UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☑ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the Fiscal Year Ended December 31, 2019February 28, 2022
or
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from to
Commission file number 001-32959
AIRCASTLE LIMITED
(Exact name of Registrant as Specified in its Charter)
| Bermuda | 98-0444035 | |||||||
| (State or other Jurisdiction of Incorporation or organization) | (I.R.S. 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) (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 | ||||||||||||||
| Preference Shares, par value $0.01 per share | N/A | NONE | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Yesþ¨ No ¨þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨þ No Noþ¨
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The aggregate market value of the Registrant’s Common Shares based upon the closing price on the New York Stock Exchange on June 30, 2019August 31, 2021 (the last business day of registrant’s most recently completed second fiscal quarter), beneficially owned by non-affiliates of the Registrant was approximately $1.10 billion.$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 February 10, 2020,April 25, 2022, there were 75,109,02314,048 outstanding shares of the registrant’s common shares, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
On November 6, 2019, Aircastle Limited announced that it had entered into a definitive agreement to be acquired by a newly-formed entity controlled by affiliates of Marubeni Corporation (“Marubeni”) and Mizuho Leasing Company, Limited (“Mizuho Leasing”). Unless stated otherwise, all forward-looking information contained in this report does not take into account or give any effect to the impact of the Merger (as defined herein). For additional details regarding the Merger, see “Item 1. Business” in Part I of this report, “Risk Factors” contained in Part I, Item 1A of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of this report, and Note 1 to the Company’s consolidated financial statements, contained in Part IV of this report.GrowthHistorically, growth in commercial air traffic is broadlyhas been correlated with world economic activity. In recent years,Prior to the COVID-19 pandemic, commercial air traffic growth has expanded at a rate 1.51 to 2 times that of global GDP growth. TheThis expansion of air travel has driven a risegrowth in the world aircraft fleet. Therefleet; and there are currently approximately 22,00025,000 commercial mainline passenger and freighter aircraft in operation worldwide. Thisthe world fleet is expectedtoday. Aircraft leasing companies own approximately 48% of the world’s commercial jet aircraft. Under normal circumstances, we would expect the global fleet to continue expanding at a threetwo to four percent average annual raterate.
2019 showed sustained growthaviation sector, resulting in a dramatic slowdown in air traffic. AccordingSubstantially all the world’s airlines have experienced financial difficulties and liquidity challenges, including many of our customers. While there have been improvements in many markets, particularly in terms of domestic travel, according to the International Air TransportTransit Association during 2019, global passenger traffic increased 4.2%(“IATA”), as of February 28, 2022, air travel was still down to approximately 55% compared to normal levels. A full recovery to pre-pandemic levels is not expected for several years and will depend on the same period in 2018. Demandeffectiveness of vaccination efforts and the continued easing of travel restrictions, among other things. While the extent and duration of the impact of the COVID-19 pandemic remain unknown, we continue to believe long-term demand for air travel varies by region. Emerging market economieswill return to historical trends over time.Notwithstandingleasing activities for all our Russian aircraft and have sought to repossess the sector’s long-term growth, the aviation market is subject to economic variability due to changes in macroeconomic variables, such as interest rates, fuel price levelsaircraft and foreign exchange rates. The aviation industry is also susceptible to external shocks, such as regional conflicts, epidemics and terrorist events. Mitigating this risk is the portabilityremove them from Russia. We have successfully repossessed two of the assets, allowingtwelve Russian aircraft. Nine aircraft remain in Russia and one aircraft was undergoing maintenance outside of Russia and is not operational. Our aircraft with a Ukrainian airline is in temporary storage outside of Ukraine. It is unclear whether we will be able to be redeployed to locations where there is demand.Fuel prices and interest rates have had a substantial effect onrecover the remaining aircraft from our industry. After dropping to a low of $36 per barrel in December 2015,former Russian airline customers or what the price of fuel averaged $61 per barrel during 2019. The prolonged low interest rate environment and the strong overall performancecondition of the aircraft financing sector attracted significant new capital, increasing competition for new investmentswill be at the time of repossession if we do so or whether we will be able to recover the related technical records and putting pressure on margins and returns. Interest rates have risen in the U.S., though current Federal Reserve guidance suggesting rate hikes in the Federal Funds rate are unlikely in the near term.
Capital availability for aircraft has varied over time, and we consider this variabilitydocumentation. Failure to be a basic characteristicrepossess any of our industry. If pursued properly, this variability represents an important investment opportunity. Strong U.S. debt capital market conditions benefit borrowers by permitting access to financing at historic lows. Commercial bank debt also continues to play a critical role for aircraft finance. Export credit agency availability, however, has been curtailed in recent years due to political issues, both in the U.S. and in Europe. While financial market conditions remain attractive, geopolitical issues may increase capital costs and limit availability going forward.We believe capital market developments should generate attractive additional investment and trading opportunities from which we can benefit given our access to different financing sources, our limited capital commitments and our reputation as a reliable trading partner. Our investment grade credit ratings from Moody’s, Standard & Poor’s and Fitch have allowed us to reduce our borrowing costs for our two most recent bond deals and will enable us to more reliably access debt capital throughout the business cycle.Our business approach is differentiated from those of other large leasing companies. Our investment strategy is to seek out the best risk-adjusted return opportunities across the commercial jet market, so the volume and types of assets we buy will vary over time with market conditions. We plan to growcould adversely affect our business and profits overfinancial results. Many of these Russian airlines have continued to fly our aircraft notwithstanding the long-term while maintaining a conservative, flexible capital structure. We preferleasing terminations and our repeated demands for the return of our assets. Our aircraft that remain in Russia may suffer damage or deterioration due to have capital resources availableinadequate maintenance and lack of spare parts.On November 5, 2019, Aircastle entered into an Agreement and PlanWe had letters of Merger (the “Merger Agreement”), with MM Air Limited, a Bermuda exempted company (“Parent”), and MM Air Merger Sub Limited, a Bermuda exempted company and wholly owned subsidiarycredit of Parent (“Merger Sub”), pursuant$49.5 million as of February 28, 2022 related to which, among other things, Merger Sub will merge with and into the Company, with Aircastle surviving as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are newly-formed entities controlled by affiliates of Marubeni and Mizuho Leasing.Pursuantour aircraft leased to Russian airlines. We have presented requests for payment to the Merger Agreement, subject to certain conditions set forth therein, at the effective timevarious financial institutions and have received about half of the Merger (the “Effective Time”), each issuedproceeds. We are pursuing collection on remaining letters of credit, but the timing and outstanding common share, paramount of any further recovery are uncertain.Consummation of the Merger is$314.1 million. Our claims are subject to the satisfaction of certain remaining customary closing conditions, including, without limitation, (i) approvalterms of the Merger Agreementapplicable policies, and given the
The Merger Agreement includes customary representations, warranties and covenants of Aircastle, Parent, and Merger Sub. Among other things, Aircastle has agreed to customary covenants regarding the operation of the business of Aircastle and its subsidiaries prior to the closing. Aircastle is permittedcounterparty’s ability to pay regular quarterly dividends up to $0.32 per common share pursuant to the Merger Agreement. The Company currently anticipates that the Merger will close in the first half of calendar year 2020, subject to the satisfaction of the remaining customary closing conditions.claim amount.
Aircraft owners have benefitedOur traditional business approach is to continue to remain differentiated from those of other large leasing companies. The recent global disruptions that occurred as a result of the low interest rate environment in recent years. Particularly strong conditions inCOVID-19 pandemic and the debt capital markets have provided select borrowers, including Aircastle, accessRussian invasion of Ukraine has required enhanced focus on diligent, proactive risk monitoring while continuing to attractively priced, flexible financing. This provides us a competitive advantage over many airlinespursue our core strategies. Our focus is to manage risk and lessors. Geopolitical and macroeconomic events may increase the cost of capital and limit its availability in the future. Market dislocations maysecure liquidity while also however, provide attractive investment opportunities for Aircastle.We planplanning to grow our business and profits over the long-term whilelong-term. By limiting long-datedlong-term capital commitments and maintaining a conservative and flexible capital structure. structure as we remain subject to these unprecedented circumstances, we seek to best position ourselves for investment opportunities in future periods of recovery.
______________(1)We have one narrow-body and three wide-body aircraft that we are currently marketing for lease or sale.
2020(2)Excludes three Airbus A319-100, four Airbus A320-200, one Boeing 737-800 and two Boeing 747-400ERF aircraft that were on lease with Russian airlines and which we continue to work to repossess.We began 2020 with 32 aircraft having scheduled lease expirations in 2020 and three off-lease aircraft. As of February 10, 2020,April 25, 2022, we have agreements to lease or extend thirteen of thesefour off-lease aircraft and fourteen aircraft with leases expiring in fiscal year 2022, which combined account for 5% of our Net Book Value at February 28, 2022, still to sell nine others. Of the remaining thirteenbe placed or sold. Additionally, we have ten aircraft that had been on lease to Russian lessees and which account for 3.9%less than 1% of our net book valueNet Book Value at December 31, 2019, we expect that six aircraft will be sold at lease end, with the remaining seven aircraft still to be placed.February 28, 2022. We do not yet have physical possession of these ten aircraft.2021-2024Fiscal Year 2023-2026 Lease Expirations and Lease Placements2021: 18 aircraft, representing 5%;2022: 34•2023: 35 aircraft, representing 10%;2023: 42•2024: 47 aircraft, representing 12%18%; and2024: 58•2025: 31 aircraft, representing 21%15%; and
these provisions would set a threshold, below which the lessee would not have a right to seek reimbursement and above which we may be required to pay a portion of the cost incurred by the lessee.authorities.. The lessees are obliged to remove liens on the aircraft other than liens permitted under the leases.Portfolio Risk ManagementOur objective is to build and maintain a lease portfolio which is balanced and diversified and delivers returns commensurate with risk. We have portfolio concentration objectives to assist in portfolio risk management and highlight areas where action to mitigate risk may be appropriate, and take into account the following:individual lessee exposures;geographic concentrations;aircraft type concentrations;portfolio credit quality distribution; andlease maturity distribution.We have a risk management team which undertakes detailed due diligence on lessees when aircraft are acquired with a lease already in place and for placement of aircraft with new lessees following lease expiration or termination.
EmployeesAs of December 31, 2019, we had 111 employees. None of our employees are covered by a collective bargaining agreement, and we believe that we maintain excellent employee relations. We provide certain employee benefits, including retirement benefits, and health, life, disability and accident insurance plans.
Our customers may also be subject toRegulations, such as those limiting CO2 emissions and reducing noise, or emissions regulationsare changing and developing in the jurisdictions in which they operate our aircraft. European countries, in particular, have strict environmental regulations, and, in 2008aviation sector, where there is an additional international angle to the European Union (“E.U.”) introduced the European Emissions Trading Scheme (“EU ETS”), which was extended to include carbon dioxide (“CO2”) emissions from aviation in 2012. As a “cap and trade” mechanism, the legislation imposes the requirementsregulation. The impact of monitoring, reporting and verifying emissions on airlines, and caps CO2 emissions for each year at a level determined by the legislation. Under the scheme, an airline is only permitted to release as many CO2 emissionsrecent crises, such as the ‘carbon credits’ allocated it, with the total number of credits allocated to all airlines being equal to the cap. An airline may increase its allocation by purchasing credits from another airline. However, in 2014, the E.U. limited the application of the EU ETS to flights within the European Economic Area (“EEA”) and deferred any further application until 2024, pending a review of a new initiative by International Civil Aviation Organization (“ICAO”) put in place in 2016.In October 2016, ICAO adopted a global market-based measure to control CO2 emissions from international aviation. This measure is the “Carbon Offsetting and Reduction Scheme” for International Aviation (“CORSIA”) with the aim of achieving carbon-neutral growth from 2020 onwards. The CORSIA pilot phase (2021-2023)COVID-19 pandemic and the CORSIA first phase (2024-2026) will apply only to routes between countries that have each volunteered to participateRussian invasion of Ukraine, on the airline sector has further complicated matters. Further regulatory changes are expected in the scheme. All airlines that operate routes between two volunteering countries will be subject to the offsetting requirements, which means that any such airline must buy an emissions credit that has been verified as having reduced emissions elsewhere to offset the emissions that that airline would otherwise not have caused. The requirement to offset emissions will be divided among airlines in proportion to their total CO2 emissions (but not the growth of emissions of the company), which is referred to as the “sectoral” approach to emissions. From 2030 onwards, this sectoral approach will transition to an approach instead based on each airline’s individual rate of growth. From 2030-2032, 20% of offsets will be calculated according to this “individual” approach, and the remaining 80% calculated by the “sectoral” approach. In 2033-2035, 70% of the offset requirements will be based on the “individual” approach.coming years.In July 2016, the U.S. Environmental Protection Agency (“EPA”) determined that Greenhouse Gas (“GHG”) emissions from certain aircraft engines contribute to climate change and endangers the public’s health and the environment. The findings are for CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. At that time, the EPA indicated its intention to promulgate new rules to adopt GHG standards promulgated by the ICAO. However, in June 2017, the United States indicated that it is reviewing whether it will remain fully committed to the ICAO rules, including CORSIA. No firm date for conclusion of this review has been announced.Other environmental regulations to which our customers may be subject to include those relating to discharges to surface and subsurface waters, management of hazardous substances, oils, and waste materials, and other regulations affecting their aircraft operations.Subsequent EventsThe Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of December 31, 2019 through the date of this filing, the date on which the consolidated financial statements included in this Form 10-K were issued.
