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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________
FORM 10-Q
_______________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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
Connecticut
06901
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code:     (203) 504-1020
_______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class                            
 
Trading Symbol
 
Name of Each Exchange on Which Registered                            
Common Shares, par value $0.01 per share
 
AYR
 
New York Stock Exchange
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      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      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
Accelerated filer
Non-accelerated filer
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  
As of November 1, 2019, there were 74,635,330 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, 2019 and December 31, 2018
 
Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018
 
Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ending September 30, 2019 and 2018
 
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,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
254,440

 
$
152,719

Restricted cash and cash equivalents
15,894

 
15,134

Accounts receivable
18,090

 
15,091

Flight equipment held for lease, net of accumulated depreciation of $1,439,216 and $1,221,985, respectively
7,240,553

 
6,935,585

Net investment in direct financing and sales-type leases
494,629

 
469,180

Unconsolidated equity method investments
69,027

 
69,111

Other assets
228,046

 
214,361

Total assets
$
8,320,679

 
$
7,871,181

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs and discounts
$
1,183,487

 
$
798,457

Borrowings from unsecured financings, net of debt issuance costs and discounts
4,004,876

 
3,962,896

Accounts payable, accrued expenses and other liabilities
163,894

 
153,341

Lease rentals received in advance
101,775

 
87,772

Security deposits
124,373

 
120,962

Maintenance payments
703,945

 
739,072

Total liabilities
6,282,350

 
5,862,500

 
 
 
 
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, 74,635,330 shares issued and outstanding at September 30, 2019; and 75,454,511 shares issued and outstanding at December 31, 2018
746

 
754

Additional paid-in capital
1,456,438

 
1,468,779

Retained earnings
581,145

 
539,332

Accumulated other comprehensive loss

 
(184
)
Total shareholders’ equity
2,038,329

 
2,008,681

 
 
 
 
Total liabilities and shareholders’ equity
$
8,320,679

 
$
7,871,181


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,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
203,005

 
$
182,043

 
$
577,062

 
$
538,012

Direct financing and sales-type lease revenue
8,229

 
8,793

 
24,993

 
27,103

Amortization of lease premiums, discounts and incentives
(5,895
)
 
(4,044
)
 
(16,951
)
 
(10,706
)
Maintenance revenue
11,095

 

 
54,063

 
11,991

Total lease revenue
216,434

 
186,792

 
639,167

 
566,400

Gain on sale of flight equipment
13,083

 
2,954

 
25,431

 
28,586

Other revenue
7,348

 
1,083

 
9,610

 
2,799

Total revenues
236,865

 
190,829

 
674,208

 
597,785

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
90,997

 
78,059

 
265,310

 
229,242

Interest, net
65,261

 
57,131

 
195,101

 
171,637

Selling, general and administrative (including non-cash share-based payment expense of $3,300 and $2,798 for the three months ended and $9,203 and $8,252 for the nine months ended September 30, 2019 and 2018, respectively)
17,956

 
18,306

 
54,273

 
54,724

Impairment of flight equipment

 

 
7,404

 

Maintenance and other costs
7,250

 
2,179

 
19,867

 
4,728

Total operating expenses
181,464

 
155,675

 
541,955

 
460,331

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Loss on extinguishment of debt
(7,577
)
 

 
(7,577
)
 

Other
(258
)
 
368

 
(4,229
)
 
4,443

Total other income (expense)
(7,835
)
 
368

 
(11,806
)
 
4,443

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and earnings of unconsolidated equity method investments
47,566

 
35,522

 
120,447

 
141,897

Income tax provision
5,505

 
1,236

 
14,595

 
3,524

Earnings of unconsolidated equity method investments, net of tax
1,274

 
2,046

 
3,405

 
5,709

Net income
$
43,335

 
$
36,332

 
$
109,257

 
$
144,082

 
 
 
 
 
 
 
 
Earnings per common share — Basic:
 
 
 
 
 
 
 
Net income per share
$
0.58

 
$
0.47

 
$
1.46

 
$
1.84

Earnings per common share — Diluted:
 
 
 
 
 
 
 
Net income per share
$
0.57

 
$
0.46

 
$
1.44

 
$
1.83

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.30

 
$
0.28

 
$
0.90

 
$
0.84


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,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income
$
43,335

 
$
36,332

 
$
109,257

 
$
144,082

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

 
288

 
184

 
883

Other comprehensive income

 
288

 
184

 
883

Total comprehensive income
$
43,335

 
$
36,620

 
$
109,441

 
$
144,965



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,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
109,257

