SEC Filing | Aircastle Limited

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ayr-20220831

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 August 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File number 001-32959

_______________________________________________________________

AIRCASTLE LIMITED

(Exact name of registrant as specified in its charter)

_______________________________________________________________


Bermuda			98-0444035
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

c/o Aircastle Advisor LLC
201 Tresser Boulevard, Suite 400
Stamford
Connecticut
06901
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (203) 504-1020

_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Shares, par value $0.01 per share

N/A

NONE

Preference Shares, par value $0.01 per share

N/A

NONE

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The aggregate market value of the Registrant’s Common Shares based upon the closing price on the New York Stock Exchange on August 31, 2022 (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 October 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.
	PART I. – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of August 31, 2022 and February 28, 2022	3
	Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and six months ended August 31, 2022 and 2021	4
	Consolidated Statements of Cash Flows for the six months ended August 31, 2022 and 2021	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended August 31, 2022 and 2021	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38
	PART II. – OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
SIGNATURE		42

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Aircastle Limited and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)


	August 31, 2022		February 28, 2022
	(Unaudited)
ASSETS
Cash and cash equivalents	$	246,713	$	167,891
Restricted cash and cash equivalents	650		2,791
Accounts receivable	54,960		63,666

Flight equipment held for lease, net	6,355,679		6,313,950
Net investment in leases, net	137,619		150,325
Unconsolidated equity method investments	39,494		38,317
Other assets	327,141		356,326
Total assets	$	7,162,256	$	7,093,266

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Borrowings from secured financings, net	$	626,776	$	684,039
Borrowings from unsecured financings, net	3,915,114		3,835,841
Accounts payable, accrued expenses and other liabilities	195,004		177,424
Lease rentals received in advance	43,040		37,361

Security deposits	65,366		69,189
Maintenance payments	498,768		459,713
Total liabilities	5,344,068		5,263,567

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 August 31, 2022 and February 28, 2022	—		—
Common shares, $0.01 par value, 250,000,000 shares authorized, 14,048 shares issued and outstanding at August 31, 2022 and February 28, 2022	—		—
Additional paid-in capital	1,878,774		1,878,774
Accumulated deficit	(60,586)		(49,075)

Total shareholders’ equity	1,818,188		1,829,699

Total liabilities and shareholders’ equity	$	7,162,256	$	7,093,266

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(Dollars in thousands)

(Unaudited)


	Three Months Ended August 31,				Six Months Ended August 31,
	2022		2021		2022		2021
Revenues:
Lease rental revenue	$	146,508	$	137,589	$	290,652	$	269,714
Direct financing and sales-type lease revenue	2,265		2,776		4,863		5,653
Amortization of lease premiums, discounts and incentives	(5,518)		(5,835)		(10,906)		(11,159)
Maintenance revenue	20,114		21,218		47,213		47,694
Total lease revenue	163,369		155,748		331,822		311,902
Gain on sale of flight equipment	10,049		1,502		13,736		10,524
Other revenue	161		402		3,585		1,036
Total revenues	173,579		157,652		349,143		323,462

Operating expenses:
Depreciation	82,106		83,391		163,424		165,782
Interest, net	50,587		55,413		100,881		113,450
Selling, general and administrative	17,393		15,990		37,309		31,573
Provision for credit losses	109		6		689		12
Impairment of flight equipment	33,671		21,232		38,099		41,815
Maintenance and other costs	5,212		8,087		13,277		15,615
Total operating expenses	189,078		184,119		353,679		368,247

Other income (expense):
Loss on extinguishment of debt	—		(14,132)		(463)		(14,156)

Other	2,072		57,609		2,072		57,619
Total other income	2,072		43,477		1,609		43,463

Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments	(13,427)		17,010		(2,927)		(1,322)
Income tax provision (benefit)	(4,068)		7,665		(739)		(627)
Earnings of unconsolidated equity method investments, net of tax	666		458		1,177		745

Net income (loss)	$	(8,693)	$	9,803	$	(1,011)	$	50

Preference share dividends	(10,500)		(5,658)		(10,500)		(5,658)

Net income (loss) available to common shareholders	$	(19,193)	$	4,145	$	(11,511)	$	(5,608)





