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Air Lease (AL) - 2018 Q4 - Annual Report

PART I Business Air Lease Corporation is a leading global aircraft leasing company focused on acquiring new commercial aircraft for lease to a diversified base of over 200 airlines - ALC's core business is purchasing new commercial aircraft directly from manufacturers like Boeing and Airbus and leasing them to airlines worldwide6 Fleet and Financial Highlights (as of Dec 31, 2018) | Metric | Value | | :--- | :--- | | Owned Aircraft | 275 | | Managed Aircraft | 61 | | Fleet Net Book Value | $15.7 billion | | Fleet NBV Growth (YoY) | 18.3% | | Weighted Average Fleet Age | 3.8 years | | Weighted Average Remaining Lease Term | 6.8 years | | Committed Aircraft Purchases (through 2024) | 372 aircraft ($26.3B) | | Committed Minimum Future Rentals | $25.7 billion | FY 2018 Financial Performance vs. FY 2017 | Metric | FY 2018 | FY 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1.7 billion | $1.5 billion | +10.8% | | Income Before Taxes | $640.1 million | $609.5 million | +5.0% | | Net Income | $510.8 million | $756.2 million | -32.4%¹ | | Diluted EPS | $4.60 | $6.82 | -32.5%¹ | - The decrease in 2018 Net Income was primarily due to a one-time tax benefit of $354.1 million in 2017 resulting from the U.S. Tax Cuts and Jobs Act13 - The company's financing strategy is focused on raising unsecured debt, which comprised 96.5% of its $11.5 billion total debt at year-end 201811 Risk Factors The company faces significant business risks from capital access, substantial debt, competition, lessee defaults, geopolitical instability, and stock price volatility - A primary risk is the company's dependence on obtaining substantial additional capital to finance its growth and repay maturing debt. As of December 31, 2018, total consolidated indebtedness was approximately $11.5 billion5764 - The company faces significant competition from other aircraft lessors, airlines, financial institutions, and new entrants, which could negatively affect lease rates and profitability808182 - Lessee defaults or reorganizations are a major risk, as they can result in significant costs for repossession, maintenance, and remarketing, along with lost revenue112113 - The company has concentrated exposure to political and economic risks in certain regions, particularly China, which could affect lessees' ability to meet their obligations127128 - Risks to the stock price include market volatility, potential future offerings of debt or equity that could be dilutive, and provisions in Delaware law and the company's charter that may inhibit a takeover193197199 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None205 Properties The company's primary assets are 275 owned aircraft, with commitments for 372 new aircraft by 2024 totaling $26.3 billion, and it leases its office spaces Owned Aircraft Portfolio (as of Dec 31, 2018) | Metric | Value | | :--- | :--- | | Total Aircraft | 275 | | Narrowbody Jet Aircraft | 207 | | Widebody Jet Aircraft | 68 | | Weighted Average Age | 3.8 years | Scheduled Lease Terminations (Number of Aircraft) | Year | Aircraft | | :--- | :--- | | 2019 | 5 | | 2020 | 15 | | 2021 | 20 | | 2022 | 24 | | 2023 | 37 | | Thereafter | 173 | New Aircraft Purchase Commitments (through 2024) | Manufacturer | Aircraft Type | Number | | :--- | :--- | :--- | | Airbus | A320/321neo | 137 | | Airbus | A330-900neo | 24 | | Airbus | A350-900/1000 | 18 | | Boeing | 737 MAX Family | 154 | | Boeing | 787-9/10 | 39 | | Total | | 372 | - The company has placed 100% of its 78 aircraft delivering in 2019 and 83.1% of its 83 aircraft delivering in 2020 on lease217 Legal Proceedings The company states that it is not currently a party to any material legal proceedings or enforcement proceedings related to regulatory compliance matters - The company is not presently a party to any material legal proceedings215 Mine Safety Disclosures This item is not applicable to the company's business - Not applicable216 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE under "AL", declared a $0.43 per share dividend in 2018, and saw no stock repurchases during the year - The company's Class A common stock is listed on the New York Stock Exchange under the symbol "AL"218 Dividends Declared Per Share | Year | Dividend per Share | | :--- | :--- | | 2018 | $0.430 | | 2017 | $0.325 | | 2016 | $0.225 | - The company did not purchase any shares of its Class A common stock during 2018224 Selected Financial Data This section provides a five-year summary of key consolidated financial and operating data, highlighting consistent growth in revenues, assets, and fleet size, along with non-GAAP reconciliations Selected Financial Data (2016-2018) | (in thousands, except