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
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from January 1, 2020 to February 29, 2020
Commission File number 001-32959
_______________________________________________________________
(Exact name of registrant as specified in its charter)
_______________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
| (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 | ||||||||||||
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 | ☐ | ||||||||
| ☑ | 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 October 30, 2020, there were 14,048 outstanding shares of the registrant’s common shares, par value $0.01 per share.
Aircastle Limited and Subsidiaries
Form 10-Q
Introductory Note
On September 30, 2020, the Board of Directors for Aircastle Limited (“Aircastle” or “the Company”) unanimously agreed to change the Company’s fiscal year end to the twelve-month period ended the last day in February. This change better aligns the Company’s financial reporting period with the financial reporting cycle of its shareholders, Marubeni Corporation and Mizuho Leasing Company, Limited.
As such, this Transition Report on Form 10-Q represents the unaudited financial statements for the two months ended February 29, 2020. In the future, the Company will file quarterly results for the periods ended May 31st, August 31st and November 30th. In January of 2021, the Company expects to file its Form 10-Q with the Securities Exchange Commission for the five and nine month periods ended November 30, 2020.
Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
| Page No. | ||||||||
| Item 1. | ||||||||
| Consolidated Balance Sheets as of February 29, 2020 and December 31, 2019 | ||||||||
| Consolidated Statements of Income and Comprehensive Income for the two months ended February 29, 2020 and February 28, 2019 | ||||||||
| Consolidated Statements of Cash Flows for the two months ended February 29, 2020 and February 28, 2019 | ||||||||
| 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. | ||||||||
3
PART I. — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
| February 29, 2020 | December 31, 2019 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and cash equivalents | |||||||||||
| Accounts receivable | |||||||||||
| Flight equipment held for lease, net of accumulated depreciation of $1,542,938 and $1,501,664, respectively | |||||||||||
| Net investment in leases, net of allowance for credit losses of $6,558 and $0, respectively | |||||||||||
| Unconsolidated equity method investments | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Borrowings from secured financings, net of debt issuance costs and discounts | $ | $ | |||||||||
| Borrowings from unsecured financings, net of debt issuance costs and discounts | |||||||||||
| Accounts payable, accrued expenses and other liabilities | |||||||||||
| Lease rentals received in advance | |||||||||||
| Security deposits | |||||||||||
| Maintenance payments | |||||||||||
| Total liabilities | |||||||||||
| 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, 75,076,794 shares issued and outstanding at February 29, 2020; and 75,122,129 shares issued and outstanding at December 31, 2019 | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Aircastle Limited and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands)
(Unaudited)
| Two Months Ended February 29/28, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||
| Lease rental revenue | $ | $ | ||||||||||||
| Direct financing and sales-type lease revenue | ||||||||||||||
| Amortization of lease premiums, discounts and incentives | ( | ( | ||||||||||||
| Maintenance revenue | ||||||||||||||
| Total lease revenue | ||||||||||||||
| Gain on sale of flight equipment | ||||||||||||||
| Other revenue | ||||||||||||||
| Total revenues | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Depreciation | ||||||||||||||
| Interest, net | ||||||||||||||
| Selling, general and administrative (including non-cash share-based payment expense of $10,678 and $1,602 for the two months ended February 29, 2020 and February 28, 2019, respectively) | ||||||||||||||
| Impairment of flight equipment | ||||||||||||||
| Maintenance and other costs | ||||||||||||||
| Total operating expenses | ||||||||||||||
| Other expense: | ||||||||||||||
| Loss on extinguishment of debt | ( | |||||||||||||
| Other | ( | ( | ||||||||||||
| Total other expense | ( | ( | ||||||||||||
| Income from continuing operations before income taxes and earnings of unconsolidated equity method investments | ||||||||||||||
| Income tax provision | ||||||||||||||
| Earnings of unconsolidated equity method investments, net of tax | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Earnings per common share - Basic: | ||||||||||||||
| Net income per share | $ | $ | ||||||||||||
| Earnings per common share - Diluted | ||||||||||||||
| Net income per share | $ | $ | ||||||||||||
| Dividends declared per share | $ | $ | ||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||
| Net derivative loss reclassified into earnings | ||||||||||||||
| Other comprehensive income | ||||||||||||||
| Total comprehensive income | $ | $ | ||||||||||||
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)