Total comprehensive income (loss) available to common shareholders	$	(19,193)	$	4,145	$	(11,511)	$	(5,608)

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Six Months Ended August 31,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	(1,011)	$	50
Adjustments to reconcile net income (loss) to net cash and restricted cash provided by operating activities:
Depreciation	163,424		165,782
Amortization of deferred financing costs	7,095		8,384
Amortization of lease premiums, discounts and incentives	10,906		11,159
Deferred income taxes	6,588		4,240


Collections on net investment in leases	4,016		8,065
Security deposits and maintenance payments included in earnings	(2,133)		(30,420)
Gain on sale of flight equipment	(13,736)		(10,524)
Loss on extinguishment of debt	463		14,156
Impairment of flight equipment	38,099		41,815
Provision for credit losses	689		12
Other	(1,179)		(745)
Changes in certain assets and liabilities:
Accounts receivable	5,808		(5,479)
Other assets	(8,223)		(15,413)
Accounts payable, accrued expenses and other liabilities	(2,284)		(10,664)
Lease rentals received in advance	7,094		(704)

Net cash and restricted cash provided by operating activities	215,616		179,714
Cash flows from investing activities:
Acquisition and improvement of flight equipment	(372,474)		(370,187)
Proceeds from sale of flight equipment	171,065		77,900


Aircraft purchase deposits and progress payments, net of deposits returned and aircraft sales deposits	4,504		10,003


Other	1,500		(64)

Net cash and restricted cash used in investing activities	(195,405)		(282,348)
Cash flows from financing activities:


Net proceeds from preference share issuance	—		393,362
Proceeds from secured and unsecured debt financings	75,000		—
Repayments of secured and unsecured debt financings	(58,355)		(546,903)
Debt extinguishment costs	(291)		(13,372)
Deferred financing costs	(1,903)		(4,748)



Security deposits and maintenance payments received	63,758		44,111
Security deposits and maintenance payments returned	(11,239)		(10,219)

Dividends paid	(10,500)		—


Net cash and restricted cash provided by (used in) financing activities	56,470		(137,769)
Net increase in cash and restricted cash:	76,681		(240,403)
Cash and restricted cash at beginning of period	170,682		580,598

Cash and restricted cash at end of period	$	247,363	$	340,195

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(Dollars in thousands)

(Unaudited)


	Six Months Ended August 31,
	2022		2021
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents	$	246,713	$	337,455
Restricted cash and cash equivalents	650		2,740

Unrestricted and restricted cash and cash equivalents	$	247,363	$	340,195

Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized	$	93,007	$	107,102
Cash paid for income taxes	$	200	$	1,201
Supplemental disclosures of non-cash investing activities:
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions	$	6,100	$	1,158

Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment	$	14,791	$	12,506
Transfers from flight equipment held for lease to Net investment in leases and Other assets	$	8,895	$	3,554

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

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		Accumulated Deficit		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance, February 28, 2022	14,048	$	—	400	$	—	$	1,878,774	$	(49,075)	$	1,829,699
Net income	—	—		—	—		—		7,682		7,682
Balance, May 31, 2022	14,048	$	—	400	$	—	$	1,878,774	$	(41,393)	$	1,837,381
Net loss	—	—		—	—		—		(8,693)		(8,693)

Preference share dividends	—	—		—	—		—		(10,500)		(10,500)

Balance, August 31, 2022	14,048	$	—	400	$	—	$	1,878,774	$	(60,586)	$	1,818,188







	Common Shares			Preference Shares			Additional Paid-In Capital		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance, February 28, 2021	14,048	$	—	—	$	—	$	1,485,777	$	245,293	$	1,731,070
Net loss	—	—		—	—		—		(9,753)		(9,753)
Balance, May 31, 2021	14,048	$	—	—	$	—	$	1,485,777	$	235,540	$	1,721,317
Net loss	—	—		—	—		—		9,803		9,803
Issuance of preference shares	—	—		400	—		393,362		—		393,362
Preference share dividends	—	—		—	—		—		(5,658)		(5,658)
Balance, August 31, 2021	14,048	$	—	400	$	—	$	1,879,139	$	239,685	$	2,118,824

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

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

Note 1. Summary of Significant Accounting Policies

Organization

Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business consists of acquiring, leasing, managing and selling commercial jet aircraft.

