PROSPECTUS
As Filed Pursuant to Rule 424(B)(1)
Registration No. 333-138381
26,100,000 Shares
AerCap Holdings N.V.
ORDINARY SHARES
AerCap Holdings N.V. and the selling shareholders are offering 26,100,000 ordinary shares, consisting of 6,800,000 ordinary shares offered by us and 19,300,000 ordinary shares being offered by the selling shareholders. This is an initial public offering of our ordinary shares. No public market currently exists for our ordinary shares. We will not receive any proceeds from the sale of ordinary shares by the selling shareholders.
Our ordinary shares have been authorized for listing on the New York Stock Exchange under the symbol "AER".
Investing in our ordinary shares involves risks. See "Risk Factors" beginning on page 15 of this prospectus.
Price $23.00 Per Share
|
Price to Public |
Underwriting Discounts and Commissions |
Proceeds to Us |
Proceeds to Selling Shareholders |
||||
---|---|---|---|---|---|---|---|---|
Per Ordinary Share | $23.00 | $1.61 | $21.39 | $21.39 | ||||
Total | $600,300,000 | $42,021,000 | $145,452,000 | $412,827,000 |
The selling shareholders have granted the underwriters the right for a period of 30 days to purchase up to an additional 3,915,000 ordinary shares to cover over-allotments, if any.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the ordinary shares to purchasers on November 27, 2006.
Morgan Stanley |
Goldman, Sachs & Co. |
Lehman Brothers |
Merrill Lynch & Co. |
UBS Investment Bank
Wachovia Securities
JPMorgan
Citigroup
Calyon Securities (USA) Inc.
November 20, 2006
Prospectus Summary | 1 | |
Risk Factors | 15 | |
Special Note About Forward-Looking Statements | 38 | |
Use of Proceeds | 39 | |
Dividend Policy | 40 | |
Dilution | 41 | |
Capitalization | 42 | |
Selected Consolidated Financial Data | 43 | |
Unaudited Consolidated Pro Forma Financial Information | 50 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 76 | |
Aircraft, Engine and Aviation Parts Industry | 114 | |
Business |
134 |
|
Indebtedness | 158 | |
Management | 167 | |
Principal and Selling Shareholders | 178 | |
Description of Ordinary Shares | 182 | |
Certain Relationships and Related Party Transactions | 186 | |
Ordinary Shares Eligible for Future Sale | 188 | |
Tax Considerations | 190 | |
Underwriters | 199 | |
Enforcement of Civil Liabilities | 205 | |
Legal Matters | 206 | |
Experts | 206 | |
Where You Can Find More Information | 206 | |
Index to Financial Statements | F-1 |
This document may only be used where it is legal to offer or sell these securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or when any offer or sale of our ordinary shares occurs.
Neither we nor the selling shareholders have taken any action to permit a public offering of the ordinary shares outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ordinary shares and the distribution of this prospectus outside of the United States.
Until December 15, 2006, all dealers that buy, sell or trade ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
i
The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and related notes appearing in this prospectus. This summary may not contain all of the information that may be important to you. Before investing in our ordinary shares, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our consolidated financial statements and related notes and the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". In this prospectus, the "Company," "we," "us" and "our" refer to AerCap Holdings N.V., its consolidated subsidiaries, its predecessors, AerCap Holdings C.V. and AerCap B.V. (formerly known as debis AirFinance B.V.) and their consolidated subsidiaries and, unless the context otherwise requires, AeroTurbine, Inc.
Our Company
We are an integrated global aviation company with a leading market position in aircraft and engine leasing, trading and parts sales. We possess extensive aviation expertise that permits us to extract value from every stage of an aircraft's lifecycle across a broad range of aircraft and engine types. We also provide aircraft management services and perform aircraft and engine maintenance, repair and overhaul, or MRO, services and aircraft disassemblies through our certified repair stations. We believe that by applying our expertise through an integrated business model, we will be able to identify and execute on a broad range of market opportunities that we expect will generate attractive returns for our shareholders.
We operate our business on a global basis, providing aircraft, engines and parts to customers in every major geographical region. As of September 30, 2006, we owned 109 aircraft and 61 engines, managed 110 aircraft, had 79 new aircraft and six new engines on order, had entered into purchase contracts for 17 aircraft with GATX Financial Corporation and had executed letters of intent to purchase an additional nine aircraft. In addition, on October 17, 2006, we signed a letter of intent with Airbus S.A.S. to purchase 20 new A330-200 widebody aircraft. As of April 2006, we had the fifth largest aircraft leasing portfolio in the world and the third largest new aircraft order book among operating lessors, according to Simat Helliesen & Eichner, Inc., or SH&E, in each case by number of aircraft.
We lease most of our aircraft to airlines under operating leases. Under an operating lease, the lessee is responsible for the maintenance and servicing of the equipment during the lease term and the lessor receives the benefit, and assumes the risk, of the residual value of the equipment at the end of the lease. As of September 30, 2006, our owned and managed aircraft and engines were leased to 97 commercial airline and cargo operator customers in 47 countries and are managed from our offices in The Netherlands, Ireland and the United States. We expect to expand our leasing activity in Asia and in China in particular through our AerDragon joint venture with China Aviation Supplies Import & Export Group Corporation, which commenced operations in October 2006.
We have the infrastructure, expertise and resources to execute a large number of diverse aircraft and engine transactions in a variety of market conditions. From January 1, 2003 to September 30, 2006, we executed over 950 aircraft and engine transactions, including 245 aircraft leases, 232 engine leases, 101 aircraft purchase or sale transactions, 167 engine purchase or sale transactions and the disassembly of 40 aircraft and 133 engines. Our teams of dedicated marketing and asset trading professionals have been successful in leasing and trading our aircraft and engine portfolios. Between January 1, 2003 and September 30, 2006, our weighted average owned aircraft utilization rate was 98.8%.
In 2005, we generated total revenues of $628.2 million and net income of $108.4 million, and in the nine months ended September 30, 2006, we generated total revenues of $661.6 million and net
1
income of $104.9 million, each on a pro forma basis after giving effect to our acquisition by funds and accounts affiliated with Cerberus Capital Management, L.P., or the 2005 Acquisition, our acquisition of AeroTurbine, Inc., or the AeroTurbine Acquisition, and this offering, each as if it had occurred on January 1, 2005. Primarily as a result of an impairment charge to write off goodwill of our predecessor prior to the 2005 Acquisition we recorded a loss of $105.4 million and revenues of $390.9 million in 2004, the results of which did not include AeroTurbine.
Our Business Strategy
We intend to pursue the following business strategies. See "BusinessOur Business Strategy" beginning on page 136 of this prospectus for a more detailed discussion of our business strategy.
Leverage Our Ability to Manage Aircraft and Engines Profitably throughout their Lifecycle. We intend to continue to leverage our integrated business model by selectively:
Our ability to profitably manage aircraft throughout their lifecycle depends in part on our successful integration of AeroTurbine, which we acquired in April 2006, our ability to successfully lease aircraft and engines at profitable rates and our ability to source acquisition opportunities of new and used aircraft at favorable prices.
Expand Our Aircraft and Engine Portfolio. We intend to grow our portfolio of aircraft and engines through portfolio purchases, new aircraft purchases, airline refleetings, and other opportunistic aircraft and engine purchases.
Focus on High Growth Markets. Although we maintain a geographically diverse portfolio, we focus on high growth airline markets such as the Asia/Pacific market.
Enter into Joint Ventures to Obtain Economies of Scale. We intend to continue to enter into joint ventures that increase our purchasing power and our ability to obtain price discounts on large aircraft orders.
Obtain Maintenance Cost Savings. We intend to lower our aircraft and engine maintenance costs by using aircraft and engine parts we obtain from the selective disassembly of acquired airframes and engines.
Acquire Complementary Businesses. We intend to selectively pursue acquisitions that we believe will enhance our ability to manage aircraft and engines profitably throughout their lifecycle.
2
Our Competitive Strengths
We believe the following competitive strengths will allow us to capitalize on growth opportunities in the global commercial aviation market. See "BusinessOur Competitive Strengths" beginning on page 135 of this prospectus for a more detailed discussion of our competitive strengths.
Risks
An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks described in "Risk Factors" before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of those risks. The trading price of our ordinary shares could decline due to any of those risks or other factors, and you may lose all or part of your investment. Below is a summary of the principal risks we face.
3
Industry Trends
We believe that trends in the aviation industry identified by SH&E, a recognized expert in the aviation industry, and described in "Aircraft, Engine and Aviation Parts Industry" create a favorable environment for us to leverage our competitive strengths and grow our business. We believe that our operating capabilities and aircraft and engine portfolios will provide us with a competitive advantage in the expanding aviation market. The trends identified by SH&E include:
Growing Demand for Air Travel. Globalization and the rapid economic growth in major emerging markets such as India and China have fueled significant growth in global demand for air travel. The Airline Monitor, a commercial aviation data analysis publication, forecasts that air traffic will grow at an average rate of 5.2% per year through 2025.
Fundamental Imbalance between Supply and Demand for Aircraft, Engines and Aircraft Equipment. In recent years, the increased demand for aircraft, engines and parts, combined with a decreased supply, has resulted in a supply-demand imbalance for certain aircraft, engines and parts. The primary factors affecting aircraft demand include rapid airline passenger growth in emerging markets, higher fuel prices, which has increased demand for fuel-efficient aircraft, the emergence of low cost carriers and industry restructuring in developed markets. The primary factors affecting aircraft supply include the aging world aircraft fleet, the significant backlog of aircraft production, the limited ability of airframe manufacturers to increase production and continued technological innovation in aviation equipment.
Greater Reliance on Operating Leases. In recent years, airlines have increasingly turned to operating leases to meet their aircraft financing needs. Operating leases permit airlines to reduce their capital commitments, improve their balance sheets, increase fleet planning flexibility and reduce residual value risk. According to SH&E, approximately 30% of the global aircraft fleet is currently operated under operating leases and SH&E forecasts that 40% of the global aircraft fleet will be operated under operating leases by 2020.
Despite these positive recent trends, the aircraft and engine leasing and trading industries have, in the past, experienced periods of aircraft and engine oversupply. The oversupply of a specific type of aircraft or engine is likely to depress the lease rates for, and the value of, that type of aircraft or engine. The supply and demand for aircraft and engines is affected by various cyclical and non-cyclical factors that are outside of our control.
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Our Corporate History and Shareholding Structure
We were formed as a Netherlands public limited liability company ("naamloze vennootschap") on July 10, 2006 to acquire all of the assets and liabilities of AerCap Holdings C.V. a Netherlands limited partnership. AerCap Holdings C.V. was formed on June 27, 2005 for the purpose of acquiring all of the shares and certain liabilities of AerCap B.V. (formerly known as debis AirFinance B.V.). On June 30, 2005, AerCap Holdings C.V. acquired all of AerCap B.V.'s shares and liabilities owed by AerCap B.V. to its prior shareholders for total consideration of $1.4 billion, $370.0 million of which was funded with equity contributions by the selling shareholders. Substantially all of the equity funding for the 2005 Acquisition was provided by funds and accounts affiliated with Cerberus Capital Management, L.P., or Cerberus, who will retain control of us after this offering. Members of our senior management are also indirect shareholders of the selling shareholders. Based on the public offering price of $23.00 per ordinary share and the assumption that all vested options exercisable on the closing date of this offering which have no exercise price are exercised on the closing date, Cerberus will receive $402.8 million from the proceeds of this offering if the underwriters do not exercise their over-allotment option and $472.9 million from the proceeds of this offering if the underwriters exercise their over-allotment option. See "Use of Proceeds" and "Principal and Selling Shareholders" for more information regarding our ownership structure and the proceeds that Cerberus as well as members of our senior management will receive from this offering.
On April 26, 2006, we acquired all of the existing share capital of AeroTurbine, Inc. an engine trading and leasing and parts sales company.
On October 27, 2006, AerCap Holdings N.V. acquired all of the assets and liabilities of AerCap Holdings C.V.
In connection with the hiring of Keith Helming, our new Chief Financial Officer, on August 21, 2006, Cerberus agreed to provide him equity incentives under an equity incentive plan offered by our indirect shareholders. Our indirect shareholders granted Mr. Helming options to purchase their common shares representing, in the aggregate, indirectly 977,962 of our ordinary shares. In addition, on September 5, 2006, our indirect shareholders granted options to acquire their shares to four non-executive directors that are not employees of Cerberus as follows: Pieter Korteweg (111,767 AerCap Holdings N.V. equivalent shares prior to the offering); James N. Chapman (111,767 equivalent shares); Marius J.L. Jonkhart (55,884 equivalent shares) and Ronald J. Bolger (55,884 equivalent shares). Also on September 5, 2006, our indirect shareholders granted options to acquire their shares to two members of senior management as follows: Aengus Kelly (215,268 equivalent shares) and Wouter M. (Erwin) den Dikken (107,634 equivalent shares). The AerCap Holdings N.V. equivalent exercise price for each option granted on August 21, 2006 or September 5, 2006 is $5.28 and was determined through extensive discussions with the option recipients and based on indications of private company valuations during the early stages of such discussions. See "ManagementEquity Incentive PlanIssuances under Bermuda Parents Equity Incentive Plans".
Financial Results for the Three Months Ended December 31, 2006
Our financial results for the three months ended December 31, 2006 will be affected by non-cash compensation expense we will recognize from the vesting of options and restricted stock previously granted or sold to the owners of AeroTurbine at the time of its acquisition by us and to members of our senior management and one consultant primarily in connection with the 2005 Acquisition. As a result, based on the public offering price of $23.00 per ordinary share, we expect to recognize approximately $73.0 million of non-cash compensation expense before tax in the fourth quarter of 2006 and expect to report a net loss for the period. See "Management's Discussion of Results of Operations and Financial PositionOperating ExpensesSelling, General and Administrative Expenses".
5
The following chart sets forth our shareholders' ownership structure prior to this offering.
Our principal executive offices are located at Evert van de Beekstraat 312, 1118 CX Schiphol Airport, The Netherlands, and our general telephone number is +31 20 655-9655. Our website address is www.aercap.com. Information contained on our website does not constitute a part of this prospectus.
* * *
6
Explanatory Note Regarding Our Aircraft Portfolio
Unless otherwise noted or the context requires, all references in this prospectus to:
In this prospectus, unless otherwise specified, when we discuss our aircraft portfolio, we describe our owned and managed portfolio as of September 30, 2006. References to lease revenues from our aircraft portfolio are to our owned portfolio for the year ended December 31, 2005 or prior periods where indicated.
The definitions above are intended to include, where the context requires, all relevant aircraft in the same categories in the future. References to the number of aircraft and engines we lease, buy, sell and have on order in this prospectus include our owned and managed aircraft and engines. Also, unless the context otherwise requires, all weighted average age percentages and weighted average lease terms of owned aircraft in this prospectus have been calculated using net book value.
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Shares offered in this offering: | |||
Ordinary shares offered by us |
6,800,000 shares |
||
Ordinary shares offered by the selling shareholders |
19,300,000 shares |
||
Over-allotment option: |
|||
Ordinary shares offered by the selling shareholders |
3,915,000 shares |
||
Total ordinary shares outstanding after the offering |
85,036,957 shares |
||
Selling shareholders |
Four Luxembourg limited liability companies indirectly owned by Cerberus and members of our senior management. |
||
Use of proceeds |
We will use $140.0 million of the net proceeds from the sale of our ordinary shares to repay a portion of our outstanding senior secured term loan and/or junior subordinated loan incurred in connection with our acquisition of AeroTurbine in April 2006. We expect to retain the remaining net proceeds for general corporate purposes. Cerberus and members of our senior management will not receive any of the proceeds from the sale of ordinary shares by us. Cerberus and members of our senior management will receive all of the net proceeds from the sale of the ordinary shares being offered by the selling shareholders. We will not receive any net proceeds from the sale of the ordinary shares by the selling shareholders. See "Use of Proceeds". |
||
Dividend Policy |
To date, we have not declared or paid any dividends on our ordinary shares. We intend to retain our future earnings to fund working capital and our growth and do not expect to pay dividends in the foreseeable future. See "Dividend Policy". |
||
Risk Factors |
See "Risk Factors" beginning on page 15 of this prospectus and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ordinary shares. |
||
Listing |
Our ordinary shares have been authorized for listing on the New York Stock Exchange under the symbol "AER". |
||
Tax Considerations |
See "Tax Considerations" beginning on page 190. |
Unless the context otherwise requires, all information in this prospectus:
8
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents AerCap Holdings C.V.'s (the successor company) and AerCap B.V.'s (the predecessor company) summary historical consolidated financial and operating data for each of the periods indicated, prepared in accordance with generally accepted accounting principles in the United States, or US GAAP. You should read this information in conjunction with AerCap Holdings C.V.'s audited consolidated financial statements and related notes, unaudited condensed consolidated interim financial statements and related notes and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus.
AerCap Holdings N.V. was formed as a Netherlands public limited liability company ("naamloze vennootschap") on July 10, 2006 and acquired all of the assets and liabilities of AerCap Holdings C.V., a Netherlands limited partnership on October 27, 2006. AerCap Holdings C.V. was formed on June 27, 2005 for the purpose of acquiring all of the shares and certain liabilities of AerCap B.V. (formerly known as debis AirFinance B.V.) in connection with the 2005 Acquisition. The financial information presented as of and for the fiscal years ended December 31, 2003 and 2004 and the six months ended June 30, 2005 and December 31, 2005 was derived from AerCap Holdings C.V.'s audited consolidated financial statements included in this prospectus. The financial information presented for the three months ended September 30, 2005 and as of and for the nine months ended September 30, 2006 was derived from AerCap Holding C.V.'s unaudited condensed consolidated interim financial statements included in this prospectus.
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AerCap B.V. |
AerCap Holdings C.V. |
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Year ended |
Six months ended |
Three months ended |
Six months ended |
Nine months ended |
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December 31, |
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2003 (restated) (1)(2)(3) |
2004 (restated) (2)(3) |
June 30, 2005 (3) |
September 30, 2005 |
December 31, 2005 (3)(4) |
September 30, 2006* |
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(In thousands, except per share amounts) |
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Consolidated Income Statements Data: | |||||||||||||||||||
Revenues |
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Lease revenue | $ | 343,045 | $ | 308,500 | $ | 175,333 | $ | 81,325 | $ | 173,568 | $ | 311,131 | |||||||
Sales revenue | 7,499 | 32,050 | 79,574 | | 12,489 | 236,665 | |||||||||||||
Management fee revenue | 13,400 | 15,009 | 6,512 | 4,044 | 7,674 | 10,330 | |||||||||||||
Interest revenue | 22,432 | 21,641 | 13,130 | 10,448 | 20,335 | 26,656 | |||||||||||||
Other revenue | 84,568 | 13,667 | 3,459 | 174 | 1,006 | 18,014 | |||||||||||||
Total revenues | 470,944 | 390,867 | 278,008 | 95,991 | 215,072 | 602,796 | |||||||||||||
Expenses |
|||||||||||||||||||
Depreciation and amortization | 143,303 | 125,877 | 66,407 | 22,477 | 45,918 | 72,347 | |||||||||||||
Cost of goods sold | 6,657 | 18,992 | 57,632 | | 10,574 | 183,264 | |||||||||||||
Interest on term debt | 123,435 | 113,132 | 69,857 | 24,868 | 44,742 | 111,432 | |||||||||||||
Impairments(5) | 6,066 | 134,671 | | | | | |||||||||||||
Other expenses | 87,079 | 66,940 | 26,726 | 10,708 | 26,656 | 44,676 | |||||||||||||
Selling, general and administrative expenses | 39,267 | 36,449 | 19,559 | 10,937 | 26,949 | 66,571 | |||||||||||||
Total expenses | 405,807 | 496,061 | 240,181 | 68,990 | 154,839 | 478,290 | |||||||||||||
Income (loss) from continuing operations before income taxes and minority interests |
65,137 |
(105,194 |
) |
37,827 |
27,001 |
60,233 |
124,506 |
||||||||||||
Provision for income taxes |
(28,222 |
) |
(168 |
) |
(4,127 |
) |
(4,086 |
) |
(10,570 |
) |
(20,094 |
) |
|||||||
Minority interests net of tax | | | | | | 730 | |||||||||||||
Net income (loss) |
$ |
36,915 |
$ |
(105,362 |
) |
$ |
33,700 |
$ |
22,915 |
$ |
49,663 |
$ |
105,142 |
||||||
Earnings (loss) per share, basic and diluted |
50.14 |
(143.12 |
) |
45.78 |
|
|
|
||||||||||||
Weighted average shares outstanding, basic and diluted | 736 | 736 | 736 | | | | |||||||||||||
Pro forma earnings per share, basic and diluted, due to change in organizational structure (unaudited)(6) | | | | 0.27 | 0.60 | 1.29 | |||||||||||||
Pro forma weighted average shares, basic and diluted, (unaudited)(6) | | | | 78,237 | 78,237 | 78,237 |
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AerCap B.V. |
AerCap Holdings C.V. |
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Year ended |
Six months ended |
Three months ended |
Six months ended |
Nine months ended |
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December 31, |
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December 31, 2005 (restated) (2)(4) |
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2003 (restated) (1)(2) |
2004 (restated) (2) |
June 30, 2005 (restated)(2) |
September 30, 2005 |
September 30, 2006* |
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(US dollars in thousands) |
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Consolidated Statements of Cash Flows Data: | |||||||||||||||||||
Net cash provided by operating activities | $ | 123,614 | $ | 91,933 | $ | 107,275 | $ | 43,323 | $ | 109,238 | $ | 176,292 | |||||||
Net cash (used in) provided by investing activities | (316,170 | ) | (218,481 | ) | 14,525 | (1,657,330 | ) | (1,431,259 | ) | (344,483 | ) | ||||||||
Net cash provided by (used in) financing activities | 237,901 | 136,546 | (142,005 | ) | 1,708,802 | 1,505,472 | 201,224 | ||||||||||||
Other Financial Data (unaudited): |
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EBITDA(7) | $ | 331,875 | $ | 133,815 | $ | 174,091 | $ | 74,346 | $ | 150,893 | $ | 309,015 |
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AerCap Holdings C.V. |
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As of December 31, 2005 |
As of September 30, 2006 |
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(US dollars in thousands) |
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Consolidated Balance Sheet Data: | ||||||
Assets | ||||||
Cash and cash equivalents | $ | 183,554 | $ | 215,325 | ||
Restricted cash | 157,730 | 125,065 | ||||
Flight equipment held for operating leases, net | 2,189,267 | 2,542,119 | ||||
Notes receivable, net of provisions | 196,620 | 158,303 | ||||
Prepayments on flight equipment | 115,657 | 129,496 | ||||
Other assets | 218,405 | 381,039 | ||||
Total assets | $ | 3,061,233 | $ | 3,551,347 | ||
Term debt | 2,172,995 | 2,458,977 | ||||
Other liabilities | 468,575 | 552,601 | ||||
Partners' capital | 419,663 | 539,769 | ||||
Total liabilities and partners' capital | $ | 3,061,233 | $ | 3,551,347 | ||
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AerCap B.V. |
AerCap Holdings C.V. |
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Year ended December 31, |
Six months ended |
Three months ended |
Six months ended |
Nine months ended |
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2003(1) |
2004 |
June 30, 2005(3) |
September 30, 2005 |
December 31, 2005(3)(4) |
September 30, 2006 |
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(US dollars in thousands) (unaudited) |
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EBITDA Reconciliation: | ||||||||||||||||||
Net income (loss) | $ | 36,915 | $ | (105,362 | ) | $ | 33,700 | $ | 22,915 | $ | 49,663 | $ | 105,142 | |||||
Depreciation and amortization | 143,303 | 125,877 | 66,407 | 22,477 | 45,918 | 72,347 | ||||||||||||
Interest on term debt | 123,435 | 113,132 | 69,857 | 24,868 | 44,742 | 111,432 | ||||||||||||
Provision for income taxes | 28,222 | 168 | 4,127 | 4,086 | 10,570 | 20,094 | ||||||||||||
EBITDA | $ | 331,875 | $ | 133,815 | $ | 174,091 | $ | 74,346 | $ | 150,893 | $ | 309,015 | ||||||
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SUMMARY UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following summary unaudited consolidated pro forma income statements for the nine months ended September 30, 2005 and 2006 and for the year ended December 31, 2005 have been derived by the application of pro forma adjustments to AerCap Holdings C.V.'s unaudited condensed consolidated interim financial statements and audited consolidated financial statements and AeroTurbine's audited combined financial statements included in this prospectus and AeroTurbine's unaudited combined interim financial statements for the period from January 1, 2006 to April 25, 2006 that are not included in this prospectus.
The summary unaudited consolidated pro forma income statement for the nine months ended September 30, 2006 gives effect to the following as if they had occurred on January 1, 2005:
The summary unaudited consolidated pro forma income statements for the nine months ended September 30, 2005 and the year ended December 31, 2005 give effect to the following as if they had occurred on January 1, 2005:
The summary unaudited consolidated pro forma financial information is based on assumptions and preliminary data and reflects adjustments described under "Unaudited Consolidated Pro Forma Financial Information" and the accompanying notes. The summary unaudited consolidated pro forma financial information is being furnished solely for informational purposes and is not intended to represent or be indicative of the results that we would have reported if the transactions identified above had occurred on the dates indicated, nor does it purport to represent the results of operations we will obtain in future periods. The summary unaudited consolidated pro forma financial information should be read in conjunction with AerCap Holdings C.V's unaudited condensed consolidated interim financial statements and the related notes, AerCap Holdings C.V.'s audited consolidated financial statements and related notes and AeroTurbine's audited combined financial statements and the related notes included in this prospectus.
For additional information regarding our summary unaudited consolidated pro forma financial information, see "Unaudited Consolidated Pro Forma Financial Information".
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Summary Unaudited Consolidated Pro Forma Financial Information
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Nine months ended |
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Year ended December 31, 2005 |
September 30, 2005 |
September 30, 2006 |
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(US dollars in thousands, except per share amounts) |
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Consolidated Income Statement Data: | ||||||||||
Revenues | ||||||||||
Lease revenue | $ | 390,757 | $ | 285,575 | $ | 328,701 | ||||
Sales revenue | 179,809 | 148,550 | 277,803 | |||||||
Management fee revenue | 14,186 | 10,556 | 10,330 | |||||||
Interest revenue | 38,083 | 28,193 | 26,661 | |||||||
Other revenue | 5,380 | 3,803 | 18,070 | |||||||
Total revenues | 628,215 | 476,677 | 661,565 | |||||||
Expenses |
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Depreciation and amortization | 108,206 | 79,753 | 76,049 | |||||||
Cost of goods sold | 134,930 | 105,409 | 216,379 | |||||||
Interest on term debt | 100,218 | 84,621 | 108,323 | |||||||
Operating lease in costs | 24,086 | 19,120 | 18,925 | |||||||
Leasing expenses | 33,879 | 23,322 | 30,251 | |||||||
Provision for doubtful notes and accounts receivable | 6,163 | 2,944 | (847 | ) | ||||||
Selling, general and administrative expenses | 87,135 | 61,617 | 82,381 | |||||||
Total expenses | 494,617 | 376,786 | 531,461 | |||||||
Income from continuing operations before income taxes and minority interests | 133,598 | 99,891 | 130,104 | |||||||
Provision for income taxes |
(25,191 |
) |
(18,507 |
) |
(25,906 |
) |
||||
Minority interests net of taxes | | | 730 | |||||||
Net income | $ | 108,407 | $ | 81,384 | $ | 104,928 | ||||
Net income per share (basic/diluted) | 1.27 | 0.96 | 1.23 |
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An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. The trading price of our ordinary shares could decline due to any of these risks or other factors, and you may lose all of part or your investment. The risks described below are those that we currently believe may materially affect us. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.
Risks Related to Our Business
Our business model depends on the continual re-leasing of our aircraft and engines when current leases expire, and we may not be able to do so on favorable terms, if at all.
Our business model depends on the continual re-leasing of our aircraft and engines when our current leases expire in order to generate sufficient revenues to finance our growth and operations and pay our debt service obligations. Between September 30, 2006 and December 31, 2009, aircraft leases accounting for approximately 58.0% of our lease revenues for the year ended December 31, 2005, are scheduled to expire and the aircraft subject to those leases will need to be re-leased or extended. In addition, nearly all of our engines are subject to short-term leases, which are generally less than 180 days. Our ability to re-lease our aircraft and engines will depend on general market and competitive conditions at the time the leases expire. The general market and competitive conditions may be affected by many factors which are outside of our control.
In 2005, we generated $12.3 million of revenues from leases that were scheduled to expire in the three months ended December 31, 2006, $50.2 million of revenues from leases that were scheduled to expire in 2007, $54.6 million of revenues from leases that were scheduled to expire in 2008 and $85.1 million of revenues from leases that were scheduled to expire in 2009. Since we lease most of our engines under short-term leases (90 to 180 days), we generally re-lease our engines at least once a year. If we are unable to re-lease an aircraft or engine on acceptable terms, our lease revenue may decline and we may need to sell the aircraft or engines at unfavorable prices to provide adequate funds for our debt service obligations and to otherwise finance our growth and operations.
If we are unable to successfully integrate AeroTurbine, we may not be able to implement our business strategy.
We acquired AeroTurbine in April 2006. Our inability to integrate AeroTurbine would adversely affect a critical component of our business strategy which is focused on leveraging our ability to manage aircraft profitably throughout their lifecycle. AeroTurbine's engine leasing business, airframe and engine disassembly business and its MRO capabilities are critical components of this strategy because we believe that these businesses and capabilities broaden our ability to extract value from a wide range of aircraft assets, particularly older aircraft, and to lower our maintenance costs. Our ability to successfully integrate AeroTurbine will depend, in part, on the efforts of the former owners of AeroTurbine who are currently its Chief Executive Officer and Chief Operating Officer. If we are unable to successfully integrate AeroTurbine, we may acquire aircraft and engines that we may not be able to lease at attractive rates, if at all, or profitably disassemble for sale by our parts business. As a result, we may overpay for new aircraft or engines that we acquire. AeroTurbine has different management information and accounting systems than we do, which will need to be integrated into our systems. As we integrate these systems we may discover weaknesses or limitations in AeroTurbine's management information and accounting systems and internal controls. We may be required to hire
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additional personnel at AeroTurbine as it transitions to becoming part of our consolidated group and we become a public company. In addition, even if we are able to successfully integrate AeroTurbine, we may be required to incur increased or unanticipated costs. If we are unable to successfully integrate AeroTurbine or if we experience increased costs in integrating AeroTurbine, we may not be able to implement our business strategy, our financial results and growth prospects may be materially and adversely affected, and we may fail to benefit from the synergies we expect to result from the AeroTurbine Acquisition.
Changes in interest rates may adversely affect our financial results and growth prospects.
We use floating rate debt to finance the acquisition of a significant portion of our aircraft and engines. All of our revolving credit facilities have floating interest rates. As of December 31, 2005 and September 30, 2006, we had $1.8 billion and $2.1 billion, respectively, of indebtedness outstanding that was floating rate debt. We incurred floating rate interest expense of $87.1 million in the nine months ended September 30, 2006. If interest rates increase, we would be obligated to make higher interest payments to our lenders. Our practice has been to hedge the expected future interest payments on a portion of our floating-rate liabilities by entering into derivative contracts. However, we remain exposed to changes in interest rates to the extent that our hedges are not perfectly correlated to our financial liabilities. In addition, if we incur significant fixed rate debt in the future, increased interest rates prevailing in the market at the time of the incurrence or refinancing of such debt will also increase our interest expense.
Changes in interest rates may also adversely affect our lease revenues generated from leases with lease rates tied to floating interest rates. In the nine months ended September 30, 2006, 31.7% of our lease revenue was attributable to leases tied to floating interest rates. Therefore, if interest rates were to decrease, our lease revenue would decrease. In addition, because our fixed rate leases are based, in part, on prevailing interest rates at the time we enter into the lease; if interest rates decrease, new leases we enter into will be at lower lease rates and our lease revenue will be adversely affected. As of December 31, 2005, if interest rates were to increase by 1%, we would expect to incur an increase in interest expense on our floating rate indebtedness of approximately $9.1 million on an annualized basis, excluding the offsetting benefits of interest rate hedges currently in effect, and, if interest rates were to decrease by 1%, we would expect to generate $9.5 million less lease revenue on an annualized basis.
The aircraft and engine leasing, trading and parts sales businesses have historically experienced prolonged periods of oversupply during which lease rates and aircraft values have declined, and any future oversupply could materially and adversely affect our financial results and growth prospects.
In the past, the aircraft and engine leasing, buying and selling businesses have experienced prolonged periods of aircraft and engine oversupply. The oversupply of a specific type of aircraft or engine is likely to depress the lease rates for and the value of that type of aircraft or engine. The supply and demand for aircraft and engines is affected by various cyclical and non-cyclical factors that are outside of our control, including:
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These factors may produce sharp and prolonged decreases in aircraft and engine lease rates and values, and have a material adverse effect on our ability to re-lease our aircraft and engines and/or sell our aircraft engines and parts at acceptable prices. Any of these factors could materially and adversely affect our financial results and growth prospects.
Our financial condition is dependent, in part, on the financial strength of our lessees; lessee defaults and other credit problems could adversely affect our financial results and growth prospects.
Our financial condition depends on the financial strength of our lessees, our ability to diligence and appropriately assess the credit risk of our lessees and the ability of lessees to perform under their leases. In 2005 and in the nine months ended September 30, 2006, we generated 62.2% and 49.7%, respectively, of our pro forma revenues from leases to the airline industry, and as a result, we are indirectly affected by all the risks facing airlines today. The ability of our lessees to perform their obligations under our leases will depend primarily on the lessee's financial condition and cash flow, which may be affected by factors outside our control, including:
Generally, airlines with high debt leverage are more likely than airlines with stronger balance sheets to seek operating leases. As a result, many of our existing lessees are in a weakened financial condition and may suffer liquidity problems, and, at any point in time, may experience lease payment difficulties or be significantly in arrears in their obligations under our operating leases. Some lessees encountering financial difficulties may seek a reduction in their lease rates or other concessions, such as a decrease in their contribution toward maintenance obligations. Any future downturns in the airline industry could greatly exacerbate the weakened financial condition and liquidity problems of some of
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our lessees and further increase the risk of delayed, missed or reduced rental payments. We may not correctly assess the credit risk of each lessee or charge lease rates which correctly reflect the related risks and our lessees may not be able to continue to meet their financial and other obligations under our leases in the future. A delayed, missed or reduced rental payment from a lessee decreases our revenues and cash flow. Our default levels may increase over time if economic conditions deteriorate. If lessees of a significant number of our aircraft or engines default on their leases, our financial results and growth prospects will be adversely affected.
The value and lease rates of our aircraft and engines could decline and this would have a material adverse effect on our financial results and growth prospects.
Aircraft and engine values and lease rates have historically experienced sharp decreases due to a number of factors including, but not limited to, decreases in passenger and air cargo demand, increases in fuel costs, government regulation and increases in interest rates. In addition to factors linked to the aviation industry generally, many other factors may affect the value and lease rates of our aircraft and engines, including:
Any decrease in the value and lease rates of aircraft or engines which may result from the above factors or other unanticipated factors, may have a material adverse effect on our financial results and growth prospects.
The concentration of some aircraft and engine models in our aircraft and engine portfolios could adversely affect our business and financial results should any problems specific to these particular models occur.
Due to the high concentration of Airbus A320 family aircraft and CFM56 family engines in our aircraft and engine portfolios, our financial results and growth prospects may be adversely affected if the demand for these aircraft or engine models declines, if they are redesigned or replaced by their manufacturer or if these aircraft or engine models experience design or technical problems. As of September 30, 2006, 89.1% of the net book value of our aircraft portfolio was represented by Airbus aircraft. Our owned aircraft portfolio included 12 aircraft types, the three highest concentrations of which together represented 76.0% of our aircraft by net book value, were Airbus A320 aircraft,
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representing 31.0% of the net book value of our aircraft portfolio, Airbus A321 aircraft, representing 27.0% of the net book value of our aircraft portfolio, and Airbus A330 aircraft, representing 18.0% of the net book value of our aircraft portfolio, as of September 30, 2006. No other aircraft type represented more than 10% of our portfolio by net book value. In addition to our significant number of existing Airbus aircraft, we have 79 new Airbus A320 family aircraft on order either directly or indirectly through our consolidated joint venture, AerVenture, and have signed a letter of intent to purchase 20 new Airbus A330-200 widebody aircraft. We also have a significant concentration of CFM56 engines in our engine portfolio. As of September 30, 2006, 76.4% of the net book value of our engine portfolio was represented by CFM56 engines and 18.0% was represented by CF6 engines.
