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 November 30, 2021
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
_______________________________________________________________
(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 | ||||||||||||
| N/A | ||||||||||||||
| N/A | ||||||||||||||
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 ☑
The aggregate market value of the Registrant’s Common Shares based upon the closing price on the New York Stock Exchange on August 31, 2021 (the last business day of registrant’s most recently completed second fiscal quarter), beneficially owned by non-affiliates of the Registrant was $0 because the Registrant’s Common Shares were not publicly traded as of that date. For purposes of the foregoing calculation, which is required by Form 10-K, the Registrant has included in the shares owned by affiliates those shares owned by directors and executive officers and shareholders owning 10% or more of the outstanding common shares of the Registrant, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.
As of January 7, 2022, 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
Table of Contents
| Page No. | ||||||||
| Item 1. | ||||||||
| Consolidated Balance Sheets as of November 30, 2021 and February 28, 2021 | ||||||||
| Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended November 30, 2021 and 2020 | ||||||||
| Consolidated Statements of Cash Flows for the nine months ended November 30, 2021 and 2020 | ||||||||
| 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)
(Unaudited)
| November 30, 2021 | February 28, 2021 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and cash equivalents | |||||||||||
| Accounts receivable | |||||||||||
| Flight equipment held for lease, net of accumulated depreciation of $2,365,312 and $2,076,972, respectively | |||||||||||
| Net investment in leases, net of allowance for credit losses of $1,828 and $864, 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, 400 (aggregate liquidation preference of $400,000) shares issued and outstanding at November 30, 2021 and no shares issued and outstanding at February 28, 2021 | |||||||||||
| Common shares, $0.01 par value, 250,000,000 shares authorized, 14,048 shares issued and outstanding at November 30, 2021 and February 28, 2021 | |||||||||||
| 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.
3
Aircastle Limited and Subsidiaries
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Dollars in thousands)
(Unaudited)
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| 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 $0 and $0 for the three months ended, and $0 and $28,049 for the nine months ended November 30, 2021 and 2020, respectively) | |||||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Impairment of flight equipment | |||||||||||||||||||||||
| Maintenance and other costs | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Loss on extinguishment of debt | ( | ( | ( | ||||||||||||||||||||
| Merger expenses | ( | ( | |||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Total other income (expense) | ( | ( | |||||||||||||||||||||
| Income (loss) 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 (loss) | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Preference share dividends | ( | ||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Total comprehensive income (loss) available to common shareholders | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
| Nine Months Ended November 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss 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 | |||||||||||
| 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 | |||||||||||
| Provision for credit losses | |||||||||||
| 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 deposits returned and aircraft sales deposits | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash and restricted cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of shares | ( | ||||||||||
| Parent contribution at Merger | |||||||||||
| Net proceeds from preference share issuance | |||||||||||
| 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) provided by financing activities | ( | ||||||||||
| Net (decrease) increase 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.
5
Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
| Nine Months Ended November 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| 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, net of amounts capitalized | $ | $ | |||||||||
| Cash 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.
6
Aircastle Limited and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
(Unaudited)
| Common Shares | Preference Shares | Additional Paid-In Capital | Retained Earnings (Deficit) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||
| Balance, February 28, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance, May 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of preference shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Preference share dividends | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance, August 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Issuance of preference shares | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, November 30, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Common Shares | Preference Shares | Additional Paid-In Capital | Retained Earnings (Deficit) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||
| Balance, February 29, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Amortization of share-based payments | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Payment of unvested shares at Merger | ( | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Parent contribution at Merger | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share cancellation and re-issuance at Merger | ( | ( | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance, May 31, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance, August 31, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance, November 30, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
On March 27, 2020, the Company successfully completed its merger (the “Merger”) and 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 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 based on 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 February 28, 2021.
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 November 30, 2021, through the date on which the consolidated financial statements included in this Form 10-Q were issued.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all its subsidiaries, including any Variable Interest Entity (“VIE”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Risk and Uncertainties
In the normal course of business, Aircastle encounters several significant types of economic risk including credit, market, aviation industry and capital market risks. Credit risk is the risk of a lessee’s inability or unwillingness to make contractually required payments and to fulfill its other contractual obligations to Aircastle. Market risk reflects the change in the value of financings due to changes in interest rate spreads or other market factors, including the value of collateral underlying financings. Aviation industry risk is the risk of a downturn in the commercial aviation industry which could adversely impact a lessee’s ability to make payments, increase the risk of early lease terminations and depress lease rates and the value of the Company’s aircraft. Capital market risk is the risk that the Company is unable to obtain capital at reasonable rates to fund the growth of its business or to refinance existing debt facilities.