The Company is controlled by affiliates of Marubeni Corporation (“Marubeni”) and Mizuho Leasing Company, Limited (“Mizuho Leasing”). Aircastle is a holding company and conducts its business through subsidiaries that are wholly-owned, either directly or indirectly, by Aircastle.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

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, 2022.

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.

We manage and analyze our business and report on our 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 Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure subsequent to the balance sheet date of August 31, 2022, through the date on which the consolidated financial statements included in this Form 10-Q were issued.

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 Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

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.

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 in the Notes to Unaudited Consolidated Financial Statements.

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, such as the location of the aircraft and accessibility to records and technical documentation.

We continue to closely monitor the impact of recent crises, such as the Russian invasion of Ukraine and the COVID-19 pandemic, 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 aircraft with near-term lease expirations, customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, and certain other customers or aircraft variants that are more susceptible to the impact of the above crises 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 London interbank

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

offered rates (“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 August 31, 2022, less than 1% of our fleet have floating-rate lease rentals and for the three and six months ended August 31, 2022, 8.0% and 6.5%, respectively, of our interest expense was derived from floating-rate debt which is referenced to LIBOR. We have not adopted ASC 848 and are evaluating the election available to us under the standard.

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 the use of unobservable inputs.

The following tables set forth our financial assets as of August 31, 2022 and February 28, 2022 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 August 31, 2022 Using Fair Value Hierarchy
	Fair Value as of August 31, 2022		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	$	246,713	$	246,713	$	—	$	—	Market
Restricted cash and cash equivalents	650		650		—		—		Market

Total	$	247,363	$	247,363	$	—	$	—


			Fair Value Measurements at February 28, 2022 Using Fair Value Hierarchy
	Fair Value as of February 28, 2022		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	$	167,891	$	167,891	$	—	$	—	Market
Restricted cash and cash equivalents	2,791		2,791		—		—		Market


Total	$	170,682	$	170,682	$	—	$	—

Our cash and cash equivalents and our restricted cash and cash equivalents 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.

For the three and six months ended August 31, 2022, 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 the carrying amounts of these assets may not be recoverable. Assets subject to these measurements include our aircraft and investment in unconsolidated joint

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

venture. 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. Our investment is recorded at cost and is adjusted by undistributed earnings and losses and the distributions of dividends and capital. This investment is 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

Excluding asset write-offs related to Russia, during the three and six months ended August 31, 2022, the Company recorded impairment charges totaling $6.2 million related to the scheduled lease expiration of one narrow-body aircraft and other flight equipment. The Company recognized $6.1 million of maintenance revenue for this one aircraft during the three and six months ended August 31, 2022.

The Company wrote off the remaining book value of eight narrow-body and one freighter aircraft in Russia which have not been returned to us. As a result, the Company recorded impairment charges totaling $27.5 million and $31.9 million during the three and six months ended August 31, 2022, respectively – see Note 3 in the Notes to Unaudited Consolidated Financial Statements. During the six months ended August 31, 2022, the Company recognized $9.5 million of maintenance and other revenue for these nine aircraft related to payments received on maintenance and general security letters of credit. No revenue was recognized for these nine aircraft during the three months ended August 31, 2022.

During the three months ended August 31, 2021, the Company recorded impairment charges totaling $21.2 million, of which $18.0 million were transactional impairments primarily related to two narrow-body aircraft resulting from early lease terminations. The Company recognized $16.1 million of maintenance revenue for these two aircraft.

During the six months ended August 31, 2021, the Company recorded impairment charges totaling $41.8 million, of which $38.6 million were transactional impairments, primarily related to four narrow-body aircraft resulting from three early lease terminations and one scheduled lease expiration. The Company recognized $37.1 million of maintenance revenue for these four aircraft.

Annual Recoverability Assessment

We plan to perform our annual recoverability assessment of all our aircraft during the third quarter of 2022.

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, such as the location of the aircraft and accessibility to records and technical documentation.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

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.

