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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to ______________
Commission file number 001-31616
INTERNATIONAL LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 22-3059110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10250 CONSTELLATION BLVD., LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 788-1999
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of May 12, 2005, there were 42,198,119 shares of Common Stock, no par
value, outstanding.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
----------------
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets March 31, 2005 and
December 31, 2004........................................................... 3
Condensed Consolidated Statements of Income
Three months Ended March 31, 2005 and 2004.................................. 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2005 and 2004.................................. 5
Condensed Consolidated Statements of Cash Flows
Three months Ended March 31, 2005 and 2004.................................. 6
Notes to Condensed Consolidated Financial Statements........................... 8
Cautionary Statement Regarding Forward Looking Information..................... 10
Item 2. Management's Discussion and Analysis of the Financial Condition and Results
of Operations........................................................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 20
Item 4. Controls and Procedures........................................................ 21
Part II. Other Information
Item 1. Legal Proceedings.............................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................ 22
Item 6. Exhibits........................................................................ 22
Signatures..................................................................... 23
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Cash, including interest bearing accounts of $66,283 (2005)
and $101,137 (2004) $ 66,738 $ 101,653
Current income taxes 70,500 19,522
Notes receivable and net investment in finance and
sales-type leases 515,398 519,739
Flight equipment under operating leases 39,557,429 37,380,712
Less accumulated depreciation 6,626,015 6,300,071
------------ ------------
32,931,414 31,080,641
Deposits on flight equipment purchases 1,383,773 1,250,168
Accrued interest, other receivables and other assets 134,958 119,415
Derivative assets 988,748 1,210,908
Investments 25,676 22,979
Variable interest entities assets 148,359 152,417
Deferred debt issue costs - less accumulated
amortization of $79,104 (2005) and $77,112 (2004) 65,831 59,666
------------ ------------
$ 36,331,395 $ 34,537,108
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued interest and other payables $ 341,511 $ 264,276
Tax benefit sharing payable to AIG 245,000 245,000
Debt financing, net of deferred debt discount of $37,425 (2005)
and $29,502 (2004) 24,709,140 23,136,016
Foreign currency translation adjust relate to
foreign currency denominated debt 932,475 1,215,809
Derivative liabilities 31,261 38,810
Capital lease obligations 20,497 39,580
Security and other deposits on flight
equipment 1,004,941 876,590
Rentals received in advance 172,872 160,878
Deferred income taxes 2,967,526 2,825,661
Variable interest entities liabilities 67,245 70,886
SHAREHOLDERS' EQUITY
Market Auction Preferred Stock, $100,000 per share liquidation value;
Series A and B each having 500 shares issued and outstanding 100,000 100,000
Common stock--no par value; 100,000,000 authorized
shares, 42,198,119 issued and outstanding 653,582 653,582
Paid-in capital 585,416 579,955
Accumulated other comprehensive (loss) income 44,852 (9,650)
Retained earnings 4,455,077 4,339,715
------------ ------------
Total shareholders' equity 5,838,927 5,663,602
------------ ------------
$ 36,331,395 $ 34,537,108
============ ============
See notes to condensed consolidated financial statements.
-3-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
2005 2004
-------- --------
.....(Unaudited)......
REVENUES
Rental of flight equipment $829,101 $722,938
Flight equipment marketing 16,411 9,742
Flight equipment marketing - securitization -- 25,610
Interest and other 12,892 20,873
-------- --------
858,404 779,163
-------- --------
EXPENSES
Interest 253,640 233,801
Depreciation of flight equipment 331,225 295,609
Provision for overhauls 44,143 34,902
Selling, general and administrative 36,366 24,959
-------- --------
665,374 589,271
-------- --------
INCOME BEFORE INCOME TAXES 193,030 189,892
Provision for income taxes 61,513 60,688
-------- --------
NET INCOME $131,517 $129,204
======== ========
See notes to condensed consolidated financial statements.
-4-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
2005 2004
...... (Unaudited).......
NET INCOME $ 131,517 $ 129,204
--------- ---------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
Net changes in cash flow hedges 54,647 (98,462)
Change in unrealized appreciation on securities
available for sale (145) --
--------- ---------
54,502 (98,462)
--------- ---------
COMPREHENSIVE INCOME $ 186,019 $ 30,742
========= =========
See notes to condensed consolidated financial statements
-5-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
2005 2004
----------- -----------
.........(Unaudited).........
OPERATING ACTIVITIES
Net income $ 131,517 $ 129,204
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation of flight equipment 331,225 295,609
Deferred income taxes 112,518 (14,422)
Foreign currency transaction gains (279,625) (133,046)
Change in derivative instruments 284,241 129,097
Amortization of deferred debt issue costs 8,507 5,738
Change in unamortized debt discount (7,923) (2,465)
Changes in operating assets and
liabilities:
(Increase) decrease in accrued interest, other receivables
and other assets (11,486) 16,992
(Decrease) increase in current income taxes payable (50,978) 74,463
Increase in accrued interest and other payables 88,038 102,737
Increase in rentals received in advance 11,994 5,516
Other 5,428 (1,851)
----------- -----------
Net cash provided by operating activities 623,456 607,572
----------- -----------
INVESTING ACTIVITIES
Acquisition of flight equipment for operating leases (2,209,516) (1,911,934)
(Increase) decrease in deposits and progress payments (133,605) 87,637
Proceeds from disposal of flight equipment - net of gain 20,975 805,921
Advances on notes receivable (6,500) --
Collections on notes receivable and finance leases 11,874 15,312
Other (2,557) (6,653)
----------- -----------
Net cash used in investing activities (2,319,329) (1,009,717)
----------- -----------
FINANCING ACTIVITIES
Net change in commercial paper 1,785,319 280,613
Proceeds from debt financing 973,146 862,741
Payments in reduction of debt financing, capital lease obligations (1,196,501) (643,321)
Debt issue costs (14,672) (8,370)
Increase (decrease) in customer deposits 128,351 (18,496)
Payment of common and preferred dividends (10,976) (8,464)
----------- -----------
Net cash provided by financing activities 1,664,667 464,703
----------- -----------
Effect of exchange rate changes on cash (3,709) --
Net (decrease) increase in cash (34,915) 62,558
Cash at beginning of period 101,653 90,780
----------- -----------
Cash at end of period $ 66,738 $ 153,338
=========== ===========
(Table continued on following page)
-6-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2005 2004
---- ----
...(Unaudited)....
