UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20172018
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35121
AIR LEASE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
| 27-1840403 |
(State or other jurisdiction of |
| (I.R.S. Employer |
2000 Avenue of the Stars, Suite 1000N |
| 90067 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (310) 553-0555
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
Large accelerated filer ☒ |
| Accelerated filer ☐ |
Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
(Do not check if a smaller reporting company) |
| Emerging growth company☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At August 2, 2017,8, 2018, there were 103,212,038104,066,545 shares of Air Lease Corporation’s Class A common stock outstanding.
Air Lease Corporation and Subsidiaries
Form 10-Q
For the Quarterly Period Ended June 30, 20172018
2
NOTE ABOUT FORWARD-LOOKING STATEMENTS
Statements in this quarterly report on Form 10-Q that are not historical facts may constitute “forward-looking statements,” including any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in such statements, including as a result of the following factors, among others:
· | our inability to make acquisitions of, or lease, aircraft on favorable terms; |
· | our inability to sell aircraft on favorable |
· | 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 effectively oversee our managed fleet; |
· | 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 |
· | unanticipated impacts of the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), including as a result of changes in assumptions we make in our interpretation of the Tax Reform Act, guidance related to application of the Tax Reform Act that may be issued in the future, and actions that we may take as a result of our expected impact of the Tax Reform Act; |
· | 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, |
All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. You are therefore cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
3
Air Lease Corporation and Subsidiaries
(In thousands, except share and par value amounts)
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| June 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 | ||||
|
| (unaudited) |
|
| (unaudited) | ||||||||
Assets |
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Cash and cash equivalents |
| $ | 239,710 |
| $ | 274,802 |
|
| $ | 259,530 |
| $ | 292,204 |
Restricted cash |
|
| 22,239 |
|
| 16,000 |
|
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| 21,528 |
|
| 16,078 |
Flight equipment subject to operating leases |
|
| 14,386,474 |
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| 13,597,530 |
|
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| 16,962,768 |
|
| 15,100,040 |
Less accumulated depreciation |
|
| (1,643,809) |
|
| (1,555,605) |
|
|
| (2,098,524) |
|
| (1,819,790) |
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| 12,742,665 |
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| 12,041,925 |
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| 14,864,244 |
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| 13,280,250 |
Deposits on flight equipment purchases |
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| 1,440,449 |
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| 1,290,676 |
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| 1,555,407 |
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| 1,562,776 |
Other assets |
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| 416,334 |
|
| 352,213 |
|
|
| 554,738 |
|
| 462,856 |
Total assets |
| $ | 14,861,397 |
| $ | 13,975,616 |
|
| $ | 17,255,447 |
| $ | 15,614,164 |
Liabilities and Shareholders’ Equity |
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Accrued interest and other payables |
| $ | 274,353 |
| $ | 256,775 |
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| $ | 329,426 |
| $ | 309,182 |
Debt financing, net of discounts and issuance costs |
|
| 9,303,312 |
|
| 8,713,874 |
|
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| 10,962,446 |
|
| 9,698,785 |
Security deposits and maintenance reserves on flight equipment leases |
|
| 851,220 |
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| 856,335 |
|
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| 933,309 |
|
| 856,140 |
Rentals received in advance |
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| 105,328 |
|
| 99,385 |
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| 112,151 |
|
| 104,820 |
Deferred tax liability |
|
| 768,980 |
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| 667,060 |
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| 580,273 |
|
| 517,795 |
Total liabilities |
| $ | 11,303,193 |
| $ | 10,593,429 |
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| $ | 12,917,605 |
| $ | 11,486,722 |
Shareholders’ Equity |
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Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued or outstanding |
|
| — |
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| — |
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| — |
|
| — |
Class A common stock, $0.01 par value; authorized 500,000,000 shares; issued and outstanding 103,211,434 and 102,844,477 shares at June 30, 2017 and December 31, 2016, respectively |
|
| 1,012 |
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| 1,010 |
| ||||||
Class A common stock, $0.01 par value; authorized 500,000,000 shares; issued and outstanding 104,065,045 and 103,621,629 shares at June 30, 2018 and December 31, 2017, respectively |
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| 1,041 |
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| 1,036 | |||||||
Class B non-voting common stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding |
|
| — |
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| — |
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| — |
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| — |
Paid-in capital |
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| 2,243,038 |
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| 2,237,866 |
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| 2,265,393 |
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| 2,260,064 |
Retained earnings |
|
| 1,314,154 |
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| 1,143,311 |
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| 2,071,408 |
|
| 1,866,342 |
Total shareholders’ equity |
| $ | 3,558,204 |
| $ | 3,382,187 |
|
| $ | 4,337,842 |
| $ | 4,127,442 |
Total liabilities and shareholders’ equity |
| $ | 14,861,397 |
| $ | 13,975,616 |
|
| $ | 17,255,447 |
| $ | 15,614,164 |
(See Notes to Consolidated Financial Statements)
4
Air Lease Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
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| Three Months Ended |
| Six Months Ended |
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| June 30, |
| June 30, |
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| Three Months Ended June 30, |
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| Six Months Ended June 30, | |||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
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| (unaudited) |
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| (unaudited) | ||||||||||||||||||||
Revenues |
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Rental of flight equipment |
| $ | 358,114 |
| $ | 327,313 |
| $ | 712,767 |
| $ | 644,511 |
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| $ | 393,479 |
| $ | 358,114 |
| $ | 771,341 |
| $ | 712,767 |
Aircraft sales, trading and other |
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| 22,843 |
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| 22,826 |
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| 28,377 |
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| 48,956 |
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| 4,335 |
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| 22,843 |
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| 7,682 |
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| 28,377 |
Total revenues |
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| 380,957 |
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| 350,139 |
|
| 741,144 |
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| 693,467 |
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| 397,814 |
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| 380,957 |
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| 779,023 |
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| 741,144 |
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Expenses |
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Interest |
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| 63,014 |
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| 63,190 |
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| 130,077 |
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| 124,150 |
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|
| 73,452 |
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| 63,014 |
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| 142,395 |
|
| 130,077 |
Amortization of debt discounts and issuance costs |
|
| 6,437 |
|
| 7,388 |
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| 15,429 |
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| 14,549 |
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| 8,010 |
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| 6,437 |
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| 16,032 |
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| 15,429 |
Interest expense |
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| 69,451 |
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| 70,578 |
|
| 145,506 |
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| 138,699 |
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| 81,462 |
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| 69,451 |
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| 158,427 |
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| 145,506 |
Depreciation of flight equipment |
|
| 126,490 |
|
| 112,136 |
|
| 250,399 |
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| 220,711 |
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| 142,600 |
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| 126,490 |
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| 278,734 |
|
| 250,399 |
Selling, general and administrative |
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| 23,843 |
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| 20,653 |
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| 46,415 |
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| 40,055 |
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| 21,458 |
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| 23,843 |
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| 44,817 |
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| 46,415 |
Stock-based compensation |
|
| 5,304 |
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| 4,501 |
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| 9,077 |
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| 7,740 |
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| 4,885 |
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| 5,304 |
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| 8,317 |
|
| 9,077 |
Total expenses |
|
| 225,088 |
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| 207,868 |
|
| 451,397 |
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| 407,205 |
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| 250,405 |
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| 225,088 |
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| 490,295 |
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| 451,397 |
Income before taxes |
|
| 155,869 |
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| 142,271 |
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| 289,747 |
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| 286,262 |
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| 147,409 |
|
| 155,869 |
|
| 288,728 |
|
| 289,747 |
Income tax expense |
|
| (54,944) |
|
| (50,468) |
|
| (103,885) |
|
| (101,601) |
|
|
| (32,198) |
|
| (54,944) |
|
| (62,866) |
|
| (103,885) |
Net income |
| $ | 100,925 |
| $ | 91,803 |
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 115,211 |
| $ | 100,925 |
| $ | 225,862 |
| $ | 185,862 |
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Net income per share of Class A and Class B common stock: |
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Basic |
| $ | 0.98 |
| $ | 0.89 |
| $ | 1.80 |
| $ | 1.80 |
|
| $ | 1.11 |
| $ | 0.98 |
| $ | 2.17 |
| $ | 1.80 |
Diluted |
| $ | 0.92 |
| $ | 0.84 |
| $ | 1.69 |
| $ | 1.69 |
|
| $ | 1.04 |
| $ | 0.92 |
| $ | 2.04 |
| $ | 1.69 |
Weighted-average shares outstanding |
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Basic |
|
| 103,180,769 |
|
| 102,837,443 |
|
| 103,064,834 |
|
| 102,758,427 |
|
|
| 104,003,960 |
|
| 103,180,769 |
|
| 103,876,647 |
|
| 103,064,834 |
Diluted |
|
| 111,564,483 |
|
| 110,839,180 |
|
| 111,490,683 |
|
| 110,710,174 |
|
|
| 112,424,582 |
|
| 111,564,483 |
|
| 112,326,506 |
|
| 111,490,683 |
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Dividends declared per share |
| $ | 0.10 |
| $ | 0.075 |
| $ | 0.20 |
| $ | 0.15 |
(See Notes to Consolidated Financial Statements)
5
Air Lease Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
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| Class A |
| Class B Non-Voting |
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| ||||||
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| Preferred Stock |
| Common Stock |
| Common Stock |
| Paid-in |
| Retained |
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| |||||||||||
(unaudited) |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total |
| ||||||
Balance at December 31, 2016 |
| — |
| $ | — |
| 102,844,477 |
| $ | 1,010 |
| — |
| $ | — |
| $ | 2,237,866 |
| $ | 1,143,311 |
| $ | 3,382,187 |
|
Cumulative effect adjustment upon adoption of ASU 2016-09 |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 458 |
|
| 458 |
|
Issuance of common stock upon vesting of restricted stock units and upon exercise of options and warrants |
| — |
|
| — |
| 505,104 |
|
| 2 |
| — |
|
| — |
|
| 1,695 |
|
| — |
|
| 1,697 |
|
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 9,077 |
|
| — |
|
| 9,077 |
|
Cash dividends (declared $0.15 per share) |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (15,477) |
|
| (15,477) |
|
Tax withholding related to vesting of restricted stock units and exercise of stock options |
| — |
|
| — |
| (138,147) |
|
| — |
| — |
|
| — |
|
| (5,600) |
|
| — |
|
| (5,600) |
|
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 185,862 |
|
| 185,862 |
|
Balance at June 30, 2017 |
| — |
| $ | — |
| 103,211,434 |
| $ | 1,012 |
| — |
| $ | — |
| $ | 2,243,038 |
| $ | 1,314,154 |
| $ | 3,558,204 |
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| Class A |
| Class B Non-Voting |
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| ||||||
|
| Preferred Stock |
| Common Stock |
| Common Stock |
| Paid-in |
| Retained |
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| |||||||||||
(unaudited) |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total |
| ||||||
Balance at December 31, 2017 |
| — |
| $ | — |
| 103,621,629 |
| $ | 1,036 |
| — |
| $ | — |
| $ | 2,260,064 |
| $ | 1,866,342 |
| $ | 4,127,442 |
|
Issuance of common stock upon vesting of restricted stock units and upon exercise of options |
| — |
|
| — |
| 599,984 |
|
| 5 |
| — |
|
| — |
|
| 4,153 |
|
| — |
|
| 4,158 |
|
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 8,317 |
|
| — |
|
| 8,317 |
|
Cash dividends (declared $0.20 per share) |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (20,796) |
|
| (20,796) |
|
Tax withholding related to vesting of restricted stock units and exercise of stock options |
| — |
|
| — |
| (156,568) |
|
| — |
| — |
|
| — |
|
| (7,141) |
|
| — |
|
| (7,141) |
|
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 225,862 |
|
| 225,862 |
|
Balance at June 30, 2018 |
| — |
| $ | — |
| 104,065,045 |
| $ | 1,041 |
| — |
| $ | — |
| $ | 2,265,393 |
| $ | 2,071,408 |
| $ | 4,337,842 |
|
(See Notes to Consolidated Financial Statements)
6
Air Lease Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
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| Six Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 | ||||
|
| (unaudited) |
|
| (unaudited) | ||||||||
Operating Activities |
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Net income |
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 225,862 |
| $ | 185,862 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation of flight equipment |
|
| 250,399 |
|
| 220,711 |
|
|
| 278,734 |
|
| 250,399 |
Stock-based compensation |
|
| 9,077 |
|
| 7,740 |
|
|
| 8,317 |
|
| 9,077 |
Deferred taxes |
|
| 103,885 |
|
| 101,601 |
|
|
| 62,866 |
|
| 103,885 |
Amortization of debt discounts and issuance costs |
|
| 15,429 |
|
| 14,549 |
|
|
| 16,032 |
|
| 15,429 |
Amortization of prepaid lease costs |
|
| 14,610 |
|
| 11,473 | |||||||
Gain on aircraft sales, trading and other activity |
|
| (17,160) |
|
| (37,713) |
|
|
| (2,185) |
|
| (25,048) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
| (86,712) |
|
| 2,367 |
|
|
| (47,313) |
|
| (90,297) |
Accrued interest and other payables |
|
| 31,240 |
|
| 7,298 |
|
|
| 23,737 |
|
| 31,240 |
Rentals received in advance |
|
| 5,943 |
|
| 3,556 |
|
|
| 7,331 |
|
| 5,943 |
Net cash provided by operating activities |
|
| 497,963 |
|
| 504,770 |
|
|
| 587,991 |
|
| 497,963 |
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of flight equipment under operating lease |
|
| (1,142,367) |
|
| (1,138,130) |
|
|
| (1,402,374) |
|
| (1,142,367) |
Payments for deposits on flight equipment purchases |
|
| (385,628) |
|
| (437,721) |
|
|
| (360,440) |
|
| (385,628) |
Proceeds from aircraft sales, trading and other activity |
|
| 433,284 |
|
| 507,202 |
|
|
| 250 |
|
| 433,284 |
Acquisition of aircraft furnishings, equipment and other assets |
|
| (84,874) |
|
| (117,132) |
|
|
| (141,125) |
|
| (84,874) |
Net cash used in investing activities |
|
| (1,179,585) |
|
| (1,185,781) |
|
|
| (1,903,689) |
|
| (1,179,585) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options and warrants |
|
| 1,664 |
|
| — |
|
|
| 4,128 |
|
| 1,664 |
Cash dividends paid |
|
| (15,450) |
|
| (10,271) |
|
|
| (20,757) |
|
| (15,450) |
Tax withholdings on stock-based compensation |
|
| (5,600) |
|
| (5,890) |
|
|
| (7,141) |
|
| (5,600) |
Net change in unsecured revolving facilities |
|
| 711,000 |
|
| 938,000 |
| ||||||
Net change in unsecured revolving facility |
|
| 109,000 |
|
| 711,000 | |||||||
Proceeds from debt financings |
|
| 1,096,673 |
|
| 690,754 |
|
|
| 1,738,665 |
|
| 1,096,673 |
Payments in reduction of debt financings |
|
| (1,229,690) |
|
| (962,403) |
|
|
| (594,706) |
|
| (1,229,690) |
Net change in restricted cash |
|
| (6,239) |
|
| (7,862) |
| ||||||
Debt issuance costs |
|
| (3,964) |
|
| (3,157) |
|
|
| (5,301) |
|
| (3,964) |
Security deposits and maintenance reserve receipts |
|
| 110,766 |
|
| 93,261 |
|
|
| 109,007 |
|
| 110,766 |
Security deposits and maintenance reserve disbursements |
|
| (12,630) |
|
| (35,362) |
|
|
| (44,421) |
|
| (12,630) |
Net cash provided by financing activities |
|
| 646,530 |
|
| 697,070 |
|
|
| 1,288,474 |
|
| 652,769 |
Net increase/(decrease) in cash |
|
| (35,092) |
|
| 16,059 |
| ||||||
Cash and cash equivalents at beginning of period |
|
| 274,802 |
|
| 156,675 |
| ||||||
Cash and cash equivalents at end of period |
| $ | 239,710 |
| $ | 172,734 |
| ||||||
Net decrease in cash |
|
| (27,224) |
|
| (28,853) | |||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 308,282 |
|
| 290,802 | |||||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 281,058 |
| $ | 261,949 | |||||||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest, including capitalized interest of $21,931 and $19,521 at June 30, 2017 and 2016, respectively |
| $ | 159,269 |
| $ | 151,165 |
| ||||||
Cash paid during the period for interest, including capitalized interest of $25,692 and $21,931 at June 30, 2018 and 2017, respectively |
| $ | 149,077 |
| $ | 159,269 | |||||||
Supplemental Disclosure of Noncash Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Buyer furnished equipment, capitalized interest, deposits on flight equipment purchases and seller financing applied to acquisition of flight equipment and other assets applied to payments for deposits on flight equipment purchases |
| $ | 312,837 |
| $ | 525,991 |
|
| $ | 451,048 |
| $ | 312,837 |
Cash dividends declared, not yet paid |
| $ | 7,741 |
| $ | 5,142 |
|
| $ | 10,399 |
| $ | 7,741 |
(See Notes to Consolidated Financial Statements)
7
Air Lease Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.Company Background and Overview
Air Lease Corporation together with its subsidiaries (the “Company”, “ALC”, “we”, “our” or “us”), is a leading aircraft leasing company that was founded by aircraft leasing industry pioneer, Steven F. Udvar-Házy. We are principally engaged in purchasing new commercial jet transport aircraft directly from theaircraft manufacturers, such as The Boeing Company (“Boeing”) and Airbus S.A.S. (“Airbus”), and leasing themthose aircraft to airlines throughout the world.world with the intention to generate attractive returns on equity. In addition to our leasing activities, we sell aircraft from our fleetoperating 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. As of June 30, 2017,2018, we owned a fleet of 240271 aircraft, managed 4849 aircraft and had 373391 aircraft on order with theaircraft manufacturers.