Should any of these aircraft or engine types or aircraft manufactured by Airbus in general encounter technical or other problems, the value and lease rates of those aircraft or engines will likely decline, and we may be unable to lease the aircraft or engines on favorable terms, if at all. Any significant technical problems with any such aircraft or engine models could result in the grounding of the aircraft or engines.
In addition, if Airbus experiences further financial difficulty we could be adversely affected. Airbus has announced that production delays on Airbus's A380 megajet are expected to reduce profits from 2007 to 2010 by $6 billion. Airbus has also announced that it will need to spend up to $10 billion to redesign its A350 aircraft. Following these announcements, the chief executive officers were forced to resign and were replaced. A new chief executive officer was appointed on July 3, 2006; however, amid announcements of further delays of the A380 aircraft and additional cost overruns, Airbus's chief executive officer resigned on October 9, 2006 and was replaced by the co-chief executive officer of Airbus's principal shareholder. Airbus's new chief executive officer will continue to serve as the co-chief executive officer of its principal shareholder. If Airbus experiences further financial and other difficulties and is unable to deliver the aircraft we have ordered from it on time or at all, we could lose the benefit of the terms of AerVenture in its Airbus purchase contract and could be unable to obtain replacement aircraft on comparable terms, or at all, which could materially and adversely affect our results of operations and growth prospects. If Airbus were to enter into reorganization or bankruptcy, we could in addition lose payments made towards aircraft not yet delivered.
Any decrease in the value and lease rates of our aircraft and engines may have a material adverse effect on our financial results and growth prospects.
We are indirectly subject to many of the economic and political risks associated with emerging markets, which could adversely affect our financial results and growth prospects.
A significant number of our aircraft and engines are leased to airlines in emerging market countries. As of September 30, 2006, we leased 58.7% of our aircraft and 32.5% of our engines, weighted by net book value, to airlines in emerging market countries. The emerging markets in which our aircraft are operated include Thailand, India, Taiwan, Sri Lanka, El Salvador, Jamaica, Malaysia, Colombia, Mexico, Nepal, Turkey, Hungary, Trinidad and Tobago, Russia, Brazil, the Slovak Republic and Indonesia.
Emerging market countries have less developed economies that are more vulnerable to economic and political problems and may experience significant fluctuations in gross domestic product, interest rates and currency exchange rates, as well as civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by government authorities. The occurrence of any of these events in markets served by our lessees and the resulting economic instability that may arise could adversely affect the value of our ownership interest in aircraft or engines subject to lease in such countries, or the ability of our lessees which operate in these markets to meet their lease obligations. As a result, lessees which operate in emerging market countries
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may be more likely to default than lessees that operate in developed countries. In addition, legal systems in emerging market countries may be less developed, which could make it more difficult for us to enforce our legal rights in such countries. For these and other reasons, our financial results and growth prospects may be materially and adversely affected by adverse economic and political developments in emerging market countries.
If our lessees encounter financial difficulties and we decide to restructure our leases, the restructuring would likely result in less favorable leases which could adversely affect our financial results and growth prospects.
If a lessee is late in making payments, fails to make payments in full or in part under a lease or has advised us that it will fail to make payments in full or in part under a lease in the future, we may elect or be required to restructure the lease, which could result in less favorable terms or termination of a lease without receiving all or any of the past due amounts. We may be unable to agree upon acceptable terms for some or all of the requested restructurings and as a result may be forced to exercise our remedies under those leases. If we, in the exercise of our remedies, repossess an aircraft or engine, we may not be able to re-lease the aircraft or engine promptly at favorable rates, if at all. You should expect that restructurings and/or repossessions with some lessees will occur in the future. The terms and conditions of possible lease restructurings may result in a significant reduction of lease revenue, which may adversely affect our financial results and growth prospects.
If we or our lessees fail to maintain our aircraft or engines, their value may decline and we may not be able to lease or re-lease our aircraft and engines at favorable rates, if at all, which would adversely affect our financial results and growth prospects.
We may be exposed to increased maintenance costs for our leased aircraft and engines associated with a lessee's failure to properly maintain the aircraft or engine or pay supplemental maintenance rent. If an aircraft or engine is not properly maintained, its market value may decline which would result in lower revenues from its lease or sale. Under our leases, our lessees are primarily responsible for maintaining the aircraft and engines and complying with all governmental requirements applicable to the lessee and the aircraft and engines, including operational, maintenance, government agency oversight, registration requirements and airworthiness directives. Although we require many of our lessees to pay us a supplemental maintenance rent, failure of a lessee to perform required maintenance during the term of a lease could result in a decrease in value of an aircraft or engine, an inability to re-lease an aircraft or engine at favorable rates, if at all, or a potential grounding of an aircraft or engine. Maintenance failures by a lessee would also likely require us to incur maintenance and modification costs upon the termination of the applicable lease, which could be substantial, to restore the aircraft or engine to an acceptable condition prior to sale or re-leasing. Supplemental maintenance rent paid by our lessees may not be sufficient to fund our maintenance costs. Our lessees' failure to meet their obligations to pay supplemental maintenance rent or perform required scheduled maintenance or our inability to maintain our aircraft or engines may materially and adversely affect our financial results and growth prospects.
Competition from other aircraft or engine lessors with greater resources or a lower cost of capital than us could adversely affect our financial results and growth prospects.
The aircraft and engine leasing industry is highly competitive. Our competition is comprised of major aircraft leasing companies including GE Commercial Aviation Services, International Lease Finance Corp., CIT Group, Aviation Capital Group, Pegasus Aviation, GATX Air, Aircastle Limited, RBS Aviation Capital, AWAS, Babcock & Brown, Boeing Capital Corp., Pembroke Group Ltd. and Singapore Aircraft Leasing Enterprise, and six major engine leasing companies, including GE Engine
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Leasing, Engine Lease Finance Corporation, Pratt & Whitney Engine Leasing LLC, Willis Lease Finance Corporation, Rolls-Royce and Partners Finance and Shannon Engine Support Ltd. Some of our competitors are significantly larger and have greater resources or lower cost of capital than us; accordingly, they may be able to compete more effectively in one or more of our markets. On October 18, 2006, GE Commercial Aviation Services completed the acquisition of The Memphis Group, Inc., an aircraft parts trading company. This acquisition could provide competition to our integrated business strategy.
In addition, we may encounter competition from other entities such as:
Some of these competitors have greater operating and financial resources and access to lower capital costs than us. We may not always be able to compete successfully with such competitors and other entities, which could materially and adversely affect our financial results and growth prospects.
We are exposed to significant regional political and economic risks due to the concentration of our lessees in certain geographical regions which could adversely affect our financial results and growth prospects.
Through our lessees, we are exposed to local economic and political conditions. Such adverse economic and political conditions include additional regulation or, in extreme cases, requisition of our aircraft or engines. The effect of these conditions on payments to us will be more or less pronounced, depending on the concentration of lessees in the region with adverse conditions. The airline industry is highly sensitive to general economic conditions. A recession or other worsening of economic conditions or a terrorist attack, particularly if combined with high fuel prices or a weak euro or other local currency, may have a material adverse effect on the ability of our lessees to meet their financial and other obligations under our leases.
Lease rental revenues from 23 lessees based in Asia accounted for 39.9% of our pro forma lease revenues in 2005. The outbreak of SARS in 2003 had a significant negative effect on the Asian economy, particularly in China, Hong Kong and Taiwan. The Asian airline industry has since recovered and is currently experiencing strong growth; however, a recurrence of SARS or the outbreak of another epidemic disease, such as avian influenza, which many experts believe would originate in Asia, could materially and adversely affect the Asian airline industry.
Lease rental revenues from 38 lessees based in Europe accounted for 32.3% of our pro forma lease revenues in 2005. Commercial airlines in Europe face, and can be expected to continue to face, increased competitive pressures, in part as a result of the deregulation of the airline industry by the European Union and the resulting expansion of low-cost carriers. European countries generally have relatively strict environmental regulations and traffic constraints that can restrict operational flexibility
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and decrease aircraft productivity, which could significantly increase operating costs of all aircraft, including our aircraft, thereby adversely affecting our lessees.
Lease rental revenues from 25 lessees based in North America accounted for 16.0% of our pro forma lease revenues in 2005. During the past 15 years, a number of North American passenger airlines filed for bankruptcy and several major U.S. airlines ceased operations altogether. The outbreak of SARS, the war and prolonged conflict in Iraq and the September 11, 2001 terrorist attacks in the United States have imposed additional financial burdens on most U.S. airlines as a result of increased expenses due to tightened security requirements and reduced demand for air travel. Lease revenues from two lessees based in the Caribbean, accounted for 3.6% of our pro forma lease revenues in 2005.
Lease revenues from ten lessees based in Latin America account for 8.2% of our pro forma lease revenues in 2005. The economies of Latin American countries are generally characterized by lower levels of foreign investment when compared to industrialized countries and greater economic volatility. Any economic downturn in the Latin American or the Caribbean economies may adversely affect the operations of our lessees in these regions.
Our substantial indebtedness incurred to acquire our aircraft and engines requires significant debt service payments.
As of September 30, 2006, our consolidated indebtedness was $2.5 billion and our interest on term debt expense (including the impact of hedging activities) was $69.9 million, $44.7 million and $111.4 million in the six months ended June 30, 2005, the six months ended December 31, 2005 and the nine months ended September 30, 2006, respectively. Due to the capital intensive nature of our business and our strategy of expanding our aircraft and engine portfolios, we expect that we will incur additional indebtedness in the future and continue to maintain high levels of indebtedness. In October 2006 we entered into a $248.0 million loan agreement in connection with the purchase of 25 used aircraft. We currently have 79 new A320 family aircraft on order and have signed a letter of intent to acquire 20 new A330-200 widebody aircraft from Airbus. If we acquire all 99 of the Airbus aircraft, over the next four years, we would expect to incur in excess of $4.0 billion of indebtedness to finance the purchase price of the aircraft. High levels of indebtedness may limit our cash flow available for capital expenditures, acquisitions and other general corporate purposes and may have a material adverse effect on our earnings and growth prospects.
In addition, covenants in some of the indebtedness incurred by our subsidiaries prevent our subsidiaries from paying dividends to us if we or the relevant subsidiary do not meet specified financial ratios. The terms of the Aircraft Lease Securitisation indebtedness allow for distributions on the subordinated notes held by us only after the senior classes of notes are repaid.
Aircraft have limited economically useful lives and depreciate over time, which can adversely affect our financial condition and growth prospects.
As our aircraft age, they will depreciate and generally the aircraft will generate lower revenues and cash flows. If we do not replace our older depreciated aircraft with newer aircraft, our ability to maintain or increase our revenues and cash flows will decline. In addition, since we depreciate our aircraft for accounting purposes on a straight line basis to the aircraft's estimated residual value over its estimated useful life, if we dispose of an aircraft for a price that is less than the depreciated book value of the aircraft on our balance sheet, we will recognize a loss on the sale.
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In the past we have identified material weaknesses in our internal controls over financial reporting. Our failure to achieve and maintain effective internal controls could have a material adverse effect on our business in the future and on our access to the capital markets.
Although we are not currently subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we are in the process of documenting and testing our internal controls in order to enable us to satisfy those requirements as of December 31, 2007. During the preparation of our fiscal 2005 financial statements, material weaknesses were identified pertaining to internal controls over the accounting for derivatives, the accounting for maintenance accruals and the accounting for defeased liabilities, each of which resulted in restatements of our consolidated financial statements. See Note 1 to our audited consolidated financial statements contained in this prospectus.
Although we are taking measures to remediate these weaknesses, including establishing a stand-alone internal audit function, building out our accounting department with additional personnel and increasing our focus on compliance with Section 404 of the Sarbanes-Oxley Act, these remediation steps and others we may undertake in the future may not be effective in successfully remediating these material weaknesses or in preventing or identifying the same or additional material weaknesses in our internal control over financial reporting in the future. In addition, even if we are successful in identifying the same or additional material weaknesses in the future, we may not successfully remediate such weaknesses quickly or at all. Any failure to maintain adequate internal control over financial reporting or to implement required, new or improved controls, or difficulties encountered in their implementation, could cause us to report material weaknesses or other deficiencies in our internal control over financial reporting and could result in a more than remote possibility of errors or misstatements in our consolidated financial statements that would be material. Following this offering, beginning with our Annual Report on Form 20-F for fiscal year 2007, pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to assess the effectiveness of our internal control over financial reporting, and we will be required to have our independent registered public accounting firm audit management's assessment and the operating effectiveness of our internal control over financial reporting. If our management or our independent registered public accounting firm were to conclude that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information and the value of our ordinary shares could be adversely impacted. Our failure to achieve and maintain effective internal controls could have a material adverse effect on our business in the future and on our access to the capital markets. In addition, in connection with our compliance with Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel will need to devote a substantial amount of time, and may need to hire additional accounting and financial staff, to assure that we comply with these requirements. Compliance may also make some of our activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and other liability insurance, and we may be required to incur substantial costs to maintain current levels of coverage. The additional management attention and costs relating to compliance with the Sarbanes-Oxley Act could materially and adversely affect our growth and financial results.
The advanced age of some of our aircraft may cause us to incur higher than anticipated maintenance expenses, which could adversely affect our financial results and growth prospects.
As of September 30, 2006, we owned 42 aircraft that were over ten years of age, representing 21.8% of the net book value of our aircraft portfolio. In general, the costs of operating an aircraft, including maintenance expenditures, increase as they age. In addition, older aircraft are typically less fuel-efficient, noisier and produce higher levels of emissions, than newer aircraft and may be more difficult to re-lease or sell. In a depressed market, the value of older aircraft may decline more rapidly than the values of newer aircraft and our operating results may be adversely affected. Increased
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variable expenses like fuel, maintenance and increased governmental regulation could make the operation of older aircraft or engines less profitable and may result in increased lessee defaults. Incurring higher than anticipated maintenance expenses associated with the advanced age of some of our aircraft or our inability to sell or re-lease such older aircraft would materially and adversely affect our financial results and growth prospects.
The advent of superior aircraft and engine technology could cause our existing aircraft and engine portfolio to become outdated and therefore less desirable, which could adversely affect our financial results and growth prospects.
As manufacturers introduce technological innovations and new types of aircraft and engines, some of the aircraft and engines in our aircraft and engine portfolios may become less desirable to potential lessees. In addition, the imposition of increased regulation regarding stringent noise or emissions restrictions may make some of our aircraft and engines less desirable in the marketplace. Any of these risks may adversely affect our ability to lease or sell our aircraft or engines on favorable terms, if at all, which would have a material adverse effect on our financial results and growth prospects.
If our lessees' insurance coverage is insufficient, it could adversely affect our financial results and growth prospects.
While we do not directly control the operation of any of our aircraft or engines, by virtue of holding title to aircraft, directly or indirectly, in certain jurisdictions around the world, we could be held strictly liable for losses resulting from the operation of our aircraft and engines, or may be held liable for those losses on other legal theories. We require our lessees to obtain specified levels of insurance and indemnify us for, and insure against, liabilities arising out of their use and operation of the aircraft.
However, following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to airlines for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events. At the same time, aviation insurers significantly increased the premiums for third-party war risk and terrorism liability insurance and coverage in general. As a result, the amount of third-party war risk and terrorism liability insurance that is commercially available at any time may be below the amount stipulated in our leases.
Our lessees' insurance or other coverage may not be sufficient to cover all claims that may be asserted against us arising from the operation of our aircraft and engines by our lessees. Inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations will reduce the proceeds that would be received by us in the event we are sued and are required to make payments to claimants, which could materially and adversely affect our financial results and growth prospects.
If we incur significant costs resulting from lease defaults it could adversely affect our financial results and growth prospects.
If we are required to repossess an aircraft or engine after a lessee default, we may be required to incur significant unexpected costs. Those costs include legal and other expenses of court or other governmental proceedings, including the cost of posting surety bonds or letters of credit necessary to effect repossession of aircraft or engine, particularly if the lessee is contesting the proceedings or is in bankruptcy. In addition, during these proceedings the relevant aircraft or engine is not generating revenue. We may also incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to pay and that are necessary to put the aircraft or engine in suitable condition for re-lease or sale. It may also be necessary to pay off liens, taxes and other governmental charges on the
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aircraft to obtain clear possession and to remarket the aircraft effectively, including, in some cases, liens that the lessor may have incurred in connection with the operation of its other aircraft. We may also incur other costs in connection with the physical possession of the aircraft or engine.
We may also suffer other adverse consequences as a result of a lessee default and the related termination of the lease and the repossession of the related aircraft or engine. Our rights upon a lessee default vary significantly depending upon the jurisdiction and the applicable law, including the need to obtain a court order for repossession of the aircraft and/or consents for de-registration or re-export of the aircraft. When a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may apply. Certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease or to assign it to a third party, or entitle the lessee or another third party to retain possession of the aircraft or engine without paying lease rentals or performing all or some of the obligations under the relevant lease. In addition, certain of our lessees are owned in whole, or in part, by government-related entities, which could complicate our efforts to repossess our aircraft or engines in that government's jurisdiction. Accordingly, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing the affected aircraft or engine.
If we repossess an aircraft or engine, we will not necessarily be able to export or de-register and profitably redeploy the aircraft or engine. For instance, where a lessee or other operator flies only domestic routes in the jurisdiction in which the aircraft or engine is registered, repossession may be more difficult, especially if the jurisdiction permits the lessee or the other operator to resist de-registration. We may also incur significant costs in retrieving or recreating aircraft or engine records required for registration of the aircraft or engine, and in obtaining the certificate of airworthiness for an aircraft. If we incur significant costs repossessing our aircraft or engines, are delayed in repossessing our aircraft or engines or are unable to obtain possession of our aircraft or engines as a result of lessee defaults, our financial results and growth prospects may be materially and adversely affected.
If we provide MRO services to third-parties, we may lose some of our existing MRO service provider customers who lease our engines and purchase our parts.
A significant portion of our short-term engine leases are to engine MRO service providers, which in turn use the engines to provide their customers with spare engines while the MRO service provider repairs the customer's engines. Also, a significant portion of our engine parts are sold directly to our engine MRO service provider customers. If we provide MRO services directly to third parties we would compete directly with some of our MRO service provider customers. Some of these MRO service provider customers may choose to lease engines and purchase parts from our competitors with whom they do not directly compete in their MRO business.
If our lessees fail to appropriately discharge aircraft liens, we may be obligated to pay the aircraft liens, which could adversely affect our financial results and growth prospects.
In the normal course of their business, our lessees are likely to incur aircraft and engine liens that secure the payment of airport fees and taxes, custom duties, air navigation charges, including charges imposed by Eurocontrol, landing charges, crew wages, repairer's charges, salvage or other liens that may attach to our aircraft or engine. These liens may secure substantial sums that may, in certain jurisdictions or for certain types of liens, particularly liens on entire fleets of aircraft, exceed the value of the particular aircraft or engine to which the liens have attached. Aircraft and engines may also be subject to mechanical liens as a result of routine maintenance performed by third parties on behalf of our customers. Although the financial obligations relating to these liens are the responsibility of our lessees, if they fail to fulfill their obligations, the liens may attach to our aircraft or engines and ultimately become our responsibility. In some jurisdictions, aircraft and engine liens may give the
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holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft or engine.
Until they are discharged, these liens could impair our ability to repossess, re-lease or sell our aircraft or engines. Our lessees may not comply with their obligations under their leases to discharge aircraft liens arising during the terms of their leases. If they do not, we may find it necessary to pay the claims secured by such aircraft liens in order to repossess the aircraft or engine. Such payments would materially and adversely affect our financial results and growth prospects.
Failure to obtain certain required licenses, certificates and approvals could adversely affect our ability to re-lease or sell aircraft and engines, our ability to perform maintenance services or to provide cash management services, which would materially and adversely affect our financial condition and results of operations.
Under our leases, we may be required in some instances to obtain specific licenses, consents or approvals for different aspects of the leases. These required items include consents from governmental or regulatory authorities for certain payments under the leases and for the import, re-export or deregistration of the aircraft and engines. Subsequent changes in applicable law or administrative practice may increase such requirements. In addition, a governmental consent, once given, might be withdrawn. Furthermore, consents needed in connection with future re-leasing or sale of an aircraft or engine may not be forthcoming. To perform some of our cash management services and insurance services from Ireland under our management arrangements with our joint ventures and securitization entities, we require a license from the Irish regulatory authorities, which we have obtained. In addition, to meet our MRO customers' requirements to maintain certain flight certifications, AeroTurbine requires certificates from the Federal Aviation Administration, or FAA, and European Aviation Safety Agency, or EASA, which it has obtained. A failure to maintain these licenses or certificates or obtain any required license or certificate, consent or approval, or the occurrence of any of the foregoing events, could adversely affect our ability to provide qualifying services or re-lease or sell our aircraft or engines, which would materially and adversely affect our financial condition and results of operations.
Our ability to operate in some countries is restricted by foreign regulations and controls on investments.
Many countries restrict or control foreign investments to varying degrees, and additional or different restrictions or policies adverse to us may be imposed in the future. These restrictions and controls have limited, and may in the future restrict or preclude, our investment in joint ventures or the acquisition of businesses outside of the United States, or may increase the cost to us of entering into such transactions. Various governments, particularly in the Asia/Pacific region, require governmental approval before foreign persons may make investments in domestic businesses and also limit the extent of any such investments. Furthermore, various governments may require governmental approval for the repatriation of capital by, or the payment of dividends to, foreign investors. Restrictive policies regarding foreign investments may increase our costs of pursuing growth opportunities in foreign jurisdictions, which could materially and adversely affect our financial results and growth prospects.
There are a limited number of aircraft and engine manufacturers and the failure of any manufacturer to meet its aircraft and engine delivery obligations to us could adversely affect our financial results and growth prospects.
The supply of commercial jet aircraft is dominated by two airframe manufacturers, Boeing and Airbus, and three engine manufacturers, GE Aircraft Engines, Rolls-Royce plc and Pratt & Whitney. As a result, we are dependent on these manufacturers' success in remaining financially stable, producing products and related components which meet the airlines' demands and fulfilling their contractual obligations to us. Airbus has recently made a series of announcements relating to significant
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delays and cost overruns in the manufacturing process for the new commercial jet it is developing, the A380 megajet. These delays and cost overruns have resulted in several changes of Airbus's top management and could lead to Airbus customers canceling existing orders, which would aggravate Airbus's economic difficulties.
Further, competition between Airbus and Boeing for market share is escalating and may cause instances of deep discounting for certain aircraft types, which could adversely affect our ability to obtain an attractive price when we attempt to sell our aircraft in the aftermarket. Should the manufacturers fail to respond appropriately to changes in the market environment or fail to fulfill their contractual obligations, we may experience:
We will need additional capital to finance our growth, and we may not be able to obtain it on terms acceptable to us, if at all, which may limit our ability to grow and compete in the aircraft and engine leasing and trading markets.
We will need additional capital to continue to expand our business by acquiring additional aircraft, engines and other aviation assets, and financing may not be available to us or may be available to us only on terms that are not favorable. We initially finance the acquisition of aircraft through a combination of medium-term revolving credit facilities and long-term debt structures. Once we obtain a sufficient number and diversity of aircraft financed with medium-term revolving credit facilities, we generally refinance these facilities with long-term debt structures, including securitizations, tax advantaged structures and bank loans. As a result, we are subject to the risk that we will not be able to acquire, during the period that our credit facilities are available, a sufficient amount of eligible aircraft and engines to allow for an issuance of long-term debt. If we are unable to raise additional funds or obtain capital on terms acceptable to us, we may have to delay, modify or abandon some or all of our growth strategies. Further, if additional capital is raised through the issuance of additional equity securities, the percentage ownership of our then current shareholders would be diluted. See "Dilution". Newly issued equity securities may have rights, preferences or privileges senior to those of our ordinary shares. See "Description of Ordinary Shares".
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We are subject to various environmental regulations that may have an adverse impact on our financial results and growth prospects.
Governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant airframe is registered, and where the aircraft is operated. For example, jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with noise level standards. In addition to the current requirements, the United States and the International Civil Aviation Organization, or ICAO, have adopted a new, more stringent set of standards for noise levels which will apply to engines manufactured or certified beginning in 2006. Currently, United States regulations would not require any phase-out of aircraft that qualify with the current standards, but the European Union has established a framework for the imposition of operating limitations on aircraft that do not comply with the new standards. These regulations could limit the economic life of our aircraft and engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and engines or, if engine modifications are permitted, require us to make significant additional investments in the aircraft and engines to make them compliant.
In addition to more stringent noise restrictions, the United States and other jurisdictions are beginning to impose more stringent limits on the emission of nitrogen oxide, carbon monoxide and carbon dioxide emissions from engines, consistent with current ICAO standards. These limits generally apply only to engines manufactured after 1999. None of our 61 aircraft engines were manufactured after 1999. Concerns over global warming could result in more stringent limitations on the operation of aircraft powered by older, non-compliant engines.
Our operations are subject to various federal, state and local environmental, health and safety laws and regulations in the United States, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of its employees. A violation of these laws and regulations or permit conditions can result in substantial fines, permit revocation or other damages. Many of these laws impose liability for clean-up of contamination that may exist at our facilities (even if we did not know of or were not responsible for the contamination) or related personal injuries or natural resource damages or costs relating to contamination at third-party waste disposal sites where we have sent or may send waste. We cannot assure you that we will be at all times in complete compliance with these laws, regulations or permits. We may have liability under environmental laws or be subject to legal actions brought by governmental authorities or other parties for actual or alleged violations of, or liability under, environmental, health and safety laws, regulations or permits.
We are the manager for several securitization vehicles and joint ventures and our financial results would be adversely affected if we were removed from these positions.
We are the aircraft manager for various securitization vehicles, joint ventures and third parties and receive annual fees for these services. In the nine months ended September 30, 2006, we generated revenue of $10.3 million from providing aircraft management services to non-consolidated securitization vehicles and joint ventures and third parties. We may be removed as manager by the affirmative vote of a requisite number of holders of the securities issued by the securitization vehicles upon the occurrence of specified events and at specified times under our joint venture agreements. If we are removed, in the case of our consolidated securitization vehicles and joint ventures, our expenses would increase since such securitization vehicles or joint ventures would have to hire an outside aircraft manager and, in the case of non-consolidated securitization vehicles, joint ventures and third parties, our revenues would decline as a result of the loss of our fees for providing management services to such entities. If we are removed as aircraft manager for any securitization vehicle or joint venture that generates a significant portion of our management fees, our financial results and growth prospects could be materially and adversely affected.
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Our limited control over our joint ventures may delay or prevent us from implementing our business strategy which may adversely affect our financial results and growth prospects.
We are currently joint venture partners in several joint ventures, including AerVenture, a consolidated joint venture which has entered into a purchase agreement with Airbus for the purchase of up to 70 A320 family aircraft, and it is our strategy to enter into additional joint ventures in the future. Under the AerVenture joint venture agreement, we share control over significant decisions with our joint venture partner. For example, we may not, without the consent of our AerVenture joint venture partner, cause AerVenture to incur any debt outside the ordinary course of business, buy or sell assets or pay dividends to us. Since we have limited control over AerVenture and certain of our other joint ventures and may not be able to exercise control over any future joint venture, we may not be able to require AerVenture or such other joint ventures to take actions that we believe are necessary to implement our business strategy. Accordingly, this limited control could have a material adverse effect on our financial results and growth prospects.
The departure of senior managers could adversely affect our financial results and growth prospects.
Our future success depends, to a significant extent, upon the continued service of our senior management personnel. For a description of the senior management team, see "Management". The departure of senior management personnel could have a material adverse effect on our ability to achieve our business strategy, including the integration of AeroTurbine.
In certain countries, an engine affixed to an aircraft may become an accession to the aircraft and we may not be able to exercise our ownership rights over the engine.
In some jurisdictions, an engine affixed to an aircraft may become an accession to the aircraft, so that the ownership rights of the owner of the aircraft supersede the ownership rights of the owner of the engine. If an aircraft is security for the owner's obligations to a third party, the security interest in the aircraft may supersede our rights as owner of the engine. This legal principle could limit our ability to repossess an engine in the event of an engine lease default while the aircraft with our engine installed remains in such jurisdiction. We would suffer a substantial loss if we were not able to repossess engines leased to lessees in these jurisdictions, which would materially and adversely affect our financial results and growth prospects.
Risks Related to the Aviation Industry
As high fuel prices continue to affect the profitability of the aviation industry, our lessees might not be able to meet their lease payment obligations, which would adversely affect our financial results and growth prospects.
Fuel costs represent a major expense to companies operating in the aviation industry. Fuel prices fluctuate widely depending primarily on international market conditions, geopolitical and environmental events and currency/exchange rates. As a result, fuel costs are not within the control of lessees and significant increases in fuel costs would materially and adversely affect their operating results.
Factors such as natural disasters can significantly affect fuel availability and prices. In August and September 2005, Hurricanes Katrina and Rita inflicted widespread damage along the Gulf Coast of the United States, causing significant disruptions to oil production, refinery operations and pipeline capacity in the region, and to oil production in the Gulf of Mexico. These disruptions resulted in decreased fuel availability and higher fuel prices.
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Fuel prices currently remain at historically high levels. The continuing high cost of fuel has had, and sustained high costs in the future may continue to have, a material adverse affect on airlines' profitability, including our lessees. Due to the competitive nature of the aviation industry, operators have been and may continue to be unable to pass on increases in fuel prices to their customers by increasing fares in a manner that fully off-sets the increased fuel costs they have incurred. In addition, they may not be able to manage this risk by appropriately hedging their exposure to fuel price fluctuations. If fuel prices remain at historically high levels or increase further due to future terrorist attacks, acts of war, armed hostilities, natural disasters or for any other reason, they are likely to cause our lessees to incur higher costs and/or generate lower revenues, resulting in an adverse affect on their financial condition and liquidity. Consequently, these conditions may adversely affect our lessees' ability to make rental and other lease payments, result in lease restructurings and/or aircraft and engine repossessions, increase our costs of servicing and marketing our aircraft and engines, impair our ability to re-lease them or otherwise dispose of them on a timely basis at favorable rates or terms, if at all, and reduce the proceeds received for such assets upon any disposition. Any of these events could adversely affect our financial results and growth prospects.
If the effects of terrorist attacks and geopolitical conditions continue to adversely affect the financial condition of the airlines, our lessees might not be able to meet their lease payment obligations, which would adversely affect our financial results and growth prospects.
As a result of the September 11, 2001 terrorist attacks in the United States and subsequent terrorist attacks abroad, notably in the Middle East, Southeast Asia and Europe, increased security restrictions were implemented on air travel, costs for aircraft insurance and security measures have increased, passenger and cargo demand for air travel decreased and operators have faced and continue to face increased difficulties in acquiring war risk and other insurance at reasonable costs. In addition, war or armed hostilities, or the fear of such events could further exacerbate many of the problems experienced as a result of terrorist attacks. Uncertainty regarding the situation in Iraq and tension over Iran's and North Korea's nuclear programs, may lead to further instability in the Middle East. Future terrorist attacks, war or armed hostilities, or the fear of such events, could further adversely affect the aviation industry and may have an adverse effect on the financial condition and liquidity of our lessees, aircraft and engine values and rental rates, and may lead to lease restructurings or repossessions, all of which could adversely affect our financial results and growth prospects.
Terrorist attacks and adverse geopolitical conditions have adversely affected the aviation industry and concerns about such events could also result in:
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Future terrorist attacks, acts of war or armed hostilities may cause certain aviation insurance to become available only at significantly increased premiums, which may be for reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage currently required by aircraft and engine lenders and lessors or by applicable government regulations, or to be not available at all.
Although the Aircraft Transportation Safety and System Stabilization Act adopted in the United States on September 22, 2001 and similar programs instituted by the governments of other countries provide for limited government coverage under government programs for specified types of aviation insurance, these programs may not continue and governments may not pay under these programs in a timely fashion.
Future terrorist attacks, acts of war or armed hostilities are likely to cause our lessees to incur higher costs and to generate lower revenues, which could result in an adverse effect on their financial condition and liquidity. Consequently, these conditions may affect their ability to make rental and other lease payments to us or obtain the types and amounts of insurance required by the applicable leases, which may in turn lead to aircraft groundings, may result in additional lease restructurings and repossessions, may increase our cost of re-leasing or selling the aircraft and may impair our ability to re-lease or otherwise dispose of them on a timely basis at favorable rates or on favorable terms, if at all, and may reduce the proceeds received for our aircraft and engines upon any disposition. These results could adversely affect our financial results and growth prospects.
The effects of SARS or other epidemic diseases may adversely affect the airline industry in the future, which might cause our lessees to not be able to meet their lease payment obligations to us, which would adversely affect our financial results and growth prospects.
The linking of the 2003 outbreak of SARS to air travel materially and adversely affected passenger demand for air travel at that time. While the World Heath Organization's travel bans related to SARS were lifted, SARS had a continuing negative affect on the aviation industry, which was evidenced by a sharp reduction in passenger bookings and the cancellation of many flights after the air travel bans had been lifted. While these effects were felt most acutely in Asia, the effect of SARS on the aviation industry also adversely affected other areas, including North America.
Since 2003, there have been several outbreaks of avian influenza, beginning in Asia and, most recently, spreading to certain parts of Africa and Europe. Although human cases of avian influenza so far have been limited in number, the World Health Organization has expressed serious concern that a human influenza pandemic could develop from the avian influenza virus. In such an event, numerous responses, including travel restrictions, might be necessary to combat the spread of the disease. Additional outbreaks of SARS or other diseases, such as avian influenza, or the fear of such events, could adversely affect passenger demand for air travel and the aviation industry. These consequences could result in our lessees' inability to satisfy their lease payment obligations to us, which in turn would adversely affect our financial results and growth prospects.
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If recent airline industry economic losses and airline reorganizations continue, our lessees might not be able to meet their lease payment obligations to us, which would adversely affect our financial results and growth prospects.
As a result of reduced fares, adverse economic conditions in numerous countries, a significant increase in oil prices, the September 11, 2001 terrorist attacks in the United States, the war and prolonged conflict in Iraq and outbreaks of epidemic diseases such as SARS and avian influenza, the aviation industry as a whole has suffered significant losses since 2001, and such losses are expected to continue for the foreseeable future for certain parts of the industry. Many airlines, including a significant number of our lessees, have announced or implemented reductions in capacity, service and workforce in response to industry-wide reductions in passenger and cargo demand and fares. In addition, since September 11, 2001, several U.S. airlines, including United Air Lines, Inc., Delta Air Lines Inc., Northwest Airlines Corp., US Airways, Inc., Gemini Air Cargo, Hawaiian Airlines, ATA Airlines, Inc., Atlas Air Worldwide Holdings, Inc. and Aloha Airlines, have sought to reorganize under the U.S. bankruptcy laws and, in certain instances, have reorganized, and further U.S. airline reorganizations are possible. Certain European and Latin American airlines, including Sabena Airlines, Swiss Air Transport Company Limited, Volare Airlines S.p.A., Varig Brazilian Airlines and Avianca, have also filed for protection under applicable bankruptcy laws. In addition, Air Canada, the largest Canadian airline, filed for protection under Canada's Companies' Creditors Arrangement Act. Historically, during the period of reorganization, airlines have undertaken substantial fare discounting to maintain cash flows and to encourage continued customer loyalty. Such fare discounting has required many other airlines to reduce their fares to stay competitive, which has led to lower profitability for many airlines, including certain of our lessees.
The airline bankruptcies and reduced demand generally have led to the grounding of significant numbers of aircraft and engines and negotiated reductions in lease rental rates, with the effect of depressing aircraft and engine market values. In addition, airlines may be affected by significant labor disputes that could lead to strikes or slowdowns or may otherwise adversely affect labor relations, thereby worsening such airlines' financial condition, which could place downward pressure on lease rates and aircraft and engines values. Additional reorganizations or liquidations by airlines under bankruptcy or reorganization laws in other countries or further rejection of aircraft and engine leases or abandonment of them in bankruptcy will further depress aircraft and engine market values and lease rates. Additional grounded aircraft and engines and lower market values would adversely affect our ability to sell or lease them on favorable terms, if at all, or re-lease our aircraft and engines at favorable rates, any of which would have an adverse effect on our financial condition and operating results.
Risks Related to Our Organization and Structure
If the ownership of our ordinary shares continues to be highly concentrated, it may prevent you and other minority shareholders from influencing significant corporate decisions and may result in conflicts of interest.
