Document
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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, 2018
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
201 Tresser Boulevard, Suite 400, Stamford, CT
06901
(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 every Interactive Data File required to be submitted 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 such files).    YES  þ    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o  
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
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 30, 2018, there were 76,227,375 outstanding shares of the registrant’s common shares, par value $0.01 per share.



Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
 
 
 
Page
No.
 
 
Item 1.
 
 
Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
 
Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I. — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)

 
September 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
593,922

 
$
211,922

Restricted cash and cash equivalents
16,275

 
21,935

Accounts receivable
27,365

 
12,815

Flight equipment held for lease, net of accumulated depreciation of $1,212,799 and $1,125,594, respectively
6,321,622

 
6,188,469

Net investment in finance and sales-type leases
517,221

 
545,750

Unconsolidated equity method investments
82,146

 
76,982

Other assets
172,718

 
141,210

Total assets
$
7,731,269

 
$
7,199,083

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs and discounts
$
717,305

 
$
849,874

Borrowings from unsecured financings, net of debt issuance costs and discounts
3,938,568

 
3,463,732

Accounts payable, accrued expenses and other liabilities
149,583

 
140,221

Lease rentals received in advance
81,594

 
57,630

Security deposits
131,000

 
130,628

Maintenance payments
754,522

 
649,434

Total liabilities
5,772,572

 
5,291,519

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Preference shares, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding

 

Common shares, $0.01 par value, 250,000,000 shares authorized, 77,179,863 shares issued and outstanding at September 30, 2018; and 78,707,963 shares issued and outstanding at December 31, 2017
772

 
787

Additional paid-in capital
1,500,030

 
1,527,796

Retained earnings
458,362

 
380,331

Accumulated other comprehensive loss
(467
)
 
(1,350
)
Total shareholders’ equity
1,958,697

 
1,907,564

Total liabilities and shareholders’ equity
$
7,731,269

 
$
7,199,083


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

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
182,043

 
$
171,687

 
$
538,012

 
$
551,371

Finance and sales-type lease revenue
8,793

 
6,412

 
27,103

 
16,363

Amortization of lease premiums, discounts and incentives
(4,044
)
 
(2,388
)
 
(10,706
)
 
(8,780
)
Maintenance revenue

 
14,507

 
11,991

 
55,738

Total lease revenue
186,792

 
190,218

 
566,400

 
614,692

Gain on sale of flight equipment
2,954

 
21,642

 
28,586

 
35,926

Other revenue
1,083

 
1,193

 
2,799

 
4,526

Total revenues
190,829

 
213,053

 
597,785

 
655,144

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
78,059

 
70,018

 
229,242

 
227,446

Interest, net
57,131

 
60,636

 
171,637

 
185,376

Selling, general and administrative (including non-cash share-based payment expense of $2,798 and $2,506 for the three months ended and $8,252 and $10,636 for the nine months ended September 30, 2018 and 2017, respectively)
18,306

 
17,137

 
54,724

 
55,491

Impairment of flight equipment

 

 

 
80,430

Maintenance and other costs
2,179

 
2,572

 
4,728

 
7,846

Total operating expenses
155,675

 
150,363

 
460,331

 
556,589

 
 
 
 
 
 
 
 
Total other income (expense)
368

 
(360
)
 
4,443

 
(3,069
)
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and earnings of unconsolidated equity method investments
35,522

 
62,330

 
141,897

 
95,486

Income tax provision
1,236

 
6,195

 
3,524

 
8,536

Earnings of unconsolidated equity method investments, net of tax
2,046

 
1,296

 
5,709

 
5,804

Net income
$
36,332

 
$
57,431

 
$
144,082

 
$
92,754

 
 
 
 
 
 
 
 
Earnings per common share — Basic:
 
 
 
 
 
 
 
Net income per share
$
0.47

 
$
0.73

 
$
1.84

 
$
1.18

 
 
 
 
 
 
 
 
Earnings per common share — Diluted:
 