 
$
144,082

Adjustments to reconcile net income to net cash and restricted cash provided by operating activities:
 
 
 
Depreciation
265,310

 
229,242

Amortization of deferred financing costs
10,778

 
10,802

Amortization of lease premiums, discounts and incentives
16,951

 
10,706

Deferred income taxes
10,513

 
3,850

Non-cash share-based payment expense
9,203

 
8,252

Cash flow hedges reclassified into earnings
184

 
883

Collections on direct financing and sales-type leases
17,260

 
22,645

Security deposits and maintenance payments included in earnings
(37,281
)
 
821

Gain on sale of flight equipment
(25,431
)
 
(28,586
)
Loss on extinguishment of debt
7,577

 

Impairment of flight equipment
7,404

 

Other
641

 
(11,377
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(11,994
)
 
(9,731
)
Other assets
2,437

 
1,541

Accounts payable, accrued expenses and other liabilities
(2,118
)
 
6,476

Lease rentals received in advance
12,398

 
26,336

Net cash and restricted cash provided by operating activities
393,089

 
415,942

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment
(892,186
)
 
(626,022
)
Proceeds from sale of flight equipment
229,061

 
276,165

Net investment in direct financing and sales-type leases

 
(15,783
)
Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits
15,829

 
(9,544
)
Unconsolidated equity method investments and associated costs
(15,176
)
 

Other
3,539

 
3,880

Net cash and restricted cash used in investing activities
(658,933
)
 
(371,304
)
Cash flows from financing activities:
 
 
 
Repurchase of shares
(21,297
)
 
(36,955
)
Proceeds from secured and unsecured debt financings
2,066,848

 
873,902

Repayments of secured and unsecured debt financings
(1,637,269
)
 
(535,808
)
Debt extinguishment costs
(7,183
)
 

Deferred financing costs
(13,711
)
 
(6,628
)
Security deposits and maintenance payments received
147,490

 
155,567

Security deposits and maintenance payments returned
(99,109
)
 
(52,513
)
Dividends paid
(67,444
)
 
(65,863
)
Net cash and restricted cash provided by financing activities
368,325

 
331,702

Net increase in cash and restricted cash:
102,481

 
376,340

Cash and restricted cash at beginning of period
167,853

 
233,857

 
 
 
 
Cash and restricted cash at end of period
$
270,334

 
$
610,197


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

6


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
$
254,440

 
$
593,922

Restricted cash and cash equivalents
15,894

 
16,275

 
 
 
 
Unrestricted and restricted cash and cash equivalents
$
270,334

 
$
610,197

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
181,332

 
$
144,844

Cash (received) paid for income taxes
$
(497
)
 
$
5,971

Supplemental disclosures of non-cash investing activities:
 
 
 
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions
$
28,709

 
$
13,909

Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment
$
37,375

 
$
59,577

Transfers from flight equipment held for lease to Net investment in direct financing and sales-type leases and Other assets
$
104,838

 
$
40,198


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

7


Aircastle Limited and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
(Unaudited)
 
Nine Month Period Ending September 30, 2019
 
 
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Common Shares
 
 
Shares
 
Amount
 
Balance, December 31, 2018
75,454,511

 
$
754

 
$
1,468,779

 
$
539,332

 
$
(184
)
 
$
2,008,681

Issuance of common shares to directors and employees
276,923

 
3

 
(3
)
 

 

 

Repurchase of common shares from stockholders, directors and employees
(653,796
)
 
(6
)
 
(11,418
)
 

 

 
(11,424
)
Amortization of share-based payments

 

 
2,410

 

 

 
2,410

Reclassification of prior year director stock award liability

 

 
796

 

 

 
796

Dividends declared

 

 

 
(22,518
)
 

 
(22,518
)
Net income

 

 

 
34,810

 

 
34,810

Net derivative loss reclassified into earnings

 

 

 

 
184

 
184

Balance, March 31, 2019
75,077,638

 
$
751

 
$
1,460,564

 
$
551,624

 
$

 
$
2,012,939

Issuance of common shares to directors and employees
35,000

 

 

 

 

 

Repurchase of common shares from stockholders, directors and employees
(129,524
)
 
(1
)
 
(2,863
)
 

 

 
(2,864
)
Amortization of share-based payments

 

 
2,833

 

 

 
2,833

Dividends declared

 

 

 
(22,536
)
 

 
(22,536
)
Net income

 

 

 
31,112

 

 
31,112

Balance, June 30, 2019
74,983,114

 
$
750

 
$
1,460,534

 
$
560,200

 
$

 
$
2,021,484

Repurchase of common shares from stockholders, directors and employees
(347,784
)
 
