Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 10/31/2013 16:46:26)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _______________________________________________________________
FORM 10-Q
  _______________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013

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 001-32959
_______________________________________________________________
  AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
  _______________________________________________________________
Bermuda
98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
c/o Aircastle Advisor LLC
300 First Stamford Place, 5 th  Floor, Stamford, CT
06902
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code     (203) 504-1020
_______________________________________________________________
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   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   þ
As of October 28, 2013 , there were 80,776,975 outstanding shares of the registrant’s common shares, par value $0.01 per share.


Table of Contents

Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
 
 
 
Page
No.
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

Table of Contents

PART I. — FINANCIAL INFORMATION
Item 1.        Financial Statements
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
 
 
December 31,
2012
 
September 30,
2013
 
 
 
(Unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
618,217

 
$
238,150

Accounts receivable
5,625

 
5,127

Restricted cash and cash equivalents
111,942

 
191,843

Restricted liquidity facility collateral
107,000

 
107,000

Flight equipment held for lease, net of accumulated depreciation of $1,305,064 and $1,424,057
4,662,661

 
4,938,113

Net investment in finance leases
119,951

 
148,005

Other assets
186,764

 
177,242

Total assets
$
5,812,160

 
$
5,805,480

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings (including borrowings of ACS Ireland VIEs of $207,926 and $168,107, respectively)
$
1,848,034

 
$
1,581,118

Borrowings from unsecured financings
1,750,642

 
1,750,556

Accounts payable, accrued expenses and other liabilities
108,593

 
134,892

Lease rentals received in advance
53,189

 
48,379

Liquidity facility
107,000

 
107,000

Security deposits
87,707

 
110,410

Maintenance payments
379,391

 
428,615

Fair value of derivative liabilities
61,978

 
44,307

Total liabilities
4,396,534

 
4,205,277

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Preference shares, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding


 


Common shares, $.01 par value, 250,000,000 shares authorized, 68,639,729 shares issued and outstanding at December 31, 2012; and 80,776,975 shares issued and outstanding at September 30, 2013
686

 
808

Additional paid-in capital
1,360,555

 
1,560,509

Retained earnings
180,675

 
126,140

Accumulated other comprehensive loss
(126,290
)
 
(87,254
)
Total shareholders’ equity
1,415,626

 
1,600,203

Total liabilities and shareholders’ equity
$
5,812,160

 
$
5,805,480


The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
159,547

 
$
161,148

 
$
465,413

 
$
475,656

Finance lease revenue
3,518

 
4,122

 
4,474

 
12,120

Amortization of lease premiums, discounts and lease incentives
(6,838
)
 
(9,737
)
 
(6,392
)
 
(25,527
)
Maintenance revenue
10,944

 
12,932

 
37,126

 
42,983

Total lease revenue
167,171

 
168,465

 
500,621

 
505,232

Other revenue
5,695

 
1,625

 
9,341

 
11,425

Total revenues
172,866

 
170,090

 
509,962

 
516,657

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
68,413

 
70,469

 
200,024

 
212,448

Interest, net
54,101

 
57,843

 
167,203

 
183,651

Selling, general and administrative (including non-cash share based payment expense of $1,128 and $1,067 for the three months ended, and $3,233 and $2,931 for the nine months ended September 30, 2012 and 2013, respectively)
11,907

 
12,830

 
36,616

 
39,297

Impairment of Aircraft
78,676

 
106,136

 
88,787

 
112,335

Maintenance and other costs
3,926

 
1,914

 
11,943

 
11,464

Total expenses
217,023

 
249,192

 
504,573

 
559,195

 
 
 
 
 
 
 
 
Other income:
 
 
 
 
 
 
 
Gain on sale of flight equipment
11

 
3,092

 
3,062

 
25,601

Other

 
855

 
604

 
5,016

Total other income
11

 
3,947

 
3,666

 
30,617

 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
(44,146
)
 
(75,155
)
 
9,055

 
(11,921
)
Income tax provision (benefit)
1,701

 
(597
)
 
5,976

 
6,719

Net income (loss)
$
(45,847
)
 
$
(74,558
)
 
$
3,079

 
$
(18,640
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic:
 
 
 
 
 
 
 
Net income (loss) per share
$
(0.65
)
 
$
(0.95
)
 
$
0.04

 
$
(0.26
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted:
 
 
 
 
 
 
 
Net income (loss) per share
$
(0.65
)
 
$
(0.95
)
 
$
0.04

 
$
(0.26
)
 
 
 
 
 
 
 
 
Dividends declared per share
$
0.15

 
$
0.165

 
$
0.45

 
$
0.495


The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
Net income (loss)
$
(45,847
)
 
$
(74,558
)
 
$
3,079

 
$
(18,640
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in fair value of derivatives, net of tax expense of $37 and $78 for the three months ended and $465 and $389 for the nine months ended, September 30, 2012 and 2013, respectively
1,426

 
1,798

 
23,708

 
13,751

Net derivative loss reclassified into earnings
8,966

 
7,300

 
21,903

 
25,285

Other comprehensive income
10,392

 
9,098

 
45,611

 
39,036

Total comprehensive income (loss)
$
(35,455
)
 
$
(65,460
)
 
$
48,690

 
$
20,396


The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2012
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
3,079

 
$
(18,640
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
200,024

 
212,448

Amortization of deferred financing costs
10,082

 
11,757

Amortization of net lease discounts and lease incentives
6,392

 
25,527

Deferred income taxes
3,609

 
3,419

Non-cash share based payment expense
3,233

 
2,931

Cash flow hedges reclassified into earnings
21,903

 
25,285

Ineffective portion of cash flow hedges
1,840

 
197

Security deposits and maintenance payments included in earnings
(36,312
)
 