9
Risks Related to Our OperationsLesseescompetition;passengerdemand, fare levels and air cargo rates;operating costs, including the price and availability of jet fuel, labor costs and insurance costs and coverages;restrictions in labor contracts and labor difficulties, including pilot shortages;Volatile
The availability and pricing of capital in the commercial bank market and in the unsecured bond market remain susceptible to global events, including, for example, political changes in the U.S. and abroad, rising interest rates, currency fluctuations, the rate of international economic growth and implications from changes in oil prices. If we need, but cannot obtain, adequate capital on satisfactory terms, or at all, as a result of negative conditions in the capital markets or otherwise, our business, financial condition, results of operations or our ability to pay dividends to our shareholders could be materially
adversely affected. Additionally, such inability to obtain capital on satisfactory terms, or at all, could prevent us from pursuing attractive future growth opportunities.We bear the risk of re-leasing and selling our aircraft.We bear the risk of re-leasing or selling or otherwise disposing of our aircraft in order to continue to generate income. In certain cases we commit to purchase aircraft that are not subject to lease and therefore are subject to lease placement risk. We are exposed to the risk that the residual value of the aircraft will not be sufficient to permit us to fully recover or realize a gain on our investment in the aircraft and that we may have to record impairment charges as only a portion of an aircraft’s value is covered by contractual cash flows from leases. Further, our ability to re-lease, lease or sell aircraftadverse effect on favorable terms, or at all, or without significant off-lease time and transition costs is likely to be adversely impacted by risks affecting the airline industry generally.Other factors that may affect our ability to fully realize our investment in our aircraft and that may increase the likelihood of impairment charges include credit deterioration of a lessee, declines in rental rates, residual value risk, higher fuel prices which may reduce demand for older, less fuel efficient aircraft, additional environmental regulations, age restrictions, customer preferences and other factors that may effectively shorten the useful life of older aircraft.We own and lease long-lived assets and have written down the value of some of our assets. If market conditions worsen, or in the event of a customer default, we may be required to record further write-downs.We test our assets for recoverability whenever events or changes in circumstances indicate that the carrying amounts for such assets are not recoverable from their expected, undiscounted cash flows. We also perform a fleet-wide recoverability assessment annually. This recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry as well as from information received from third party sources.If anticipated aircraft lease cash flows or sales values worsen due to a decline in market conditions, or if a lessee defaults, we may have to reassess the carrying value of one or more of our aircraft. As aircraft approach the end of their economic lives, their carrying values may be more susceptible to non-recoverable declines in value because such assets will have a shorter opportunity in which to benefit from a market recovery. We monitor our fleet for aircraft that are more susceptible to failing our recoverability assessments within one year due to their sensitivity to changes in contractual cash flows, future cash flow estimates and aircraft residual or scrap values. As of December 31, 2019, no aircraft were on our monitoring list.Our ability to obtain debt financing and our cost of debt financing is, in part, dependent upon our credit ratings and a credit downgrade or being put on negative watch could adversely impact our financial results.Maintaining our credit ratings depends in part on strong financial results and in part on other factors, including the outlook of the ratings agencies on our sector and on the market generally. A credit rating downgrade or being put on negative watch may make it more difficult or costly for us to raise debt financing in the unsecured bond market, or may result in higher pricing or less favorable terms under other financings. Credit rating downgrades or being put on negative watch may make it more difficult and/or more costly to satisfy our funding requirements. In addition, any future tightening or regulation of financial institutions, including increasing capital reserves, could impact our ability to raise funds in the commercial bank loan market in the future.An increase in our borrowing costs may adversely affect our earnings and cash available for distribution to our shareholders.Some of our aircraft are financed under long-term debt financings. As these financings mature, we will be required to either refinance these instruments by entering into new financings, which could result in higher borrowing costs, or repay them by using cash on hand or cash from the sale of our assets.Departure of key officers could harm our business and financial results.Our senior management’s reputations and relationships with lessees, sellers, buyers and financiers of aircraft are a critical element of our business. We encounter intense competition for qualified employees from other companies in the aircraft leasing industry, and we believe there are only a limited number of available qualified executives in our industry.
The Company seeks to retain a pipeline of senior management personnel with superior talent to provide continuity of succession, including for the Chief Executive Officer position and other senior positions. In addition, our Board of Directors is involved in succession planning, including review of short- and long-term succession plans for the Chief Executive Officer and other senior positions. Our future success depends, to a significant extent, upon the continued service of our senior management personnel, including the Chief Executive Officer and his potential successors, and if we lose one or more of these individuals, our business could be adversely affected.We may not be able to pay or maintain dividends, or we may choose not to pay dividends, and the failure to pay or maintain dividends may adversely affect our share price.On October 28, 2019, our Board of Directors declared a regular quarterly dividend of $0.32 per common share, or an aggregate of $23.9 million, which was paid on December 13, 2019 to holders of record on November 29, 2019. This dividend may not be indicative of the amount of any future quarterly dividends. Our ability to pay, maintain or increase cash dividends to our shareholders is subject to the discretion of our Board of Directors and will depend on many factors, including: our ability to comply with financial covenants in our financing documents that limit our ability to pay dividends and make certain other restricted payments; the difficulty we may experience in raising, and the cost of, additional capital and our ability to finance our aircraft acquisition commitments; our ability to re-finance our long-term financings; our ability to negotiate and enforce favorable lease rates and other contractual terms; the level of demand for our aircraft in the lease placement or sales markets; the economic condition of the commercial aviation industry generally; the financial condition and liquidity of our lessees; unexpectedlessees, aircraft values and rental rates and may lead to lease restructurings or increased aircraft maintenance or other expenses;repossessions.We are subject to risks related to our indebtedness that may limit our operational flexibility and our ability to compete with our competitors.As of December 31, 2019, our total indebtedness was $5.06 billion, representing approximately 71.1%Increases in fuel prices could negatively impact the profitability of our total capitalization. Aircastle Limited is either the principal obligor or has guaranteed most of this indebtedness,lessees.Our indebtedness subjects us to certain risks, including:14.7% of our net book value serves as collateral for our secured indebtedness, and the terms of certain of our indebtedness require us to use proceeds from sales of aircraft, in part, to repay amounts outstanding under such indebtedness;our failure to comply with the terms of our indebtedness, including restrictive covenants contained therein, may result in additional interest being due or defaults that could result in the acceleration of the principal, and unpaid interest on, the defaulted debt, as well as the forfeiture of any aircraft pledged as collateral; andnon-compliance with covenants prohibiting certain investments and other restricted payments, including limitations on our ability to pay dividends, repurchase our common shares, raise additional capital or refinance our existing debt, may reduce our operational flexibility and limit our ability to refinance or grow the business.The provisions of our long-term financings require us to comply with financial and other covenants. Our compliance with these ratios, tests and covenants depends upon, among other things, the timely receipt of lease payments from our lessees and upon our overall financial performance.
indebtedness, refinancing our existing indebtedness, paying dividends, repurchasing our common shares, making other restricted payments, making certain investments or entering into joint ventures and a cross-default to certain other financings of the Company.
The terms of our financings also restrict our ability to incur or guarantee additional indebtedness or engage in mergers, amalgamations or consolidations among our subsidiary companies or between a subsidiary company and a third party or otherwise dispose of all or substantially all of our assets.We are subject to various risks and requirements associated with transacting business in foreign jurisdictions.The international nature of our business exposes us to trade and economic sanctions and other restrictions imposed by the U.S. and other governments. The U.S. Departments of Justice, Commerce and Treasury, as well as other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the Foreign Corrupt Practices Act (“FCPA”), and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control (“OFAC”) and, increasingly, similar or more restrictive foreign laws, rules and regulations, including the U.K. Bribery Act (“UKBA”), which may also apply to us. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws, and we expect the relevant agencies to continue to increase these activities.We have compliance policies and training programs in place for our employees with respect to FCPA, OFAC Regulations, UKBA and similar laws, but there can be no assurance that our employees, consultants or agents will not engage in conduct for which we may be held responsible. Violations of FCPA, OFAC Regulations, UKBA and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities.General Data Protection Regulation (“GDPR”) took effect on May 25, 2018, requiring us to protect the privacy of certain personal data of E.U. citizens. While we have implemented processes and controls to comply with GDPR requirements, the manner in which the E.U. will interpret and enforce certain provisions remains unclear and we could incur significant fines of up to 4% of worldwide revenue, individual damages and reputational risks if the E.U. determines that our controls and processes are ineffective and we have failed to adequately comply with the requirements.We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration.We are dependent upon information technology systems to manage, process, store and transmit information associated with our operations, which may include proprietary business information and personally identifiable information of our customers, suppliers and employees. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyber-attacks, employee error, natural disasters and defects in design. Damage, disruption, or failure of one or more information technology systems may result in interruptions to our operations in the interim or may require a significant investment to fix or replace them or may result in significant damage to our reputation. Although various measures have been implemented to manage our risks related to the information technology systems and network disruptions, our resources and technical sophisticationfluctuate widely. Airlines may not be adequateable to prevent all types of cyber-attacks thatsuccessfully manage their exposure to fuel prices and significant changes could leadmaterially affect their operating results. Airlines may not be able to the payment of fraudulent claims, loss of sensitive information, including our own proprietary information or that of ourpass on increases in fuel prices to their customers suppliersby increasing fares. High fuel prices may also have an impact on consumer spending and employees, and could harm our reputation and result in lost revenues and additional costs and potential liabilities.