 
 
 
 
 
 
Net income per share
$
0.46

 
$
0.73

 
$
1.83

 
$
1.18

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.28

 
$
0.26

 
$
0.84

 
$
0.78


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

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
36,332

 
$
57,431

 
$
144,082

 
$
92,754

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net derivative loss reclassified into earnings
288

 
569

 
883

 
1,725

Other comprehensive income
288

 
569

 
883

 
1,725

Total comprehensive income
$
36,620

 
$
58,000

 
$
144,965

 
$
94,479



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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
144,082

 
$
92,754

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
229,242

 
227,446

Amortization of deferred financing costs
10,802

 
15,860

Amortization of lease premiums, discounts and incentives
10,706

 
8,780

Deferred income taxes
3,850

 
(1,369
)
Non-cash share-based payment expense
8,252

 
10,636

Cash flow hedges reclassified into earnings
883

 
1,725

Security deposits and maintenance payments included in earnings
821

 
(17,147
)
Gain on sale of flight equipment
(28,586
)
 
(35,926
)
Impairment of flight equipment

 
80,430

Other
(11,377
)
 
2,078

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(9,731
)
 
415

Other assets
1,541

 
(6,980
)
Accounts payable, accrued expenses and other liabilities
6,476

 
17,648

Lease rentals received in advance
26,336

 
(2,892
)
Net cash and restricted cash provided by operating activities
393,297

 
393,458

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment
(626,022
)
 
(353,492
)
Proceeds from sale of flight equipment
276,165

 
764,984

Net investment in finance and sales-type leases
(15,783
)
 
(246,871
)
Collections on finance and sales-type leases
22,645

 
23,673

Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits
(9,544
)
 
(14,068
)
Other
3,880

 
(405
)
Net cash and restricted cash (used in) provided by investing activities
(348,659
)
 
173,821

Cash flows from financing activities:
 
 
 
Repurchase of shares
(36,955
)
 
(4,862
)
Proceeds from secured and unsecured debt financings
873,902

 
500,000

Repayments of secured and unsecured debt financings
(535,808
)
 
(852,451
)
Deferred financing costs
(6,628
)
 
(8,540
)
Security deposits and maintenance payments received
155,567

 
138,813

Security deposits and maintenance payments returned
(52,513
)
 
(104,475
)
Dividends paid
(65,863
)
 
(61,396
)
Net cash and restricted cash provided by (used in) financing activities
331,702

 
(392,911
)
Net increase in cash and restricted cash:
376,340

 
174,368

Cash and restricted cash at beginning of period
233,857

 
508,817

Cash and restricted cash at end of period
$
610,197

 
$
683,185







6


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
$
593,922

 
$
662,649

Restricted cash and cash equivalents
16,275

 
20,536

 
 
 
 
Unrestricted and restricted cash and cash equivalents
$
610,197

 
$
683,185

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
144,844

 
$
156,428

Cash paid for income taxes
$
5,971

 
$
3,622

Supplemental disclosures of non-cash investing activities:
 
 
 
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions
$
13,909

 
$
133,389

Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment
$
59,577

 
$
22,542

Transfers from flight equipment held for lease to Net investment in finance and sales-type leases and Other assets
$
40,198

 
$
154,213


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

7

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018


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 acquiring, leasing, managing and selling commercial jet aircraft.
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 (“U.S. GAAP”). The Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment: leasing, financing, selling and managing commercial flight equipment. Our Chief Executive Officer is the chief operating decision maker.
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 U.S. 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, 2017.
As part of the Company’s adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), we have reclassified Gain on sale of flight equipment from Other income (expense) to Revenues on our Consolidated Statements of Income for the three and nine months ended September 30, 2018. We believe this better reflects the sale of flight equipment as part of our ordinary activities and conforms our presentation to those of our publicly traded peers. The presentation for the three and nine months ended September 30, 2017, has also been reclassified to conform to the current period presentation:
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Total revenues as previously reported
$
191,411