Cash paid (received) during the period for:
Interest (net of amount capitalized of $14,507 (2005)
and $12,712 (2004)) 167,645 $ 141,825
Income taxes, net (28) 647
2005
Notes receivable in the amount of $13,286 were used as partial payment
for the acquisition of seven aircraft.
Aircraft previously accounted for as operating leases were converted
into sales-type leases in the amount of $19,228.
$5,179 was reclassed from Retained earnings to Paid-in capital as a
result of an adjustment for certain prior period compensation costs
related to an incentive plan of ILFC's parent, AIG.
2004
One aircraft was received in exchange for investment in finance leases
and notes receivables in the amount of $23,456.
Notes in the amount of $2,700 were received as partial payment in
exchange for flight equipment sold with a net book value of $23,727.
Other assets in the amount of $250,924 were received in exchange for
aircraft sold into a securitization, but not yet novated, with a net
book value of $250,759.
See notes to condensed consolidated financial statements.
-7-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
A. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the 2004 unaudited
condensed consolidated financial statements to conform to the 2005
presentation. Operating results for the three months ended March 31, 2005
are not necessarily indicative of the results that may be expected for the
year ended December 31, 2005. These statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in International Lease Finance Corporation's (the
"Company," "management," "we," "our," "us") Annual Report on Form 10-K for
the year ended December 31, 2004.
B. HEDGING ACTIVITIES
We use derivatives to manage exposures to interest rate and foreign
currency risks. During the three months ended March 31, 2005, we recorded
the following in interest expense:
Income (loss) related to derivative instruments: (Dollars in thousands)
Changes in fair value of non-hedging instruments $ 4,117
Changes in fair value of hedging instruments (287,156)
Offsetting changes in fair value of hedged items 283,334
Ineffectiveness related to cash flow hedges (230)
----------
$ 65
==========
During the three months ended March 31, 2005, $16.0 million (net) was
reclassified from Accumulated other comprehensive (loss) income to Interest
expense when interest was paid or received on our cash flow hedges. We
estimate that within the next twelve months we will amortize into earnings
approximately $68.7 million of the pre-tax balance in Accumulated other
comprehensive income under cash flow hedge accounting in connection with
our program to convert debt from floating to fixed interest rates.
C. FLIGHT EQUIPMENT MARKETING - SECURITIZATION
We sold 34 aircraft to a trust during the first quarter of 2004. The
transaction generated approximately $1.0 billion of gross proceeds. The
trust was primarily funded and is owned by other subsidiaries of American
International Group, Inc. ("AIG"), our ultimate parent corporation, and is
consolidated by AIG. We do not consolidate the trust, nor do we consolidate
the subsidiary. The transaction was structured similar to a securitization,
in which the trust acquired the aircraft based on values assigned by
independent appraisers. Further, an unaffiliated third party acted as
capital markets advisor and initial purchaser of the notes of the
securitization. Gains in the amount of $25.6 million, net of fees and
expenses, related to the transaction are included in Flight Equipment
Marketing - Securitization for the period ended March 31, 2004. A similar
transaction related to 37 aircraft was completed during 2003. The Company
is continuing to manage the aircraft sold to the trusts for a fee. For the
three months ended March 31 we recorded management fees in the amounts of
$2.5 million (2005) and $2.4 million (2004) in income related to management
services provided to the trusts and $38,550 and $166,256 accounts
receivable related to the management of those aircraft is included in
"Accrued interest, other receivables and other assets" on our March 31,
2005 and December 31, 2004 Consolidated Balance Sheets.
-8-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
D. RELATED PARTY TRANSACTIONS
Compensation to Certain ILFC Employees From Starr International Company,
Inc. (SICO)
In 1975, the voting shareholders and Board of Directors of SICO, a
private holding company whose principal asset consists of approximately 12%
of AIG's outstanding common stock as of January 31, 2005, and which has no
direct ownership interest in us, decided that a portion of the capital value
of SICO (AIG shares or their cash equivalent) should be used to provide an
incentive plan for the current and succeeding management of all American
International companies, including ILFC. At that time, SICO established the
SICO Deferred Compensation Plan (the "SICO Plan"). None of the costs of the
various benefits provided under the SICO Plan have been paid by ILFC.
AIG has determined that it is required under accounting principles
generally accepted in the United States of America to expense amounts
attributable to deferred compensation granted to certain AIG employees under
the SICO Plan. As a result, we have determined that, as a subsidiary of AIG,
it is appropriate to record such compensation expense, related to our
employees' participation in the SICO Plan, in our financial statements.
Total compensation expense related to the SICO Plan would not have been
material to any prior year, and as such no restatement of prior financial
statements is necessary. We made the determination of materiality, and
evaluated the impact that expense recognition would have had on all prior
years to which SICO Plan compensation would have applied. In the first
quarter of 2005, we have recorded the total amount of compensation expense
related to the SICO Plan that would have been recorded in all prior periods
through December 31, 2004. This adjustment was recorded as a reduction of
retained earnings on the Consolidated Balance Sheet of $5.2 million, with a
corresponding increase to additional paid-in capital. The adjustment has no
effect on total shareholders' equity or cash flows. The amount of
compensation expense related to the SICO Plan recorded in income for the
first quarter of 2005 is not material.