(32,047
)
Gain on sale of flight equipment
(3,062
)
 
(25,601
)
Impairment of aircraft
88,787

 
112,335

Other
1,820

 
(4,481
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(9,180
)
 
1,588

Other assets
(3,278
)
 
1,155

Accounts payable, accrued expenses and other liabilities
14,071

 
7,978

Lease rentals received in advance
2,948

 
(4,538
)
Net cash provided by operating activities
305,956

 
319,313

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment and lease incentives
(450,962
)
 
(837,183
)
Proceeds from sale of flight equipment
54,439

 
285,199

Restricted cash and cash equivalents related to sale of flight equipment
35,762

 
(2,200
)
Aircraft purchase deposits and progress payments
(25,155
)
 
(5,655
)
Net investment in finance leases
(91,500
)
 
(11,595
)
Collections on finance leases
2,041

 
6,658

Purchase of debt investment
(43,626
)
 

Principal repayments on debt investment
3,245

 
42,001

Other
(544
)
 
(852
)
Net cash used in investing activities
(516,300
)
 
(523,627
)
Cash flows from financing activities:
 
 
 
Issuance of shares net of repurchases
(30,692
)
 
197,478

Proceeds from notes and term debt financings
877,100

 
78,230

Securitization and term debt financing repayments
(783,976
)
 
(430,482
)
Deferred financing costs
(17,794
)
 
(2,910
)
Restricted secured liquidity facility collateral
3,000

 

Secured liquidity facility collateral
(3,000
)
 

Restricted cash and cash equivalents related to financing activities
102,315

 
(77,701
)
Security deposits received
11,400

 
19,545

Security deposits returned
(3,217
)
 
(3,890
)
Maintenance payments received
103,527

 
134,758

Maintenance payments returned
(36,967
)
 
(54,886
)
Payments for terminated cash flow hedges
(50,757
)
 

Dividends paid
(32,158
)
 
(35,895
)
Net cash (used in) provided by financing activities
138,781

 
(175,753
)
Net increase (decrease) in cash and cash equivalents
(71,563
)
 
(380,067
)
Cash and cash equivalents at beginning of period
295,522

 
618,217

Cash and cash equivalents at end of period
$
223,959

 
$
238,150

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
114,538

 
$
136,799

Cash paid for income taxes
$
1,765

 
$
701

Supplemental disclosures of non-cash investing activities:
 
 
 
Purchase deposits, advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
18,988

 
$
46,232

Term debt financings assumed in asset acquisitions
$

 
$
84,721

Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment
$
7,817

 
$
41,659


The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013



Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including leasing, managing and selling commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments.
Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all of the outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). We operate in a single segment.
The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 .
The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of September 30, 2013 through the date on which the consolidated financial statements included in this Form 10-Q were issued.

Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates eight Variable Interest Entities (“VIEs”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
We consolidate VIEs in which we have determined that we are the primary beneficiary. We use judgment when deciding (a) whether an entity is subject to consolidation as a VIE, (b) who the variable interest holders are, (c) the potential expected losses and residual returns of the variable interest holders, and (d) which variable interest holder is the primary beneficiary. When determining which enterprise is the primary beneficiary, we consider (1) the entity’s purpose and design, (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance, and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses incurred by an entity.
Effective January 1, 2013, the Company adopted Financial Accounting Standards Board (the "FASB") Accounting Standards Update ("ASU") 2013-02 (“ASU 2013-02”) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . This ASU requires that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) either on the face of the financial statements or in the notes, provided that all required information is presented in a single location. ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012 and should be applied prospectively. The adoption of ASU 2013-02 did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2013, the Company adopted ASU 2011-11 (“ASU 2011-11”) Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities . This ASU requires that companies disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on its financial position. ASU 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013 and should be applied retrospectively for all

7


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


periods presented on the balance sheet. The adoption of ASU 2011-11 did not have a material impact on the Company's consolidated financial statements.

Risk and Uncertainties
In the normal course of business, Aircastle encounters several significant types of economic risk including credit, market, aviation industry and capital market risks. Credit risk is the risk of a lessee’s inability or unwillingness to make contractually required payments and to fulfill its other contractual obligations. Market risk reflects the change in the value of derivatives and financings due to changes in interest rate spreads or other market factors, including the value of collateral underlying derivatives and financings. Aviation industry risk is the risk of a downturn in the commercial aviation industry which could adversely impact a lessee’s ability to make payments, increase the risk of unscheduled lease terminations and depress lease rates and the value of the Company’s aircraft. Capital market risk is the risk that the Company is unable to obtain capital at reasonable rates to fund the growth of our business or to refinance existing debt facilities.

Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.

Proposed Accounting Pronouncements
In May 2013, the FASB issued re-exposure draft, “Leases” (the “Lease Re-ED”), which would replace the existing guidance in the Accounting Standards Codification (“ASC”) 840 (“ASC 840”), Leases . The FASB decided that leases would be classified as either leases of real property (Type B) or leases of assets other than real property (Type A). Leases of real property will continue to use operating lease accounting. Leases of other than real property would use the receivable residual approach. Under the receivable residual approach, a lease receivable would be recognized for the lessor's right to receive lease payments, a portion of the carrying amount of the underlying asset would be allocated between the right of use granted to the lessee and the lessor's residual value and profit or loss would only be recognized at commencement if it is reasonably assured. The comment period for the Lease Re-ED ended on September 13, 2013. We anticipate that the final standard may have an effective date no earlier than 2017. When and if the proposed guidance becomes effective, it may have a significant impact on the Company's consolidated financial statements. Although we believe the presentation of our financial statements, and those of our lessees could change, we do not believe the accounting pronouncement will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we do not believe it will have a material impact on our business.