Note 2.Basis of Preparation and Critical Accounting Policies
The Company consolidates financial statements of all entities in which we have a controlling financial interest, including the accounts of any Variable Interest Entity in which we 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, which are in the opinion of management, necessary to present fairly the Company’s financial position, results of operations and cash flows at June 30, 2017,2018, and for all periods presented. The results of operations for the three and six months ended June 30, 20172018 are not necessarily indicative of the operating results expected for the year ending December 31, 2017.2018. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Stock-based compensationMaintenance Rights
Effective as of January 1, 2017, the Company adopted a change in accounting policy in accordance with Accounting Standards Update (“ASU”) 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718),” wherein all excess tax benefits and tax deficiencies related to employee stock compensation will be recognized within income tax expense on the Consolidated Statement of Income. Previously, only net tax deficiencies were recognized as tax expense. As a result of adopting ASU 2016-09, we recognized $1.7 million as a discrete item in income tax expense relating to stock-based compensation expense for tax deficiencies incurred during the three months ended March 31, 2017. We did not recognize any additional income tax expense for the three months ended June 30, 2017 from the adoption of ASU 2016-09. Additionally, in connection with the adoption of ASU 2016-09, the Company recorded excess tax benefits relating to prior periods of $0.5 million on a modified retrospective basis through a cumulative effect adjustment to retained earnings.
In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be classified as operating activities on the Statement of Cash Flow. Previously, these items were classified as financing activities. We have elected to present the cash flow statement on a prospective transition method and there were no adjustments to the Consolidated Statement of Cash Flows forFor the six months ended June 30, 2018, the Company purchased nine aircraft in the secondary market, two of which were subject to existing leases. The total cost for the two aircraft was $73.3 million, which included maintenance right assets of $13.2 million. The Company did not purchase any aircraft in the secondary market subject to existing leases for the year ended December 31, 2017. As of June 30, 2018 and December 31, 2017, as a resultthe Company had maintenance right assets, net of this adoption.accumulated amortization of $55.6 million and $44.6 million, respectively. Maintenance right assets are included under flight equipment subject to operating lease in our Consolidated Balance Sheets.
Finally, ASU 2016-09 provides an accounting policy electionCash, cash equivalents and restricted cash
The Company considers cash and cash equivalents to account for forfeitures as they occurbe cash on hand and highly liquid investments with original maturity dates of 90 days or less. Restricted cash consists of pledged security deposits, maintenance reserves, and rental payments related to account for forfeitures on an estimated basis. We elected to change our policy from estimating forfeitures to accounting for forfeitures as they are incurred. This change in accounting policy was made on a prospective basis.secured aircraft financing arrangements.
8
The following table reconciles cash, cash equivalents and restricted cash reported in our consolidated balance sheets to the total amount presented in our consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
| June 30, 2018 |
| June 30, 2017 | ||
|
| (unaudited) | ||||
Cash and cash equivalents |
| $ | 259,530 |
| $ | 239,710 |
Restricted cash |
|
| 21,528 |
|
| 22,239 |
Total cash, cash equivalents and restricted cash in the consolidated statements of cash flows |
| $ | 281,058 |
| $ | 261,949 |
Reclassifications
Certain reclassifications have been made in the 2017 consolidated financial statements to conform to the classifications in 2018.
Recently adopted accounting standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” The amendments in ASU 2014-09 supersede current revenue recognition requirements. The guidance specifically notes that lease contracts are a scope exception. ASU 2014-09 requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Further, the guidance requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Effective January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. Adopting this standard did not have a material impact to our consolidated financial statements and related disclosures. As the standard did not apply to lease contracts within the scope of FASB Accounting Standard Codification (“ASC”) 840 Leases, we evaluated the recognition of gains on sale of flight equipment under the scope of the new standard. Under ASU 2014-09, a performance obligation is satisfied and the related revenue recognized when control of the underlying goods or services related to the performance obligation is transferred to the customer. Our performance obligation associated with the sale of flight equipment is satisfied upon delivery of the flight equipment to a customer, which is the point in time where control of the underlying flight equipment has transferred to the buyer. At the time flight equipment is retired or sold, the cost and accumulated depreciation are removed from the related accounts and the difference, net of transaction price, is recorded as a gain or loss. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
In August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”), “Statement of Cash Flows (Topic 230).” The amendments in ASU 2016-15 address eight classification issues related to the statement of cash flows. The Company adopted ASU 2016-15 using the retrospective transition method. The adoption of this standard did not have an impact on the current period or prior period consolidated financial statements.
In November 2016, FASB issued ASU No. 2016-18 (“ASU 2016-18”), “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. In addition, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, ASU 2016-18 requires a reconciliation of the totals in the statement of cash flows to the related captions on the balance sheet. The Company adopted ASU 2016-18 retrospectively as of January 1, 2018. The adoption of this standard did not have a material impact on the current period or prior period consolidated financial statements.
9
Note 3.Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”)February 2016, FASB issued ASU No. 2017-012016-02 (“ASU 2017-01”2016-02”), “Business CombinationsLeases (Topic 805)842).” The amendments in ASU 2017-012016-02 set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, which provides anarrow amendments to clarify how to apply certain aspects of the new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01lease standard. Both standards will be effective for annual reporting periods beginning after December 15, 20172018 for public entities.entities and is required to be applied using the modified retrospective transition approach. Early adoption is permitted. Based on our initial evaluation of the guidance, we noted that Lessor accounting is similar to the current model but the guidance will impact us in scenarios where we are the Lessee. We are currently evaluating this guidance to determinedo not expect the impact it willof this standard to have a material impact on our consolidated financial statements.
In February 2017, We will adopt the FASB issued ASU No. 2017-05 (“ASU 2017-05”), “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).” The amendments in ASU 2017-05 clarifies the guidance in Subtopic 610-20standard on accounting for derecognition of a nonfinancial asset. ASU 2017-05 will be effective at the same time the Company applies ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” We are currently evaluating this guidance to determine the impact it will have on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09 (“ASU 2017-09”), “Compensation - Stock Compensation (Topic 718).” This ASU clarifies when changes to share-based payment awards must be accounted for as modifications. ASU 2017-09 will be effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating this guidance to determine the impact it will have on our financial statements.January 1, 2019.
Note 4.Debt Financing
The Company’sCompany's debt financing was comprised of the following at June 30, 20172018 and December 31, 20162017 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 | ||||
Unsecured |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
| $ | 6,919,871 |
| $ | 6,953,343 |
|
| $ | 9,268,445 |
| $ | 8,019,871 |
Revolving credit facility |
|
| 1,477,000 |
|
| 766,000 |
|
|
| 956,000 |
|
| 847,000 |
Convertible senior notes |
|
| 199,951 |
|
| 199,983 | |||||||
Term financings |
|
| 213,760 |
|
| 211,346 |
|
|
| 183,838 |
|
| 203,704 |
Convertible senior notes |
|
| 199,985 |
|
| 199,995 |
| ||||||
Total unsecured debt financing |
|
| 8,810,616 |
|
| 8,130,684 |
|
|
| 10,608,234 |
|
| 9,270,558 |
Secured |
|
|
|
|
|
|
|
|
|
|
|
|
|
Term financings |
|
| 539,462 |
|
| 619,767 |
|
|
| 428,951 |
|
| 484,036 |
Export credit financing |
|
| 48,247 |
|
| 51,574 |
|
|
| 41,593 |
|
| 44,920 |
Total secured debt financing |
|
| 587,709 |
|
| 671,341 |
|
|
| 470,544 |
|
| 528,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt financing |
|
| 9,398,325 |
|
| 8,802,025 |
|
|
| 11,078,778 |
|
| 9,799,514 |
Less: Debt discounts and issuance costs |
|
| (95,013) |
|
| (88,151) |
|
|
| (116,332) |
|
| (100,729) |
Debt financing, net of discounts and issuance costs |
| $ | 9,303,312 |
| $ | 8,713,874 |
|
| $ | 10,962,446 |
| $ | 9,698,785 |
The Company’s secured obligations as of June 30, 20172018 and December 31, 20162017 are summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 | ||||
Nonrecourse |
| $ | 225,368 |
| $ | 245,155 |
|
| $ | 187,616 |
| $ | 205,906 |
Recourse |
|
| 362,341 |
|
| 426,186 |
|
|
| 282,928 |
|
| 323,050 |
Total secured debt financing |
| $ | 587,709 |
| $ | 671,341 |
|
| $ | 470,544 |
| $ | 528,956 |
Number of aircraft pledged as collateral |
|
| 21 |
|
| 25 |
|
|
| 21 |
|
| 21 |
Net book value of aircraft pledged as collateral |
| $ | 1,210,534 |
| $ | 1,421,657 |
|
| $ | 1,157,994 |
| $ | 1,184,264 |
Senior unsecured notes
As of June 30, 2017,2018, the Company had $6.9$9.3 billion in senior unsecured notes outstanding. As of December 31, 2016,2017, the Company had $7.0$8.0 billion in senior unsecured notes outstanding.
OnIn June 12, 2017, the Company issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 2.625%.
9
On March 8, 2017,2018, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes due 20272023 that bear interest at a rate of 3.625%3.875%.
In January 2018, the Company issued (i) $550.0 million in aggregate principal amount of senior unsecured notes due 2021 that bear interest at a rate of 2.50% and (ii) $700.0 million in aggregate principal amount of senior unsecured notes due 2025 that bear interest at a rate of 3.25%.
