Income tax expense		(21,676		)	(14,683		)
Net income		$	39,996		$	26,927
Net income per share of Class A and Class B Common Stock:
Basic		$	0.39		$	0.27
Diluted		$	0.38		$	0.26
Weighted-average shares outstanding:
Basic		101,260,614			100,717,302
Diluted		108,346,885			107,426,789

 

See accompanying notes

 

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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, 2012		—		$	—		99,417,998		$	991		1,829,339		$	18		$	2,198,501		$	133,111		$	2,332,621
Common stock issued		—		—			63,899		—			—		—			—			—			—
Stock based compensation expense		—		—			—		—			—		—			6,775			—			6,775
Cash dividends declared		—		—			—		—			—		—			—			(2,532		)	(2,532		)
Tax withholding related to vesting of restricted stock units		—		—			(26,558	)	—			—		—			(1,742		)	—			(1,742		)
Net income		—		—			—		—			—		—			—			39,996			39,996
Balance at March 31, 2013		—		$	—		99,455,339		$	991		1,829,339		$	18		$	2,203,534		$	170,575		$	2,375,118

 

See accompanying notes

 

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Three Months Ended March 31,
		2013			2012
		(unaudited)
Operating Activities
Net income		$	39,996		$	26,927
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of flight equipment		63,863			44,336
Stock-based compensation		6,775			8,217
Deferred taxes		21,676			14,679
Amortization of discounts and deferred debt issue costs		5,210			2,867
Changes in operating assets and liabilities:
Other assets		6,739			(7,658		)
Accrued interest and other payables		11,048			7,529
Rentals received in advance		5,834			4,625
Net cash provided by operating activities		161,141			101,522
Investing Activities
Acquisition of flight equipment under operating lease		(323,431		)	(458,710		)
Payments for deposits on flight equipment purchases		(299,029		)	(104,006		)
Acquisition of furnishings, equipment and other assets		(36,708		)	(35,113		)
Net cash used in investing activities		(659,168		)	(597,829		)
Financing Activities
Cash dividends paid		(2,532		)	—
Tax witholdings related to vesting of restricted stock units		(1,742		)	—
Net change in unsecured revolving facilities		25,000			(245,500		)
Proceeds from debt financings		551,030			1,465,949
Payments in reduction of debt financings		(99,953		)	(178,433		)
Restricted cash		(4,251		)	(16,220		)
Debt issue costs		(10,760		)	(23,291		)
Security deposits and maintenance reserve receipts		40,333			26,703
Security deposits and maintenance reserve disbursements		(11,564		)	(11,440		)
Net cash provided by financing activities		485,561			1,017,768
Net (decrease) increase in cash		(12,466		)	521,461
Cash and cash equivalents at beginning of period		230,089			281,805
Cash and cash equivalents at end of period		$	217,623		$	803,266
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest, including capitalized interest of $6,899 and $3,949 at March 31, 2013 and 2012		$	30,600		$	17,408
Supplemental Disclosure of Noncash Activities
Buyer furnished equipment, capitalized interest, deposits on flight equipment purchases and seller financing applied to acquisition of flight equipment		$	108,493		$	105,590

 

See accompanying notes

 

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Air Lease Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                                  Company Background and Overview

 

Air Lease Corporation (the “Company”, “ALC”, “we”, “our” or “us”) is incorporated in the State of Delaware and licensed to operate in the State of California. The Company is principally engaged in the leasing of commercial aircraft to airlines throughout the world. We supplement our leasing revenues by providing fleet management and remarketing services to third parties. We typically provide many of the same services that we perform for our fleet, including leasing, releasing, lease management and sales services for which we charge a fee, with the objective of assisting our clients to maximize lease or sale revenues. In addition to our leasing activities and management services, and depending on market conditions, we sell aircraft from our fleet to other leasing companies, financial services companies and airlines.