Following the completion of this offering, Cerberus will have voting control over approximately 57.5% of our ordinary shares. As a result, Cerberus will be able to control fundamental corporate matters and transactions, including the appointment of a majority of our directors, mergers, amalgamations, consolidations or acquisitions, the sale of all or substantially all of our assets, the amendment of our articles of association and our dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other shareholders, such as a change of control transaction that would result in the payment of a premium to our other shareholders. In addition, this concentration of share ownership may adversely affect the trading price of our ordinary
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shares if the perception among investors exists that owning shares in a company with a significant shareholder is not desirable.
We are a Netherlands public limited liability company (naamloze vennootschap) and it may be difficult for you to obtain or enforce judgments against us or our executive officers, some of our directors and some of our named experts in the United States.
We were formed under the laws of The Netherlands and, as such, the rights of holders of our ordinary shares and the civil liability of our directors will be governed by the laws of The Netherlands and our articles of association. The rights of shareholders under the laws of The Netherlands may differ from the rights of shareholders of companies incorporated in other jurisdictions. Some of the named experts referred to in this prospectus are not residents of the United States, and most of our directors and our executive officers and most of our assets and the assets of our directors are located outside the United States. In addition, under our articles of association, all lawsuits against us and our directors and executive officers shall be governed by the laws of The Netherlands and must be brought exclusively before the Courts of Amsterdam, The Netherlands. As a result, you may not be able to serve process on us or on such persons in the United States or obtain or enforce judgments from U.S. courts against them or us based on the civil liability provisions of the securities laws of the United States. There is doubt as to whether Netherlands courts would enforce certain civil liabilities under U.S. securities laws in original actions and enforce claims for punitive damages. See "Enforcement of Civil Liabilities".
Under our articles of association, we indemnify and hold our directors, officers and employees harmless against all claims and suits brought against them, subject to limited exceptions. Under our articles of association, to the extent allowed by law, the rights and obligations among or between us, any of our current or former directors, officers and employees and any current or former shareholder shall be governed exclusively by the laws of The Netherlands and subject to the jurisdiction of the Netherlands courts, unless such rights or obligations do not relate to or arise out of their capacities listed above. Although there is doubt as to whether U.S. courts would enforce such provision in an action brought in the United States under U.S. securities laws, such provision could make enforcing judgments obtained outside of The Netherlands more difficult to enforce against our assets in The Netherlands or jurisdictions that would apply Netherlands law.
Our international operations expose us to economic and legal risks associated with a global business.
We conduct our business in many countries, and we anticipate that revenue from our international operations, particularly from the Asia/Pacific region, will continue to account for a significant amount of our future revenue. There are risks inherent in conducting our business internationally, including:
These factors may have a material adverse effect on our financial results and growth prospects.
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If our subsidiaries do not make distributions to us we will not be able to pay dividends.
Substantially all of our assets are held by and our revenues are generated by our subsidiaries. We will be limited in our ability to pay dividends unless we receive dividends or other cash flow from our subsidiaries. Substantially all of our owned aircraft are held through special purpose subsidiaries or finance structures which borrow funds to finance or refinance the aircraft. The terms of such financings place restrictions on distributions of funds to us. If these limitations prevent distributions to us or our subsidiaries do not generate positive cash flows, we will be limited in our ability to pay dividends and may be unable to transfer funds between subsidiaries if required to support our subsidiaries.
Risks Related to This Offering
An active market for our ordinary shares may never develop.
Our ordinary shares have been authorized for listing on the NYSE under the symbol "AER". However, a regular trading market of our ordinary shares may not develop on that exchange or elsewhere or, if developed, any market may not be sustained. Accordingly, an active trading market for our ordinary shares may not develop or be maintained, any trading market may not be liquid, and you may be unable to sell your ordinary shares when desired or at all, or you may not be able to obtain desirable prices for your ordinary shares.
The market price and trading volume of our ordinary shares may be volatile, which could result in rapid and substantial losses for our shareholders.
Even if an active trading market for our ordinary shares develops, the market price of our ordinary shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our ordinary shares may fluctuate and cause significant price variations to occur. If the market price of our ordinary shares declines significantly, you may be unable to resell your ordinary shares at or above your purchase price, if at all. Some of the factors that could negatively affect our ordinary share price or result in fluctuations in the price or trading volume of our ordinary shares include:
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In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of listed companies. Broad market and industry factors may significantly affect the market price of companies' ordinary shares, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our ordinary shares shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
The public offering price of our ordinary shares is substantially higher than the net tangible book value per ordinary share immediately after this offering. Therefore, if you purchase our ordinary shares in this offering, you will incur an immediate dilution of $15.77 in net tangible book value per ordinary share from the public offering price of $23.00 per ordinary share you paid. For a further description of the dilution that you will experience immediately after this offering, see "Dilution".
Future sales of ordinary shares by existing shareholders could cause our ordinary share price to decline which could adversely affect our ability to fund our growth and operations.
If our existing shareholders sell, or indicate an intention to sell, substantial amounts of our ordinary shares in the public market after the lock-up, and other legal restrictions on resale discussed in this prospectus no longer apply, the trading price of our ordinary shares could decline. Upon completion of this offering, we will have outstanding a total of 85.0 million ordinary shares. Of these ordinary shares, only the 26.1 million ordinary shares sold in this offering, which does not include any shares to be sold if the underwriters exercise their overallotment option, will be freely tradable, without restriction, in the public market.
Our underwriters, however, may, in their sole discretion, permit our officers, directors, and other current shareholders who are subject to the contractual lock-up to sell ordinary shares prior to the expiration of the lock-up agreements.
We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus, although those lock-up agreements may be extended for up to an additional 18 days under certain circumstances. After the lock-up agreements expire, up to an additional 58.9 million ordinary shares will be eligible for sale in the public market. All of these ordinary shares are held by affiliates and will be subject to volume limitations under Rule 144 under the Securities Act. If these additional ordinary shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our ordinary shares could decline.
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Risks Related to Taxation
We may become a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.
We do not believe we are currently a PFIC and we intend to conduct our affairs in a manner that will reduce the likelihood of our being a PFIC. The determination as to whether a foreign corporation is a PFIC is a complex determination based on all of the relevant facts and circumstances and depends on the classification of various assets and income under PFIC rules. In our case, the determination is further complicated by the application of the PFIC rules to leasing companies and to joint ventures and financing structures common in the aircraft leasing industry. If we are or become a PFIC, U.S. shareholders may be subject to increased U.S. federal income taxes on a sale or other disposition of our ordinary shares and on the receipt of certain distributions and will be subject to increased U.S. federal income tax reporting requirements. See "Tax ConsiderationsU.S. Tax Considerations" for a more detailed discussion of the consequences to you if we are treated as a PFIC and a discussion of certain elections that may be available to mitigate the effects of that treatment. We urge you to consult your own tax advisors regarding the application of the PFIC rules to your particular circumstances.
We may become subject to income or other taxes in jurisdictions which would adversely affect our financial results and growth prospects.
We and our subsidiaries are subject to the income tax laws of Ireland, The Netherlands and the United States and other jurisdictions in which our subsidiaries are incorporated or based. In addition, we or our subsidiaries may be subject to additional income or other taxes in these and other jurisdictions by reason of the management and control of our subsidiaries, our activities and operations, where our aircraft operate or where the lessees of our aircraft (or others in possession of our aircraft) are located. Although we have adopted guidelines and operating procedures to ensure our subsidiaries are appropriately managed and controlled to reduce the exposure to such additional taxation, no assurance can be given that we will not be subject to such taxes in the future and that such taxes will not be substantial. The imposition of such taxes could have a material adverse effect on our financial results and growth prospects.
We may incur current tax liabilities in our primary operating jurisdictions in the future.
While we have not incurred material income tax liabilities in our primary operating jurisdictions in the past due to, among other things, accelerated tax depreciation, deductible financing expenses and intercompany servicing arrangements, we may incur material income tax liabilities in those jurisdictions in the future. Due to the acquisition of AeroTurbine, we expect to pay U.S. income taxes in the future. If we become subject to material income taxes in any of our other primary operating jurisdictions, our increased tax liabilities could adversely affect our cash flows and have a material adverse effect on our financial results and growth prospects.
We may become subject to additional Irish taxes based on the extent of our operations carried on in Ireland.
Our Irish tax resident subsidiaries are currently subject to Irish corporate income tax on trading income at a rate of 12.5%, on capital gains at 20%, and on other income at 25%. We expect that substantially all of our Irish income will be treated as trading income for tax purposes in future periods. As of December 31, 2005, we had $410.0 million of Irish tax losses available to carry forward against our trading income. The continued application of the 12.5% tax rate to trading income generated in our Irish tax resident subsidiaries and the ability to carry forward Irish tax losses to shelter future taxable trading income depends in part on the extent and nature of activities carried on in Ireland both in the past and in the future. AerCap Ireland and its Irish tax resident subsidiaries intend to carry on
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their activities in Ireland so that the 12.5% rate of tax applicable to trading income will apply and that they will be entitled to shelter future income with tax losses that arose from the same trading activity. There can be no assurance that we will continue to be entitled to apply our loss carryforwards against future taxable trading income in Ireland.
We may fail to qualify for benefits under one or more tax treaties.
We do not expect that our subsidiaries located outside of the United States will have any material U.S. federal income tax liability by reason of activities we carry out in the United States and the lease of assets to lessees that operate in the United States. However, this conclusion will depend, in part, on continued qualification for the benefits of income tax treaties between the United States and other countries in which we are subject to tax (particularly The Netherlands and Ireland). That in turn will depend for the most part on the nature and level of activities carried on by our subsidiaries in each jurisdiction.
There can be no assurance that the nature of our activities will be such that our subsidiaries will continue to qualify for the benefits of the income tax treaties with the United States or that we will otherwise qualify for treaty benefits. Failure to so qualify could result in the imposition of U.S. federal taxes which could have a material adverse effect on our financial results and growth prospects.
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements, principally under the captions "Prospectus Summary", "Aircraft, Engine and Aviation Parts Industry", "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business". We have based these forward-looking statements largely on our current beliefs, expectations of SH&E and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed in this prospectus, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:
The words "believe", "may", "will", "aim", "estimate", "continue", "anticipate", "intend", "expect" and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward-looking events and circumstances described in this prospectus might not occur and are not guarantees of future performance.
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The Sale of Ordinary Shares by Us
The net proceeds to us from the offering will be approximately $143.0 million, after deducting estimated underwriting discounts and commissions and offering expenses totaling $13.4 million. We expect to use $140.0 million of the net proceeds we receive from the offering to repay a portion of our outstanding senior secured term loan and/or junior subordinated loan incurred in connection with our acquisition of AeroTurbine in April 2006. These loans are scheduled to mature in April 2011 and are repayable with a 1% prepayment penalty. The senior secured term loan bears an interest rate of three-month LIBOR plus 2.75% and the junior subordinated loan bears an interest rate of three-month LIBOR plus 5.50%. See "IndebtednessAeroTurbine Calyon Loans and Facility". We expect to retain the remaining net proceeds for general corporate purposes. Our selling shareholders will not receive any proceeds from the sale of ordinary shares by us. We will not receive any of the proceeds from the sale of ordinary shares by the selling shareholders or from the exercise of the over-allotment option granted by the selling shareholders to the underwriters.
Rothschild Inc. is an independent financial advisor assisting us in connection with our financing strategies in connection with this offering. Upon consummation of this offering, we have agreed to pay Rothschild Inc. a fee of $2.0 million for its services, which we and Cerberus will pay from the proceeds of this offering.
The Sale of Ordinary Shares by the Selling Shareholders
Our selling shareholders are directly owned by Bermuda holding companies, the Bermuda Parents, with identical share ownership and capital structures consisting of preferred shares and common shares. The Bermuda Parents do not own any other significant assets or conduct any other significant activities outside of their indirect investment in us and the value of the Bermuda Parents is derived exclusively with reference to our value. No distributions may be made to holders of common shares of the Bermuda Parents unless all accrued and unpaid dividends on their preferred shares have been paid and the preferred shares have been redeemed or otherwise retired. As of September 30, 2006, the accrued dividends and liquidation preference payment required to pay all accrued dividends and redeem the preferred shares of all of the Bermuda Parents was $393.5 million. Cerberus owns 99.6% and members of our senior management identified under "Principal and Selling Shareholders" own 0.4% of the preferred shares of the Bermuda Parents.
We expect the net proceeds from the sale of the ordinary shares by the selling shareholders to be distributed to the Bermuda Parents and used first to pay all accrued dividends and to redeem all of the preferred shares. We expect any remaining net proceeds from the sale of the ordinary shares by the selling shareholders, including any remaining proceeds from exercise of the over-allotment option by the underwriters, to be distributed to holders of the common shares of the Bermuda Parents. Cerberus owns 86.0% of the common shares of the Bermuda Parents and members of our senior management and a consultant identified under "Principal and Selling Shareholders" own 14.0% of the common shares of the Bermuda Parents.
In addition to common shares owned by members of our senior management and a consultant described above, members of our senior management and Board of Directors also own options to purchase common shares of the Bermuda Parents exercisable upon the closing of this offering. If all such options are exercised, Cerberus would own 83.0% of the common shares of the Bermuda Parents and members of our senior management, Board of Directors and a consultant would own 17.0% of the common shares. See "Principal and Selling Shareholders" for more information regarding our ownership structure and our indirect shareholders.
39
To date, we have not declared or paid any dividends on our ordinary shares. We intend to retain any future earnings to fund working capital and our growth and do not expect to pay any dividend in the foreseeable future. The payment of dividends is subject to the discretion of our Board of Directors and the approval of our shareholders. While the financial statements included in this prospectus are prepared in accordance with US GAAP, under the laws of The Netherlands the amount of dividends we may declare is determined by our Board of Directors by reference to our accounts under Netherlands GAAP and subject to the availability of adequate equity.
In addition, to the extent we decide to pay dividends in the future, our ability to pay dividends will be subject to:
As a holding company, our ability to pay dividends depends primarily on the receipt of dividends and distributions from our subsidiaries. If we pay dividends, we expect to declare dividends in US dollars; however, we have the corporate authority to declare dividends in other currencies. Existing financing arrangements for our aircraft include provisions which limit distributions of cash to us from the subsidiaries through which our aircraft are owned.
40
Dilution is the amount by which the price paid by the new investors purchasing our ordinary shares in this offering will exceed the pro forma net tangible book value per ordinary share as of September 30, 2006 after completion of this offering. Net tangible book value per ordinary share represents our net worth, or total tangible assets less total liabilities and minority interests, divided by the number of ordinary shares outstanding on September 30, 2006, adjusted to give effect to a 1,738.6 to 1 stock split. Our net tangible book value as of September 30, 2006 was $472.1 million, or $6.03 per ordinary share. Based on the sale of ordinary shares in this offering at the public offering price of $23.00 per ordinary share and after deducting the estimated underwriting discounts and commissions and offering expenses, our net tangible book value as of September 30, 2006 would have been approximately $615.1 million, or $7.23 per ordinary share. This represents an immediate dilution in net tangible book value of $15.77 per ordinary share to new investors purchasing ordinary shares in this offering, and an immediate increase in net tangible book value of $1.20 per ordinary share to existing shareholders.
Purchasers of ordinary shares in the offering will experience a substantial and immediate dilution in net tangible book value per ordinary share for financial accounting purposes, as illustrated on a pro forma basis in the following table:
Public offering price per ordinary share |
$ |
23.00 |
||||
Net tangible book value per ordinary share as of September 30, 2006 before this offering |
$ |
6.03 |
||||
Increase in net tangible book value per ordinary share attributable to this offering |
$ |
1.20 |
||||
Adjusted net tangible book value per ordinary share as of September 30, 2006, as adjusted to reflect this offering |
$ |
7.23 |
||||
Dilution in net tangible book value per ordinary share |
$ |
15.77 |
||||
The following table sets forth as of September 30, 2006, the total consideration paid and the average price per ordinary share paid by existing shareholders and new investors with respect to the number of ordinary shares issued, as adjusted to reflect this offering. Amounts are given before deduction of the estimated underwriting discount and offering expenses payable by us and are based on the public offering price of $23.00 per ordinary share.
|
Ordinary shares issued |
Total consideration |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average price per ordinary share |
||||||||||||
|
Number |
Percent |
Amount |
Percent |
|||||||||
Existing shareholders | 78,236,957 | 92.0 | % | $ | 370,000,000 | 70.0 | % | $ | 4.73 | ||||
New investors(1) | 6,800,000 | 8.0 | % | $ | 156,400,000 | 30.0 | % | $ | 23.00 | ||||
Total | 85,036,957 | 100.0 | % | $ | 526,400,000 | 100.0 | % | $ | 6.19 | ||||
41
The following table sets forth our consolidated cash and cash equivalents, restricted cash and capitalization as of September 30, 2006. This information is presented:
This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Use of Proceeds", and our unaudited consolidated financial statements and the accompanying notes that appear elsewhere in this prospectus.
|
As of September 30, 2006 |
|||||||
---|---|---|---|---|---|---|---|---|
|
Actual |
As adjusted |
||||||
|
(US dollars in thousands) |
|||||||
Cash and cash equivalents | $ | 215,325 | $ | 218,313 | ||||
Restricted cash | 125,065 | 125,065 | ||||||
Total cash and cash equivalents and restricted cash(1) | $ | 340,390 | $ | 343,378 | ||||
ALS securitization debt(1) | $ | 896,157 | $ | 896,157 | ||||
ECA-guaranteed debt(1) | 578,573 | 578,573 | ||||||
Commercial bank debt(1)(2) | 706,074 | 566,074 | ||||||
Other term debt | 278,173 | 278,173 | ||||||
Total term debt | 2,458,977 | 2,318,977 | ||||||
Minority interest | 32,020 | 32,020 | ||||||
General partner's capital | 3,700 | | ||||||
Limited partners' capital | 381,264 | | ||||||
Ordinary share capital, €0.01 par value (200,000,000 ordinary shares authorized, 85,036,957 ordinary shares issued and outstanding)(3) | | 528,552 | ||||||
Retained earnings | 154,805 | 154,205 | ||||||
Total partners' capital/shareholders' equity | 539,769 | 682,757 | ||||||
Total capitalization | $ | 3,371,156 | $ | 3,377,132 | ||||
42
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents AerCap Holdings C.V.'s (the successor company) and AerCap B.V.'s (the predecessor company) selected consolidated financial data for each of the periods indicated, prepared in accordance with US GAAP. You should read this information in conjunction with AerCap Holdings C.V.'s audited consolidated financial statements and related notes and unaudited condensed consolidated interim financial statements and related notes included in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
AerCap Holdings N.V. was formed as a Netherlands public limited liability company ("naamloze vennootschap") on July 10, 2006 and acquired all of the assets and liabilities of AerCap Holdings C.V., a Netherlands limited partnership on October 27, 2006. AerCap Holdings C.V. was formed on June 27, 2005 for the purpose of acquiring all of the shares and certain liabilities of AerCap B.V., (formerly known as debis Air Finance B.V.), in connection with the 2005 Acquisition. The financial information presented as of and for the fiscal years ended December 31, 2003 and 2004, and the six months ended June 30, 2005 and December 31, 2005, was derived from AerCap Holdings C.V.'s audited consolidated financial statements included in this prospectus. The financial information presented as of and for the fiscal years ended December 31, 2001 and 2002 was derived from AerCap B.V.'s unaudited consolidated financial statements. The financial information presented for the three months ended September 30, 2005 and as of and for the nine months ended September 30, 2006 was derived from AerCap Holding C.V.'s unaudited condensed consolidated interim financial statements included in this prospectus.
43
Consolidated Income Statement Data:
|
AerCap B.V. |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year ended December 31, |
Six months ended June 30, |
||||||||||||||
|
2001 (restated)(1)(2)(3) |
2002 (restated)(1)(2)(3) |
2003 (restated)(1)(2)(3) |
2004 (restated)(2)(3) |
||||||||||||
|
2005(3) |
|||||||||||||||
|
(In thousands, except per share amounts) |
|||||||||||||||
Revenues | ||||||||||||||||
Lease revenue | $ | 530,329 | $ | 459,115 | $ | 343,045 | $ | 308,500 | $ | 175,333 | ||||||
Sales revenue | 263,827 | 13,105 | 7,499 | 32,050 | 79,574 | |||||||||||
Management fee revenue | 16,803 | 7,160 | 13,400 | 15,009 | 6,512 | |||||||||||
Interest revenue | 30,854 | 28,468 | 22,432 | 21,641 | 13,130 | |||||||||||
Other revenue | | 1,826 | 84,568 | 13,667 | 3,459 | |||||||||||
Total revenues | 841,813 | 509,674 | 470,944 | 390,867 | 278,008 | |||||||||||
Expenses |
||||||||||||||||
Depreciation and amortization | 189,699 | 202,395 | 143,303 | 125,877 | 66,407 | |||||||||||
Cost of goods sold | 223,721 | 11,012 | 6,657 | 18,992 | 57,632 | |||||||||||
Interest on term debt | 309,932 | 267,228 | 123,435 | 113,132 | 69,857 | |||||||||||
Impairments(4) | 17,304 | 170,498 | 6,066 | 134,671 | | |||||||||||
Other expenses | 54,029 | 54,734 | 87,079 | 66,940 | 26,726 | |||||||||||
Selling, general and administrative expenses | 39,704 | 40,472 | 39,267 | 36,449 | 19,559 | |||||||||||
Total expenses | 834,389 | 746,339 | 405,807 | 496,061 | 240,181 | |||||||||||
Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle |
7,424 |
(236,665 |
) |
65,137 |
(105,194 |
) |
37,827 |
|||||||||
Provision for income taxes |
(42,311 |
) |
58,569 |
(28,222 |
) |
(168 |
) |
(4,127 |
) |
|||||||
Minority interest net of tax |
|
|
|
|
|
|||||||||||
Cumulative effect of change in accounting principle | | (99,491 | ) | | | | ||||||||||
Net (loss) income |
$ |
(34,887 |
) |
$ |
(277,587 |
) |
$ |
36,915 |
$ |
(105,362 |
) |
$ |
33,700 |
|||
(Loss) earnings per share, basic and diluted |
(47.39 |
) |
(377.05 |
) |
50.14 |
(143.12 |
) |
45.78 |
||||||||
Weighted average shares outstanding, basic and diluted | 736 | 736 | 736 | 736 | 736 | |||||||||||
Pro forma earnings per share, basic and diluted, due to change in organizational structure (unaudited)(5) | | | | | | |||||||||||
Pro forma weighted average shares, basic and diluted (unaudited)(5) | | | | | |
44
Consolidated Income Statement Data:
|
AerCap Holdings C.V. |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended September 30, |
Six months ended December 31, |
Nine months ended September 30, |
|||||||
|
2005 |
2005(3)(6) |
2006* |
|||||||
Revenues | ||||||||||
Lease revenue | $ | 81,325 | $ | 173,568 | $ | 311,131 | ||||
Sales revenue | | 12,489 | 236,665 | |||||||
Management fee revenue | 4,044 | 7,674 | 10,330 | |||||||
Interest revenue | 10,448 | 20,335 | 26,656 | |||||||
Other revenue | 174 | 1,006 | 18,014 | |||||||
Total revenues | 95,991 | 215,072 | 602,796 | |||||||
Expenses |
||||||||||
Depreciation and amortization |
22,477 | 45,918 | 72,347 | |||||||
Cost of goods sold | | 10,574 | 183,264 | |||||||
Interest on term debt | 24,868 | 44,742 | 111,432 | |||||||
Impairments(4) | | | | |||||||
Other expenses | 10,708 | 26,656 | 44,676 | |||||||
Selling, general and administrative expenses |
10,937 | 26,949 | 66,571 | |||||||
Total expenses | 68,990 | 154,839 | 478,290 | |||||||
Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle |
27,001 |
60,233 |
124,506 |
|||||||
Provision for income taxes |
(4,086 |
) |
(10,570 |
) |
(20,094 |
) |
||||
Minority interest net of tax |
|
|
730 |
|||||||
Cumulative effect of change in accounting principle |
| | | |||||||
Net (loss) income |
$ |
22,915 |
$ |
49,663 |
$ |
105,142 |
||||
(Loss) earnings per share, basic and diluted |
|
|
|
|||||||
Weighted average shares outstanding, basic and diluted |
| | | |||||||
Pro forma earnings per share, basic and diluted, due to change in organizational structure (unaudited)(5) |
0.27 | 0.60 | 1.29 | |||||||
Pro forma weighted average shares, basic and diluted (unaudited)(5) |
78,237 | 78,237 | 78,237 |
45
Consolidated Statements of Cash Flows Data:
|
AerCap B.V. |
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year ended December 31, |
Six months ended June 30, |
||||||||||||||
|
2001 (restated)(1)(2)(3) |
2002 (restated)(1)(2)(3) |
2003 (restated)(1)(2)(3) |
2004 (restated)(2)(3) |
||||||||||||
|
2005(3) |
|||||||||||||||
|
(US dollars in thousands) |
|
||||||||||||||
Net cash provided by operating activities | $ | 249,592 | $ | 220,234 | $ | 123,614 | $ | 91,933 | $ | 107,275 | ||||||
Net cash provided by (used in) investing activities | 110,556 | (676,619 | ) | (316,170 | ) | (218,481 | ) | 14,525 | ||||||||
Net cash (used in) provided by financing activities | (410,960 | ) | 389,839 | 237,901 | 136,546 | (142,005 | ) |
Consolidated Balance Sheets Data:
|
AerCap B.V. |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of December 31, |
|||||||||||
|
2001 (restated)(2) |
2002 (restated)(2) |
2003 (restated)(1)(2) |
2004 (restated)(2) |
||||||||
|
(US dollars in thousands) |
|||||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 152,667 | $ | 86,121 | $ | 131,268 | $ | 143,640 | ||||
Restricted cash | 140,086 | 243,336 | 206,572 | 118,422 | ||||||||
Flight equipment held for operating leases, net | 3,255,737 | 3,476,501 | 2,484,850 | 2,748,347 | ||||||||
Notes receivable, net of provisions | 187,433 | 195,236 | 188,616 | 250,774 | ||||||||
Prepayments on flight equipment | 121,915 | 157,198 | 160,624 | 135,202 | ||||||||
Other assets | 492,621 | 343,685 | 305,498 | 218,565 | ||||||||
Total assets | $ | 4,350,459 | $ | 4,502,077 | $ | 3,477,428 | $ | 3,614,950 | ||||
Term debt | 3,162,850 | 3,571,178 | 2,763,666 | 3,115,492 | ||||||||
Other liabilities | 814,368 | 835,255 | 581,202 | 472,443 | ||||||||
Shareholders' equity / partners' capital | 373,241 | 95,644 | 132,560 | 27,015 | ||||||||
Total liabilities and shareholders' equity / partners' capital |
$ | 4,350,459 | $ | 4,502,077 | $ | 3,477,428 | $ | 3,614,950 | ||||
46
Consolidated Statements of Cash Flows Data:
|
AerCap Holdings C.V. |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended September 30, |
Six months ended December 31, |
Nine months ended September 30, |
|||||||
|
2005 |
2005(3)(6) |
2006* |
|||||||
Net cash provided by operating activities |
$ | 43,323 | $ | 109,238 | $ | 176,292 | ||||
Net cash provided by (used in) investing activities |
(1,657,330 | ) | (1,431,259 | ) | (344,483 | ) | ||||
Net cash (used in) provided by financing activities |
(1,708,802 | ) | 1,505,472 | 201,224 |
Consolidated Balance Sheets Data:
|
AerCap Holdings C.V. |
|||||
---|---|---|---|---|---|---|
|
As of December 31, |
As of September 30, |
||||
|
2005 |
2006 |
||||
Assets | ||||||
Cash and cash equivalents | $ | 183,554 | $ | 215,325 | ||
Restricted cash | 157,730 | 125,065 | ||||
Flight equipment held for operating leases, net |
2,189,267 | 2,542,119 | ||||
Notes receivable, net of provisions | 196,620 | 158,303 | ||||
Prepayments on flight equipment | 115,657 | 129,496 | ||||
Other assets | 218,405 | 381,039 | ||||
Total assets | $ | 3,061,233 | $ | 3,551,347 | ||
Term debt | 2,172,995 | 2,458,977 | ||||
Other liabilities | 468,575 | 552,601 | ||||
Shareholders' equity / partners' capital | 419,663 | 539,769 | ||||
Total liabilities and shareholders' equity / partners' capital |
$ | 3,061,233 | $ | 3,551,347 | ||
47
48
upon its incorporation, after giving effect to a 1,738.6 to 1 stock split and to reflect the tax impact of changing from a non-taxable partnership to a taxable corporation. See Note 2 "Pro forma Information Due to Change in Organizational Structure (unaudited)" to our audited consolidated financial statements included in this prospectus and Note 8 to our unaudited condensed consolidated interim financial statements in this prospectus.
49
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited consolidated pro forma income statements for the nine months ended September 30, 2005 and 2006 and for the year ended December 31, 2005 have been derived by the application of pro forma adjustments to AerCap Holdings C.V.'s unaudited condensed consolidated interim financial statements and audited consolidated financial statements and AeroTurbine's audited combined financial statements included in this prospectus and AeroTurbine's unaudited combined interim financial statements for the period from January 1, 2006 to April 25, 2006 not included in this prospectus.
The unaudited consolidated pro forma income statement for the nine months ended September 30, 2006 gives effect to the following as if they had occurred on January 1, 2005:
The unaudited consolidated pro forma income statements for the nine month period ended September 30, 2005 and the year ended December 31, 2005 give effect to the following as if they had occurred on January 1, 2005:
The unaudited consolidated pro forma balance sheet as of September 30, 2006 has been derived by the application of pro forma adjustments to AerCap Holdings C.V.'s unaudited condensed consolidated balance sheet for the nine months ended September 30, 2006 and gives effect to this offering and our use of proceeds as if they occurred on September 30, 2006.
The unaudited consolidated pro forma financial information is based on assumptions and preliminary data and reflects adjustments described in the accompanying notes. The unaudited consolidated pro forma financial information is being furnished solely for informational purposes and is not intended to represent or be indicative of the results that we would have reported if the transactions identified above had occurred on the dates indicated, nor does it purport to represent the results of operations we will obtain in future periods. The unaudited consolidated pro forma financial information should be read in conjunction with AerCap Holdings C.V's unaudited condensed consolidated interim financial statements and the related notes, AerCap Holdings C.V.'s audited consolidated financial statements and the related notes and AeroTurbine's audited combined financial statements and the related notes included in this prospectus.
50
The 2005 Acquisition
On June 27, 2005, Cerberus formed AerCap Holdings C.V., a Netherlands partnership. On June 30, 2005, AerCap Holdings C.V. acquired all of AerCap B.V.'s (formerly known as debis AirFinance B.V.) shares (book equity of $96.0 million) and $1.8 billion of liabilities owed by AerCap B.V. to its prior shareholders. AerCap Holdings C.V. paid a total consideration of $1.37 billion in the 2005 Acquisition, including transaction expenses of $42.7 million and an equity contribution directly to AerCap B.V. of $35.1 million. Of the total consideration paid by AerCap Holdings C.V., $370.0 million was funded through equity contributions by Cerberus and $1.0 billion was funded through a term loan. The purchase price was $506.4 million less than the net book value of the acquired assets and assumed liabilities. The purchase consideration has been allocated to the acquired assets and assumed liabilities on June 30, 2005 based on their fair values in accordance with FAS 141, Business Combinations, as follows:
|
Fair values acquired |
|||
---|---|---|---|---|
|
(US dollars in thousands) |
|||
Flight equipment held for operating lease | $ | 2,085,221 | ||
Prepayments on flight equipment | 119,200 | |||
Intangible lease premium | 45,134 | |||
Deferred tax asset | 109,447 | |||
Cash and cash equivalents | 123,668 | |||
Other | 359,019 | |||
Total assets | $ | 2,841,689 | ||
Accrued maintenance liability |
135,114 |
|||
Term debt | 999,457 | |||
Other | 337,841 | |||
Total liabilities | 1,472,412 | |||
Cash paid | $ | 1,369,277 | ||
The fair value adjustments to our assets and liabilities will amortize over the applicable contractual terms, the useful lives of the acquired assets and liabilities or all at once upon the disposition of the acquired assets and liabilities. Our operating results in periods after the 2005 Acquisition have been positively impacted by reduced depreciation and amortization as a result of reduced carrying values of our assets. In addition, due to the reduction in term debt following the 2005 Acquisition, our operating results in periods after 2005 have been positively impacted by reduced interest expense.
51
The AeroTurbine Acquisition
On April 26, 2006, we purchased all of the existing share capital of AeroTurbine, Inc. The total payment for the AeroTurbine shares of $146.8 million, including acquisition expenses, was funded through cash from our operations of $73.1 million and $73.7 million of cash raised from a refinancing of AeroTurbine's existing debt. The new financing totaled $175.0 million and included $160.0 million of senior secured debt and a $15.0 million subordinated loan. We have allocated the $146.8 million purchase price to our preliminary estimate of the fair values of acquired assets and assumed liabilities at April 26, 2006 in accordance with FAS 141 as follows:
|
Estimated fair values |
|||
---|---|---|---|---|
|
(US dollars in thousands) |
|||
Cash and cash equivalents | $ | 1,601 | ||
Equipment held for operating lease | 160,994 | |||
Inventory | 52,643 | |||
Intangible assets | 25,600 | |||
Goodwill | 37,225 | |||
Property and equipment | 7,896 | |||
Other | 23,442 | |||
Total assets | $ | 309,401 | ||
Term debt |
93,104 |
|||
Deferred taxes | 49,972 | |||
Other | 19,477 | |||
Total liabilities | 162,553 | |||
Total consideration paid |
$ |
146,848 |
||
This allocation was based on the assumptions described in the notes below and information available to us at the time of this offering, which are subject to change. The pro forma adjustments for the AeroTurbine Acquisition do not include the tax effects, if any, of the addition of AeroTurbine's operations to those of AerCap C.V. The allocation of the estimated purchase price is preliminary as final valuation information has not been obtained and is based on the assets and liabilities existing at April 26, 2006. The final allocation of the purchase price will be based on final valuation data. The operating results of AeroTurbine after the AeroTurbine Acquisition have been negatively impacted as a result of increased asset carrying values and indebtedness which resulted in increased depreciation and amortization, cost of goods sold and interest expense.
The intangibles recognized in the purchase price allocation and their related estimated useful lives are as follows:
Intangible Asset |
Estimated fair value |
Estimated useful lives |
||||
---|---|---|---|---|---|---|
|
(US dollars in thousands) |
(years) |
||||
Customer relationshipsparts | $ | 19,800 | 10 | |||
Customer relationshipsengines | 3,600 | 10 | ||||
FAA certificate | 1,100 | 15 | ||||
Non-compete agreement | 1,100 | 6 | ||||
Total | $ | 25,600 | ||||
52
After we have completed our valuation analysis for the purchase price allocation for the AeroTurbine Acquisition, we may make adjustments to our carrying values of acquired assets and assumed liabilities to reflect our final valuation determinations. These adjustments could be significant. The final determination of the cash we will be required to pay for the AeroTurbine Acquisition is contingent on the amount of taxable earnings of AeroTurbine for the year ended December 31, 2005 and for the period from January 1, 2006 to April 25, 2006. It is not possible to determine the exact amount of this adjustment at this time, but the amount is anticipated to be approximately a $1.2 million increase to total cash paid for AeroTurbine. In addition, we may elect to treat the purchase as an asset purchase for tax purposes. If this election is made, additional cash will be paid to the selling shareholders of AeroTurbine to indemnify them against an increase in their personal income tax liability arising from the sale. As a result of the election, the tax basis of the acquired assets will increase resulting in a decrease to the deferred tax liability recognized in the acquisition of AeroTurbine and a decrease in the amount of recognized goodwill. We have not yet determined the amount of additional cash we would be required to pay in connection with such an election, but anticipate that the amount will be approximately $20.0 million. We expect to determine whether we will elect to treat the AeroTurbine Acquisition as an asset purchase by December 31, 2006.
Prior to the AeroTurbine Acquisition, certain of AeroTurbine's financial statements line items were different from those of AerCap Holding C.V.'s. Due to the consolidation of AerCap Holdings C.V. and AeroTurbine we have reclassified certain of AeroTurbine's historical financial statement line items to reflect our consolidated results of operations. Accordingly, we have conformed the presentation of our pro forma financial information for the nine months ended September 30, 2005 and the year ended December 31, 2005 to our new unified financial statement presentation.