(4
)
 
(7,005
)
 

 

 
(7,009
)
Amortization of share-based payments

 

 
2,909

 

 

 
2,909

Dividends declared

 

 

 
(22,390
)
 

 
(22,390
)
Net income

 

 

 
43,335

 

 
43,335

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
74,635,330

 
$
746

 
$
1,456,438

 
$
581,145

 
$

 
$
2,038,329



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






















8


Aircastle Limited and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity (Continued)
(Dollars in thousands, except share amounts)
(Unaudited)
 
Nine Month Period Ending September 30, 2018
 
 
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Common Shares
 
 
Shares
 
Amount
 
Balance, December 31, 2017
78,707,963

 
$
787

 
$
1,527,796

 
$
380,331

 
$
(1,350
)
 
$
1,907,564

Issuance of common shares to stockholders, directors and employees
293,680

 
3

 
(3
)
 

 

 

Repurchase of common shares from stockholders, directors and employees
(462,452
)
 
(5
)
 
(9,408
)
 

 

 
(9,413
)
Amortization of share-based payments

 

 
2,048

 

 

 
2,048

Reclassification of prior year director stock award liability

 

 
1,680

 

 

 
1,680

Dividends declared

 

 

 
(22,085
)
 

 
(22,085
)
Net income

 

 

 
57,547

 

 
57,547

Adoption of accounting standard

 

 

 
(188
)
 

 
(188
)
Net derivative loss reclassified into earnings

 

 

 

 
301

 
301

Balance, March 31, 2018
78,539,191

 
$
785

 
$
1,522,113

 
$
415,605

 
$
(1,049
)
 
$
1,937,454

Repurchase of common shares from stockholders, directors and employees
(295,153
)
 
(3
)
 
(5,571
)
 

 

 
(5,574
)
Amortization of share-based payments

 

 
2,750

 

 

 
2,750

Reclassification of prior year director stock award liability

 

 
187

 

 

 
187

Dividends declared

 

 

 
(21,908
)
 

 
(21,908
)
Net income

 

 

 
50,203

 

 
50,203

Net derivative loss reclassified into earnings

 

 

 

 
294

 
294

Balance, June 30, 2018
78,244,038

 
$
782

 
$
1,519,479

 
$
443,900

 
$
(755
)
 
$
1,963,406

Repurchase of common shares from stockholders, directors and employees
(1,064,175
)
 
(10
)
 
(21,958
)
 

 

 
(21,968
)
Amortization of share-based payments

 

 
2,528

 

 

 
2,528

Reclassification of prior year director stock award liability

 

 
(19
)
 

 

 
(19
)
Dividends declared

 

 

 
(21,870
)
 

 
(21,870
)
Net income

 

 

 
36,332

 

 
36,332

Net derivative loss reclassified into earnings

 

 

 

 
288

 
288

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
77,179,863

 
$
772

 
$
1,500,030

 
$
458,362

 
$
(467
)
 
$
1,958,697



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


9

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2019


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 the 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, 2018.
Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 remained largely unchanged from the concepts that existed in ASC 840. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct financing 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.
As a result of the Company’s adoption of ASC 842, we have recognized right-of-use assets and lease liabilities on our Consolidated Balance Sheet as of September 30, 2019, for our office leases classified as operating leases under ASC 842, existing at, or entered into after, January 1, 2019. We adopted the standard using the required “modified retrospective” approach and the available practical expedients. The standard did not have a material impact on our consolidated financial statements and related disclosures.
As part of the Company’s adoption of ASC 842, we classified collections on direct financing and sales-type leases within operating activities on our Consolidated Statement of Cash Flows for the nine months ended September 30, 2019. This had previously been included within investing activities. The presentation for the nine months ended September 30, 2018, has also been reclassified to conform to the current period presentation:
 
Nine Months Ended September 30, 2018
Net cash and restricted cash provided by operating activities as previously reported
$
393,297

Collections on direct financing and sales-type leases
22,645

Net cash and restricted cash provided by operating activities
$
415,942

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, 2019, through the date on which the consolidated financial statements included in this Form 10-Q were issued.