10
Unsecured revolving credit facility
In May 2017,2018, the Company amended and extended its unsecured revolving credit facility whereby, among other things, the Company extended the final maturity date from May 5, 20202021 to May 5, 20212022 and increased the total revolving commitments to approximately $3.7$4.5 billion from approximately $3.5$4.1 billion with an interest rate of LIBOR plus 1.05% with a 0.20% facility fee. Lenders hold revolving commitments totaling approximately $3.1$4.0 billion that mature on May 5, 2022, commitments totaling $20.0 million that mature on May 5, 2021, commitments totaling approximately $217.7$247.7 million that mature on May 5, 2020, and commitments totaling $290.0$245.0 million that mature on May 5, 2019, and commitments totaling $55.0 million that mature on May 5, 2018.2019.
The total amount outstanding under our unsecured revolving credit facility was approximately $1.5 billion$956.0 million and $766.0$847.0 million as of June 30, 20172018 and December 31, 2016,2017, respectively.
Maturities
Maturities of debt outstanding as of June 30, 20172018 are as follows (in thousands):
|
|
|
|
|
|
|
|
Years ending December 31, |
|
|
|
|
| ||
|
|
|
|
| |||
2017 |
| $ | 77,404 |
| |||
2018 |
|
| 1,565,857 |
|
| $ | 777,247 |
2019 |
|
| 1,093,900 |
|
|
| 1,203,874 |
2020 |
|
| 1,258,585 |
|
|
| 1,232,890 |
2021 |
|
| 2,378,952 |
|
|
| 1,685,157 |
2022 |
|
| 2,078,942 | ||||
Thereafter |
|
| 3,023,627 |
|
|
| 4,100,668 |
Total |
| $ | 9,398,325 |
|
| $ | 11,078,778 |
Note 5.Commitments and Contingencies
As of June 30, 2017 and through August 3, 2017,2018, except as noted in footnote 2 below, the Company had commitments to acquire a total of 373391 new aircraft scheduled to deliverfor delivery through 20232024 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| Total |
Airbus A321-200 |
| 2 |
| — |
| — |
| — |
| — |
| — |
| 2 | ||||||||||||||
Airbus A320/321neo(1) |
| 5 |
| 17 |
| 32 |
| 26 |
| 22 |
| 44 |
| 146 |
| 9 |
| 36 |
| 27 |
| 22 |
| 25 |
| 25 |
| 144 |
Airbus A330-900neo |
| — |
| 7 |
| 5 |
| 5 |
| 5 |
| 5 |
| 27 |
| 5 |
| 5 |
| 4 |
| 7 |
| 6 |
| 2 |
| 29 |
Airbus A350-900/1000 |
| 2 |
| 4 |
| 2 |
| 7 |
| 9 |
| — |
| 24 |
| 1 |
| 4 |
| 2 |
| 5 |
| 3 |
| — |
| 15 |
Boeing 737-7/8/9 MAX |
| 2 |
| 12 |
| 26 |
| 28 |
| 35 |
| 27 |
| 130 |
| 4 |
| 27 |
| 29 |
| 36 |
| 34 |
| 28 |
| 158 |
Boeing 787-9/10 |
| 3 |
| 7 |
| 12 |
| 9 |
| 7 |
| 8 |
| 46 |
| 4 |
| 12 |
| 10 |
| 8 |
| 9 |
| — |
| 43 |
Total(2) |
| 12 |
| 47 |
| 77 |
| 75 |
| 78 |
| 84 |
| 373 |
| 25 |
| 84 |
| 72 |
| 78 |
| 77 |
| 55 |
| 391 |
(1) | Our Airbus A320/321neo aircraft orders include 55 long-range variants. |
(2) | In |
Airbus has informed us to expect several month delivery delays relating to certain aircraft scheduled for delivery in 20172018 and 2018.2019. The delays have been reflected in our commitment schedules above. We have signed leases for all ofabove; however, we anticipate additional delivery delays not currently reflected in the delayed aircraft on order.schedules above. Our leases contain lessee cancellation clauses related to aircraft delivery delays, typically for aircraft delays greater than one year. Our purchase agreements contain similar clauses. As of August 3, 2017,9, 2018, none of our lease contracts arewere subject to cancellation.
1011
Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $28.5$27.8 billion at June 30, 2017 and through August 3, 20172018, as adjusted for the order referenced in footnote 2 in the table above, are as follows (in thousands):
|
|
|
|
|
|
|
Years ending December 31, |
|
|
|
|
| |
|
|
|
| |||
2017 |
| $ | 1,528,931 | |||
2018 |
|
| 4,246,763 |
| $ | 2,465,306 |
2019 |
|
| 5,703,782 |
|
| 6,151,512 |
2020 |
|
| 6,048,859 |
|
| 5,493,536 |
2021 |
|
| 5,886,385 |
|
| 5,808,153 |
2022 |
|
| 5,210,440 | |||
Thereafter |
|
| 5,088,935 |
|
| 2,714,769 |
Total |
| $ |
| $ | 27,843,716 |
We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $1.4 billion and $1.3$1.6 billion as of June 30, 20172018 and December 31, 2016, respectively,2017, which are subject to manufacturer performance commitments. If we are unable to satisfy our purchase commitments, we may be forced to forfeit our deposits. Further, we would be subjectexposed to breach of contract claims by our lessees and manufacturers.
As of June 30, 2017,2018, as adjusted for the order referenced in footnote 2 in the table above, the Company had a non-binding commitmentcommitments to acquire up to five Airbus A350-1000 aircraft and 45 Boeing 737-8 MAX aircraft. Deliveries of these aircraft are scheduled to commence in 2023 and continue through 2024.
Note 6.Net Earnings Per Share
Basic net earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if the effect of including these shares would be anti-dilutive. The Company’s two classes of common stock, Class A and Class B Non-Voting, have equal rights to dividends and income, and therefore, basic and diluted earnings per share are the same for each class of common stock. As of June 30, 2017,2018, we did not have any Class B Non-Voting common stock outstanding.
Diluted net earnings per share takes into account the potential conversion of stock options, restricted stock units, and warrants using the treasury stock method and convertible notes using the if-converted method. For the three and six months ended June 30, 2017,2018, the Company did not haveexclude any potentially anti-dilutivedilutive securities, whichwhose effect would require exclusionhave been anti-dilutive, from the computation of dilutivediluted earnings per share. The Company excluded 1,086,653951,878 and 1,006,6471,086,653 shares related to restricted stock units for which the performance metric had yet to be achieved as of June 30, 20172018 and 2016,2017, respectively.
1112
The following table sets forth the reconciliation of basic and diluted net income per share (in thousands, except share and per share amounts):
|
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|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Basic net income per share: |
|
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|
Numerator |
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|
|
Net income | $ | 100,925 |
| $ | 91,803 |
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 115,211 |
| $ | 100,925 |
| $ | 225,862 |
| $ | 185,862 |
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
| 103,180,769 |
|
| 102,837,443 |
|
| 103,064,834 |
|
| 102,758,427 |
|
|
| 104,003,960 |
|
| 103,180,769 |
|
| 103,876,647 |
|
| 103,064,834 |
Basic net income per share | $ | 0.98 |
| $ | 0.89 |
| $ | 1.80 |
| $ | 1.80 |
|
| $ | 1.11 |
| $ | 0.98 |
| $ | 2.17 |
| $ | 1.80 |
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 100,925 |
| $ | 91,803 |
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 115,211 |
| $ | 100,925 |
| $ | 225,862 |
| $ | 185,862 |
Assumed conversion of convertible senior notes |
| 1,431 |
|
| 1,455 |
|
| 2,847 |
|
| 2,909 |
|
|
| 1,735 |
|
| 1,431 |
|
| 3,474 |
|
| 2,847 |
Net income plus assumed conversions | $ | 102,356 |
| $ | 93,258 |
| $ | 188,709 |
| $ | 187,570 |
|
| $ | 116,946 |
| $ | 102,356 |
| $ | 229,336 |
| $ | 188,709 |
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in basic computation |
| 103,180,769 |
|
| 102,837,443 |
|
| 103,064,834 |
|
| 102,758,427 |
|
|
| 104,003,960 |
|
| 103,180,769 |
|
| 103,876,647 |
|
| 103,064,834 |
Weighted-average effect of dilutive securities |
| 8,383,714 |
|
| 8,001,737 |
|
| 8,425,849 |
|
| 7,951,747 |
|
|
| 8,420,622 |
|
| 8,383,714 |
|
| 8,449,859 |
|
| 8,425,849 |
Number of shares used in per share computation |
| 111,564,483 |
|
| 110,839,180 |
|
| 111,490,683 |
|
| 110,710,174 |
|
|
| 112,424,582 |
|
| 111,564,483 |
|
| 112,326,506 |
|
| 111,490,683 |
Diluted net income per share | $ | 0.92 |
| $ | 0.84 |
| $ | 1.69 |
| $ | 1.69 |
|
| $ | 1.04 |
| $ | 0.92 |
| $ | 2.04 |
| $ | 1.69 |
Note 7.Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring and Non-recurring Basis
The Company had no assets or liabilities which are measured at fair value on a recurring or non-recurring basis as of June 30, 20172018 or December 31, 2016.2017.
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, 20172018 was $9.6approximately $10.9 billion compared to a book value of $9.4$11.1 billion. The estimated fair value of debt financing as of December 31, 20162017 was $8.9$10.0 billion compared to a book value of $8.8$9.8 billion.
The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at June 30, 2017,2018, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at June 30, 2018 and December 31, 2017 approximates their carrying value as reported on the consolidated balance sheet. The fair value of all these instruments would be categorized as Level 1 ofin the fair value hierarchy.
Note 8.Stock-based Compensation
On May 7, 2014, the stockholders of the Company approved the Air Lease Corporation 2014 Equity Incentive Plan (the “2014 Plan”). Upon approval of the 2014 Plan, no new awards may be granted under the Amended and Restated 2010 Equity Incentive Plan (the “2010 Plan”). As of June 30, 2017,2018, the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) remaining under the 2014 Plan is approximately 5,768,763,5,608,176, which includes 768,763608,176 shares which were previously reserved for issuance under the 2010 Plan. Stock Options are generally granted for a term of 10 years and generally vest over a three year period. The Company has issued RSUs with four different vesting criteria: those RSUs that vest based on the attainment of book value goals, those RSUs that vest based on the attainment of Total Shareholder Return (“TSR”) goals, time based RSUs that vest ratably over a time period of three years and RSUs that cliff-vest at the end of a one or two year period. The Company has two types of book value RSUs generally— those that vest ratably over three years if the performance condition has been met, and those that vest at the end of a three-year period if the performance condition has been met. For the book value RSUs that vest at the end of the three-year period,
13
the number of shares that will ultimately vest will range from 0% to 200% of the RSUs initially granted depending on the percentage change in the Company's book value per share at the end of the vesting period. At each reporting period, the Company reassesses the probability of the performance condition being achieved and expense is recognized based upon management’s assessment. Book value RSUs for which the performance metric has not been met are forfeited. The TSR RSUs vest at the end of a three-year period. The number of TSR RSUs that will ultimately vest is based upon the percentile ranking of the Company’s TSR among a peer group. The number of shares that will ultimately
12
vest will range from 0% to 200% of the RSUs initially granted depending on the extent to which the TSR metric is achieved.
The Company recorded $5.3$4.9 million and $4.5$5.3 million of stock-based compensation expense related to RSUs for the three months ended June 30, 20172018 and 2016,2017, respectively. The Company recorded $9.1$8.3 million and $7.7$9.1 million of stock-based compensation expense related to RSUs for the six months ended June 30, 20172018 and 2016,2017, respectively.
Stock Options
A summary of stock option activity for the six month period ended June 30, 20172018 follows:
|
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|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
| Remaining |
| Aggregate |
|
|
|
|
|
|
| Remaining |
| Aggregate | ||
|
|
|
| Exercise |
| Contractual Term |
| Intrinsic Value |
|
|
|
| Exercise |
| Contractual Term |
| Intrinsic Value | ||||
|
| Shares |
| Price |
| (in years) |
| (in thousands)(1) |
|
| Shares |
| Price |
| (in years) |
| (in thousands)(1) | ||||
Balance at December 31, 2016 |
| 3,308,158 |
| $ | 20.40 |
| 3.50 |
| $ | 46,086 |
| ||||||||||
Balance at December 31, 2017 |
| 2,858,158 |
| $ | 20.37 |
| 2.49 |
| $ | 79,230 | |||||||||||
Granted |
| — |
| $ | — |
| — |
| $ | — |
|
| — |
| $ | — |
| — |
| $ | — |
Exercised |
| (70,000) |
| $ | 23.77 |
| — |
| $ | 1,036 |
|
| (206,363) |
| $ | 20.00 |
| — |
| $ | 4,903 |
Forfeited/canceled |
| — |
| $ | — |
| — |
| $ | — |
|
| — |
| $ | — |
| — |
| $ | — |
Balance at June 30, 2017 |
| 3,238,158 |
| $ | 20.33 |
| 2.99 |
| $ | 55,158 |
| ||||||||||
Vested and exercisable as of June 30, 2017 |
| 3,238,158 |
| $ | 20.33 |
| 2.99 |
| $ | 55,158 |
| ||||||||||
Balance at June 30, 2018 |
| 2,651,795 |
| $ | 20.40 |
| 1.99 |
| $ | 57,204 | |||||||||||
Vested and exercisable as of June 30, 2018 |
| 2,651,795 |
| $ | 20.40 |
| 1.99 |
| $ | 57,204 |
(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. |
TheAs of June 30, 2018, all of the Company’s outstanding employee stock options had fully vested on June 30, 2013 and there were no unrecognized compensation costs related to outstanding stock options as of June 30, 2017.2018. As a result, there was no stock-based compensation expense related to Stock Options for the three and six months ended June 30, 20172018 and 2016.2017.