Note 2. Fair Value Measurements
Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.



8


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


The valuation techniques that may be used to measure fair value are as follows:
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The following tables set forth our financial assets and liabilities as of December 31, 2012 and September 30, 2013 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. 
 
 
 
Fair Value Measurements at December 31, 2012 Using Fair Value Hierarchy
 
Fair Value as of December 31, 2012
 
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
Technique
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
618,217

 
$
618,217

 
$

 
$

 
Market
Restricted cash and cash equivalents
111,942

 
111,942

 

 

 
Market
Debt investments
40,388

 

 

 
40,388

 
Income
Total
$
770,547

 
$
730,159

 
$

 
$
40,388

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
61,978

 
$

 
$
61,978

 
$

 
Income
 
 
 
Fair Value Measurements at September 30, 2013 Using Fair Value Hierarchy
 
Fair Value as of September 30, 2013
 
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
Technique
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
238,150

 
$
238,150

 
$

 
$

 
Market
Restricted cash and cash equivalents
191,843

 
191,843

 

 

 
Market
Total
$
429,993

 
$
429,993

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
44,307

 
$

 
$
44,307

 
$

 
Income

Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivatives included in Level 2 consist of United States dollar-denominated interest rate derivatives, and their fair values are determined by applying standard modeling techniques under the income approach to relevant market interest rates (cash rates, futures rates, swap rates) in effect at the period close to determine appropriate reset and discount rates and incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.

9


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


The following tables reflect the activity for the classes of our assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012 and 2013 , respectively:
 
Assets
 
Debt Investments
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Balance at beginning of period
$

 
$

 
$

 
$
40,388

Total gains/(losses), net:
 
 
 
 
 
 
 
        Included in other revenue

 

 

 
1,613

Settlements

 

 

 
(42,001
)
Balance at end of period
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 Derivative Liabilities
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Balance at beginning of period
$

 
$

 
$
(56,229
)
 
$

Total gains/(losses), net:
 
 
 
 
 
 
 
Included in other income (expense)

 

 
599

 

Included in interest expense

 

 
73

 

Included in other comprehensive income

 

 
4,800

 

Settlements

 

 
50,757

 

Balance at end of period
$

 
$

 
$

 
$


For the three and nine months ended September 30, 2012 , we had no transfers into or out of Level 3; however we did terminate all Level 3 interest rate derivatives during the second quarter of 2012 . For the three and nine months ended September 30, 2013 , we had no transfers into or out of Level 3; however we did settle the debt investment during the first quarter of 2013 .
We measure the fair value of certain assets and liabilities on a non-recurring basis, when US GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft impaired are based on an income approach that uses Level 3 inputs, which include our assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.
Aircraft Valuation
We perform our annual fleet-wide recoverability assessment during the third quarter of each year. This recoverability assessment, as more fully described in our Annual Report on Form 10-K for the year ended December 31, 2012, is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management's experience in the aircraft leasing industry as well as information received from third party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.

10


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


Following completion of the recoverability analysis during the third quarter of 2013, we determined the cash flows expected to be generated by several of our aircraft did not support carrying values. As a result, as noted below, we impaired seven aircraft with an aggregate net book value as of June 30, 2013 that was $318,854 , writing down their book values by a total of $97,592 . For some of these aircraft we also shortened the expected lives and/or reduced the residual values. More specifically, we wrote down the values on:

Six Boeing Model 747-400 converted freighter aircraft manufactured between 1990 and 1994 and recorded impairment charges total $88,647 ; and
One Boeing Model 737-700 aircraft manufactured in 1999 and recorded an impairment charge of $8,945 .

During the third quarter of 2013, we elected not to invest in engine performance restoration maintenance visits for one Boeing Model 767-300ER aircraft and instead agreed with the lessee to terminate the lease prior to scheduled expiry and pursue a part-out sale. We recorded impairment charges of $8,544 and we recorded maintenance revenue of $12,056 and other revenue of $875 from an early termination payment for the three months ended September 30, 2013 , for this aircraft.

In addition, for two McDonnell Douglas MD-11F freighter aircraft manufactured in 1997 that passed the recoverability assessment, we shortened the expected lives from 35 years to 25 years from production date.
For changes we made to our aircraft, our total depreciation expense will decrease by approximately $900 in the fourth quarter of 2013, as compared to the three months ended June 30, 2013. We estimate a decrease in depreciation expense for changes we made to our aircraft for the year ended December 31, 2014 of approximately $4,600 .
In this year's assessment, we lowered our assumptions for the freighter aircraft noted above to reflect the cumulative effect of increasing supply in the wake of stagnating demand over the past three years. More specifically, higher production levels for new, large freighter aircraft together with increased belly freight capacity from the latest generation of wide-body passenger aircraft have resulted in a glut of large freighter aircraft. At the same time, air freight demand has not increased due to modest economic growth rates in certain key economies and structural changes in the freight market (e.g., the evolution of smaller, smarter and lighter electronic devices and modal shifts). The combined effect of these developments has depressed lease rates and driven more converted freighter aircraft into storage, particularly over the past year.

In addition to the changes noted above, we reduced projected rental levels for Boeing Model 737-700 aircraft to reflect lower demand for this smaller variant of the Boeing 737 "New Generation" family, as lower fare airline business models drive demand for shorter-haul operations to larger models having similar trip costs.

Other than the aircraft discussed above, management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no other aircraft were impaired as a consequence of this recoverability assessment. However, our lessees may face financial difficulties and return aircraft to us prior to the contractual lease expiry dates which may change our cash flow assumptions and require future impairment charges. While we believe that the estimates and related assumptions used in the recoverability assessment are appropriate, actual results could differ from those estimates.