Risks Related to Our Aviation AssetsThe variability of supply andadversely impact demand for aircraft could depress lease ratesair transportation.The aircraft leasing and sales industry has experienced periodsair travel or the inability of aircraft oversupply and undersupply. The oversupply of a specific type of aircraft in the market is likelyairlines to depress aircraft lease rates for, and the value of, that type of aircraft.The supply and demand for aircraft is affected by various cyclical and non-cyclical factors that are not under our control, including:passenger and air cargo demand;operating costs, including fuel costs, and general economicoperate to or from certain regions due to severe weather conditions affecting our lessees’ operations;interest rates;foreign exchange rates;the availability of credit;airline restructurings and bankruptcies;changes in control of, or restructurings of, other aircraft leasing companies;manufacturer production levels and technological innovation;discounting by manufacturers on aircraft types nearing end of production;manufacturers merging, exiting the industrynatural disasters, such as floods, earthquakes or ceasing to produce aircraft types;new-entrant manufacturers producing additional aircraft models, or existing manufacturers producing newly engined aircraft models or new aircraft models, in competition with existing aircraft models;geopolitical events, including war, prolonged armed conflict and acts of terrorism;governmental regulation;climate change initiatives, technological change, aircraft noise and emissions regulations, aircraft age limits and other factors leading to reduced demand for, early retirement or obsolescence of aircraft models;tariffs and other restrictions on trade;outbreaks of communicable diseases and natural disasters;reintroduction into service of aircraft previously in storage; andairport and air traffic control infrastructure constraints.These and other factors may produce sharp decreases or increases in aircraft values and lease rates, which would impact our cost of acquiring aircraft and our ability to grow the business, or which may result in lease defaults and also prevent the aircraft from being re-leased or sold on favorable terms. Thisvolcanic eruptions, could have an adverse effect on our financial results and growth prospects.Other factors that increase the risk of decline in aircraft value and lease rates could have an adverse effect on our financial results and growth prospects.In addition to factors linked to the aviation industry generally, other factors that may affect the value and lease rates of our aircraft include:the age of the aircraft;the particular maintenance and operating history of the airframe and engines;the number of operators using that type of aircraft;whether the aircraft is subject to a lease and, if so, whether the lease terms are favorable to us;the demand for and availability of such aircraft at any given time;applicable airworthiness directives or manufacturer’s service bulletins that have not yet been performed on the aircraft;grounding orders or other regulatory action that could prevent or limit utilization of our aircraft;
any regulatory and legal requirements that must be satisfied before the aircraft can be purchased, sold or re-leased; andcompatibility of our aircraft configurations or specifications with those desired by the operators of other aircraft of that type.Any decrease in the values of and lease rates for commercial aircraft which may result from the above factors or other unanticipated factors may have a material adverse effect on our financial results and growth prospects.The advent of superior aircraft technology and higher production levels could cause our existing aircraft portfolio to become outdated and therefore less desirable.As manufacturers introduce technological innovations and new types of aircraft, including the Boeing 787, the Airbus A350, the Airbus A220 (formerly the Bombardier C series) and re-engined and/or replacement types for the Boeing 737, Boeing 777, Airbus A320, Airbus A330 and Embraer E-Jet families of aircraft, certain aircraft in our existing aircraft portfolio may become less desirable to potential lessees or purchasers. This next generation of aircraft is expected to deliver improved fuel consumption and reduced noise and emissions with lower operating costs compared to current-technology aircraft. The Boeing 787 and 737 MAX and the Airbus A350, A320neo and A220 are all currently in production. The Boeing 777X is expected to enter service in 2021. Additionally, Commercial Aircraft Corporation of China Ltd., Mitsubishi and Russia’s United Aircraft Corporation are developing aircraft models that will compete with the Airbus A320 family aircraft, the Boeing 737 and the Embraer E-Jet.The introduction of these new models and the potential resulting overcapacity in aircraft supply, could adversely affect the residual values and the lease rates for our aircraft, ourlessees’ ability to lease or sell our aircraft on favorable terms, or at all, or result in us recording future impairment charges.The effects of energy, emissions, and noise regulations and policies may negatively affect the airline industry. This may cause lessees to default on their lease payment obligations to us and may limit the market for certain aircraft in our portfolio.Governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant aircraft is registered and operated. Jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with noise level standards. In addition to the current requirements, the United States and ICAO have adopted a new, more stringent set of standards for noise levels which applies to engines manufactured or certified on or after January 1, 2006. Currently, U.S. regulations would not require any phase-out of aircraft that qualify with the older standards applicable to engines manufactured or certified prior to January 1, 2006, but the E.U. has established a framework for the imposition of operating limitations on aircraft that do not comply with the new standards. These regulations could limit the economic life of the aircraft and engines, reduce their value, limit our ability to lease or sell these non-compliant aircraft and engines or, if engine modifications are permitted, require us to make significant additional investments in the aircraft and engines to make them compliant.In addition to noise restrictions, the U.S. and other jurisdictions have imposed limits on aircraft engine emissions, such as NOx, CO and CO2, consistent with current ICAO standards. European countries have relatively strict environmental regulations that can restrict operational flexibility and decrease aircraft productivity. The E.U. has included the aviation sector in its emissions trading scheme (“ETS”), and attempted to apply the ETS to flights outside of European airspace. As a result of opposition from other countries to the E.U. effort, in 2014, the E.U. limited the application of the E.U. ETS to flights within the European Economic Area (“EEA”) and deferred any further application until 2024, pending a review of the results of a new initiative introduced by the promulgated by ICAO. In October 2016, ICAO adopted a global market-based measure to control CO2 emissions from international aviation. This measure is the “Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) with the aim of achieving carbon-neutral growth from 2020 onwards. The CORSIA pilot phase (2021-2023) and the CORSIA first phase (2024-2026) will apply only to routes between countries that have each volunteered to participate in the scheme. All airlines that operate routes between two volunteering countries will be subject to the offsetting requirements, which means that any such airline must buy an emissions credit that has been verified as having reduced emissions elsewhere to offset the emissions that that airline would otherwise not have caused. The requirement to offset emissions will be divided among airlines in proportion to their total CO2 emissions (but not the growth of emissions of the company), which is referred to as the “sectoral” approach to emissions. From 2030 onwards, this sectoral approach will transition to a new approach based on each airline’s individual rate of growth. From 2030-2032, 20% of offsets will be calculated according to this “individual” approach, and the remaining 80% calculated by the “sectoral” approach. In 2033-2035, 70% of the offset requirements will be based on the “individual” approach.
In 2015, over 190 countries, including the United States, reached an agreement to reduce global GHG emissions at the United Nations Framework Convention on Climate. The agreement does not expressly reference aviation, but if the agreement is implemented in the United States and other countries there could be an adverse direct or indirect effect on the aviation industry as a whole. On June 1, 2017 the United States announced that it intends to withdraw from the 2015 agreement and gave notice officially on November 4, 2019. The withdrawal would be effective November 4, 2020.Over time, it is possible that governments will adopt additional regulatory requirements and/or market-based policies that are intended to reduce energy usage, emissions, and noise levels from aircraft. Such initiatives may be based on concerns regarding climate change, energy security, public health, local impacts, or other factors, and may also impact the global market for certain aircraft and cause behavioral shifts that result in decreased demand for air travel. These concerns could also result in greater limitations on the operation of our fleet, particularly aircraft equipped with older technology engines.Compliance with current or future regulations, taxes or duties could cause our lessees to incur higher costs and lead to higher ticket prices, which could mean lower demand for travel and adverse impacts on the financial condition of our lessees. Such compliance may also affect our lessees’ ability to make rental and other lease payments and limit the market for aircraft in our portfolio, which could have other negative effects on our financial position.The older age, or older technology, of some of our aircraft may expose us to higher than anticipated maintenance related expenses.In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Additionally, older aircraft typically are less fuel-efficient than newer aircraft and may be more difficult to re-lease or sell, particularly if, due to increasing production rates by aircraft manufacturers or airline insolvencies or other distress, older aircraft are competing with newer aircraft in the lease or sale market. Expenses like fuel, carbon charges, aging aircraft inspections, maintenance or modification programs and related airworthiness directives could make the operation of older aircraft less economically viable and may result in increased lessee defaults. We may also incur some of these increased maintenance expenses and regulatory costs upon acquisition or re-leasing of our aircraft. Re-leasing larger wide-body aircraft may result in higher reinvestment and maintenance expenditures than re-leasing narrow-body aircraft.The concentration of aircraft types in our aircraft portfolio could lead to adverseeffects on our business and financial results should any difficulties specific tothese particular types of aircraft occur.Our owned aircraft portfolio is concentrated in certain aircraft types. Should any of these aircraft types (or other types we acquire in the future) or aircraft manufacturers encounter technical, financial or other difficulties, it would cause a decrease in value of these aircraft, an inability to lease the aircraft on favorable terms or at all, or a potential grounding of these aircraft, which may adversely impact our financial results, to the extent the affected aircraft types comprise a significant percentage of our aircraft portfolio.We operate in a highly competitive market for investment opportunities in aviation assets and for the leasing and sale of aircraft.We compete with other lessors, airlines, aircraft manufacturers, financial institutions, aircraft brokers and other investors with respect to aircraft acquisitions, leasing and sales. The aircraft leasing industry is highly competitive and may be divided into three basic activities: (i) aircraft acquisition; (ii) leasing or re-leasing of aircraft; and (iii) aircraft sales. Competition varies among these three basic activities.A number of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances, lower investment return expectations or different risk or residual value assessments, which could allow them to consider a wider variety of investments, establish more relationships, bid more aggressively on aviation assets available for sale and offer lower lease rates or sales prices than we can. Some of our competitors may provide financial services, maintenance services or other inducements to potential lessees or buyers that we cannot provide. As a result of competitive pressures, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objectives. We continue to see lessors and airlines starting to manage the transition from current to newer technology and younger aircraft. Additionally, the barriers to entry in the aircraft acquisition and leasing market are comparatively low, and new entrants with private equity, hedge fund, Asian bank or other funding sources appear from time
to time. We may not be able to compete effectively against present and future competitors in the aircraft acquisition, leasing or sales market.Risks Related to our Order of New Embraer E-Jet E2 AircraftWe have lease commitments for fourteen of the 25 Embraer E-Jet E2 aircraft that we contracted to purchase from Embraer and are scheduled for delivery between the third quarter of 2020 and second quarter of 2024. We do not yet have lease commitments for the remaining deliveries nor have we put financing in place for any of the Embraer E-Jet E2 aircraft deliveries. Our ability to lease these aircraft on favorable terms, if at all, may be adversely affected by desirability of this aircraft type and risks to the commercial airline industry generally. If we are unable to obtain commitments for the remaining deliveries or the necessary financing, if needed, or otherwise satisfy our contractual obligations to Embraer, we will be subject to several potential risks, including:forfeiting advance deposits and progress payments to Embraer, as well as incurring certain significant costs related to these commitments such as contractual damages and legal, accounting and financial advisory expenses;defaulting on any future lease commitments we may have entered into with respect to these aircraft, which could result in monetary damages and strained relationships with lessees;failing to realize the benefits of purchasing and leasing such aircraft; andrisking harm to our business reputation, which would make it more difficult to purchase and lease aircraft in the future on agreeable terms, if at all.The Embraer E-Jet E2 is a new aircraft variant and first entered service in April 2018. The Embraer E-Jet E2 aircraft incorporates a modified version of the Pratt & Whitney geared turbofan engine. Airframe and engine manufacturers have occasionally experienced delays and technical difficulties in bringing new aircraft and engine types to market. If any aircraft for which we have made future lease commitments is delayed or if Embraer is unable to produce the aircraft in compliance with the performance specifications, some or all of our affected lessees might be able to terminate their leases with respect to such aircraft. Our purchase agreement with Embraer and the anticipated future leases for these aircraft contain certain cancellation rights related to delays in delivery. Any such termination could strain our relations with those lessees going forward. Lastly, we will rely on Embraer to return any advance deposits and progress payments if they are unable to meet their obligations to us, and we may not be able to recover such amounts if Embraer defaults or becomes insolvent. In July 2018, Airbus and Bombardier completed a previously announced partnership for the C-series aircraft (now known as the Airbus A220 model), which competes with the E-Jet E2. In December 2018, Boeing and Embraer announced a strategic partnership. As of today, the transaction has received the approval of both the U.S. and Brazil but the European Commission has yet to approve it. No assurance can be given that the Boeing and Embraer strategic partnership will receive European Commission approval, and that even if the transaction is consummated, what the implications could be for our commitments and the E-Jet E2 program. Any of these events could materially and adversely affect our financial results and operations.Risks Related to Our LeasesIf lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease.The standards of maintenance observed by the various lessees and the condition of the aircraft at the time of lease or sale may affect the future values and rental rates for our aircraft.Under our leases, the relevant lessee is responsible for maintaining the aircraft and complying with all governmental requirements applicable to the lessee and the aircraft, including, without limitation, operational, maintenance, and registration requirements and airworthiness directives, although in certain cases we may agree to share certain of these costs. Failure of a lessee to perform required aircraft maintenance or required airworthiness directives could result in a decrease in value of such aircraft, an adverse effect on our ability to lease the aircraft at favorable rates or at all, or a potential grounding of such aircraft, and will likely require us to incur increased maintenance and modification costs upon the expiration or earlier termination of the applicable lease, which could be substantial, to restore such aircraft to an acceptable condition. If any of our aircraft are not subject to a lease, we would be required to bear the entire cost of maintaining that aircraft and performing any required airworthiness directives.
Certain of our leases provide that the lessee is required to make periodic payments to us during the lease term in order to provide cash reserves for major maintenance. In these leases there is an associated liability for us to reimburse the lessee after such maintenance is performed. A substantial number of our leases do not provide for any periodic maintenance reserve payments to be made to us. Typically, these lessees are required to make payments at the end of the lease term. However, in the event such lessees default, the value of the aircraft could be negatively affected by the maintenance condition and we may be required to fund the entire cost of performing major maintenance on the relevant aircraft without, in either case, having received compensating maintenance payments from these lessees.Even if we receive maintenance payments, these payments may not cover the entire expense of the scheduled maintenance they are intended to fund. In addition, maintenance payments typically cover only certain scheduled maintenance requirements and do not cover all required maintenance and all scheduled maintenance. As a result, we may incur unanticipated or significant costs at the conclusion of a lease.Failure to pay certain potential additional operating costs could result in the grounding or arrest of our aircraft and prevent the re-lease, sale or other use of our aircraft.As in the case of maintenance costs, we may incur other operational costs upon a lessee default or where the terms of the lease require us to pay a portion of those costs. Such costs include:the costs of casualty, liability and political risk insurance and the liability costs or losses when insurance coverage has not been or cannot be obtained as required, or is insufficient in amount or scope;the costs of licensing, exporting or importing an aircraft, airport charges, customs duties, air navigation charges, landing fees and similar governmental or quasi-governmental impositions, which can be substantial;penalties and costs associated with the failure of lessees to keep aircraft registered under all appropriate local requirements or obtain required governmental licenses, consents and approvals; andcarbon taxes or other fees, taxes or costs imposed under emissions limitations, climate change regulations or other initiatives.The failure to pay certain of these costs can result in liens on the aircraft. The failure to register the aircraft can result in a loss of insurance. These matters could result in the grounding or arrest of the aircraft and prevent the re-lease, sale or other use of the aircraft until the problem is cured.Our lessees may have inadequate insurance coverage or fail to fulfill their respective indemnity obligations, which could result in us not being covered for claims asserted against us.By virtue of holding title to the aircraft, lessors may be held strictly liable for losses resulting from the operation of aircraft or may be held liable for those losses based on other legal theories. Liability may be placed on an aircraft lessor in certain jurisdictions around the world even under circumstances in which the lessor is not directly controlling the operation of the relevant aircraft.Lessees are required under our leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable. Lessees are also required to maintain public liability, property damage and hull all risk and hull war risk insurance on the aircraft at agreed upon levels. However, they are not generally required to maintain political risk insurance. Following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to airlines for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events. At the same time, they significantly increased the premiums for such third-party war risk and terrorism liability insurance and coverage in general. As a result, the amount of such third-party war risk and terrorism liability insurance that is commercially available at any time may be below the amount stipulated in our leases.Our lessees’ insurance, including any available governmental supplemental coverage, may not be sufficient to cover all types of claims that may be asserted against us. Any inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations will reduce the proceeds that would be received by us upon an event of loss under the respective leases or upon a claim under the relevant liability insurance.