The following table summarizes additional information regarding exercisable and vested stock options at June 30, 2017:2018:
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| Stock Options Exercisable |
|
| Stock Options Exercisable | ||||
|
| and Vested |
|
| and Vested | ||||
|
|
|
| Weighted- |
|
|
|
| Weighted- |
|
|
|
| Average |
|
|
|
| Average |
|
| Number of |
| Remaining Life |
|
| Number of |
| Remaining Life |
Range of exercise prices |
| Shares |
| (in years) |
|
| Shares |
| (in years) |
$20.00 |
| 3,118,158 |
| 2.96 |
|
| 2,531,795 |
| 1.95 |
$28.80 |
| 120,000 |
| 3.82 |
|
| 120,000 |
| 2.82 |
$20.00 - $28.80 |
| 3,238,158 |
| 2.99 |
|
| 2,651,795 |
| 1.99 |
Restricted Stock Units
Compensation cost for stock awards is measured at the grant date based on fair value and recognized over the vesting period. The fair value of time based and book value RSUs is determined based on the closing market price of the Company’s Class A common stock on the date of grant, while the fair value of TSR RSUs is determined at the grant date using a Monte Carlo simulation model. Included in the Monte Carlo simulation model were certain assumptions regarding a number of highly complex and subjective variables, such as expected volatility, risk-free interest rate and expected dividends. To appropriately value the award, the risk-free interest rate is estimated for the time period from the valuation date until the vesting date and the historical volatilities were estimated based on a historical timeframe equal to the time from the valuation date until the end date of the performance period.
1314
During the six months ended June 30, 2017,2018, the Company granted 505,545379,480 RSUs of which 228,93890,761 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the six months ended June 30, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unvested Restricted Stock Units |
|
| Unvested Restricted Stock Units | ||||||
|
|
|
| Weighted-Average |
|
|
|
| Weighted-Average | ||
|
|
|
| Grant-Date |
|
|
|
| Grant-Date | ||
|
| Number of Shares |
| Fair Value |
|
| Number of Shares |
| Fair Value | ||
Unvested at December 31, 2016 |
| 1,129,045 |
| $ | 37.47 |
| |||||
Unvested at December 31, 2017 |
| 1,163,700 |
| $ | 40.24 | ||||||
Granted |
| 505,545 |
| $ | 45.05 |
|
| 379,480 |
| $ | 47.26 |
Vested |
| (311,259) |
| $ | 37.43 |
|
| (401,959) |
| $ | 42.48 |
Forfeited/canceled |
| (102,270) |
| $ | 48.38 |
|
| (35,089) |
| $ | 47.83 |
Unvested at June 30, 2017 |
| 1,221,061 |
| $ | 39.70 |
| |||||
Unvested at June 30, 2018 |
| 1,106,132 |
| $ | 41.60 | ||||||
Expected to vest after June 30, 2018 |
| 1,142,464 |
| $ | 41.64 |
The Company recorded $5.3$4.9 million and $4.5$5.3 million of stock-based compensation expense related to RSUs for the three months ended June 30, 20172018 and 2016,2017, respectively. The Company recorded $9.1$8.3 million and $7.7$9.1 million of stock-based compensation expense related to RSUs for the six months ended June 30, 20172018 and 2016,2017, respectively.
As of June 30, 2017,2018, there was $27.0$27.2 million of unrecognized compensation cost related to unvested RSUsstock-based payments granted to employees. Total unrecognized compensation cost will be recognized over a weighted-average remaining period of 2.042.01 years.
Note 9. Investments9.Investments
On November 4, 2014, a wholly owned subsidiary of the Company entered into an agreement with a co-investment vehicle arranged by Napier Park Global Capital (US) LP (‘‘Napier Park’’) to participate in a joint venture and formed Blackbird Capital I, LLC (‘‘Blackbird’Blackbird I’’) 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 I is 9.5% and it is accounted for as an investment under the equity method of accounting. The Company incurred $0.3 million of losses and recognized $0.8 million of gains on the sale of aircraft to Blackbird during the six months ended June 30, 2017 and June 30, 2016, respectively. As of June 30, 2017 and December 31, 2016, the amounts due from Blackbird to the Company were $0.6 million and $0.7 million, respectively. The Company's investment in Blackbird I was $30.8$33.8 million and $25.1$32.3 million as of June 30, 20172018 and December 31, 2016,2017, respectively, and is recorded in other assets on the Consolidated Balance Sheet.
Note 10. Flight Equipment Held for SaleSheets.
On May 3,August 1, 2017, wea wholly owned subsidiary of the Company entered into an agreement with a co-investment vehicle arranged by Napier Park to sell 19participate in a joint venture and formed Blackbird Capital II, LLC (‘‘Blackbird II’’) for the purpose of investing in commercial aircraft and leasing them to Thunderbolt Aircraft Lease Limited (‘‘Thunderbolt’’),airlines around the globe. We provide management services to the joint venture for a groupfee based upon aircraft assets under management. The Company’s non-controlling interest in Blackbird II is 9.5% and it is accounted for as an investment under the equity method of third party investors. We have no ownershipaccounting. The Company's investment in Thunderbolt. During the quarter ended June 30, 2017, we completed sales of 16 aircraft to Thunderbolt. We expect the sale of the remaining three aircraft to be completed in the third quarter of 2017.
AsBlackbird II was $3.4 million and $3.3 million as of June 30, 2018 and December 31, 2017, we had four aircraft, with a carrying value of $77.5 million, which were held for salerespectively, and includedis recorded in flight equipment subject to operating leasesother assets on the Consolidated Balance Sheet. We cease recognition of depreciation expense once an aircraft is classified as held for sale.Sheets. As of December 31, 2016, we had six aircraft, with a carrying value of $163.4 million, held for sale and included in flight equipment subjectAugust 9, 2018, the Company's total unfunded commitment to operating leases on the Consolidated Balance Sheet.Blackbird II was $34.7 million.
Note 11. Subsequent10.Subsequent Events
On August 1, 2017, a wholly owned subsidiary of the Company2018, we entered into an agreement with a co-investment vehicle arranged by Napier Park to participate in a joint venturesell 18 aircraft to Thunderbolt Aircraft Lease Limited II (“Thunderbolt II”), an asset-backed securities platform which will facilitate the sale and formed Blackbird Capital II, LLC (‘‘Blackbird II’’) for the purposecontinued management 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.to investors. The Company’s non-controlling interest in BlackbirdThunderbolt II is 9.5%5.1% and will beit is accounted for as an investment under the equitycost method of accounting. All of the aircraft in Thunderbolt II's portfolio will be managed by the Company. As of August 3, 2017, Blackbird II had $230.81, 2018, all 18 aircraft, with a carrying value of $546.8 million, were classified as held for sale and included in equity commitments. flight equipment subject to operating leases on the Consolidated Balance Sheet. We expect a majority of the aircraft sales to be completed by the end of the fourth quarter of 2018.
14
On August 2, 2017,8, 2018, our board of directors approved a quarterly cash dividend of $0.075$0.10 per share on our outstanding common stock. The dividend will be paid on October 6, 20175, 2018 to holders of record of our common stock as of September 13, 2017.
14, 2018.
15
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Overview
Air Lease Corporation is a leading aircraft leasing company that was founded by aircraft leasing industry pioneer, Steven F. Udvar-Házy. We are principally engaged in purchasing new commercial jet transport aircraft directly from aircraft manufacturers, such as Boeing and Airbus, and leasing those aircraft to airlines throughout the world with the intention to generate attractive returns on equity. In addition to our leasing activities, we sell aircraft from our operating lease portfolio to third-parties, including other leasing companies, financial services companies and airlines. We also provide fleet management services to investors and owners of aircraft portfolios for a management fee. Our operating performance is driven by the growth of our fleet, the terms of our leases, the interest rates on our debt, and the aggregate amount of our indebtedness, supplemented by the gains from our aircraft sales and trading activities and our management fees.
During the six months ended June 30, 2017,2018, we purchased and took delivery of 1918 aircraft from our new order pipeline and purchased sixnine incremental aircraft and sold 22 aircraft, ending the period with a total of 240271 aircraft with a net book value of $12.7$14.9 billion. The weighted average lease term remaining on our operating lease portfolio was 6.96.8 years and the weighted average age of our fleet was 3.63.8 years as of June 30, 2017.2018. Our fleet grew by 5.8%11.9% based on net book value of $12.7$14.9 billion as of June 30, 20172018 compared to $12.0$13.3 billion as of December 31, 2016.2017. In addition, ourwe had a managed fleet increased to 48of 49 aircraft as of June 30, 2017 from 302018, compared to a managed fleet of 50 aircraft as of December 31, 2016.2017. We have a globally diversified customer base comprised of 8893 airlines in 5456 countries. AllAs of theJune 30, 2018, all of our aircraft in our operating lease portfolio were subject to lease as of June 30, 2017.agreements.
In 2017,August 2018, we entered into amendments and supplemental agreements to existing agreementsan agreement with Airbus and Boeing to purchase 28 additionalup to 78 Boeing airplanes, including 75 737-8 MAX and three 787-9 aircraft. The three 787-9 aircraft consisting of 12 incremental A321neo aircraft, two A330-900 aircraft, 12 737and 30 737-8 MAX aircraft and two 787-9 aircraft. Deliveriesare firm purchases as of the aircraft are scheduled to commence in 2018 and continue through 2023.August 9, 2018. As of June 30, 2017,2018, as adjusted for the firm purchases referenced above, we had in the aggregate, 373commitments to purchase 391 aircraft on order withfrom Airbus and Boeing and Airbus for delivery through 2023.2024, with an estimated aggregate commitment of $27.8 billion. We ended the second quarter of 2018 with $25.0 billion in committed minimum future rental payments and placed 87% of our order book on long-term leases for aircraft delivering through 2020. This includes $11.3 billion in contracted minimum rental payments on the aircraft in our existing fleet and $13.7 billion in minimum future rental payments related to aircraft which will be delivered during the remainder of 2018 through 2022.
On May 3, 2017,August 1, 2018, we entered into an agreement to sell 1918 aircraft to Thunderbolt Aircraft Lease Limited (‘‘Thunderbolt’’II (“Thunderbolt II”), a groupan asset-backed securities platform which will facilitate the sale and continued management of third partyaircraft assets to investors. We have no ownershipOur non-controlling interest in Thunderbolt.Thunderbolt II is 5.1%. All of the aircraft in Thunderbolt'sThunderbolt II's portfolio will be managed by the Company. During the quarter ended June 30, 2017, we completed theus. As of August 1, 2018, all 18 aircraft, with a carrying value of $546.8 million, were classified as held for sale of 16 aircraftand included in flight equipment subject to Thunderbolt.operating leases on our consolidated balance sheet. We expect the salea majority of the remaining three aircraft sales to be completed inby the thirdend of the fourth quarter of 2017.2018.
On August 1, 2017,In 2018, we have issued a wholly owned subsidiarytotal of the Company entered into an agreement with a co-investment vehicle arranged by Napier Park Global Capital (US) LP (‘‘Napier Park’’) to participate in a joint venture and formed Blackbird Capital II, LLC (‘‘Blackbird II’’) for the purpose of investing in commercial aircraft and leasing them to airlines around the globe. We provide management services to the joint venture for a fee based upon aircraft assets under management. The Company’s non-controlling interest in Blackbird II is 9.5%. As of August 3, 2017, Blackbird II had $230.8 million in equity commitments.
During the six months ended June 30, 2017, we issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 2.625% and $500.0 million in aggregate principal amount of senior unsecured notes due 2027 that bear interest at a rate of 3.625%. We also paid down $1.1$1.75 billion in aggregate principal amount of senior unsecured notes that bearwith maturity dates ranging between 2021 and 2025 and bearing interest at a rate of 5.625% during the quarter ended June 30, 2017.fixed rates ranging from 2.5% to 3.875%. In addition,May 2018, we amended and extended our unsecured revolving credit facility whereby, among other things, we extended the final maturity date from May 5, 2020 to May 5, 2021 and increased the total revolving commitments to approximately $3.7$4.5 billion from approximately $3.5 billion with anand extended the final maturity date to May 5, 2022. Borrowings under our unsecured revolving credit facility will bear interest rate ofat LIBOR plus a margin of 1.05% with a 0.20% facility fee.per year. We ended the second quarter of 20172018 with total debt outstanding, net of discounts and issuance costs, of $9.3$11.0 billion, of which 77.5%86.6% was at a fixed rate and 93.7%95.8% of which was unsecured. Our composite cost of funds decreasedincreased to 3.08%3.32% as of June 30, 20172018 from 3.42%3.20% as of December 31, 2016.2017.
Our total revenues for the quarter ended June 30, 2018 increased by 4.4% to $397.8 million, compared to the quarter ended June 30, 2017. The increase in our revenues is primarily due to the increase in the net book value of our operating lease portfolio. Our net income for the quarter ended June 30, 2018 was $115.2 million compared to $100.9 million for the quarter ended June 30, 2017. Our diluted earnings per share for the quarter ended June 30, 2018 was $1.04 compared
16
The minimum future rental payments that our airline customers have committed to increased to $23.9 billion as of June 30, 2017 from $23.8 billion as of December 31, 2016. This includes $9.8 billion in contracted minimum rental payments on the aircraft in our existing fleet and $14.1 billion in minimum future rental payments related to aircraft which will deliver during the remainder of 2017 through 2021.
Our total revenues$0.92 for the quarter ended June 30, 2017 increased by 8.8% to $381.0 million, compared to the quarter ended June 30, 2016. This is comprised of rental revenues on our operating lease portfolio of $358.1 million and aircraft sales, trading and other revenue of $22.8 million.
Our net income for the quarter ended June 30, 2017 was $100.9 million compared to $91.8 million for the quarter ended June 30, 2016. Our diluted earnings per share for the quarter ended June 30, 2017 was $0.92 compared to $0.84 for the quarter ended June 30, 2016. Our pre-tax profit margin for the quarter ended June 30, 2017 was 40.9% compared to 40.6% for the quarter ended June 30, 2016.2017. The increase in net income in the second quarter of 20172018 as compared to 20162017 was primarily due to an increase in our rental revenue resultinga lower income tax expense as a result of the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”), which, among other things, lowered the corporate tax rate from an increase in the net book value of our fleet of aircraft subject35% to operating lease.21% effective January 1, 2018.