| Two Months Ended February 29/28, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash and restricted cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Amortization of lease premiums, discounts and incentives | |||||||||||
| Deferred income taxes | |||||||||||
| Non-cash share-based payment expense | |||||||||||
| Cash flow hedges reclassified into earnings | |||||||||||
| Collections on net investment in leases | |||||||||||
| Security deposits and maintenance payments included in earnings | ( | ||||||||||
| Gain on sale of flight equipment | ( | ( | |||||||||
| Loss on extinguishment of debt | |||||||||||
| Impairment of flight equipment | |||||||||||
| Other | ( | ( | |||||||||
| Changes in certain assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Other assets | ( | ||||||||||
| Accounts payable, accrued expenses and other liabilities | |||||||||||
| Lease rentals received in advance | |||||||||||
| Net cash and restricted cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition and improvement of flight equipment | ( | ( | |||||||||
| Proceeds from sale of flight equipment | |||||||||||
| Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits | ( | ||||||||||
| Unconsolidated equity method investments and associated costs | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash and restricted cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of shares | ( | ( | |||||||||
| Proceeds from secured and unsecured debt financings | |||||||||||
| Repayments of secured and unsecured debt financings | ( | ( | |||||||||
| Debt extinguishment costs | ( | ||||||||||
| Deferred financing costs | ( | ||||||||||
| Security deposits and maintenance payments received | |||||||||||
| Security deposits and maintenance payments returned | ( | ( | |||||||||
| Dividends paid | |||||||||||
| Net cash and restricted cash used in financing activities | ( | ( | |||||||||
| Net increase (decrease) in cash and restricted cash: | ( | ||||||||||
| Cash and restricted cash at beginning of period | |||||||||||
| Cash and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
| Two Months Ended February 29/28, | |||||||||||
| 2020 | 2019 | ||||||||||
| Reconciliation to Consolidated Balance Sheets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and cash equivalents | |||||||||||
| Unrestricted and restricted cash and cash equivalents | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash (received) paid for income taxes | $ | ( | $ | ( | |||||||
| Supplemental disclosures of non-cash investing activities: | |||||||||||
| Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions | $ | $ | |||||||||
| Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment | $ | $ | |||||||||
Transfers from flight equipment held for lease to Net investment in leases and Other assets | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Aircastle Limited and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
(Unaudited)
| Two Months Ended February 29, 2020 | |||||||||||||||||||||||||||||||||||
| Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||
| Common Shares | |||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common shares to directors and employees | ( | — | — | ||||||||||||||||||||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Amortization of share-based payments | — | — | — | — | |||||||||||||||||||||||||||||||
| Reclassification of prior year director stock award liability | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, February 29, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Two Months Ended February 28, 2019 | |||||||||||||||||||||||||||||||||||
| Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||
| Common Shares | |||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of common shares to directors and employees | ( | — | — | ||||||||||||||||||||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Amortization of share-based payments | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net derivative loss reclassified into earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, February 28, 2019 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
8
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
On March 27, 2020, the Company successfully completed its merger (the “Merger”) with MM Air Merger Sub Limited, a Bermuda exempted company (“Merger Sub”), pursuant to the Agreement and Plan of Merger, dated as of November 5, 2019 (the “Merger Agreement”), by and among the Company, MM Air Limited, a Bermuda exempted company (“Parent”), and Merger Sub. As a result of the Merger, Aircastle’s shareholders (other than Marubeni Corporation and its affiliates) received cash consideration of $32.00 per common share and the Company is now controlled by affiliates of Marubeni Corporation and Mizuho Leasing Company, Limited (“Mizuho Leasing”).
Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all 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, 2019.
Effective January 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”). The standard applies to entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The standard affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and other financial assets not excluded from the scope that have the contractual right to receive cash. Net investment in leases comprised the Company’s financial asset principally affected by the standard. Operating lease receivables are not within the scope of ASC 326.