 
$
619,218

Gain on sale of flight equipment
21,642

 
35,926

Total revenues
$
213,053

 
$
655,144


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, 2018, through the date on which the consolidated financial statements included in this Form 10-Q were issued.
Effective January 1, 2018, the Company adopted FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The standard clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The update is applied using a retrospective transition method to each period presented. The standard did not have a material impact on our consolidated financial statements and related disclosures.
Effective January 1, 2018, the Company adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related updates, as noted above. Lease contracts within the scope of Accounting Standards Codification (“ASC”) 840, Leases, are specifically excluded from ASU No. 2014-09. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The update is applied using the modified retrospective approach. The standard did not have a material impact on our consolidated financial statements and related disclosures.

8

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

Effective January 1, 2018, the Company adopted FASB ASU No. 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. In addition, when applicable, disclosure is required to indicate that compensation expense has not changed. The update is applied using a prospective transition method to each period presented. The standard did not have a material impact on our consolidated financial statements and related disclosures.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates four 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
Recent Accounting Pronouncements
On February 25, 2016, the FASB issued ASC 842, Leases (“ASC 842”) which, together with all subsequent amendments, replaced the existing guidance in ASC 840, Leases (“ASC 840”). The accounting for leases by lessors basically remained unchanged from the concepts that existed in ASC 840 accounting. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct finance lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.
The most significant among the changes in ASC 842 is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP, existing at, or entered into after, January 1, 2019. The standard will be effective for reporting periods beginning after December 15, 2018. We plan to adopt the standard on its required effective date of January 1, 2019, using the required “modified retrospective” approach and the available practical expedients. We have evaluated the impact of ASC 842 and have determined the standard will not have a material impact on our consolidated financial statements and related disclosures. We do not believe that the adoption of the standard will significantly impact our existing or potential lessees' economic decisions to lease aircraft.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The standard is applied on a modified retrospective approach. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as early as the fiscal years beginning after December 15, 2018, including

9

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

interim periods within those fiscal years. We are in the process of determining the impact the standard will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.  The standard modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project.  The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted. We are in the process of determining the impact the standard will have on our related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use-software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.  The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted, including adoption in any interim period. We are in the process of determining the impact the standard will have on our consolidated financial statements and related disclosures.
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.
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 as of September 30, 2018 and December 31, 2017 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. 

10

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

 
 
 
Fair Value Measurements at September 30, 2018
Using Fair Value Hierarchy
 
Fair Value as of September 30, 2018
 
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
$
593,922

 
$
593,922

 
$

 
$

 
Market
Restricted cash and cash equivalents
16,275

 
16,275

 

 

 
Market
Derivative assets
7,696

 

 
7,696

 

 
Market
Total
$
617,893

 
$
610,197

 
$
7,696

 
$

 
 
 
 
 
Fair Value Measurements at December 31, 2017
Using Fair Value Hierarchy
 
Fair Value as of December 31, 2017
 
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
$
211,922

 
$
211,922

 
$

 
$

 
Market
Restricted cash and cash equivalents
21,935

 
21,935

 

 

 
Market
Derivative assets
3,254

 

 
3,254

 

 
Market
Total
$
237,111

 
$
233,857

 
$
3,254

 
$

 
 

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 derivative assets included in Level 2 consist of United States dollar-denominated interest rate caps, and the fair value is based on market comparisons for similar instruments. We also considered the credit rating and risk of the counterparty providing the interest rate cap based on quantitative and qualitative factors.
For the three and nine months ended September 30, 2018 and the year ended December 31, 2017, we had no transfers into or out of Level 3.
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. 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 our investments in unconsolidated joint ventures and aircraft. We account for our investments in unconsolidated joint ventures under the equity method of accounting and record impairment when its fair value is less than its carrying value. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on an income approach which uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.
Aircraft Valuation
Annual Recoverability Assessment
We completed our annual recoverability assessment of our aircraft in the second quarter this year. We also performed aircraft-specific analyses where there were changes in circumstances, such as approaching lease expirations. No impairments were recorded as a result of our annual recoverability assessment.