ExcludingOur adjusted net income before income taxes excludes the effects of certain non-cash items, one-time or non-recurring items, such as settlement expense, net of recoveries, that are not expected to continue in the future and certain other items,items. Our adjusted net income before income taxes for the three months ended June 30, 2018 was $160.3 million or $1.44 per diluted share, compared to $166.7 million or $1.51 per diluted share for the three months ended June 30, 2017. As we did not sell any aircraft in the second quarter of 2018, our adjusted net income before income taxes was $166.7 million for the three months ended June 30, 2017decreased as compared to $152.2 million for the three months ended June 30, 2016.second quarter of 2017. Our adjusted margin before income taxes for the three months ended June 30, 20172018 was 43.9%40.3% compared to 43.7%43.9% for the three months ended June 30, 2016. Adjusted diluted earnings per share before income taxes for the three months ended June 30, 2017 was $1.51 compared to $1.39 for the three months ended June 30, 2016.2017. Adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the "Results“Results of Operations"Operations” table for a discussion of adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income.
Our fleetFleet
Portfolio metrics of our aircraft portfoliofleet as of June 30, 20172018 and December 31, 20162017 are as follows:
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| June 30, 2018 |
| December 31, 2017 |
| |||||||||
|
|
|
|
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|
|
| |||||||
Aggregate fleet net book value |
| $ | 14.9 | billion | $ | 13.3 | billion | |||||||
Weighted-average fleet age(1) |
|
| 3.8 | years |
| 3.8 | years | |||||||
Weighted-average remaining lease term(1) |
|
| 6.8 | years |
| 6.8 | years | |||||||
|
| June 30, 2017 |
| December 31, 2016 |
|
|
|
|
|
|
|
| ||
Owned fleet |
|
| 240 |
|
| 237 |
|
|
| 271 |
|
| 244 |
|
Managed fleet |
|
| 48 |
|
| 30 |
|
|
| 49 |
|
| 50 |
|
Order book |
|
| 373 |
|
| 363 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Weighted-average fleet age(1) |
|
| 3.6 | years |
| 3.8 | years | |||||||
Weighted-average remaining lease term(1) |
|
| 6.9 | years |
| 6.9 | years | |||||||
Aggregate fleet net book value |
| $ | 12.7 | billion | $ | 12.0 | billion | |||||||
Order book(2) |
|
| 391 |
|
| 368 |
| |||||||
Total |
|
| 711 |
|
| 662 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current fleet contracted rentals |
| $ | 9.8 | billion | $ | 9.4 | billion |
| $ | 11.3 | billion | $ | 10.1 | billion |
Committed fleet rentals |
| $ | 14.1 | billion | $ | 14.4 | billion |
| $ | 13.7 | billion | $ | 13.3 | billion |
Total committed rentals |
| $ | 23.9 | billion | $ | 23.8 | billion |
| $ | 25.0 | billion | $ | 23.4 | billion |
(1) | Weighted-average fleet age and remaining lease term calculated based on net book value. |
(2) | In August 2018, we entered into an agreement to purchase up to 78 Boeing Aircraft, including 75 737-8 MAX aircraft and three 787-9 aircraft. Of the 78 aircraft commitments, 30 737-8 MAX aircraft and three 787-9 aircraft are firm commitments and are included in our order book total. |
The following table sets forth the net book value and percentage of the net book value of our flight equipment subject to operating lease in the indicated regions based on each airline's principal place of business as of June 30, 2018 and December 31, 2017 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
| December 31, 2017 |
| ||||||
|
| Net Book |
|
|
| Net Book |
|
|
| ||
Region |
| Value |
| % of Total |
| Value |
| % of Total |
| ||
Europe |
| $ | 4,612,563 |
| 31.0 | % | $ | 4,205,431 |
| 31.7 | % |
Asia (excluding China) |
|
| 3,448,245 |
| 23.2 | % |
| 2,981,339 |
| 22.4 | % |
China |
|
| 2,717,681 |
| 18.3 | % |
| 2,720,124 |
| 20.5 | % |
The Middle East and Africa |
|
| 1,982,018 |
| 13.3 | % |
| 1,481,825 |
| 11.2 | % |
Central America, South America and Mexico |
|
| 1,062,000 |
| 7.2 | % |
| 926,732 |
| 7.0 | % |
U.S. and Canada |
|
| 683,374 |
| 4.6 | % |
| 599,367 |
| 4.5 | % |
Pacific, Australia and New Zealand |
|
| 358,363 |
| 2.4 | % |
| 365,432 |
| 2.7 | % |
Total |
| $ | 14,864,244 |
| 100.0 | % | $ | 13,280,250 |
| 100.0 | % |
17
The following table sets forth the net book value and percentage of the net book value of our aircraft portfolio operating in the indicated regions as of June 30, 2017 and December 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
| December 31, 2016 |
| ||||||
|
| Net Book |
|
|
| Net Book |
|
|
| ||
Region |
| Value |
| % of Total |
| Value |
| % of Total |
| ||
Europe |
| $ | 4,144,547 |
| 32.5 | % | $ | 3,547,294 |
| 29.5 | % |
China |
|
| 2,727,113 |
| 21.4 | % |
| 2,779,546 |
| 23.0 | % |
Asia (excluding China) |
|
| 2,725,655 |
| 21.4 | % |
| 2,739,554 |
| 22.7 | % |
The Middle East and Africa |
|
| 1,056,494 |
| 8.3 | % |
| 935,968 |
| 7.8 | % |
Central America, South America and Mexico |
|
| 988,989 |
| 7.8 | % |
| 937,287 |
| 7.8 | % |
U.S. and Canada |
|
| 653,888 |
| 5.1 | % |
| 647,743 |
| 5.4 | % |
Pacific, Australia and New Zealand |
|
| 445,979 |
| 3.5 | % |
| 454,533 |
| 3.8 | % |
Total |
| $ | 12,742,665 |
| 100.0 | % | $ | 12,041,925 |
| 100.0 | % |
The following table sets forth the number of aircraft we leased by aircraft type as of June 30, 20172018 and December 31, 2016:2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 |
| ||||||||
|
| Number of |
|
|
| Number of |
|
|
|
| Number of |
|
|
| Number of |
|
|
|
Aircraft type |
| Aircraft |
| % of Total |
| Aircraft |
| % of Total |
|
| Aircraft |
| % of Total |
| Aircraft |
| % of Total |
|
Airbus A319-100 |
| 1 |
| 0.4 | % | 3 |
| 1.3 | % |
| 1 |
| 0.4 | % | 1 |
| 0.4 | % |
Airbus A320-200 |
| 43 |
| 17.9 | % | 44 |
| 18.6 | % |
| 42 |
| 15.4 | % | 40 |
| 16.4 | % |
Airbus A320-200neo |
| 4 |
| 1.7 | % | 1 |
| 0.4 | % |
| 5 |
| 1.9 | % | 5 |
| 2.1 | % |
Airbus A321-200 |
| 30 |
| 12.5 | % | 31 |
| 13.1 | % |
| 33 |
| 12.1 | % | 29 |
| 11.9 | % |
Airbus A321-200neo |
| 2 |
| 0.8 | % | — |
| — | % |
| 9 |
| 3.3 | % | 5 |
| 2.1 | % |
Airbus A330-200 |
| 16 |
| 6.7 | % | 17 |
| 7.2 | % |
| 15 |
| 5.5 | % | 15 |
| 6.2 | % |
Airbus A330-300 |
| 5 |
| 2.1 | % | 5 |
| 2.1 | % |
| 5 |
| 1.9 | % | 5 |
| 2.0 | % |
Airbus A350-900 |
| 5 |
| 1.9 | % | 2 |
| 0.9 | % | |||||||||
Boeing 737-700 |
| 3 |
| 1.3 | % | 8 |
| 3.4 | % |
| 5 |
| 1.9 | % | 3 |
| 1.2 | % |
Boeing 737-800 |
| 104 |
| 43.3 | % | 95 |
| 40.1 | % |
| 103 |
| 37.9 | % | 102 |
| 41.8 | % |
Boeing 737-8 MAX |
| 10 |
| 3.7 | % | 2 |
| 0.8 | % | |||||||||
Boeing 767-300ER |
| 1 |
| 0.4 | % | 1 |
| 0.4 | % |
| 1 |
| 0.4 | % | 1 |
| 0.4 | % |
Boeing 777-200ER |
| 1 |
| 0.4 | % | 1 |
| 0.4 | % |
| 1 |
| 0.4 | % | 1 |
| 0.4 | % |
Boeing 777-300ER |
| 24 |
| 10.0 | % | 22 |
| 9.3 | % |
| 24 |
| 8.8 | % | 24 |
| 9.7 | % |
Boeing 787-9 |
| 5 |
| 2.1 | % | 3 |
| 1.3 | % |
| 11 |
| 4.1 | % | 8 |
| 3.3 | % |
Embraer E190 |
| 1 |
| 0.4 | % | 6 |
| 2.4 | % |
| 1 |
| 0.4 | % | 1 |
| 0.4 | % |
Total |
| 240 |
| 100.0 | % | 237 |
| 100.0 | % |
| 271 |
| 100.0 | % | 244 |
| 100.0 | % |
As of June 30, 2017 and through August 3, 2017,2018, except as noted in footnote 2 below, we had commitments to acquire a total of 373391 new aircraft for delivery as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| Total |
Airbus A321-200 |
| 2 |
| — |
| — |
| — |
| — |
| — |
| 2 | ||||||||||||||
Airbus A320/321neo(1) |
| 5 |
| 17 |
| 32 |
| 26 |
| 22 |
| 44 |
| 146 |
| 9 |
| 36 |
| 27 |
| 22 |
| 25 |
| 25 |
| 144 |
Airbus A330-900neo |
| — |
| 7 |
| 5 |
| 5 |
| 5 |
| 5 |
| 27 |
| 5 |
| 5 |
| 4 |
| 7 |
| 6 |
| 2 |
| 29 |
Airbus A350-900/1000 |
| 2 |
| 4 |
| 2 |
| 7 |
| 9 |
| — |
| 24 |
| 1 |
| 4 |
| 2 |
| 5 |
| 3 |
| — |
| 15 |
Boeing 737-7/8/9 MAX |
| 2 |
| 12 |
| 26 |
| 28 |
| 35 |
| 27 |
| 130 |
| 4 |
| 27 |
| 29 |
| 36 |
| 34 |
| 28 |
| 158 |
Boeing 787-9/10 |
| 3 |
| 7 |
| 12 |
| 9 |
| 7 |
| 8 |
| 46 |
| 4 |
| 12 |
| 10 |
| 8 |
| 9 |
| — |
| 43 |
Total(2) |
| 12 |
| 47 |
| 77 |
| 75 |
| 78 |
| 84 |
| 373 |
| 25 |
| 84 |
| 72 |
| 78 |
| 77 |
| 55 |
| 391 |
(1) | Our Airbus A320/321neo aircraft orders include 55 long-range variants. |
(2) | In |
Airbus has informed us to expect several month delivery delays relating to certain aircraft scheduled for delivery in 20172018 and 2018.2019. The delays have been reflected in our commitment schedules above. We have signed leases for all ofabove; however, we anticipate additional delivery delays not currently reflected in the delayed aircraft on order.schedules above. Our leases contain lessee cancellation clauses related to aircraft delivery delays, typically for aircraft delays greater than one year. Our purchase agreements contain similar clauses. As of August 3, 2017,9, 2018, none of our lease contracts arewere subject to cancellation.
As of June 30, 2018, as adjusted for the order referenced in footnote 2 in the table above, we had non-binding commitments to acquire up to five Airbus A350-1000 aircraft and 45 Boeing 737-8 MAX aircraft. Deliveries of these aircraft are scheduled to commence in 2023 and continue through 2024.
18
As of June 30, 2017, we had a non-binding commitment to acquire up to five A350-1000 aircraft. Deliveries of these aircraft are scheduled to commence in 2023 and continue through 2024.
Our lease placements are progressing in line with expectations. As of June 30, 20172018 and through August 3, 2017,9, 2018, we have entered into contracts for the lease of new aircraft scheduled to be delivered as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of |
| Number |
|
|
|
| Number of |
| Number |
|
|
|
Delivery Year |
| Aircraft |
| Leased |
| % Leased |
|
| Aircraft |
| Leased |
| % Leased |
|
2017 |
| 12 |
| 12 |
| 100.0 | % | |||||||
2018 |
| 47 |
| 47 |
| 100.0 | % |
| 25 |
| 25 |
| 100.0 | % |
2019 |
| 77 |
| 64 |
| 83.1 | % |
| 84 |
| 84 |
| 100.0 | % |
2020 |
| 75 |
| 31 |
| 41.3 | % |
| 72 |
| 48 |
| 66.7 | % |
2021 |
| 78 |
| 5 |
| 6.4 | % |
| 78 |
| 15 |
| 19.2 | % |
2022 |
| 77 |
| 9 |
| 11.7 | % | |||||||
Thereafter |
| 84 |
| — |
| — | % |
| 55 |
| — |
| — | % |
Total |
| 373 |
| 159 |
|
|
|
| 391 |
| 181 |
|
|
|
Aircraft industry and sources of revenues
Our revenues are principally derived from operating leases with scheduled and charter airlines. In each of the last four calendar years, we derived more than 95% of our revenues from airlines domiciled outside of the U.S., and we anticipate that most of our revenues in the future will be generated from foreign customers.