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 August 31, 2022 and February 28, 2022 were as follows:


	August 31, 2022				February 28, 2022
	Carrying Amount of Liability		Fair Value of Liability		Carrying Amount of Liability		Fair Value of Liability
Credit Facilities	$	95,000	$	95,000	$	20,000	$	20,000
Unsecured Term Loan	155,000		152,968		155,000		152,195
Export Credit Agency (“ECA”) Financings	—		—		21,576		21,931
Bank Financings	629,479		613,383		666,258		675,667
Senior Notes	3,700,000		3,481,227		3,700,000		3,776,997

All our financial instruments are classified as Level 2 except for our senior notes, which are classified as Level 1.

Note 3. Flight Equipment Held for Lease, Net

The following table summarizes the activities for the Company’s flight equipment held for lease for the six months ended August 31, 2022:


	Amount
Balance at February 28, 2022	$	6,313,950
Additions	361,928
Depreciation	(162,752)
Disposals and transfers to net investment in leases and held for sale	(122,366)
Impairments	(35,081)

Balance at August 31, 2022	$	6,355,679

Accumulated depreciation as of August 31, 2022	$	2,459,049

Write-off of Russian Aircraft

As of August 31, 2022, nine of our aircraft that were previously leased to Russian airlines remain in Russia. Most of the operators of these aircraft have continued to fly the aircraft notwithstanding the sanctions imposed on Russia and leasing terminations. While we will continue to pursue repossession, it is unlikely we will regain possession of any of these nine aircraft. As a result, the Company wrote off the remaining book value of these nine aircraft, resulting in impairment charges totaling $4.4 million and $27.5 million during the three months ended May 31, 2022 and August 31,

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

2022, respectively. These nine aircraft have been removed from the Company’s owned fleet count. The Company is vigorously pursuing insurance claims to recover its losses relating to these aircraft, however, collection, timing and amounts of any insurance recoveries is uncertain.

We also had one freighter aircraft outside of Russia that we successfully repossessed during the three months ended August 31, 2022. Additionally, in response to a new wave of sanctions against Russia in the United Kingdom (“U.K.”), the Company terminated the lease of one freighter aircraft with a U.K.-based airline and successfully repossessed that aircraft during the three months ended August 31, 2022. We recognized $11.9 million of maintenance revenue as a result of this lease termination. Subsequent to August 31, 2022, these two freighter aircraft and one wide-body aircraft previously on lease to a Russian airline were sold for gains of approximately $53.0 million.

During the six months ended August 31, 2022, the Company recognized $25.4 million of maintenance and other revenue related to payments received on maintenance and general security letters of credit for our former Russian lessees. We are pursuing collection on remaining letters of credit totaling $24.1 million.

Note 4. Lease Rental Revenues

Minimum future lease rentals contracted to be received under our existing operating leases of flight equipment at August 31, 2022 were as follows:


Year Ending February 28/29,	Amount(1)
2023 (Remainder of fiscal year)	$	291,415
2024	546,501
2025	446,371
2026	331,792
2027	276,959
Thereafter	784,086
Total	$	2,677,124

_______________

(1)Reflects impact of lessee lease rental deferrals.

At August 31, 2022 and February 28, 2022, the amounts of lease incentive liabilities recorded in maintenance payments on our consolidated balance sheets were $20.1 million and $16.5 million, respectively.

Note 5. Net Investment in Leases, Net

At August 31, 2022 and February 28, 2022, our net investment in leases consisted of nine and eleven aircraft, respectively. The components of our net investment in leases at August 31, 2022 and February 28, 2022, were as follows:


	August 31, 2022		February 28, 2022
Lease receivable	$	46,444	$	52,021
Unguaranteed residual value of flight equipment	93,620		100,068
Net investment leases	140,064		152,089
Allowance for credit losses	(2,445)		(1,764)
Net investment in leases, net	$	137,619	$	150,325

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

The activity in the allowance for credit losses related to our net investment in leases for the six months ended August 31, 2022 was as follows:


	Amount
Balance at February 28, 2022	$	1,764
Provision for credit losses	689
Write-offs	(8)

Balance at August 31, 2022	$	2,445

At August 31, 2022, future lease payments on net investment in leases are as follows:


Year Ending February 28/29,	Amount
2023 (Remainder of fiscal year)	$	3,983
2024	8,973
2025	9,509
2026	8,353
2027	8,292
Thereafter	16,103
Total lease payments to be received	55,213
Present value of lease payments - lease receivable	(46,444)
Difference between undiscounted lease payments and lease receivable	$	8,769

Note 6. Concentration of Risk

The classification of regions in the tables below is based on our customers’ principal place of business.