11

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

The recoverability assessment 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.
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 aircraft were impaired as a consequence of our annual recoverability assessment. However, if our estimates or assumptions change, we may revise our cash flow assumptions and record future impairment charges. While we believe that the estimates and related assumptions used in the annual recoverability assessment are appropriate, actual results could differ from those estimates.
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 value of our senior notes is estimated using quoted market prices. The fair values of all our other financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of our financial instruments at September 30, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
December 31, 2017
 
Carrying  Amount
of Liability
 
Fair Value
of Liability
 
Carrying
Amount
of Liability
 
Fair Value
of Liability
Credit Facilities
$

 
$

 
$
175,000

 
$
175,000

Unsecured Term Loan
120,000

 
120,000

 
120,000

 
120,000

ECA Financings
198,809

 
198,395

 
227,491

 
232,030

Bank Financings
528,317

 
529,373

 
634,898

 
634,132

Senior Notes
3,850,000

 
3,923,812

 
3,200,000

 
3,367,245


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, 2018 were as follows:
Year Ending December 31,
 
Amount
Remainder of 2018
 
$
186,005

2019
 
693,418

2020
 
592,246

2021
 
480,666

2022
 
395,624

Thereafter
 
767,833

Total
 
$
3,115,792



12

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

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
2018
 
2017
 
2018
 
2017
Asia and Pacific
34
%
 
35
%
 
35
%
 
38
%
Europe
27
%
 
24
%
 
28
%
 
23
%
Middle East and Africa
11
%
 
12
%
 
11
%
 
12
%
North America
11
%
 
9
%
 
9
%
 
8
%
South America
17
%
 
20
%
 
17
%
 
19
%
 
 
 
 
 
 
 
 
Total
100
%
 
100
%
 
100
%
 
100
%


The classification of regions in the table above and in the tables and discussion below is determined based on the principal location of the lessee of each aircraft.
The following table shows the number of lessees with lease rental revenue of at least 5% of total lease rental revenue and their combined total percentage of lease rental revenue for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
Largest lessees by lease rental revenue
3
 
19%
 
4
 
25%
 
3
 
19%
 
4
 
24%

At September 30, 2018 and December 31, 2017, no country represented at least 10% of total revenue based on each counterparty’s principal place of business.
Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in finance and sales-type leases, or “net book value”) was as follows:
 
September 30, 2018
 
December 31, 2017
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
65

 
32
%
 
59

 
30
%
Europe
89

 
30
%
 
92

 
32
%
Middle East and Africa
17

 
9
%
 
15

 
9
%
North America
37

 
11
%
 
32

 
10
%
South America
26

 
18
%
 
25

 
19
%
Off-lease


%
 
1

(1) 
%
Total
234

 
100
%
 
224

 
100
%
 
_______________
(1)
Consisted of one Airbus A321-200 aircraft, which was delivered on lease to a customer in the second quarter of 2018.
At September 30, 2018 and December 31, 2017, no country represented at least 10% of net book value of flight equipment based on each lessee’s principal place of business.
At September 30, 2018 and December 31, 2017, the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $14,586 and $11,496, respectively.

13

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

Note 4. Net Investment in Finance and Sales-Type Leases
At September 30, 2018, our net investment in finance and sales-type leases consisted of 30 aircraft. The following table lists the components of our net investment in finance and sales-type leases at September 30, 2018:
 
 
Amount
Total lease payments to be received
 
$
280,498

Less: Unearned income
 
(139,490
)
Estimated residual values of leased flight equipment (unguaranteed)
 
376,213

 
 
 
Net investment in finance and sales-type leases
 
$
517,221


At September 30, 2018, minimum future lease payments on finance and sales-type leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2018
 
$
16,770

2019
 
66,285

2020
 
63,840

2021
 
53,057

2022
 
42,460

Thereafter
 
38,086

Total lease payments to be received
 
$
280,498


Note 5. Unconsolidated Equity Method Investments
We have joint ventures with an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) and with the leasing arm of the Industrial Bank of Japan, Limited (“IBJL”).
At September 30, 2018, the net book value of both joint ventures’ twelve aircraft was approximately $621,000.
 