-9-
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains or incorporates statements
that constitute forward-looking statements. Those statements appear in a
number of places in this Form 10-Q and include statements regarding, among
other matters, the state of the airline industry, the Company's access to
the capital markets, the Company's ability to restructure leases and
repossess aircraft, the structure of the Company's leases, regulatory
matters pertaining to compliance with governmental regulations and other
factors affecting the Company's financial condition or results of
operations. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," and "should" and variations of these
words and similar expressions, are used in many cases to identify these
forward-looking statements. Any such forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and other
factors that may cause actual results, performance or achievements of the
Company or industry results to vary materially from the Company's future
results, performance or achievements, or those of the industry, expressed
or implied in such forward-looking statements. Such factors include, among
others, the risk factors described and referred to in the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments" and - "Risk Factors Affecting
International Lease Finance Corporation" and general industry economic and
business conditions, which will, among other things, affect demand for
aircraft, availability and creditworthiness of current and prospective
lessees, lease rates, availability and cost of financing and operating
expenses, governmental actions and initiatives and environmental and safety
requirements. The Company will not update any forward-looking information
to reflect actual results or changes in the factors affecting the
forward-looking information.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
International Lease Finance Corporation ("the Company", "management",
"we", "our", "us") primarily acquires new jet transport aircraft from The Boeing
Company ("Boeing") and AVSA, S.A.R.L., the sales subsidiary of Airbus Industries
("Airbus") and leases these aircraft to airlines throughout the world. In
addition to our leasing activity, we sell aircraft from our leased aircraft
fleet to other leasing companies, financial services companies and airlines. In
some cases, we provide fleet management services to companies with aircraft
portfolios for a management fee. From time to time we provide asset value
guarantees and loan guarantees to the buyers of aircraft or to financial
institutions for a fee. We also remarket and sell aircraft owned or managed by
others for a fee.
As of March 31, 2005, we owned 699 aircraft, had twenty aircraft in the
fleet that were classified as finance and sales-type leases, and provided fleet
management services for 95 aircraft. We have contracted with Airbus and Boeing
to buy 322 new aircraft for delivery through 2010 with an estimated purchase
price of $19.5 billion, 64 of which will deliver during the remainder of 2005.
Our sources of revenue are principally from scheduled and charter
airlines and companies associated with the airline industry. Our revenues and
results of operation are therefore affected by how our customers cope with the
economic environment in which airlines operate. The airline industry is
cyclical, economically sensitive and highly competitive. Airlines and related
companies may be affected by political or economic instability, terrorist
activities, changes in national policy, competitive pressures on certain air
carriers, fuel prices and shortages, labor stoppages, insurance costs,
recessions, and other political or economic events adversely affecting world or
regional trading markets. Our revenues and income will be affected by our
customers' ability to react to and cope with the volatile competitive
environment in which they operate, as well as our own competitive environment.
Our primary source of revenue is from operating leases. One measure of
profitability we use is a ratio called Lease Margin (see "Management's
Discussion and Analysis - Non-GAAP Financial Measures"). The airline industry is
cyclical in nature and lease margins generally declined after the terrorist
attacks of September 11, 2001, due to a surplus of aircraft in the market place,
airline bankruptcies, higher incidents of restructurings with troubled airlines,
repossessions of aircraft, depressed airline revenue yields, terrorism and
worldwide health concerns such as SARS. However, since late 2003, airliner
passenger and cargo traffic worldwide has exhibited measured growth. Despite
rising fuel prices which significantly impacted the airline industry during
2004, and continue to negatively impact it in 2005, overall industry trends in
2004 showed continued improvement, particularly outside the United States. As a
result, starting in 2004, and continuing in 2005, we see an increase in demand
for newer, modern, fuel-efficient aircraft which comprise the bulk of our fleet,
and an overall strengthening of lease rates. Although lease rates strengthened
during 2004, and continued to strengthen in the first quarter of 2005, there is
a lag between changes in market conditions and their impact on our results, as
contracts signed during times of lower lease rates are still in effect. The
strengthening of lease rates are starting to materialize in our results with the
lease margin increasing 1.4% at March 31, 2005 compared to March 31, 2004, but
the improvement in the airline industry has yet to be completely reflected in
our financial performance. Also, increasing interest rates, along with other
risk factors, may impact our future results. We believe we are well positioned
in the current industry environment with signed lease agreements for all of our
2005 deliveries of new aircraft and only one aircraft in our existing fleet not
placed with an airline at March 31, 2005.
We have received tax benefits under the Foreign Sales Corporation
("FSC") law and its successor regime, the Extraterritorial Income Act ("ETI").
In October 2004, Congress passed a bill, the American Jobs Creation Act of 2004,
repealing the corporate export tax benefits under the ETI, after the World Trade
Organization ruled the export subsidies were illegal. Under the bill, ETI export
tax benefits for corporations would be phased out in 2005 and 2006 and cease to
exist for the year 2007. We expect our effective tax rate to rise over the next
two years to a rate consistent with the "expected" statutory rate.
RECENT DEVELOPMENTS
AIG, our indirect parent, has delayed filing its Annual Report on Form
10-K for the year ended December 31, 2004 to allow AIG's Board of Directors and
new management adequate time to complete an extensive review of AIG's books and
records. The review includes issues arising from pending investigations into
non-traditional insurance products and certain assumed reinsurance transactions
by the Office of the
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Attorney General for the State of New York and the Securities and Exchange
Commission and from AIG's decision to review the accounting treatment of certain
additional items. The findings of the review have resulted in AIG's decision to
restate its financial statements for the years ended December 31, 2003, 2002,
2001 and 2000, and the quarters ended March 31, June 30, September 30 for the
years 2004 and 2003.
While neither AIG nor any of its subsidiaries is a co-obligor or
guarantor of our debt securities, circumstances affecting AIG can have an impact
on us. For example, concurrent with the most recent ratings actions taken by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"),
Moody's Investors Service, Inc. ("Moody's") and Fitch, Inc. ("Fitch") with
respect to AIG, the following ratings actions were taken or statements were made
with respect to our ratings: (i) S&P retained our long-term debt rating at AA-
on CreditWatch Negative and our short-term rating at A-1+ on CreditWatch
Negative, (ii) Moody's affirmed our (A1/Stable/P-1) rating with a Stable outlook
and (iii) Fitch lowered our long-term rating to A+ and short-term rating to F-1
and continues to have us on Rating Watch Negative. Accordingly, we can give no
assurance that any further changes in circumstances for AIG will not impact us.