Formation of AerCap Holdings N.V.
As part of this offering, we have formed AerCap Holdings N.V., a taxable Netherlands public limited liability company ("naamloze vennootschap"), to acquire all of the assets and liabilities of AerCap Holdings C.V., a non-taxable Netherlands limited partnership. AerCap Holdings N.V. acquired all of the assets and liabilities of AerCap Holdings C.V. on October 27, 2006. Since this acquisition is a transaction under common control, there is no resulting impact on our consolidated financial position.
53
Unaudited Consolidated Pro Forma Income StatementNine Months Ended September 30, 2005
|
|
|
AerCap Acquisition |
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Predecessor |
Successor |
Subtotal AerCap |
||||||||||
|
Six months ended June 30, 2005 Pro Forma Adjustments(1) |
||||||||||||
|
Six months ended June 30, 2005 Historic |
Three months Ended September 30, 2005 Historic |
Nine months ended September 30, 2005 |
||||||||||
|
(US dollars in thousands) |
||||||||||||
Revenues | |||||||||||||
Lease revenue | $ | 175,333 | $ | 81,325 | $ | (2,935 | )1(a) | $ | 253,723 | ||||
Sales revenue | 79,574 | | | 79,574 | |||||||||
Management fee revenue | 6,512 | 4,044 | | 10,556 | |||||||||
Interest revenue | 13,130 | 10,448 | 4,610 | 1(b) | 28,188 | ||||||||
Other revenue | 3,459 | 174 | | 3,633 | |||||||||
Total revenues | 278,008 | 95,991 | 1,675 | 375,674 | |||||||||
Expenses |
|||||||||||||
Depreciation and amortization | 66,407 | 22,477 | (18,454 | )1(c) | 70,430 | ||||||||
Cost of goods sold | 57,632 | | | 57,632 | |||||||||
Interest on term debt | 69,857 | 24,868 | (13,269 | )1(d),(e) | 81,456 | ||||||||
Operating lease in costs | 13,877 | 6,475 | (1,232 | )1(f) | 19,120 | ||||||||
Leasing expenses | 9,688 | 4,450 | | 14,138 | |||||||||
Provision for doubtful notes and accounts receivable | 3,161 | (217 | ) | | 2,944 | ||||||||
Selling, general and administrative expenses | 19,559 | 10,937 | | 30,496 | |||||||||
Total expenses | 240,181 | 68,990 | (32,955 | ) | 276,216 | ||||||||
Income (loss) from continuing operations before income taxes and minority interests |
37,827 |
27,001 |
34,630 |
99,458 |
|||||||||
Other (expenses) income | | | | | |||||||||
Provision for income taxes | (4,127 | ) | (4,086 | ) | (6,926 | )1(g) | (15,139 | ) | |||||
Net income (loss) | $ | 33,700 | $ | 22,915 | $ | 27,704 | $ | 84,319 | |||||
54
Unaudited Consolidated Pro Forma Income StatementNine Months Ended September 30, 2005
|
|
AeroTurbine Acquisition |
Conforming changes |
|
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
AerCap |
|
|||||||||||||
|
AeroTurbine |
|
||||||||||||||
|
Nine months ended September 30, 2005 Pro Forma Adjustments(2) |
Nine months ended September 30, 2005 Pro Forma Adjustments(3) |
Change of corporate structure/ offering Pro Forma Adjustments(4) |
|
||||||||||||
|
Nine months ended September 30, 2005 Historic |
Nine months ended September 30, 2005 Pro Forma |
||||||||||||||
|
(US dollars in thousands except share and per share amounts) |
|||||||||||||||
Revenues | ||||||||||||||||
Lease revenue | $ | 24,463 | $ | 108 | 2(a) | $ | | $ | 7,281 | 4(a) | $ | 285,575 | ||||
Sales revenue | 68,976 | | | 148,550 | ||||||||||||
Management fee revenue | | | | | 10,556 | |||||||||||
Interest revenue | | | 5 | 3(a) | | 28,193 | ||||||||||
Other revenue | | | 170 | 3(a) | | 3,803 | ||||||||||
Total revenues | 93,439 | 108 | 175 | 7,281 | 476,677 | |||||||||||
Expenses |
||||||||||||||||
Depreciation and amortization | | | 9,323 | 3(b) | | 79,753 | ||||||||||
Cost of goods sold | 56,000 | 9,264 | 2(b),(c),(e) | (17,487 | )3(b) | | 105,409 | |||||||||
Interest on term debt | | | 11,439 | 3(a) | (8,274) | 4(b) | 84,621 | |||||||||
Operating lease in costs | | | | 19,120 | ||||||||||||
Leasing expenses | | | 9,184 | | 23,322 | |||||||||||
Provision for doubtful notes and accounts receivable | | | | | 2,944 | |||||||||||
Selling, general and administrative expenses | 12,933 | 19,208 | 2(d),(g) | (1,020 | )3(b) | 4(c) | 61,617 | |||||||||
Total expenses | 68,933 | 28,472 | 11,439 | (b) | (8,274 | ) | 376,786 | |||||||||
Income (loss) from continuing operations before income taxes and minority interests |
24,506 |
(28,364 |
) |
(11,264 |
) |
15,555 |
99,891 |
|||||||||
Other (expenses) income | (4,945 | ) | (6,319 | )2(f) | 11,264 | 3(a) | | | ||||||||
Provision for income taxes | | 5,834 | 2(h) | | (9,202 | )4(d),(e) | (18,507 | ) | ||||||||
Net income (loss) | $ | 19,561 | $ | (28,849 | ) | $ | | $ | 6,353 | $ | 81,384 | |||||
Earnings per share basic | | | | | 0.96 | (5) | ||||||||||
Earnings per share diluted | | | | | 0.96 | |||||||||||
Weighted average shares outstanding basic | | | | | 85,036,957 | |||||||||||
Weighted average shares outstanding diluted | | | | | 85,036,957 |
55
Unaudited Consolidated Pro Forma Income StatementNine Months Ended September 30, 2006
|
AerCap Holdings C.V. |
|
AeroTurbine Acquisition |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
AeroTurbine |
|||||||||
|
Nine months ended September 30, 2006 Historic |
January 1 - April 25, 2006 Pro Forma Adjustments(2) |
||||||||
|
January 1 - April 25, 2006 Historic |
|||||||||
|
(US dollars in thousands except share and per share amounts) |
|||||||||
Revenues | ||||||||||
Lease revenue | $ | 311,131 | $ | 12,668 | $ | 48 | 2(a) | |||
Sales revenue | 236,665 | 41,138 | | |||||||
Management fee revenue | 10,330 | | | |||||||
Interest revenue | 26,656 | | | |||||||
Other revenue | 18,014 | | | |||||||
Total revenues | 602,796 | 53,806 | 48 | |||||||
Expenses |
||||||||||
Depreciation and amortization | 72,347 | | | |||||||
Cost of goods sold | 183,264 | 36,551 | 3,388 | 2(b),(c),(e) | ||||||
Interest on term debt | 111,432 | | | |||||||
Operating lease in costs | 18,925 | | | |||||||
Leasing expenses | 26,598 | | | |||||||
Provision for doubtful notes and accounts receivable | (847 | ) | | | ||||||
Selling, general and administrative expenses | 66,571 | 7,804 | 8,537 | 2(d),(g) | ||||||
Total expenses (income) | 478,290 | 44,355 | 11,925 | |||||||
Income (loss) from continuing operations before income taxes and minority interests |
124,506 |
9,451 |
(11,877 |
) |
||||||
Provision for income taxes |
(20,094 |
) |
|
2,905 |
2(h) |
|||||
Other (expenses) income | | (2,569 | ) | (2,535 | ) | |||||
Minority interests net of taxes | 730 | | | |||||||
Net income (loss) | $ | 105,142 | $ | 6,882 | $ | (11,507 | ) | |||
Earnings per share basic | | | | |||||||
Earnings per share diluted | | | | |||||||
Weighted average shares outstanding basic | | | | |||||||
Weighed average shares outstanding diluted | | | |
56
Unaudited Consolidated Pro Forma Income StatementNine Months Ended September 30, 2006
|
|
AerCap Holdings C.V. |
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Conforming Changes |
|
||||||||
|
Change of corporate structure/offering Pro Forma Adjustments(4) |
|
||||||||
|
Nine months ended September 30, 2006 Pro Forma |
|||||||||
|
Nine months ended September 30, 2006 |
|||||||||
|
(US dollars in thousands except share and per share amounts) |
|||||||||
Revenues | ||||||||||
Lease revenue | $ | | $ | 4,854 | 4(a) | $ | 328,701 | |||
Sales revenue | | | 277,803 | |||||||
Management fee revenue | | | 10,330 | |||||||
Interest revenue | 5 | 3(a) | | 26,661 | ||||||
Other revenue | 56 | 3(a) | | 18,070 | ||||||
Total revenues | 61 | 4,854 | 661,565 | |||||||
Expenses |
||||||||||
Depreciation and amortization | 3,702 | 3(b) | | 76,049 | ||||||
Cost of goods sold | (6,824 | )3(b) | | 216,379 | ||||||
Interest on term debt | 5,165 | 3(a) | (8,274) | 4(b) | 108,323 | |||||
Operating lease in costs | | | 18,925 | |||||||
Leasing expenses | 3,653 | 3(b) | | 30,251 | ||||||
Provision for doubtful notes and accounts receivable | | | (847 | ) | ||||||
Selling, general and administrative expenses | (531 | )3(b) | | 4(c) | 82,381 | |||||
Total expenses (income) | 5,165 | (8,274 | ) | 531,461 | ||||||
Income (loss) from continuing operations before income taxes and minority interests |
(5,104 |
) |
13,128 |
130,104 |
||||||
Provision for income taxes |
|
(8,717) |
4(d),(e) |
(25,906 |
) |
|||||
Other (expenses) income | 5,104 | 3(a) | | | ||||||
Minority interests net of taxes | | | 730 | |||||||
Net income (loss) | $ | | $ | 4,411 | $ | 104,928 | ||||
Earnings per share basic | | | 1.23 | (5) | ||||||
Earnings per share diluted | | | 1.23 | |||||||
Weighted average shares outstanding basic | | | 85,036,957 | |||||||
Weighed average shares outstanding diluted | | | 85,036,957 |
57
1. Unaudited Consolidated Pro Forma Income Statement Adjustments2005 Acquisition
The unaudited consolidated pro forma income statement adjustments for the nine months ended September 30, 2005 relating to the 2005 Acquisition are as follows:
1(a) | Adjusted to reflect six months of straight-line amortization of intangible lease premium and lease deficiency of $26.8 million arising from the 2005 Acquisition. The lease premium asset represents the present value of contracted lease revenues which were at above-market rates. The lease deficiency represents the present value of contracted lease revenues which were at below-market rates. The useful lives were determined based on the applicable lease terms as of January 1, 2005 which range from one to six years, with a weighted average life of 4.6 years. | |
1(b) | Adjusted to reflect six months of accretion of the fair value adjustments on financial instruments of $29.9 million arising from the 2005 Acquisition. Accretion is calculated on an effective interest method over the applicable terms of the notes, which range from one to six years. Year one accretion is approximately $9.2 million. | |
1(c) | Adjusted to reflect six months of straight-line depreciation of the fair value adjustments on our flight equipment held for operating leases arising from the 2005 Acquisition. The fair value adjustment resulted in a $632.8 million reduction to the net book value of our flight equipment. The useful lives were determined for each asset and range from 10 to 25 years, with a weighted average remaining life of 17.1 years. | |
1(d) | Adjusted to reflect the financing of the 2005 Acquisition and the amortization of the fair value adjustments of $4.0 million recorded on our fixed rate term debt existing at the date of the 2005 Acquisition. On the date of the 2005 Acquisition, we eliminated $1.8 billion of loans from AerCap B.V.'s prior shareholders and we borrowed $1.0 billion under a variable rate term loan, which was repaid in October 2005 with the proceeds from an aircraft securitization variable rate term debt financing ($1.0 billion) that closed on September 15, 2005. The term loan is considered non-recurring for pro forma purposes. The pro forma adjustment was calculated as follows: |
If interest rates were one eighth of one percentage point higher or lower, our pro forma interest expense would have increased or decreased, respectively, by approximately $1.2 million in 2005.
1(e) | Adjusted to reflect six months of amortization ($4.8 million) of fair value adjustments of $34.2 million to liabilities (principally accrued maintenance liability and lessee deposit liability) which amortize on an effective-interest method. Year one amortization is approximately $9.6 million. | |
1(f) | Adjusted to reflect six months of accretion of fair value adjustments of $14.0 million of our onerous contract accrual arising from the 2005 Acquisition. This accrual relates to aircraft we lease under operating leases and sublease to airlines. Accretion is on an effective-interest method with periods corresponding to the remaining terms of the leases, ranging from three to seven years. Year one accretion is approximately $2.5 million. | |
58
1(g) | Adjusted to reflect the effects of the pro forma adjustments (1)(a) through (1)(f) above on provision for income taxes. The income tax effects of the acquisition adjustments are calculated with reference to the enacted tax rates of the jurisdictions in which the assets and liabilities to which the individual acquisition adjustments relate are owned. The tax rates ranged from 12.5% to 29.6%. |
2. Unaudited Consolidated Pro Forma Income Statement AdjustmentsAeroTurbine Acquisition
The pro forma adjustments relating to the AeroTurbine Acquisition included in the unaudited consolidated pro forma income statement for the nine months ended September 30, 2006 and September 30, 2005 are as follows:
2(a) | Adjusted to reflect nine months of straight-line amortization of a lease deficiency of $0.7 million recognized on the date of the AeroTurbine Acquisition ($0.1 million) for the nine months ended September 30, 2005 and four months of the amortization ($0.1 million) for the nine months ended September 30, 2006. The lease deficiency represents the present value of contracted lease revenues which are at below market rates for one of AeroTurbine's leases. The amortization period of five years is based on the remaining contractual lease term, including the renewal options that were determined at the time of the AeroTurbine Acquisition to be reasonably assured of being exercised. | |
2(b) | Adjusted to reflect nine months of the depreciation of the $35.8 million fair value adjustment of equipment held for operating lease ($1.9 million) for the nine months ended September 30, 2005 and four months of the fair value adjustment ($0.8 million) for the nine months ended September 30, 2006 of depreciation of the $35.8 million. The fair value adjustments are depreciated over the remaining estimated useful lives of the underlying assets as of January 1, 2005. The depreciation periods range from four to 15 years, with a remaining weighted average life of 12.6 years. | |
2(c) | Adjusted to reflect nine months of amortization of customer relationship intangible assets ($2.0 million) and straight line amortization of a FAA certificate and non-compete agreement ($0.2 million) for the nine months ended September 30, 2005 and four months of the amortization of the intangible assets ($0.8 million) and the amortization of a FAA certificate and non-compete agreement ($0.1 million) for the nine months ended September 30, 2006. Amortization of the intangible assets related to customer relationships is based on the anticipated sales in the ten years after the AeroTurbine Acquisition of both parts and engines which benefit from such relationships. 7% and 11% of the sales benefiting from the customer relationships are expected to occur in the first and second years following the AeroTurbine Acquisition, respectively. Amortization of the acquired FAA certificate is straight-line over 15 years, the remaining estimated useful life of the engine type to which the repair station certificate relates. Amortization of the non-compete agreement is straight-line over six years, which is the sum of the term of the employment agreements of the related individuals and the term of the non-compete agreements. | |
2(d) | Adjusted to reflect nine months of the $4.0 million fair value adjustment on AeroTurbine's property and equipment ($0.9 million) for the nine months ended September 30, 2005 and four months of the adjustment ($0.4 million) for the nine months ended September 30, 2006. The depreciation is recorded straight-line over the remaining estimated useful lives of the underlying assets as of January 1, 2005. The depreciation periods range from one to seven years, with a weighted average life of 3.5 years. | |
2(e) | Adjusted to reflect nine months of amortization of the $13.6 million fair value adjustment to inventory ($5.2 million) for the nine months ended September 30, 2005 and four months of the amortization ($1.6 million) for the nine months ended September 30, 2006. Based on our historical experience, approximately 52% of the acquired inventory will be sold in the first 12 months after the AeroTurbine Acquisition and 36% will be sold in the second 12 months after the AeroTurbine Acquisition. | |
59
2(f) | Adjusted to reflect the financing of the AeroTurbine Acquisition. The adjustment for the nine months ended September 30, 2005 reflects the subtraction of $5.1 million of interest expense and $0.4 million of debt issuance cost amortization for nine months on AeroTurbine's historical indebtedness prior to the AeroTurbine Acquisition and pro forma inclusion of $10.6 million of interest expense and $1.2 million of debt issuance cost amortization for nine months for the $175.0 million financing incurred to fund the AeroTurbine Acquisition. The adjustment for the nine months ended September 30, 2006 reflects the subtraction of $2.7 million of interest and debt issuance cost amortization for four months on AeroTurbine's historical indebtedness prior to the AeroTurbine Acquisition and the inclusion of $4.7 million of interest expense and $0.5 million of debt issuance cost amortization for four months for the $175.0 million financing incurred to fund the AeroTurbine Acquisition. Interest on the post AeroTurbine Acquisition debt was calculated using a three-month LIBOR rate of 5.13% at the date of the AeroTurbine Acquisition plus a weighted average spread of 2.99%. | |
If interest rates were one eighth of one percentage point higher or lower, our pro forma interest expense would have increased or decreased, respectively, by approximately $0.2 million and $0.1 million in the nine months ended September 30, 2005 and the four months ended April 26, 2006. | ||
2(g) | Adjusted to reflect nine months of the compensation expense ($18.3 million) in connection with restricted shares purchased by two members of the senior management of AeroTurbine on the date of the AeroTurbine Acquisition for the nine months ended September 30, 2005 and four months of compensation expense ($8.1 million) for the nine months ended September 30, 2006. The restricted shares were awarded in four equal tranches. The first three tranches qualify as equity awards from their inception under FAS 123R. The fourth tranche qualified as a liability award between April 26, 2006, the date of grant, and September 19, 2006 because the two members of the senior management of AeroTurbine had the right to put the shares back to the Bermuda Parents immediately upon vesting in the fourth year of the vesting period. On September 19, 2006, the two AeroTurbine executives executed amendments to the award agreements which removed their right to put the shares back to the Bermuda Parents and the fourth tranche then qualified as an equity award. For all tranches, vesting accelerates upon a change in control, including an initial public offering. The amount of expense recognition for the first three tranches is based on the difference between the estimated fair value ($57.9 million) of these restricted shares on the date of grant and the price paid for these shares by the two members of the senior management of AeroTurbine ($0.9 million). The amount of expense recognition for the fourth tranche is based on the difference between the estimated fair value ($22.2 million) of the shares at September 19, 2006 (when the amendment to the award agreements were signed) and the price paid for these shares ($0.3 million). The fair value of all restricted shares was determined based on the public offering price of $23.00 per ordinary share and reflects a discount for lack of marketability ("DLOM") at each valuation date which varies according to such date's proximity to the anticipated date of this offering. |
60
2(h) Adjusted to reflect (i) nine months of the tax effect of AeroTurbine's pro forma income before tax of $19.6 million for the nine months ended September 30, 2005 ($7.6 million tax expense) and four months of the tax effect of AeroTurbine's pro forma income before tax of $6.9 million in the nine months ended September 30, 2006 ($2.7 million tax expense) as if AeroTurbine had been a taxable corporation for those periods and (ii) nine months of the tax effect of the pro forma adjustments (a) through (g) above totaling a net loss effect of $34.7 million ($13.4 million tax benefit) in the nine months ended September 30, 2005 and four months of the tax effect of the pro forma adjustments (a) through (g) above totaling a net loss effect of $14.4 million ($5.6 million tax benefit) in the nine months ended September 30, 2006. The determination of the tax effect on the above items was calculated using AeroTurbine's blended pro forma estimated U.S. federal and state tax rate of 38.58%.
3. Unaudited Consolidated Pro Forma Income Statement AdjustmentsConforming Accounting Changes and Reclassifications
The following reclassifications have been made for the nine months ended September 30, 2005 and September 30, 2006 to align AeroTurbine's accounting policies and financial statement line items with those presented in our financial statements for the nine months ended September 30, 2006:
3(a) Adjusted to reclassify AeroTurbine's interest expense, interest income and other income historically recorded net within other income (expenses) on its income statement to conform with the consolidated income statement presentation we have adopted for our 2006 consolidated financial statements. AeroTurbine has historically recorded these items below income from continuing operations before income taxes and minority interests. We have historically recorded these items separately in their respective line items (interest on term debt, interest revenue and other revenue) as income from continuing operations before income taxes and minority interests or operating expenses. These reclassifications to the respective line items were based on the classification provided in AeroTurbine's unaudited combined income statements for the nine months ended September 30, 2005 and adjustment 2(f) to these pro forma financial statements. The following table summarizes the adjustments made to reclassify the amounts previously presented in other expenses to their respective line item within our consolidated income statement presentation:
Adjustments for the nine months ended September 30, 3005 |
Interest revenue |
Interest on term debt |
Other revenue |
Other (expenses) income |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
||||||||||||
Reclassify historical interest revenue for AeroTurbine to interest revenue | $ | 5 | $ | | $ | | $ | (5 | ) | ||||
Reclassify historical interest expense for AeroTurbine to interest on term debt | | 5,120 | | 5,120 | |||||||||
Reclassify historical other income for AeroTurbine to other revenue | | | 170 | (170 | ) | ||||||||
Reclassify pro forma interest expense for AeroTurbine to interest on term debt* | | 6,319 | | 6,319 | |||||||||
Total | $ | 5 | $ | 11,439 | $ | 170 | $ | 11,264 | |||||
61
Adjustments for the nine months ended September 30, 2006 |
Interest revenue |
Interest on term debt |
Other revenue |
Other (expenses) income |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
|||||||||||
Reclassify historical interest revenue for AeroTurbine to interest revenue | $ | 5 | $ | | $ | | 5 | |||||
Reclassify historical interest expense for AeroTurbine to interest on term debt | | 2,630 | | 2,630 | ||||||||
Reclassify historical other income for AeroTurbine to other revenue | | | 56 | 2,630 | ||||||||
Reclassify pro-forma interest expense for AeroTurbine to interest on term debt* | | 2,535 | | 2,535 | ||||||||
Total | $ | 5 | $ | 5,165 | $ | 56 | $ | 5,104 | ||||
3(b) Adjusted to reclassify depreciation and amortization expenses in the cost of goods sold, and selling, general and administration expenses line items to the depreciation and amortization line item and to reclassify leasing expenses in the costs of goods sold line item to leasing expenses. AeroTurbine has historically shown depreciation of leased engines and aircraft and leasing expenses associated with such engines and aircraft as part of cost of goods sold. In addition, AeroTurbine has shown depreciation of property and equipment and amortization of leasehold interest as selling, general and administrative expenses. Due to the recognition of intangible assets resulting from the AeroTurbine Acquisition and the related future amortization, amortization expense will be a more significant expense for the consolidated group than it has been historically for each company. In addition, we have historically shown leasing expenses on a separate line on our income statement. The following table summarizes the adjustments made:
Adjustments for the nine months ended September 30, 2005 |
Depreciation and amortization |
Cost of goods sold |
Selling, general and administrative |
Leasing expenses |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
|||||||||||
Reclassify historical depreciation on leased engines for AeroTurbine | $ | 4,276 | $ | (4,276 | ) | $ | | $ | | |||
Reclassify historical leasing expenses for AeroTurbine | | (9,184 | ) | | 9,184 | |||||||
Reclassify pro forma depreciation of fair value adjustment on leased engines for AeroTurbine | 1,883 | (1,883 | ) | | | |||||||
Reclassify pro forma amortization of intangible assets for AeroTurbine | 2,144 | (2,144 | ) | | | |||||||
Reclassify historical depreciation in selling, general and administrative expenses for AeroTurbine | 163 | | (163 | ) | | |||||||
Reclassify pro forma depreciation of fair value adjustment of property and equipment for AeroTurbine | 857 | | (857 | ) | | |||||||
Total | $ | 9,323 | $ | (17,487 | ) | $ | (1,020 | ) | $ | 9,184 | ||
62
Adjustments for the nine months ended September 30, 2006 |
Depreciation and amortization |
Cost of goods sold |
Selling, general and administrative |
Leasing expenses |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
|||||||||||
Reclassify historical depreciation on leased engines for AeroTurbine | $ | 1,411 | $ | (1,411 | ) | $ | | $ | | |||
Reclassify historical leasing expenses for AeroTurbine | | (3,653 | ) | | 3,653 | |||||||
Reclassify pro-forma depreciation of fair value adjustment on leased engines for AeroTurbine | 837 | (837 | ) | | | |||||||
Reclassify pro-forma amortization of intangible assets for AeroTurbine | 923 | (923 | ) | | | |||||||
Reclassify historical depreciation in selling, general and administrative expenses for AeroTurbine | 150 | | (150 | ) | | |||||||
Reclassify pro forma depreciation of fair value adjustment of property and equipment for AeroTurbine | 381 | | (381 | ) | | |||||||
Total | $ | 3,702 | $ | (6,824 | ) | $ | (531 | ) | $ | 3,653 | ||
4. Unaudited Consolidated Pro Forma Income Statement AdjustmentsChange in Organizational Structure and this Offering
The pro forma adjustments relating to our change in organizational structure and the completion of this offering are as follows:
4(a) | Adjusted to show nine months of the effect of the reduced amortization of the intangible lease premium for the nine months ended September 30, 2005 and six months of the effect for the nine months ended September 30, 2006 due to the reduction of the intangible lease premium as described in note 4(d). The effect of the reduced amortization for the three months ended September 30, 2006 is included in our historical lease revenue for the nine months ended September 30, 2006 because we adjusted our lease premium at June 30, 2006. | |
4(b) |
Adjusted to reflect the reduction of nine months of interest paid due to the repayment of approximately $140.0 million of the Caylon senior secured term loan and/or junior subordinated loan from the use of proceeds of this offering. The reduction of interest paid is calculated assuming a three-month LIBOR rate of 5.13% at the date of the AeroTurbine Acquisition plus the spread on the senior term debt of 2.75%. As a result of the early repayment of the $140.0 million of the senior secured term loan and/or junior subordinated loan, we will incur an early repayment penalty of $1.4 million and will write off $3.1 million for the nine months ended September 30, 2005, which represents the portion of the debt issuance costs related to the $140.0 million repayment assuming a closing date of this offering of October 1, 2005, and $2.4 million for the nine months ended September 30, 2006, which represents the portion of the debt issuance costs related to the $140.0 million repayment assuming a closing date of this offering of October 1, 2006. As the early repayment penalty and the write off of the debt issuance costs are one time adjustments, they are considered non-recurring in nature and are not included as adjustments to these pro forma financial statements. |
|
4(c) |
On the closing of this offering certain restricted shares and share options granted by Cerberus in the Bermuda Parents and held by members of our senior management and a consultant will vest and we will recognize stock compensation expense. Due to the non-recurring nature of these adjustments, no pro forma adjustment has been included. The impact of the vesting for the restricted shares/options would be, on a pro forma basis, as follows: |
| With respect to all shares held by the two members of the senior management of AeroTurbine described in note 2(g), the vesting will trigger immediate recognition of compensation expense on the closing date of this offering. For the first three tranches this amount would be approximately $42.7 million on a pro forma basis for the nine months ended September 30, 2005 and approximately $23.7 million on a pro forma basis for the nine months ended September 30, 2006. These amounts are calculated using the fair value of the awards less the compensation expense recorded in note 2(g). For the fourth tranche this amount would be approximately $17.5 million for the nine months ended September 30, 2005 and approximately $12.1 million for the nine months ended September 30, 2006. These amounts are based on the fair value of the shares at September 19, 2006, the date the awards were modified to restrict the executives from immediately putting their shares to the Bermuda Parents upon vesting, less the compensation expense recorded in note 2(g). For the compensation expense for the nine months ended September 30, 2005, we have assumed a closing date of this offering of October 1, 2005 and for the compensation expense for the nine months ended September 30, 3006, we have assumed a closing date of this offering of October 1, 2006. | |||
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With respect to restricted shares and share options granted to our management, expense recognition will be triggered upon the closing of the offering and would be equal to the grant date fair value of $3.1 million multiplied by the number of months between the grant date and the offering date and divided by the number of months between the grant date and the offering date plus a two-year lock-up period, during which management is not allowed to sell their shares. For the nine months ended September 30, 2005, based on an assumed closing date of this offering of October 1, 2005, this expense recognition would total $0.8 million, and for the nine months ended September 30, 2006, based on an assumed closing date of this offering of October 1, 2006, this expense recognition would total $1.4 million. |
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|
With respect to restricted shares in the Bermuda Parents granted to an individual providing consulting services to us, the restricted shares will vest upon the closing of the offering and will trigger immediate recognition of compensation expense on such date. The amount of expense recognized is calculated in the same way as for our management, but with reference to the offering price instead of the grant date fair value. The expense recognition would be approximately $1.6 million, based on the public offering price of $23.00 per ordinary share and an assumed closing date of this offering of October 1, 2005, in the case of the compensation expense for the nine months ended September 30, 2005, and the expense recognition would be approximately $3.7 million, based on the public offering price of $23.00 per ordinary share and an assumed closing date of this offering of October 1, 2006, in the case of the compensation expense for the nine months ended September 30, 2006. |
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|
With respect to stock options in the Bermuda Parents granted to three executive officers in August and September 2006, expense recognition will be triggered in an amount equal to the grant date fair value of the options of $11.1 million multiplied by the number of months between the grant date and the offering date and divided by the number of months between the grant date and the end of the formal vesting period, but not earlier than the end of a two-year lock up period. The options will either vest upon the closing of this offering, vest based on the passage of time or vest based on the achievement of defined performance criteria deemed probable at the time of this offering. The expense recognition would be approximately $2.4 million, based on an assumed closing date of this offering of October 1, 2005, in the case of the compensation expense for the nine months ended September 30, 2005, and the expense recognition would be $4.6 million, based on an assumed closing date of this offering of October 1, 2006, in the case of the compensation expense for the nine months ended September 30, 2006. |
4(d) |
Adjusted to show a nine-month tax impact of changing from a non-taxable partnership to a taxable corporation ($4.6 million). In connection with the change in organizational structure, the loans owed by AerCap B.V. to AerCap Holdings C.V. will be transferred to one of our Irish subsidiaries. Interest income on these loans when owed to AerCap Holdings C.V. was not taxable. After the transfer, the interest is expected to be taxable in Ireland at a rate of 12.5%. This tax rate is calculated on the $802.0 million of loans plus accrued interest. The interest rate is equal to a one-month LIBOR of 4.39% at December 31, 2005 plus a weighted average spread on the loans of 1.34%. As a result of the loan transfer, we will report additional taxable income in Ireland which has allowed us to eliminate the previously recorded valuation allowance of $17.4 million related to Irish tax losses. US GAAP requires the benefit recognized from the elimination of a valuation allowance existing at the date of an acquisition of a company to be recorded first as a reduction of goodwill, then as a reduction of intangible assets and lastly as a reduction of income tax expense. As the valuation allowance was recognized on the deferred tax assets at the 2005 Acquisition date and no goodwill was recognized in the 2005 Acquisition, the elimination of the valuation allowance is recorded as a reduction of the intangible lease premium. |
|
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4(e) |
Adjusted to reflect the effects of the pro forma adjustments (4)(a) and (4)(b) above on the provision for income taxes for the nine months ended September 30, 2005 ($4.6 million) and 2006 ($4.2 million). The income tax effects of the adjustments are calculated with reference to the enacted tax rates in the jurisdictions in which the adjustment relates. The tax rates range from 12.5% to 38.58%. |
5. Unaudited Pro Forma Net Income Per Share
Nine months ended September 30, 2005 and 2006
Basic and diluted pro forma earnings per share are calculated on the basis of the weighted average number of shares outstanding as if all shares had been issued on January 1, 2005. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. Diluted pro forma earnings per share in this case is identical to basic pro forma earnings per share because we do not have any securities or other contracts outstanding that could result in the issuance of additional shares. The weighted average number of ordinary shares outstanding assumes the issuance of shares in the initial public offering. As explained in the notes above, including note 4(c), certain pro forma effects are excluded from the calculation of pro forma net income due to their non-recurring nature. Pro forma earnings per share would be lower if these non-recurring adjustments were included in the calculation of pro forma net income.