Upon the Company’s adoption of ASC 326, our net investment in leases was recorded in the consolidated financial statements net of an allowance for credit losses. This allowance for credit losses reflects the Company’s estimate of lessee default probabilities and loss given default percentages. The estimate of expected credit losses considers relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of reported amounts. Our allowance also considers the potential loss due to non-credit risk related to unguaranteed residual values. We adopted the standard using the “modified retrospective” approach with a January 1, 2020 adjustment to the opening balance of retained earnings. The adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.
Effective January 1, 2020, the Company adopted, the FASB Accounting Standard Update (“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 adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.
9
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
Effective January 1, 2020, the Company adopted the FASB 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 adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.
Effective January 1, 2020, the Company adopted the FASB 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 adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.
The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure subsequent to the balance sheet date of February 29, 2020, through the date on which the consolidated financial statements included in this Transition Report on Form 10-Q were issued.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all 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 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 statements of income in the period of change. Revenue is not recognized when collection is not probable. When collectability is not probable, the customer is placed on non-accrual status, and revenue is recognized when cash payments are received.
In certain instances, we may provide lease concessions to customers, generally in the form of lease rental deferrals. While these deferral arrangements affect the timing of lease rental payments, the total amount of lease rental payments required over the lease term is generally the same as that which was required under the original lease agreement. We
10
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
account for the deferrals as if no modifications to the lease agreements were made and record the deferred rentals as a receivable within Other assets in our consolidated balance sheet. We continue to recognize lease rental revenue for such receivables to the extent collectability is probable.
The COVID-19 virus has had an unprecedented negative impact on the global economy, and in particular on the aviation sector. Since March 2020, there has been a dramatic slowdown in air traffic, with many markets in near complete shutdown. According to IATA, air travel is down to approximately 20 % of normal levels and a recovery to pre-pandemic levels is not expected for several years. Substantially all of the world’s airlines are experiencing financial difficulties and liquidity challenges. While we believe the long-term demand for air travel will return to historical trends over time, the near-term impacts of the COVID-19 virus’ economic shock are material; the extent and duration of which cannot currently be determined.
Airlines have been seeking to preserve liquidity through a combination of requesting government support, raising debt and equity, delaying or canceling new aircraft orders, furloughing employees, as well as requesting deferrals from lessors. We have agreed to defer near-term lease payments with certain of our airline customers, which they are obliged to repay over time. As of October 30, 2020, we have agreed to defer approximately $101,000 in near-term lease payments with 40 airlines, including $9,594 that appear in our Consolidated Balance Sheet as components of Accounts receivable or Other assets. If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to extend further deferrals to some of our other customers or to extend the deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred.
Impairment of Flight Equipment
We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis annually during the second quarter. In addition, a recoverability assessment is performed whenever events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant change in aircraft model’s storage levels, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted lease rental and maintenance payments, future projected lease rates, transition costs, estimated down time, estimated residual or scrap values for an aircraft, economic conditions and other factors. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See Note 2 – Fair Value Measurements.
Management develops the assumptions used in the recoverability analysis based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in projected lease rental and maintenance payments, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors.
We are closely monitoring the impact of the COVID-19 virus on our customers, air traffic, lease rental rates, and aircraft valuations, and will perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft. We will focus on our customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, aircraft with near-term lease expirations, and certain aircraft variants that are more susceptible to the impact of COVID-19 and value deterioration.
Net Investment in Leases
If a lease meets specific criteria at lease commencement or at the effective date of a lease modification, we recognize the lease as a direct financing or sales-type lease. The net investment in direct financing and sales- type leases
11
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
consists of the lease receivable, estimated unguaranteed residual value of the leased flight equipment at lease-end and, for direct financing leases, deferred selling profit. For sales-type leases, we recognize the difference between the net book value of the aircraft and the net investment in the lease as a gain or loss on sale of flight equipment. Selling profit on a direct financing lease is deferred and amortized over the lease term, and a selling loss is recognized at lease commencement. Interest income on our net investment in leases is recognized as Direct financing and sales-type leases revenue over the lease term in a manner that produces a constant rate of return on the net investment in the lease.