 

Note 2.                                  Basis of Preparation

 

The Company consolidates financial statements of all entities in which we have a controlling financial interest, including the accounts of any Variable Interest Entity in which we have a controlling financial interest and for which we are determined to be the primary beneficiary. All material intercompany balances are eliminated in consolidation. The accompanying Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

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

 

Note 3.          Debt Financing

 

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

 

		March 31, 2013			December 31, 2012
Unsecured
Senior notes		$	2,163,950		$	1,775,000
Revolving credit facilities		445,000			420,000
Term financings		199,229			248,916
Convertible senior notes		200,000			200,000
		3,008,179			2,643,916
Secured
Warehouse facilities		1,045,292			1,061,838
Term financings		740,431			688,601
Export credit financing		76,530			—
		1,862,253			1,750,439
Total secured and unsecured debt financing		4,870,432			4,394,355
Less: Debt discount		(9,231		)	(9,623		)
Total debt		$	4,861,201		$	4,384,732

 

At March 31, 2013, we were in compliance in all material respects with the covenants in our debt agreements, including our financial covenants concerning debt-to-equity, tangible net equity, unencumbered assets and interest coverage ratios.

 

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

 

		March 31, 2013			December 31, 2012
Nonrecourse		$	1,068,203		$	1,085,941
Recourse		794,050			664,498
Total		$	1,862,253		$	1,750,439
Number of aircraft pledged as collateral		57			55
Net book value of aircraft pledged as collateral		$	2,803,565		$	2,728,636

 

Senior unsecured notes

 

In February 2013, the Company issued $400.0 million in aggregate principal amount of senior unsecured notes due 2020 pursuant to the Company’s effective shelf registration statement previously filed with the SEC.  The notes are senior unsecured obligations of the Company and bear interest at a rate of 4.75% per annum.  The notes will bear additional interest of 0.50% per annum during any period from and after February 5, 2014 during which a publicly available rating on the notes is not maintained by at least one rating agency as described in the related Indenture.

 

Unsecured revolving credit facilities

 

In May 2012, the Company entered into an $853.0 million three-year senior unsecured revolving credit facility (the “Syndicated Unsecured Revolving Credit Facility”). The Syndicated Unsecured Revolving Credit Facility will mature on May 4, 2015. Borrowings under the Syndicated Unsecured Revolving Credit Facility bear interest at LIBOR plus a margin of 1.75% with no LIBOR floor. The Company is required to pay a commitment fee in respect of unutilized commitments under the Syndicated Unsecured Revovling Credit Facility at a rate of 0.375%.  As of March 31, 2013, the Company had added four additional lenders to the Syndicated Unsecured Revolving Credit Facility and increased the aggregate principal amount by $240.0 million to $1.1 billion. The total amount outstanding under our unsecured revolving credit facilities was $445.0 million and $420.0 million as of March 31, 2013 and December 31, 2012, respectively.

 

On May 7, 2013, the Company completed an amendment to its Syndicated Unsecured Revolving Credit Facility. Pursuant to the amendment we have increased the aggregate principal amount by $607.0 million to $1.7 billion, extending the availability period from 3 years to 4 years to May 2017, and reducing the pricing from LIBOR plus a margin of 1.75% with no LIBOR floor and an undrawn fee of 0.375% to LIBOR plus 1.45% with no LIBOR floor and a 0.30% facility fee.

 

Warehouse facilities

 

As of March 31, 2013, the Company had borrowed $1.0 billion under our Warehouse Facilities and pledged 37 aircraft as collateral with a net book value of $1.5 billion. As of December 31, 2012, the Company had borrowed $1.1 billion under the Warehouse Facilities and pledged 38 aircraft as collateral with a net book value of $1.6 billion. The Company had pledged cash collateral and lessee deposits of $99.7 million and $104.3 million at March 31, 2013 and December 31, 2012, respectively.

 

Secured term financings

 

During the quarter ended March 31, 2013, the Company entered into two additional secured term facilities aggregating $75.0 million with terms of six and seven years and bearing interest at a floating rate of LIBOR plus a margin of 2.85% and a fixed rate of 4.25%, respectively. The outstanding balance on our secured term facilities was $740.4 million and $688.6 million at March 31, 2013 and December 31, 2012, respectively.