Demand for air travel has consistently grown in terms of both passenger traffic and number of aircraft in service. According to theThe International Air Transport Association (“IATA”), global reported passenger traffic demand has grown 7.9%up 7.6% year over year in 2017, exceeding the 10-year average annual growth rate. For the first six months of 2017 compared to the first six months of 2016, the fastest first half since 2005. In 2016 and 2015,2018, global revenue passenger traffic demandkilometers grew 6.3% and 6.5% respectively, which exceeded the ten-year average annual growth rate of 5.5%.7.0% year-on-year. The number of aircraft in service has grown steadily and the number of leased aircraft in the global fleet has increased. The long-termlong term outlook for aircraft demand remains robust due to increased passenger traffic and the need to replace aging aircraft.
From time to time, our airline customers face financial difficulties. In May 2017, Alitalia, an Italian airline, began the process to file a petition to begin an Extraordinary Administration proceeding in the Italian Bankruptcy Court. Extraordinary Administrative proceedings are aimed at enabling a debtor in financial difficulty to restructure its operations, including its debt, in order to continue its activities. While the Extraordinary Administrative proceeding is pending, the airline is permitted to operate and we understand that Alitalia intends to continue its normal operations. Alitalia operates four of our Airbus A330-200 aircraft.
The success of the commercial airline industry is linked to the strength of global economic development, which may be negatively impacted by macroeconomic conditions and geopolitical and policy risks. Nevertheless, across a variety of global economic conditions, the leasing industry has remained resilient over time. We remain optimistic about the long-termlong‑term growth prospects for air transportation. We see a growing demand for aircraft leasing in the broader industry and a role for us in helping airlines modernize their fleets to support the growth of the airline industry. However, with the growth in aircraft leasing worldwide, we are witnessing an increase in competition among aircraft lessors resulting in more variation in lease rates.
Liquidity and Capital Resources
Overview
We finance the purchase of aircraft and our business with available cash balances, internally generated funds, including aircraft sales and trading activity, and debt financings. We have structured ourselves with the goal to have anmaintain investment-grade credit profilemetrics and our debt financing strategy has focused on funding our business on an unsecured basis. Unsecured financing provides us with operational flexibility when selling or transitioning aircraft from one airline to another. In addition, we may, to a limited extent, utilize export credit financing in support of our new aircraft deliveries.
We ended the second quarter of 20172018 with total debt outstanding, net of discounts and issuance costs, of $9.3$11.0 billion compared to $8.7$9.7 billion as of December 31, 2016.2017. Our unsecured debt increased to $8.8$10.6 billion as of June 30, 20172018 from $9.3 billion as of December 31, 2017. Our unsecured debt as a percentage of total debt increased to 95.8% as of June 30, 2018 from 94.6% as of December 31, 2017.
We increased our cash flows from operations by 18.1% or $90.0 million, to $588.0 million for the six months ended June 30, 2018 as compared to $498.0 million for the six months ended June 30, 2017. Our cash flow used in investing activities was $1,903.7 million for the six months ended June 30, 2018, which resulted primarily from the purchase of aircraft. Our cash flow provided by financing activities was $1,288.5 million for the six months ended June 30, 2018, which resulted primarily from the issuance of unsecured notes during the first half of 2018, partially offset by the repayment of outstanding debt.
19
from $8.1 billion as of December 31, 2016. Our unsecured debt as a percentage of total debt increased to 93.7% as of June 30, 2017 from 92.4% as of December 31, 2016.
Our cash flows from operations decreased slightly by 1.3% or $6.8 million, to $498.0 million for the six months ended June 30, 2017 as compared to $504.8 million for the six months ended June 30, 2016. Our cash flow used in investing activities was $1.2 billion for the six months ended June 30, 2017, which resulted primarily from the purchase of aircraft partially offset by proceeds on the sale of aircraft. Our cash flow provided by financing activities was $646.5 million for the six months ended June 30, 2017, which resulted primarily from the issuance of unsecured notes during the first half of 2017, partially offset by the repayment of outstanding debt.
We ended the second quarter of 20172018 with available liquidity of $2.5$3.8 billion which is comprised of unrestricted cash of $239.7$259.5 million and undrawn balances under our unsecured revolving credit facility of $2.2$3.6 billion. We believe that we have sufficient liquidity to satisfy the operating requirements of our business through the next twelve months.
Our financing plan for the remainder of 20172018 is focused on funding the purchase of aircraft and our business with available cash balances, internally generated funds, including aircraft sales and trading activities, and debt financings. Our debt financing plan iswill remain focused on continuing to raise unsecured debt in the global bank and investment grade capital markets. In addition, we may utilize, to a limited extent, export credit financing in support of our new aircraft deliveries.
We are in compliance in all material respects with all covenants or other requirements in our debt agreements. While a ratings downgrade would not result in a default under any of our debt agreements, it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the cost of certain financings. Our liquidity plans are subject to a number of risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Debt
Our debt financing was comprised of the following at June 30, 20172018 and December 31, 2016 (dollars in thousands)2017 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| June 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 |
| ||||
Unsecured |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Senior notes |
| $ | 6,919,871 |
| $ | 6,953,343 |
|
| $ | 9,268,445 |
| $ | 8,019,871 |
|
Revolving credit facility |
|
| 1,477,000 |
|
| 766,000 |
|
|
| 956,000 |
|
| 847,000 |
|
Convertible senior notes |
|
| 199,951 |
|
| 199,983 |
| |||||||
Term financings |
|
| 213,760 |
|
| 211,346 |
|
|
| 183,838 |
|
| 203,704 |
|
Convertible senior notes |
|
| 199,985 |
|
| 199,995 |
| |||||||
Total unsecured debt financing |
|
| 8,810,616 |
|
| 8,130,684 |
|
|
| 10,608,234 |
|
| 9,270,558 |
|
Secured |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Term financings |
|
| 539,462 |
|
| 619,767 |
|
|
| 428,951 |
|
| 484,036 |
|
Export credit financing |
|
| 48,247 |
|
| 51,574 |
|
|
| 41,593 |
|
| 44,920 |
|
Total secured debt financing |
|
| 587,709 |
|
| 671,341 |
|
|
| 470,544 |
|
| 528,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt financing |
|
| 9,398,325 |
|
| 8,802,025 |
|
|
| 11,078,778 |
|
| 9,799,514 |
|
Less: Debt discounts and issuance costs |
|
| (95,013) |
|
| (88,151) |
|
|
| (116,332) |
|
| (100,729) |
|
Debt financing, net of discounts and issuance costs |
| $ | 9,303,312 |
| $ | 8,713,874 |
|
| $ | 10,962,446 |
| $ | 9,698,785 |
|
Selected interest rates and ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Composite interest rate(1) |
|
| 3.08 | % |
| 3.42 | % |
|
| 3.32 | % |
| 3.20 | % |
Composite interest rate on fixed-rate debt(1) |
|
| 3.29 | % |
| 3.69 | % |
|
| 3.32 | % |
| 3.27 | % |
Percentage of total debt at fixed-rate |
|
| 77.52 | % |
| 83.48 | % |
|
| 86.61 | % |
| 85.42 | % |
(1) | This rate does not include the effect of upfront fees, undrawn fees or |
Senior unsecured notes
As of June 30, 2017, the Company2018, we had $6.9$9.3 billion in senior unsecured notes outstanding. As of December 31, 2016, the Company2017, we had $7.0$8.0 billion in senior unsecured notes outstanding.
In June 2018, we issued $500.0 million in aggregate principal amount of senior unsecured notes due 2023 that bear interest at a rate of 3.875%.
In January 2018, we issued (i) $550.0 million in aggregate principal amount of senior unsecured notes due 2021 that bear interest at a rate of 2.50% and (ii) $700.0 million in aggregate principal amount of senior unsecured notes due 2025 that bear interest at a rate of 3.25%.
20
On June 12, 2017, the Company issued $600.0 million in aggregate principal amount of senior unsecured notes due 2022 that bear interest at a rate of 2.625%.
On March 8, 2017, the Company issued $500.0 million in aggregate principal amount of senior unsecured notes due 2027 that bear interest at a rate of 3.625%.
Unsecured revolving credit facility
In May 2017,2018, we amended and extended our unsecured revolving credit facility whereby, among other things, we extended the final maturity date from May 5, 20202021 to May 5, 20212022 and increased the total revolving commitments to approximately $3.7$4.5 billion from approximately $3.5$4.1 billion with an interest rate of LIBOR plus 1.05% with a 0.20% facility fee. Lenders hold revolving commitments totaling approximately $3.1$4.0 billion that mature on May 5, 2022, commitments totaling $20.0 million that mature on May 5, 2021, commitments totaling approximately $217.7$247.7 million that mature on May 5, 2020, and commitments totaling $290.0$245.0 million that mature on May 5, 2019, and commitments totaling $55.0 million that mature on May 5, 2018.2019.
The total amount outstanding under our unsecured revolving credit facility was approximately $1.5 billion$956.0 million and $766.0$847.0 million as of June 30, 20172018 and December 31, 2016,2017, respectively.
Credit ratings
In July 2017, Fitch reaffirmed an investment grade rating of 'BBB' to our senior unsecured debt and long-term issuer default rating with a stable outlook. Our investment-grade credit ratings help us to lower our cost of funds and broaden our access to attractively priced capital.
In July 2018, Fitch Ratings reaffirmed its issuer and senior unsecured debt ratings and outlook. The following table summarizes our current credit ratings:
|
|
|
|
|
|
|
|
| |
|
|
| |||||||
Rating Agency |
| Long-term Debt |
| Corporate Rating |
| Outlook |
| Date of Last Ratings Action | |
|
|
|
|
| |||||
Kroll Bond |
| A− |
| A− |
| Stable |
| December | 15, 2017 |
Standard and Poor's |
| BBB |
| BBB |
| Stable |
|
| |
Fitch Ratings | BBB | BBB | Stable | July 17, 2018 |
While a ratings downgrade would not result in a default under any of our debt agreements, it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the cost of our financings.
21
Results of Operations
The following table presents our historical operating results for the three and six month periods ended June 30, 20172018 and 20162017 (in thousands, except percentages and per share data)amounts and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
|
|
| (unaudited) |
|
| (unaudited) | |||||||||||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental of flight equipment |
| $ | 358,114 |
| $ | 327,313 |
|
| $ | 712,767 |
| $ | 644,511 |
|
| $ | 393,479 |
| $ | 358,114 |
| $ | 771,341 |
| $ | 712,767 |
|
Aircraft sales, trading and other |
|
| 22,843 |
|
| 22,826 |
|
|
| 28,377 |
|
| 48,956 |
|
|
| 4,335 |
|
| 22,843 |
|
| 7,682 |
|
| 28,377 |
|
Total revenues |
|
| 380,957 |
|
| 350,139 |
|
|
| 741,144 |
|
| 693,467 |
|
|
| 397,814 |
|
| 380,957 |
|
| 779,023 |
|
| 741,144 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| 63,014 |
|
| 63,190 |
|
|
| 130,077 |
|
| 124,150 |
|
|
| 73,452 |
|
| 63,014 |
|
| 142,395 |
|
| 130,077 |
|
Amortization of debt discounts and issuance costs |
|
| 6,437 |
|
| 7,388 |
|
|
| 15,429 |
|
| 14,549 |
|
|
| 8,010 |
|
| 6,437 |
|
| 16,032 |
|
| 15,429 |
|
Interest expense |
|
| 69,451 |
|
| 70,578 |
|
|
| 145,506 |
|
| 138,699 |
|
|
| 81,462 |
|
| 69,451 |
|
| 158,427 |
|
| 145,506 |
|
Depreciation of flight equipment |
|
| 126,490 |
|
| 112,136 |
|
|
| 250,399 |
|
| 220,711 |
|
|
| 142,600 |
|
| 126,490 |
|
| 278,734 |
|
| 250,399 |
|
Selling, general and administrative |
|
| 23,843 |
|
| 20,653 |
|
|
| 46,415 |
|
| 40,055 |
|
|
| 21,458 |
|
| 23,843 |
|
| 44,817 |
|
| 46,415 |
|
Stock-based compensation |
|
| 5,304 |
|
| 4,501 |
|
|
| 9,077 |
|
| 7,740 |
|
|
| 4,885 |
|
| 5,304 |
|
| 8,317 |
|
| 9,077 |
|
Total expenses |
|
| 225,088 |
|
| 207,868 |
|
|
| 451,397 |
|
| 407,205 |
|
|
| 250,405 |
|
| 225,088 |
|
| 490,295 |
|
| 451,397 |
|
Income before taxes |
|
| 155,869 |
|
| 142,271 |
|
|
| 289,747 |
|
| 286,262 |
|
|
| 147,409 |
|
| 155,869 |
|
| 288,728 |
|
| 289,747 |
|
Income tax expense |
|
| (54,944) |
|
| (50,468) |
|
|
| (103,885) |
|
| (101,601) |
|
|
| (32,198) |
|
| (54,944) |
|
| (62,866) |
|
| (103,885) |
|
Net income |
| $ | 100,925 |
| $ | 91,803 |
|
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 115,211 |
| $ | 100,925 |
| $ | 225,862 |
| $ | 185,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of Class A and B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.98 |
| $ | 0.89 |
|
| $ | 1.80 |
| $ | 1.80 |
|
| $ | 1.11 |
| $ | 0.98 |
| $ | 2.17 |
| $ | 1.80 |
|
Diluted |
| $ | 0.92 |
| $ | 0.84 |
|
| $ | 1.69 |
| $ | 1.69 |
|
| $ | 1.04 |
| $ | 0.92 |
| $ | 2.04 |
| $ | 1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin |
|
| 40.9 | % |
| 40.6 | % |
|
| 39.1 | % |
| 41.3 | % |
|
| 37.1 | % |
| 40.9 | % |
| 37.1 | % |
| 39.1 | % |
Adjusted net income before income taxes(1) |
| $ | 166,660 |
| $ | 152,160 |
|
| $ | 313,303 |
| $ | 303,301 |
|
| $ | 160,304 |
| $ | 166,660 |
| $ | 313,077 |
| $ | 313,303 |
|
Adjusted margin before income taxes(1) |
|
| 43.9 | % |
| 43.7 | % |
|
| 42.3 | % |
| 44.1 | % |
|
| 40.3 | % |
| 43.9 | % |
| 40.2 | % |
| 42.3 | % |
Adjusted diluted earnings per share before income taxes(1) |
| $ | 1.51 |
| $ | 1.39 |
|
| $ | 2.84 |
| $ | 2.77 |
|
| $ | 1.44 |
| $ | 1.51 |
| $ | 2.82 |
| $ | 2.84 |
|
(1) | Adjusted net income before income taxes (defined as net income excluding the effects of certain non-cash items, one-time or non-recurring items |
Management and our board of directors use adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes to assess our consolidated financial and operating performance. Management believes these measures are helpful in evaluating the operating performance of our ongoing operations and identifying trends in our performance, because they remove the effects of certain non-cash items, one-time or non-recurring items that are not expected to continue in the future and certain other items from our operating results. Adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes, however, should not be considered in isolation or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes do not reflect our cash expenditures or changes in our cash requirements for our working capital needs. In addition, our calculation of adjusted net income before income taxes, adjusted margin before income taxes and adjusted diluted earnings per share before income taxes may differ from the adjusted net income before income taxes, adjusted
22
margin before income taxes and adjusted diluted earnings per share before income taxes or analogous calculations of other companies in our industry, limiting their usefulness as a comparative measure.