Failure to obtain certain required licenses and approvals could negatively affect our ability to re-lease or sell aircraft.A number of our lessees must obtain licenses, consents or approvals in order to import or operate the aircraft or comply with the leases. These include consents from governmental or regulatory authorities for certain payments under the leases and for the import, export or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase such requirements and a governmental consent, once given, might be withdrawn. Furthermore, consents needed in connection with future re-leasing or sale of an aircraft may not be forthcoming. Any of these events could adversely affect our ability to re-lease or sell aircraft.Due to the fact that many of our lessees operate in emerging markets, we are indirectly subject to many of the economic and political risks associated with competing in such markets.Emerging markets are countries which may be more vulnerable to economic and political problems, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, unfavorable legal systems, change in law regarding recognition of contracts or ownership rights, changes in governments or government policy and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by our lessees and the resulting instability may adversely affect our ownership interest in an aircraft or the ability of lessees which operate in these markets to meet their lease obligations and these lessees may be more likely to default than lessees that operate in developed economies. For the year ended December 31, 2019, 59 of our lessees, which operated 163 aircraft and generated 65% of our lease rental revenue, are domiciled or habitually based in emerging markets.Risks Related to Our LesseesAs a general matter, airlines with weak capital structures are more likely than well-capitalized airlines to seek operating leases, and, at any point in time, investorsInvestors should expect a varying number ofsome lessees and sub-lessees to experience payment difficulties.difficulties, particularly in difficult economic or operating environments. As a result of their weak financial condition and lack of liquidity, a portion of lessees over time may be significantly in arrears in their rental or maintenance payments. This is likely to continue to be the case in the future, particularly in difficult economic or operating environments. Liquidity issues are more likely to lead to airline failures in the periods of large air traffic declines, financial system distress, volatile fuel prices, and economic slowdown, with additional liquidity being more difficult and expensive to source.slowdown. Given the size of our aircraft portfolio, we expect that from time to time some lessees will be slow in making, or will fail to make their payments in full under their leases.
Significant costs resulting from lease defaults could have a material adverse effect on our business.While we have the right to repossess the aircraft and to exercise other remedies upon a lessee default, repossession of an aircraft after a lessee default could lead to significantly increased costs for us. Those costs include legal and other expenses of court or other governmental proceedings, particularly if the lessee is contesting the proceedings or is in bankruptcy, and costs to obtain possession and/or de-registration of the aircraft and flight and export permissions. Delays resulting from any of these proceedings would increase the period of time during which the relevant aircraft is not generating revenue. We may also incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to incur or pay and that are necessary to put the aircraft in suitable condition for re-lease or sale. We may be required to pay off liens, claims, taxes and other governmental charges on the aircraft to obtain clear possession and to remarket the aircraft for re-lease or sale. We may also incur maintenance, storage or other costs while we have physical possession of the aircraft.We may suffer other adverse consequences as a result of a lessee default and the termination of the lease and the repossession of the related aircraft. Our rights upon a lessee default vary significantly depending upon the jurisdiction, including the need to obtain a court order for repossession of the aircraft and/or consents for de-registration or re-export of the aircraft. When a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may apply. Certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease or to assign it to a third party, or entitle the lessee or another third party to retain possession of the aircraft without paying lease rentals or without performing all or some of the obligations under the relevant lease. There can be no assurance that jurisdictions that have adopted the Cape Town Convention, which provides for uniformity and certainty for repossession of aircraft, will enforce it as written. Certain of our lessees are owned in whole or in part by government-related entities, which could complicate our efforts to repossess the relevant aircraft. Accordingly, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing or selling the affected aircraft.If we repossess an aircraft, we may not necessarily be able to export or de-register and profitably redeploy the aircraft. When a lessee or other operator flies only domestic routes in the jurisdiction in which the aircraft is registered, repossession may be more difficult, especially if the jurisdiction permits the lessee or the other operator to resist de-registration. Significant costs may also be incurred in retrieving or recreating aircraft records required for registration of the aircraft and obtaining a certificate of airworthiness for the aircraft. A default and exercise of remedies involving a lessee where we have a significant exposure or concentration risk could have a materially adverse impact on our future revenue and cash flows.Adverse currency movements could negatively affect our lessees’ ability to honor the terms of their leases and could materially adversely affect our business, financial condition and results of operations.Many of our lessees are exposed to currency risk due to the fact that they earn revenues in their local currencies while a significant portion of their liabilities and expenses, including fuel, debt service, and lease payments are denominated in U.S. dollars. In the case of a devaluation of the local currency, our lessees may not be able to increase revenue sufficiently to offset the impact of exchange rates on these expenses. This is particularly true for non-U.S. airlines whose operations are primarily domestic. Currency volatility, particularly in emerging market countries, could impact the ability of some of our customers to meet their contractual obligations in a timely manner. Shifts in foreign exchange rates can be significant, are difficult to predict, and can occur quickly.
Our business is sensitiveThrough our lessees and the countries in which they operate, we are exposed to localthe specific conditions and associated risks of those particular jurisdictions. An adverse economic andor political conditions that can influenceevent in any region or country in which our lessees or our aircraft are concentrated could affect the performance of lessees located in a particular region.European ConcentrationThirty-four lessees in Europe accounted for 99 aircraft, totaling 26% of the net book valueability of our aircraft at December 31, 2019. Five lessees accounting for 42 aircraft, are based in the U.K. The U.K. left the E.U. on January 31, 2020. The final terms of the U.K.’s future relations with the E.U. remain unclear and could potentially negatively impact carriers based in the U.K. and to a lesser extent elsewhere in the E.U.Asian ConcentrationTwenty-five lessees in Asia accounted for 94 aircraft, totaling 38% of the net book value of our aircraft at December 31, 2019. Growth in Asia has been strong, driven in large part by Southeast Asia and India. Eleven lessees accounting for 40 aircraft are based in Southeast Asia and four lessees accounting for 29 aircraft are based in India. There is risk of oversupply in the future driven by large outstanding order books of certain Southeast Asian and Indian carriers as well as infrastructure constraints. Asian airlines continue to face competition from new entrants and the growth of low cost carriers in the region.North American ConcentrationTen lessees in North America accounted for 40 aircraft, totaling 13% of the net book value of our aircraft at December 31, 2019. Consolidation among major airlines in the U.S. has helped drive capacity discipline and pricing power.South American ConcentrationSeven lessees in South America accounted for 26 aircraft, totaling 15% of the net book value of our aircraft at December 31, 2019. One lessee in Chile accounted for thirteen aircraft, totaling 9% of the net book value of our aircraft at December 31, 2019.Middle East and African ConcentrationEight lessees in the Middle East and Africa accounted for sixteen aircraft, totaling 7% of the net book value of our aircraft at December 31, 2019. One lessee in South Africa accounted for four aircraft totaling 3% of net book value.
Risks Related to the Aviation IndustryFuel prices significantly impact the profitability of the airline industry. If fuel prices rise in the future, our lessees might not be able to meet their lease payment obligations to us or expose us to various legal or political risks associated with the affected jurisdictions, all of which wouldcould have ana material and adverse effect on our financial resultsresults.FuelEmerging markets may be more vulnerable to economic and political problems, such as significant fluctuations in gross domestic product, interest and currency exchange rates, government instability, nationalization and expropriation of private assets, unfavorable legal systems, change in law regarding recognition of contracts or ownership rights, changes in governments or government policy and the imposition of taxes or other charges by governments. The occurrence of these events may adversely affect our ownership interest in an aircraft or the ability of our lessees to meet their lease obligations. For the year ended February 28, 2022, 49 of our lessees, which operated 121 aircraft and generated 60% of our lease rental revenue, are domiciled or habitually based in emerging markets.
Duethe CORSIA first phase (2024-2026) will apply only to routes between countries that have each volunteered to participate in the scheme. All airlines that operate routes between two volunteering countries will be subject to the competitive natureoffsetting requirements. The requirement to offset emissions will be divided among airlines in proportion to their total CO2 emissions, which is referred to as the “sectoral” approach to emissions. From 2030 onwards, this sectoral approach will transition to an approach based on each airline’s individual rate of the airline industry, airlinesgrowth.
War, armed hostilitiesAs of April 25, 2022, four of our customers are subject to judicial insolvency proceedings or terrorist attacks,similar protection. These customers lease eighteen aircraft, which comprise 12% of Net Book Value and 9% of our lease rental revenue as of and for the year ended February 28, 2022. One of these customers is LATAM, our second largest customer, which represents 7% of our Net Book Value and 8% of our lease rental revenue as of and for the year ended February 28, 2022. 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 grounding our aircraft, negotiating reductions in aircraft lease rentals, rejecting the leases or taking other actions that could adversely impact us or the fear of such events, could decrease demand for air travel or increase the operating costsvalue of our customers. Terrorist incidentsaircraft. As a
Terrorist attacks and geopolitical conditions can negatively affected the airline industry, and concerns about geopolitical conditions and further terrorist attacks could continue to negatively affect airlines (including•16.3% of our lessees), resulting in: (i) higher costs due to the increased security measures; (ii) decreased passenger demand and revenue due to safety concerns or the inconvenience of additional security measures; (iii) higher price of jet fuel; (iv) higher financing costs and difficulty in raising the desired amount of proceeds on favorable terms, or at all; (v) significantly higher costs of aircraft insurance coverageNet Book Value serves as collateral for future claims caused by acts of war, terrorism, sabotage, hijacking and other similar perils,our secured indebtedness, and the extentterms of certain of our indebtedness require us to whichuse proceeds from sales of certain aircraft, in part, to repay amounts outstanding under such insurance has beenindebtedness;Economic conditions and regulatory changes resulting from the United Kingdom’s (“U.K.”) probable exit from the E.U. could have an adverse effect on our business.In June 2016, voters in the U.K. approved a referendum to exit from the E.U., known as Brexit and the U.K. subsequently left the E.U. on January 31, 2020, though current trade arrangements will remain in place during a transition period, set to end in December 2020. Brexitdefaults that could result in adverse consequences, including deterioration in economic conditions, volatility in currency exchange rates or adverse impact to air travelthe acceleration of the principal, and the air freight market. These impacts may negatively impact the airline and finance industries. Future trade arrangements are being negotiated and could have an adverse effect on U.K. carriers, and to a lesser extent other carriers. The effects of Brexit on us will dependunpaid interest on, the resulting agreements regarding tradedefaulted debt, as well as the forfeiture of any aircraft pledged as collateral; and travel made between the U.K.
Epidemic diseases, severe weather conditions, natural disasters or their perceived effects may negatively impact the airline industryOur ability to obtain debt financing and our lessees’ ability to meet their lease payment obligations to us.Recently,cost of debt financing is, in part, dependent upon our credit ratings and a novel strain of coronavirus first identified in Wuhan, Hubei Province, China has led to travel restrictions and cancellation of flights impacting some of our customers. While it is difficult to predict the extent to which the virus may spread both within and beyond China, the outbreakcredit downgrade or being put on negative watch could lead to further restrictions and negatively impact demand for air travel, which could affect our airline customers and have an adverse effect on our financial performance. In addition, if another outbreak of epidemic diseases were to occur, numerous responses, including travel restrictions, might be necessary to combat the spread of the disease. Even if restrictions are not implemented, passengers may voluntarily choose to reduce travel. Additional outbreaks of epidemic diseases, or the fear of such events, could result in travel bans or could have an adverse effect on our financial results. Similarly, demand for air travel or the inability of airlines to operate to or from certain regions due to severe weather conditions or natural disasters, such as floods, earthquakes or volcanic eruptions, could have an adverse effect on our lessees’ ability to their lease payment obligations to us, which could negativelyadversely impact our financial results.Risks RelatedMaintaining our credit ratings depends on our financial results and on other factors, including the outlook of the ratings agencies on our sector and on the market generally. A credit rating downgrade or being put on negative watch may make it more difficult or costly for us to raise debt financing in the unsecured bond market, or may result in higher pricing or less favorable terms under other financings. Credit rating downgrades or being put on negative watch, may make it more difficult and/or more costly to satisfy our funding requirements. Any future tightening or regulation of financial institutions could impact our ability to raise funds in the commercial bank loan market in the future.