 

Export credit financings

 

In March 2013, the Company issued $76.5 million in secured notes due 2024 guaranteed by the Export-Import Bank of the United States (“Ex-Im Bank”). The notes will mature on August 15, 2024 and will bear interest at a rate of 1.617% per annum. The Company used the proceeds of the offering to refinance a portion of the purchase price of two Boeing 737-800 aircraft and the related premium charged by Ex-Im Bank for its guarantee of the notes.

 

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Maturities

 

Maturities of debt outstanding as of March 31, 2013, after giving effect to the amendment of our Unsecured Revolving Credit Facility, are as follows (in thousands):

 

Years ending December 31,
2013		$	312,047
2014		391,022
2015		365,433
2016		1,148,280
2017		1,593,706
Thereafter		1,059,944
Total(1)(2)		$	4,870,432

(1)          As of March 31, 2013, the Company had $864.3 million of debt outstanding under the 2010 Warehouse Facility for which the availability period expires in June 2013. The outstanding drawn balance at the end of the availability period may be converted at the Company’s option to an amortizing, four-year term loan and has been presented as such in the maturity schedule above.

(2)          As of March 31, 2013, the Company had $445.0 million of debt outstanding under our unsecured revolving credit facilities. The outstanding drawn balances may be rolled until the maturity date of each respective facility and have been presented as such in the maturity schedule above. Maturities of outstanding drawn balances under the Syndicated Unsecured Revolving Credit Facility have been presented as amended on May 7, 2013.

 

Note 4.          Commitments and Contingencies

 

Aircraft Acquisition

 

As of March 31, 2013 and through May 9, 2013, we had commitments to acquire a total of 323 new aircraft for delivery as follows:

 

Aircraft Type		2013		2014		2015		2016		2017		Thereafter		Total
Airbus A320/321-200		9		13		6		—		—		—		28
Airbus A320/321 NEO		—		—		—		3		12		35		50
Airbus A330-200/300		2		—		—		—		—		—		2
Airbus A350-900/1000(1)		—		—		—		—		—		30		30
Boeing 737-800		12		13		17		18		11		4		75
Boeing 737-8/9 MAX(2)		—		—		—		—		—		100		100
Boeing 777-300ER		—		6		8		1		—		—		15
Boeing 787-9		—		—		—		—		1		11		12
ATR 72-600		6		4		1		—		—		—		11
Total		29		36		32		22		24		180		323

 

(1)      As of May 9, 2013, five of the Airbus A350-900/1000 aircraft were subject to reconfirmation.

(2)      As of May 9, 2013, 20 of the Boeing 737-8/9 MAX aircraft were subject to reconfirmation.

 

Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $22.9 billion at March 31, 2013 and through May 9, 2013 are as follows (in thousands):

 

Years ending December 31,
2013		$	1,387,197
2014		2,225,998
2015		2,010,361
2016		1,312,235
2017		1,559,400
Thereafter		14,449,731
Total		$	22,944,922

 

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We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $776.5 million and $564.7 million as of March 31, 2013 and December 31, 2012, respectively, which are subject to manufacturer performance commitments. If we are unable to satisfy our purchase commitments, we may forfeit our deposits. Further, we would be subject to breach of contract claims by our lessees and manufacturers.

 

Note 5.         Net Earnings Per Share

 

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

 

Diluted net earnings per share takes into account the potential conversion of stock options, restricted stock units, and warrants using the treasury stock method and convertible notes using the if-converted method.  For the three months ended March 31, 2013, the Company excluded 150,000 shares related to stock options which were potentially dilutive securities from the computation of diluted earnings per share because including these shares would be anti-dilutive.  For the three months ended March 31, 2012, the Company excluded 3,365,908 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 2,192,931 and 2,970,643 shares related to restricted stock units for which the performance metric had yet to be achieved as of March 31, 2013 and 2012, respectively.

 

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

 

		Three Months Ended March 31,
		2013			2012
Basic net income per share:
Numerator
Net income		$	39,996		$	26,927
Denominator
Weighted-average common shares outstanding		101,260,614			100,717,302
Basic net income per share		$	0.39		$	0.27
Diluted net income per share:
Numerator
Net income		$	39,996		$	26,927
Assumed conversion of convertible senior notes		1,407			1,480
Net income plus assumed conversions		$	41,403		$	28,407
Denominator
Number of shares used in basic computation		101,260,614			100,717,302
Weighted-average effect of dilutive securities		7,086,271			6,709,487
Number of shares used in per share computation		108,346,885			107,426,789
Diluted net income per share		$	0.38		$	0.26

 

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 March 31, 2013 or December 31, 2012.