The following tables show the reconciliation of net income to adjusted net income before income taxes and adjusted margin before income taxes (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| June 30, |
| June 30, |
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| June 30, |
| June 30, |
| ||||||||||||
|
| (unaudited) |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||||||||
Reconciliation of net income to adjusted net income before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited)
|
| ||||||||||
Net income |
| $ | 100,925 |
| $ | 91,803 |
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 115,211 |
| $ | 100,925 |
| $ | 225,862 |
| $ | 185,862 |
|
Amortization of debt discounts and issuance costs |
|
| 6,437 |
|
| 7,388 |
|
| 15,429 |
|
| 14,549 |
|
|
| 8,010 |
|
| 6,437 |
|
| 16,032 |
|
| 15,429 |
|
Stock-based compensation |
|
| 5,304 |
|
| 4,501 |
|
| 9,077 |
|
| 7,740 |
|
|
| 4,885 |
|
| 5,304 |
|
| 8,317 |
|
| 9,077 |
|
Insurance recovery on settlement |
|
| (950) |
|
| (2,000) |
|
| (950) |
|
| (5,250) |
|
|
| — |
|
| (950) |
|
| — |
|
| (950) |
|
Provision for income taxes |
|
| 54,944 |
|
| 50,468 |
|
| 103,885 |
|
| 101,601 |
|
|
| 32,198 |
|
| 54,944 |
|
| 62,866 |
|
| 103,885 |
|
Adjusted net income before income taxes |
| $ | 166,660 |
| $ | 152,160 |
| $ | 313,303 |
| $ | 303,301 |
|
| $ | 160,304 |
| $ | 166,660 |
| $ | 313,077 |
| $ | 313,303 |
|
Adjusted margin before income taxes(1) |
|
| 43.9 | % |
| 43.7 | % |
| 42.3 | % |
| 44.1 | % |
|
| 40.3 | % |
| 43.9 | % |
| 40.2 | % |
| 42.3 | % |
(1) | Adjusted margin before income taxes is adjusted net income before income taxes divided by total revenues excluding insurance |
The following table shows the reconciliation of net income to adjusted diluted earnings per share before income taxes (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||||
|
| (unaudited) |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||||
Reconciliation of net income to adjusted diluted earnings per share before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited)
| ||||||||||
Net income |
| $ | 100,925 |
| $ | 91,803 |
| $ | 185,862 |
| $ | 184,661 |
|
| $ | 115,211 |
| $ | 100,925 |
| $ | 225,862 |
| $ | 185,862 |
Amortization of debt discounts and issuance costs |
|
| 6,437 |
|
| 7,388 |
|
| 15,429 |
|
| 14,549 |
|
|
| 8,010 |
|
| 6,437 |
|
| 16,032 |
|
| 15,429 |
Stock-based compensation |
|
| 5,304 |
|
| 4,501 |
|
| 9,077 |
|
| 7,740 |
|
|
| 4,885 |
|
| 5,304 |
|
| 8,317 |
|
| 9,077 |
Insurance recovery on settlement |
|
| (950) |
|
| (2,000) |
|
| (950) |
|
| (5,250) |
|
|
| — |
|
| (950) |
|
| — |
|
| (950) |
Provision for income taxes |
|
| 54,944 |
|
| 50,468 |
|
| 103,885 |
|
| 101,601 |
|
|
| 32,198 |
|
| 54,944 |
|
| 62,866 |
|
| 103,885 |
Adjusted net income before income taxes |
| $ | 166,660 |
| $ | 152,160 |
| $ | 313,303 |
| $ | 303,301 |
|
| $ | 160,304 |
| $ | 166,660 |
| $ | 313,077 |
| $ | 313,303 |
Assumed conversion of convertible senior notes |
|
| 1,431 |
|
| 1,455 |
|
| 2,847 |
|
| 2,909 |
|
|
| 1,735 |
|
| 1,431 |
|
| 3,474 |
|
| 2,847 |
Adjusted net income before income taxes plus assumed conversions |
| $ | 168,091 |
| $ | 153,615 |
| $ | 316,150 |
| $ | 306,210 |
|
| $ | 162,039 |
| $ | 168,091 |
| $ | 316,551 |
| $ | 316,150 |
Weighted-average diluted shares outstanding |
|
| 111,564,483 |
|
| 110,839,180 |
|
| 111,490,683 |
|
| 110,710,174 |
|
|
| 112,424,582 |
|
| 111,564,483 |
|
| 112,326,506 |
|
| 111,490,683 |
Adjusted diluted earnings per share before income taxes |
| $ | 1.51 |
| $ | 1.39 |
| $ | 2.84 |
| $ | 2.77 |
|
| $ | 1.44 |
| $ | 1.51 |
| $ | 2.82 |
| $ | 2.84 |
23
Three months ended June 30, 2017,2018, compared to the three months ended June 30, 20162017
Rental revenue
As of June 30, 2017,2018, we owned 240271 aircraft atwith a net book value of $12.7$14.9 billion and recorded $358.1$393.5 million in rental revenue for the quarter then ended, which included $2.2$1.8 million in amortization expense related to initial direct costs, which is net of overhaul revenue. In the prior year, as of June 30, 2016,2017, we owned 245240 aircraft atwith a net book value of $11.7$12.7 billion and recorded $327.3$358.1 million in rental revenue for the quarter ended June 30, 2016,2017, which included $0.3$2.2 million in amortization expense related to initial direct costs, which is net of overhaul revenue. The increase in rental revenue was primarily due to the increase in net book value of our operating lease portfolio to $14.9 billion as of June 30, 2018 from $12.7 billion as of June 30, 2017 from $11.7 billion as2017.
23
Aircraft sales, trading and other revenue
Aircraft sales, trading and other revenue totaled $22.8$4.3 million for each of the three months ended June 30, 2017 and2018 compared to $22.8 million for the three months ended June 30, 2016.2017. During the quarter ended June 30, 2018, we did not sell any aircraft from our operating lease portfolio. During the quarter ended June 30, 2017, we recorded $17.6 million in gains from the sale ofsold 17 aircraft from our operating lease portfolio. In addition, we received insurance proceeds of $1.0 million during the quarter ended June 30, 2017 in connection with litigation settlement. During the quarter ended June 30, 2016, we recorded $16.7 million in gains from the sale of 10 aircraft from our operating lease portfolio. In addition, we received insurance proceeds of $2.0 million during the quarter ended June 30, 2016 in connection with a litigation settlement.
Interest expense
Interest expense totaled $81.5 million for the three months ended June 30, 2018 compared to $69.5 million for the three months ended June 30, 2017 compared to $70.6 million for the three months ended June 30, 2016.2017. The decrease was primarily due to a decrease in our composite cost of funds, partially offset by an increase in our debt balance. We expect that our interest expense will increase as our average debt balance outstanding continues to increase. Interest expense will also be impacted by changes in our composite cost of funds.
Depreciation expense
We recorded $126.5 million in depreciation expense of flight equipment for the three months ended June 30, 2017 compared to $112.1 million for the three months ended June 30, 2016. The increase in depreciation expense for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is attributable to the acquisition of additional aircraft during the last twelve months.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of $23.8 million for the three months ended June 30, 2017 compared to $20.7 million for the three months ended June 30, 2016. Selling, general and administrative expense as a percentage of total revenue increased slightly to 6.3% for the three months ended June 30, 2017 compared to 5.9% for the three months ended June 30, 2016. As we continue to add new aircraft to our portfolio, we expect over the long-term, selling, general and administrative expense to decrease as a percentage of revenue.
Taxes
The effective tax rate was 35.3% and 35.5% for the three months ended June 30, 2017 and 2016, respectively.
Net income
For the three months ended June 30, 2017, we reported consolidated net income of $100.9 million, or $0.92 per diluted share, compared to a consolidated net income of $91.8 million, or $0.84 per diluted share, for the three months ended June 30, 2016. Net income increased in the second quarter of 2017 as compared to 2016, primarily due to an increase in our rental revenue resulting from an increase in the net book value of our fleet of aircraft subject to operating lease.
24
Adjusted net income before income taxes
For the three months ended June 30, 2017, we recorded adjusted net income before income taxes of $166.7 million, or $1.51 per adjusted diluted share before income taxes, compared to an adjusted net income before income taxes of $152.2 million, or $1.39 per adjusted diluted share before income taxes, for the three months ended June 30, 2016. The increase in adjusted net income before income taxes for the second quarter of 2017 compared to the second quarter of 2016 was primarily due to an increase in our rental revenue resulting fromaggregate debt balance and an increase in the net book value of our fleet of aircraft subject to operating lease.
Adjusted net income before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the "Results of Operations" table above for a discussion of adjusted net income before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income.
Six months ended June 30, 2017, compared to the six months ended June 30, 2016
Rental revenue
As of June 30, 2017, we owned 240 aircraft at a net book value of $12.7 billion and recorded $712.8 million in rental revenue for the six months then ended, which included overhaul revenue, net of amortization of initial direct costs, of $2.7 million. In the prior year, as of June 30, 2016, we owned 245 aircraft at a net book value of $11.7 billion and recorded $644.5 million in rental revenue for the six months ended June 30, 2016, which included $0.7 million in amortization expense related to initial direct costs, which is net of overhaul revenue. The increase in rental revenue was primarily due to the increase in net book value of our operating lease portfolio to $12.7 billion as of June 30, 2017 from $11.7 billion as of June 30, 2016.
Aircraft sales, trading and other revenue
Aircraft sales, trading and other revenue totaled $28.4 million for the six months ended June 30, 2017 compared to $49.0 million for the six months ended June 30, 2016. During the six months ended June 30, 2017, we recorded $17.2 million in gains from the sale of 22 aircraft from our operating lease portfolio. In addition, we received insurance proceeds of $1.0 million during the six months ended June 30, 2017 in connection with litigation settlement. During the six months ended June 30, 2016, we recorded $37.7 million in gains from the sale of 22 aircraft from our operating lease portfolio. In addition, we received insurance proceeds of $5.25 million during the six months ended June 30, 2016 in connection with a litigation settlement.
Interest expense
Interest expense totaled $145.5 million for the six months ended June 30, 2017 compared to $138.7 million for the six months ended June 30, 2016. The change was primarily due to an increase in our average outstanding debt balances partially offset by the decrease in our average composite cost of funds. We expect that our interest expense will increase as our average debt balance outstanding continues to increase. Interest expense will also be impacted by changes in our composite cost of funds.
Depreciation expense
We recorded $250.4$142.6 million in depreciation expense of flight equipment for the sixthree months ended June 30, 20172018 compared to $220.7$126.5 million for the sixthree months ended June 30, 2016.2017. The increase in depreciation expense for the sixthree months ended June 30, 2018, compared to the three months ended June 30, 2017, compared to the six months ended June 30, 2016, is primarily attributable to the acquisition of additional aircraft.aircraft during the last twelve months.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of $46.4$21.5 million for the sixthree months ended June 30, 20172018 compared to $40.1$23.8 million for the sixthree months ended June 30, 2016.2017. Selling, general and administrative expense as a percentage of total revenue increased slightlydecreased to 5.4% for the three months ended June 30, 2018 compared to 6.3% for the sixthree months ended June 30, 2017 compared to 5.8% for the six months ended June 30, 2016. The increase in selling, general and administrative expenses was primarily due to $3.3
25
million of transaction expenses incurred during the first half of 2017 related to the Thunderbolt transaction.2017. As we continue to add new aircraft to our portfolio, we expect over the long-term, selling, general and administrative expense to decrease as a percentage of our revenue.
Taxes
The effective tax rate was 35.9%21.8% and 35.5%35.3% for the sixthree months ended June 30, 20172018 and 2016,2017, respectively. The increasechange in our effective tax rate wasis primarily due to the adoptionimpact of ASU 2016-09 in the first quarter of 2017, which resulted in a discreteTax Reform Act. The Tax Reform Act significantly revised the U.S. corporate income tax expense item relatedlaw by, among other things, lowering the U.S. corporate tax rate from 35% to stock-based compensation of approximately $1.7 million as discussed in Note 2: Basis of Preparation, in the Notes to Consolidated Financial Statements included in Part I, Item21%, effective January 1, of this Quarterly Report on Form 10-Q.2018.