RISK FACTORS AFFECTING INTERNATIONAL LEASE FINANCE CORPORATION
Our business is subject to numerous risks and uncertainties, as
described below and in the section titled "Quantitative and Qualitative
Disclosures about Market Risk".
We operate as a supplier and financier to airlines. The risks affecting
our airline customers are generally out of our control and impact our customers
to varying degrees. As a result, we are indirectly impacted by all the risks
facing airlines today. Our ability to succeed is dependent on the financial
strength of our customers. Our customers' ability to compete effectively in the
market place and manage these risks has a direct impact on us and our operating
results. Risks directly or indirectly affecting our business include:
- - Overall Airline Industry Risk
-- Demand for air travel
-- Competition between carriers
-- Fuel prices and availability
-- Labor costs and stoppages
-- Maintenance costs
-- Employee labor contracts
-- Air traffic control infrastructure constraints
-- Insurance costs
-- Security, terrorism and war
-- Health concerns
-- Equity and borrowing capacity
-- Environmental concerns
-- Government regulation
-- Interest rates
- - Manufacturer Risk
- - Borrowing Risks
-- Liquidity
-- Interest rates
- - Other Risks
-- Residual value
-- Obsolescence
-- Key personnel
-- Foreign currency exchange rate risk
For a detailed discussion of risk factors affecting us, see "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended December 31,
2004.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate the estimates and judgments, including those related to revenue,
depreciation, overhaul reserves, and contingencies. The estimates are based on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. The results form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions.
We believe that the following critical accounting policies can have a
significant impact on our results of operations, financial position and
financial statement disclosures and may require subjective and complex estimates
and judgments:
- Lease Revenue
- Flight Equipment Marketing
- Flight Equipment
- Capitalized Interest
- Provision for Overhauls
For a detailed discussion on the application of these accounting
policies, see "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
year ended December 31, 2004.
FINANCIAL CONDITION
We borrow funds to purchase new and used flight equipment, including
funds for progress payments during the construction phase, and to pay off
maturing debt obligations. These funds are borrowed principally on an unsecured
basis from various sources. During the three months ended March 31, 2005, we
borrowed $973.1 million (excluding commercial paper) and $623.5 million was
provided by operating activities. As of March 31, 2005, we have committed to
purchase 322 new aircraft from Airbus and Boeing at an estimated aggregate
purchase price of $19.5 billion for delivery through 2010. We also hold options
to purchase six additional new aircraft at an estimated aggregate purchase price
of approximately $361.4 million. We currently expect to fund expenditures for
aircraft and to meet liquidity needs from a combination of available cash
balances, internally generated funds and financing arrangements.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We have modified our borrowing strategy with the goal that, over time,
we will have approximately 15% or less of our debt, excluding commercial paper,
mature in any one year. Management continues to explore new funding sources and
ways to diversify our investor base. Our debt financing and capital lease
obligations were comprised of the following at the following dates:
March 31, December 31,
2005 2004
------------ ------------
.......(Dollars in thousands)...
Public term debt with single maturities $ 11,419,575 $ 11,544,575
Public medium-term notes with varying maturities 5,502,867 5,972,171
Capital lease obligations 20,497 39,580
Bank and other term debt 3,363,557 2,973,525
------------ ------------
Total term debt, bank debt, and capital
lease obligations 20,306,496 20,529,851
Commercial paper 4,460,566 2,675,247
Deferred debt discount (37,425) (29,502)
------------ ------------
Total debt financing and capital lease obligations $ 24,729,637 $ 23,175,596
============ ============
Selected interest rates and ratio:
Composite interest rate 4.49% 4.34%
Percentage of total debt at fixed rates 70.16% 66.21%
Composite interest rate on fixed rate debt 4.99% 5.07%
Bank prime rate 5.75% 5.25%
The above amounts represent the anticipated settlement of our currently
outstanding debt obligations. Certain adjustments required to present currently
outstanding debt obligations have been recorded and presented separately on the
balance sheet, including adjustments related to foreign currency and interest
rate hedging activities. We have eliminated the currency exposure arising from
foreign currency denominated notes by either hedging the notes through swaps or
through the offset provided by operating lease payments denominated in the
related currency. Foreign currency denominated debt is translated into US
dollars using current exchange rates as of each balance sheet date. The foreign
exchange adjustment for the foreign currency denominated debt was $932.5 million
at March 31, 2005 and $1,215.8 million at December 31, 2004. Composite interest
rates and percentages of total debt at fixed rates reflect the effect of
derivative instruments.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Public Debt (Exclusive of the Commercial Paper Program)
The interest on most of the public debt is effectively fixed for the
terms of the notes. We have the ability to borrow under various public debt
financing arrangements as follows:
Maximum Sold as of Sold as of Sold as of
Offering December 31, 2004 March 31, 2005 May 12, 2005
-------- ----------------- -------------- ------------
........................(Dollars in millions)......................
Registration statement dated
December 20, 2002 (including
$2.88 billion Medium-Term
Note Program and $1.0 billion
Retail Medium-Term Note
Program) $6,080(a) $5,593 $5,609 $5,609
Registration statement dated
December 28, 2004 (including
$2.0 billion Medium Term Note
Program) 7,045(b) -- 500 1,300
Euro Medium-Term Note
Programme dated
May 2004 (c)(d) 7,000 4,475 4,475 4,475
- ----------
(a) Includes $1.08 billion, which was incorporated into the registration
statement from a prior registration statement, increasing the maximum
offering from $5.0 billion to $6.08 billion.
