AerCap Holdings N.V. — FY 2011 Form 20-F
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
AerCap leases, finances, sells and manages commercial aircraft globally. At year-end it owned 251 aircraft, managed 42 and had 27 aircraft on order or purchase rights. Of its owned aircraft, 245 were on lease to 89 customers in 46 countries; fleet utilization was 98.5%. The company sold AeroTurbine in October 2011 and thereafter reported one business segment.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $1,093.9 million | $959.3 million |
| Lease revenue | $1,050.5 million | $902.3 million |
| Income from continuing operations | $225.5 million | $239.7 million |
| Net income attributable to AerCap | $172.2 million | $207.6 million |
| Basic and diluted EPS | $1.17 | $1.81 |
| Cash flow from operating activities | $621.6 million | $641.6 million |
- Revenue increased 14.0%, principally as basic rents rose 13.2% to $951.3 million, reflecting net fleet additions and deliveries. Maintenance rents and end-of-lease compensation increased to $99.2 million.
- Net gain on asset sales fell 74.3% to $9.3 million. Total expenses rose 23.2% to $863.9 million, including higher depreciation, debt interest and selling, general and administrative costs. Continuing-operations pre-tax income was $230.1 million, down from $258.2 million; the reported pre-tax margin was approximately 21.0%, versus 26.9% in 2010.
- Management reported adjusted net income of $303.1 million, up 35% from $223.9 million, and adjusted EPS of $2.07. These non-GAAP measures exclude specified non-cash and one-time charges, including the AeroTurbine discontinued-operations loss.
- Net spread, a company-defined measure of basic rents less debt interest excluding specified effects, was $718.1 million, up 13% from $633.7 million.
- Year-end cash and cash equivalents were $411.1 million, with a further $237.3 million restricted. Total assets were $9.11 billion; debt was $6.11 billion, about 67% of assets; total equity was $2.28 billion. Debt declined from $6.57 billion in 2010.
- Committed undrawn facilities were reported at approximately $1.0 billion, primarily restricted to aircraft financing. Operating cash flow exceeded investing outflows of $567.9 million; financing activities used $53.2 million.
Material changes and unusual items
- AeroTurbine was sold to ILFC for $228.0 million. AerCap recorded a $52.8 million after-tax discontinued-operations loss, including transaction and incentive costs, a deferred-tax-asset write-off and a book loss. The sale increased cash by $119.9 million net of specified items.
- A $24.5 million payment to buy out Genesis portfolio servicing rights was recorded in SG&A; the company expected approximately $6.0 million in annual savings.
- Interest expense increased to $292.5 million, including a $59.3 million non-cash mark-to-market charge on interest-rate caps. Share-based compensation was $6.2 million before tax.
- Asset impairment was $15.6 million, including older Airbus A320 and Boeing 737 aircraft, engines and an intangible lease premium. Management said further impairment could result if aircraft values or market conditions deteriorate.
- Four lessees leasing seven aircraft defaulted in 2011; lost revenue during off-lease periods and related technical costs totaled approximately $21.3 million. Defaults and restructurings also reduced basic rents and increased leasing expenses.
- American Airlines filed for Chapter 11 in November 2011. This automatically terminated AerCap’s remaining commitment for 31 deliveries under a 35-aircraft purchase-and-leaseback agreement. AerCap said it would consider funding aircraft individually under previously agreed terms; four further aircraft had been delivered by March 23, 2012.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management planned continued portfolio growth and expected capital expenditures to increase, funded through operating cash flow, committed facilities and additional debt or equity financing. Six aircraft were scheduled for delivery in 2012; reported purchase obligations totaled $1.18 billion and excluded the terminated American Airlines deliveries.
- Management identified aircraft purchase commitments and continued access to funding as material liquidity needs. The filing cites $1.0 billion of undrawn facilities and states that funding may also require aircraft or investment sales or capital-market transactions.
- Lease expirations representing 25.9% of 2011 lease revenue were scheduled through 2014. Re-leasing at acceptable rates, lessee credit quality, repossession costs and aircraft residual values are key sensitivities.
- Interest-rate exposure is significant: a 1 percentage-point increase was estimated to raise annual interest expense by approximately $33.2 million after current caps and swaps; further rate declines could reduce annual lease revenue by up to $5.6 million.
- Additional risks include aviation-market oversupply, fuel costs, airline capacity and profitability, regional and political exposure, maintenance and regulatory requirements, and concentration in Airbus aircraft. Asia/Pacific/Russia and Europe generated 39% and 38% of 2011 lease revenue, respectively; 77.8% of portfolio net book value was Airbus aircraft.
- Two Brazilian litigation matters remain disclosed. In the Transbrasil matter, the plaintiff asserted an aggregate claim of approximately $210 million, while AerCap disputed liability and estimated its potential proportionate share at about 7% if a penalty applied. Management made no provision for either Transbrasil or VASP litigation, judging them not likely to have a material effect; outcomes remain uncertain.
- Management said disclosure controls and internal control over financial reporting were effective as of year-end; the independent auditor also reported effective internal control. The company warned that proposed lease-accounting changes could materially affect financial-statement presentation, though the eventual effect was not yet assessable.
Important facts for investors to verify
- Reconcile the filing’s inconsistent net-income discussion: the audited statements report 2011 net income of $172.8 million and net income attributable to AerCap of $172.2 million, while one MD&A passage says net income declined to $127.7 million.
- Review the non-GAAP adjusted net income reconciliation and the treatment of the AeroTurbine loss, derivative mark-to-market charges and Genesis servicing-rights buyout.
- Assess liquidity available for aircraft deliveries, financing maturities and the refinancing of the TUI facility tranche due in April 2012; distinguish unrestricted cash from restricted cash and facilities limited to aircraft purchases.
- Track American Airlines deliveries and lease performance, as well as re-leasing progress for upcoming expirations and any additional defaults or repossessions.
- Monitor aircraft impairment assumptions and the Transbrasil and VASP litigation exposure, including whether circumstances change enough to require a provision.