 
Amount
Investment in joint ventures at December 31, 2017
 
$
76,982

Investment in joint ventures
 
355

Earnings from joint ventures, net of tax
 
5,709

Distributions
 
(900
)
Investment in joint ventures at September 30, 2018
 
$
82,146


The Company has recorded in its Consolidated Balance Sheet a $13,200 guarantee liability in Maintenance payments and a $5,100 guarantee liability in Security deposits representing its share of the respective exposures.
Note 6. Variable Interest Entities
Aircastle consolidates four 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 six aircraft discussed below.
ECA Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), has entered into six different twelve-year term loans, which are supported by guarantees from Compagnie

14

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

Française d'Assurance pour le Commerce Extérieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). We refer to these COFACE-supported financings as “ECA 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. The related aircraft, with a net book value as of September 30, 2018 of $399,301, were included in our flight equipment held for lease. The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of September 30, 2018 is $194,687.
Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At September 30, 2018
 
At
December 31, 2017
Debt Obligation
Outstanding
Borrowings
 
Number of Aircraft
 
Interest Rate
 
Final Stated
Maturity
 
Outstanding
Borrowings
Secured Debt Financings:
 
 
 
 
 
 
 
 
 
ECA Financings(1)
$
198,809

 
6

 
3.02% to 3.96%
 
12/03/21 to 11/30/24
 
$
227,491

Bank Financings(2)
528,317

 
21

 
2.22% to 5.03%
 
12/12/18 to 01/19/26
 
634,898

Less: Debt issuance costs and discounts
(9,821
)
 

 
 
 
 
 
(12,515
)
Total secured debt financings, net of debt issuance costs and discounts
717,305

 
27

 
 
 
 
 
849,874

 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
 
 
Senior Notes due 2018
400,000

 
 
 
4.625%
 
12/15/18
 
400,000

Senior Notes due 2019
500,000

 
 
 
6.25%
 
12/01/19
 
500,000

Senior Notes due 2020
300,000

 
 
 
7.625%
 
04/15/20
 
300,000

Senior Notes due 2021
500,000

 
 
 
5.125%
 
03/15/21
 
500,000

Senior Notes due 2022
500,000

 
 
 
5.50%
 
02/15/22
 
500,000

Senior 5.00% Notes due 2023
500,000

 
 
 
5.00%
 
04/01/23
 
500,000

Senior 4.40% Notes due 2023
650,000

 
 
 
4.40%
 
09/25/23
 

Senior Notes due 2024
500,000

 
 
 
4.125%
 
05/01/24
 
500,000

Unsecured Term Loan
120,000

 
 
 
4.337%
 
04/28/19
 
120,000

Revolving Credit Facilities

 
 
 
%
 
11/21/19 to 06/27/22
 
175,000

   Less: Debt issuance costs and discounts
(31,432
)
 
 
 
 
 
 
 
(31,268
)
Total unsecured debt financings, net of debt issuance costs and discounts
3,938,568

 
 
 
 
 
 
 
3,463,732

 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings, net of debt issuance costs and discounts
$
4,655,873

 
 
 
 
 
 
 
$
4,313,606

 
        
(1)
The borrowings under these financings at September 30, 2018 have a weighted-average rate of interest of 3.58%.
(2)
The borrowings under these financings at September 30, 2018 have a weighted-average fixed rate of interest of 4.37%.