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.
8
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
COVID-19 Pandemic
COVID-19 has had an unprecedented negative impact on the aviation sector, resulting in a dramatic slowdown in air traffic. While there have been some improvements in certain markets recently, according to IATA, as of November 30, 2021, air travel was still down to approximately 53 % compared to normal levels and a full recovery to pre-pandemic levels is not expected for several years. Substantially all the world’s airlines have experienced financial difficulties and liquidity challenges, including many of our customers. While we believe long-term demand for air travel will return to historical trends over time, the near-term impacts of COVID-19’s economic shock are material; the extent and duration of those impacts cannot currently be determined.
Even as the airline industry begins to recover, airlines continue to seek support from their respective governments, raise debt and equity, delay or cancel new aircraft orders, furlough employees, request concessions from lessors, and in certain cases, seek judicial protection. As of January 7, 2022, our total deferrals, net of repayments, were $87,219 . These deferrals have been granted to nineteen customers for an average of six to twelve months of lease rentals and represent 15 % of Lease rental and Direct financing and sales-type lease revenues for the twelve months ended November 30, 2021. Of the total deferrals, $81,797 is included in Accounts receivable or Other assets as of November 30, 2021, with the balance representing future lease payments. Approximately 87 % of our total deferrals as of January 7, 2022, have been agreed to as part of broader lease restructurings. These generally include term extensions, better security packages, or other valuable consideration in exchange for near-term economic concessions. Many have repayment terms that extend beyond twelve months and in a limited number of situations, we have agreed to broader lease restructurings that do not include the full repayment of all of lease payments.
If air traffic remains depressed and our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to grant additional deferrals to certain customers or extend the period of repayment for deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred.
As of January 7, 2022, six of our customers are subject to judicial insolvency proceedings or similar protection. These customers lease 21 aircraft, which represent 13 % of our net book value of flight equipment (including Flight equipment held for lease and Net investment in leases, or “net book value”) and 12 % of our Lease rental and direct financing and sales-type lease revenue as of and for the twelve months ended November 30, 2021. We are actively engaged in these judicial proceedings to protect our economic interests. However, the outcome of these proceedings is uncertain and could result in these customers negotiating reductions in aircraft lease rentals, rejecting their leases or taking other actions that could adversely impact us or the value of our aircraft. Based on historic experience, the judicial process can take up to twelve to eighteen months to be resolved. As a result of these proceedings, lease rental revenue for certain customers may be recognized on a cash basis of accounting rather than the accrual method depending on the customers’ lease security arrangements.
LATAM, our second largest customer, is included in the above group and represents 7 % of our net book value of flight equipment and 7 % of our Lease rental revenue as of and for the twelve months ended November 30, 2021. We have signed restructured leases for all thirteen of our LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process. During the second quarter of 2021, the Company entered into claims sale and purchase agreements with a third party for the sale of certain unsecured claims filed by various Aircastle entities against LATAM Airlines Group S.A. and certain of its subsidiaries in the Chapter 11 case captioned LATAM Airlines Group S.A., et al., Case No. 20-11254 (JLG) (Jointly Administered) (the “LATAM Bankruptcy”). The allowed amount of our unsecured claims was approved by the Bankruptcy Court and proceeds from the sales of these claims in the amount of $55,213 were received during the second quarter of 2021 and recognized in Other income (expense).
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.
9
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
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 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.
Should we determine that the collectability of rental payments is no longer probable (including any deferral thereof), we will recognize lease rental revenue using a cash basis of accounting rather than an accrual method. In the period we conclude that collection of lease payments is no longer probable, we recognize any difference between revenue amounts recognized to date under the accrual method and payments that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to lease rental revenue.
Impairment of Flight Equipment
We perform an annual recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis. A recoverability assessment is also 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 an aircraft type’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 and maintenance payments, transition costs, estimated down time, and estimated residual or scrap values for an aircraft. 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 continue to closely monitor the impact of COVID-19 on our customers, air traffic, lease rental rates, and aircraft valuations, and have and will continue to 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.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform Topic 848 (“ASC 848”), in response to the market transition from the LIBOR and other interbank offered rates (“IBORs”) to alternative reference rates. U.S. GAAP requires entities to evaluate whether a contract modification, such as the replacement or change of a reference rate, results in the establishment of a new contract or continuation of an existing contract. ASC 848 allows an entity to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform. The standard provides this temporary election through December 31, 2022, and cannot be applied to contract modifications that occur after December 31, 2022. Reference rate reform will primarily impact our lease and debt arrangements for which floating-rate lease rentals and interest expense are based on LIBOR. As of November 30, 2021, less than 1 % of our fleet have floating-rate lease rentals and, for the three and nine months ended November 30, 2021, 4 % of our interest expense was derived from floating-rate debt which is referenced to LIBOR. We have not adopted ASC 848 and are currently evaluating the election available to us under the standard.