During the first quarter of 2013 , we impaired two aircraft, one Airbus A319-100 aircraft and one Boeing 767-300ER aircraft, each of which was returned to us early by the respective lessee. The decision was made to sell these aircraft and the net book value of each was written down to the expected sale price. For these two aircraft, we recorded impairment charges totaling $6,199 and recorded maintenance revenue of $9,019 and other revenue of $876 during the nine months ended September 30, 2013 .

During the third quarter of 2012 , following our recoverability assessment of the aircraft in our fleet at that time, we impaired four Boeing Model 767-300ER aircraft, eight Boeing 737 “Classic” aircraft, and one Airbus Model A310-300F freighter aircraft and recorded aggregate impairment charges of $67,370 to write these aircraft down to current market values. Also during the third quarter of 2012, we elected not to invest in engine performance restoration maintenance visits for two Airbus Model A320-200 “Classic” aircraft with older technology engines and instead agreed with the lessee to terminate

11


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


the leases prior to scheduled expiry and pursue part-out sales. Following agreement with our customer to terminate the leases, these aircraft failed the recoverability assessment and we recorded impairment charges of $11,306 and we recorded $10,159 of maintenance revenue and reversed $1,157 of lease incentives for the three months ended September 30, 2012 , for these two aircraft.
During the second quarter of 2012 , we impaired two aircraft, one Boeing Model 757-200 aircraft that we sold for less than its net book value and one Boeing Model 767-300ER aircraft which was returned to us following its scheduled lease expiration and which failed its recoverability assessment. For these two aircraft, we recorded impairment charges of $10,111 , and we recorded $2,447 of maintenance revenue during the three months ended June 30, 2012 .

Financial Instruments
Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under financings and interest rate derivatives. The fair value of cash, cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.
The fair values of our securitizations which contain third party credit enhancements are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates of borrowing arrangements that do not contain third party credit enhancements. The fair values of our ECA term financings and bank financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices.
 The carrying amounts and fair values of our financial instruments at December 31, 2012 and September 30, 2013 are as follows:
 
December 31, 2012
 
September 30, 2013
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
Securitizations and term debt financings
$
(1,082,368
)
 
$
(962,960
)
 
$
(892,272
)
 
$
(831,391
)
ECA term financings
(652,916
)
 
(671,966
)
 
(504,419
)
 
(522,478
)
Bank financings
(112,750
)
 
(116,272
)
 
(184,427
)
 
(189,094
)
Senior Notes
(1,750,642
)
 
(1,905,565
)
 
(1,750,556
)
 
(1,899,575
)
All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.

Note 3. Lease Rental Revenues and Flight Equipment Held for Lease
Minimum future annual lease rentals contracted to be received under our existing operating leases of flight equipment at September 30, 2013 were as follows:
Year Ending December 31,
Amount
Remainder of 2013
$
166,891

2014
620,543

2015
554,155

2016
483,676

2017
354,261

Thereafter
998,948

Total
$
3,178,474



12


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013



Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Region
2012
 
2013
 
2012
 
2013
Europe
37
%
 
33
%
 
40
%
 
33
%
Asia and Pacific
33
%
 
38
%
 
30
%
 
38
%
North America
12
%
 
10
%
 
12
%
 
9
%
South America
7
%
 
9
%
 
7
%
 
9
%
Middle East and Africa
11
%
 
10
%
 
11
%
 
11
%
Total
100
%
 
100
%
 
100
%
 
100
%
The classification of regions in the tables above and in the table and discussion below is determined based on the principal location of the lessee of each aircraft.
For the three months ended September 30, 2012 , one customer accounted for 9% of lease rental revenue and four additional customers accounted for a combined 24% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue. For the three months ended September 30, 2013 , one customer accounted for 8% of lease rental revenue and three additional customers accounted for a combined 16% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
For the nine months ended September 30, 2012 , one customer accounted for 10% of lease rental revenue and four additional customers accounted for a combined 25% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue. For the nine months ended September 30, 2013 , one customer accounted for 8% of lease rental revenue and three additional customers accounted for a combined 17% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) based on each lessee’s principal place of business:
 
Three Months Ended September 30,
 
2012
 
2013
Country
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
 
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
China (1)
$
19,303

 
11
%
 
4

 
$

 
%
 

United States (1)
17,685

 
10
%
 
6

 

 
%
 

Russia (1)
17,472

 
10
%
 
8

 

 
%
 

United Kingdom (2)

 
%
 

 
16,293

 
10
%
 
2

            
(1) Total revenue was less than 10% for the three months ended September 30, 2013 .
(2) Total revenue includes $12,056 of maintenance revenue and $875 of other revenue related to an agreed upon lease termination prior to delivery date.

13


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013



 
Nine Months Ended September 30,
 
2012
 
2013
Country
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
 
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
China
$
56,160

 
11
%
 
4

 
$
49,148

 
10
%
 
4

United States (1)
61,366

 
12
%
 
6

 

 
%
 

Russia (1)
50,280

 
10
%
 
8

 

 
%
 

_______________
(1) Total revenue was less than 10% for the nine months ended September 30, 2013 .
Geographic concentration of net book value of flight equipment (includes net book value of flight equipment held for lease, net investment in finance leases and flight equipment held for sale) was as follows:
 
December 31, 2012
 
September 30, 2013
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Europe
68

 
35
%
 
67

 
33
%
Asia and Pacific
50

 
34
%
 
52

 
38
%
North America
17

 
10
%
 
21

 
11
%
South America
14

 
8
%
 
14

 
7
%
Middle East and Africa
8

 
12
%
 
7

 
11
%
Off-lease
2

(1)  
1
%
 


%
Total
159

 
100
%
 
161

 
100
%
 
_______________

(1)
Includes one Boeing 767-300ER that was sold in the first quarter of 2013 and one Boeing 747-400BDSF aircraft which was delivered to a lessee in the second quarter of 2013.