(b) Includes $2.045 billion, which was incorporated into the registration
statement from a prior registration statement, increasing the maximum
offering from $5.0 billion to $7.045 billion.
(c) We have hedged the foreign currency risk of the notes through operating
lease payments or derivatives.
(d) This is a perpetual program. As a bond issue matures, the amount becomes
available again under the program.
Capital Lease Obligations
We have Export Credit lease financings which provided ten-year
amortizing loans in the form of capital lease obligations. The interest rate on
62.5% of the original financed amount is 6.55% and the interest rate on 22.5% of
the original financed amount is fixed at rates varying between 6.18% and 6.89%.
These two tranches are guaranteed by various European Export Credit Agencies.
The remaining 15% of the original financed amount was prepaid by the Company in
2000. At March 31, 2005, $20.5 million was still outstanding.
Bank Term Debt
In January 1999, we entered into an Export Credit Facility, for up to a
maximum of $4.3 billion, for aircraft delivered through 2001. The facility was
used to fund 85% of each aircraft's purchase price. This facility is guaranteed
by various European Export Credit Agencies. We financed 62 aircraft using $2.8
billion under this facility over ten years with interest rates from 5.753% to
5.898%. We have collateralized the debt by a pledge of the shares of a
subsidiary which holds title to the aircraft financed under the facility. At
March 31, 2005, $1.5 billion was outstanding under the facility and the net book
value of the related aircraft was $2.9 billion.
During 2003, we borrowed $1.3 billion under various bank financing
arrangements. The financings mature through 2009. One tranche of one of the
loans totaling $410 million was funded in Japanese yen and swapped to US
dollars. The interest rates are LIBOR based with spreads ranging from 0.375% to
1.625%.
In May 2004, we entered into an Export Credit Facility for up to a
maximum of $2.64 billion, for Airbus aircraft to be delivered in 2004 and 2005.
The facility will be used to fund 85% of each aircraft's purchase price. This
facility becomes available as the various European Export Credit Agencies
provide their guarantees for aircraft based on a six-month forward-looking
calendar. The financing is for a ten-year fully amortizing loan per aircraft at
an interest rate determined through a bid process. We have collateralized the
debt by a pledge of the shares of a subsidiary which holds title to the aircraft
financed under this facility. As of March 31, 2005, nine aircraft were financed
under this facility and $603.6 million was outstanding. Subsequent to March 31,
through May 12, 2005, an additional four aircraft were financed under the
facility for an amount of $282.1 million. As well, subsequent to March 31, 2005,
the facility expiration date was extended to May 31, 2006.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In August 2004, the Company received a commitment for an Ex-Im Bank
comprehensive guarantee in the amount of $1.68 billion to support the financing
of up to 30 new Boeing aircraft. The delivery period initially extends from
September 1, 2004 through August 31, 2005. We have extended the delivery period
to February 28, 2006 and may extend it further to August 31, 2006. As of March
31, 2005, we had not financed any aircraft under this facility.
Commercial Paper
We currently have a $6.0 billion Commercial Paper Program. Under this
program, we may borrow in minimum increments of $100,000 for periods from one
day to 270 days. It is our intention to only sell commercial paper to a maximum
amount of 75% of the total amount of the backup facilities available (see Bank
Commitments). The weighted average interest rate of our commercial paper
outstanding was 2.87% at March 31, 2005 and 2.34% at December 31, 2004.
Bank Commitments
As of March 31, 2005, we had committed revolving loans and lines of
credit with 30 banks aggregating $6.0 billion, including a $2.0 billion
five-year tranche that expires in October of 2009 and a $4.0 billion 364-day
tranche that expires in October of 2005, with a one-year term out option.
Subsequent to March 31, 2005, we entered into two $500 million, 180-day
revolving credit agreements with banks, each with a one-year term out option.
These revolving loans and lines of credit provide for interest rates that vary
according to the pricing option in effect at the time of borrowing. Pricing
options include prime, a range from .25% over LIBOR to .45% over LIBOR based
upon utilization, or a rate determined by a competitive bid process with the
banks. The revolving loans and lines of credit are subject to facility fees of
up to .10% of amounts available. This financing is used as backup for our
maturing debt and other obligations. We expect to replace or extend these credit
agreements on or prior to their expiration dates. We had not drawn against our
revolving loans and lines of credit as of March 31, 2005. Subsequent to March
31, 2005, we drew $500 million against a revolving credit agreement.
In March 2004, an indirect subsidiary of the Company entered into a
credit facility providing for an 18-month commitment for a $500 million
revolving loan. The loan backs up the subsidiary's $1.0 billion secured note
facility available to purchase new aircraft from Boeing and Airbus. We have
guaranteed the subsidiary's obligations under the credit facility and the
secured note facility. The credit facility is available for borrowing only if
the subsidiary is unable to sell notes under the secured note facility on
acceptable terms. The subsidiary had not drawn on the credit facility or issued
any notes under the secured note facility as of March 31, 2005.
Other Variable Interest Entities
We have sold aircraft to entities owned by third parties and from time
to time we have issued asset value guarantees or loan guarantees related to the
aircraft sold. Management has determined ten such entities, each owning one
aircraft, are Variable Interest Entities ("VIEs") in which we are a primary
beneficiary, as defined by Financial Accounting Standards Board Interpretation
No. 46R ("FIN 46R"). In accordance with FIN 46R, we have consolidated these
entities commencing December 31, 2003.
The assets and liabilities of these entities are presented separately on
our Balance Sheet. We do not control or own the assets nor are we obligated for
the liabilities of these entities.
We have not established any other unconsolidated entities for the
purpose of facilitating off-balance sheet arrangements or for other
contractually narrow or limited purposes. We have, however, from time to time
established subsidiaries, entered into joint ventures or created other
partnership arrangements with the limited purpose of leasing aircraft or
facilitating borrowing arrangements.