The net investment in leases is recorded in the consolidated financial statements net of an allowance for credit losses. The allowance for credit losses is recorded upon the initial recognition of the net investment in the lease based on the Company’s estimate of expected credit losses over the lease term. The allowance reflects the Company’s estimate of lessee default probabilities and loss given default percentages. When determining the credit loss allowance, we consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the net investment in the lease. The allowance also considers potential losses due to non-credit risk related to unguaranteed residual values. A provision for credit losses is recorded as a component of Selling, general, and administrative expenses in the Consolidated Statement of Income to adjust the allowance for changes to management’s estimate of expected credit losses.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard applies to entities that have contracts, such as debt agreements, lease agreements or derivative instruments, which reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Entities can elect not to apply certain modification accounting requirements for contract modifications that replace a reference rate affected by reference rate reform. If elected, such contracts are accounted for as a continuation of the existing contract and no reassessments or remeasurements are required. The standard is effective for all entities from March 12, 2020 through December 31, 2022, and does not apply to contract modifications made after December 31, 2022. We have not adopted ASC 848 for this interim period and are currently evaluating the election available to us under the standard and the impact it may have on our financial statements.
In April 2020, the FASB Staff issued a question-and-answer document (the “Q&A”) regarding accounting for lease concessions related to the effects of the COVID-19 pandemic. The Q&A provides that entities may elect to apply or not apply the lease modification guidance in ASC 842, “Leases”, for lease concessions provided by lessors as a result of the COVID-19 pandemic. The Company has elected not to apply the lease modification guidance in ASC 842 for such lease concessions – see “Lease Revenue Recognition” above.
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)
February 29, 2020
The following tables set forth our financial assets as of February 29, 2020 and December 31, 2019 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 February 29, 2020 Using Fair Value Hierarchy | |||||||||||||||||||||||||||||
| Fair Value as of February 29, 2020 | 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 | $ | $ | $ | $ | Market | ||||||||||||||||||||||||
| Restricted cash and cash equivalents | Market | ||||||||||||||||||||||||||||
| Derivative assets | Market | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2019 Using Fair Value Hierarchy | |||||||||||||||||||||||||||||
| Fair Value as of December 31, 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 | $ | $ | $ | $ | Market | ||||||||||||||||||||||||
| Restricted cash and cash equivalents | Market | ||||||||||||||||||||||||||||
| Derivative assets | Market | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are 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 derivative included in Level 2 consists of a United States dollar-denominated interest rate cap, and its fair value is based on the 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 two months ended February 29, 2020 and the year ended December 31, 2019, 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 investment in unconsolidated joint ventures and aircraft. 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 the average of the market approach that uses Level 2 inputs which include third-party appraisal data, and an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft discounted using the Company’s weighted average cost of capital.
We account for our investment in unconsolidated joint ventures under the equity method of accounting. Investments are recorded at cost and are adjusted by undistributed earnings and losses and the distributions of dividends and capital. These investments are also reviewed for impairment whenever events or circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary.
13
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
Aircraft Valuation
Transactional Impairments
In February 2020, the Company initiated a process to accept the redelivery of four wide-body aircraft prior to their scheduled lease expirations due to a lessee default. As a result, the Company recorded impairment charges of $62,657 and recognized $38,305 of maintenance revenue and $9,062 of security deposits into revenue during the first two months of 2020.