The following table sets forth the computation of unaudited pro forma basic and diluted net income per share:
|
Nine months ended September 30, 2005 |
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|
Shares |
Income per share |
||||
|
|
(US dollars) |
||||
AerCap pro forma weighted average shares-basic and diluted | 78,236,957 | $ | 1.04 | |||
Shares issued to repay $140.0 million of the principal amount of the AeroTurbine Calyon senior secured term loan and/or junior subordinated loan | 6,800,000 | (0.08 | ) | |||
Pro forma weighted average shares - basic and diluted | 85,036,957 | $ | 0.96 | |||
|
Nine months ended September 30, 2006 |
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---|---|---|---|---|---|---|
|
Shares |
Income per share |
||||
|
|
(US dollars) |
||||
AerCap pro forma weighted average shares-basic and diluted | 78,236,957 | $ | 1.34 | |||
Shares issued to repay $140.0 million of the principal amount of the AeroTurbine Calyon senior secured term loan and/or junior subordinated loan | 6,800,000 | (0.11 | ) | |||
Pro forma weighted average shares - basic and diluted | 85,036,957 | $ | 1.23 | |||
65
Unaudited Consolidated Pro Forma Income StatementYear Ended December 31, 2005
|
|
AerCap Holdings C.V. |
2005 Acquisition |
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AerCap B.V. |
|
|||||||||||
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Subtotal AerCap |
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|
Six months ended June 30, 2005 Historic |
Six months ended December 31, 2005 Historic |
Twelve months ended December 31, 2005 Adjustments(1) |
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|
Year ended December 31, 2005 Pro Forma |
||||||||||||
|
(US dollars in thousands) |
||||||||||||
Revenues | |||||||||||||
Lease revenue | $ | 175,333 | $ | 173,568 | $ | (2,935 | )1(a) | $ | 345,966 | ||||
Sales revenue. | 79,574 | 12,489 | | 92,063 | |||||||||
Management fee revenue | 6,512 | 7,674 | | 14,186 | |||||||||
Interest revenue | 13,130 | 20,335 | 4,610 | 1(b) | 38,075 | ||||||||
Other revenue | 3,459 | 1,006 | | 4,465 | |||||||||
Total revenues | 278,008 | 215,072 | 1,675 | 494,755 | |||||||||
Expenses |
|||||||||||||
Depreciation and amortization | 66,407 | 45,918 | (18,454 | )1(c) | 93,871 | ||||||||
Cost of goods sold | 57,632 | 10,574 | | 68,206 | |||||||||
Interest on term debt | 69,857 | 44,742 | (18,922 | )1(d),(e) | 95,677 | ||||||||
Operating lease in costs | 13,877 | 11,441 | (1,232 | )1(f) | 24,086 | ||||||||
Leasing expenses | 9,688 | 12,213 | | 21,901 | |||||||||
Provision for doubtful notes and accounts receivable | 3,161 | 3,002 | | 6,163 | |||||||||
Selling, general and administrative expenses | 19,559 | 26,949 | | 46,508 | |||||||||
Total expenses | 240,181 | 154,839 | (38,608 | ) | 356,412 | ||||||||
Income from continuing operations before income taxes and minority interest | 37,827 | 60,233 | 40,283 | 138,343 | |||||||||
Other (expenses) income |
|
|
|
|
|||||||||
Provision for income taxes | (4,127 | ) | (10,570 | ) | (8,057 | )1(g) | (22,754 | ) | |||||
Net income | $ | 33,700 | $ | 49,663 | $ | 32,226 | $ | 115,589 | |||||
66
Unaudited Consolidated Pro Forma Income StatementYear Ended December 31, 2005
|
AeroTurbine |
AeroTurbine Acquisition |
Conforming changes |
AerCap change of organizational structure/ Offering |
|
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year ended December 31, 2005 Historic |
Year ended December 31, 2005 Adjustments(2) |
Year ended December 31, 2005 Adjustments(3) |
Year ended December 31, 2005 Adjustments(4) |
Year ended December 31, 2005 Pro Forma |
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|
(US dollars in thousands, except share and per share amounts) |
|||||||||||||||
Revenues | ||||||||||||||||
Lease revenue | $ | 34,939 | $ | 144 | 2(a) | $ | | $ | 9,708 | 4(a) | $ | 390,757 | ||||
Sales revenue | 87,746 | | | | 179,809 | |||||||||||
Management fee revenue | | | | | 14,186 | |||||||||||
Interest revenue | | | 8 | 3(a) | | 38,083 | ||||||||||
Other revenue | | | 915 | 3(a) | | 5,380 | ||||||||||
Total revenues | 122,685 | 144 | 923 | 9,708 | 628,215 | |||||||||||
Expenses |
||||||||||||||||
Depreciation and amortization | | | 14,335 | 3(b) | | 108,206 | ||||||||||
Cost of goods sold | 79,230 | 12,352 | 2(b),(c)(e) | (24,858) | 3(a),(b) | | 134,930 | |||||||||
Interest on term debt | | | 15,573 | 3(a) | (11,032 | )4(b) | 100,218 | |||||||||
Operating lease in costs | | | | | 24,086 | |||||||||||
Leasing expenses | | | 11,978 | | 33,879 | |||||||||||
Provision for doubtful notes and accounts receivable | | | | | 6,163 | |||||||||||
Selling, general and administrative expenses | 16,471 | 25,611 | 2(d),(g) | (1,455 | )3(b) | | 4(c) | 87,135 | ||||||||
Total expenses (income) | 95,701 | 37,963 | 15,573 | (11,032 | ) | 494,617 | ||||||||||
Income (loss) from continuing operations before income taxes and other (expenses) income | 26,984 | (37,819 | ) | (14,650 | ) | 20,740 | 133,598 | |||||||||
Provision for income taxes |
|
9,832 |
2(h) |
|
(12,270 |
)4(d)(e) |
(25,191 |
) |
||||||||
Other (expenses) income | (6,691 | ) | (7,959 | )2(f) | 14,650 | 3(a) | | | ||||||||
Net income (loss) | $ | 20,293 | $ | (35,946 | ) | $ | | $ | 8,470 | $ | 108,407 | |||||
Earnings per share basic | | | | | 1.27 | (5) | ||||||||||
Earnings per share diluted | | | | | 1.27 | |||||||||||
Weighted average shares outstanding basic | | | | | 85,036,957 | |||||||||||
Weighted average shares outstanding diluted | | | | | 85,036,957 |
67
1. Unaudited Consolidated Pro Forma Income Statement Adjustments2005 Acquisition
The unaudited consolidated pro forma income statement adjustments relating to the 2005 Acquisition are as follows:
1(a) | Adjusted to reflect six months of straight-line amortization of intangible lease premium and lease deficiency of $26.8 million arising from the 2005 Acquisition. The lease premium asset represents the present value of contracted lease revenues which were at above-market rates. The lease deficiency represents the present value of contracted lease revenues which were at below-market rates. The useful lives were determined based on the applicable lease terms as of January 1, 2005 which range from one to six years, with a weighted average life of 4.6 years. | |
1(b) | Adjusted to reflect six months of accretion of the fair value adjustments on financial instruments ($29.9 million) arising from the 2005 Acquisition. Accretion is calculated on an effective interest method over the applicable terms of the notes, which range from one to six years. Year one accretion is approximately $9.2 million. | |
1(c) | Adjusted to reflect six months of straight-line depreciation of the fair value adjustments on our flight equipment held for operating leases arising from the 2005 Acquisition. The fair value adjustment resulted in a $632.8 million reduction to the net book value of our flight equipment. The useful lives were determined for each asset which range from 10 to 25 years, with a remaining weighted average life of 17.1 years. | |
1(d) | Adjusted to reflect the financing of the 2005 Acquisition and the amortization of the fair value adjustments ($4.0 million) recorded on our fixed rate term debt existing at the date of the 2005 Acquisition. On the date of the 2005 Acquisition, we eliminated $1.8 billion of loans from AerCap B.V.'s prior shareholders and we borrowed $1.0 billion under a variable rate term loan, which was repaid in October 2005 with the proceeds from an aircraft securitization variable rate term debt financing ($1.0 billion) that closed on September 15, 2005. The term loan is considered non-recurring for pro forma purposes. The adjustments to the aircraft securitization variable rate term debt are calculated for the period from January 1, 2005 until September 15, 2005, as the effects of this debt are included in the historical income statement from September 16, 2005. The pro forma adjustment was calculated as follows: |
| Addition of $32.2 million of interest expense representing 8.5 months of interest on the aircraft securitization variable rate term debt using an interest rate of 4.82%, consisting of the one-month LIBOR rate of 3.34% at the date of the 2005 Acquisition plus a weighted average spread of 1.48%, on an average debt outstanding of $941.0 million for the six month period covered by this adjustment; | |||
|
Addition of $2.5 million of amortization of the related aircraft securitization term debt financing costs $29.6 million for 8.5 months. The amortization is calculated using the effective interest method. Year one amortization is approximately $3.5 million; |
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Subtraction of $42.2 million of interest expense on the shareholder loans recorded in our historical income statement for the six months ended June 30, 2005; |
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Subtraction of $15.9 million of interest expense on the variable rate term loan recorded in our historical income statement for the period from July to October 2005, when this loan was repaid. This amount is subtracted as it is considered non-recurring in nature; and |
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Subtraction of $0.3 million of accretion of the fair value adjustment ($4.0 million) on the fixed rate term debt existing at the date of the 2005 Acquisition. The amortization is calculated using the effective interest method over a period of four to nine years. Year one accretion is approximately $0.6 million. |
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68
Hypothetically, if interest rates were one eighth of one percentage point higher or lower, our pro forma interest expense would have increased or decreased, respectively, by approximately $1.2 million in 2005. |
1(e) | Adjusted to reflect six months of amortization ($4.8 million) of fair value adjustments ($34.2 million) to liabilities (principally accrued maintenance liability and lessee deposit liability) which amortize on an effective-interest method. Year one amortization is approximately $9.6 million. | |
1(f) | Adjusted to reflect six months of amortization of fair value adjustments ($14.0 million) of our onerous contract accrual arising from the 2005 Acquisition. This accrual relates to aircraft we lease under operating leases and sublease to airlines. Amortization is on an effective-interest method with periods corresponding to the remaining terms of the leases, ranging from three to seven years. Year one accretion is approximately $2.5 million. | |
1(g) | Adjusted to reflect the effects of the pro forma adjustments (1)(a) through (1)(f) above on provision for income taxes. The income tax effects of the acquisition adjustments are calculated with reference to the enacted tax rates of the jurisdictions in which the assets and liabilities to which the individual acquisition adjustments relate are owned. The tax rates ranged from 12.5% to 29.6%. |
2. Unaudited Consolidated Pro Forma Income Statement AdjustmentsAeroTurbine Acquisition
The pro forma adjustments relating to the AeroTurbine Acquisition included in the unaudited consolidated pro forma income statement are as follows:
2(a) | Adjusted to reflect 12 months of straight-line amortization ($0.1 million) of a lease deficiency of $0.7 million recognized on the date of the AeroTurbine Acquisition. The lease deficiency represents the present value of contracted lease revenues which are at below market rates for one of AeroTurbine's leases. The amortization period of five years is based on the remaining contractual lease term, including the renewal options that were determined at the time of the AeroTurbine Acquisition to be reasonably assured of being exercised. | |
2(b) | Adjusted to reflect 12 months of depreciation ($2.5 million) of the $35.8 million fair value adjustment of equipment held for operating lease. The fair value adjustments are depreciated over the remaining estimated useful lives of the underlying assets as of January 1, 2005. The depreciation periods range from four to 15 years, with a weighted average remaining life of 12.6 years. | |
2(c) | Adjusted to reflect 12 months ($2.6 million) of amortization of the $23.4 million of customer relationship intangible assets, and 12 months ($0.3 million) of straightline amortization of the FAA license and non-compete agreement. Amortization of the intangible assets related to customer relationships is based on the anticipated sales in the ten years after the AeroTurbine Acquisition of both parts and engines which benefit from such relationships. 7% of the sales benefiting from the customer relationships are expected to occur in the first year following the AeroTurbine Acquisition. Amortization of the acquired FAA certificate is straight-line over 15 years, the remaining estimated useful life of the engine type to which the repair station certificate relates. Amortization of the non-compete agreement is straight-line over six years, which is the sum of the term of the employment agreements of the related individuals and the term of the non-compete agreements. | |
2(d) | Adjusted to reflect 12 months ($1.2 million) of the $4.0 million fair value adjustment on AeroTurbine's property and equipment. The depreciation is recorded straight-line over the remaining estimated useful lives of the underlying assets as of January 1, 2005. The depreciation periods range from one to seven years, with a weighted average life of 3.5 years. | |
2(e) | Adjusted to reflect 12 months ($7.0 million) of amortization of the $13.6 million fair value adjustment to inventory. Based on our historical experience, approximately 52% will be sold in the first 12 months after the AeroTurbine Acquisition. | |
69
2(f) | Adjusted to reflect the financing of the AeroTurbine Acquisition. The adjustment for the 12 months reflects the subtraction of $7.0 million of interest expense and $0.8 million of debt issuance cost amortization for 12 months on AeroTurbine's historical indebtedness prior to the AeroTurbine Acquisition; and pro forma inclusion of $14.2 million of interest expense and $1.6 million of debt issuance cost amortization for 12 months for the $175.0 million financing incurred to fund the AeroTurbine Acquisition. Interest on the post AeroTurbine Acquisition debt was calculated using a three-month LIBOR rate of 5.13% at the date of the AeroTurbine Acquisition plus a weighted average spread of 2.99%. | |
If interest rates were one eighth of one percentage point higher or lower, our pro forma interest expense would have increased or decreased, respectively, by approximately $0.2 million in for the year ended December 31, 2005. | ||
2(g) | Adjusted to reflect 12 months ($24.5 million) of compensation expense in connection with restricted shares purchased by two members of the senior management of AeroTurbine on the date of the AeroTurbine acquisition. The restricted shares were awarded in four equal tranches. The first three tranches qualify as equity awards under FAS 123R. The fourth tranche qualified as a liability award between April 26, 2006, the date of grant, and September 19, 2006 because the two members of the senior management of AeroTurbine had the right to put the shares back to the Bermuda Parents immediately upon vesting in the fourth year of the vesting period until September 19, 2006. On September 19, 2006, the two AeroTurbine executives executed amendments to the award agreements which removed their right to put the shares back to the Bermuda Parents and the fourth tranche then qualified as an equity award. For all tranches, vesting accelerates upon a change in control, including an initial public offering. The amount of expense recognition for the first three tranches is based on the difference between the estimated fair value ($57.9 million) of these restricted shares at the date of grant and the price paid for these shares by the two members of the senior management of AeroTurbine ($0.9 million). The amount of expense recognition for the fourth tranche is based on the difference between the estimated fair value ($21.9 million) of the shares at September 19, 2006 (when the amendment to the award agreements were signed) and the price paid for these shares ($0.3 million). The fair value of all restricted shares was determined based on the public offering price of $23.00 per ordinary share and reflects a DLOM at each valuation date which varies according to such date's proximity to the anticipated date of this offering. | |
2(h) | Adjusted to reflect (i) the tax effect of AeroTurbine's income before tax of $20.3 million for the year ended December 31, 2005 ($7.8 million tax expense) as if AeroTurbine had been a taxable corporation for this period and (ii) the tax effect of the pro forma adjustments (a) through (g) above totaling a net loss effect of $45.8 million ($17.7 million tax benefit) for the year ended December 31, 2005. The determination of the tax effect on the above items was calculated using AeroTurbine's blended pro forma estimated U.S. federal and state tax rate of 38.58%. |
3. Unaudited Consolidated Pro Forma Income Statement AdjustmentsConforming Accounting Changes and Reclassifications
The following reclassifications have been made to align the accounting policies and financial statement line items presented in our financial statements for the nine months ended September 30, 2006:
3(a) | Adjusted to reclassify AeroTurbine's interest expense, interest income and other income historically recorded net within other income (expenses) on its income statement to conform with the consolidated income statement presentation we have adopted for our 2006 consolidated financial statements. AeroTurbine has historically recorded these items below income from continuing operations before income taxes and minority interests. We have historically recorded these items separately in their respective line items (interest on term debt, interest revenue and other revenue) as income from continuing operations before income taxes and minority interests or operating expenses. These reclassifications to the respective line items were based on the classification provided in AeroTurbine's combined income statement for the year ended December 31, 2005 and adjustment 2(f) to these pro forma financial statements. The following table summarizes the adjustments made to reclassify the amounts previously presented in other expenses to their respective line item within our consolidated income statement presentation: | |
70
Adjustments for the year ended December 31, 2005 |
Interest revenue |
Interest on term debt |
Other revenue |
Other (expenses) income |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
||||||||||||
Reclassify historical interest revenue for AeroTurbine to interest revenue | $ | 8 | $ | | $ | | $ | (8 | ) | ||||
Reclassify historical interest expense for AeroTurbine to interest on term debt | | 7,614 | | 7,614 | |||||||||
Reclassify historical other income for AeroTurbine to other revenue | | | 915 | (915 | ) | ||||||||
Reclassify pro forma interest expense for AeroTurbine to interest on term debt* | | 7,959 | | 7,959 | |||||||||
Total | $ | 8 | $ | 15,573 | $ | 915 | $ | 14,650 | |||||
3(b) | Adjusted to reclassify depreciation and amortization expenses in the cost of goods sold and selling, general and administrative expenses line items to the depreciation and amortization line item and to reclassify leasing expenses in the cost of goods sold line item to leasing expenses. AeroTurbine has historically shown depreciation of leased engines and leasing expenses associated with such engines and aircraft as part of cost of goods sold. In addition, AeroTurbine has shown depreciation of property and equipment and amortization of leasehold interest as selling, general and administrative expenses. Due to the recognition of intangible assets resulting from the AeroTurbine Acquisition and the related future amortization, amortization expense will be a more significant expense for the consolidated group than it has been historically for each company. The following table summarizes the adjustments made: |
Adjustments for the year ended December 31, 2005 |
Depreciation and amortization |
Cost of goods sold |
Selling, general and administrative |
Leasing expenses |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
|||||||||||
Reclassify historical depreciation on leased engines for AeroTurbine | $ | 7,511 | $ | (7,511 | ) | $ | | $ | | |||
Reclassify historical leasing expenses for AeroTurbine | | (11,978 | ) | | 11,978 | |||||||
Reclassify pro forma depreciation of fair value adjustment on leased engines for AeroTurbine | 2,510 | (2,510 | ) | | | |||||||
Reclassify pro forma amortization of intangible assets for AeroTurbine | 2,859 | (2,859 | ) | | | |||||||
Reclassify historical depreciation in selling, general and administrative expenses for AeroTurbine | 313 | | (313 | ) | | |||||||
Reclassify pro forma depreciation of fair value adjustment of property and equipment for AeroTurbine | 1,142 | | (1,142 | ) | | |||||||
Total | $ | 14,335 | $ | (24,858 | ) | $ | (1,455 | ) | $ | 11,978 | ||
71
4. Unaudited Consolidated Pro Forma Income Statement AdjustmentChange in Organizational Structure and this Offering
The pro forma adjustments relating to our change in organizational structure and the completion of this offering are as follows:
4(a) | Adjusted to show the effect of 12 months of the reduced amortization of the intangible lease premium due to a reduction of the intangible lease premium in connection with a reduction of the valuation allowance as described in note 4(e). | |
4(b) | Adjusted to reflect the reduction of 12 months of interest paid due to the repayment of approximately $140.0 million of the Caylon senior secured term loan and/or junior subordinated loan from the use of proceeds of this offering. The reduction of interest paid is calculated assuming a three-month LIBOR rate of 5.13% at the date of the AeroTurbine Acquisition plus the spread on the senior secured term debt of 2.75%. As a result of the early repayment of the $140.0 million of the senior term loan, we will incur an early repayment penalty of $1.4 million and will write off $2.9 million which represents the portion of the debt issuance costs related to the $140.0 million repayment, assuming a closing date of this offering of January 1, 2006. As the early repayment penalty and the write off of the debt issuance costs are one time adjustments, they are considered non-recurring in nature and are not included as adjustments to these pro forma financial statements. | |
4(c) | On the closing of this offering restricted shares and share options granted by Cerberus in the Bermuda Parents and held by members of our senior management will vest. Due to the non-recurring nature of these adjustments, no pro forma adjustment has been included. The impact of the vesting for the restricted shares/options would be, on a pro forma basis, as follows: |
| With respect to all shares held by the two members of the senior management of AeroTurbine described in note 2(g), the vesting will trigger immediate recognition of compensation expense on the closing date of this offering. For the first three tranches this amount will be approximately $38.0 million on a pro forma basis for the year ended December 31, 2005. This amount is calculated using the fair value of the awards less the compensation expense recorded in note 2(g). For the fourth tranche this amount would be $16.1 million on a pro forma basis for the year ended December 31, 2005. This amount is based on the fair value of the shares at September 19, 2006, the date the awards were modified to restrict the two members of the senior management of AeroTurbine from immediately putting their shares to the Bermuda Parents upon vesting, less the compensation expense recorded in note 2(g). For the adjustments for the year ended December 31, 2005, we have assumed a closing date of this offering of January 1, 2006. | |||
|
With respect to restricted shares and share options granted to our management in December 2005 expense recognition will be triggered upon the offering equal to the grant date fair value of $3.1 million multiplied by the number of months between the grant date and the offering date and divided by the number of months between the grant date and the offering date plus a two-year lock-up period, during which management is not allowed to sell their shares. Based on an assumed closing date of this offering of January 1, 2006, this expense recognition would total $1.0 million. |
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With respect to restricted shares in the Bermuda Parents granted to an individual providing consulting services to us, the restricted shares will vest at the offering and will trigger immediate recognition of compensation expense on the closing date of this offering. The amount of expense recognized is calculated in the same way as for shares and options granted to our senior management in December 2005, but with reference to the offering price instead of the grant date fair value. The expense recognition would be approximately $2.1 million, based on the public offering price of $23.00 per ordinary share and assuming a closing date of this offering of January 1, 2006. |
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With respect to stock options in the Bermuda Parents granted to three executive officers in August and September 2006, expense recognition will be triggered in an amount equal to the grant date fair value of options multiplied by the number of months between the grant date and the offering date and divided by the number of months between the grant date and the end of the formal vesting period but not earlier than the end of a two-year lock up period. The options either vest upon the offering, vest based on the passage of time or vest based on the achievement of defined performance criteria deemed probable at the time of this offering. Based on an assumed closing date of this offering of January 1, 2006, this expense recognition would total $3.0 million. |
4(d) |
Adjusted to show a 12 month tax impact of changing from a non-taxable partnership to a taxable corporation ($6.1 million). In connection with the change in organizational structure, the loans owed by AerCap B.V. to AerCap Holdings C.V. will be transferred to one of our Irish subsidiaries. Interest income on these loans when owed to AerCap Holdings C.V. was not taxable. After the transfer, the interest is expected to be taxable in Ireland at a rate of 12.5%. This tax rate is calculated on the $802.0 million of loans plus accrued interest. The interest rate is equal to a one-month LIBOR of 4.39% at December 31, 2005 plus a weighted average spread on the loans of 1.34%. As a result of the loan transfer, we will report additional taxable income in Ireland which will allow us to eliminate the existing valuation allowance of $17.4 million related to Irish tax losses. As the valuation allowance was recognized on the deferred tax assets at the 2005 Acquisition date and no goodwill was recognized in the 2005 Acquisition, the elimination of the valuation allowance is recorded as a reduction of the intangible lease premium. |
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4(e) | Adjusted to reflect the effects of the pro forma adjustments (4)(a) and (4)(b) above on the provision for income taxes for the 12 months ended December 31, 2005 ($6.2 million). The income tax effects of the adjustments are calculated with reference to the enacted tax rates in the jurisdictions in which the adjustment relates. The tax rates range from 12.5% to 38.58%. |
5. Unaudited Pro Forma Net Income Per Share
Year ended December 31, 2005
Basic and diluted pro forma earnings per share are calculated on the basis of the weighted average number of shares outstanding as if all shares had been issued on January 1, 2005. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. Diluted pro forma earnings per share in this case is identical to basic pro forma earnings per share because we do not have any securities or other contracts outstanding that could result in the issuance of additional ordinary shares. The weighted average number of ordinary shares outstanding assumes the issuance of shares in the initial public offering. As explained in the notes above, including note 4(c), certain pro forma effects are excluded from the calculation of pro forma net income due to their non-recurring nature. Pro forma earnings per share would be lower if these non-recurring adjustments were included in the calculation of pro forma net income.
The following table sets forth the computation of unaudited pro forma basic and diluted net income per share:
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Year ended December 31, 2005 |
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Shares |
Income per share |
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|
(US dollars) |
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AerCap weighted average shares - basic and diluted | 78,236,957 | $ | 1.39 | |||
Shares issued to repay the $140.0 million Caylon senior secured term loan and/or junior subordinated loan | 6,800,000 | (0.12 | ) | |||
Pro forma weighted average shares - basic and diluted | 85,036,957 | $ | 1.27 | |||
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Unaudited Consolidated Pro Forma Balance SheetSeptember 30, 2006
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AerCap Holdings C.V. |
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|
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---|---|---|---|---|---|---|---|---|---|
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At September 30, 2006 Historic |
Change of corporate structure/offering Adjustments |
At September 30, 2006 Pro Forma |
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|
(US dollars in thousands) |
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Assets | |||||||||
Cash and cash equivalents | $ | 215,325 | $ | | $ | 215,325 | |||
Restricted cash | 125,065 | | 125,065 | ||||||
Flight equipment held for operating leases, net | 2,542,119 | | 2,542,119 | ||||||
Notes receivable, net of provisions | 158,303 | | 158,303 | ||||||
Prepayments on flight equipment | 129,496 | | 129,426 | ||||||
Goodwill | 37,225 | | 37,225 | ||||||
Intangible assets | 30,455 | | 30,455 | ||||||
Inventory | 85,475 | | 85,475 | ||||||
Other assets | 227,884 | | 227,884 | ||||||
Total assets | $ | 3,551,347 | $ | | $ | 3,551,347 | |||
Liabilities and partners' capital/shareholders' equity |
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Term debt | 2,458,977 | (140,000) | 1(a) | 2,318,977 | |||||
Other liabilities | 520,581 | | 520,581 | ||||||
Total liabilities | 2,979,558 | (140,000 | ) | 2,839,558 | |||||
Minority interest |
32,020 |
|
32,020 |
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Partners' capital |
384,964 |
(384,964 |
)1(b) |
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Ordinary share capital | | 1,078 | 1,078 | ||||||
Additional paid in-capital | | 526,613 | (a),(b),(d) | 526,613 | |||||
Retained earnings | 154,805 | (2,727 | )1(e) | 152,078 | |||||
Total partners' capital/shareholders' equity | 539,769 | 140,000 | 679,769 | ||||||
Total liabilities and partners' capital/shareholders' equity | $ | 3,551,347 | $ | | $ | 3,551,347 | |||
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1. Unaudited Condensed Consolidated Pro Forma Balance Sheet AdjustmentsThis Offering
In connection with this offering, we will change our current organizational structure from a Netherlands partnership to a Netherlands public limited liability company through the acquisition by AerCap Holdings N.V. of the assets of AerCap Holdings C.V., including the common stock of AerCap B.V.
The adjustments are based on an issuance of ordinary shares at the public offering price of $23.00 per ordinary share in connection with this offering. The following adjustments give effect to the change in our capitalization and the receipt and application of the proceeds from this offering.
1(a) | Adjusted to reflect the retention of $3.0 million of the net proceeds from the sale of our ordinary shares in this offering for general corporate purposes. | |
1(b) | Adjusted to reflect the application of $140.0 million of the net proceeds from the sale of our ordinary shares in this offering to repay indebtedness incurred in connection with our acquisition of AeroTurbine. | |
1(c) | Adjusted to show the effect of the change in organizational structure following AerCap Holdings N.V.'s acquisition of the assets and liabilities of AerCap Holdings C.V. (reclassification of $385.0 million). | |
1(d) | Adjusted to reflect the 1,738.6 to 1 stock split, the issuance of 6.8 million of additional ordinary shares in connection with this offering and the adjustment of our par value of ordinary shares to €.01 per share based on an exchange rate of U.S. dollar 1.2674 to Euro 1.0 at September 30, 2006. | |
1(e) | Adjusted to reflect proceeds of $143.0 million to be received from the sale of ordinary shares by us, net of estimated underwriting discounts and commissions and expenses, at the public offering price of $23.00 per ordinary share in connection with this offering and the payment of $0.6 million of expenses to advisors in connection with the offering, which are not capitalizable and are included in shareholders' equity. | |
1(f) | Adjusted to reflect cash paid to advisors in connection with the offering of our shares ($0.6 million), which are recorded as a reduction to our retained earnings. |
At an assumed closing date of this offering of November 21, 2006, we would recognize an expense for stock-based non-cash compensation, which would result in a $68.3 million charge to selling, general and administrative expense (retained earnings) and a corresponding increase to additional paid-in capital (shareholders' equity). As this effect is non-recurring, no pro forma adjustment has been made.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read this discussion in conjunction with our audited and unaudited consolidated financial statements and the related notes included in this prospectus. Our financial statements are presented in accordance with generally accepted accounting principles in the United States of America, or US GAAP. The discussion below contains forward looking statements that are based upon our current expectations and are subject to uncertainty and changes of circumstances. See "Risk Factors" and "Special Note About Forward- Looking Statements".
Overview
We are an integrated global aviation company with a leading market position in aircraft and engine leasing, trading and parts sales. We also provide aircraft management services and perform aircraft and engine MRO services and aircraft disassemblies through our certified repair stations. We operate our business on a global basis, providing aircraft, engines and parts to customers in every major geographical region. As of April 2006, we had the fifth largest aircraft leasing portfolio in the world, and the third largest new aircraft order book among operating lessors, according to SH&E, in each case by number of aircraft. As of September 30, 2006, we owned 109 aircraft and 61 engines, managed 110 aircraft, had 79 new aircraft and six new engines on order, had entered into purchase contracts for 17 aircraft with GATX and had executed letters of intent to purchase an additional nine aircraft. In addition, on October 17, 2006, we signed a letter of intent with Airbus to purchase 20 new A330-200 widebody aircraft. As of September 30, 2006, our owned and managed aircraft and engines were leased to 97 commercial airline and cargo operator customers in 47 countries and were managed from our offices in The Netherlands, Ireland and the United States. We expect to expand our leasing activity in Asia and in China in particular through our AerDragon joint venture with China Aviation Supplies Import & Export Group Corporation, which commenced operations in October 2006.
We have the infrastructure, expertise and resources to execute a large number of diverse aircraft and engine transactions in a variety of market conditions. From January 1, 2003 to September 30, 2006, we have executed over 950 aircraft and engine transactions, including 245 aircraft leases, 232 engine leases, 101 aircraft purchase or sale transactions, 167 engine purchase or sale transactions and the disassembly of 40 aircraft and 133 engines. Our teams of dedicated marketing and asset trading professionals have been successful in leasing and trading our aircraft and engine portfolios, and between January 1, 2003 and September 30, 2006, our weighted average owned aircraft utilization rate was 98.8%.
Joint Ventures
We expect to derive an increasing portion of our income from continuing operations before income taxes and minority interests in the future through joint ventures. Entering into joint venture arrangements is an integral part of our business strategy, allowing us to:
In December 2005, we established AerVenture. In January 2006, LoadAir, a subsidiary of Al Fawares, an investment and construction company based in Kuwait, purchased a 50% equity interest in AerVenture. We have invested $25.0 million in AerVenture and LoadAir has invested $25.0 million in AerVenture. We have each agreed to make additional equity contributions of up to $90.0 million. The AerVenture joint venture allows us to leverage our buying power and to achieve more favorable aircraft acquisition terms. We have entered into exclusive agreements to provide management and marketing
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services to AerVenture in return for fixed fees and incentive fees tied to the profitability of AerVenture. Our management and marketing services agreement may not be terminated by AerVenture until 2014, other than for cause. We have determined AerVenture to be a variable interest entity for which we are the primary beneficiary and, as such, it is consolidated into our accounts. Due to the size of the Airbus aircraft order, we expect AerVenture to become an important growth driver of our business.
In May 2006, we signed a joint venture agreement with China Aviation Supplies Import & Export Group Corporation, or China Aviation, and affiliates of Calyon S.A., or Calyon, establishing AerDragon. AerDragon consists of two companies, Dragon Aviation Leasing Company Limited, based in Beijing with a registered capital of $10.0 million and AerDragon Aviation Partners Limited, based in Ireland with a registered capital of $50.0 million. AerDragon is 50% owned by China Aviation and 25% owned by each of us and Calyon. Following receipt of the local Chinese approvals required for it to begin operations, AerDragon commenced operations in October 2006. We will act as the exclusive aircraft manager for the joint venture. This contract may be terminated upon the earlier of either July 1, 2009 or the occurrence of specified events, such as AerDragon developing the expertise required to manage its aircraft. This joint venture enhances our presence in the increasingly important China market and will reinforce our ability to lease, buy and sell our aircraft and engines throughout the entire Asia/Pacific region.
We use the equity method to account for the joint ventures that we do not consolidate.
Factors Affecting our Results
Our results of operations have been affected by a variety of factors, primarily:
Factors Affecting the Comparability of Our Results
Our Acquisition by Cerberus
On June 30, 2005, AerCap Holdings C.V., a Netherlands partnership owned by Cerberus acquired all of AerCap B.V.'s (formerly known as debis AirFinance B.V.) shares and $1.8 billion of liabilities owed by AerCap B.V. to its prior shareholders. AerCap Holdings C.V. paid total consideration of $1.37 billion for AerCap B.V.; $370 million of the total consideration paid by AerCap Holdings C.V. was funded through equity contributions by Cerberus and $1.0 billion was funded through a term loan. The 2005 Acquisition resulted in a net decrease of $802.0 million of indebtedness on our balance sheetthe difference between the $1.8 billion of intercompany liabilities and the indebtedness incurred to fund the acquisition. In accordance with FAS 141, Business Combinations, we allocated the purchase consideration to the assets acquired and liabilities assumed based on their fair values. Since the
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purchase consideration of $1.37 billion was less than the $1.9 billion combined carrying value of the liabilities and the equity purchased by Cerberus, the purchase price allocation resulted in lower carrying values for our assets after the 2005 Acquisition. The carrying values of our assets and liabilities influence our results of operations and, accordingly, the net decrease in asset carrying values, which resulted from the 2005 Acquisition, has resulted in improved operating performance when compared to periods prior to the 2005 Acquisition.
The material impacts on our consolidated income statement of the 2005 Acquisition relate to purchase accounting adjustments in our assets which are reflected in lower depreciation expense and lower cost of goods sold due to reduced net book values, and in lower interest on term debt expense due to the elimination of $802.0 million of debt as described in the preceding paragraph. Other than the corresponding effect on income from continuing operations before provision for income taxes and net income, the 2005 Acquisition did not materially impact any of the other line items in our consolidated income statement.
Acquisition of AeroTurbine
On April 26, 2006, we acquired all of the existing share capital of AeroTurbine, Inc. an engine trading and leasing and part sales company. We acquired AeroTurbine to implement our strategy of managing aircraft profitably throughout their lifecycle, to diversify our investment in aviation assets and to obtain a more significant presence in the market for older aircraft equipment. The total payment for the AeroTurbine shares of $146.8 million, including acquisition expenses, was funded through cash from our operations of $73.1 million and $73.7 million of cash raised from a refinancing of AeroTurbine's existing debt. The new financing totaled $175.0 million and included $160.0 million of senior secured debt and a $15.0 million subordinated loan guaranteed by AerCap B.V. In 2005, AeroTurbine generated revenues of $123.8 million and a net loss of $4.6 million on a pro forma basis giving effect to the AeroTurbine Acquisition and related conforming accounting changes as if they had occurred on January 1, 2005, which include the impact of purchase accounting and the effect of AeroTurbine's conversion to a taxable entity.
In accordance with FAS 141, Business Combinations, we allocated the purchase price paid to the assets acquired and liabilities assumed based on their fair values. Since the purchase consideration of $146.8 million was greater than the $81.9 million combined carrying value of the assets purchased and liabilities assumed by us, the purchase price allocation resulted in higher carrying values for the AeroTurbine assets as well as $25.6 million of intangible assets. The increase in net book values of assets and intangible assets will be reflected in higher depreciation and amortization expense in future periods than would have occurred without the acquisition. Our financial results for the nine months ended September 30, 2006 include $58.1 million of revenues and a $6.8 million net loss derived from the AeroTurbine results for the period from April 26, 2006 to September 30, 2006. The AeroTurbine net loss for the period from April 26, 2006 to September 30, 2006 includes $6.4 million of compensation net of tax expense relating to share-based compensation incurred as a result of the AeroTurbine acquisition. The share-based compensation expense relates to the vesting of restricted shares of the Bermuda Parents sold by Cerberus to the selling shareholders of AeroTurbine at the date of the AeroTurbine Acquisition. We will no longer record additional share-based compensation expense related to the shares issued in connection with the AeroTurbine Acquisition following the closing of this offering. Assuming a closing date of this offering of November 21, 2006, we would expect to record $64.5 million of share-based compensation expense before tax due to the accelerated vesting of the restricted shares issued in connection with the AeroTurbine Acquisition.
Prior to our acquisition of AeroTurbine, we operated our business as one reportable segment: leasing, financing, sales and management of commercial aircraft. From the date of our acquisition of AeroTurbine, we manage our business and analyze and report our results on the basis of two business segments: leasing, financing, sales and management of commercial aircraft ("Aircraft") and leasing, financing and sales of engines and parts ("Engines and Parts").
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Stock Compensation Expenses
Our financial results for the three months ended December 31, 2006 will be affected by non-cash compensation expense we will recognize from the vesting of options and restricted stock previously granted or sold to the owners of AeroTurbine at the time of its acquisition by us and to members of our senior management and one consultant primarily in connection with the 2005 Acquisition. As a result, based on the initial public offering price of $23.00 per ordinary share, we expect to recognize approximately $73.0 million of non-cash compensation expense before tax in the fourth quarter of 2006 and expect to report a net loss for the period. See "Operating ExpensesSelling, General and Administrative Expenses".
Deconsolidation of AerCo Limited
AerCo is a special purpose public company incorporated in Jersey, Channel Islands that we formed in 1998. AerCo has raised over $1.7 billion of funding through the securitization of a total of 65 aircraft previously owned by us. AerCo is a variable interest entity under FIN 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. AerCo's results of operations were consolidated in our results of operations until March 31, 2003. In March 2003, we sold a portion of our interests in AerCo in a transaction which qualified as a reconsideration event under FIN 46. We determined that we were no longer the primary beneficiary of AerCo and deconsolidated our investment in AerCo from March 31, 2003. As a result of the deconsolidation, our revenues, aircraft depreciation, and interest on term debt significantly decreased in 2004. In the first three months of 2003, AerCo had revenues of $34.2 million, depreciation expense of $14.5 million and interest on term debt expense of $19.3 million. AerCo's net equity value was negative $36.6 million as of March 31, 2003, which was $72.2 million less than the fair value of our remaining interests in AerCo at the time of the deconsolidation. As a result, we recognized this difference of $72.2 million as other revenue in our 2003 results of operations following the deconsolidation of AerCo. The AerCo deconsolidation was the primary cause of the differences between our 2003 and 2004 results of operations.
Goodwill Impairment
In 2004, we recorded an impairment of all of our existing goodwill of $132.4 million as a result of our annual goodwill impairment test. We calculate our valuation using a discounted cash flow approach that considers all of our existing assets and liabilities as well as our business plans. Based on the factors described below, in 2004 our goodwill impairment analysis resulted in the impairment of all of our then existing goodwill. In years prior to the 2005 Acquisition, our ability to grow and make additional aviation investments was primarily controlled by our prior shareholders who were also our primary source of debt funding. In 2004, we signed a new $1.6 billion facility agreement with our prior shareholders to refinance all of our previous senior debt contracted with them. The new facility agreement included significant constraints on our operations and our ability to make additional investments and required that a substantial amount of internally generated cash from asset sales be used to pre-pay our obligations under the facility agreement. In 2004, our shareholders also indicated that they were not willing to invest additional equity capital in us. We revised our discounted cash flow projection downward in 2004 to reflect these factors. In addition, we were aware that our shareholders were in discussions to sell their stake in us for consideration significantly less than our net equity value. As a result of our analysis, we recorded a $132.4 million impairment to write down all of our then existing goodwill in 2004.