Derivatives
In the normal course of business, we employ a variety of derivative
products to manage our exposure to interest rates and foreign currency exchange
rates and the resulting impact of changes in interest rates and exchange rates
on earnings with the objective to eliminate all foreign currency risk, lower our
overall borrowing cost and maintain an optimal mix of variable and fixed rate
interest obligations.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We enter into derivative transactions only to hedge interest rate risk and
currency risk and not to speculate on interest rates or currency fluctuations.
These derivative products include interest rate swap agreements, currency swap
agreements, and interest rate floor agreements. In 2004, as a result of a
customer bankruptcy, we assumed liabilities in the form of a derivative
contract. The derivative does not qualify as a hedge under Statement of
Financial Accounting Standards Board No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("SFAS 138"). The derivative is
carried at fair market value on our Consolidated Balance Sheets with changes in
market value taken through income.
The counterparty to our derivative instruments is AIG Financial Products
Corp. ("AIGFP"), a related party. The derivatives are subject to a bilateral
security agreement, which, in certain circumstances, may allow one party to the
agreement to require the second party to the agreement to provide collateral.
Failure of the instruments or counterparty to perform under the derivative
contracts would have a material impact on our results of operations.
Market Liquidity Risk
We are in compliance with all covenants or other requirements set forth
in our credit agreements. Further, we do not have any rating downgrade triggers
that would automatically accelerate the maturity dates of any debt. However, a
downgrade in our credit rating could adversely affect our ability to borrow on,
renew existing, or obtain access to new financing arrangements and would
increase the cost of such financing arrangements. For example, a downgrade in
credit rating could preclude us from issuing commercial paper under our current
program.
Turmoil in the airline industry, recent developments at AIG and credit
concerns regarding large corporate borrowers have led to increased uncertainty
in the debt markets in which we borrow funds. While we have been able to borrow
the funds necessary to finance operations in the current market environment,
additional turmoil in the airline industry or political environment could limit
our ability to borrow funds from our current funding sources. Should this occur
we would seek alternative sources of funding, including securitizations,
manufacturers' financings, drawings upon our revolving loans and lines of credit
facilities or additional short-term borrowings. If we were unable to obtain
sufficient funding, we could negotiate with manufacturers to defer deliveries of
certain aircraft.
The following summarizes our contractual obligations at March 31, 2005,
and the possible effect of such obligations on our liquidity and cash flows in
future periods.
Existing Commitments (Exclusive of Interest)
Commitments Due by Fiscal Year
Total 2005 2006 2007 2008 2009 Thereafter
.......................................(Dollars in thousands)........................................
Public and Bank
Term Debt .......... $20,285,999 $ 2,626,257 $ 3,721,292 $ 3,626,137 $ 3,809,580 $ 3,710,022 $ 2,792,711
Capital Lease
Obligations ........ 20,497 20,497 -- -- -- -- --
Commercial Paper ... 4,460,566 4,460,566 -- -- -- -- --
Operating Leases ... 100,253 6,233 8,629 8,951 9,303 9,594 57,543
Purchase Commitments 19,552,000 3,803,800 5,487,200 4,645,000 3,696,100 1,552,700 367,200
-----------------------------------------------------------------------------------------------------
Total .............. $44,419,315 $10,917,353 $ 9,217,121 $ 8,280,088 $ 7,514,983 $ 5,272,316 $ 3,217,454
=====================================================================================================
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Contingent Commitments
Contingency Expiration by Fiscal Year
-----------------------------------------------------------------------------
Total 2005 2006 2007 2008 2009 Thereafter
-----------------------------------------------------------------------------
............................(Dollars in thousands).............................
Purchase Options on New
Aircraft ................. $361,400 $ -- $ 81,400 $280,000 $ -- $ -- $ --
Put Options (a) .......... 327,350 23,300 -- -- -- -- 304,050
Asset Value Guarantees (a) 65,689 2,500 5,452 6,815 8,178 -- 42,744
Loan Guarantees (a) ...... 143,915 -- 97,677 -- -- -- 46,238
Lines of Credit .......... 50,000 -- -- -- -- -- 50,000
-----------------------------------------------------------------------------
Total .................... $948,354 $ 25,800 $184,529 $286,815 $ 8,178 $ -- $443,032
=============================================================================
- ----------
(a) From time to time, we participate with airlines, banks and other
financial institutions to assist in financing aircraft by providing
asset guarantees, put options, or loan guarantees collateralized by
aircraft. As a result, should we be called upon to fulfill our
obligations, we would have recourse to the value of the underlying
aircraft.
NON-GAAP FINANCIAL MEASURES
Lease Margin
Lease Margin is defined as Rental of flight equipment less total
expenses, adjusted for VIE expenses related to Other Variable Interest Entities,
divided by Rental of flight equipment. Lease Margin is a measure by which we
isolate and evaluate the overall profitability of our contractual leasing
operations, which constitute our primary revenue generating activity. Beginning
in 2004, to more accurately portray the trend of our core leasing operations, we
began to adjust total expenses in the calculation of Lease Margin by excluding
the above mentioned VIE expenses. Related VIE revenues are included in Interest
and other and are by definition excluded from the calculation of Lease Margin.
VIE revenues and expenses are recorded in our 2005 net income as a result of our
adoption of FIN 46R beginning December 31, 2003. The most directly comparable
GAAP financial measure is Profit Margin. The following is a reconciliation of
Profit Margin to Lease Margin:
Three months
2005 2004
------ ------
....(Dollars in millions)...
Total revenues (A) ............... $ 858.4 $ 779.2
Flight equipment marketing ....... (16.4) (35.4)
Interest and other ............... (12.9) (20.9)
-------- --------
Rental of flight equipment (B) ... 829.1 722.9
-------- --------
Total expenses (C) ............... 665.4 589.3
VIE expenses ..................... (5.2) (3.7)
-------- --------
Adjusted total expenses (D) ...... 660.2 585.6
-------- --------
Profit margin (A) - (C) = (E) .... $ 193.0 $ 189.9
Lease margin (B) - (D) = (F) ..... $ 168.9 $ 137.3
Profit margin % (E) divided by (A) 22.5% 24.4%
Lease margin % (F) divided by (B) 20.4% 19.0%
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - Three months ended March 31, 2005 versus 2004.