The geographic concentration of the net book value of our fleet (flight equipment held for lease and net investment in direct financing and sales-type leases, or “Net Book Value”) as of August 31, 2022 and February 28, 2022 was as follows:


	August 31, 2022				February 28, 2022
Region	Number of Aircraft		Net Book Value %		Number of Aircraft		Net Book Value %
Asia and Pacific	65		29	%	71		32	%
Europe	90		29	%	98		30	%
Middle East and Africa	10		4	%	10		4	%
North America	37		19	%	36		17	%
South America	26		13	%	25		13	%
Off-lease	15	(1)	6	%	11	(2)	4	%
Total	243		100	%	251		100	%

_______________

(1)Of the fifteen off-lease aircraft at August 31, 2022, we have two narrow-body aircraft and six wide-body aircraft which we are currently marketing for lease or sale.

(2)Of the eleven off-lease aircraft at February 28, 2022, we have three wide-body aircraft which we are currently marketing for lease or sale.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

The following table sets forth individual countries representing at least 10% of our Net Book Value as of August 31, 2022 and February 28, 2022:


	August 31, 2022				February 28, 2022
Country	Net Book Value		Net Book Value %	Number of Lessees	Net Book Value		Net Book Value %	Number of Lessees
India	$	656,090	10%	3	$	670,523	10%	3

The geographic concentration of our lease rental revenue earned from flight equipment held for lease was as follows:


	Three Months Ended August 31,				Six Months Ended August 31,
Region	2022		2021		2022		2021
Asia and Pacific	35	%	32	%	34	%	33	%
Europe	29	%	36	%	29	%	35	%
Middle East and Africa	5	%	5	%	5	%	5	%
North America	18	%	15	%	17	%	15	%
South America	13	%	12	%	15	%	12	%

Total	100	%	100	%	100	%	100	%

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 August 31,				Six Months Ended August 31,
	2022		2021		2022		2021
	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	4	28%	4	30%	3	23%	5	34%

For the three months ended August 31, 2022, total revenue attributable to the U.K, the United States, and India was 11%, 11%, and 10%, respectively. Total revenue attributable to the U.K. included $11.9 million of maintenance revenue resulting from the lease termination of one freighter aircraft – see Note 3 in the Notes to Unaudited Consolidated Financial Statements. For the three months ended August 31, 2021, total revenue attributable to India was 13% and less than 10% for the U.K. and the United States.

For the six months ended August 31, 2022 and 2021, total revenue attributable to India was 11% and 13%, respectively.

Judicial Insolvency Proceedings or Similar Protection

As of October 7, 2022, three of our customers, to which we lease sixteen aircraft, are subject to judicial insolvency proceedings or similar protection. We have signed restructured lease agreements for fifteen of these aircraft, subject only to the lessees emerging from their respective judicial insolvency processes, and a restructured lease commitment for one of these aircraft.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

Note 7. Unconsolidated Equity Method Investments

We have a joint venture with Mizuho Leasing which has nine aircraft with a net book value of $292.0 million at August 31, 2022.


	Amount
Investment in joint venture at February 28, 2022	$	38,317

Earnings from joint venture, net of tax	1,177
Investment in joint venture at August 31, 2022	$	39,494

On June 30, 2022, the Company received full repayment of the unsecured loan facility it provided to the joint venture in the amount of $1.5 million.