As ainformation technology systems and network disruptions, our resources and technical sophistication may not be adequate to prevent all types of cyber-attacks that could lead to the payment of fraudulent claims, loss of sensitive information, including our own proprietary information or that of our customers, suppliers and employees, and could harm our reputation and result of two fatal accidents of Boeing 737 MAX aircraft within five months of each other, airlinesin lost revenues and regulators grounded the worldwide fleet of Boeing 737 MAX aircraft in March 2019. Boeing continued to produce 737 MAX aircraft until January 2020,additional costs and these aircraft remain undelivered. The duration of the Boeing 737 MAX grounding and the timing of its eventual return to service are uncertain, and it is also uncertain when Boeing may resume production and at what rate it may produce these aircraft. We do not own, nor do we have commitments to purchase, any Boeing 737 MAX aircraft. Nevertheless, the uncertainty surrounding the duration of the grounding, the rate of Boeing’s continued production and the timing and implications of any return to service could negatively impact our lessees’ financial condition, lease rates, demand for other aircraft types and the value of the aircraft in our fleet. A similar type of grounding for other aircraft types that we have in our fleet, or have commitments to purchase, could also negatively affect our financial results.potential liabilities.If the ownership of our common shares continues to be highly concentrated, it may prevent minority shareholders from influencing significant corporate decisions and may result in conflicts of interest.As of February 10, 2020, Marubeni owns 21,605,347 shares, or 28.8% of our common shares. Although the Shareholder Agreement, dated as of June 6, 2013, among us, Marubeni and a subsidiary of Marubeni (as amended and restated from time to time, the “Shareholder Agreement”), imposes certain restrictions on Marubeni’s and its affiliates’ ability to make additional acquisitions of our common shares, Marubeni, nonetheless, may be able to influence fundamental corporate matters and transactions, including the election of directors; mergers or amalgamations (subject to prior board approval); consolidations or acquisitions; the sale of all or substantially all of our assets; in certain circumstances, the amendment of our bye-laws; and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other shareholders. The interests of Marubeni may not always coincide with our interests or the interests of our other shareholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of our company. Also, Marubeni may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other shareholders or adversely affect us or our other shareholders. In addition, under the Shareholder Agreement, based on the current ownership of our common shares by Marubeni and the current size of our Board of Directors, Marubeni is entitled to designate three directors for election to our Board of Directors. As a result of these or other factors, the market price of our common shares could decline or shareholders might not receive a premium over the then-current market price of our common shares upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common shares because investors may perceive disadvantages in owning shares in a company with a significant shareholder.
We are a Bermuda company, and it may be difficult for securityholders to enforce judgments against us or our directors and executive officers.We are a Bermuda exempted company and, as such, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of securityholders under Bermuda law may differ from the rights of securityholders of companies incorporated in other jurisdictions. A substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.Our bye-laws restrict shareholders from bringing legal action against our officers and directors.Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.We have anti-takeover provisions in our bye-laws that may discourage a change of control.Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include:provisions providing for a classified board of directors with staggered three-year terms;provisions regarding the election of directors, classes of directors, the term of office of directors and amalgamations to be rescinded, altered or amended only upon approval by a resolution of the directors and by a resolution of our shareholders, including the affirmative votes of at least 66% of the votes attaching to all shares in issue entitling the holder to vote on such resolution;provisions in our bye-laws dealing with the removal of directors and corporate opportunity to be rescinded, altered or amended only upon approval by a resolution of the directors and by a resolution of our shareholders, including the affirmative votes of at least 80% of the votes attaching to all shares in issue entitling the holder to vote on such resolution;provisions providing for the removal of directors by a resolution, including the affirmative votes of at least 80% of all votes attaching to all shares in issue entitling the holder to vote on such resolution;provisions providing for our Board of Directors to determine the powers, preferences and rights of our preference shares and to issue such preference shares without shareholder approval;provisions providing for advance notice requirements by shareholders for director nominations and actions to be taken at annual meetings; andno provision for cumulative voting in the election of directors; all the directors standing for election may be elected by our shareholders by a plurality of votes cast at a duly convened annual general meeting, the quorum for which is two or more persons present in person or by proxy at the start of the meeting and representing in excess of 50% of all votes attaching to all shares in issue entitling the holder to vote at the meeting.In addition, these provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and/or our Board of Directors. Public shareholders who might desire to participate in these types of transactions may not have an opportunity to do so. These anti-takeover provisions could substantially impede the ability of public shareholders to benefit from a change in control or change our management and Board of Directors and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium.
There are provisions in our bye-laws that may require certain of our non-U.S. shareholders to sell their shares to us or to a third party.Our bye-laws provide that if our Board of Directors determines that we or any of our subsidiaries do not meet, or in the absence of repurchases of shares will fail to meet, the ownership requirements of a limitation on benefits article of any bilateral income tax treaty with the U.S. applicable to us, and that such tax treaty would provide material benefits to us or any of our subsidiaries, we generally have the right, but not the obligation, to repurchase, at fair market value (as determined pursuant to the method set forth in our bye-laws), common shares from any shareholder who beneficially owns more than 5% of our issued and outstanding common shares and who fails to demonstrate to our satisfaction that such shareholder is either a U.S. citizen or a qualified resident of the U.S. or the other contracting state of any applicable tax treaty with the U.S. (as determined for purposes of the relevant provision of the limitation on benefits article of such treaty).We will have the option, but not the obligation, to purchase all or a part of the shares held by such shareholder (to the extent the Board of Directors, in the reasonable exercise of its discretion, determines it is necessary to avoid or cure adverse consequences), provided that the Board of Directors will use its reasonable efforts to exercise this option equitably among similarly situated shareholders (to the extent feasible under the circumstances).Instead of exercising the repurchase right described above, we will have the right, but not the obligation, to cause the transfer to, and procure the purchase by, any U.S. citizen or a qualified resident of the U.S. or the other contracting state of the applicable tax treaty (as determined for purposes of the relevant provision of the limitation on benefits article of such treaty) of the number of issued and outstanding common shares beneficially owned by any shareholder that are otherwise subject to repurchase under our bye-laws as described above, at fair market value (as determined in the good faith discretion of our Board of Directors).Our joint venture may have an adverse effect on our business.Our joint venture involves significant risks that may not be present with other methods of ownership, including:we may not realize a satisfactory return on our investment or the joint venture may divert management’s attention from our business;our joint venture partner could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments;our joint venture partner might fail to fund its share of required capital contributions or fail to fulfill its obligations as a joint venture partner;decisions of our partner to sell aircraft in our joint venture may have an impact on our financial performance; andour joint venture partner may have competing interests in our markets that could create conflict of interest issues, particularly if aircraft owned by the joint venture are being marketed for lease or sale at a time when the Company also has comparable aircraft available for lease or sale.Risks Related to Our Common SharesThe market price and trading volume of our common shares may be volatile or may decline regardless of our operating performance, which could result in rapid and substantial losses for our shareholders.If the market price of our common shares declines significantly, shareholders may be unable to resell their shares at or above their purchase price. The market price or trading volume of our common shares could be highly volatile and may decline significantly in the future in response to various factors, many of which are beyond our control, including:variations in our quarterly or annual operating results;failure to meet any earnings estimates;actual or perceived reduction in our growth or expected future growth;actual or anticipated accounting issues;publication of research reports about us, other aircraft lessors or the aviation industry or the failure of securities analysts to cover our common shares or the decision to suspend or terminate coverage in the future;additions or departures of key management personnel;
increased volatility in the capital markets and more limited or no access to debt financing, which may result in an increased cost of, or less favorable terms for, debt financing or may result in sales to satisfy collateral calls or other pressure on holders to sell our shares;redemptions, or similar events affecting funds or other investors holding our shares, which may result in large block trades that could significantly impact the price of our common shares;adverse market reaction to any indebtedness we may incur or preference or common shares we may issue in the future;changes in or elimination of our dividend;actions by shareholders;changes in market valuations of similar companies;the inability to complete the Merger due to the failure to satisfy the remaining conditions to the consummation of the Merger, including receipt of the required shareholder approval or the remaining required regulatory approvals;the risk that the Merger Agreement may be terminated in certain limited circumstances that require us to pay Parent a termination fee of $73.5 million;risks that the proposed Merger disrupts our current plans and operations or affects our ability to retain or recruit key employees;the effect of the pending Merger on Aircastle’s business relationships (including, without limitation customers and suppliers), operating results and business generally;the amount of the costs, fees, expenses and charges related to the Merger;risks related to the Merger diverting management’s or employees’ attention from ongoing business operations;the risk that our share price may decline significantly if the Merger is not completed;announcements by us, our competitors or our suppliers of significant contracts, acquisitions, disposals, strategic partnerships, joint ventures or capital commitments;speculation in the press or investment community;changes or proposed changes in laws or regulations affecting the aviation industry or enforcement of these laws and regulations, or announcements relating to these matters; andgeneral market, political and economic conditions and local conditions in the markets in which our lessees are located.In addition, the equity markets in general have frequently experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those markets. Changes in economic conditions in the U.S., Europe or globally could also impact our ability to grow profitably. These broad market and industry factors may materially affect the market price of our common shares, regardless of our business or operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.Future additional debt, which would be senior to our common shares upon liquidation, and additional equity securities, which would dilute the percentage ownership of our then current common shareholders and may be senior to our common shares for the purposes of dividends and liquidation distributions, may adversely affect the market price of our common shares.In the future, we may attempt to increase our capital resources by incurring debt or issuing additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes or loans and series of preference shares or common shares. Upon liquidation, holders of our debt investments and preference shares and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common shares. Additional equity offerings would dilute the holdings of our then current common shareholders and could reduce the market price of our common shares, or both. Preference shares, if issued, could have a preference on liquidating distributions or a preference on dividend payments. Restrictive provisions in our debt and/or preference shares could limit our ability to make a distribution to the holders of our common shares. Because our decision to incur more debt or issue additional equity securities in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of our future capital raising activities. Thus, holders of our common shares bear the risk of our future debt and equity issuances reducing the market price of our common shares and diluting their percentage ownership.The market price of our common shares could be negatively affected by sales ofsubstantial amounts of our common shares in the public markets.As of February 10, 2020, there were 75,109,023 shares issued and outstanding, all of which are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Approximately 28.8% of our outstanding common shares are held by our affiliate, Marubeni, and can be resold into the public markets in the future in accordance with the requirements of Rule 144 under the Securities Act.Beginning in July 2016, pursuant to the occurrence of certain events set forth in the Shareholders Agreement, Marubeni and permitted third-party transferees have the ability to cause us to register the resale of their common shares into the public markets. We cannot assure you if or when any such registration or offering may occur.The issuance of additional common shares in connection with acquisitions or otherwise will dilute all other shareholdings.As of February 10, 2020, we had an aggregate of 149,608,871 common shares authorized but unissued and not reserved for issuance under our incentive plan. We may issue all of these common shares without any action or approval by our shareholders. We intend to continue to actively pursue acquisitions of aviation assets and may issue common shares in connection with these acquisitions. Any common shares issued in connection with our acquisitions, our incentive plan, and the exercise of outstanding share options or otherwise would dilute the percentage ownership held by existing shareholders.
One or more of our Irish subsidiaries could fail to qualify for treaty benefits, including as a result of the Merger, which would subject certain of their income to U.S. federal income taxation, which could adversely affect our business and result in decreased cash available for distribution to our shareholders.Qualification for the benefits of the double tax treaty between the United States and Ireland (the “Irish Treaty”) depends on many factors, including, historically, our ability to establish the identity of the ultimate beneficial owners of our common shares. Following the Merger, we do not expect that our Irish subsidiaries will qualify for benefits under the Irish Treaty solely on the basis of our beneficial ownership, which will change significantly as a result of the Merger. Certain of our Irish subsidiaries may continue to qualify for benefits under the Irish Treaty following the Merger if such subsidiaries are considered to be engaged in an active trade or business in Ireland for purposes of the Irish Treaty. However, the ability to satisfy the Irish Treaty’ s active trade or business standard is subject to significant legal and factual uncertainties, which may prevent our Irish subsidiaries from receiving benefits under the Irish Treaty. Accordingly, for any year, our Irish subsidiaries may not satisfy the requirements of the Irish Treaty or may be deemed to have a permanent establishment in the United States. Moreover, the provisions of the Irish Treaty may change. Failure to so qualify, or to be deemed to have a permanent establishment in the United States, could result in the rental income from aircraft used for flights within the United States being subject to increased U.S. federal income taxation. The imposition of such taxes would adversely affect our business and would result in decreased cash available for distribution to our shareholders.