Revenues from the rental of flight equipment increased 14.7% to $829.1
million in 2005 compared to $722.9 million in 2004, due to an increase in the
number of aircraft available for operating lease (699 at March 31, 2005 compared
to 619 at March 31, 2004), partially offset by aircraft being reconfigured and
redelivered and therefore not earning revenue for the entire period. We had one
aircraft in our fleet that was not subject to a signed lease agreement or a
signed letter of intent at March 31, 2005. Lease Margin for the period increased
to 20.4% in 2005 compared to 19.0% for the same period in 2004. Profit Margin
decreased to 22.5% compared to 24.4% for the same periods primarily due to
revenue related to aircraft sales. Management expects factors described in our
Overview to continue to negatively impact revenues in 2005 and beyond, even as
we may see increases in the Lease Margins going forward, as some airlines
continue to experience financial difficulties and improving trends in lease
rates take time to be completely reflected in our lease revenues.
At March 31, 2005, our fleet, on which we earn rental revenue, consisted
of 699 aircraft compared to a fleet of 619 aircraft at March 31, 2004. The cost
of the leased fleet increased to $39.6 billion at March 31, 2005, compared to
$34.6 billion at March 31, 2004.
In addition to leasing operations, we engage in the marketing of flight
equipment throughout the lease term, as well as the sale of third party owned
flight equipment on a principal and commission basis. Revenues from flight
equipment marketing increased to $16.4 million in 2005 compared to $9.7 million
in 2004. We sold twelve aircraft during the first quarter of 2005, eleven of
which were in the form of sales-type leases, compared to three aircraft during
the same period in 2004.
Further, during the first quarter of 2004, the Company sold 34 aircraft
to a trust included in the consolidated financial statements of the Company's
parent (see Note C of Notes to Condensed Consolidated Financial Statements). The
gains, net of expenses, related to the transaction is included in Flight
Equipment Marketing - Securitization.
Interest and other revenue decreased to $12.9 million in 2005 compared
to $20.9 million in 2004 primarily due to a decrease in foreign currency
exchange gains.
Interest expense increased to $253.6 million in 2005 compared to $233.8
million in 2004 as a result of an increase in average debt outstanding, borrowed
to finance aircraft acquisitions (excluding the effect of debt discount and
foreign exchange adjustments), to $24.0 billion in 2005 compared to $22.1
billion in 2004. Our composite borrowing rates in 2005 and 2004 were as follows:
Increase
2005 2004 (decrease)
---- ---- ----------
Beginning of Quarter 4.34% 4.53% (0.19)%
End of Quarter 4.49% 4.34% 0.15%
Average 4.42% 4.43% (0.01)%
Interest expense for the three months ended March 31, 2005 includes a
$0.1 million reduction related to derivative ineffectiveness and mark-to-market
of derivatives not considered a hedge under FAS 133.
Depreciation of flight equipment increased 12.1% to $331.2 million in
2005 compared to $295.6 million in 2004 due to the increased cost of the fleet.
Provision for overhauls increased to $44.1 million in 2005 compared to
$34.9 million in 2004 due to an increase in the aggregate number of hours flown
on which we collect overhaul revenue and against which the provision is computed
and an increase in the rate used to calculate the provision.
Selling, general and administrative expenses increased to $36.4 million
in 2005 compared to $25.0 million in 2004 primarily due to higher expenses to
support our larger fleet.
We typically contract to re-lease aircraft before the end of the
existing lease term. For aircraft returned before the end of the lease term, we
have generally been able to re-lease aircraft within two to six months of its
return. We have not recognized any impairment charges related to our fleet, as
the existing service potential of the aircraft in our portfolio has not been
diminished. Further, we have been able to re-lease aircraft without diminution
in lease rates to an extent that would warrant an impairment write down.
Other comprehensive income was $54.5 million in 2005 compared to a $98.5
million loss in 2004, primarily due to changes in the market value of cash flow
hedges.
-19-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
VALUE AT RISK
Measuring potential losses in fair values has recently become the focus
of risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR), a summary statistical measure that uses historical interest
rates, foreign currency exchange rates and equity prices and which estimates the
volatility and correlation of these rates and prices to calculate the maximum
loss that could occur over a defined period of time given a certain probability.
Management believes that statistical models alone do not provide a
reliable method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.
We are exposed to market risk and the risk of loss of fair value and
possible liquidity strain resulting from adverse fluctuations in interest rates
and foreign exchange prices. We statistically measure the loss of fair value
through the application of a VaR model on a quarterly basis. In this analysis
ILFC's net fair value is determined using the financial instrument and other
assets. This includes tax adjusted future flight equipment lease revenues, and
financial instrument liabilities, which includes future servicing of current
debt. The estimated impact of current derivative positions is also taken into
account.
We calculate the VaR with respect to the net fair value by using
historical scenarios. This methodology entails re-pricing all assets and
liabilities under explicit changes in market rates within a specific historical
time period. In this case, the most recent three years of historical information
for interest rates and foreign exchange rates were used to construct the
historical scenarios at March 31, 2005 and December 31, 2004, respectively. For
each scenario, each financial instrument is re-priced. Scenario values for ILFC
are then calculated by netting the values of all the underlying assets and
liabilities. The final VaR number represents the maximum adverse deviation in
fair market value incurred under these scenarios with 95% confidence (i.e. only
5% of historical scenarios show losses greater than the VaR figure). A one month
holding period is assumed in computing the VaR figure. The following table
presents the average, high and low VaRs on a combined basis and of each
component of market risk for ILFC as of March 31, 2005 and December 31, 2004:
ILFC Market Risk
----------------------------------------------------------------
Three months Year Ended
Ended March 31, 2005 December 31, 2004
----------------------------------------------------------------
...........................(Dollars in millions)...............