10

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2019

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.
Lease Revenue Recognition
We lease flight equipment under net operating leases with lease terms typically ranging from three to seven years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals. Operating lease rentals that adjust based on a London Interbank Offered Rate (“LIBOR”) index are recognized on a straight-line basis over the lease term using the prevailing rate at lease commencement. Changes to rate-based lease rentals are recognized in the statement of income in the period of change.
Flight Equipment Held for Lease and Depreciation
Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% to 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value or when events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments and related updates. The standard affects entities holding financial assets and net investments 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 takes effect for annual periods beginning after December 15, 2019. The Company’s net investments in direct financing and sales-type leases compose the financial assets principally affected by the standard. Operating lease receivables are not within the scope of ASC 326.
Upon the Company’s adoption of ASC 326 in 2020, our net investments in direct finance and sales-type leases will be recorded in the consolidated financial statements net of an allowance for credit losses. This allowance for credit losses will reflect the Company’s estimate of lessee default probabilities and loss given default percentages. This estimate of expected credit losses will consider relevant information about past events, current conditions, and reasonable and supportable forecasts

11

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2019

that affect the collectability of reported amounts. Additional consideration will be given for potential non-credit losses to unguaranteed residual values. We will adopt the standard using the “modified retrospective” approach with a January 1, 2020 adjustment to the opening balance of retained earnings. The Company does not anticipate that the adoption of the standard will have a material impact on the consolidated financial statements or 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. The Company does not anticipate that the adoption of the standard will have a material impact on the consolidated financial statements or 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. The Company does not anticipate that the adoption of the standard will have a material impact on the consolidated financial statements or related disclosures.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities. The standard changes how all entities evaluate decision-making fees under the variable interest entity guidance. The standard is applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate that the adoption of the standard will have a material impact on the consolidated financial statements or 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).



12

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2019

The following tables set forth our financial assets as of September 30, 2019 and December 31, 2018 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.
 
 
 
Fair Value Measurements at September 30, 2019
Using Fair Value Hierarchy
 
Fair Value as of September 30, 2019
 
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
$
254,440

 
$
254,440

 
$

 
$

 
Market
Restricted cash and cash equivalents
15,894

 
15,894

 

 

 
Market
Derivative assets
379

 

 
379

 

 
Market
Total
$
270,713

 
$
270,334

 
$
379

 
$

 
 
 
 
 
Fair Value Measurements at December 31, 2018
Using Fair Value Hierarchy
 
Fair Value as of December 31, 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
$
152,719

 
$
152,719

 
$

 
$

 
Market
Restricted cash and cash equivalents
15,134

 
15,134

 

 

 
Market
Derivative assets
4,886

 

 
4,886

 

 
Market
Total
$
172,739

 
$
167,853

 
$
4,886

 
$

 
 

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 consider 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, 2019 and the year ended December 31, 2018, 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 and the Company determines that the decline is other than temporary. 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.




13

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2019

Aircraft Valuation
Transactional Impairments
On April 10, 2019, the Company early terminated the leases for seven Boeing 737NG aircraft on lease to Jet Airways (India) Limited (“Jet Airways”) due to lessee default. As a result of these lease terminations, the Company recognized net maintenance revenue of $17,554 and impairment charges of $7,404 in the second quarter of 2019.
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. Other than the transactional impairment discussed above, no other impairments were recorded as a result of our annual recoverability assessment.
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, 2019 and December 31, 2018 were as follows:
 
September 30, 2019
 
December 31, 2018
 
Carrying  Amount
of Liability
 
Fair Value
of Liability
 
Carrying
Amount
of Liability
 
Fair Value
of Liability
Credit Facilities
$
225,000

 
$
225,000

 
$
425,000

 
$
425,000

Unsecured Term Loan
215,000

 
215,000

 
120,000

 
120,000

ECA Financings
159,360

 
163,183

 
189,080

 
190,216

Bank Financings
1,037,166

 
1,057,020

 
619,715

 
623,604

Senior Notes
3,600,000

 
3,763,964

 
3,450,000

 
3,446,826


All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.

14

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2019

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, 2019 were as follows:
Year Ending December 31,
 
Amount
Remainder of 2019
 
$
197,966

2020
 
738,272

2021
 
658,360

2022
 
575,462

2023
 
495,994

Thereafter
 
921,965

Total
 
$
3,588,019


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
2019
 
2018
 
2019
 
2018
Asia and Pacific
44
%
 
34
%
 
43
%
 
35
%
Europe
26
%
 
27
%
 
27
%
 
28
%
Middle East and Africa
9
%
 
11
%
 
10
%
 
11
%
North America
9
%
 
11
%
 
9
%
 
9
%
South America
12
%
 
17
%
 
11
%
 
17
%
 
 
 
 
 
 
 
 
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,
 
2019
 
2018
 
2019
 
2018
 
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
 
22%
 
3
 
19%
 
3
 
21%
 
3
 
19%

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 for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Country
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
India(1)
$
26,700

 
11%
 
$