We may be subject to an increased rate of Singapore taxation which would adversely affect our business and would result in decreased earnings available for distribution to our shareholders.Our Singapore subsidiaries are subject to Singapore income tax on their income from leasing, managing and servicing aircraft. Our Singapore subsidiaries had obtained a reduced rate of tax from the Singapore authorities through June 30, 2017. Beginning on July 1, 2017 and effective to June 30, 2022, the Singapore authorities renewed the reduced rate of tax to our Singapore subsidiaries, provided we satisfy certain conditions and requirements. If we cannot meet such conditions and requirements, or if the award is not renewed after June 30, 2022, we would be subject to additional Singapore income tax. This would adversely affect our business and would result in decreased earnings available for distribution to our shareholders.33%.We expect to continue to be a passive foreign investment company (“PFIC”) and may be a controlled foreign corporation (“CFC”) for U.S. federal income tax purposes.We expect to continue to be treated as a PFIC and may be a CFC for U.S. federal income tax purposes. If you are a U.S. person and do not make a qualified electing fund (“QEF”) election with respect to us and each of our PFIC subsidiaries, unless we are a CFC and you own 10% of our shares (by vote or value), you would be subject to special deferred tax and interest charges with respect to certain distributions on our common shares, any gain realized on a disposition of our common shares and certain other events. The effect of these deferred tax and interest charges could be materially adverse to you. Alternatively, if you are such a shareholder and make a QEF election for us and each of our PFIC subsidiaries, or if we are a CFC and you own 10% or more of our shares (by vote or value), you will not be subject to those charges, but could recognize taxable income in a taxable year with respect to our common shares in excess of any distributions that we make to you in that year, thus giving rise to so-called “phantom income” and to a potential out-of-pocket tax liability.Distributions made to a U.S. person that is an individual will not be eligible for taxation at reduced tax rates generally applicable to dividends paid by certain United States corporations and “qualified foreign corporations.” The more favorable rates applicable to regular corporate dividends could cause individuals to perceive investment in our shares to be relatively less attractive than investment in the shares of other corporations, which could adversely affect the value of our shares.
Ireland soughtThe Irish Finance Bill published on October 21, 2021 included draft legislation to deferenact the introduction of rules restrictinginterest limitation measures prescribed by ATAD. The implementation date for the taxnew law was January 1, 2022. Based on the final legislation in Finance Act 2021 signed into law on December 21, 2021, the interest limitation rule will apply to limit the deductibility of a company’s exceeding borrowing costs (i.e. its interest payments until 2024. However it seems increasingly likely that Ireland may seek to introduce these rules from January 1, 2021. The current proposal would restrict the tax deductibility of(and equivalent) borrowing costs as reduced by its interest expense(and equivalent) income) to 30% of EBITDA or possiblytax adjusted EBITDA. Importantly for companies carrying on a higher threshold ifleasing trade, a portion of their operating lease income and expense will be treated as equivalent to interest for the third-party grouppurposes of the test. The legislation was finalized on December 21, 2021; however, Irish Revenue guidance remains outstanding and may not be issued until later in 2022. It is therefore difficult to fully and definitively conclude on the potential impact of the interest expense ratio to group EBITDA is higher than 30%. This measure may impact the ability of ourlimitation rule on Aircastle and its Irish tax resident companies to claim a tax deduction for interest payments.subsidiaries.Risks RelatedThe E.U. Unshell Proposal may result in additional reporting and disclosure obligations for us.The Merger
There can be no assurance that the proposed Merger will occur. Consummationdevelopment of the Merger is subject to certain customary conditions, including, without limitation: (i) approval of the Merger Agreementproposal and the transactions contemplated thereby by the affirmative votes of a majority of the votes cast by holders of outstanding Common Shares at a meeting ofits implementation. The proposal could result in additional reporting and disclosure obligations for Aircastle.
the Company’s shareholders; (ii) the receipt of any applicable pre-clearance or similar approval of certain remaining specified jurisdictions (i.e., Chile, Mexico and Morocco), and all required regulatory approvals being in full force and effect; (iii) the absence of any law, judgment or other legal restraint that prevents, makes illegal or prohibits the consummation of the Merger and the other transactions contemplated by the Merger Agreement; (iv) the accuracy of each party’s representations and warranties (subject to certain qualifications); (v) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (vi) the absence of a material adverse effect on the Company since the date of the Merger Agreement.While we believe we will receive the requisite approvals, there can be no assurance that these and other conditions to closing will be satisfied at all or satisfied on the proposed terms and schedules as contemplated by the parties. Satisfaction of the closing conditions may delay the consummation of the Merger, and if certain closing conditions are not satisfied prior to the end date specified in the Merger Agreement, the parties will not be obligated to complete the Merger.If the Merger is not completed for any reason, we will have incurred substantial expenses. We have incurred substantial legal, accounting and financial advisory fees that are payable by us whether or not the Merger is completed, and our management has devoted considerable time and effort in connection with the pending Merger. The Merger Agreement contains specified termination rights for each of the parties. Upon termination of the Merger Agreement under specified circumstances, including with respect to the Company’s entry into an agreement with respect to a qualifying “Superior Proposal” (as defined in the Merger Agreement), the Company will be required to pay Parent a termination fee of $73.5 million. For these and other reasons, a failed merger could materially adversely affect our business, operating results or financial condition. In addition, the trading price of our common stock could be adversely affected to the extent that the current price reflects an assumption that the Merger will be completed.The pendency of the Merger may cause disruptions in our business, which could have an adverse effect on our business, financial condition or results of operations.The pendency of the Merger could cause disruptions in and create uncertainty regarding our business, which could have an adverse effect on our financial condition and results of operations, regardless of whether the Merger is completed. These risks, which could be exacerbated by a delay in the consummation of the Merger, include the following:key management and other employees may be difficult to retain or may become distracted from day-to-day operations because matters related to the Merger may require substantial commitments of their time and resources, which could adversely affect our operations and financial results;our ability to pursue alternative business opportunities, including strategic acquisitions, is limited by the terms of the Merger Agreement. If the Merger is not completed for any reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected;our ability to make appropriate changes to our business may be restricted by covenants in the Merger Agreement; these restrictions generally require us to conduct our business in the ordinary course and subject us to a variety of specified limitations absent Parent’s prior written consent. We may find that these and other contractual restrictions in the Merger Agreement may delay or prevent us from responding, or limit our ability to respond, effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management believes they may be advisable; andthe costs and potential adverse outcomes of litigation relating to the Merger.
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On December 18, 2019,The Company is not a purported shareholder of Aircastle filed a lawsuit against Aircastle and its directors and certain of its officers in the United States District Court for the Southern District of New York, captioned David Younge v. Aircastle Limited, et al., Case No. 1:19-cv-11574. Also on December 18, 2019, a purported shareholder of Aircastle filed a putative class action lawsuit against Aircastle and its directors in the United States District Court for the District of Delaware, captioned Jordan Rosenblatt v. Aircastle Limited, et al., Case No. 1:19-cv-02295. On January 3, 2020, a purported shareholder of Aircastle filed a lawsuit against Aircastle and its directors in the United States District Court for the District of Connecticut, captioned Ruda Anderson v. Aircastle Limited, et al., Case No. 3:20-cv-00017. On January 21, 2020, a purported shareholder of Aircastle filed a lawsuit against Aircastle and its directors in the United States District Court for the Eastern District of New York, captioned Sherie Johnson v. Aircastle Limited, et al., Case No. 1:20-cv-00334. On January 28, 2020, a purported shareholder of Aircastle filed a lawsuit against Aircastle and its directors in the United States District Court for the Southern District of New York, captioned Howard Shoemaker v. Aircastle Limited, et al., Case No. 1:20-cv-00746. These five complaints allege that, among other things, the defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14d 9 by omittingparty to any material legal or misrepresenting certain allegedly material information in the proxy statement. These complaints seek, among other things: (i) injunctive relief preventing the consummation of the proposed transaction; (ii) rescissory damages or rescission in the event the proposed transaction is consummated; and (iii) plaintiffs’ attorneys’ and experts’ fees. The defendants believe the claims asserted in these complaints are without merit.adverse regulatory proceedings.On January 2, 2020, a purported shareholder of Aircastle filed a putative class action lawsuit against Aircastle and its directors in the Superior Court of Connecticut, Judicial District of Stamford-Norwalk, captioned Daniel Hotop v. Aircastle Limited, et al., Case No. FST-CV20-6045115 (the “Hotop Complaint”). The Hotop Complaint alleges that the directors breached their fiduciary duties by: (i) entering into the proposed transaction through a flawed process; (ii) accepting an unfair price; and (iii) filing a materially deficient proxy statement. The Hotop Complaint seeks, among other things: (a) injunctive relief preventing the consummation of the proposed transaction; (b) rescissory damages or rescission in the event the proposed transaction is consummated; (c) declaratory relief that the Merger Agreement is unenforceable; (d) a judgment directing Aircastle to commence a new sale process; (e) damages; and (f) plaintiff’s attorneys’ and experts’ fees. The defendants believe the claims asserted in the Hotop Complaint are without merit.Other potential plaintiffs may also file additional lawsuits challenging the Merger. The outcome of the Younge, Rosenblatt, Hotop, Anderson, Johnson and Shoemaker actions and any additional future litigation is uncertain. Such litigation, if not resolved, could prevent or delay consummation of the Merger and result in substantial costs to the Company, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the Merger is the absence of any law, injunction or order by any governmental entity enjoining or otherwise prohibiting the consummation of the Merger. Therefore, if a plaintiff were successful in obtaining an injunction prohibiting the consummation of the Merger on the agreed- upon terms, then such injunction may prevent the Merger from being completed, or from being completed within the expected time frame. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may adversely affect the Company’s business, financial condition, results of operations and cash flows.
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James C. Connelly, 47,Dane Silverman, 35, became our Chief Accounting Officer in July 2021. He was previously our Vice President, Controller from September 2018. Mr. Connelly has been Aircastle’s Controller since January 2013. He joined Aircastle in May 2007 as Assistant Controller, Operational Accounting. Prior to joining Aircastle, Mr. ConnellySilverman held Controller and Assistant Controller roles at Voyager Aviation from May 2016. Prior to this, he was with Lehman Brothers as a ControllerSenior Manager in their Finance Division, beginning in January 2001. Mr. ConnellyKPMG LLP’s audit practice. He received a BS in Accounting from Syracuse University.Marist College and is a CPA.
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Our common shares are listed for trading on the NYSE under the symbol “AYR.” As of February 3, 2020, there were 13,003 record holders of our common shares.Not applicable.Our ability to pay, maintain or increase cash dividends to our shareholders is subject to the discretion of our Board of Directors and will depend on many factors, including the difficulty we may experience in raising capital in a market that has experienced significant volatility in recent years and our ability to finance our aircraft acquisition commitments; our ability to negotiate favorable lease and other contractual terms; the level of demand for our aircraft; the economic condition of the commercial aviation industry generally; the financial condition and liquidity of our lessees; the lease rates we are able to charge and realize; our leasing costs; unexpected or increased expenses; the level and timing of capital expenditures; principal repayments and other capital needs; the value of our aircraft portfolio; our compliance with loan to value, debt service coverage, interest rate coverage and other financial covenants in our financings; our results of operations, financial condition and liquidity; general business conditions; restrictions imposed by our senior notes and other financings; legal restrictions on the payment of dividends, including a statutory dividend test and other limitations under Bermuda law; and other factors that our Board of Directors deems relevant. Additionally, the Merger Agreement permits the Company to declare and pay a regular quarterly dividend of up to $0.32 per common share (please refer to Item 7. for a further discussion of the Merger Agreement). Some of these factors are beyond our control and a change in any such factor could affect our ability to pay dividends on our common shares. In the future we may choose not to pay dividends or may not be able to pay dividends, maintain our current level of dividends, or increase them over time. Increases in demand for our aircraft and operating lease payments may not occur and may not increase our actual cash available for dividends to our common shareholders. The failure to maintain or pay dividends may adversely affect our share price.Issuer Purchases of Equity SecuritiesOn May 17, 2019, our Board of Directors increased the authorization to repurchase the Company’s common shares to $100.0 million from the $76.0 million that was remaining under the previous authorization. During the fourth quarter of 2019, we purchased our common shares as follows:
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Performance GraphThe following stock performance graph shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended.The following graph compares the cumulative five year total return to holders of our common shares relative to the cumulative total returns of the S&P Midcap 400 Index and a customized peer group over the five year period ended December 31, 2019. The peer group consists of three companies: AerCap Holdings NV (NYSE: AER), Air Lease Corporation (NYSE: AL) and FLY Leasing Limited (NYSE: FLY). An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common shares, the S&P Midcap 400 Index and in the peer group on December 31, 2014, and the relative performance of each is tracked through December 31, 2019. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance. We believe that the S&P Midcap 400 Index is more representative of our peers and as such, we utilize the S&P Midcap 400 Index as one of the metrics for our performance share-based compensation as part of our long-term incentive plan.