Net income
For the sixthree months ended June 30, 2017,2018, we reported consolidated net income of $185.9$115.2 million, or $1.69$1.04 per diluted share, compared to a consolidated net income of $184.7$100.9 million, or $1.69$0.92 per diluted share, for the sixthree months ended June 30, 2016.2017. Net income increased in the first six monthssecond quarter of 20172018 as compared to 2016, this was2017, primarily due to an increase in rental revenuethe reduction of our tax expense resulting from an increase in the net book valueimpact of our fleet of aircraft subject to operating lease.the Tax Reform Act.
Adjusted net income before income taxes
For the sixthree months ended June 30, 2017,2018, we recorded adjusted net income before income taxes of $313.3$160.3 million, or $2.84$1.44 per adjusted diluted share, before income taxes, compared to an adjusted net income before income taxes of $303.3$166.7 million, or $2.77$1.51 per adjusted diluted share, before income taxes, for the sixthree months ended June 30, 2016. The increase2017. As we did not sell any aircraft in the second quarter of 2018, our adjusted net income before income taxes for the first six months of 2017decreased as compared to the first six monthssecond quarter of 2016 was primarily due to an increase in rental revenue resulting from an increase in the net book value of our fleet of aircraft subject to operating lease, partially offset by a decrease in gains on aircraft sales, as well as the receipt of insurance proceeds in 2016 related to a legal settlement in 2015. 2017.
Adjusted net income before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the "Results“Results of Operations"Operations” table above for a discussion of adjusted net income before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income.
24
Six months ended June 30, 2018, compared to the six months ended June 30, 2017
Rental revenue
As of June 30, 2018, we owned 271 aircraft with a net book value of $14.9 billion and recorded $771.3 million in rental revenue for the six months then ended, which included $2.7 million in amortization expense related to initial direct costs, which is net of overhaul revenue. In the prior year, as of June 30, 2017, we owned 240 aircraft with a net book value of $12.7 billion and recorded $712.8 million in rental revenue for the six months ended June 30, 2017, which included overhaul revenue, net of amortization of initial direct costs, of $2.7 million. The increase in rental revenue was primarily due to the increase in net book value of our operating lease portfolio to $14.9 billion as of June 30, 2018 from $12.7 billion as of June 30, 2017.
Aircraft sales, trading and other revenue
Aircraft sales, trading and other revenue totaled $7.7 million for the six months ended June 30, 2018 compared to $28.4 million for the six months ended June 30, 2017. During the six months ended June 30, 2018, we did not sell any aircraft from our operating lease portfolio. During the six months ended June 30, 2017, we sold 22 aircraft from our operating lease portfolio. In addition, we received insurance proceeds of $1.0 million during the six months ended June 30, 2017 in connection with a litigation settlement.
Interest expense
Interest expense totaled $158.4 million for the six months ended June 30, 2018 compared to $145.5 million for the six months ended June 30, 2017. The increase was primarily due to an increase in our aggregate debt balance and an increase in our composite cost of funds. We expect that our interest expense will increase as our average debt balance outstanding continues to increase. Interest expense will also be impacted by changes in our composite cost of funds.
Depreciation expense
We recorded $278.7 million in depreciation expense of flight equipment for the six months ended June 30, 2018 compared to $250.4 million for the six months ended June 30, 2017. The increase in depreciation expense for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, is primarily attributable to the acquisition of additional aircraft during the last twelve months.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of $44.8 million for the six months ended June 30, 2018 compared to $46.4 million for the six months ended June 30, 2017. Selling, general and administrative expense as a percentage of total revenue decreased to 5.8% for the six months ended June 30, 2018 compared to 6.3% for the six months ended June 30, 2017. As we continue to add new aircraft to our portfolio, we expect over the long-term, selling, general and administrative expense to decrease as a percentage of our revenue.
Taxes
The effective tax rate was 21.8% and 35.9% for the six months ended June 30, 2018 and 2017, respectively. The change in effective tax rate is primarily due to the impact of the Tax Reform Act. The Tax Reform Act significantly revised the U.S. corporate income tax law by, among other things, lowering the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018.
Net income
For the six months ended June 30, 2018, we reported consolidated net income of $225.9 million, or $2.04 per diluted share, compared to a consolidated net income of $185.9 million, or $1.69 per diluted share, for the six months ended June 30, 2017. Net income increased in the first six months of 2018 as compared to 2017, primarily due to the reduction of our tax expense resulting from the impact of the Tax Reform Act.
25
Adjusted net income before income taxes
For the six months ended June 30, 2018, we recorded adjusted net income before income taxes of $313.1 million, or $2.82 per diluted share, compared to an adjusted net income before income taxes of $313.3 million, or $2.84 per diluted share, for the six months ended June 30, 2017. As we did not sell any aircraft in the first six months of 2018, our adjusted net income before income taxes decreased as compared to the first six months of 2017.
Adjusted net income before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the “Results of Operations” table above for a discussion of adjusted net income before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income.
Contractual Obligations
Our contractual obligations as of June 30, 2017,2018, except as noted in footnote 2 below, are as follows (in thousands):
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| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
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| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| Total | ||||||||||||||
Long-term debt obligations |
| $ | 77,404 |
| $ | 1,565,857 |
| $ | 1,093,900 |
| $ | 1,258,585 |
| $ | 2,378,952 |
| $ | 3,023,627 |
| $ | 9,398,325 |
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| $ | 777,247 |
| $ | 1,203,874 |
| $ | 1,232,890 |
| $ | 1,685,157 |
| $ | 2,078,942 |
| $ | 4,100,668 |
| $ | 11,078,778 |
Interest payments on debt outstanding(1) |
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| 141,610 |
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| 259,894 |
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| 209,614 |
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| 172,046 |
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| 132,729 |
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| 739,694 |
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| 1,655,587 |
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| 186,058 |
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| 330,950 |
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| 290,344 |
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| 241,493 |
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| 179,869 |
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| 823,926 |
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| 2,052,640 |
Purchase commitments |
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| 1,528,931 |
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| 4,246,763 |
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| 5,703,782 |
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| 6,048,859 |
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| 5,886,385 |
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| 5,088,935 |
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| 28,503,655 |
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| 2,465,306 |
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| 6,151,512 |
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| 5,493,536 |
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| 5,808,153 |
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| 5,210,440 |
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| 2,714,769 |
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| 27,843,716 |
Operating leases |
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| 1,211 |
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| 2,926 |
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| 3,232 |
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| 3,111 |
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| 2,946 |
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| 6,804 |
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| 20,230 |
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| 2,059 |
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| 2,711 |
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| 2,590 |
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| 2,729 |
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| 3,034 |
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| 3,770 |
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| 16,893 |
Total |
| $ | 1,749,156 |
| $ | 6,075,440 |
| $ | 7,010,528 |
| $ | 7,482,601 |
| $ | 8,401,012 |
| $ | 8,859,060 |
| $ | 39,577,797 |
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| $ | 3,430,670 |
| $ | 7,689,047 |
| $ | 7,019,360 |
| $ | 7,737,532 |
| $ | 7,472,285 |
| $ | 7,643,133 |
| $ | 40,992,027 |
(1) | Future interest payments on floating rate debt are estimated using floating rates in effect at June 30, |
(2) | In August 2018, we entered into an agreement to purchase up to 78 Boeing Aircraft, including 75 737-8 MAX aircraft and three 787-9 aircraft. Of the 78 aircraft commitments, 30 737-8 MAX aircraft and three 787-9 aircraft are firm commitments and are included in our purchase commitments total. |
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Off-Balance Sheet Arrangements
We have not established any unconsolidated entities for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We have, however, from time to time established subsidiaries and created partnership arrangements or trusts for the purpose of leasing aircraft or facilitating borrowing arrangements, all of which are consolidated. We have investments in two joint ventures in which we own 9.5% of the equity of each joint venture. We account for our investment in these joint ventures using the equity method of accounting due to our level of influence and involvement in the joint ventures.
Critical Accounting Policies
Our critical accounting policies reflecting management’s estimates and judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if any, on itsour consolidated financial statements. Accordingly, there have been no material changes to critical accounting policies in the six months ended June 30, 2017.2018.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and foreign exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.
Interest Rate Risk
The nature of our business exposes us to market risk arising from changes in interest rates. Changes, both increases and decreases, in our cost of borrowing, as reflected in our composite interest rate, directly impact our net income. Our lease rental stream is generally fixed over the life of our leases, whereas we have used floating-rate debt to finance a significant portion of our aircraft acquisitions from time to time. Weacquisitions. As of June 30, 2018 and December 31, 2017, we had $2.1$1.5 billion and $1.5$1.4 billion in floating-rate debt outstanding, on each of June 30, 2017 and December 31, 2016.respectively. If interest rates increase, we would be obligated to make higher interest payments to our lenders. AsIf we incur significant fixed-rate debt in the future, increased interest rates prevailing in the market at the time of the incurrence of such debt willwould also increase our interest expense. If theour composite rate on our floating-rate debt were to increase by 1.0%, we would expect to incur additional interest expense on our existing indebtedness of approximately $21.1$14.8 million and $14.5$14.3 million as of June 30, 20172018 and December 31, 2016,2017, respectively, each on an annualized basis, which would put downward pressure on our operating margins. Further, as of June 30, 2017, 77.5%2018, 86.6% of our total debt incurred interest at a fixed rate.
We also have interest rate risk on our forward lease placements. This is caused by us setting a fixed lease rate in advance of the delivery date of an aircraft. The delivery date is when a majority of the financing for an aircraft is arranged. We partially mitigate the risk of an increasing interest rate environment between the lease signing date and the delivery date of the aircraft by having interest rate adjusters in a majority of our forward lease contracts which would adjust the final lease rate upward if certain benchmark interest rates are higher at the time of delivery of the aircraft than at the lease signing date.
Foreign Exchange Rate Risk
We attempt to minimize currency and exchange risks by entering into aircraft purchase agreements and a majority of lease agreements and debt agreements with U.S. dollars as the designated payment currency. Thus, most of our revenue and expenses are denominated in U.S. dollars. As of June 30, 20172018 and December 31, 2016,2017, approximately 0.8% and 1.0% of our lease revenues were denominated in Euros.Euros, respectively. As our principal currency is the U.S. dollar, changesfluctuations in the U.S. dollar as compared to other major currencies should not have a significant impact on our future operating results.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”), as appropriate, to allow timely decisions regarding required disclosure. OurIn designing and evaluating the disclosure controls and procedures, management including the Certifying Officers, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.objectives as the Company’s controls are designed to do, and management necessarily was required to apply its judgment in evaluating the risk related to controls and procedures.
We have evaluated, under the supervision and with the participation of management, including the Certifying Officers, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of June 30, 2017.2018. Based on that evaluation, our Certifying Officers have concluded that our disclosure controls and procedures were effective at June 30, 2017.2018.
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Changes in Internal Control Over Financial Reporting
There have beenwere no changes in our internal control over financial reporting during the quarter ended June 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Effective January 1, 2018, we implemented ASU 2014-09 and given its limited impact, we made certain revisions to existing controls to conform to the new five-step model provided in the revenue standard, including enhanced contract review requirements and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our consolidated financial statements and related disclosures.
From time to time, we may be involved in litigation and claims incidental to the conduct of our business in the ordinary course. Our industry is also subject to scrutiny by government regulators, which could result in enforcement proceedings or litigation related to regulatory compliance matters. We are not presently a party to any enforcement proceedings or litigation related to regulatory compliance matters or material legal proceedings. We maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards.
There have been no material changes in our risk factors from those discussed under “Part I—Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 5, 2017,June 1, 2018, a holder of our 3.875% convertible senior notes due 2018 ("(“Convertible Notes"Notes”) converted $6,000$2,000 in principal amount of our Convertible Notes and received 20268 shares of Class A Common Stock at a per share conversion price of $29.60.$29.35. The shares were issued in reliance on an exemption from registration from registration under Section 3(a)(9) underof the 1933 Act.Securities Act of 1933.
On June 8, 2017,5, 2018, a holder of our 3.875% convertible senior notes due 2018 ("Convertible Notes")Notes converted $3,000 in principal amount of our Convertible Notes and received 101102 shares of Class A Common Stock at a per share conversion price of $29.60.$29.35. The shares were issued in reliance on an exemption from registration under Section 3(a)(9) of the Securities Act of 1933.
On June 13, 2018, a holder of our Convertible Notes converted $18,000 in principal amount of our Convertible Notes and received 614 shares of Class A Common Stock at a per share conversion price of $29.35. The shares were issued in reliance on an exemption from registration under Section 3(a)(9) of the Securities Act of 1933.
On June 15, 2018, a holder of our Convertible Notes converted $1,000 in principal amount of our Convertible Notes and received 34 shares of Class A Common Stock at a per share conversion price of $29.29. The shares were issued in reliance on an exemption from registration under Section 3(a)(9) of the 1933 Act.Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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NoneOn August 6, 2018, Air Lease Corporation (the “Company”) entered into two supplemental agreements to existing purchase agreements with The Boeing Company (“Boeing”). Pursuant to the supplemental agreements, the Company agreed to purchase up to 78 Boeing airplanes, including 75 737-8 MAX aircraft and three 787-9 aircraft. As of August 9, 2018, the three 787-9 aircraft and 30 737-8 MAX aircraft of the order are firm commitments. Deliveries of the aircraft are scheduled to commence in 2020 and to continue through 2024.
3029
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10.1 | |
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32.1 | |
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32.2 | |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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† | The registrant has omitted confidential portions of the referenced exhibit and filed such confidential portions separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. |
3230
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AIR LEASE CORPORATION |
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August | /s/ John L. Plueger |
| John L. Plueger |
| Chief Executive Officer and President |
| (Principal Executive Officer) |
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August | /s/ Gregory B. Willis |
| Gregory B. Willis |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer and Principal Accounting Officer) |
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3531