 

Financial Instruments Not Measured at Fair Value

 

The fair value of debt financing is estimated based on the quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities, which would be categorized as a Level 2 measurement in the fair value hierarchy. The estimated fair value of debt financing as of March 31, 2013 was $5,057.4 million compared to a book value of $4,861.2 million. The estimated fair value of debt financing as of December 31, 2012 was $4,517.6 million compared to a book value of $4,384.7 million.

 

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The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at March 31, 2013, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at March 31, 2013 approximates their carrying value as reported on the consolidated balance sheet.  The fair value of all these instruments would be categorized as Level 1 of the fair value hierarchy.

 

Note 7.          Stock-based Compensation

 

In accordance with the Amended and Restated Air Lease Corporation 2010 Equity Incentive Plan (“Plan”), the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) authorized under the Plan is approximately 8,193,088 as of March 31, 2013. Options are generally granted for a term of 10 years and generally vest over a three year period. There are two kinds of RSUs: those that vest based on the attainment of book-value goals and those that vest based on the attainment of Total Shareholder Return (“TSR”) goals. The book-value RSUs generally vest ratably over three to four years, if the performance condition has been met. Book-value RSUs for which the performance metric has not been met are forfeited.  The TSR RSUs vest at the end of a three year period.  The number of TSR RSUs that will ultimately vest is based upon the percentile ranking of the Company’s TSR among a peer group. The number of shares that will ultimately vest will range from 0% to 200% of the RSUs initially granted depending on the extent to which the TSR metric is achieved.  As of March 31, 2013, the Company had granted 3,375,908 Stock Options and 4,005,381 RSUs of which 263,569 are TSR RSUs.

 

The Company recorded $6.8 million and $8.2 million of stock-based compensation expense for the three months ended March 31, 2013 and 2012, respectively.

 

Stock Options

 

A summary of stock option activity in accordance with the Company’s stock option plan as of March 31, 2013, and changes for the three month period then ended, follows:

 

		Shares		Exercise price			Remaining contractual term (in years)		Aggregate intrinsic value (in thousands)(1)
Balance at December 31, 2012		3,358,408		$	20.39		7.49		$	4,813
Granted		—		—			—		—
Exercised		—		$	—		—		$	—
Forfeited/canceled		—		$	—		—		$	—
Balance at March 31, 2013		3,358,408		$	20.39		7.25		$	29,980
Vested and exercisable as of March 31, 2013		2,238,265		$	20.20		7.23		$	20,421
Vested and exercisable as of March 31, 2013 and expected to vest thereafter(2)		3,353,423		$	20.39		7.25		$	29,934

 

(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.

(2)          Options expected to vest reflect an estimated forfeiture rate.

 

Stock-based compensation expense related to employee stock options for the three months ended March 31, 2013 and 2012 totaled $2.9 million and $2.8 million, respectively.

 

The following table summarizes additional information regarding outstanding and exercisable and vested options at March 31, 2013:

 

		Options outstanding				Options exercisable and vested
Range of exercise prices		Number of shares		Weighted- average remaining life (in years)		Number of shares		Weighted- average remaining life (in years)
$20.00		3,208,408		7.21		2,188,265		7.21
$28.80		150,000		8.07		50,000		8.07
$20.00 -$28.80		3,358,408		7.25		2,238,265		7.23

 

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As of March 31, 2013, there was $2.4 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of one year. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.

 

Restricted Stock Units

 

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

 

During the three months ended March 31, 2013, the Company granted 139,320 RSUs of which 69,655 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the three months ended March 31, 2013:

 

		Unvested Restricted Stock Units
		Number of shares		Weighted-average grant-date fair value
Unvested at December 31, 2012		2,117,510		$	21.38
Granted		139,320		31.53
Vested		(63,899	)	24.65
Forfeited/canceled		—		—
Unvested at March 31, 2013		2,192,931		$	21.95
Expected to vest after March 31, 2013(1)		2,177,818		$	22.16

 

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

 

The Company recorded $3.8 million and $5.4 million of stock-based compensation expense related to RSUs for the three months ended March 31, 2013 and 2012, respectively.