Critical Accounting Policies Applicable to Us
Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with US GAAP, and require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The use of estimates is or could be a significant factor affecting the reported carrying values of flight equipment, investments, trade and
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notes receivable, deferred tax assets and accruals and reserves. Our estimates and assumptions are based on historical experiences and currently available information. We utilize professional appraisers and valuation experts, where possible, to support our estimates, particularly with respect to flight equipment. Despite our best efforts, actual results may differ from our estimates under different conditions, sometimes materially. A summary of our significant accounting policies is presented in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results of operations and require our most subjective judgments, estimates and assumptions. Our most critical accounting policies and estimates are described below.
Lease Revenue Recognition
We lease flight equipment principally under operating leases and report rental income on a straight-line basis over the life of the lease as it is earned. Virtually all of our lease contracts require payment in advance. Rents collected in advance of when they are earned are recorded as deferred revenue on our balance sheet and recorded as lease revenue as they are earned. Provisions for doubtful notes and accounts receivables are recorded in the income statement when rentals become past-due and the rentals exceed security deposits held, except where it is anticipated that the lease will end in repossession and then provisions are made regardless of the level of security deposits. Our management monitors the status of customers and the collectability of their receivables based on factors such as the customer's credit worthiness, payment performance, financial condition and requests for modifications of lease terms and conditions. Customers for whom collectability is not reasonably assured are placed on non-accrual status and revenue is recorded on a cash basis. When our management deems the collectability to be reasonably assured, based on the above factors, the customer is removed from non-accrual status and revenue is recognized on an accrual basis. As described below, revenue from supplemental maintenance rent is recognized when we are no longer legally obligated to refund such rent to our customer, which normally coincides with lease termination or where the terms of the lease allow us to control the occurrence, timing or amount of such reimbursement.
Depreciation and Amortization
Flight equipment held for operating leases, including aircraft, is recorded on our balance sheet at cost less accumulated depreciation and impairment. Aircraft are depreciated over the assets' useful life, which is 25 years from the date of manufacture for substantially all of our aircraft, using the straight-line method to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer's price.
We depreciate current production model engines on a straight-line basis over a 15-year period from the acquisition date to an estimated residual value. We estimate residual values of current production model engines based on observed current market prices and management expectations of value trends. Out-of-production engines are depreciated on a straight-line basis over an estimated useful life ranging from five to seven years to an estimated residual value. The carrying value of flight equipment that we designate for disassembly is transferred to our inventory pool and is held for sale at the time of such designation. We discontinue the depreciation of our flight equipment when it is held as inventory. Differences between our estimates of useful lives and residual values and actual experience may result in future impairments of aircraft or engines and/or additional gains or losses upon disposal. We review residual values of aircraft and engines periodically based on our knowledge of current residual values and residual value trends to determine if they are appropriate and record adjustments as necessary.
Intangibles related to customer relationships are amortized over ten years, which is the length of time that we expect to benefit from existing customer relationships. The amortization in each year is based on the anticipated sales in each year which benefit from such relationships. Our FAA certificate is amortized straight-line over 15 years, the remaining estimated useful life of the engine type to which
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the repair station certificate relates. Amortization of the non-compete agreement is straight-line over six years, which is the sum of the term of the employment agreements of the related individuals and the term of the non-compete agreements.
Inventory
Inventory, which consists exclusively of finished goods, is valued at the lower of cost or market. Cost is primarily determined using the specific identification method for individual part purchases and whole engines and on an allocated basis for dismantled engines, aircraft, and bulk inventory purchases using the relationship of the cost of the dismantled engine, aircraft or bulk inventory purchase to estimated remaining sales value at the time of purchase. We evaluate the carrying value of inventory on a regular basis in order to account for any permanent impairment in values. We estimate market value for this purpose based on internal estimates of sales values and recent sales activity of similar inventory.
Impairments
In accordance with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our flight equipment held for operating lease and definite lived intangible assets are evaluated for impairment when events and circumstances indicate that the carrying amounts of those assets may not be recoverable. The review for recoverability includes an assessment of the estimated future cash flows associated with the use of an asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The loss is measured as the excess of the carrying amount of the impaired asset over its fair value. Fair value reflects the present value of cash expected to be received from the asset in the future, including its expected residual value discounted at a rate commensurate with the associated risk. Future cash flows are assumed to occur under then current market conditions and assume adequate time for a sale between a willing buyer and a willing seller. Expected future lease rates are based on all relevant information available, including current contracted rates for similar assets, appraisal data and industry trends. Residual value assumptions generally reflect an asset's booked residual, except where more recent industry information indicates a different value is appropriate.
In accordance with FAS 142, Goodwill and Other Intangible Assets, we evaluate any goodwill and indefinite-lived intangible assets for impairment at the reporting unit level each year or upon the occurrence of events or circumstances that indicate that the asset may be impaired. We determine the fair value of our reporting unit through a discounted cash flow approach. In addition to the fair valuation of our individual assets and liabilities, we also estimate the discounted value of future operations. The estimated results of future operations consider current contractual rights we have to sources of future revenue, contracts under letter of intent and our current business plans. The discount rates we use to determine the fair value of our reporting unit are based on prevailing interest rates adjusted to account for our financial strength and the financial strength of our debtors/lessees. When our discounted cash flow suggests that the fair value of our reporting unit is less than our net equity, we determine the amount of implied goodwill by allocating the fair value of the reporting unit to our assets and liabilities as we would in purchase accounting and adjust our goodwill to its implied value through an impairment entry. If we fail to meet our forecasted future cash flows or if weak economic conditions prevail in our primary markets, the estimated fair values of our reporting unit may be adversely affected, resulting in impairment charges.
Allocation of Purchase Price to Acquired Assets
We account for business combinations in accordance with FAS 141, Business Combinations. We apply the purchase price of all acquisitions to the fair value of acquired assets and liabilities, including identifiable intangible assets and liabilities. To determine fair value, we utilize a combination of third-
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party appraisers, our own recent experience in the market place and discounted cash flow analyses. Our discounted cash flow analyses require us to make estimates and assumptions of the future use of these assets and their impact on our financial position. We apply a discount rate to each different asset or liability based on prevailing interest rates and the underlying credit of the obligor.
Accrued Maintenance Liability
In many operating lease and finance lease contracts, the lessee has the obligation to make a periodic payment of supplemental maintenance rent which is calculated with reference to the utilization of airframes, engines and other major life-limited components during the lease. In most of these contracts, upon lessee presentation of invoices evidencing the completion of qualifying maintenance on the aircraft or engine, we reimburse the lessee for the maintenance costs incurred, up to the maximum of the supplemental maintenance rental payments made with respect to the lease contract. In all contracts without supplemental maintenance rent obligations, to the extent that the aircraft or engine is redelivered in a different condition than at acceptance, there is normally an end-of-lease compensation adjustment for the difference at re-delivery. In addition, in both types of contracts, we may be obligated to contribute to the cost of specified maintenance events expected to occur during the term of the lease (lessor contributions) which result from utilization of the aircraft or engine prior to the subject lease.
Our accounting for supplemental rents paid by the lessee during the term of a lease depends upon whether we can control the occurrence, timing or amount of any reimbursement of supplemental rents during the lease. In longer-term lease contracts (primarily aircraft lease contracts) where we are not able to control the occurrence, timing or associated cost of qualifying maintenance work, we record supplemental rent paid by the lessee as accrued maintenance liability in recognition of our contractual commitment to refund such receipts. In these contracts, we do not recognize such supplemental rent as revenue during the lease. Reimbursements to the lessee upon the receipt of evidence of qualifying maintenance work are charged against the existing accrued maintenance liability. At the end of a lease, any amounts of undisbursed supplemental rents received from lessees are released from accrued maintenance liability as lease revenue. Separately, our obligation to make lessor contribution payments is estimated at the inception of the lease and recorded as accrued maintenance liability through a charge to leasing expenses. Our payments of lessor contributions during the term of a lease are charged against the relevant accrual. At the end of the lease, any undisbursed amounts of lessor contributions are released from the accrued maintenance liability as a credit to leasing expenses. Any amounts received as part of an end-of-lease adjustment are recorded as lease revenue and any amounts paid are recorded as leasing expenses.
In shorter-term lease contracts (primarily engine lease contracts) where the terms of the lease are designed specifically to allow us to control the occurrence, timing and associated cost of qualifying maintenance work on the flight equipment, supplemental rents collected during the lease are recognized as lease revenue. For flight equipment subject to these shorter-term contracts, we record a charge to leasing expenses at the time maintenance work is performed on the flight equipment.
Consolidation
We consolidate all companies in which we have direct or indirect legal or effective control and all variable interest entities for which we are deemed the primary beneficiary under FIN 46R. Consolidated entities include certain joint ventures such as our AerVenture and Bella Aircraft Leasing I Limited, or Bella and our Aircraft Lease Securitisation securitization vehicle. The determination of which entities are variable interest entities and of which variable interest entities we are the primary beneficiary involves the use of significant estimates, including whether the entity has sufficient equity to finance its activities without additional subordinated financial support and the expected cash flows to the entity and distributions of those cash flows in the future. We estimate expected cash flows based on the variable interest entities' contractual rights and obligations as well as reasonable expectations for future business developments. We then adjust these cash flow estimates to
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simulate possible changes in economic trends which could impact the variable interest entity to determine which entity will absorb a majority of the variability in order to determine if we are the primary beneficiary of the variable interest entity.
Deferred Income Taxes
We provide for income taxes according to FAS 109, Accounting for Income Taxes. We have significant tax loss carryforwards in certain of our subsidiaries. We evaluate valuation allowances for tax losses at the individual company level or consolidated tax group level in accordance with the tax law in the specific jurisdiction. We evaluate the potential for recovery of our tax losses by estimating the future taxable profits expected from each subsidiary and considering prudent and feasible tax planning strategies. In estimating future taxable profits, we consider all current contracts and assets of the business, as well as a reasonable estimation of future taxable profits achievable by us. If we are not able to achieve the level of projected taxable profits used in our assessment, and no tax planning strategies are available to us, an additional valuation allowance may be required against our tax assets with a corresponding charge to our income statement in the future.
Financial Period Convention
We were formed on June 27, 2005; however, we did not commence operations until June 30, 2005, when we acquired all of the shares and certain of the liabilities of AerCap B.V. Our initial accounting period is from June 27, 2005 to December 31, 2005 but we generated no material revenue or expense between June 27, 2005 and June 30, 2005, and did not have any material assets before the 2005 Acquisition. For convenience of presentation only, we have labeled our initial accounting period in table headings in this prospectus as the six months ended December 31, 2005. In addition, for presentation purposes in this Management's Discussion and Analysis of Financial Condition and Results of Operations, we have combined the six months ended June 30, 2005 of AerCap B.V., our predecessor, with our initial accounting period into a 12 month period ended December 31, 2005. The financial information presented for this combined period reflects the addition, with no adjustments, of the results of AerCap B.V. for the six months ended June 30, 2005 and for our initial accounting period ended December 31, 2005. The combined period information is included as a combined presentation since it is the way our management analyzes our business results. This combined presentation, however, is not in accordance with US GAAP and should be considered as supplemental information only.
Revenues
Our revenues consist primarily of lease revenue from aircraft and engine leases, sales revenue, management fee revenue and interest revenue.
Lease Revenue.
Nearly all of our aircraft and engine lease agreements provide for the payment of a fixed, periodic amount of rent or a floating, periodic amount of rent tied to interest rates during the term of the lease. In limited circumstances, our leases may require a basic rental payment based partially or exclusively on the amount of usage during a period. In addition, many of our leases require the payment of supplemental maintenance rent based on aircraft or engine utilization and lease term, or an end-of-lease compensation amount calculated with reference to the technical condition of the aircraft or engine at lease expiration. The amount of lease revenue we recognize is primarily influenced by five factors:
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In addition to aircraft or engine specific factors such as the type, condition and age of the asset, the lease rates for our leases with fixed rental payments are determined in part by reference to the prevailing interest rate for a debt instrument with a term similar to the lease term and with a similar credit quality as the lessee at the time we enter into the lease. Many of the factors described in the bullet points above are influenced by global and regional economic trends, airline market conditions, the supply/demand balance for the type of flight equipment we own and our ability to remarket flight equipment subject to expiring lease contracts under favorable economic terms.
We operate our business on a global basis. As of September 30, 2006, we had 99 aircraft on lease (excluding the eight aircraft that we intend to disassemble or sell at the end of their leases) to 49 customers in 34 countries, with no lessee accounting for more than 7.1% of lease revenue for the nine months ended September 30, 2006. The following table shows the regional profile of our lease revenue for the periods indicated:
|
AerCap Holdings B.V. |
AerCap Holdings C.V. |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year ended December 31, |
|
|
|
|
|||||||||
|
Six months ended June 30, 2005 |
Three months ended September 30, 2005 |
Six months ended December 31, 2005 |
Nine months ended September 30, 2006 |
||||||||||
|
2003 |
2004 |
||||||||||||
Asia/Pacific | 34 | % | 35 | % | 43 | % | 44 | % | 44 | % | 43 | % | ||
Europe | 33 | 36 | 33 | 33 | 33 | 34 | ||||||||
North America/Caribbean | 18 | 21 | 18 | 19 | 18 | 17 | ||||||||
Latin America | 12 | 7 | 6 | 4 | 5 | 6 | ||||||||
Africa/Middle East | 3 | 1 | | | | | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||
The geographical concentration of our customer base has varied historically, reflecting the opportunities available in particular markets at a given time. The current recent concentration in the Asia/Pacific region reflects high growth in demand for air travel in this developing market.
Sales Revenue.
Our sales revenue is generated from the sale of our aircraft, engines, and inventory. The price we receive for our aircraft, engines and inventory is largely dependent on the condition of the asset being sold, prevailing interest rates, airline market conditions and the supply/demand balance for the type of asset we are selling. The timing of the closing of aircraft and engine sales is often uncertain, as a sale may be concluded swiftly or negotiations may extend over several weeks or months. As a result, even if sales are comparable over a long period of time, during any particular fiscal quarter or other reporting period we may close significantly more or fewer sale transactions than in other reporting periods. Accordingly, sales revenue recorded in one fiscal quarter or other reporting period may not be comparable to sales revenue in other periods.
Management Fee Revenue.
We generate management fee revenue through a variety of management services that we provide to non-consolidated aircraft securitization vehicles and joint ventures and third-party owners of aircraft. Our management services include leasing and remarketing services, cash management and treasury services, technical advisory services and accounting and administrative services. We currently generate almost three-quarters of our management fee income from services we provide to two securitization
84
vehicles, Airplanes Group and AerCo. Since Aircraft Lease Securitisation's results are consolidated in our financial statements, we do not generate any accounting revenue from the services we provide to it.
Interest Revenue.
Our interest revenue is derived primarily from deposit interest on unrestricted and restricted cash balances and interest recognized on financial instruments we hold, such as notes issued by lessees in connection with lease restructurings and subordinated debt investments in unconsolidated securitization vehicles or affiliates. The amount of interest revenue we recognize in any period is influenced by the amount of free or restricted cash balances, the principal balance of financial instruments we hold, contracted or effective interest rates, and movements in provisions for financial instruments which can affect adjustments to valuations or provisions.
Other Revenue.
Our other revenue includes net gains or losses we generate from the sale of aircraft-related investments, such as our subordinated interests in securitization vehicles and notes, warrants or convertible securities issued by our lessees, which we receive from lessees as compensation for amounts owed to us in connection with lease restructurings. The amount of other revenue recognized in any period is influenced by the number of saleable financial instruments we hold, the credit profile of the obligor and the demand for such investments in the market at the time. Since there is limited or no market liquidity for some of the securities we receive in connection with lease restructurings, making the securities difficult to value, and because many of the issuers of the securities are in a distressed financial condition, we may experience volatility in our revenues when we sell our aircraft-related investments due to significant changes in their value.
Operating Expenses
Our primary operating expenses consist of depreciation and amortization, interest on term debt, other operating expenses and selling, general and administrative expenses.
Depreciation and Amortization.
We depreciate our aircraft on a straight-line basis over the asset's useful life, which is 25 years from the date of manufacture for substantially all or our aircraft, to an estimated residual value. We depreciate current production model engines on a straight-line basis over a 15-year period from the acquisition date to an estimated residual value. Out-of-production engines are depreciated on a straight-line basis over an estimated useful life ranging from five to seven years to an estimated residual value. Our depreciation expense is influenced by the adjusted gross book values of our flight equipment, the depreciable life of the flight equipment and the estimated residual value of the flight equipment. Adjusted gross book value is the original cost of our flight equipment, including purchase expenses, adjusted for subsequent capitalized improvements, impairments, and accounting basis adjustments associated with business combinations.
Cost of Goods Sold.
Our cost of goods sold consists of the net book value of flight equipment, including inventory, sold to third parties at the time of the sale.
Interest on Term Debt.
Our interest on term debt expense arises from a variety of funding structures and related derivative instruments as described in "Indebtedness". Interest on term debt expense in any period is primarily affected by contracted interest rates, principal amounts of indebtedness, including notional values of derivative instruments and unrealized mark-to-market gains or losses on derivative instruments.
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Other Operating Expenses.
Our other operating expenses consist primarily of operating lease-in costs, leasing expenses, provision for doubtful notes and accounts receivable and restructuring expenses.
Our operating lease-in costs relate to our lease obligations for aircraft we lease from financial investors and sublease to aircraft operators. We entered into all of our lease-in transactions between 1988 and 1992 and these leases expire between 2008 and 2012. As described in Note 15 to our consolidated financial statements included in this prospectus, we have established an onerous contract accrual equal to the difference between the present value of our lease expenses and the sublease revenue we receive, discounted at appropriate discount rates. The amount of this liability amortizes monthly as a reduction of operating lease-in costs on a constant yield basis as we meet our obligations to the aircrafts' legal owners under the applicable leases.
Our leasing expenses consist primarily of maintenance expenses on our flight equipment, which we incur when our flight equipment is off-lease, technical expenses we incur to monitor the maintenance condition of our flight equipment during a lease, end-of-lease payments and to transition flight equipment from an expired lease to a new lease contract and non-capitalizable flight equipment transaction expenses. In addition, we recognize leasing expenses when we contractually agree to contribute our own funds to maintenance events during a lease or increase our accrued maintenance liability based on estimates of our contractual obligations in current lease contracts.
Our provision for doubtful notes and accounts receivable consists primarily of provisions we establish to reduce the carrying value of our notes and accounts receivables to estimated collectible levels.
Our restructuring expenses relate to legal and professional fees, as well as refinancing fees incurred in 2003 in a restructuring of our principal bank debt as described in Note 26 to our audited consolidated financial statements included in this prospectus.
The primary factors affecting our other operating expenses are:
Selling, General and Administrative Expenses.
Our principal selling, general and administrative expenses consist of personnel expenses, including salaries and benefits, professional and advisory costs and office and travel expenses as summarized in Note 25 to our audited consolidated financial statements included in this prospectus. The level of our selling, general and administrative expenses is influenced primarily by our number of employees and the extent of transactions or ventures we pursue which require the assistance of outside professionals or advisors. Our selling, general and administrative expenses also include the mark-to-market gains and losses for our foreign exchange rate hedges related to our euro denominated selling, general and administrative expenses. Assuming a closing date of November 21, 2006, on the closing date of this offering, we expect to recognize $68.3 million in non-cash compensation expenses consisting of (i) $2.9 million from the vesting of options and restricted stock previously granted to members of our senior management, and one consultant, primarily in connection with the 2005 Acquisition, (ii) $64.5 million from the vesting of restricted stock sold at a discount to the two executives/shareholders of AeroTurbine in connection with the AeroTurbine Acquisition, and (iii) $0.9 million from the vesting of options granted to our new Chief Financial Officer, in connection with his hiring, and to two other executive officers, which will increase our selling, general and administrative expenses in the fourth quarter of 2006. In addition to the expected $68.3 million non-cash compensation expense we will incur on the closing date of this offering, we will incur additional compensation expense in the fourth quarter
86
and in the periods after the closing date of this offering tied to the remaining restricted stock and stock options, which are not fully vested or subject to selling restrictions, and any future stock option grants.
Provisions for Income Taxes
Our operations are taxable primarily in three main jurisdictions in which we manage our business: The Netherlands, Ireland and the United States. Deferred income taxes are provided to reflect the impact of temporary differences between our US GAAP income from continuing operations before income taxes and minority interests and our taxable income. Our effective tax rate has varied significantly year to year from 2003 to 2005. The primary source of temporary differences is the availability of accelerated tax depreciation in our primary operating jurisdictions. As a result of the temporary differences, we have not incurred any material net income tax liability since our inception. Our effective tax rate in any year depends on the tax rates in the jurisdictions from which our income is derived along with the extent of permanent differences between US GAAP income from continuing operations before income taxes and minority interests and taxable income.
We have substantial tax losses which can be carried forward, which we recognize as tax assets. We evaluate the recoverability of tax assets in each jurisdiction in each period based upon our estimates of future taxable income in those jurisdictions. If we determine that we are not likely to generate sufficient taxable income in a jurisdiction prior to expiration, if any, of the availability of tax losses, we establish a valuation allowance against the tax loss to reduce it to its recoverable value. We evaluate the appropriate level of valuation allowances annually and make adjustments as necessary. Increases or decreases to valuation allowances can affect our provision for income taxes on our consolidated income statement and consequently may affect our effective tax rate in a given year.
Recent Developments
In August 2006, we entered into agreements with GATX to purchase 22 used aircraft consisting of one A319 aircraft, 13 A320 aircraft, four Boeing 737 aircraft and four Boeing 757 aircraft for $275.0 million. Five of the 22 aircraft had been delivered as of September 30, 2006 and we expect the remaining 17 aircraft to be delivered before February 2007. In addition, in November 2006, we entered into purchase agreements with GATX to purchase five additional A320 aircraft. In October 2006, we entered into a senior secured loan facility with a syndicate of banks led by affiliates of Calyon to finance the purchase of 25 of the 27 GATX aircraft. The purchase of the remaining two aircraft are being financed through our existing lines of credit.
On October 17, 2006, we signed a letter of intent to acquire 20 new A330-200 widebody aircraft from Airbus. Our board of directors has approved the purchase and the letter of intent anticipates that, subject to limited exceptions, we and Airbus agree upon final purchase documentation by November 30, 2006. We paid a $10.0 million non-refundable deposit to Airbus in connection with the letter of intent. On the basis of base value appraisals cited to us by an aircraft valuation consultant, we believe the approximate current appraised base value for a single A330-200 aircraft manufactured in 2006 is approximately $95 million. The aircraft covered by the letter of intent would be manufactured at a later date. However, in the event we enter into definite purchase documentation, we expect the per aircraft purchase price for our 20 aircraft order will be at a discount to this amount. Although we expect to be able to negotiate final purchase documentation with Airbus, we may not be able to do so and therefore the purchase of the A330-200 aircraft may not in fact occur and we would lose our $10.0 million deposit. In the event we enter into final purchase documentation with respect to the A330-200 aircraft, we would have significantly increased financial commitments. We would expect to meet such commitments through a combination of our current cash and cash equivalent balances, cash flows from operations, existing committed financings and additional financings that we would need to secure in the future.
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Results of Operations
Results of Operations for the Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005
Our results of operations for the nine months period ended September 30, 2005 represent an aggregation of the results of operations for AerCap B.V. from January 1, 2005 to June 30, 2005 when it was owned by our prior shareholders and the results of operations for AerCap Holdings C.V. from June 27, 2005 (inception) to September 30, 2005 following the 2005 Acquisition on June 30, 2005. These results have been aggregated to provide investors with information related to our operating results for the nine months ended September 30, 2005 on the same basis our management uses to analyze our business results and to provide a basis for comparing our results of operations in 2005 with the nine months ended September 30, 2006. Results of operations for AerCap Holdings C.V. after the 2005 Acquisition include the effects of purchase accounting related to the 2005 Acquisition and, therefore, are not directly comparable to the results of operation for AerCap B.V. in prior periods. The material impacts on our consolidated income statement of the 2005 Acquisition are reflected in lower depreciation expense due to reduced net book values, which resulted in a $10.4 million decrease in depreciation expense in the nine months ended September 30, 2005, and in lower interest on term debt expense due to the elimination of certain debt, which resulted in a $6.5 million decrease in interest on term debt expense in the nine months ended September 30, 2005. Other than the corresponding effect on income from continuing operations before provision for income taxes and net income, the 2005 Acquisition did not materially impact any of the other line items in our consolidated income statement. We have included a reconciliation of our nine months ended September 30, 2005 aggregate period results to our consolidated income statements prepared in accordance with US GAAP in the table below:
|
AerCap B.V. |
AerCap Holdings C.V. |
Aggregate non-GAAP |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Six months ended June 30, 2005 (restated) |
Three months ended September 30, 2005 |
Nine months ended September 30, 2005 |
|||||||
|
(US dollars in millions) |
|||||||||
Revenues | ||||||||||
Lease revenue | $ | 175.3 | $ | 81.3 | $ | 256.6 | ||||
Sales revenue | 79.6 | | 79.6 | |||||||
Management fee revenue | 6.5 | 4.0 | 10.5 | |||||||
Interest revenue | 13.1 | 10.5 | 23.6 | |||||||
Other revenue | 3.5 | 0.2 | 3.7 | |||||||
Total revenues | 278.0 | 96.0 | 374.0 | |||||||
Expenses |
||||||||||
Depreciation and amortization | 66.4 | 22.5 | 88.9 | |||||||
Cost of goods sold | 57.6 | | 57.6 | |||||||
Interest on term debt | 69.8 | 24.9 | 94.7 | |||||||
Operating lease in costs | 13.9 | 6.5 | 20.4 | |||||||
Leasing expenses | 9.7 | 4.4 | 14.1 | |||||||
Provision for doubtful notes and accounts receivable | 3.2 | (0.2 | ) | 3.0 | ||||||
Selling, general and administrative expenses | 19.6 | 10.9 | 30.5 | |||||||
Total expenses | 240.2 | 69.0 | 309.2 | |||||||
Income from continuing operations before income taxes |
37.8 |
27.0 |
64.8 |
|||||||
Provision for income taxes |
(4.1 |
) |
(4.1 |
) |
(8.2 |
) |
||||
Net income |
$ |
33.7 |
$ |
22.9 |
$ |
56.6 |
||||
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The aggregation of the results of operations data for the nine months ended September 30, 2005 is not in accordance with US GAAP. Since AerCap Holdings C.V is a different reporting entity for accounting purposes from AerCap B.V., the aggregated information should be considered as supplemental information only. The financial information presented for this combined period reflects the addition, with no adjustments, of the results of AerCap B.V. for the six months ended June 30, 2005 and the results of AerCap Holdings C.V. for the three months ended September 30, 2005.
|
Aggregate non-GAAP |
AerCap Holdings C.V. |
|||||
---|---|---|---|---|---|---|---|
|
Nine months ended September 30, 2005 |
Nine months ended September 30, 2006 |
|||||
|
(US dollars in millions) |
||||||
Revenues | |||||||
Lease revenue | $ | 256.6 | $ | 311.1 | |||
Sales revenue | 79.6 | 236.7 | |||||
Management fee revenue | 10.5 | 10.4 | |||||
Interest revenue | 23.6 | 26.7 | |||||
Other revenue | 3.7 | 18.0 | |||||
Total revenues | 374.0 | 602.9 | |||||
Expenses |
|||||||
Depreciation and amortization | 88.9 | 72.4 | |||||
Cost of goods sold | 57.6 | 183.3 | |||||
Interest on term debt | 94.7 | 111.4 | |||||
Operating lease in costs | 20.4 | 18.9 | |||||
Leasing expenses | 14.1 | 26.6 | |||||
Provision for doubtful notes and accounts receivable | 3.0 | (0.8 | ) | ||||
Selling, general and administrative expenses | 30.5 | 66.6 | |||||
Total expenses | 309.2 | 478.4 | |||||
Income from continuing operations before income taxes and minority interest | 64.8 | 124.5 | |||||
Provision for income taxes | (8.2 | ) | (20.1 | ) | |||
Minority interest net of taxes | | 0.7 | |||||
Net income | $ | 56.6 | $ | 105.1 | |||
Revenues. Our total revenues increased by $228.9 million, or 61.2%, to $602.9 million in the nine months ended September 30, 2006 from $374.0 million in the nine months ended September 30, 2005. In the nine months ended September 30, 2006, we generated $545.0 million in our aircraft segment and $58.2 million in our engine and parts segment, and, in the nine months ended September 30, 2005, we generated $374.0 million in our aircraft segment and no revenue in our engine and parts segment since we had not yet acquired AeroTurbine. The principle categories of our revenue and their variances were:
|
Nine months ended September 30, 2005 (restated) |
Nine months ended September 30, 2006 |
Increase/ (decrease) |
Percentage difference |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in millions) |
|||||||||||
Lease revenue | $ | 256.6 | $ | 311.1 | $ | 54.5 | 21.2 | % | ||||
Sales revenue | 79.6 | 236.7 | 157.1 | 197.4 | % | |||||||
Management fee revenue | 10.5 | 10.4 | (0.1 | ) | (1.0 | )% | ||||||
Interest revenue | 23.6 | 26.7 | 3.1 | 13.1 | % | |||||||
Other revenue | 3.7 | 18.0 | 14.3 | 386.5 | % | |||||||
Total | $ | 374.0 | $ | 602.9 | $ | 228.9 | 61.2 | % | ||||
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The increase in lease revenue was attributable primarily to:
The increase in sales revenue was attributable primarily to:
Management fee revenue did not materially change in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005.
The increase in interest revenue was due to an increase in our average cash and cash equivalents and restricted cash balances to $360.0 million in the nine months ended September 30, 2006 compared to $299.4 million in the nine months ended September 30, 2005, and an increase in the average interest rates to 4.1% in the nine months ended September 30, 2006 from 1.9% in the nine months ended September 30, 2005 on those balances.
The increase in other revenue was due to the increase in revenue from the sale of financial assets in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. In the nine months ended September 30, 2005, we sold our AerCo Series D Note for a gain of $4.6 million which was partially offset by our sale of notes secured by two aircraft for a loss of $1.4 million. In the nine months ended September 30, 2006, we sold three unsecured notes for a gain of $15.3 million, received $2.1 million from an investment in liquidation and sold notes secured by eight aircraft for a gain of $0.6 million.
Depreciation and Amortization. Depreciation and amortization decreased by $16.5 million, or 18.6%, to $72.4 million in the nine months ended September 30, 2006 from $88.9 million in the nine months ended September 30, 2005 due primarily to the reduction of our asset values in connection with the 2005 Acquisition. The decrease was partially offset by the acquisition of 14 new aircraft between September 30, 2005 and September 30, 2006 with a book value at the time of the acquisition of $441.6 million and the increased depreciation and amortization resulting from the AeroTurbine Acquisition.
90
Cost of Goods Sold. Cost of goods sold increased by $125.7 million, or 218.2%, to $183.3 million in the nine months ended September 30, 2006 from $57.6 million in the nine months ended September 30, 2005 due primarily to:
Interest on Term Debt. Our interest on term debt increased by $16.7 million, or 17.6%, to $111.4 million in the nine months ended September 30, 2006 from $94.7 million in the nine months ended September 30, 2005. The increase in interest on term debt was principally caused by:
partially offset by:
Other Operating Expenses. Our other operating expenses increased by $7.2 million, or 19.2%, to $44.7 million in the nine months ended September 30, 2006 from $37.5 million in the nine months ended September 30, 2005. The principal categories of our other operating expenses and their variances were as follows:
|
Nine months ended September 30, 2005 |
Nine months ended September 30, 2006 |
Increase/ (decrease) |
Percentage difference |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US$ in millions) |
|||||||||||
Operating lease in costs | $ | 20.4 | $ | 18.9 | $ | (1.5 | ) | (7.4 | )% | |||
Leasing expenses | 14.1 | 26.6 | 12.5 | 88.7 | % | |||||||
Provision for doubtful notes and accounts receivable | 3.0 | (0.8 | ) | (3.8 | ) | (126.7 | )% | |||||
Total | $ | 37.5 | $ | 44.7 | $ | 7.2 | 19.2 | % | ||||
Our leasing expenses increased in the nine months ended September 30, 2006 primarily because of an increase of $14.2 million in the recognition of accrued maintenance liability for lease transitions primarily on six aircraft. We recorded $10.2 million of expenses for four of these six aircraft related to maintenance contributions we agreed to make on new leases. On the same four aircraft we recorded
91
$13.3 million of supplemental maintenance rent income, which is recorded as lease revenue, from payments to us by the prior lessees of the aircraft.
Our provision for doubtful notes and accounts receivable was lower in the nine months ended September 30, 2006 when compared to the nine months ended September 30, 2005 due to the decrease in lessee defaults in the nine months ended September 30, 2006 and the collection of $2.4 million of receivables for which we had previously recorded a reserve.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by $36.1 million, or 118.4%, to $66.6 million in the nine months ended September 30, 2006 from $30.5 million in the nine months ended September 30, 2005, due primarily to (i) the acquisition of AeroTurbine on April 26, 2006, which resulted in a $23.2 million increase in selling, general and administrative expenses, including a $10.5 million stock compensation charge, (ii) start-up costs for our two consolidated joint ventures, AerVenture and Bella, which totaled $3.8 million, (iii) stock compensation expenses of $4.5 million related to the issuance of options to purchase stock in the companies which indirectly own us to our non-executive directors and (iv) expenses of $4.2 million incurred up to September 30, 2006 in connection with our public offering.
Income From Continuing Operations Before Income Taxes and Minority Interests. For the reasons explained above, our income from continuing operations before income taxes and minority interests increased by $59.7 million, or 92.1%, to $124.5 million in the nine months ended September 30, 2006 from $64.8 million in the nine months ended September 30, 2005.
Provision for Income Taxes. Our provision for income taxes increased by $11.9 million to $20.1 million in the nine months ended September 30, 2006 from $8.2 million in the nine months ended September 30, 2005 primarily due to our increased income from continuing operations before income taxes and minority interests.
Net Income. For the reasons explained above, our net income increased by $48.5 million, or 85.7%, to $105.1 million in the nine months ended September 30, 2006 from $56.6 million in the nine months ended September 30, 2005.
Results of Operations for 2005 Compared to 2004
Our results of operations for the year ended December 31, 2005 represent an aggregation of the results of operations for AerCap B.V. from January 1, 2005 to June 30, 2005 when it was owned by our prior shareholders and the results of operations for AerCap Holdings C.V. from June 27, 2005 (inception) to December 31, 2005 following the 2005 Acquisition on June 30, 2005. These results have been aggregated to provide investors with information related to our operating results for the full year of 2005 on the same basis our management uses to analyze our business results and to provide a basis for comparing our results of operations in 2005 with prior periods. Results of operations for AerCap Holdings C.V. after the 2005 Acquisition include the effects of purchase accounting related to the 2005 Acquisition and, therefore, are not directly comparable to the results of operation for AerCap B.V. in the prior periods. The material impacts on our consolidated income statement of the 2005 Acquisition are reflected in lower depreciation expense due to reduced net book values, which resulted in a $20.9 million decrease in depreciation expense in 2005, and in lower interest on term debt expense due to the elimination of certain debt, which resulted in a $19.6 million decrease in interest on term debt expense in 2005. Other than the corresponding effect on income from continuing operations before income taxes and net income, the 2005 Acquisition did not materially impact any of the other line items in our consolidated income statement. We have included a reconciliation of our 2005 aggregate
92
period results to our consolidated income statements prepared in accordance with US GAAP in the table below:
|
AerCap B.V. |
AerCap Holdings C.V. |
Aggregate non-GAAP |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Six months ended June 30, 2005 (restated) |
Six months ended December 31, 2005 (restated) |
Year ended December 31, 2005 |
|||||||
|
(US dollars in millions) |
|||||||||
Lease revenue |
$ |
175.3 |
$ |
173.6 |
$ |
348.9 |
||||
Sales revenues | 79.6 | 12.5 | 92.1 | |||||||
Management fee revenue | 6.5 | 7.7 | 14.2 | |||||||
Interest revenue | 13.1 | 20.3 | 33.4 | |||||||
Other revenue | 3.5 | 1.0 | 4.5 | |||||||
Total revenue | 278.0 | 215.1 | 493.1 | |||||||
Depreciation and amortization |
66.4 |
46.0 |
112.4 |
|||||||
Cost of goods sold | 57.6 | 10.6 | 68.2 | |||||||
Interest on term debt | 69.9 | 44.7 | 114.6 | |||||||
Operating lease-in costs | 13.9 | 11.4 | 25.3 | |||||||
Leasing expenses | 9.7 | 12.2 | 21.9 | |||||||
Provisions for doubtful notes and accounts receivable | 3.2 | 3.0 | 6.2 | |||||||
Selling, general and administrative expenses | 19.5 | 26.9 | 46.4 | |||||||
Total expenses | 240.2 | 154.8 | 395.0 | |||||||
Income from continuing operations before income taxes |
37.8 |
60.3 |
98.1 |
|||||||
Provisions for income taxes | (4.1 | ) | (10.6 | ) | (14.7 | ) | ||||
Net income | $ | 33.7 | $ | 49.7 | $ | 83.4 | ||||
The aggregation of the results of operations data for 2005 is not in accordance with US GAAP. Since AerCap Holdings C.V is a different reporting entity for accounting purposes from AerCap B.V., the aggregated information should be considered as supplemental information only. The financial information presented for this combined period reflects the addition, with no adjustments, of the results of AerCap B.V. for the six months ended June 30, 2005 and the results of AerCap Holdings C.V. for the initial accounting period ended December 31, 2005.