The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance leases) attributable to individual countries representing at least 10% of net book value of flight equipment based on each lessee’s principal place of business as of:
 
December 31, 2012
 
September 30, 2013
Country
Net Book
Value
 
Net Book
Value %
 
Number of
Lessees
 
Net Book
Value
 
Net Book
Value %
 
Number of
Lessees
China (1)
$
515,194

 
11
%
 
4

 
$

 
%
 

_______________
(1) The net book value of flight equipment was less than 10% as of September 30, 2013.

  At December 31, 2012 and September 30, 2013 , the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $15,587 and $25,265 , respectively.




14


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


Note 4. Net Investment in Finance Leases
At September 30, 2013 , our net investment in finance leases represents six aircraft leased to a customer in Germany, four aircraft leased to two customers in the United States and one aircraft leased to a customer in Canada. The following table lists the components of our net investment in finance leases at September 30, 2013 :
 
 
Amount
Total lease payments to be received
 
$
144,341

Less: Unearned income
 
(66,795
)
Estimated residual values of leased flight equipment (unguaranteed)
 
70,459

    Net investment in finance leases
 
$
148,005


    
At September 30, 2013 , minimum future lease payments on finance leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2013
 
$
7,129

2014
 
27,042

2015
 
27,042

2016
 
27,042

2017
 
26,127

Thereafter
 
29,959

    Total
 
$
144,341


Note 5. Variable Interest Entities
Aircastle consolidates eight VIEs of which it is the primary beneficiary. The operating activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the 17 aircraft discussed below.
Securitizations
In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland plc (“ACS Ireland”) and ACS Aircraft Finance Bermuda Limited (“ACS Bermuda”) issued Class A-1 notes, and each has fully and unconditionally guaranteed the other’s obligations under the notes. In connection with Securitization No. 2, two of our subsidiaries, ACS Aircraft Finance Ireland 2 Limited (“ACS Ireland 2”) and ACS 2007-1 Limited (“ACS Bermuda 2”) issued Class A-1 notes and each has fully and unconditionally guaranteed the other’s obligations under the notes. ACS Bermuda and ACS Bermuda 2 are collectively referred to as the “ACS Bermuda Group.”
Aircastle is the primary beneficiary of ACS Ireland and ACS Ireland 2 (collectively, the “ACS Ireland VIEs”), as we have both the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through Class E-1 Securities. Although Aircastle has not guaranteed the ACS Ireland VIEs debt, Aircastle wholly owns the ACS Bermuda Group which has fully and unconditionally guaranteed the ACS Ireland VIEs obligations. The activity that most significantly impacts the economic performance is the leasing of aircraft. Aircastle Advisor (Ireland) Limited (Aircastle’s wholly owned subsidiary) is the remarketing servicer and is responsible for the leasing of the aircraft. An Irish charitable trust owns 95% of the common shares of the ACS Ireland VIEs. The Irish charitable trust’s risk is limited to its annual dividend of $2 per VIE. At September 30, 2013 , the assets of the two VIEs include 10 aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1 and Securitization No. 2.

15


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


The combined assets of the ACS Ireland VIEs as of September 30, 2013 are $322,269 . The combined liabilities of the ACS Ireland VIEs, net of $72,068 Class E-1 Securities held by the Company, which is eliminated in consolidation, as of September 30, 2013 are $267,810 .

ECA Term Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), entered into eleven different twelve -year term loans, which are supported by guarantees from Compagnie Francaise d’ Assurance pour le Commerce Exterieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). These loans provided for the financing for eleven new Airbus Model A330-200 aircraft. In June 2011, we repaid one of these loans from the proceeds of the sale of the related aircraft. In June 2013, we repaid two of these loans from the proceeds of the sale of the related aircraft. We sold an additional aircraft in June 2013, and we posted cash, which is reflected in restricted cash and cash equivalents on the consolidated balance sheet, as collateral for the related term loan until we pay-off the loan or substitute an aircraft. At September 30, 2013 , Aircastle had eight outstanding term loans with guarantees from COFACE. We refer to these COFACE-supported financings as “ECA Term Financings.”
Aircastle is the primary beneficiary of the Air Knight VIEs, as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which our wholly owned subsidiary is the servicer and is responsible for managing the relevant aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.
The only assets that the Air Knight VIEs have on their books are financing leases that are eliminated in the consolidated financial statements and deferred financing costs. The related aircraft, with a net book value as of September 30, 2013 of $580,361 were included in our flight equipment held for lease. The related assets also include restricted cash and cash equivalents of $70,771 . The consolidated debt outstanding of the Air Knight VIEs as of September 30, 2013 is $504,419 .