 

As of March 31, 2013, there was $15.9 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 1.2 years.

 

Note 8. Litigation

 

On April 24, 2012, the Company was named as a defendant in a complaint filed in Superior Court of the State of California for the County of Los Angeles by American International Group, Inc. and ILFC. The complaint also names as defendants certain executive officers and employees of the Company. The complaint was amended on November 30, 2012 and on January 18, 2013. Among other things, the suit 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.

 

Note 9.  Subsequent Events

 

On May 9, 2013, our Board of Directors approved our second quarterly cash dividend of $0.025 per share on our outstanding common stock. The dividend will be paid on July 8, 2013 to holders of record of our common stock as of June 17, 2013.

 

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

 

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

 

Overview

 

During the quarter ended March 31, 2013, the Company continued to execute on our primary business plan to acquire new, fuel-efficient commercial aircraft from aircraft manufacturers and to lease those aircraft to airlines around the world. We grew our fleet primarily through the acquisition of five aircraft from our new order pipeline supplemented by two purchases of used aircraft acquired in the secondary market. We continued to supplement our leasing revenues by providing management services to investors and/or owners of aircraft portfolios, for which we receive fee-based revenue. These services include leasing, re-leasing, and lease management and sales services, with the goal of helping our clients maximize lease and sale revenues. As of March 31, 2013, we managed four aircraft compared to two aircraft as of March 31, 2012. In addition to our leasing activities and management services, and depending on market conditions, we sell aircraft from our fleet to other leasing companies, financial services companies and airlines.

 

We ended the first quarter of 2013 with 162 aircraft comprised of 123 single-aisle narrowbody jet aircraft, 29 twin-aisle widebody jet aircraft and 10 turboprop aircraft, with a weighted average age of 3.5 years. We ended the first quarter of 2012 with 114 aircraft, comprised of 88 single-aisle narrowbody jet aircraft, 22 twin-aisle widebody jet aircraft and 4 turboprop aircraft, with a weighted average age of 3.5 years and a weighted average remaining lease term of 7.1 years. Our fleet grew by 5.1% based on net book value to $6.6 billion as of March 31, 2013 compared to $6.3 billion as of December 31, 2012.

 

The acquisition and lease of additional aircraft resulted in a 44.3% increase in our rental revenue to $190.1 million for the quarter ended March 31, 2013 compared to $131.7 million for the quarter ended March 31, 2012. Due to the timing of aircraft deliveries the full impact on rental revenue for aircraft acquired during a given period will be reflected in subsequent periods.

 

We recorded earnings before income taxes of $61.7 million for the quarter ended March 31, 2013 compared to $41.6 million for the quarter ended March 31, 2012, an increase of $20.1 million or 48.2%. Our profitability increased year over year as our pretax profit margin increased to 32.1% for the quarter ended March 31, 2013 compared to 31.4% for the quarter ended March 31, 2012. Diluted earnings per share increased to $0.38 for the quarter ended March 31, 2013 compared to $0.26 for the quarter ended March 31, 2012, an increase of 46%.

 

Our financing plans remained focused on raising unsecured debt in the global bank and capital markets, reinvesting cash flow from operations and limited utilization of export credit financing. During the quarter ended March 31, 2013 and through May 9, 2013, we entered into additional debt facilities aggregating $1.2 billion, which included a $607.0 million addition to our Syndicated Unsecured Revolving Credit Facility, $400.0 million in senior unsecured notes due 2020 bearing interest at a rate of 4.75%, $76.5 million of secured notes due 2024 which bear interest at a rate of 1.6% and are guaranteed by Ex-Im Bank and additional facilities aggregating $75.0 million. In May 2013, the Company received a corporate credit rating of A- from Kroll Bond Ratings which further broadens our access to attractively priced capital.