* $100 invested on December 31, 2014 in stock or index, including reinvestment of dividends.
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The selected historical consolidated financial, operating and other data as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 presented in this table are derived from our audited consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report. The selected consolidated financial data as of December 31, 2017, 2016 and 2015, and for each of the two years in the period ended December 31, 2016, presented in this table are derived from our audited consolidated financial statements and related notes thereto, which are not included in this Annual Report. You should read these tables along with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report.
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We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed. EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business.We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants.The table below shows the reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
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Management believes that Adjusted Net Income (“ANI”) when viewed in conjunction with the Company’s results under U.S. GAAP and the below reconciliation, provides useful information about operating and period-over-period performance, and provides additional information that is useful for evaluating the underlying operating performance of our business without regard to periodic reporting elements related to interest rate derivative accounting, changes related to refinancing activity, merger related expenses and non-cash share-based payment expense.For additional information regarding the limitations of these non-GAAP measures, see “Limitations of EBITDA, Adjusted EBITDA and ANI” below.
The table below shows the reconciliation of net income to ANI for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
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Pending Merger with MM Air LimitedOn November 5, 2019, Aircastle entered into the Merger Agreement with Parent and Merger Sub, pursuant to which, among other things, Merger Sub will merge with and into the Company, with Aircastle surviving as a wholly owned subsidiary of Parent. Parent and Merger Sub are newly-formed entities controlled by affiliates of Marubeni and Mizuho Leasing.Pursuant to the Merger Agreement, subject to certain conditions set forth therein, at the Effective Time, each issued and outstanding Common Share (other than (i) shares to be canceled or converted into shares of the surviving company pursuant to the Merger Agreement and (ii) restricted shares to be canceled and exchanged pursuant to the Merger Agreement), shall be converted into the right to receive the Merger Consideration.Consummation of the Merger is subject to the satisfaction of certain remaining customary closing conditions, including, without limitation, (i) approval of the Merger Agreement and the transactions contemplated thereby by the affirmative votes of a majority of the votes cast by holders of outstanding Common Shares at a meeting of the Company’s shareholders; (ii) the receipt of any applicable pre-clearance or similar approval of certain remaining specified jurisdictions (i.e., Chile, Mexico and Morocco), and all required regulatory approvals being in full force and effect; (iii) the absence of any law, judgment or other legal restraint that prevents, makes illegal or prohibits the consummation of the Merger and the other transactions contemplated by the Merger Agreement; (iv) the accuracy of each party’s representations and warranties (subject to certain qualifications); (v) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (vi) the absence of a material adverse effect on the Company since the date of the Merger Agreement.The Merger Agreement includes customary representations, warranties and covenants of Aircastle, Parent, and Merger Sub. Among other things, Aircastle has agreed to customary covenants regarding the operation of the business of Aircastle and its subsidiaries prior to the closing. Aircastle is permitted to pay regular quarterly dividends up to $0.32 per common share pursuant to the Merger Agreement. We currently anticipate that the Merger will close in the first half of calendar year 2020, subject to the satisfaction of the remaining customary closing conditions.
RevenuesOur revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from maintenance payments related to lease expirations, lease termination payments, interest recognized from direct financing and sales-type leases and gains on the sale of flight equipment.Typically, our aircraft are subject to net leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs arising during the term of the lease. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.Under a lease, the lessee is responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we typically do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee.Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay.This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.Operating ExpensesOperating expenses are comprised of depreciation of flight equipment held for lease, interest expense, SG&A expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations.Income Tax ProvisionWe obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall
not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland, Singapore and the United States.All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes, unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and Singapore are subject to tax in those respective jurisdictions.We have a U.S.-based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.ended February 28, 2021.
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Our owned aircraft portfolio as of December 31, 2019 is listed in Exhibit 99.1 to this Annual Report.
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Our largest customer represents approximately 9% of the net book value at December 31, 2019. OurThe top fifteenten customers for aircraft we owned at December 31, 2019, representing 139 aircraft and 54% of the net book value,February 28, 2022 are as follows:
Aircastle Limited isWe operate in a publicly-listed company,capital-intensive industry and our shares have been trading on the NYSE since August 2006.a demonstrated track record of raising substantial amounts of capital from debt and equity investors. Since our inception in late 2004, we raised $1.69$2.1 billion in equity capital from private and public investors. We also obtained $16.90$18.9 billion in debt capital from a variety of sources including export credit agency-backed debt, commercial bank debt, the aircraft securitization markets and the unsecured bond market. The diversity and global nature of our financing sources demonstrates our ability to adapt to changing market conditions and seize new growth opportunities.
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a $34.2 million decrease dueleasing activities in Russia – see Note 2 in the Notes to the sale of 25 aircraft during 2019 and 2018.Consolidated Financial Statements.
The decrease in amortization of lease discounts of $3.4 million for the year ended December 31, 2019 as compared to the same period in 2018 was primarily due to fully amortized lease discounts for aircraft that transitioned to new lessees or extended.lessees.
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Earnings (Loss) of Unconsolidated Equity Method Investment, net of Tax:Earnings from unconsolidated equity method investment, net of tax, was $4.1 million in 2019 compared to a loss of $8.1 million in 2018. In 2018, the majority shareholder of one of our joint ventures, Lancaster Aircraft Leasing (“Lancaster”) stated its intention to liquidate all assets in the joint venture. The equity loss forDuring the year ended December 31, 2018 relates
Other Comprehensive Income:
Other comprehensive income was $156.8 million forsecurity deposits into revenue related to these 25 aircraft during the year ended December 31, 2019, a decrease of $92.3 million from the $249.1 million of other comprehensive income for the year ended December 31, 2018. Other comprehensive income for the year ended December 31, 2019 primarily consisted of $156.6 million of net income and $0.2 million of amortization of deferred net losses reclassified into earnings primarily relatedFebruary 28, 2021. The impairment charges were attributable to terminated interest rate derivatives.Other comprehensive income for the year ended December 31, 2018 primarily consisted of $247.9 million of net income and $1.2 million of amortization of deferred net losses reclassified into earnings primarily related to terminated interest rate derivatives.Summary of Recoverability Assessment and Other ImpairmentsTransactional ImpairmentsDuring 2019, the Company early terminated the leases for seven Boeing 737NG aircraft on lease to Jet Airways (India) Limited (“Jet Airways”) due toterminations, scheduled lease expirations, lessee default. Asdefaults and/or judicial insolvency proceedings, or as a result of these lease terminations, the Company recognized net maintenance revenue of $17.6 million and impairment charges of $7.4 million. We did not record any transactional impairments during 2018.our annual recoverability assessment.Management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no aircraft were impaired as a consequence of our annual recoverability assessment. However, ifIf 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 the annual recoverability assessment, and subsequent assessments, are appropriate, actual results could differ from those estimates.Aircraft Monitoring List
At December 31, 2019, no aircraft were on our monitoring list. We monitor our fleet for aircraft that are more susceptible to failing our recoverability assessments within one year due to their sensitivity to changes in contractual cash flows, future cash flow estimates and aircraft residual or scrap values.
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OurWe 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 lease. We will neither recognize revenue nor record a receivable from a customer when collectability is not probable. Estimating whether collectability is probable requires some level of subjectivity and judgment. When collectability is not probable, the customer is placed on non-accrual status and revenue is recognized when cash payments are received. Management determines whether customers should be placed back on accrual status when it becomes probable that payments will be received in a timely manner. The accrual/non-accrual status of a customer is maintained at a level deemed appropriate based on factors such as the customer’s credit rating, payment performance, financial condition and requests for modifications ofinitial lease, terms and conditions. Events or circumstances outside of historical customer patterns can also result in changes to a customer’s accrual status.assuming no renewals.Maintenance Payments and Maintenance RevenueUnder our leases, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges; certain taxes, licenses, consents and approvals; aircraft registration; and insurance premiums. Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease, and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.
Collectability of direct financing and sales-typeThe net investment in leases is evaluated atrecorded in the consolidated financial statements net of an allowance for credit losses. The allowance for credit losses is recorded upon the initial recognition of the net investment in the lease commencement and periodically duringbased on the Company’s estimate of expected credit losses over the lease term. The evaluation is performed at an individual customer levelallowance reflects the Company’s estimate of lessee default probabilities and among other things, considersloss given default percentages. When determining the credit loss allowance, we consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the lessee and the value of the underlying aircraft. A loss allowance is established if there is evidence that we will be unable to collect all amounts due according to the contractual terms ofnet investment in the lease. At December 31, 2019, we had noThe allowance also considers potential losses due to non-credit risk related to unguaranteed residual values. A provision for credit losses is recorded as a component of operating expenses in
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a $6.9 million decrease in cash paid for taxes; anda $5.1$32.6 million increase in cash related to feesas the year ended February 28, 2021 included banking and legal costs resulting from our joint ventures.the Merger; andThese inflows were offset by a:a $22.2 million decrease in cash from working capital; anda $15.9 million increase in cash paid for maintenance.as the year ended February 28, 2021 included advance lease rentals recognized into revenue primarily due to lease terminations.a $22.9$30.4 million increase in proceeds from the sale of flight equipment;equipment and
These decreases were offset by a $30.0$12.8 million decrease in collections on direct financingaircraft purchase deposits and sales-type leases (please refer to Note 1)progress payments, net of deposits returned and an $11.8 million increase in our investments in our IBJ joint venture for the purchase of aircraft.aircraft sales deposits.a $848.4$393.0 million increase in repaymentsnet proceeds from the issuance of secured and unsecured financings;a $7.2 million increase in debt extinguishment costs.These outflows were offset by a $702.9 million increase in proceeds from secured and unsecured financings and a $34.7 an $18.4 million decrease in dividends paid on common shares repurchased.as a result of the Merger.
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During the third quarter of 2019, the sale of all eight aircraft held by the joint venture with Teachers’ to a single buyer was completed. Teachers’, as majority shareholder, chose to liquidate the joint venture. As of December 31, 2019, minimal assets remain in the joint venture as needed to complete its liquidation during 2020.HedgingFor complete information on our derivative instruments, please refer to Note 14 “Other Assets” in the Notes to Consolidated Financial Statements below.
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Management’s Use of Adjusted Net Income (“ANI”)Management believes that Adjusted Net Income (“ANI”) when viewed in conjunction with the Company’s results under U.S. GAAP and the below reconciliation, provides useful information about operating and period-over-period performance, and provides additional information that is useful for evaluating the underlying operating performance of our business without regard to periodic reporting elements related to interest rate derivative accounting, changes related to refinancing activity, merger related expenses and non-cash share-based payment expense.
The table below shows the reconciliation of net income to ANI for the years ended December 31, 2019, 2018 and 2017, respectively.
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hedge loss amortization charges related to Term Financing No. 1 and Securitization No. 1; and
Changes If LIBOR is no longer available or in interest rates may also impact our net book valuecertain other circumstances as our interest rate derivatives are periodically marked-to-market through shareholders’ equity. Generally, we are exposed to loss on our fixed pay interest rate derivatives to the extent interest rates decrease below their contractual fixed rate.The relationship between spreads on derivative instruments may vary from time to time, resulting in a net aggregate book value increase or decrease. Changesdescribed in the general levelborrowing agreements, the applicable borrowing agreements provide a mechanism for determining an alternative rate of interest rates can also affect our abilityinterest. There is no assurance that any such alternative, successor or replacement reference rate will be similar to, acquire new investments and our ability to realize gains fromor produce the settlementsame value or economic equivalence of, such assets.LIBOR.
A hypothetical 100-basis point increase/decrease in our variable interest rates would increase/decrease the minimum contracted rentals on our portfolio as of December 31, 2019 by $4.2 million and $4.2 million, respectively, over the next twelve months. As of December 31, 2019,February 28, 2022, a hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings would result in an interest expense increase/decrease of $4.6$3.3 million and $6.3$0.7 million, respectively, net of amounts received from our interest rate derivatives, over the next twelve months. We have an interest rate cap to hedge approximately 70% of our floating rate interest exposure which is set at 2% and has a current notional balance of $245.0 million and reduces over time to $215.0 million. The cap matures in September 2021.
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Ernst & Young LLP, the independent registered public accounting firm that audited our Consolidated Financial Statements included in this Annual Report on Form 10-K, audited the effectiveness of our controls over financial reporting as of December 31, 2019. Ernst & Young LLP has issued its report which is included below.February 28, 2022.