Revenues. Our total revenues increased by $102.2 million, or 26.1%, from $390.9 million in 2004 to $493.1 million in 2005. The principal categories of our revenue and their year over year variances were:
|
2004 (restated) |
2005 (restated) |
Increase/ (decrease) |
Percentage difference |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in millions) |
||||||||||||
Lease revenue | $ | 308.5 | $ | 348.9 | $ | 40.4 | 13.1 | % | |||||
Sales revenue | 32.1 | 92.1 | 60.0 | 186.9 | % | ||||||||
Management fee revenue | 15.0 | 14.2 | (0.8 | ) | (5.3 | )% | |||||||
Interest revenue | 21.6 | 33.4 | 11.8 | 54.6 | % | ||||||||
Other revenue | 13.7 | 4.5 | (9.2 | ) | (67.2 | )% | |||||||
Total | $ | 390.9 | $ | 493.1 | $ | 102.2 | 26.1 | % | |||||
The increase in lease revenue was attributable primarily to:
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partially offset by:
The increase in sales revenue to $92.1 million in 2005 from $32.1 million in 2004 reflects an increase in the number of aircraft sold in 2005 (21 aircraft) as compared to those sold in 2004 (nine aircraft). The average sales price per aircraft in 2005 was $4.3 million compared to $3.5 million in 2004. The number of aircraft sold in 2005 increased as our management decided to take advantage of favorable market conditions by selling some of our older, less desirable aircraft, including 16 of our Fokker aircraft.
Management fee revenue decreased slightly between 2004 and 2005 primarily because of a reduction in AerCo fees due to lower AerCo cashflows. In 2005, we generated 39.2% of our management fee revenue from Airplanes Group and 34.9% of our management fee revenue from AerCo. In 2004, we generated 39.0% of our management fee revenue from Airplanes Group and 36.0% of our management fee revenue from AerCo.
The increase in interest revenue in 2005 compared with 2004 was due to:
The decrease in other revenue primarily reflects the net gain on sale of a claim which we sold in 2004, which originated from the bankruptcy of one of our lessees. The gain recognized was $8.2 million. We recognized a gain on the sale of our AerCo Series D notes in 2005 of $4.6 million and a similar amount of other revenue in 2004 from penalty fees received from a lessee in connection with a lease restructuring.
Depreciation and Amortization. Depreciation and amortization decreased by $13.5 million, or 12.0%, to $112.4 million in 2005 from $125.9 million in 2004 due primarily to the reduction of our asset values in connection with the 2005 Acquisition. The decrease was partially offset by an increase in depreciation related to increased aggregate book values of our assets resulting from the acquisition of six new aircraft with a net book value of $250.3 million and the sale of 19 aircraft (18 of which were older aircraft) with an aggregate net book value of $67.4 million during 2005.
Cost of Goods Sold. The increase in cost of goods sold in 2005 reflected the increase in the number of aircraft sold to 21 with an average carrying value of $3.2 million in 2005 from nine with an average carrying value of $2.1 million in 2004.
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Interest on Term Debt. Our interest on term debt increased by $1.5 million, or 1.3%, to $114.6 million in 2005 from $113.1 million in 2004. Our interest on term debt expense was principally affected by:
largely offset by:
Our average outstanding indebtedness declined primarily due to the 2005 Acquisition. This decrease as a result of the 2005 Acquisition was only partially offset by our incurrence of $1.0 billion of indebtedness to pay a portion of the 2005 Acquisition purchase price and $221.0 million of indebtedness which was incurred in connection with the acquisition of new aircraft in 2005.
Impairments. In 2004, we recorded a $132.4 million impairment for all of our existing goodwill as a result of our annual goodwill impairment test described in "Factors Affecting the Comparability of our ResultsGoodwill Impairment". We did not record any impairments in 2005.
Other Operating Expenses. Our other operating expenses decreased by $13.5 million, or 20.2%, to $53.4 million in 2005 from $66.9 million in 2004. The principal categories of our other operating expenses and their year over year variances were as follows:
|
2004 |
2005 |
Increase/ (decrease) |
Percentage difference |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in millions) |
||||||||||||
Operating lease-in costs | $ | 35.8 | $ | 25.3 | $ | (10.5 | ) | (29.3 | )% | ||||
Leasing expenses | 30.5 | 21.9 | (8.6 | ) | (28.2 | )% | |||||||
Provision for doubtful notes and accounts receivable | 0.6 | 6.2 | 5.6 | 933.3 | % | ||||||||
Total | $ | 66.9 | $ | 53.4 | $ | (13.5 | ) | (20.2 | )% | ||||
Our operating lease-in costs decreased due primarily to the repurchase of an aircraft previously leased-in and the termination of our lease obligation to the prior legal owner of the aircraft and an amendment to the lease on one of our other leased-in aircraft which lowered our lease obligations.
Our leasing expenses decreased in 2005 primarily because we incurred lower maintenance expenses due to fewer lessee defaults than in 2004. Leasing expenses in 2004 reflected lease transition costs totaling $7.2 million related to the transition of six A320 aircraft, which we had repossessed in 2003, from two defaulting lessees to new lessees.
Our provision for doubtful notes and accounts receivable was lower in 2004 when compared to 2005 due to the collection in 2004 of $9.5 million of receivables for which we had previously taken a reserve.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by $10.1 million, or 27.7%, to $46.5 million in 2005 from $36.4 million in 2004, due primarily to increased personnel costs of $5.1 million in 2005 mainly arising from the hiring of new employees, an increase in professional fees of $1.9 million and an increase in foreign exchange losses of $3.9 million in 2005. We recognized an increase in net foreign exchange losses between 2004 and 2005 as a result of losses on our mark-to-market foreign exchange hedges, which are used to partially hedge our euro expense against changes in the euro/US dollar exchange rate.
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Income From Continuing Operations Before Income Taxes and Minority Interests. For the reasons explained above, our income from continuing operations before income taxes and minority interests increased by $203.2 million to an income from continuing operations before income taxes and minority interests of $98.1 million in 2005 from a loss on income from continuing operations before income taxes and minority interests of $105.2 million in 2004.
Provision for Income Taxes. Our provision for income taxes increased by $14.5 million to $14.7 million in 2005 from $0.2 million in 2004 primarily due to our increased income from continuing operations before income taxes and minority interests. The effect of our increase in income from continuing operations before income taxes and minority interests was partially offset by a decrease in our average effective tax rate below the statutory tax rates as a result of the effects of the 2005 Acquisition structure described above and the reduction in non-taxable permanent differences between our US GAAP income from continuing operations before income taxes and minority interests and taxable income. In 2004, we had a net tax charge despite recording a net loss primarily as a result of the goodwill impairment charge of $132.4 million which was not tax deductible in The Netherlands. Our 2005 tax rate was reduced below the average enacted tax rates in the relevant jurisdictions producing income in that year because we were able to deduct interest expenses in The Netherlands on AerCap B.V.'s debts to its parent, AerCap Holdings C.V. while the corresponding interest income for AerCap Holdings C.V. was not subject to taxes in any jurisdiction.
Net Income. For the reasons explained above, our net income increased by $188.8 million to a net income of $83.4 million in 2005 from a net loss of $105.4 million in 2004.
Results of Operations for 2004 Compared to 2003
Revenues. Our total revenues decreased by $80.0 million, or 17.0%, to $390.9 million in 2004 from $470.9 million in 2003. The main reason for this decline was the deconsolidation of AerCo effective March 31, 2003.
|
2003 (restated) |
2004 (restated) |
Increase/ (decrease) |
Percentage difference |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in millions) |
|||||||||||
Lease revenue | $ | 343.0 | $ | 308.5 | $ | (34.5 | ) | (10.1 | )% | |||
Sales revenue | 7.5 | 32.1 | 24.6 | 328.0 | % | |||||||
Management fee revenue | 13.4 | 15.0 | 1.6 | 11.9 | % | |||||||
Interest revenue | 22.4 | 21.6 | (0.8 | ) | (3.6 | )% | ||||||
Other revenue | 84.6 | 13.7 | (70.9 | ) | (83.8 | )% | ||||||
Total Revenues | $ | 470.9 | $ | 390.9 | $ | (80.0 | ) | (17.0 | )% | |||
The decrease in aircraft leasing revenues was mainly due to:
offset by:
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partially offset by the sale of 14 older aircraft during such period, with a cumulative net book value of $25.0 million at the date of sale which increased lease revenue by $16.7 million.
The increase in sales revenue in 2004 reflected an increase in the number and value of aircraft sold. In 2004, we sold nine aircraft at an average sales price of $3.5 million. In 2003, we sold three aircraft at an average sales price of $2.5 million.
Our management fee revenue increased in 2004 mainly due to the fact that we recognized 12 months of management fees from AerCo and only nine months of management fees in 2003 after its deconsolidation on March 31, 2003.
The decrease in our interest revenue was mainly due to the decrease in our average cash and cash equivalents and restricted cash balances to $295.6 million in 2004 from $321.9 million in 2003, which was only partially offset by an increase in the average interest rates of those balances to 1.1% in 2004 from 1.0% in 2003.
The decrease in other revenues in 2004 was mainly due to the deconsolidation of AerCo, which resulted in a gain on deconsolidation of AerCo of $72.2 million in 2003 recorded as other revenue as described above in "Factors Affecting the Comparability of our ResultsDeconsolidation of AerCo."
Depreciation and Amortization. Our depreciation and amortization decreased by $16.7 million, or 11.7%, to $125.9 million in 2004 from $143.3 million in 2003, due primarily to the deconsolidation of AerCo. Our aircraft depreciation in 2003 included $14.5 million relating to AerCo. In addition, in 2003, we settled a balance sheet liability of $107.5 million for $20.0 million. The liability related to our obligation to share the aggregate profits from the sale of all of our Fokker aircraft with the seller of the aircraft. Due to a decline in Fokker aircraft values, it appeared unlikely that we would make a profit on the portfolio equal to our recognized liability for this profit sharing obligation and the seller agreed to settle the arrangement for a payment of $20.0 million by us. Since the original liability originated from an arrangement to provide protection against declines in Fokker residual values, the $87.5 million discount on the settlement was used to reduce the carrying values of our Fokker portfolio to their current market values at the time. This reduction in net book values was also one of the reasons that our depreciation expense declined in 2004 compared with 2003.
Cost of Goods Sold. The increase in cost of goods sold in 2004 reflected the increase in the number of aircraft sold to nine with an average carrying value of $2.1 million per aircraft in 2004 from three with an average carrying value of $2.2 million per aircraft in 2003.
Interest on Term Debt. Our interest on term debt decreased by $10.3 million, or 8.3%, to $113.1 million in 2004 from $123.4 million in 2003 due primarily to the deconsolidation of AerCo, which was partially offset by an increase in our outstanding indebtedness and an increase in interest rates. Our interest on term debt in 2003 included $19.3 million relating to AerCo. In 2004, our average outstanding indebtedness balance was $2.70 billion compared to $2.55 billion in 2003. The increase was mainly caused by the incurrence of debt used to acquire nine new aircraft in 2004. In 2004, the average interest rate on our outstanding indebtedness increased to 5.2% compared to 5.0% in 2003, which was principally due to an increase in LIBOR.
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Other Operating Expenses. Our other operating expenses decreased by $20.3 million, or 23.3%, to $66.9 million in 2004 from $67.8 million in 2003. The principal categories of our operating expenses and their year over year variances were as follows:
|
2003 |
2004 |
Increase/ (decrease) |
Percentage difference |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in millions) |
|||||||||||
Operating lease-in costs | $ | 50.7 | $ | 35.8 | $ | (14.9 | ) | (29.4 | )% | |||
Leasing expenses | 3.6 | 30.5 | 26.9 | 747.2 | % | |||||||
Provision for doubtful notes and accounts receivable | 13.6 | 0.6 | (13.0 | ) | (95.6 | )% | ||||||
Restructuring expenses | 19.3 | | (19.3 | ) | (100.0 | )% | ||||||
Total | $ | 87.2 | $ | 66.9 | $ | (20.3 | ) | (23.3 | )% | |||
The decrease in operating lease-in costs resulted from a $15.1 million charge in 2003 to increase our onerous contract accrual due to a deterioration in the financial strength of one of our sublessees, which increased the difference between our lease obligations to the owner of the aircraft and our expected lease rental receipts from our subleases.
The increase in leasing expenses was primarily due to a $14.6 million reduction of leasing expenses in 2003 from the elimination of maintenance liabilities which did not occur in 2004. As part of a review of our accrued maintenance liabilities in 2003, our management determined that our accrued maintenance liability was in excess of the amount required to meet our future maintenance obligations and reduced our liability accordingly. In addition, in 2004 we incurred increased lease transition expenses due to a greater number of lease transitions compared to 2003 and the incurrence in 2004 of $7.3 million of expenses related to the transition of six Airbus A320 aircraft, which we repossessed from two defaulting lessees. This increase was partially offset by the absence of AerCo lease costs in 2004, which were $1.8 million in 2003.
The decrease in provision for doubtful notes and accounts receivable in 2004 was primarily due to the collection in 2004 of receivables for which we had previously taken a reserve in 2003.
In 2003, we restructured a portion of the senior unsecured debt provided by our prior shareholders in a troubled debt restructuring. As a result of this restructuring, we incurred substantial costs for legal and professional fees, as well as refinancing fees, which were classified as restructuring expenses. The expenses associated with this restructuring were $19.3 million in 2003. We recorded no similar expense in 2004.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased by $2.9 million, or 7.97%, to $36.4 million in 2004 from $39.3 million in 2003, due primarily to the deconsolidation of AerCo. In 2003, our selling, general and administrative expenses included $1.8 million relating to AerCo.
Impairments. In 2004, we recorded a $132.4 million impairment for all of our existing goodwill as a result of our annual goodwill impairment test described in " Factors Affecting the Comparability of our ResultsGoodwill Impairment" above. In 2003, we recorded $6.1 million of aircraft impairment related to two aircraft repossessed from a bankrupt airline.
Income From Continuing Operations Before Income Taxes and Minority Interests. For the reasons explained above, our income from continuing operations before income taxes and minority interests decreased by $170.3 million to a loss of $105.2 million in 2004 from income from continuing operations before income taxes and minority interests of $65.1 million in 2003.
Provision for income taxes. Our provision for income taxes decreased by $28.0 million to $0.2 million in 2004 from $28.2 million in 2003, due primarily to our loss in 2004 compared with income from continuing operations before income taxes and minority interests in 2003. The difference also resulted from the establishment of a provision against a significant deferred tax asset in The
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Netherlands in 2003. The valuation allowance was related to a tax deductible loss we had taken in our 2002 tax return. We provided a valuation allowance against such loss in 2003 as a result of a proposed change in tax law in The Netherlands and preliminary discussions with The Netherlands tax inspector on our 2002 tax return. We subsequently settled the tax loss issue with The Netherlands tax inspector for the amount of the tax asset, net of related valuation allowance.
Net Income. For the reasons explained above, our net income decreased by $142.3 million to a net loss of $105.4 million in 2004 from net income of $36.9 million in 2003.
Liquidity and Capital Resources
We satisfy our liquidity requirements through several sources, including:
Aircraft leasing and trading is a capital intensive business. We believe that the proceeds of this offering, our existing cash balance and anticipated future operating cash flows, including proceeds arising from the sale of aircraft, engines and parts, will be sufficient to satisfy the operating requirements of our business through 2007. In the longer term, we expect to fund the growth of our business, including the acquisition of aircraft and engines, through internally generated cash flows, the incurrence of bank debt and the issuance of debt and equity securities. For additional information on the availability of funding under our revolving credit facilities see "Indebtedness".
The acquisition of aircraft and engines drives our growth and fuels our long-term need for liquidity. It is our intention to fund future aircraft and engines acquisitions initially through cash flows from our operations, borrowings under credit facilities and government guaranteed debt issuances, and to repay all or a portion of the borrowings from time to time with the net proceeds from a variety of capital market and bank sources, including securitizations and from aircraft and engine sale proceeds. Therefore, our ability to execute our business strategy, particularly the growth of our business, depends to a significant degree on our ability to secure additional financing. Whether we will be able to obtain financing will depend upon a number of factors, such as our historical and expected performance, industry and market trends, the availability of capital and the relative attractiveness of alternative investments. We believe that funds will be available to support our growth strategy. However, future deterioration in our performance or our markets could limit our ability to obtain financing and/or increase our cost of capital, which may negatively affect our ability to raise additional funds and grow our business.
Our liquidity also depends on the ability of our subsidiaries to dividend cash to us. Substantially, all of our owned aircraft are held through special purpose subsidiaries, consolidated joint ventures or finance structures which borrow funds to finance or refinance the aircraft. Most of the commercial bank loans and export credit facility financings restrict the payment of dividends in the event that the borrower is in default under the applicable loan, which can include the failure to meet financial ratios or tests. Our revolving credit facility with a syndicate of banks led by affiliates of UBS Real Estate Securities Inc. permits limited distributions to us by the relevant subsidiary borrower during the first two years provided specified principal payments are made. AeroTurbine's revolving credit facility with a syndicate of banks led by affiliates of Calyon permits distributions to us provided that specified financial ratios are met. The securitization of Aircraft Lease Securitisation allows distributions on the subordinated notes to us after the senior classes of notes are repaid. We believe we are in compliance
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with the financial covenants in all of our indebtedness. For more information on our indebtedness, see "Indebtedness".
From time to time, we enter into intercompany funding arrangements with our subsidiaries and/or provide capital contributions to them to ensure that our subsidiaries have sufficient liquidity to satisfy their contractual and operational requirements.
Cash Flows
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005. Our cash flows for the nine months ended September 30, 2005 represent the cash flows for AerCap B.V. from January 1, 2005 to June 30, 2005, when it was owned by our prior shareholders, and the cash flows for AerCap Holdings C.V. from June 27, 2005 (inception) to September 30, 2005, following the 2005 Acquisition on June 30, 2005. For the period from June 27, 2005 to June 30, 2005, we did not generate any cash flows. The cash flows have been aggregated to provide investors with data for nine months ended September 30, 2005 on the same basis our management uses to analyze our business results and to provide a basis for comparing our cash flows for the nine months ended September 30, 2006 to cash flows for prior periods. We have included a reconciliation of the aggregate nine months ended September 30, 2005 cash flows to the consolidated statements of cash flows prepared in accordance with US GAAP in the table below:
|
AerCap B.V. |
AerCap Holdings C.V. |
Aggregate Non-GAAP |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Six months ended June 30, 2005 (restated) |
Three months ended September 30, 2005 (restated) |
Nine months ended September 30, 2005 |
|||||||
|
(US dollars in millions) |
|||||||||
Net cash flow provided by operating activities | $ | 107.3 | $ | 43.3 | $ | 150.6 | ||||
Net cash flow provided by (used in) investing activities | 14.5 | (1,657.3 | ) | (1,642.8 | ) | |||||
Net cash flow (used in) provided by financing activities | (142.0 | ) | 1,708.8 | 1,566.8 |
The aggregation of cash flow data for the nine months ended September 30, 2005 is not in accordance with US GAAP, as AerCap Holdings C.V. is a different reporting entity for accounting purposes from AerCap B.V. and the periods presented are not directly comparable because the cash flow information for the three months ended September 30, 2005 includes the effects of the 2005 Acquisition. The AerCap Holdings C.V. cash flow information for the nine months ended September 30, 2005 reflects the addition, without adjustment, of the cash flows of AerCap B.V. for the six months ended June 30, 2005 and of AerCap Holdings C.V. for the three months ended September 30, 2005. The aggregated cash flow information should be considered as supplemental information only.
|
Aggregate Non-GAAP |
AerCap Holdings C.V. |
|||||
---|---|---|---|---|---|---|---|
|
Nine months ended September 30, 2005 |
Nine months ended September 30, 2006 |
|||||
|
(US dollars in millions) |
||||||
Net cash flow provided by operating activities | $ | 150.6 | $ | 176.3 | |||
Net cash flow used in investing activities | (1,642.8 | ) | (344.5 | ) | |||
Net cash flow provided by financing activities | 1,566.8 | 201.2 |
Cash Flows From Operating Activities. Our cash flows provided by operating activities increased by $25.7 million to $176.3 million in the nine months ended September 30, 2006 from $150.6 million in the nine months ended September 30, 2005 due primarily to the $48.6 million increase in net income to $105.1 million for the nine months ended September 30, 2006 from $56.5 million in the nine months ended September 30, 2005. This increase in net income did not cause an equivalent increase in the cash flows primarily due to the $32.8 million increase in our inventory following the AeroTurbine Acquisition.
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Cash Flows Used in Investing Activities. Our cash flows used in investing activities decreased by $1,298.3 million, to cash used in investing activities of $344.5 million in the nine months ended September 30, 2006 from cash used in investing activities of $1,642.8 million in the nine months ended September 30, 2005. The principal reason for the decrease in cash used in investing activities in the nine months ended September 30, 2006 was the consideration paid, net of cash acquired, of $1,245.6 million paid by AerCap Holdings C.V. to acquire AerCap B.V. in the nine months ended September 30, 2005.
Cash Flows Provided by Financing Activities. Our cash flows provided by financing activities decreased by $1,365.6 million, to $201.2 million provided by financing activities in the nine months ended September 30, 2006 from $1,566.8 million provided by financing activities in the nine months ended September 30, 2005. This decrease in cash flows provided by financing activities was due primarily to the $1.0 billion term loan contracted in connection with the 2005 Acquisition and additional equity investments totaling $405.1 million at the time of the 2005 Acquisition, which did not occur in the nine months ended September 30, 2006.
Year ended December 31, 2005 compared to year ended December 31, 2004. Our cash flows for the year ended December 31, 2005 represent an aggregation of the cash flows for AerCap B.V. from January 1, 2005 to June 30, 2005 when it was owned by our prior shareholders and the cash flows for AerCap Holdings C.V. from June 27, 2005 (inception) to December 31, 2005, following the 2005 Acquisition on June 30, 2005. For the period from June 27, 2005 to June 30, 2005, we did not generate any cash flows. The cash flows have been aggregated to provide investors with 2005 data for the full year of 2005 on the same basis our management uses to analyze our business results and to provide a basis for comparing our 2005 cash flows to cash flows to prior periods. We have included a reconciliation of the aggregate 2005 cash flows to the consolidated statements of cash flows prepared in accordance with US GAAP in the table below:
|
|
|
AerCap Holdings C.V. |
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
AerCap B.V. |
|
|||||||||||
|
Six months ended December 31, 2005 (restated) |
Aggregate non-GAAP year ended December 31, 2005 |
|||||||||||
|
Year ended December 31, 2004 (restated) |
Six months ended June 30, 2005 (restated) |
|||||||||||
|
(US dollars in millions) |
||||||||||||
Net cash flow provided by operating activities | $ | 91.9 | $ | 107.3 | $ | 109.2 | $ | 216.5 | |||||
Net cash flow (used in) provided by investing activities | (218.5 | ) | 14.5 | (1,431.3 | ) | (1,416.8 | ) | ||||||
Net cash flow provided by (used in) financing activities | 136.5 | (142.0 | ) | 1,505.5 | 1,363.5 |
The aggregation of the cash flow data for the year ended December 31, 2005 is not in accordance with US GAAP, as AerCap Holdings C.V is a different reporting entity for accounting purposes from AerCap B.V., and the periods presented are not directly comparable because the cash flow information for the six months ended December 31, 2005 includes the effects of the 2005 Acquisition. The AerCap Holdings C.V. cash flow information for the year ended December 31, 2005 reflects the addition, without adjustment, of the cash flows of AerCap B.V. for the six months ended June 30, 2005 and of AerCap Holdings C.V. for the initial accounting period of the six months ended December 31, 2005. The aggregated cash flow information should be considered as supplemental information only.
Cash Flows from Operating Activities. Our cash flows provided by operating activities increased by $124.6 million, or 135.6%, to $216.5 million in 2005 from $91.9 million in 2004 due primarily to the $188.7 million increase in net income to $83.4 million in 2005 from a net loss of $105.4 million in 2004. This increase in net income did not cause an equivalent increase in cash flows primarily due to the $132.4 million non-cash goodwill impairment charge in 2004 which did not occur in 2005. Cash flows also increased in 2005 as compared with 2004 as a result of a decline in notes receivables in 2005 primarily reflecting payment of a $45.0 million loan receivable secured by two A320 aircraft.
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Cash Flows from Investing Activities. Our cash flows used in investing activities increased by $1,198.3 million, from $218.5 million in 2004 to $1,416.8 million in 2005. The principal reason for the increase in cash used in 2005 was the consideration, net of cash acquired, of $1,245.6 million paid by AerCap Holdings C.V. to acquire AerCap B.V. In addition, we have increased the amount of cash in restricted cash accounts by $125.9 million. A large percentage of this additional cash was required to be placed in a restricted account due to Aircraft Lease Securitisation. The increased uses of cash flows for investing activities during 2005 were only partially offset by a $101.4 million decrease in the amounts paid for the acquisition of new aircraft and the payment of pre-delivery aircraft payments and a $88.2 million increase in amounts received from the sale of assets.
Cash Flows from Financing Activities. Our cash flows provided by financing activities increased by $1,227.0 million, from $136.5 million in 2004 to $1,363.5 million in 2005. In 2005, we increased the source of cash from additional borrowings by $1,991.6 million primarily related to the $1.0 billion term loan contracted at the 2005 Acquisition and the $1.0 billion debt issued by Aircraft Lease Securitisation. The increased cash flows provided by financing activities in 2005 were offset partially by the repayment of the $1.0 billion term loan in 2005 with the proceeds of the debt issued by Aircraft Lease Securitisation. These increased borrowings in 2005 when compared to 2004 are partially offset by increased borrowings in 2004 to fund additional aircraft deliveries in that year. Additional financing cash flows were obtained in 2005 through additional equity investments totaling $405.1 million at the time of the 2005 Acquisition, which did not occur in 2004.
Indebtedness
As of September 30, 2006, our outstanding indebtedness totaled $2.5 billion and primarily consisted of export credit facilities, Japanese operating lease financings, commercial bank debt, securitization debt and capital lease structures.
The following table provides a summary of our indebtedness at September 30, 2006:
Debt Obligation |
Collateral |
Commitment |
Outstanding |
Undrawn amounts |
Weighted average interest rate |
Final stated maturity |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(US dollars in thousands) |
|||||||||||||||
Export credit facilities guaranteed financings | 17 aircraft | $ | 578,573 | $ | 578,573 | $ | | 5.45 | % | 2006-2018 | ||||||
Japanese operating lease financings | 3 aircraft | 100,545 | 100,545 | | 4.97 | % | 2006-2015 | |||||||||
Commercial bank debt | 22 aircraft and 49 engines | 1,704,957 | 706,074 | 998,883 | 5.61 | % | 2006-2019 | |||||||||
Aircraft Lease Securitization debt | 42 aircraft | 896,157 | 896,157 | | 5.33 | % | 2006-2030 | |||||||||
Capital lease obligations | 1 aircraft | 22,490 | 22,490 | | 8.49 | % | 2006-2014 | |||||||||
Capital lease obligations under defeasance structures | 4 aircraft | 155,138 | 155,138 | | 5.38 | % | 2006-2010 | |||||||||
Total | $ | 3,457,860 | $ | 2,458,977 | $ | 998,883 | ||||||||||
The weighted average interest rate in the table above includes the impact of related derivative instruments, regardless of whether such derivatives qualified for hedge accounting at the related periods.
In October 2006, we entered into a $248.0 million senior secured term loan with a syndicate of banks led by Calyon to finance the purchase of 25 aircraft from GATX. The interest rate on the senior secured loan is one month LIBOR plus 1.75% for the first five years and one month LIBOR plus 2.25% thereafter and its maturity date is October 2013. As of September 30, 2006, we had $872.0 million available and undrawn under our UBS revolving credit facility and $126.9 million available and undrawn under our Calyon revolving credit facility. See "Indebtedness" for more information regarding our indebtedness.
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On October 17, 2006, we signed a letter of intent to acquire 20 new A330-200 widebody aircraft from Airbus. In the event we enter into final purchase documentation with respect to the A330-200 aircraft, we would have significantly increased financial commitments. See "BusinessAircraftAircraft on Order or Subject to Letters of Intent".
Contractual Obligations
Our contractual obligations consist of principal and interest payments on term debt, executed purchase agreements to purchase aircraft, operating lease rentals on aircraft under lease in/lease out structures and rent payments pursuant to our office leases. We intend to fund our contractual obligations through our lines of credit and other borrowings as well as internally generated flows. We believe that our sources of liquidity will be sufficient to meet our contractual obligations.
The following table sets forth our contractual obligations and their maturity dates as of September 30, 2006:
Payments Due By Period as of September 30, 2006
Contractual Obligations |
2006(6) |
2007 to 2009 |
2010 to 2011 |
Therafter |
Total |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(U.S. dollars in thousands) |
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Term debt(1) | $ | 79,484 | $ | 976,696 | $ | 819,690 | $ | 1,302,272 | $ | 3,178,142 | |||||||
Purchase obligations(2)(3)(5) | 237,628 | 2,076,404 | 949,421 | | 3,263,453 | ||||||||||||
Operating leases(4) | 8,081 | 110,964 | 54,327 | 30,630 | 204,002 | ||||||||||||
Derivative obligations | (175 | ) | (2,256 | ) | (2,762 | ) | (3,710 | ) | (8,903 | ) | |||||||
Total(4) | $ | 325,018 | $ | 3,161,808 | $ | 1,820,676 | $ | 1,329,192 | $ | 6,636,694 | |||||||
In May 2006, we entered into a joint venture agreement with China Aviation Supplies Import & Export Group Corporation and affiliates of Calyon to establish AerDragon, a Chinese aircraft leasing company. Under the AerDragon joint venture agreement, we have agreed to contribute $15.0 million to fund AerDragon's initial aircraft and engine purchases. Since AerDragon had not received the local Chinese approvals to begin operations until October 2006, we were not required to make the $15.0 million capital contribution as of September 30, 2006 and the capital contribution is not included in the table above.
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Capital Expenditures
Our primary capital expenditure is the purchase of aircraft, including pre-delivery payments under our 1999 aircraft purchase agreement with Airbus. The table below sets forth our capital expenditures for the historical periods indicated.
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Year ended December 31, |
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Nine months ended September 30, 2006 |
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2003 |
2004 |
2005 |
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(US dollars in thousands) |
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Capital expenditures | $ | 222,041 | $ | 313,213 | $ | 198,870 | $ | 390,437 | ||||
Pre-delivery payments | 52,923 | 33,366 | 46,315 | 59,496 |
In 2003, our principal capital expenditures were for four A321 aircraft, one A320 aircraft and one A319 aircraft and predelivery payments for 13 aircraft. In 2004, our principal capital expenditures were for five A320 aircraft, three A321 aircraft and one MD-11F aircraft which we previously leased-in under an operating lease and predelivery payments for nine aircraft. In 2005, our principal capital expenditures were for five A320 aircraft and one A319 aircraft and predelivery payments for 12 aircraft.
The table below sets forth our expected capital expenditures for future periods indicated based on contracted commitments as of September 30, 2006.
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2006(1) |
2007 |
2008 |
2009 |
2010 |
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(US dollars in thousands) |
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Capital expenditures | $ | 222,389 | $ | 428,609 | 310,421 | 829,143 | 944,257 | |||||||||
Pre-delivery payments | 15,239 | 87,142 | 214,318 | 206,771 | 5,164 | |||||||||||
Total | $ | 237,628 | $ | 515,751 | $ | 524,739 | $ | 1,035,914 | $ | 949,421 | ||||||
In the nine months ended September 30, 2006, we purchased three A319 aircraft and three A320 aircraft under our 1999 Airbus purchase contract and seven additional used aircraft. In 2007, we expect to make capital expenditures related to final delivery payments on nine A320 family aircraft under our 1999 Airbus purchase contract. We expect to make capital expenditures related to the 47 A320 aircraft and 23 A319 aircraft on order by AerVenture between 2007 and 2010. As we implement our growth strategy and expand our aircraft and engine portfolio, we expect our capital expenditures to increase in the future. We anticipate that we will fund these capital expenditures through internally generated cash flows, draw downs on our committed revolving credit facilities and the incurrence of bank debt, and other debt and equity issuances. In the three months ended December 31, 2006, we expect to take delivery of a portfolio of 17 aircraft at a total cost of approximately $210.9 million.
Off-Balance Sheet Arrangements
We are obligated to make sublease payments under 11 aircraft operating leases of aircraft which mature between 2008 and 2012. We lease these 11 aircraft to aircraft operators. Since we are not fully exposed to the risks and rewards of ownership of these aircraft, we do not include these aircraft on our balance sheet. In addition, we do not recognize a financial liability for our operating lease obligations under the leases on our balance sheet. Due to the fact that sublease receipts related to these 11 aircraft are insufficient to cover our lease obligations, we have recognized an onerous contract accrual on our balance sheet which is equal to the difference between the present value of the lease expenses and the present value of the sublease income discounted at appropriate discount rates. This accounting treatment, however, does not result in the same presentation as if we accounted for these aircraft as owned assets and the related operating lease obligations as term debt liabilities. Note 15 of our
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consolidated financial statements included in this prospectus includes more information on this arrangement, including a table of future lease obligations by year.
As described above in "Factors Affecting the Comparability of our ResultsDeconsolidation of AerCo", we continue to have an economic interest in AerCo. This interest is not assigned any value on our balance sheet because we do not expect to realize any value for our investment.
We have other investments in companies or ventures in the airline industry which we obtain primarily through restructurings in our leasing business. The value of these investments are immaterial to our financial position. We do not consolidate such companies on our balance sheet because the investments do not meet the requirements for consolidation.
Subsequent to December 31, 2005, we have entered into one joint venture, our Annabel joint venture, that does not qualify for consolidated accounting treatment, the assets and liabilities of which will be off our balance sheet and we will record only our net investment under the equity method of accounting.
Related Party Transactions
Related Party Transactions with Current Affiliates
We have made payments to Cerberus and third parties on behalf of Cerberus totaling approximately $1.1 million since the 2005 Acquisition. The payments to Cerberus represent reimbursement of consulting fees paid by Cerberus to individuals who have assisted us in the evaluation of acquisitions, including the purchase of aircraft and our acquisition of AeroTurbine. In addition, this amount also includes approximately $0.2 million of reimbursements for consulting services incurred by Cerberus in connection with Cerberus's evaluation of the 2005 Acquisition. We are currently establishing agreements directly with the consultants who we expect to retain for similar services in the future instead of working with them through Cerberus. If we accept services from individuals employed by or contracted through Cerberus in the future, we expect these arrangements to reflect arm's length negotiations that will not be less favorable to us than the terms we could negotiate with an independent party.
We leased two A321-200 model aircraft to Air Canada in 2002. One lease began on April 23, 2002 and lasts for a term of six years. The other lease began on May 29, 2002 and lasts for a term of ten years. We generated $12.5 million in revenue from these leases in 2005. Cerberus indirectly controls 11% of the equity of Air Canada, but did not hold this equity interest at the time we entered into the leases. We believe that the terms of the lease reflect arm's length negotiations.