Note 8. Borrowings from Secured and Unsecured Debt Financings

The outstanding amounts of our secured and unsecured debt financings were as follows:


	At August 31, 2022					At February 28, 2022
Debt Obligation	Outstanding Borrowings		Number of Aircraft	Interest Rate	Final Stated Maturity	Outstanding Borrowings
Secured Debt Financings:
ECA Financings(1)	$	—	—	—%	N/A	$	21,576
Bank Financings(2)	629,479		31	3.13% to 4.55%	06/17/23 to 03/06/25	666,258
Less: Debt issuance costs and discounts	(2,703)		—			(3,795)
Total secured debt financings, net of debt issuance costs and discounts	626,776		31			684,039

Unsecured Debt Financings:
Senior 5.00% Notes due 2023	500,000			5.00%	04/01/23	500,000
Senior 4.40% Notes due 2023	650,000			4.40%	09/25/23	650,000
Senior Notes due 2024	500,000			4.125%	05/01/24	500,000
Senior Notes due 2025	650,000			5.25%	08/11/25	650,000
Senior Notes due 2026	650,000			4.25%	06/15/26	650,000
Senior Notes due 2028	750,000			2.85%	01/26/28	750,000
Unsecured Term Loans	155,000			3.38%	02/27/24	155,000
Revolving Credit Facilities	95,000			3.24% to 4.24%	02/28/23 to 05/24/25	20,000
Less: Debt issuance costs and discounts	(34,886)					(39,159)
Total unsecured debt financings, net of debt issuance costs and discounts	3,915,114					3,835,841

Total secured and unsecured debt financings, net of debt issuance costs and discounts	$	4,541,890				$	4,519,880

(1)In May 2022, the Company repaid the principal and accrued interest outstanding under our remaining ECA Financing and incurred early extinguishment costs of $0.5 million.

(2)The borrowings under these financings at August 31, 2022 have a weighted-average fixed rate of interest of 3.81%.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

Unsecured Debt Financings:

Revolving Credit Facilities

On May 24, 2022, we entered into an amendment for one of our unsecured revolving credit facilities that expanded the size and extended the term of the facility. As a result, the existing $230.0 million commitment was expanded to $280.0 million, with $35.0 million and $245.0 million of the commitment allocated to Tranche B and Tranche C, respectively. Tranche B will mature on February 28, 2023 and Tranche C will mature on May 23, 2025. Tranche A matured on its stated maturity date of December 27, 2021.

On June 27, 2022, a $100.0 million commitment under one of our unsecured revolving credit facilities, with a total commitment of $1.0 billion, matured on its stated maturity date. On September 8, 2022, we entered into an amendment that expanded the size of the facility from $900.0 million to $1.0 billion and replaced LIBOR with Term Secured Overnight Financing Rate (“SOFR”) as the benchmark interest rate. The facility bears interest at Adjusted Term SOFR (as defined in the amendment to the credit agreement) plus a margin of 1.625% per year and matures on April 26, 2025.

On July 30, 2022, a $50.0 million commitment under our revolving credit facility with Mizuho Bank Ltd., a related party, matured on its stated maturity date.

As of August 31, 2022, we had $95.0 million outstanding under our revolving credit facilities and had $1.2 billion available for borrowing.

As of August 31, 2022, we were in compliance with all applicable covenants in our financings.

Note 9. Shareholders' Equity

On March 15, 2022, the Company paid a quarterly dividend in the amount of $10.5 million for its Preference Shares, which was approved by the Company’s Board of Directors on January 6, 2022, and accrued as of February 28, 2022.

On September 15, 2022, the Company paid a quarterly dividend in the amount of $10.5 million for its Preference Shares, which was approved by the Company’s Board of Directors on July 6, 2022, and accrued as of August 31, 2022.

Note 10. Related Party Transactions

The Company incurred fees from Marubeni as part of its intra-company service agreement totaling $1.2 million and $0.9 million during the three months ended August 31, 2022 and 2021, respectively, and $2.6 million and $1.9 million during the six months ended August 31, 2022 and 2021, respectively, whereby Marubeni provides certain management and administrative services to the Company. In addition, the Company purchased parts under a parts management services and supply agreement with an affiliate of Marubeni totaling $2.3 million and $1.4 million during the three months ended August 31, 2022 and 2021, respectively, and $4.0 million and $2.0 million during the six months ended August 31, 2022 and 2021, respectively.

Note 11. Income Taxes

Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

August 31, 2022

The sources of income (loss) from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and six months ended August 31, 2022 and 2021 were as follows:


	Three Months Ended August 31,				Six Months Ended August 31,
	2022		2021		2022		2021
U.S. operations	$	4,790	$	4,479	$	10,126	$	8,190
Non-U.S. operations	(18,217)		12,531		(13,053)		(9,512)
Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments	$	(13,427)	$	17,010