AerCap Holdings N.V. — 2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by PwC, which issued an unqualified opinion. Results include ILFC from its acquisition on May 14, 2014, so comparisons with 2013 are not like-for-like.
Business context
AerCap is an aircraft lessor and asset manager. At year-end it owned 1,132 aircraft, managed 147, and had 380 aircraft on order. Owned-fleet utilization was 99.2%; the fleet’s net-book-value-weighted average age was 7.7 years. Its May 2014 acquisition of ILFC substantially expanded the business and made AIG a 46% shareholder.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue and other income | $3.640 billion | $1.050 billion |
| Net income attributable to AerCap | $810.4 million | $292.4 million |
| Basic / diluted EPS | $4.61 / $4.54 | $2.58 / $2.54 |
| Operating cash flow | $2.297 billion | $692.7 million |
| Investing cash flow | $(1.832) billion | $(1.335) billion |
| Financing cash flow | $734.1 million | $417.4 million |
- Management-reported adjusted net income, a non-GAAP measure, was $855.5 million ($4.86 adjusted basic EPS), versus $291.8 million in 2013. It excludes specified derivative mark-to-market, transaction/integration, and maintenance-rights effects.
- Net spread—basic rents less interest expense excluding derivative mark-to-market—was $2.519 billion, versus $663.6 million.
- Year-end total assets were $43.9 billion, up from $9.5 billion; flight equipment held for operating leases was $32.0 billion.
- Year-end cash and cash equivalents were $1.490 billion; restricted cash was $717 million. Total liquidity, including unrestricted cash and undrawn credit lines, was reported as $7.3 billion, including $5.8 billion of undrawn commitments.
- Debt was $30.4 billion on the balance sheet, including $1.3 billion of acquisition-related fair-value adjustments; principal debt was approximately $29.1 billion. Fixed-rate debt was 69.8% of principal debt. Adjusted debt-to-equity ratio was 3.4:1.
Material changes versus the prior period
- Reported revenue rose 247% and AerCap-attributable net income rose 177%, primarily because of the ILFC acquisition, not solely organic growth. ILFC contributed $2.623 billion of revenue and $687.8 million of net income from May 14 through year-end.
- Interest expense increased to $780.3 million from $226.3 million, mainly reflecting the larger debt balance after the acquisition; average borrowing cost excluding specified effects declined to 3.6% from 3.9%.
- Transaction and integration expenses were $148.8 million, versus $11.0 million. Selling, general and administrative expenses increased to $299.9 million from $89.1 million.
- Operating cash flow increased substantially with the enlarged business. Capital spending and aircraft pre-delivery payments were $2.102 billion and $458.2 million, respectively.
- The acquisition was funded with $2.4 billion cash and 97.6 million newly issued shares; AerCap also assumed ILFC liabilities. Year-end shares outstanding rose to 212.3 million from 113.8 million.
Outlook, risks and unusual items
- Management expected average capital expenditures of about $4 billion annually over the next three years and stated that available liquidity was expected to cover at least 120% of debt maturities and contracted capital expenditures over the next 12 months. Contracted aircraft and engine purchase obligations totaled approximately $24.3 billion, with deliveries extending through 2022.
- The company expects to fund aircraft commitments through operating cash flows, credit facilities, new debt and capital-market access, and potentially aircraft sales. These plans depend on financing availability, covenant compliance, and the ability to meet manufacturer payment schedules.
- Interest-rate sensitivity: management estimated that a 1 percentage-point increase in rates would raise average annual interest expense by about $37 million over the next three years, after considering derivatives and offsets. Floating-rate debt represented 30.2% of principal debt after swaps.
- Key risks include substantial leverage and debt service, aircraft purchase commitments, lessee defaults, aircraft residual-value and lease-rate declines, interest-rate and refinancing risk, and integration and synergy execution. Management identified Russia and emerging markets as exposures; 35% of 2014 lease revenue came from Asia/Pacific/Russia and 33% from Europe.
- Aircraft impairment charges were $21.8 million. Management reported that all aircraft passed its year-end recoverability tests, while noting sensitivity to future lease rates, residual values and economic conditions. Asset-value guarantee liability was $133.5 million; maximum aggregate potential commitment was approximately $316.6 million. No 2014 provision for guarantee losses was recorded.
- Specified litigation includes long-running Brazilian VASP and Transbrasil matters, as well as claims related to the Yemenia aircraft crash and Air Lease Corporation dispute. The company said it believes it has defenses in these matters; it reported aggregate reasonably possible losses exceeding recognized amounts as immaterial, but outcomes remain uncertain.
- AIG’s 46% ownership, director-designation rights and voting arrangements may influence governance; AIG shares were subject to staggered lockups. A $250 million share-repurchase authorization was announced in February 2015, after year-end. The company stated it did not currently pay or intend to pay dividends.
Most important facts for investors to verify
- Separate acquisition-driven results from the legacy business; review the unaudited pro forma figures and the timing and assumptions behind expected ILFC synergies.
- Reconcile GAAP earnings to adjusted net income, particularly the acquisition-related maintenance-rights and integration adjustments.
- Review debt maturities, covenant headroom, restricted cash, facility conditions and the funding plan for the $24.3 billion purchase commitments.
- Assess aircraft residual-value assumptions, impairment sensitivity, asset-value guarantees and exposure to older or concentrated aircraft types.
- Track lessee credit quality, geographic exposures and the outcomes of material litigation and aircraft repossessions.
- Evaluate AIG’s ownership, potential share sales, governance rights and the execution and funding of the post-year-end repurchase program.