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 February 29, 2020 and December 31, 2019 were as follows:
| February 29, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Carrying Amount of Liability | Fair Value of Liability | Carrying Amount of Liability | Fair Value of Liability | ||||||||||||||||||||
| Credit Facilities | $ | $ | $ | $ | |||||||||||||||||||
| Unsecured Term Loan | |||||||||||||||||||||||
| ECA Financings | |||||||||||||||||||||||
| Bank Financings | |||||||||||||||||||||||
| Senior Notes | |||||||||||||||||||||||
All 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 February 29, 2020 were as follows:
| Year Ending February 29/28, | Amount | |||||||
| Remainder of 2020 | $ | |||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
14
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
| Two Months Ended February 29/28, | |||||||||||
| Region | 2020 | 2019 | |||||||||
| Asia and Pacific | % | % | |||||||||
| Europe | % | % | |||||||||
| Middle East and Africa | % | % | |||||||||
| North America | % | % | |||||||||
| South America | % | % | |||||||||
| Total | % | % | |||||||||
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:
| Two Months Ended February 29/28, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Number of Lessees | Combined % of Lease Rental Revenue | Number of Lessees | Combined % of Lease Rental Revenue | ||||||||||||||||||||
| Largest lessees by 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 for the periods indicated:
| Two Months Ended February 29/28, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Country | Revenue | % of Total Revenue | Revenue | % of Total Revenue | |||||||||||||||||||
Indonesia(1) | $ | % | $ | % | |||||||||||||||||||
South Africa(2) | % | % | |||||||||||||||||||||
_______________
(1)For the two months ended February 29, 2020, total revenue attributable to Indonesia included $14,987 of gain on sale of flight equipment. For the two months ended February 28, 2019, total revenue attributable to Indonesia was less than 10%.
(2)For the two months ended February 29, 2020, total revenue attributable to South Africa included $38,305 of maintenance revenue and $9,062 of security deposits recognized into revenue. For the two months ended February 28, 2019, total revenue attributable to South Africa was less than 10%.
15
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in leases, or “net book value”) as of the dates indicated below was as follows:
| February 29, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Region | Number of Aircraft | Net Book Value % | Number of Aircraft | Net Book Value % | |||||||||||||||||||
| Asia and Pacific | % | % | |||||||||||||||||||||
| Europe | % | % | |||||||||||||||||||||
| Middle East and Africa | % | % | |||||||||||||||||||||
| North America | % | % | |||||||||||||||||||||
| South America | % | % | |||||||||||||||||||||
| Off-lease | (1) | % | (2) | % | |||||||||||||||||||
| Total | % | % | |||||||||||||||||||||
_______________
(1)Consisted of one Airbus A330-200 aircraft, which was delivered to a customer in Europe in August 2020, and one Boeing 737-800 aircraft, which we are marketing for lease or sale.
(2)Consisted of one Airbus A320-200 aircraft, which was delivered on lease to a customer in Europe in February 2020, one Airbus A330-200 aircraft, was delivered to a customer in Europe in August 2020, and one Boeing 737-800 aircraft, which was sold in February 2020.
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 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:
| February 29, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Country | Net Book Value | Net Book Value % | Number of Lessees | Net Book Value | Net Book Value % | Number of Lessees | |||||||||||||||||
| India | $ | $ | |||||||||||||||||||||
At February 29, 2020 and December 31, 2019, the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $10,076 and $9,176 , respectively.
Note 4. Net Investment in Leases
At February 29, 2020 and December 31, 2019, our net investment in leases consisted of 30 and 29 aircraft, respectively. The components of our net investment in leases at February 29, 2020, and December 31, 2019, were as follows:
| February 29, 2020 | December 31, 2019 | ||||||||||
| Lease receivable | $ | $ | |||||||||
| Unguaranteed residual value of flight equipment | |||||||||||
| Net investment leases | |||||||||||
| Allowance for credit losses | ( | ||||||||||
| Net investment in leases, net of allowance | $ | $ | |||||||||
16
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
The activity in the allowance for credit losses related to our net investment in leases for the two months ended February 29, 2020 is as follows:
| Amount | ||||||||
| Balance at December 31, 2019 | $ | |||||||
| Adoption of accounting standard | ||||||||
| Provision for credit losses | ||||||||
| Balance at February 29, 2020 | $ | |||||||
At February 29, 2020, future lease payments on net investment in leases are as follows:
| Year Ending February 29/28, | Amount | |||||||
| Remainder of 2020 | $ | |||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Total lease payments to be received | ||||||||
| Present value of lease payments - lease receivable | ( | |||||||
| Difference between undiscounted lease payments and lease receivable | $ | |||||||
Note 5. Unconsolidated Equity Method Investments
We have a joint venture with Mizuho Leasing which has nine aircraft with a net book value of $325,585 at February 29, 2020.