15

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

Unsecured Debt Financings:
Senior 4.40% Notes due 2023
On September 25, 2018, Aircastle issued $650,000 aggregate principal amount of Senior Notes due 2023 (the “Senior 4.40% Notes due 2023”) at an issue price of 99.831%. The Senior 4.40% Notes due 2023 will mature on September 25, 2023 and bear interest at the rate of 4.40% per annum, payable semi-annually on March 25 and September 25 of each year, commencing on March 25, 2019. Interest accrues on the Senior 4.40% Notes due 2023 from September 25, 2018.
Prior to August 25, 2023, we may redeem all or part of the aggregate principal amount of the Senior 4.40% Notes due 2023 at any time at a redemption price equal to the greater of (a) 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest thereon to, but not including, the redemption date and (b) the sum of the present values of 100% of the principal amount of the notes redeemed and the remaining scheduled payments of interest on the notes from the redemption date through August 25, 2023 (computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the Senior 4.40% Notes due 2023) as of such redemption date plus 0.25%). In addition, on or after August 25, 2023, we may redeem all or part of the aggregate principal amount of the Senior 4.40% Notes due 2023 at a redemption price equal to 100%, plus accrued and unpaid interest thereon to, but not including, the redemption date. If the Company undergoes a change of control (as defined in the indenture governing the Senior 4.40% Notes due 2023) and, as a result of the change of control, the rating of the Senior 4.40% Notes due 2023 is downgraded to below an investment grade rating by certain rating agencies in the manner specified in the indenture governing the Senior 4.40% Notes due 2023, it must offer to repurchase the Senior 4.40% Notes due 2023 at 101% of the principal amount, plus accrued and unpaid interest to, but not including, the purchase date. The Senior 4.40% Notes due 2023 are not guaranteed by any of the Company's subsidiaries or any third-party.
The net proceeds from the issuance were used to repay amounts drawn under our existing revolving credit facility and for general corporate purposes.
Revolving Credit Facility
On June 27, 2018, we entered into an amendment that increased the size of one of our unsecured revolving facilities from $675,000 to $800,000, extended its maturity by more than two years to June 2022 and decreased the interest rate from LIBOR plus 2.25% to LIBOR plus 1.50%. At September 30, 2018, we had no amounts outstanding under our revolving credit facilities and had $935,000 available.
As of September 30, 2018, we were in compliance with all applicable covenants in our financings.
Note 8. Shareholders' Equity and Share-Based Payment
During the nine months ended September 30, 2018, the Company issued 291,876 restricted common shares and issued 336,826 performance share units (“PSUs”). These awards were made under the Aircastle Limited Amended and Restated 2014 Omnibus Incentive Plan.
During the nine months ended September 30, 2018, the Company incurred share-based compensation expense of $4,085 related to restricted common shares and $4,167 related to PSUs, which included an adjustment related to a retirement and transition agreement entered into with the Company’s Chief Commercial Officer.
As of September 30, 2018, there was $5,974 of unrecognized compensation cost related to unvested restricted common share-based payments and $7,599 of unrecognized compensation cost related to unvested PSU share-based payments that are expected to be recognized over a weighted-average remaining period of 1.76 years.
During the nine months ended September 30, 2018, we repurchased 1,702,811 common shares at an aggregate cost of $34,461, including commissions. At September 30, 2018, the remaining dollar value of shares that may be repurchased under the repurchase program approved by our Board of Directors on February 9, 2016 is $61,427.


16

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

Note 9. 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
August 3, 2018
$
0.28

 
$
21,870

 
August 31, 2018
 
September 14, 2018
May 1, 2018
$
0.28

 
$
21,908

 
May 31, 2018
 
June 15, 2018
February 9, 2018
$
0.28

 
$
22,085

 
February 28, 2018
 
March 15, 2018
October 31, 2017
$
0.28

 
$
22,039

 
November 30, 2017
 
December 15, 2017
August 4, 2017
$
0.26

 
$
20,464

 
August 31, 2017
 
September 15, 2017

Note 10. 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. Our PSUs are contingently issuable shares which are included in our diluted earnings per share calculations which do not include voting or dividend rights.
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.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
77,599,803