Note 6. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings were as follows:
 
At December 31, 2012
 
At 9/30/2013
Debt Obligation
Outstanding
Borrowings
 
Outstanding
Borrowings
 
Interest Rate (1)
 
Final Stated
Maturity (2)
Secured Debt Financings:
 
 
 
 
 
 
 
Securitization No. 1
$
309,505

 
$
239,221

 
0.45%
 
06/20/31
Securitization No. 2
772,863

 
653,051

 
0.49%
 
06/14/37
ECA Term Financings
652,916

 
504,419

 
3.02% to 3.96%
 
12/3/21 to 11/30/24
Bank Financings
112,750

 
184,427

 
1.08% to 4.57%
 
09/15/15 to 02/13/20
Total secured debt financings
1,848,034

 
1,581,118

 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
Senior Notes due 2017
500,000

 
500,000

 
6.75%
 
04/15/17
Senior Notes due 2018
450,642

 
450,556

 
9.75%
 
08/01/18
Senior Notes due 2019
500,000

 
500,000

 
6.250%
 
12/01/19
Senior Notes due 2020
300,000

 
300,000

 
7.625%
 
04/15/20
2013 Revolving Credit Facility

 

 
N/A
 
08/02/16
Total unsecured debt financings
1,750,642

 
1,750,556

 
 
 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings
$
3,598,676

 
$
3,331,674

 
 
 
 
 

16


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


        
(1)
Reflects the floating rate in effect at the applicable reset date plus the margin for Securitization No. 1, Securitization No. 2 and one of our Bank Financings. All other financings have a fixed rate.
(2)
For Securitizations No. 1 and No. 2, all cash flows available after expenses and interest are applied to debt amortization.

The following securitizations include liquidity facility commitments described in the table below: 
 
 
 
Available Liquidity
 
 
 
 
Facility
Liquidity Facility Provider
 
December 31,
2012
 
September 30,
2013
 
Unused
Fee
 
Interest Rate
on any Advances
Securitization No. 1
Crédit Agricole Corporate and Investment Bank
 
$
42,000

 
$
42,000

 
0.45%
 
1M Libor + 1.00
Securitization No. 2
HSH Nordbank AG
 
65,000

 
65,000

 
0.50%
 
1M Libor + 0.75
 

ECA Term Financings

In June 2013, we repaid in full the outstanding principal balances on two of our ECA term financings in the total amount of $111,693 , plus accrued interest, interest rate derivative breakage fees of $2,954 , and accrued interest on the terminated interest rate derivatives. During the second quarter of 2013, we wrote off $3,825 of deferred financing fees which is reflected in interest expense on the consolidated statement of income. We sold an additional aircraft in June 2013, and we posted cash, which is reflected in restricted cash and cash equivalents on the consolidated balance sheet, as collateral for the related term loan until we pay-off the loan or substitute an aircraft.

In August 2013, one of our subsidiaries issued a fixed rate ECA bond with a face value of $78,230 which is supported by a guarantee from COFACE and the proceeds were utilized to repay an interim floating rate bank financing that was drawn in connection with the acquisition of one Airbus Model A330-200 aircraft in 2012. The bond has a fixed coupon rate of 3.488% and a final maturity of November 30, 2024 .

Bank Financings

In May 2013, we assumed three floating rate loans and one fixed rate loan totaling $91,797 in connection with the acquisition of two Airbus Model A320-200 aircraft and two Boeing Model 737-800 aircraft. During the quarter, we amended two of the floating rate loans to a fixed rate of 2.58% for the remaining debt term. At September 30, 2013 , these four loans had a weighted average interest rate of 2.36% and mature in 2018 and 2020 .

We include these loan facilities in “Bank Financings”. Aircastle Limited has guaranteed the repayment of these Bank Financings.


2013 Revolving Credit Facility
In early August 2013, we amended and restructured our existing $150,000 revolving credit facility (the "2012 Revolving Credit Facility") with a new unsecured revolving credit facility (the "2013 Revolving Credit Facility”).  The 2013 Revolving Credit Facility was initially sized at $335,000 and can be increased to a maximum of $400,000 .  The 2013 Revolving Credit Facility has a term of 3 years and is scheduled to expire in August 2016 .

As of September 30, 2013 , we are in compliance with all applicable covenants in all of our financings.



17


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


Note 7. Dividends
The following table sets forth the quarterly dividends declared by our board of directors for the periods covered in this report: 
Declaration Date
Dividend
per Common
Share
 
Aggregate
Dividend
Amount
 
Record Date
 
Payment Date
February 17, 2012
$
0.150

 
$
10,865

 
February 29, 2012
 
March 15, 2012
May 2, 2012
$
0.150

 
$
10,847

 
May 31, 2012
 
June 15, 2012
August 1, 2012
$
0.150

 
$
10,464

 
August 31, 2012
 
September 14, 2012
November 5, 2012
$
0.165

 
$
11,493

 
November 30, 2012
 
December 14, 2012
February 18, 2013
$
0.165

 
$
11,268

 
March 4, 2013
 
March 15, 2013
May 1, 2013
$
0.165

 
$
11,297

 
May 31, 2013
 
June 14, 2013
August 2, 2013
$
0.165

 
$
13,330

 
August 30, 2013
 
September 13, 2013

Note 8.  Shareholders' Equity
During January 2013, we repurchased 679,292 common shares at an aggregate cost of $8,579 including commissions. The remaining dollar value of common shares that may be purchased under the repurchase program approved by the Company's Board of Directors on November 5, 2012 is $30,000 .
In July 2013, we issued 12,320,000 of our common shares, par value US $0.01 , at a price of $ 17.00 per share to an affiliate of Marubeni Corporation, a Japanese corporation (the "Investor"). In June 2013, we also entered into a Shareholder Agreement with the Investor, which became effective in July 2013 upon the closing of the issuance.


Note 9. Earnings Per Share
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities.
Under the two-class method, earnings per common share is computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period. Because the holders of the participating restricted common shares were not contractually required to share in the Company’s losses, in applying the two-class method to compute basic and diluted net loss per common share, no allocation to restricted common shares was made for the three months ended September 30, 2012 and 2013 and the nine months ended September 30, 2013.