 

During the quarter ended March 31, 2013 and through May 9, 2013, we entered into binding commitments to acquire up to 45 additional aircraft from Airbus, Boeing and ATR. From Airbus, we agreed to purchase up to 30 A350-900/1000 family aircraft, five of which are subject to reconfirmation. From Boeing, we agreed to purchase an additional 10 Boeing 777-300ER aircraft. Deliveries of the additional aircraft we are purchasing from Airbus and Boeing are scheduled to commence in 2014 and to continue through 2023. From ATR, we agreed to purchase five additional ATR 72-600 aircraft which are scheduled to deliver in 2013 through 2015.

 

Our fleet

 

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

 

		March 31, 2013			December 31, 2012
Fleet size		162			155
Weighted-average fleet age(1)		3.5 years			3.5 years
Weighted-average remaining lease term(1)		7.1 years			6.8 years
Aggregate fleet net book value		$	6,571,077		$	6,251,863

 

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

 

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

 

		March 31, 2013					December 31, 2012
Region		Net book value			% of total		Net book value			% of total
Asia/Pacific		$	2,575,834		39.2	%	$	2,245,002		35.9	%
Europe		2,375,086			36.1		2,398,531			38.4
Central America, South America and Mexico		809,212			12.3		788,189			12.6
U.S. and Canada		452,322			6.9		457,546			7.3
The Middle East and Africa		358,623			5.5		362,595			5.8
Total		$	6,571,077		100.0	%	$	6,251,863		100.0	%

 

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

 

		March 31, 2013				December 31, 2012
Aircraft type		Number of aircraft		% of total		Number of aircraft		% of total
Airbus A319-100		7		4.3	%	7		4.5	%
Airbus A320-200		33		20.4		29		18.7
Airbus A321-200		5		3.1		5		3.2
Airbus A330-200		15		9.3		14		9.0
Airbus A330-300		4		2.5		3		1.9
Boeing 737-700		8		4.9		8		5.2
Boeing 737-800		38		23.5		38		24.5
Boeing 767-300ER		3		1.8		3		1.9
Boeing 777-200ER		1		0.6		1		0.7
Boeing 777-300ER		6		3.7		6		3.9
Embraer E175		8		4.9		8		5.2
Embraer E190		24		14.8		23		14.8
ATR 72-600		10		6.2		10		6.5
Total		162		100.0	%	155		100.0	%

 

As of March 31, 2013 and through May 9, 2013, we had commitments to acquire a total of 323 new aircraft for delivery as follows:

 

Aircraft Type		2013		2014		2015		2016		2017		Thereafter		Total
Airbus A320/321-200		9		13		6		—		—		—		28
Airbus A320/321 NEO		—		—		—		3		12		35		50
Airbus A330-200/300		2		—		—		—		—		—		2
Airbus A350-900/1000(1)		—		—		—		—		—		30		30
Boeing 737-800		12		13		17		18		11		4		75
Boeing 737-8/9 MAX(2)		—		—		—		—		—		100		100
Boeing 777-300ER		—		6		8		1		—		—		15
Boeing 787-9		—		—		—		—		1		11		12
ATR 72-600		6		4		1		—		—		—		11
Total		29		36		32		22		24		180		323

 

(1)      As of May 9, 2013, five of the Airbus A350-900/1000 aircraft were subject to reconfirmation.

(2)      As of May 9, 2013, 20 of the Boeing 737-8/9 MAX aircraft were subject to reconfirmation.

 

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Our current lease placements are in line with expectations and are progressing well. As of March 31, 2013 and through May 9, 2013, we have entered into contracts for the lease of new aircraft scheduled to be delivered as follows:

 

Delivery year		Number of Aircraft		Number Leased		% Leased
2013		29		29		100.0	%
2014		36		33		91.7
2015		32		17		53.1
2016		22		3		13.6
2017		24		1		4.2
Thereafter		180		7		3.9
Total		323		90		27.9	%

 

Aircraft industry and sources of revenues

 

Our revenues are principally derived from operating leases with scheduled and charter airlines and we derive more than 90% of our revenues from airlines domiciled outside of the United States. As of March 31, 2013, we had 162 aircraft leased under operating leases to 71 airlines based in 41 countries and we anticipate that most of our revenues in the future will be generated from foreign lessees.