10
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
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.
The following tables set forth our financial assets as of November 30, 2021 and February 28, 2021 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 November 30, 2021 Using Fair Value Hierarchy | |||||||||||||||||||||||||||||
| Fair Value as of November 30, 2021 | 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 | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
| Fair Value Measurements at February 28, 2021 Using Fair Value Hierarchy | |||||||||||||||||||||||||||||
| Fair Value as of February 28, 2021 | 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 | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
Our cash and cash equivalents, and 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 the fair value hierarchy.
For the three and nine months ended November 30, 2021, we had no
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 the carrying amounts of these 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.
11
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
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 changes in circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary.
Aircraft Valuation
Impairment of Flight Equipment
During the three months ended November 30, 2021, the Company recorded transactional impairment charges totaling $69,111 related to two narrow-body and one wide-body aircraft on lease to Garuda Indonesia, resulting from the lessee’s default on its lease obligations. The Company recognized $24,268 of maintenance revenue for these three aircraft.
During the nine months ended November 30, 2021, the Company recorded impairment charges totaling $110,926 , of which $107,705 were transactional impairments, primarily related to six narrow-body and one wide-body aircraft. The impairment charges resulted from early lease terminations, scheduled lease expiration and a lessee default. The Company recognized $61,414 of maintenance revenue for these seven aircraft.
During the three months ended November 30, 2020, the Company recorded transactional impairment charges totaling $9,867 , primarily related to the scheduled lease expirations of two narrow-body aircraft. The Company recognized $15,200 of maintenance revenue for these two aircraft.
During the nine months ended November 30, 2020, the Company recorded impairment charges totaling $299,551 , of which $256,510 were transactional impairments, primarily related to thirteen narrow-body and five wide-body aircraft. The Company recognized $107,448 of maintenance and security deposits into revenue for these eighteen aircraft. The impairment charges were attributable to early lease terminations, scheduled lease expirations, lessee defaults, judicial insolvency proceedings, or as a result of our annual recoverability assessment.
Annual Recoverability Assessment
We performed our annual recoverability assessment of all our aircraft during the third quarter of 2021. No impairments were recorded as a result of our annual recoverability assessment – see the discussion above for further detail regarding transactional impairment charges recorded during the three and nine months ended November 30, 2021.
Although we have completed our annual recoverability assessment, we will continue to closely monitor the impact of COVID-19 on our customers, air traffic, lease rental rates, and aircraft valuations, and have and will continue to perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft. We have and 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 the COVID-19 pandemic and value deterioration.
The recoverability assessment is a comparison of the carrying value of each aircraft to its estimated undiscounted 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.
If our estimates or assumptions change, including those related to our customers that have entered judicial insolvency proceedings, we may revise our cash flow assumptions and record future impairment charges. While we believe that the estimates and related assumptions used in our recoverability assessments are appropriate, actual results could differ from those estimates.
12
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
Financial Instruments
Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and amounts borrowed under financings. The fair value of cash and 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 November 30, 2021 and February 28, 2021 were as follows:
| November 30, 2021 | February 28, 2021 | ||||||||||||||||||||||
| Carrying Amount of Liability | Fair Value of Liability | Carrying Amount of Liability | Fair Value of Liability | ||||||||||||||||||||
| Credit Facilities | $ | $ | $ | $ | |||||||||||||||||||
| Unsecured Term Loan | |||||||||||||||||||||||
| Export Credit Agency (“ECA”) Financings | |||||||||||||||||||||||
| Bank Financings | |||||||||||||||||||||||
| Senior Notes | |||||||||||||||||||||||
All our financial instruments are classified as Level 2 except for 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 November 30, 2021 were as follows:
| Year Ending February 28/29, | Amount(1) | |||||||
| Remainder of 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
_______________
(1)Reflects impact of lessee lease rental deferrals.