per share data) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenues | $1,679,702 | $1,516,380 | $1,419,055 | | Net income | $510,835 | $756,152 | $374,925 | | Diluted EPS | $4.60 | $6.82 | $3.44 | | Total assets | $18,481,808 | $15,614,164 | $13,975,616 | | Total debt, net | $11,538,905 | $9,698,785 | $8,713,874 | | Shareholders' equity | $4,806,900 | $4,127,442 | $3,382,187 | | Owned aircraft | 275 | 244 | 237 | - The company provides non-GAAP metrics, including Adjusted Net Income Before Income Taxes, to exclude non-cash and non-recurring items. For 2018, this figure was $690.3 million, compared to $657.8 million in 2017232234 - A significant tax benefit of $354.1 million was recorded in 2017 due to the U.S. Tax Cuts and Jobs Act, which substantially increased net income for that year compared to 2018 and 2016231 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes the company's financial condition and operational results, attributing 18.3% revenue growth to fleet expansion, detailing liquidity, financing, and critical accounting policies - The 10.8% increase in total revenues in 2018 was primarily driven by a $2.4 billion increase in the net book value of the operating lease portfolio246 - As of Dec 31, 2018, the company had commitments to purchase 372 aircraft through 2024 for an estimated $26.3 billion and had placed 72% of its order book on long-term leases for aircraft delivering through 2021243 - The company's financing strategy focuses on unsecured debt, which represented 96.5% of its $11.5 billion total debt at year-end. In 2018, ALC issued $3.03 billion in senior unsecured notes and increased its unsecured revolving credit facility to $4.6 billion245 - Available liquidity at the end of 2018 was $4.3 billion, comprising $300.1 million in unrestricted cash and $4.0 billion in undrawn capacity under its revolving credit facility267 Results of Operations This section analyzes income statement trends, highlighting fleet-driven revenue growth, increased expenses, a 2018 net income decrease due to a 2017 tax benefit, and rising adjusted net income Comparison of Key Expenses (2018 vs. 2017) | Expense (in millions) | 2018 | 2017 | Change Driver | | :--- | :--- | :--- | :--- | | Interest Expense | $342.7 | $287.4 | Increased average debt balance and higher cost of funds. | | Depreciation Expense | $582.0 | $508.4 | Continued growth of the aircraft fleet. | | SG&A | $97.4 | $91.3 | General business growth. | - The effective tax rate was 20.2% in 2018 compared to -24.0% in 2017. The negative rate in 2017 was due to a $354.1 million net tax benefit from the re-measurement of deferred tax liabilities following the Tax Reform Act315 - Adjusted net income before income taxes increased to $690.3 million in 2018 from $657.8 million in 2017, driven by fleet growth, partially offset by reduced aircraft sales and trading activity317 Liquidity and Capital Resources The company finances growth primarily through unsecured debt, totaling $11.5 billion (96.5% unsecured) at year-end 2018, maintaining $4.3 billion in liquidity and investment-grade credit ratings Debt Composition (as of Dec 31, 2018) | Debt Type | Amount (in billions) | % of Total | | :--- | :--- | :--- | | Unsecured Debt | $11.3 | 96.5% | | Secured Debt | $0.4 | 3.5% | | Total Debt | $11.7 | 100.0% | - In 2018, the company issued $2.95 billion in senior unsecured notes and an additional $75.0 million in a private placement271272 - The company's unsecured revolving credit facility was increased to $4.6 billion in 2018, with a final maturity extended to May 2022287412 Credit Ratings (as of Dec 2018) | Rating Agency | Long-term Debt Rating | Outlook | | :--- | :--- | :--- | | Kroll Bond Ratings | A- | Stable | | Standard and Poor's | BBB | Stable | | Fitch Ratings | BBB | Stable | Critical Accounting Policies This subsection details the accounting policies that management believes are most critical to the company's financial statements, as they require significant judgment and estimates - Lease Revenue: Rental income is recognized ratably over the lease term. Maintenance reserves collected from lessees are recognized as revenue only when the company is virtually certain they will not be reimbursed, which requires significant judgment regarding the timing and cost of future maintenance events331334335 - Flight Equipment: Aircraft are stated at cost and depreciated on a straight-line basis over a 25-year life to a 15% residual value. Management performs quarterly impairment tests if indicators are present, comparing the aircraft's carrying amount to future undiscounted net cash flows340342 - Income Taxes: The company uses the asset and liability method. Recognition of deferred tax assets and uncertain tax positions requires management to