| Amount | ||||||||
| Investment in joint ventures at December 31, 2019 | $ | |||||||
| Earnings from joint venture, net of tax | ||||||||
| Investment in joint venture at February 29, 2020 | $ | |||||||
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”), entered into six different twelve-year term loans supported by guarantees from Compagnie Française d'Assurance pour le Commerce Extérieur (“COFACE”), which has subsequently been renamed “BPI France”, the French government sponsored export credit agency (“ECA”). We refer to these BPI France-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 our net investment in leases. The activity that most significantly impacts the economic
17
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
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 net investments in leases that are eliminated in the consolidated financial statements. The related aircraft, with a net book value as of February 29, 2020 of $310,950 , were included in our flight equipment held for lease. During February 2020, for four of the six aircraft owned by the Air Knight VIEs, we repaid the principal and accrued interest amounts outstanding under our ECA financings of $95,128 and incurred early extinguishment costs of $3,955 . The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of February 29, 2020 is $49,989 .
Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured debt financings as of the dates indicated below are as follows:
| At February 29, 2020 | At December 31, 2019 | ||||||||||||||||||||||||||||
| Debt Obligation | Outstanding Borrowings | Number of Aircraft | Interest Rate | Final Stated Maturity | Outstanding Borrowings | ||||||||||||||||||||||||
| Secured Debt Financings: | |||||||||||||||||||||||||||||
ECA Financings(1) | $ | 3.49% to 3.96% | 12/03/21 to 11/30/24 | $ | |||||||||||||||||||||||||
Bank Financings(2) | 3.13% to 4.55% | 06/17/23 to 01/19/26 | |||||||||||||||||||||||||||
| Less: Debt issuance costs and discounts | ( | — | ( | ||||||||||||||||||||||||||
| Total secured debt financings, net of debt issuance costs and discounts | |||||||||||||||||||||||||||||
| Unsecured Debt Financings: | |||||||||||||||||||||||||||||
| Senior Notes due 2020 | 04/15/20 | ||||||||||||||||||||||||||||
| Senior Notes due 2021 | 03/15/21 | ||||||||||||||||||||||||||||
| Senior Notes due 2022 | 02/15/22 | ||||||||||||||||||||||||||||
| Senior 5.00% Notes due 2023 | 04/01/23 | ||||||||||||||||||||||||||||
| Senior 4.40% Notes due 2023 | 09/25/23 | ||||||||||||||||||||||||||||
| Senior Notes due 2024 | 05/01/24 | ||||||||||||||||||||||||||||
| Senior Notes due 2026 | 06/15/26 | ||||||||||||||||||||||||||||
| Unsecured Term Loans | 03/07/22 to 03/07/24 | ||||||||||||||||||||||||||||
| Revolving Credit Facilities | 12/27/21 to 6/27/22 | ||||||||||||||||||||||||||||
| Less: Debt issuance costs and discounts | ( | ( | |||||||||||||||||||||||||||
| Total unsecured debt financings, net of debt issuance costs and discounts | |||||||||||||||||||||||||||||
| Total secured and unsecured debt financings, net of debt issuance costs and discounts | $ | $ | |||||||||||||||||||||||||||
(1)The borrowings under these financings at February 29, 2020 have a weighted-average rate of interest of 3.62 %. During February 2020, the Company repaid the principal amounts outstanding for four aircraft, which were not released as security for the loans as of February 29, 2020, due to the physical location of the aircraft - see Note 6.
(2)The borrowings under these financings at February 29, 2020 have a weighted-average fixed rate of interest of 3.78 %.
At February 29, 2020, we had $100,000 outstanding under our revolving credit facilities and had $1,000,000 available for borrowing.
18
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
February 29, 2020
Note 8. Shareholders' Equity and Share-Based Payment
The Company also repurchased 73,903 shares totaling $2,369 from our employees and directors to settle tax obligations related to share vesting.
As of February 29, 2020, there was $4,835 and $23,214 of unrecognized compensation cost related to restricted common share-based payments and PSUs respectively, which was ultimately recognized upon completion of the Merger on March 27, 2020.
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 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.
| Two Months Ended February 29/28, | |||||||||||
| 2020 | |||||||||||