13
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||
| Region | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| 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:
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||||||||
The following table sets forth revenue attributable to individual countries representing at least 10% of Total revenue (including maintenance and other revenue) based on each lessee’s principal place of business for the periods indicated:
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Country | Revenue | % of Total Revenue | Revenue | % of Total Revenue | Revenue | % of Total Revenue | Revenue | % of Total Revenue | |||||||||||||||||||||||||||||||||||||||
Canada(1) | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
India(2) | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
Indonesia(3) | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
Mexico(4) | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
_______________
(1)For the three months ended November 30, 2020, total revenue attributable to Canada included maintenance and other revenue, including early lease termination fees and security deposits recognized into revenue, totaling $19,260 . Total revenue attributable to Canada was less than 10% for the three and nine months ended November 30, 2021 and for the nine months ended November 30, 2020
(2)For the three and nine months ended November 30, 2021, total revenue attributable to India included maintenance revenue totaling $3,609 and $5,608 , respectively. For the three and nine months ended November 30, 2020, total revenue attributable to India included maintenance and other revenue, including early lease termination fees and security deposits recognized into revenue, totaling $6,080 and $16,251 , respectively.
(3)For the three months ended November 30, 2021, total revenue attributable to Indonesia included maintenance revenue totaling $24,268 . Total revenue attributable to Indonesia was less than 10% for the nine months ended November 30, 2021 and for the three and nine months ended November 30, 2020.
(4)For the nine months ended November 30, 2020, total revenue attributable to Mexico included maintenance and other revenue, including early lease termination fees and security deposits recognized into revenue, totaling $79,912 . Total revenue attributable to Mexico was less than 10% for the three and nine months ended November 30, 2021 and for the three months ended November 30, 2020.
14
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in leases, or “net book value”) was as follows:
| November 30, 2021 | February 28, 2021 | ||||||||||||||||||||||
| 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)Of the thirteen off-lease aircraft at November 30, 2021, we have two narrow-body aircraft and three wide-body aircraft which we are currently marketing for lease or sale.
(2)Of the sixteen off-lease aircraft at February 28, 2021, we have three wide-body aircraft which we are currently marketing for lease or sale.
The following table sets forth the 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:
| November 30, 2021 | February 28, 2021 | ||||||||||||||||||||||
| Country | Net Book Value | Net Book Value % | Number of Lessees | Net Book Value | Net Book Value % | Number of Lessees | |||||||||||||||||
| India | $ | $ | |||||||||||||||||||||
At November 30, 2021 and February 28, 2021, the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $19,832 and $14,673 , respectively.
Note 4. Net Investment in Leases
At November 30, 2021 and February 28, 2021, our net investment in leases consisted of fifteen and fifteen aircraft, respectively. The components of our net investment in leases at November 30, 2021 and February 28, 2021, were as follows:
| November 30, 2021 | February 28, 2021 | ||||||||||
| Lease receivable | $ | $ | |||||||||
| Unguaranteed residual value of flight equipment | |||||||||||
| Net investment leases | |||||||||||
| Allowance for credit losses | ( | ( | |||||||||
| Net investment in leases, net of allowance | $ | $ | |||||||||
15
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
The activity in the allowance for credit losses related to our net investment in leases for the nine months ended November 30, 2021 is as follows:
| Amount | ||||||||
| Balance at February 28, 2021 | $ | |||||||
| Provision for credit losses | ||||||||
| Write-offs | ( | |||||||
| Balance at November 30, 2021 | $ | |||||||
At November 30, 2021, future lease payments on net investment in leases are as follows:
| Year Ending February 28/29, | Amount | |||||||
| Remainder of 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 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 $301,862 at November 30, 2021.
| Amount | ||||||||
| Investment in joint venture at February 28, 2021 | $ | |||||||
| Earnings from joint venture, net of tax | ||||||||
| Investment in joint venture at November 30, 2021 | $ | |||||||
On December 9, 2021, we entered into a loan agreement to provide the joint venture with a $1,500 unsecured loan facility, which bears interest at a rate of LIBOR plus 2 % and is payable on December 9, 2022. This transaction was approved by our management as an arm’s length transaction under our related party policy.
16
Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2021
Note 6. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured debt financings are as follows:
| At November 30, 2021 | At February 28, 2021 | ||||||||||||||||||||||||||||
| Debt Obligation | Outstanding Borrowings | Number of Aircraft | Interest Rate | Final Stated Maturity | Outstanding Borrowings | ||||||||||||||||||||||||
| Secured Debt Financings: | |||||||||||||||||||||||||||||
| ECA Financings | $ | ||||||||||||||||||||||||||||