assess the probability of realization and whether a tax position is more than 50% likely to be sustained on audit396 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk and foreign exchange rate risk. Interest rate risk arises from its use of floating-rate debt to finance its fleet; a 1.0% increase in its composite interest rate would increase annual interest expense by an estimated $15.9 million. Foreign exchange risk is minimal as most revenues, expenses, and debt are denominated in U.S. dollars - The company is exposed to interest rate risk as $1.6 billion of its debt was floating-rate as of December 31, 2018345 - A hypothetical 1.0% increase in the composite interest rate would result in an additional $15.9 million in annualized interest expense on existing indebtedness as of year-end 2018345 - Foreign exchange rate risk is considered minimal because the vast majority of lease agreements and debt are denominated in U.S. dollars. Only 0.7% of 2018 lease revenues were in foreign currencies347 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018, including core statements, the independent auditor's report, and detailed notes on accounting policies Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's accounting policies and the composition of accounts in the financial statements. Key notes cover debt financing (Note 2), rental income and future lease commitments (Note 5), concentration of geographic and credit risk (Note 6), income taxes (Note 7), aircraft purchase commitments (Note 8), and stock-based compensation (Note 11) Debt Maturities (as of Dec 31, 2018) | Year | Amount (in thousands) | | :--- | :--- | | 2019 | $1,083,726 | | 2020 | $1,220,454 | | 2021 | $1,685,961 | | 2022 | $3,071,445 | | 2023 | $1,870,676 | | Thereafter | $2,729,991 | Minimum Future Rentals on Delivered Fleet (as of Dec 31, 2018) | Year | Amount (in thousands) | | :--- | :--- | | 2019 | $1,742,589 | | 2020 | $1,689,333 | | 2021 | $1,587,150 | | 2022 | $1,455,673 | | 2023 | $1,270,209 | | Thereafter | $4,030,672 | | Total | $11,775,626 | - As of December 31, 2018, the company had commitments to acquire 372 new aircraft for an estimated aggregate purchase price of $26.3 billion through 2024445448 - China was the only individual country representing at least 10% of rental revenue for 2018, 2017, and 2016433 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None480 Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The company's Certifying Officers concluded that disclosure controls and procedures were effective as of December 31, 2018482 - Management assessed internal control over financial reporting as effective based on the COSO framework, and the independent auditor issued an unqualified opinion on its effectiveness484485 Other Information The company reports no other information for this item - None486 PART III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2019 Proxy Statement. Information on executive officers is provided in Part I of this report. The company has adopted a Code of Business Conduct and Ethics, which is available on its website - Most information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement487 Executive Compensation The information required for this item concerning executive compensation is incorporated by reference from the company's 2019 Proxy Statement - The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference491 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item concerning security ownership is incorporated by reference from the company's 2019 Proxy Statement. Information regarding equity compensation plans is provided in Part II, Item 5 - The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference492 Certain Relationships and Related Transactions, and Director Independence The information required for this item concerning related party transactions and director independence is incorporated by reference from the company's 2019 Proxy Statement - The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference492 Principal Accounting Fees and Services The information required for this item concerning fees paid to the principal accountant is incorporated by reference from the company's 2019 Proxy Statement - The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference493 PART IV Exhibits, Financial Statement Schedules This section provides a detailed list of all exhibits filed with the Form 10-K, including financial statements, corporate governance documents, debt agreements, and material contracts - This section provides a comprehensive list of all exhibits filed with the Form 10-K, including governance documents, debt agreements, and material contracts497 Form 10-K Summary The company indicates that there is no Form 10-K summary provided - None516