Average High Low Average High Low
------- ---- --- ------- ---- ---
Combined 76.4 111.7 34.6 $ 69.6 $ 86.3 $ 34.6
Interest Rate 76.5 112.4 35.0 69.7 86.4 35.0
Currency 0.7 2.0 0.3 0.3 0.5 0.2
-20-
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in its
filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the periods specified in the
rules and forms of the Securities and Exchange Commission. Such
information is accumulated and communicated to management of the
Company, including the Chairman of the Board and Chief Executive Officer
and the Vice Chairman, Chief Financial Officer and Chief Accounting
Officer (collectively the "Certifying Officers"), as appropriate, to
allow timely decisions regarding required disclosure. The management of
the Company, including the Certifying Officers, recognizes that any set
of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
(b) As of the end of the period covered by this Quarterly Report on Form
10-Q, the Company has carried out an evaluation, under the supervision
and with the participation of management, including the Certifying
Officers, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that
evaluation, the Certifying Officers concluded that disclosure controls
and procedures provide reasonable assurance that the information
required to be disclosed is recorded, processed, summarized, and
reported within the periods specified by the Securities and Exchange
Commission.
Variable Interest Entities
The Company's consolidated financial statements for the period ended
March 31, 2005, include assets in the amount of $148.4 million,
liabilities in the amount of $67.2 million and a net gain of $1.6
million related to Variable Interest Entities ("VIEs"). The Company's
assessment of disclosure controls and procedures, as described above,
includes the VIEs. Each of the VIEs has a discrete number of assets and
the Company, as lender and guarantor to the VIEs, has been provided
sufficient information to conclude that the Company's procedures with
respect to these VIEs are effective in providing reasonable assurance
that the information required to be disclosed by the Company relating to
these entities is reconciled, processed, summarized and reported within
the periods specified by the Securities and Exchange Commission.
However, management has been unable to assess the effectiveness of
internal controls at those entities, due to the Company's inability to
dictate or modify the controls of those entities, or to assess those
controls.
(c) There have been no changes in the Company's internal controls over
financial reporting identified in connection with the evaluation
referred to above that occurred during the Company's first quarter that
has materially affected, or is reasonably likely to materially affect,
the Company's internal controls over financial reporting.
-21-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no change in the legal proceedings to which the Company
is a party. See "Item 3. Legal Proceedings" in our Annual Report on
Form 10-K for the year ended December 31, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 31, 2005, the shareholders of the Company, by unanimous
written consent, elected the following persons as directors of the
Company:
- William N. Dooley
- Leslie L. Gonda
- Louis L. Gonda
- Alan H. Lund
- John L. Plueger
- Martin J. Sullivan
- Steven F. Udvar-Hazy
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 Restated Articles of Incorporation of the Company, as amended
through December 9, 1992, filed November 3, 1993 (filed as an
exhibit to Registration Statement No. 33-50913 and
incorporated herein by reference).
3.2 Certificate of Determination of Preferences of Series A Market
Auction Preferred Stock (filed December 9, 1992 as an exhibit
to Registration Statement No. 33-54294 and incorporated herein
by reference).
3.3 Certificate of Determination of Preferences of Series B Market
Auction Preferred Stock (filed December 9, 1992 as an exhibit
to Registration Statement 33-54294 and incorporated herein by
reference).
3.4 Certificate of Determination of Preferences of Series C Market
Auction Preferred Stock (filed as an exhibit to Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference).
3.5 Certificate of Determination of Preferences of Series D Market
Auction Preferred Stock (filed as an exhibit to Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference).
3.6 Certificate of Determination of Preferences of Series E Market
Auction Preferred Stock (filed as an exhibit to Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference).
3.7 Certificate of Determination of Preferences of Series F Market
Auction Preferred Stock (filed as an exhibit to Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference).
3.8 Certificate of Determination of Preferences of Series G Market
Auction Preferred Stock (filed as an exhibit to Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference).
3.9 Certificate of Determination of Preferences of Series H Market
Auction Preferred Stock (filed as an exhibit to Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference).
3.10 Certificate of Determination of Preferences of Preferred Stock
of the Company (filed as an exhibit to Form 10-K for the year
ended December 31, 2001 and incorporated herein by reference).
3.11 By-Laws of the Company, including amendment thereto dated
August 31, 1990 (filed as an exhibit to Form 10-K for the year
ended December 31, 2003 and incorporated herein by reference).
3.12 Unanimous Written Consent of Sole Stockholder of the Company,
dated January 2, 2002, amending the Bylaws of the Company
(filed as an exhibit to Form 10-Q for the quarter ended June
30, 2003 and incorporated herein by reference).
10.1 Agreement, dated as of October 28, 2004 among the Company,
Barclays Bank PLC and Export-Import Bank of the United States
12. Computation of Ratios of Earnings to Fixed Charges and
Preferred Stock Dividends
31.1 Certification of Chairman of the Board and Chief Executive
Officer
31.2 Certification of Vice Chairman, Chief Financial Officer and
Chief Accounting Officer
32.1 Certification under 18 U.S.C., Section 1350
-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL LEASE FINANCE CORPORATION
May 13, 2005 /S/ Steven F. Udvar-Hazy
------------------------
STEVEN F. UDVAR-HAZY
Chairman of the Board and
Chief Executive Officer
May 13, 2005 /S/ Alan H. Lund
-------------------------
ALAN H. LUND
Vice Chairman,
Chief Financial Officer
and Chief Accounting Officer
-23-
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
10.1 Agreement, dated as of October 28, 2004 among the Company,
Barclays Bank PLC and Export-Import Bank of the United
States
12. Computation of Ratios of Earnings to Fixed Charges and
Preferred Stock Dividends
31.1 Certification of Chairman of the Board and Chief Executive
Officer
31.2 Certification of Vice Chairman, Chief Financial Officer and
Chief Accounting Officer
32.1 Certification under 18 U.S.C., Section 1350
-24-