 
78,237,199

 
77,956,159

 
78,197,091

Restricted common shares
488,771

 
569,617

 
472,999

 
569,453

Total weighted-average shares
78,088,574

 
78,806,816

 
78,429,158

 
78,766,544

 
 
 
 
 
 
 
 
Percentage of weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
99.37
%
 
99.28
%
 
99.40
%
 
99.28
%
Restricted common shares
0.63
%
 
0.72
%
 
0.60
%
 
0.72
%
Total percentage of weighted-average shares
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%








17

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

The calculations of both basic and diluted earnings per share are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Earnings per share – Basic:
 
 
 
 
 
 
 
Net income
$
36,332

 
$
57,431

 
$
144,082

 
$
92,754

Less: Distributed and undistributed earnings allocated to restricted common shares(1)
(227
)
 
(415
)
 
(869
)
 
(671
)
Earnings available to common shareholders – Basic
$
36,105

 
$
57,016

 
$
143,213

 
$
92,083

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
77,599,803

 
78,237,199

 
77,956,159

 
78,197,091

 
 
 
 
 
 
 
 
Earnings per common share – Basic
$
0.47

 
$
0.73

 
$
1.84

 
$
1.18

 
 
 
 
 
 
 
 
Earnings per share – Diluted:
 
 
 
 
 
 
 
Net income
$
36,332

 
$
57,431

 
$
144,082

 
$
92,754

Less: Distributed and undistributed earnings allocated to restricted common shares(1)
(227
)
 
(415
)
 
(869
)
 
(671
)
Earnings available to common shareholders – Diluted
$
36,105

 
$
57,016

 
$
143,213

 
$
92,083

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
77,599,803

 
78,237,199

 
77,956,159

  
78,197,091

Effect of dilutive shares(2)
295,671

 
137,810

 
287,136

 
169,053

Weighted-average common shares outstanding – Diluted
77,895,474

 
78,375,009

 
78,243,295

  
78,366,144

 
 
 
 
 
 
 
 
Earnings per common share – Diluted
$
0.46

 
$
0.73

 
$
1.83

  
$
1.18

 
        
(1)
For the three months ended September 30, 2018 and 2017, distributed and undistributed earnings to restricted shares were 0.63% and 0.72%, respectively, of net income. For the nine months ended September 30, 2018 and 2017, distributed and undistributed earnings to restricted shares were 0.60% and 0.72%, respectively, of net income. The amount of restricted share forfeitures for all periods presented are immaterial to the allocation of distributed and undistributed earnings.
(2)
For all periods presented, dilutive shares represented contingently issuable shares.
Note 11. Income Taxes
Income taxes have been provided based on 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 relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland and the United States.
The sources of income from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and nine months ended September 30, 2018 and 2017 were as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
U.S. operations
$
3,033

 
$
531

 
$
4,504

 
$
2,029

Non-U.S. operations
32,489

 
61,799

 
137,393

 
93,457

Income from continuing operations before income taxes and earnings of unconsolidated equity method investments
$
35,522

 
$
62,330

 
$
141,897

 
$
95,486


Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions.

18

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2018

We have a U.S. based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
The consolidated income tax expense for the three and nine months ended September 30, 2018 and 2017 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2018 and 2017, respectively.
The Company’s effective tax rate (“ETR”) for the three and nine months ended September 30, 2018 was 3.5% and 2.5%, respectively, compared to 9.9% and 8.9%, respectively, for the three and nine months ended September 30, 2017. The first quarter of 2018 included a $2,779 tax benefit related to the Singapore rate reduction from 10% to 8%, which was treated as a discrete item. Excluding this tax benefit, the ETR would have been 4.5% for the nine months ended September 30, 2018. The pre-tax earnings for the nine months ended September 30, 2017 included impairment charges of approximately $80,430 in a non-taxable jurisdiction. Movements in the ETR are generally caused by changes in the proportion of the Company’s pre-tax earnings in taxable and non-tax jurisdictions.