In February 2006, we entered into a guarantee arrangement with DvB Bank AG and Aozora Bank Limited, an entity that is majority owned by Cerberus. In addition, Pieter Korteweg, the Chairman of our Board of Directors, and Marius Jacques Leonard Jonkhart, a non-executive director, are also on the board of directors of Aozora Bank. The guarantee supports certain of our obligations to a Japanese operating lessor of up to $13.8 million in connection with our lease of an A320 aircraft from a Japanese operating lessor. The lessor of the aircraft required the guarantee as additional credit support following the 2005 Acquisition. We leased the A320 aircraft from the Japanese operating lessor under a lease and then subleased the aircraft to an aircraft operator. In the event we fail to make certain payments related to the unwind values following the termination of the lease under our head lease, DvB Bank will make the payment on our behalf but will be reimbursed by Aozora Bank for any payments made. We have agreed to indemnify Aozora Bank for any payments it makes under the guarantee arrangement. The guarantee expires in February 2008. Under the terms of the guarantee arrangement, we are required to provide cash collateral to Aozora Bank if we breach certain financial covenants. Currently we are not in breach of any of these covenants and have not provided any cash
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collateral. In connection with the guarantee arrangement, we pay Aozora Bank a fee of 4.1% per annum of the amount guaranteed and have provided Aozora Bank with a second priority share pledge over the shares of the entity leasing the aircraft from the Japanese operating lessor. We believe that the terms of the guarantee reflect arm's length negotiations and are not more favorable than the terms we would have negotiated with an independent party.
In April 2006, we entered into a senior secured revolving credit facility in the aggregate amount of up to $1.0 billion with UBS Real Estate Securities Inc., UBS Securities Inc., Deutsche Bank Trust Company Americas and certain other financial institutions. See "IndebtednessUBS Revolving Credit Facility" for more information regarding the UBS revolving credit facility. Aozora Bank is a syndicate member under the facility and participated in up to $50.0 million of the class A loans and up to $25.0 million of the class B loans issued thereunder, representing 7.0% of the class A loans and 13.9% of the class B loans. As of September 30, 2006, we had drawn and outstanding $91.9 million of the class A loans and $23.7 million of the class B loans. We believe that the terms of the revolving credit facility reflect arm's length negotiations and are not more favorable than the terms we would have negotiated with an independent party.
We lease our office and warehouse located in Miami, Florida from an entity owned by the Chief Executive Officer and Chief Operating Officer of AeroTurbine. The lease for this facility expires on December 31, 2013. The lease was amended in March 2006 to adjust the rent to current market rates commencing in January 2007.
In 2004, we entered into leases for six A320 aircraft with WizzAir Hungary Limited. As part of the transaction, WizzAir agreed to issue us shares of their equity representing 17.4% of their equity as of November 2004. In 2005, we agreed with WizzAir's other shareholders and creditors to enter into a Shareholders' and Noteholders' Agreement under which we agreed to convert trade receivables into an unsecured, non-amortizing €7.8 million note, convertible into approximately 26% of WizzAir's outstanding shares on a fully diluted basis as of February 2005). Under the terms of the Shareholders' and Noteholders' Agreement, we were able to appoint a director of WizzAir between February 2005 and June 2005. We appointed one of our senior managers to be a director of WizzAir during this period. We sold all of our WizzAir convertible notes in September 2006. We believe that the terms of the leases and the conversion of trade receivables into convertible notes reflect arm's length negotiations and are not more favorable than the terms we would have negotiated with an independent party.
We have also entered into aircraft management agreements with our non-consolidated joint ventures, AerDragon and Annabel Aircraft Leasing Limited, or Annabel, and the AerCo securitization vehicle. We believe that the terms of these agreements reflect arm's length negotiations that are not more favorable than the terms we would have negotiated with an independent party. See "BusinessAircraftJoint Ventures".
Related Party Transactions with Affiliates of our Prior Shareholders
Prior to the 2005 Acquisition, we entered into several related party transactions with affiliates of our prior shareholders, including financings which were on favorable terms.
In March 2004, we entered into a $1.5 billion secured term loan and two subordinated $50.0 million revolving loan facilities with our prior shareholders or their affiliates, DaimlerChrysler, Bayerische Landesbank Girozentrale, Dresdner Bank AG, DZ BANK AG, Deutsche Zentrale-Genossenschaftsbank, HVB Banque Luxembourg Girozentrale and Kreditanstalt für Wiederaufbau. The term loan is repayable semiannually between June 30, 2006 and December 30, 2015, with a $620.0 million principal payment due on the last payment date. The interest rate on the term loan is one-, three- or six-month LIBOR plus 1.25% and the interest rate on the subordinated revolving loan
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facilities is six-month LIBOR plus 0.50%. We believe that the covenants, principal amortization schedule and interest rates on these loans were more favorable than what we could have obtained in arm's length negotiations at the time we entered into the loans. In connection with the 2005 Acquisition, these loans were acquired by us and eliminated in consolidation. As a result of the favorable amortization schedule and interest rates on these loans, we had greater liquidity and our interest on term debt expense was lower in 2004 and in the six months ended June 30, 2005 than it would otherwise have been had we entered into the loan on market terms.
In December 2002, we entered into an agreement with Wings Aircraft Finance, Inc. to provide aircraft management services for 41 Fairchild Dornier 328 aircraft. The agreement terminates in February 2013. Since December 2002, we have sold nine of the Fairchild Dornier aircraft on behalf of the owner. We generated revenue of $1.9 million in 2003, $1.6 million in 2004 and $2.0 million in 2005 from the fees we received for managing the Wings portfolio. Prior to the 2005 Acquisition, DaimlerChrysler Aerospace A.G., one of our prior indirect shareholders, held a 100% equity interest in Wings Aircraft Finance. We believe that the terms of the aircraft management services agreement reflect arm's length negotiations and are not more favorable than the terms we would have negotiated with an independent party.
In 1999, we signed an aircraft purchase order with Airbus for the purchase of 32 new A320 family aircraft. As of September 30, 2006, nine aircraft remained to be delivered under the agreement. Airbus is partially owned by European Aeronautic Defense & Space CompanyEADS N.V., an affiliate of DaimlerChrysler, one of our former shareholders. We believe that the terms of this contract reflect arm's length negotiations and are not more favorable than the terms we would have negotiated with an independent third party.
Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk associated with short and long-term borrowings bearing variable interest rates and lease payments under leases tied to floating interest rates. To manage this interest rate exposure, we enter into interest rate swap and cap agreements. We are also exposed to foreign currency risk, which can adversely affect our operating profits. To manage this risk, we enter into forward exchange contracts.
The following discussion should be read in conjunction with Notes 1, 2 and 11 to our audited consolidated financial statements contained in this prospectus, which provide further information on our derivative instruments contained in this prospectus.
Interest Rate Risk
The rentals we receive under our leases are based on fixed and variable interest rates. We fund our operations with a mixture of fixed and floating rate US dollar denominated debt and finance lease obligations. An interest rate exposure arises to the extent that the mix of these obligations are not matched with our assets. This exposure is primarily managed through the use of interest rate caps and interest rate swaps using a cash flow based risk management model. This model takes the expected cash flows generated by our assets and liabilities and then calculates by how much the value of these cash flows will change for a given movement in interest rates. Our policy is to seek to ensure that the net worth of our business will not be exposed to more than a $15 million movement from a 1% parallel shift in US dollar interest rates across the yield curve.
Under our interest rate swaps, we pay fixed amounts and receive floating amounts on a monthly basis. The swaps amortize based on a number of factors, including the expiration dates of the leases under which our lessees are contracted to make fixed rate rental payments and the three- or six-month LIBOR reset dates under our floating rate leases. Under our interest rate caps, we will receive the
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excess, if any, of LIBOR, reset monthly or quarterly on an actual/360 adjusted basis, over the strike rate of the relevant cap.
The table below provides information as of September 30, 2006 regarding our derivative financial instruments that are sensitive to changes in interest rates on our borrowing, including our interest rate swaps and caps. The table presents the notional amounts and weighted average interest rates by contracted maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the applicable date.
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2006 |
2007 |
2008 |
2009 |
2010 |
Thereafter |
Total |
Fair value |
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(US Dollars in thousands) |
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Interest rate caps | ||||||||||||||||||||||||
Notional amounts | $ | | $ | 75,000 | $ | 575,000 | $ | 145,000 | $ | 135,000 | $ | 640,000 | $ | 1,570,000 | $ | 9,116 | ||||||||
Weighted average strike rate | | 5.75% | 5.75% | 5.75% | 5.61% | 5.90% | 5.80% |
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2006 |
2007 |
2008 |
2009 |
2010 |
Thereafter |
Total |
Fair value |
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(US Dollars in thousands) |
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Interest rate swaps | ||||||||||||||||||||||||
Notional amounts | $ | 20,000 | $ | | $ | 60,000 | $ | | $ | | $ | | $ | 80,000 | $ | (212) | ||||||||
Weighted average pay rate | 2.63% | | 5.38% | | | | 4.69% | |||||||||||||||||
Weighted average receive rate | 5.32% | | 5.37% | | | | 5.36% |
As of September 30, the interest rate swaps and caps had notional amounts of $1.65 billion and a fair value of $8.9 million. The variable benchmark interest rates associated with these instruments ranged from one to six-month LIBOR.
Our Board of Directors is responsible for reviewing and approving our overall interest rate management policies and transaction authority limits. Specific hedging contracts are approved by the treasury committee acting within the overall policies and limits. Our counterparty risk is monitored on an ongoing basis, but is mitigated by the fact that all of our interest rate derivatives, except Aircraft Lease Securitisation's derivatives, require two-way cash collateralization. Our counterparties are subject to the prior approval of the treasury committee.
Foreign Currency Risk and Foreign Operations
Our functional currency is the U.S. dollar. As of September 30, 2006, all of our aircraft leases and all of our engine leases were payable in U.S. dollars. We incur euro denominated expenses in connection with our offices in The Netherlands and Ireland. For the year ended December 31, 2005, our aggregate expenses denominated in currencies other than the U.S. dollar, such as payroll and office costs and professional advisory costs, were $40.5 million in U.S. dollar equivalents and represented 85.5% of total selling, general and administrative expenses. We enter into foreign exchange contracts based on our projected exposure to foreign currency risks in order to protect ourselves from the effect of period over period exchange rate fluctuations. Mark-to-market gains or losses on such contracts are recorded as part of selling, general and administrative expenses since most of our non-US denominated payments relate to such expenses. Since we currently receive substantially all of our revenues in US dollars and we hedge a material portion of our non-dollar denominated expenditures, we do not believe that a change in foreign exchange rates will have material impact on our results of operations. However, the portion of our business conducted in foreign currencies could increase in the future, which could increase our exposure to losses arising from currency fluctuations.
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Inflation
Inflation generally affects our costs, including selling, general and administrative expenses and other expenses. However, we do not believe that our financial results have been, or will be, adversely affected by inflation in a material way.
Management's Use of EBITDA
We define EBITDA as income (loss) from continuing operations before provision for income taxes, interest on term debt and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-US GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable revenue and expenses and enhances our management's ability to make decisions with respect to resource allocation and whether we are meeting established financial goals.
EBITDA provides us with a useful measure of operating performance because it assists us in comparing our operating performance in different periods without the impact of our capital structure (primarily interest charges on our outstanding debt) and non-cash expenses related to our long-lived asset base (primarily depreciation and amortization) on our operating results. Accordingly, EBITDA measures our financial performance based on operational factors that management can impact in the short-term, such as our cost structure or expenses, and on a more medium-term basis, our revenues. In addition, our Aozora Bank guarantee contains a provision that requires us to place certain fees from certain aircraft management services in a pledged account if our EBITDA falls below specified thresholds and our Calyon revolving credit facility contains a covenant tied to EBITDA that requires AeroTurbine to maintain a specified ratio of fixed charges to EBITDA.
Limitations of EBITDA
EBITDA has limitations as an analytical tool and should not be viewed in isolation. EBITDA is a measure of operating performance that is not calculated in accordance with US GAAP. EBITDA should not be considered a substitute for net income, income from continuing operations or cash flows provided by or used in operations, as determined in accordance with US GAAP. Material limitations in making the adjustments to our earnings to calculate EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:
We strongly urge you to review the reconciliation of EBITDA to GAAP net income (loss) in the table below, along with our audited consolidated financial statements included in this prospectus. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the EBITDA measure, as presented in this prospectus, may differ from and may not be directly comparable to similarly titled measures used by other companies. The table below shows the reconciliation of net income (loss) to EBITDA for the years ended December 31, 2003, 2004 and 2005 (on an aggregated basis, as described above), and the six months ended June 30, 2005, three months
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ended September 30, 2005, six months ended December 31, 2005 and nine months ended September 30, 2006.
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AerCap, B.V. |
AerCap Holdings C.V. |
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Six months ended June 30, |
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Year ended December 31, |
Three months ended September 30, 2005 |
Six months ended December 31, 2005 |
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Nine months ended September 30, 2006 |
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2003 |
2004 |
2005 |
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(US dollars in thousands) |
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Net income (loss) | $ | 36,915 | $ | (105,362 | ) | $ | 33,700 | $ | 22,915 | $ | 49,663 | $ | 83,363 | $ | 105,142 | ||||||
Depreciation | 143,303 | 125,877 | 66,407 | 22,477 | 45,918 | 112,325 | 72,347 | ||||||||||||||
Interest on term debt | 123,435 | 113,132 | 69,857 | 24,868 | 44,742 | 114,599 | 11,432 | ||||||||||||||
Provision for income taxes | 28,222 | 168 | 4,127 | 4,086 | 10,570 | 14,697 | 20,094 | ||||||||||||||
EBITDA | $ | 331,875 | $ | 133,815 | $ | 174,091 | $ | 74,346 | $ | 150,893 | $ | 324,984 | $ | 309,015 | |||||||
Other Contingencies
VASP Litigation
We leased 13 aircraft and three spare engines to Viacao Aerea de Sao Paulo, or VASP, a Brazilian airline. In 1992, VASP defaulted on its lease obligations and we commenced litigation against VASP to repossess our aircraft. In 1992, we obtained a preliminary injunction for the repossession and export of 13 aircraft and three spare engines from VASP. We repossessed and exported the aircraft and engines in 1992. VASP appealed this decision. In 1996, the High Court of the State of Sao Paulo ruled in favor of VASP on its appeal. We were instructed to return the aircraft and engines to VASP for lease under the terms of the original lease agreements. The High Court also granted VASP the right to seek damages in lieu of the return of the aircraft and engines. Since 1996 we have pursued this case in the Brazilian courts through various motions and appeals. On March 1, 2006, the Superior Court of Justice dismissed our most recent appeal and on April 5, 2006 a special panel of the Superior Court of Justice confirmed the Superior Court of Justice decision. On May 15, 2006 we appealed this decision to the Federal Supreme Court. On February 23, 2006, VASP commenced a procedure for the calculation of the award for damages and since then both we and VASP have appointed experts to assist the court in calculating damages. Our external legal counsel has advised us that even if we lose on the merits, they do not believe that VASP will be able to demonstrate any damages. We continue to actively pursue all courses of action that may be available to us and intend to defend our position vigorously.
We are currently pursuing claims for damages in the English courts against VASP based on the damages we incurred as a result of the default by VASP on its lease obligations. In October 2006, the English Courts approved our motion to serve process upon VASP in Brazil. Our management, based on the advice of external legal counsel, has determined that it is not necessary to make any provisions for this litigation.
Swedish Tax Dispute
In 2001, Swedish tax authorities challenged the position we took in tax returns we filed for the years 1999 and 2000 with respect to certain deductions. In accordance with Swedish law, we made a guaranty payment to the tax authority of $16.8 million in 2003. We appealed the decision of the tax authorities, and, in August 2004, a Swedish Court ruled in our favor, which resulted in a tax refund of $19.9 million (which included interest and the effect of foreign exchange movements for the intervening period). In September 2004, the Swedish tax authorities appealed the decision of the Court and filed an appeal with the Administrative Court of Appeal in Sweden. We have responded to that appeal. At the
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moment, it is considered likely that a decision will be forthcoming from the Court by the end of 2006. Our management, based on the advice of our tax advisors, has determined that it is not necessary to make any provisions for this tax dispute.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB" or the "Board") issued SFAS No. 154, "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements", and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods' financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We have adopted SFAS No. 154 beginning January 1, 2006.
In July 2005, the FASB issued FSP No. APB 18-1, "Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for Under the Equity Method in Accordance with APB Opinion No. 18 Upon a Loss of Significant Influence", which requires that when equity method accounting ceases upon the loss of significant influence of an investee, the investor's proportionate share of the investee's other comprehensive income should be offset against the carrying value of the investment. To the extent this results in a negative carrying value, the investor should adjust the carrying value to zero and record the residual balance through earnings. The FSP is effective for reporting periods beginning after July 12, 2005. We have adopted FSP No. APB 18-1 beginning January 1, 2006 and do not anticipate that it will have a material impact on our financial position or results of operations.
On November 10, 2005, the FASB issued FSP No. 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards", which provides an alternative (and simplified) method to calculate the pool of excess income tax benefits upon the adoption of SFAS No. 123(R). Among other things, the FSP also provides guidance on how to present excess tax benefits in statements of cash flows when the alternative pool calculation is used. This new guidance became effective upon its issuance; however, companies can generally make a one-time election to adopt the transition method in FSP No. 123(R)-3 up to one year from the later of (i) initial adoption of SFAS No. 123(R) or (ii) November 10, 2005. If a company elects to adopt the alternative method after it has already issued financial statements pursuant to the provisions of SFAS No. 123(R), such adoption would be considered a change in accounting principle. We continue to evaluate FSP No. 123(R)-3 and, accordingly, have not yet determined whether the alternative method will be utilized.
In February 2006, the FASB issued FSP FAS No. 123(R)-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon Occurrence of a Contingent Event". This position amends SFAS No. 123(R) to incorporate that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee's control does not meet certain conditions in SFAS No. 123(R) until it becomes probable that the event will occur. The FSP is effective for the first reporting period beginning after the date the FSP was posted to the FASB website, which was on February 3, 2006; if in applying SFAS No. 123(R) an entity treated options or similar instruments that allow for cash settlement upon the occurrence of a contingent event in a manner inconsistent with the guidance in this FSP, then retrospective application
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is required. We do not anticipate that FSP No. 123(R)-4 will have a material impact on our financial position or results of operations.
In February 2006, the FASB issued SFAS No.155, "Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB statements No. 133 and 140". This statement permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006 (January 1, 2007 for us). Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided that no interim period financial statements have been issued for the financial year. We do not anticipate that the adoption of SFAS 155 will have a material effect on our financial statements or our results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets". SFAS No. 156 amends SFAS No. 140. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes. SFAS No. 156 is effective as of the beginning of a company's first fiscal year that begins after September 15, 2006. We do not anticipate SFAS No. 156 to have a material impact on our financial position or our results of operations.
In April 2006, the FASB issued FSP No. FIN 46(R)-6, "Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)". The FSP addresses how a reporting enterprise should determine the variability to be considered in applying FIN 46(R). The variability that is considered in applying FIN 46(R) affects the determination of (a) whether an entity is a VIE, (b) which interests are "variable interests" in the entity, and (c) which party, if any, is the primary beneficiary of the VIE. That variability affects any calculation of expected losses and expected residual returns, if such a calculation is necessary. FSP No. FIN 46(R)-6 must be applied prospectively to all entities (including newly created entities) and to all entities previously required to be analyzed under FIN 46(R) when a "reconsideration event" has occurred, in the first reporting period beginning after June 15, 2006. We will evaluate the impact of this FSP at the time any such "reconsideration event" occurs and for any new entities created.
In July 2006, FASB released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109" (FIN 48 or the "Interpretation"). FIN 48 is applicable to all uncertain positions for taxes accounted for under FASB Statement 109, "Accounting for Income Taxes" (FAS 109). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that we have taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. The new accounting model for uncertain tax positions is effective for annual periods beginning after December 15, 2006. We have not yet determined the impact of the adoption of FIN 48 on our financial statements, if any.
In September 2006, the FASB issued FSP No. AUG AIR-1 "Accounting for Planned Major Maintenance Activities." This FSP amends certain provisions in the AICPA Industry Audit guide, "Audits of Airlines" to prohibit the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and makes this guidance applicable to entities in all industries. The FSP is effective for the first fiscal year beginning after December 15, 2006 and requires retrospective application for all fiscal years presented in the financial statements upon adoption. Early adoption as of the beginning of an entity's fiscal year is permitted. We
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have not yet determined the impact of the adoption of FSP No. AUG-AIR-1 on our financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin 108 ("SAB 108"). SAB 108 establishes an approach requiring the quantification of financial statement errors based on the effects of the error on each of an entity's financial statements and the related financial statement disclosures. This model is commonly referred to as a "dual approach" because it essentially requires quantification of errors under both of the widely-recognized methods for quantifying the effects of financial statement errors: the "roll-over" method and the "iron curtain" method. SAB 108 permits existing public companies to record the cumulative effect of initially applying the "dual approach" in the first year ending after November 15, 2006 by recording the necessary "correcting" adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. We do not anticipate that the adoption of SAB 108 will have a material effect on our financial statements or our results of operations.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans 'an amendment of FASB Statements No. 87, 88, 106, and 132 (R)' " ("SFAS 158"). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires the measurement of defined benefit plan assets and obligations as of the date of the employer's fiscal year-end statement of financial position (with limited exceptions). Under SFAS 158, we will be required to recognize the funded status of its defined benefit postretirement plan and to provide the required disclosures in its financial statements as of December 31, 2006. We do not anticipate that the adoption of SFAS 158 will have a material effect on our results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS 157 prescribes a single definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are currently evaluating the impact, if any that SFAS 157 will have on our results of operations or financial position. SFAS 157 is effective for us beginning as of January 1, 2008.
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AIRCRAFT, ENGINE AND AVIATION PARTS INDUSTRY
Introduction
The information and data contained in this prospectus relating to the commercial aircraft industry has been provided by Simat, Helliesen & Eichner, Inc. ("SH&E"), an international air transport consulting firm, relied upon as an expert. See "Experts". SH&E has advised us that this information is drawn from its database and other sources and that: some information in SH&E's database is derived from estimates or subjective judgments; the information in the databases of other commercial aircraft data collection agencies may differ from the information in SH&E's database; and although SH&E has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited verification, audit and validation procedures, and may accordingly contain errors. The historical and projected information in this prospectus relating to the aircraft, engine and aviation parts industry that is not attributed to a specific source is derived from SH&E's internal analyses, estimates and subjective judgments.
Executive Summary
The business of owning, leasing and trading aircraft, engines and parts is influenced by several key industry drivers, including demand for air travel and aircraft and engine fleet development.
Key trends in the industry include:
Industry Overview
Globalization and the continued expansion of free market economies in much of the developing world have led to increased demand for air travel. Between 1990 and 2005, global passenger traffic measured in Revenue Passenger Miles ("RPM": an RPM represents one fare-paying passenger transported one mile, and is the most common measure of air travel demand) increased by nearly 115%, or 5.2% per year, according to The Airline Monitor (January 2006). The Airline Monitor forecasts that air traffic will continue to grow an average 5.2% per year through 2025.
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Historical and Forecast World Traffic (RPMs) and GDP Growth
Source: The Airline Monitor, January 2006 and International Monetary Fund ("IMF") World Economic Outlook, April 2006
Demand for air travel and freight is driven primarily by economic growth and competitive pricing. Aviation industry profitability has traditionally shown a strong correlation to gross domestic product growth, indicating that global and regional economic performance is a principal driver of air travel and air freight demand, and thus of aircraft demand. Over the past five years, a series of events, including the September 11, 2001 terrorist attacks in the United States, global economic recession, military actions in the Middle East, health concerns, surging fuel costs and several natural disasters have affected the demand for air travel and cargo capacity in different parts of the world. Despite these challenges, the global economy has expanded rapidly since 2002, driving sustained growth in worldwide air transportation demand. The graph below indicates that passenger demand in North America, Europe and Latin America has rebounded from the 2001 lows, while traffic in Asia, Africa and the Middle East, regions that are less dependent than Europe or Latin America on the U.S. market, have experienced steady growth since 1998. Similarly, freight traffic has shown strong growth due to the recovery in the global economy and the continuing growth of international trade. As a result of these positive trends, IATA's September 2006 forecast predicts airline industry operating profit to reach $9.8 billion in 2006 and $11.7 billion in 2007.
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RPMs by Carrier Region, Indexed (1998 = 100)
Sources: 1998-2005 Airline Business and latest 2005 data based on IATA estimates
Strong economic growth over the last few years has been accompanied by increased competition among airlines and greater penetration of LCCs in the U.S., Europe and several emerging markets, which have exerted downward pressure on airfares and made air travel more affordable. Today, air travel is rapidly becoming a more accessible alternative to land transportation for a growing proportion of the world's population, especially in high-growth emerging markets.
Air Transport Demand Trends
Demand for new and used commercial aircraft is driven primarily by the requirements of the passenger airline industry. Boeing and Airbus both predict that over 96% of the new aircraft that they will sell in the next 20 years will be configured for passenger use, while only 4% will be designed for cargo transport. Historically, growth in the aircraft leasing industry has primarily been driven by fleet requirements of the major passenger airlines in developed regions of the world. Despite the relatively low level of recent new orders by the major U.S. airlines, several new factors are currently contributing to higher demand for aircraft and were the primary drivers for the 2005 surge in orders from manufacturers and commitments to operating lessors. These factors include:
It is possible that such fundamental structural changes in the industry could result in less cyclical volatility and a longer upturn in the current cycle. Although many major airlines have had to limit aircraft acquisitions in recent years to focus on cutting costs, many are now in a position to capitalize
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on the rising demand for air travel and will have increasing incentives to replace aging fleets in coming years.
Growth in Emerging Markets
Emerging markets, especially those with large populations distributed over a broad geographic area, tend to have very small commercial passenger jet aircraft fleets and order backlogs relative to total population size. Their low aircraft to population ratios, which are generally less than one-tenth the ratio of the U.S., highlight the growth potential in these markets. To the extent per capita income rises, driven by high GDP growth rates, it is reasonable to expect the fleet size of these markets to increase.
Ratio of Current Aircraft Fleet and Order Backlog to Population (aircraft / million of population)(1)
Source: AvSoft UK Aircraft Analytical System ("ACAS") (April 2006) and IMF World Economic Outlook, April 2006
Asia/Pacific. Despite epidemics and natural disasters, Asian traffic, which was less affected by the terrorist attacks of September 11 than the U.S. and Europe, has experienced continued growth in recent years. The China market presents the primary growth opportunity in the region: passenger traffic growth has been very strong, with the number of passengers handled by China's airports reaching nearly 140 million in 2005, an increase of more than 15% from the prior year. Although medium-term growth in the China market may be temporarily constrained by infrastructure and capacity limits, the Civil Aviation Administration of China plans to invest over $17.4 billion in airport development and build over 40 airports to address these infrastructure needs over the next five years, according to Airline Business. According to ACAS, the current order backlog for Chinese airlines totals 546 aircraft, nearly all of which are expected to be delivered within the next 5 years.
India, a country with over one billion people representing 15% of the global population, has until recently experienced limited air service growth. The present strong traffic growth is expected to
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continue, with India's GDP forecast to grow by 7.3% in 2006 and 7% in 2007, according to the IMF 2006 World Economic Outlook. Globalysis Ltd., a research and advisory firm, forecasts India's aviation market to be one of the fastest growing air traffic markets in the world for the years 2007-2008. The Globalysis research report forecasts growth in India's aviation market of approximately 28% in 2007 and 24% in 2008 for a total of 52 million passengers being carried in 2008. Similar to China however, future growth may be temporarily slowed by infrastructure limits and, in India's case, by bureaucratic inertia.
Japan, Asia's largest air travel market in terms of annual passengers, has greatly expanded its airline handling capacity and infrastructure. In addition, ongoing industry deregulation should pave the way for market stimulation through the advent of LCCs and increased competition.
Eastern Europe/Russia. Air travel growth prospects for Eastern Europe are very positive, with seven countries ranking in IATA's list of the top 20 countries with the highest compounded annual growth rates in passenger traffic for 2005-2009. This passenger growth is being driven by European Union enlargement, which has bolstered the region's economic growth, promoted liberalization in the aviation market, and encouraged the establishment of several LCCs.
In Russia, air travel demand is hampered by Russian airlines' difficulties in accessing the market for efficient, Western-built aircraft. The bulk of Russia's passenger aircraft fleet is currently made up of old and inefficient Soviet-era aircraft. Foreign aircraft purchases are currently subject to a 20% import duty and an 18% excise tax intended to protect the country's ailing aircraft manufacturing industry. Hence, the country's airlines do not have the flexibility to introduce fuel efficient aircraft. Russia's civil aviation authority estimates that a large number of the Soviet-era aircraft in service will face retirement by 2010, driving the need for an estimated 500 aircraft to fill the capacity gap. Nonetheless, economic realities may push Russia to become a significant growth market for operating lessors in coming years.
Latin America. Since 2001, most Latin American economies have experienced an economic upturn, according to the International Monetary Fund's 2006 World Economic Outlook. Several airlines in the region ceased operations in recent years, but the increased liberalization of domestic and international air transport markets has spurred renewed investment, reorganization and consolidation in the airline sector. Growth potential in large domestic markets such as Mexico and Brazil is substantial and several well-run carriers are taking advantage of this demand. Industry consolidation is expected to generate savings through economies of scale and expand the airlines' route networks, which should improve service levels and stimulate further traffic growth.
Africa/Middle East. Air traffic in Africa and the Middle East has also grown rapidly in the last ten years. Governments in Persian Gulf states such as the United Arab Emirates and Qatar have supported the development of airlines, including Emirates Airlines, Etihad Airways and Qatar Airways, resulting in the rapid expansion of these airlines into long-haul markets.
In response to growing demand from Africa, major European carriers have added capacity to serve this market.
Low Cost Carriers
The increasing presence of LCCs is generating additional demand for aircraft by creating new markets and stimulating traffic demand with low fares. Given the importance of high asset utilization and service frequency, LCC fleet growth has focused on efficient and reliable narrowbody aircraft such as the Airbus A320 and Boeing 737 NG aircraft families.
LCCs have existed since the early 1970s, when Southwest Airlines began service in the United States. However, the rapid development of LCCs began in 2000, when rising fuel prices and an economic slowdown in several major economies magnified the benefits of the low cost business model over the traditional network model. Although much of the early growth was in North America, the LCC presence has strengthened in other world markets, particularly Europe. In Great Britain, Ireland and parts of Western Europe, LCCs now represent a larger proportion of intra-regional capacity than
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their peers in North America. The enlargement of the European Union in 2004 extended the fully-liberalized European marketplace, and opened new markets to LCC expansion.
While still far behind the levels seen in North America and Europe, LCC penetration in other regions is also growing significantly. LCC capacity share in Latin America has risen due to successful operators in Brazil, Central America and a new expansion of Mexican carriers. Meanwhile, Southeast Asia and Australia have seen significant penetration by LCCs, which are now spreading to other parts of Asia.
The new frontiers for LCC expansion in Asia are likely to be India and China. India, with its very large population and high number of urban population centers, is poised for LCC growth. As the Indian economy grows, it is expected that the country's accompanying air traffic expansion will be met by increased capacity on the part of existing and new start-up LCCs.
Industry Restructuring in Developed Markets
North America. The liberal U.S. bankruptcy laws have made it possible for a number of major U.S. carriers to avoid liquidation by operating and restructuring under bankruptcy protection. The protection afforded by Chapter 11 of the United States Bankruptcy Code has allowed major carriers such as United Air Lines Inc., US Airways Group, Inc., Delta Air Lines, Inc. and Northwest Airlines, Inc. to restructure their operations by reorganizing schedules, restructuring debt, rationalizing fleets, reducing labor costs, lowering pension liabilities and taking other steps that have enabled them to continue operating. As a result, the aircraft market has not been impacted by a sudden flood of aircraft being disposed of in liquidation. In addition, airlines that have been operating under Chapter 11 protection generally have relatively old fleets, and have not ordered new aircraft. As they recover, these carriers are expected to replace their existing fleets over time with more modern, fuel-efficient aircraft.
European Network Carriers. Large European network carriers, particularly Lufthansa, Air France and British Airways, have achieved significant cost savings in conjunction with material revenue growth improvement by concentrating on more lucrative long-haul operations rather than marginally profitable short-haul flights. All three carriers have recently expanded operations to India and East Asia, especially China.
The airline industry in developed markets is expected to continue its restructuring efforts to lower costs and improve labor and asset productivity with the goal of returning to profitability in a new environment that is experiencing greater LCC penetration rates and persistently high fuel costs. Assuming the industry can achieve financial stability and current traffic forecasts are accurate, demand for aircraft should continue to rise as airlines in developed markets seek to capitalize on the growing demand for air travel.
Fuel Prices
Increased energy prices have counteracted many of the efficiency gains and cost-cutting efforts undertaken by airlines since 2001. The U.S. Department of Energy reports that New York jet fuel prices increased by 143% between September 2003 and September 2006 in U.S. dollar terms and 116% in Euro terms, after peaking in July 2006 at 190% and 157%, respectively.
Adjusting to high fuel prices will continue to present a challenge to the airlines, since fuel prices are largely beyond their control, at least in the short term. Airlines can control their fuel costs by entering into oil/fuel hedges, implementing fuel surcharges and ensuring that fuel efficiency is a major determinant in fleet acquisition decisions. The rising cost of fuel is leading to an acceleration of the replacement of older aircraft with modern, more fuel-efficient aircraft.
Aircraft Retirement
Airlines order new aircraft not only to grow their businesses, but also to replace older less-efficient aircraft in their fleets, and current high fuel prices are accelerating such replacements. Many airlines in the United States have aging fleets that will require substantial replacement in the next few years and the large number of Russian-built aircraft still in operation will also generate a substantial replacement requirement. Approximately 23% of the global commercial jet fleet, or over 4,000 aircraft, is in excess of 20 years of age. The graph below sets forth the average age by global region.
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Commercial JetsAverage Fleet Age2006
Source: ACAS, April 2006
According to ACAS, as of June 2006, there were nearly 2,400 aircraft currently parked in temporary or permanent storage. SH&E believes less than 600 of these have the potential to re-enter commercial airline service, while the remainder should be considered obsolete. As shown in the graph below, the number of aircraft being retired from service or being scrapped for parts spiked during 2001 and 2002 and is again trending upwards as carriers act to rationalize fleet requirements. SH&E expects a continued increase in the retirement rate and forecasts between 350 and 400 retirements in each of the next three years. This forecast accounts for aging aircraft in active service and also assumes that a large proportion of the currently parked aircraft fleet is effectively already retired. The retirement forecast excludes Russian built jet retirements due to limitations in fleet data.
Historic and Forecast Annual Jet Aircraft Retirements
Source: Historical: Airline Monitor January 2006, Forecast: SH&E
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Aircraft and Engine Fleet Development
The airline industry's financial challenges in 2001-2003 impacted aircraft and engine manufacturers. Airbus, Boeing, Pratt & Whitney, General Electric and Rolls-Royce had to implement production cutbacks during that period. While neither Boeing nor Airbus experienced a high number of outright cancellations during the downturn, they had to manage the deferment of deliveries and adapt to much lower levels of new orders. However, the recovery of the economy and the rising demand for travel have pushed aircraft orders to record highs in 2005, suggesting the beginning of a new business cycle.
World Aircraft Orders and Deliveries (1990-2005 and delivery forecast through 2009)
Source: ACAS, April 2006
The order backlog for new aircraft reached a peak in 2000, but then declined continuously through 2004. The surge in orders during 2005, however, has led to an increase in backlog: net combined orders for Boeing and Airbus grew from only 520 in 2002, the lowest total since 1994, to over 2,000 in 2005.
Yearly Percentage of Jet Aircraft Order Backlog of Total Fleet
|
Year ending December 31, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006* |
|||||||
Order Backlog | 4,877 | 4,592 | 3,886 | 3,663 | 3,608 | 4,469 | 4,610 | |||||||
Commercial Jet Aircraft Fleet | 15,883 | 16,847 | 17,548 | 18,205 | 18,927 | 19,647 | 19,837 | |||||||
Backlog as % of Fleet | 31% | 27% | 22% | 20% | 19% | 23% | 23% |
Source:
ACAS, April 2006
* 2006 is as of March 31, 2006. Fleet data includes regional jets and parked aircraft.
As further evidence of the growing demand for additional capacity, the number of available used aircraft has declined steadily since 2002. The percentage of the world fleet that was available for sale or
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lease at the end of 2005 fell below 3%, nearing the lows experienced in 1996. Such supply shortages are generally leading to higher lease rates and trading prices. For a number of aircraft types, particularly the A320 and 737, which are highly favored by LCCs, supply is very limited and there is some concern that manufacturers will not be able to satisfy demand in the near term.