18


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
70,349,265

 
78,544,380

 
71,248,765

 
71,462,264

Restricted common shares
571,326

 
669,489

 
596,749

 
562,612

Total weighted-average shares
70,920,591

 
79,213,869

 
71,845,514

 
72,024,876

 
 
 
 
 
 
 
 
Percentage of weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
99.19
%
 
99.15
%
 
99.17
%
 
99.22
%
Restricted common shares
0.81
%
 
0.85
%
 
0.83
%
 
0.78
%
Total
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%

The calculations of both basic and diluted earnings per share are as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Earnings (loss) per share – Basic:
 
 
 
 
 
 
 
Net income (loss)
$
(45,847
)
 
$
(74,558
)
 
$
3,079

 
$
(18,640
)
Less: Distributed and undistributed earnings allocated to restricted common shares (a)

 

 
(25
)
 

Earnings (loss) available to common shareholders – Basic
$
(45,847
)
 
$
(74,558
)
 
$
3,054

 
$
(18,640
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
70,349,265

 
78,544,380

 
71,248,765

 
71,462,264

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Basic
$
(0.65
)
 
$
(0.95
)
 
$
0.04

 
$
(0.26
)
 
 
 
 
 
 
 
 
Earnings (loss) per share – Diluted:
 
 
 
 
 
 
 
Net income (loss)
$
(45,847
)
 
$
(74,558
)
 
$
3,079

 
$
(18,640
)
Less: Distributed and undistributed earnings allocated to restricted common shares(a)

 

 
(25
)
 

Earnings (loss) available to common shareholders – Diluted
$
(45,847
)
 
$
(74,558
)
 
$
3,054

 
$
(18,640
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
70,349,265

 
78,544,380

 
71,248,765

  
71,462,264

Effect of dilutive shares (b)

 

 

 

Weighted-average common shares outstanding – Diluted
70,349,265

 
78,544,380

 
71,248,765

  
71,462,264

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Diluted
$
(0.65
)
 
$
(0.95
)
 
$
0.04

  
$
(0.26
)
 
        
(a)
For the nine months ended September 30, 2012 , distributed and undistributed earnings to restricted shares is 0.83% of net income. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(b)
For the three and nine months ended September 30, 2012 and 2013 , we had no dilutive shares.

Note 10. Income Taxes
Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.
The sources of income (loss) from continuing operations before income taxes for the three and nine months ended September 30, 2012 and 2013 were as follows: 

19


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
U.S. operations
$
572

 
$
488

 
$
1,253

 
$
1,684

Non-U.S. operations
(44,718
)
 
(75,643
)
 
7,802

 
(13,605
)
Total
$
(44,146
)
 
$
(75,155
)
 
$
9,055

 
$
(11,921
)

All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. We also have a U.S. based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes.
The consolidated income tax expense (benefit) for the three and nine months ended September 30, 2012 and 2013 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2012 and 2013, respectively.
The Company's effective tax rate for the three and nine months ended September 30, 2012 was (3.9)% and 66.0% , respectively, compared to 0.8% and (56.4)% , respectively, for the three and nine months ended September 30, 2013 . Movements in the effective tax rates are generally caused by changes in the proportion of the Company's pre-tax earnings in taxable and non-tax jurisdictions. For the three and nine months ended September 30, 2012 and 2013, the interim period effective tax rate reflects the portfolio impairment of aircraft in the amount of $78,676 and $97,592 , respectively, which was treated as a discrete item.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Notional U.S. federal income tax expense (benefit) at the statutory rate
$
(15,451
)
 
$
(26,305
)
 
$
3,169

 
$
(4,173
)
U.S. state and local income tax, net
37

 
39

 
86

 
125

Non-U.S. operations:
 
 
 
 
 
 
 
Bermuda
20,203

 
26,613

 
9,439

 
13,748

Ireland
(2,101
)
 
(53
)
 
(3,776
)
 
(544
)
Other
(1,051
)
 
(990
)
 
(3,109
)
 
(2,719
)
Non-deductible expenses in the U.S.
71

 
107

 
183

 
306

Other
(7
)
 
(8
)
 
(16
)
 
(24
)
Income tax provision (benefit)
$
1,701

 
$
(597
)
 
$
5,976

 
$
6,719


Note 11. Interest, Net
The following table shows the components of interest, net: 

20


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities (1)
$
41,373

 
$
47,682

 
$
135,140

 
$
147,096

Hedge ineffectiveness (gains) losses
1,474

 
93

 
1,840

 
197

Amortization of interest rate derivatives related to deferred losses
8,966

 
7,300

 
21,903

 
25,285

Amortization of deferred financing fees (2)
2,391

 
2,976

 
10,082

 
11,757

Interest Expense
54,204

 
58,051

 
168,965

 
184,335

Less interest income
(103
)
 
(208
)
 
(447
)
 
(684
)
Less capitalized interest

 

 
(1,315
)
 

Interest, net
$
54,101

 
$
57,843

 
$
167,203

 
$
183,651

            
(1) For the nine months ended September 30, 2013 , includes the loan termination fee of $2,954 related to two ECA aircraft sold in June 2013.
(2) For the nine months ended September 30, 2012 , includes the write-off of deferred financings fees of $2,914 related to the repayment of Term Financing No. 1. For the nine months ended September 30, 2013 , includes the write-off of deferred financings fees of $3,975 related to the repayment of two ECA Financings.

Note 12. Commitments and Contingencies
At September 30, 2013 , we had commitments to acquire five aircraft during the remainder of 2013 for $256,320 .