 

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

 

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

 

Liquidity and Capital Resources

 

Overview

 

As we grow our business, our financing strategy remains focused on raising unsecured debt in the global bank and capital markets, reinvesting cash flow from operations and limited utilization of export credit financing. In May 2013, the Company received a corporate credit rating of A- from Kroll Bond Ratings which further broadens our access to attractively priced capital.

 

Our substantial cash requirements will continue as we expand our fleet through the purchase commitments in our pipeline. However, we believe that we will have sufficient liquidity to satisfy the operating requirements of our business through the next 12 months.

 

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

 

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Debt

 

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

 

		March 31, 2013			December 31, 2012
Unsecured
Senior notes		$	2,163,950		$	1,775,000
Revolving credit facilities		445,000			420,000
Term financings		199,229			248,916
Convertible senior notes		200,000			200,000
		3,008,179			2,643,916
Secured
Warehouse facilities		1,045,292			1,061,838
Term financings		740,431			688,601
Export credit financing		76,530			—
		1,862,253			1,750,439
Total secured and unsecured debt financing		4,870,432			4,394,355
Less: Debt discount		(9,231		)	(9,623		)
Total debt		$	4,861,201		$	4,384,732
Selected interest rates and ratios:
Composite interest rate(1)		4.05		%	3.94		%
Composite interest rate on fixed debt(1)		5.11		%	5.06		%
Percentage of total debt at fixed rate		57.95		%	53.88		%

 

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

 

Senior unsecured notes

 

In February 2013, the Company issued $400.0 million in aggregate principal amount of senior unsecured notes due 2020 pursuant to the Company’s effective shelf registration statement previously filed with the SEC.  The notes are senior unsecured obligations of the Company and bear interest at a rate of 4.75% per annum.  The notes will bear additional interest of 0.50% per annum during any period from and after February 5, 2014 during which a publicly available rating on the notes is not maintained by at least one rating agency as described in the related Indenture.

 

Unsecured revolving credit facilities

 

In May 2012, the Company entered into an $853.0 million three-year senior unsecured revolving credit facility (the “Syndicated Unsecured Revolving Credit Facility”). The Syndicated Unsecured Revolving Credit Facility will mature on May 4, 2015. Borrowings under the Syndicated Unsecured Revolving Credit Facility bear interest at LIBOR plus a margin of 1.75% with no LIBOR floor. The Company is required to pay a commitment fee in respect of unutilized commitments under the Syndicated Unsecured Revovling Credit Facility at a rate of 0.375%.  As of March 31, 2013, the Company had added four additional lenders to the Syndicated Unsecured Revolving Credit Facility and increased the aggregate principal amount by $240.0 million to $1.1 billion.  The total amount outstanding under our unsecured revolving credit facilities was $445.0 million and $420.0 million as of March 31, 2013 and December 31, 2012, respectively.

 

On May 7, 2013, the Company completed an amendment to its Syndicated Unsecured Revolving Credit Facility. Pursuant to the amendment we have increased the aggregate principal amount by $607.0 million to $1.7 billion, extending the availability period from 3 years to 4 years to May 2017, and reducing the pricing from LIBOR plus a margin of 1.75% with no LIBOR floor and an undrawn fee of 0.375% to LIBOR plus 1.45% with no LIBOR floor and a 0.30% facility fee.

 

Warehouse facilities

 

As of March 31, 2013, the Company had borrowed $1.0 billion under our Warehouse Facilities and pledged 37 aircraft as collateral with a net book value of $1.5 billion. As of December 31, 2012, the Company had borrowed $1.1 billion under the Warehouse Facilities and pledged 38 aircraft as collateral with a net book value of $1.6 billion. The Company had pledged cash collateral and lessee deposits of $99.7 million and $104.3 million at March 31, 2013 and December 31, 2012, respectively.

 

Secured term financings

 

During the quarter ended March 31, 2013, the Company entered into two additional secured term facilities aggregating $75.0 million with terms of 6 and 7 years and bearing interest at fixed rates of 3.36% and 4.25%, respectively. The outstanding balance on our secured term facilities was $740.4 million and $688.6 million at March 31, 2013 and December 31, 2012, respectively.

 

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