Note 13. Derivatives
The objective of our hedging policy is to adopt a risk averse position with respect to changes in interest rates. Accordingly, we have entered into a number of interest rate derivatives to hedge the current and expected future interest rate payments on our variable rate debt. Interest rate derivatives are agreements in which a series of interest rate cash flows are exchanged with a third party over a prescribed period. The notional amount on an interest rate derivative is not exchanged. Our interest rate derivatives typically provide that we make fixed rate payments and receive floating rate payments to convert our floating rate borrowings to fixed rate obligations to better match the largely fixed rate cash flows from our investments in flight equipment.
We held the following interest rate derivatives as of September 30, 2013

21


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


 
Derivative Liabilities
Hedged Item
Current
Notional
Amount
 
Effective
Date
 
Maturity
Date
 
Future
Maximum
Notional
Amount
 
Floating
Rate
 
Fixed
Rate
 
Balance Sheet
Location
 
Fair
Value
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securitization No. 1
$
222,487

 
Jun-06
 
Jun-16
 
$
222,487

 
1M LIBOR
+ 0.27%
 
5.78%
 
Fair value of
derivative
liabilities
 
$
27,122

Securitization No. 2
499,338

 
Jun-12
 
Jun-17
 
499,338

 
1M LIBOR
 
1.26%
to
1.28%
 
Fair value of
derivative
liabilities
 
6,510

Total interest rate derivatives designated as cash flow hedges
$
721,825

 
 
 
 
 
$
721,825

 
 
 
 
 
 
 
$
33,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives not designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securitization No. 1
87,575

 
Jun-06
 
Jun-16
 
87,575

 
1M LIBOR + 0.27%
 
5.78%
 
Fair value of derivative liabilities
 
10,675

Total interest rate derivatives not designated as cash flow hedges
87,575

 
 
 
 
 
87,575

 
 
 
 
 
 
 
10,675

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest rate derivative liabilities
$
809,400

 
 
 
 
 
$
809,400

 
 
 
 
 
 
 
$
44,307

 

The weighted average interest pay rates of these derivatives at December 31, 2012 and September 30, 2013 were 2.91% and 3% , respectively.
For the nine months ended September 30, 2013 , the amount of loss reclassified from accumulated other comprehensive income (“OCI”) into interest expense related to net interest settlements on active interest rate derivatives was $13,717 . The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months related to net interest settlements on active interest rate derivatives is $16,077 .
Our interest rate derivatives involve counterparty credit risk. As of September 30, 2013 , our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, and Wells Fargo Bank NA. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of Baa2 or above) by Moody’s Investors Service. All are also considered investment grade (long-term foreign issuer ratings of A- or above) by Standard and Poor’s. We do not anticipate that any of these counterparties will fail to meet their obligations.
In addition to the derivative liability above, another component of the fair value of our interest rate derivatives is accrued interest. As of September 30, 2013 , accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $827 related to interest rate derivatives designated as cash flow hedges and $194 related to interest rate derivatives not designated as cash flow hedges.
Following is the effect of interest rate derivatives on the statement of financial performance for the nine months ended September 30, 2013
Effective Portion
 
Ineffective Portion
Derivatives in
ASC 815
Cash Flow
Hedging
Relationships
 
Amount of
Gain or (Loss)
Recognized in
OCI on
Derivative
(a)
 
Location of
Gain or (Loss)
Reclassified from
Accumulated
OCI into Income
 
Amount of
Gain or (Loss)
Reclassified from
Accumulated
OCI into Income  (b)
 
Location of
Gain or (Loss)
Recognized in
Income on Derivative
 
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
(c)
Interest rate derivatives
 
$403
 
Interest expense
 
$(38,633)
 
Interest expense
 
$(203)
 
        

22


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2013


(a)
This represents the change in fair market value of our interest rate derivatives since year end, net of taxes, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives for the nine months ended September 30, 2013 .
(b)
This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest rate derivatives for the nine months ended September 30, 2013 plus any effective amortization of net deferred interest rate derivative losses.
(c)
This represents both realized and unrealized ineffectiveness incurred during the nine months ended September 30, 2013 .

Derivatives Not Designated as Hedging Instruments under ASC 815
 
Location of Gain
or (Loss)
Recognized in Income
On Derivative
 
Amount of Gain
or (Loss)
Recognized in Income on
Derivative
Interest rate derivatives
 
Other income (expense)
 
$
3,727


On an ongoing basis, terminated swap notionals are evaluated against debt forecasts. To the extent that interest payments are deemed remote to occur, deferred gains or losses are accelerated into interest expense as applicable.
For the nine months ended September 30, 2013 , the amount of deferred net loss (including $2,027 of accelerated amortization driven by aircraft sales in 2013) reclassified from OCI into interest expense related to our terminated interest rate derivatives was $24,117 . The amount of deferred net loss expected to be reclassified from OCI into interest expense over the next 12 months related to our terminated interest rate derivatives is $24,603 of which $15,908 relates to Term Financing No. 1 interest rate derivatives terminated in 2012, $1,336 relates to Term Financing No. 1 derivatives terminated in 2008, $6,030 relates to ECA Term Financings for New A330 Aircraft and $1,329 relates to other financings.

For the nine months ended September 30, 2013 , the amount of effective deferred loss reclassified from OCI into interest expense related to our undesignated active interest rate derivative was $ 1,168 . The amount of effective deferred loss expected to be reclassified from OCI into interest expense over the next 12 months related to our undesignated active interest rate derivative under our Securitization No. 1 is $ 1,678 .
The following table summarizes amounts charged directly to the consolidated statement of income for the three and nine months ended September 30, 2012 and 2013 , respectively, related to our interest rate derivatives:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Interest expense:
 
 
 
 
 
 
 
Hedge ineffectiveness losses
$
1,474

 
$
93

 
$