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Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Aircastle LimitedOpinion on Internal Control over Financial ReportingWe have audited Aircastle Limited and Subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Aircastle Limited and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based onthe COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Companyas of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related notes (collectively referred to as the “consolidated financial statements”) of the Company and our report dated February 13, 2020 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPStamford, CTFebruary 13, 2020
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InformationEXECUTIVE COMPENSATION
Information on the number of shares of Aircastle’s common shares beneficially owned by each director, each named executive officer and by all directors and executive officers as a group will be contained under the captions “OWNERSHIP OF THE COMPANY’S COMMON SHARES - Security Ownership by Management” and information on each beneficial owner of more than 5% of Aircastle’s common shares will be contained under the captions “OWNERSHIP OF THE COMPANY’S COMMON SHARES - Security Ownership of Certain Beneficial Owners” inOwners and Management. The table below sets forth information as of April 22, 2020 as to the beneficial ownership of our Common Shares.
Information regarding our equity compensation will be contained undersurviving company in the caption “COMPENSATION COMMITTEE REPORT - Equity Compensation Plan Information” in our 2020 Proxy Statement or in an amendment to this Annual Report not later than 120 days afterMerger. As a result, immediately following the endEffective Time, MHC beneficially owned 28.8% of the fiscal year coveredoutstanding common shares of the surviving company in the Merger, and MM Air Limited beneficially owned the remaining 71.2%. On March 27, 2020, MM Air Limited transferred 2,976 Common Shares to MHC, resulting in MHC owning 7,024 Common Shares.
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Information relating toCertain Relationships and Related Party Transactions
Information relating to director independence will be contained under the caption “CORPORATE GOVERNANCE - Director Independence” in our 2020 Proxy Statementpersons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or in an amendment to this Annual Report not later than 120 days after the endsister-in-law of the fiscal year covered by this Annual Report. The foregoing information is incorporated herein by reference.Director, executive officer, nominee or Marubeni and Mizuho Leasing or their affiliates, and any person (other than a tenant or employee) sharing the household of such Director, executive officer, nominee or Marubeni and Mizuho Leasing or their affiliates.Information relating toAudit Fees, Audit Related Fees, Tax Fees and All Other Fees. In connection with the audit fees, audit-related fees, tax fees and all other fees billed in fiscalof the 2019 and by2020 financial statements, the Company entered into an engagement letter with Ernst & Young LLP (“EY”) that sets forth the terms by which EY has performed audit services for the Company. The following summarizes the fees paid by us to EY for professional services rendered to Aircastle will be contained underin the caption “INDEPENDENT AUDITOR FEES”years ended February 28, 2022 and 2021:
InformationIBJ Air joint venture, consultations concerning financial accounting and reporting standards, statutory audits and services rendered relating to the pre-approvalCompany’s registration statements.
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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 13, 2020 expressed an unqualified opinion thereon.
February 13, 2020April 28, 2022
F - 5
Aircastle Limited and SubsidiariesConsolidated Statements of Comprehensive Income(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
On November 5, 2019, Aircastle entered into an Agreement and Plan of Merger (the “Merger Agreement”), with MM Air Limited, a Bermuda exempted company (“Parent”), and MM Air Merger Sub Limited, a Bermuda exempted company and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, among other things, Merger Sub will merge with and into the Company, with Aircastle surviving as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are newly-formed entities controlled by affiliates of Marubeni Corporation (“Marubeni”) and Mizuho Leasing Company, Limited (“Mizuho Leasing”). The Marubeni Corporation is a related party and owns 28.8% of the Company’s outstanding common shares as of December 31, 2019.Pursuant to the Merger Agreement, subject to certain conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each issued and outstanding common share, par value $0.01 per share, of the Company (the “Common Shares”) (other than (i) shares to be canceled or converted into shares of the surviving company pursuant to the Merger Agreement and (ii) restricted shares to be canceled and exchanged pursuant to the Merger Agreement), shall be converted into the right to receive $32.00 in cash, without interest (the “Merger Consideration”).Consummation of the Merger is subject to the satisfaction of certain remaining customary closing conditions, including, without limitation, (i) approval of the Merger Agreement and the transactions contemplated thereby by the affirmative votes of a majority of the votes cast by holders of outstanding Common Shares at a meeting of the Company’s shareholders; (ii) the receipt of any applicable pre-clearance or similar approval of certain remaining specified jurisdictions (i.e., Chile, Mexico and Morocco), and all required regulatory approvals being in full force and effect; (iii) the absence of any law, judgment or other legal restraint that prevents, makes illegal or prohibits the consummation of the Merger and the other transactions contemplated by the Merger Agreement; (iv) the accuracy of each party’s representations and warranties (subject to certain qualifications); (v) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (vi) the absence of a material adverse effect on the Company since the date of the Merger Agreement.The Merger Agreement includes customary representations, warranties and covenants of Aircastle, Parent, and Merger Sub. Among other things, Aircastle has agreed to customary covenants regarding the operation of the business of Aircastle and its subsidiaries prior to the closing. Aircastle is permitted to pay regular quarterly dividends up to $0.32 per common share pursuant to the Merger Agreement. The Company currently anticipates that the Merger will close in the first half of calendar year 2020, subject to the satisfaction of the remaining customary closing conditions.Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) which, together with all subsequent amendments, replaced the existing guidance in ASC 840, Leases (“ASC 840”). The accounting for leases by lessors remained largely unchanged from the concepts that existed in ASC 840. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct financing lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.As a result of the Company’s adoption of ASC 842, we recognized right-of-use assets and lease liabilities on our Consolidated Balance Sheet as of December 31, 2019, for our office leases classified as operating leases under ASC 842, existing at, or entered into after, January 1, 2019. We adopted the standard using the required “modified retrospective”
F - 9
Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
approach and the available practical expedients. ASC 842 requires collections on direct financing and sales-type leases to be reported within operating activities on our Consolidated Statement of Cash Flows for the year ended December 31, 2019. Our financial statements for comparative periods have not been adjusted and continue to be reported in accordance with ASC 840. The standard did not have a material impact on our consolidated financial statements and related disclosures.We consolidate VIEs in which we have determined that we are the primary beneficiary. We use judgment when deciding (a) whether an entity is subject to consolidation as a VIE, (b) who the variable interest holders are, (c) the potential expected losses and residual returns of the variable interest holders, and (d) which variable interest holder is the primary beneficiary. When determining which enterprise is the primary beneficiary, we consider (1) the entity’s purpose and design, (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance, and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses incurred by an entity.
F - 10
Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
F - 11
Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
In monitoringfactors such as the location of the aircraft and accessibility to records and technical documentation.Collectability of direct financing and sales-typeThe net investment in leases is evaluated atrecorded net of an allowance for credit losses. The allowance for credit losses is recorded upon the initial recognition of the net investment in the lease commencement and periodically duringbased on the Company’s estimate of expected credit losses over the lease term. The evaluation is performed at an individual customer levelallowance reflects the Company’s estimate of lessee default probabilities and among other things, considersloss given default percentages. When determining the credit loss allowance, we consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the lessee and the value of the underlying aircraft. A loss allowance is established if there is evidence that we will be unable to collect all amounts due according to the contractual terms ofnet investment in the lease. At December 31, 2019, we had 0The allowance also considers potential losses due to non-credit risk related to unguaranteed residual values. A provision for credit losses is recorded as a component of operating expenses to adjust the allowance for our Net investment in direct financing and sales-type leases.changes to management’s estimate of expected credit losses.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
Upon the Company’s adoption of ASC 326 in 2020, our net investments in direct financing and sales-type leases will be recorded in the consolidated financial statements net of an allowance for credit losses. This allowance for credit losses will reflect the Company’s estimate of lessee default probabilities and loss given default percentages. This estimate of expected credit losses will consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of reported amounts. Additional consideration will be given for potential non-credit losses to unguaranteed residual values. We will adopt the standard using the “modified retrospective” approachFebruary 28, 2022, we have only 1 aircraft with a Januaryfloating-rate lease rental and for the year ended February 28, 2022, 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.In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The standard modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the standard will not have a material impact on our consolidated financial statements or related disclosures.In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. Income Taxes. The standard requires a customer in a cloud computing arrangement that is a service contractguidance aims to followsimplify the internal-use-software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The standard is effectiveaccounting for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The adoption of the standard will not have a material impact on our consolidated financial statements or related disclosures.income taxes by removing certainIn October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities. The standard changes how all entities evaluate decision-making fees under the variable interest entity guidance. The standard is applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the standard will not have a material impact on our consolidated financial statements or related disclosures.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
Transactional ImpairmentsImpairment of Flight EquipmentOn April 10, 2019,Excluding impairment charges resulting from the Russian invasion of Ukraine, during the year ended February 28, 2022, the Company recorded impairment charges totaling $110,926, of which $107,705 were transactional impairments. These impairments primarily related to 6 narrow-body and 1 wide-body aircraft, and resulted from early terminated the leases for 7 Boeing 737NG aircraft on lease to Jet Airways (India) Limited (“Jet Airways”) due toterminations, a scheduled lease expiration, and a lessee default. AsThe Company recognized $61,414 of maintenance revenue for these 7 aircraft.
Management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft and, accordingly, 0 aircraft were impaired as a consequence of our annual recoverability assessment. However, ifIf 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 the annualour recoverability assessmentassessments are appropriate, actual results could differ from those estimates.The carrying amounts and fair values of our financial instruments at December 31, 2019 and 2018 are as follows:
______________
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) based on each lessee’s principal place of business for the periods indicated:
______________
Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in direct financing and sales-type leases, or “net book value”) was as follows:
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The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in direct financing and sales-type 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:
At December 31, 2019 and 2018, the amounts of lease incentive liabilities recorded in maintenance payments on the Consolidated Balance Sheets were $9,176 and $15,636, respectively.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
December 31, 2019, ourDuring the year ended February 28, 2022, we sold 5 aircraft that were classified as net investment in direct financing and sales-type leases consisted of 29 aircraft. The components of our net investment in direct financing and sales-type leases at December 31, 2019 are as follows:
0
During 2019, the sale of all 8 aircraft held by thea joint venture with Teachers’ to a single buyer was completed. Included in Other revenue is $5,431 in fees earned in relation to the sale of all 8 aircraft in our Lancaster joint venture. Guarantee liabilities in Maintenance payments and Security deposits were offset against the investment in joint venture, as we had no further obligations due to the sale of the joint venture’s aircraft. Teachers’, as majority shareholder, chose to liquidate the joint venture and as a result we received a distribution of $36,750 during 2019. As of December 31, 2019, minimal assets remain in the joint venture as needed to complete its liquidation during 2020.In 2019, we sold 4 aircraft to IBJ Air, in which we hold a 25% equity interest. Included in Other revenue is $1,985 in fees earned in relation to IBJ Air’s acquisition of these 4 aircraft. These transactions were approved by our Audit Committee as arm’s length transactions under our related party policy. At December 31, 2019, the net book value of the IBJ Air joint venture’sMizuho Leasing that has 9 aircraft was $327,839.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
Note 6. Variable Interest EntitiesAircastle consolidates 4 VIEs of which it is the primary beneficiary. The operating activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the 6 aircraft discussed below.ECA FinancingsAircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), has entered into 6 different twelve-year term loans, which are supported by guarantees from Compagnie Francaise d’ Assurance pour le Commerce Extérieur (“COFACE”), the French government sponsored export credit agency (“ECA”). We refer to these COFACE-supported financings as “ECA Financings.”Aircastle is the primary beneficiary of the Air Knight VIEs, as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which our wholly owned subsidiary is the servicer and is responsible for managing the relevant aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.The only assets that the Air Knight VIEs have on their books are net investments in direct financing and sales-type leases that are eliminated in the consolidated financial statements. The related aircraft with a net book value of $298,473 at February 28, 2022.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
_______________
Secured Debt Financing:Bank FinancingsOn May 1, 2019, we entered into a full recourse $320,000 secured bank financing with BNP Paribas and Société Générale in relation to 8 Airbus A320-200neo aircraft on lease with a customer in Asia. This financing bears interest at a fixed rate of 3.61% and matures in September 2024. In addition, on May 1, 2019, we entered into a full recourse $120,000 secured bank financing with Crédit Agricole in relation to 3 Airbus A320-200neo aircraft on lease with a customer in Asia. This financing bears interest at a fixed rate of 3.13% and matures in March 2025.3.23%.On June 26, 2019, we amended and restated the original loan agreement, dated October 11, 2018, with National Bank of Australia to include an additional $40,000 in financing for 2 Boeing 737-800 aircraft on lease with a customer in North America. This financing bears interest at a fixed rate of 3.14% and matures in December 2024.
Senior Notes due 2026Revolving Credit FacilitiesOn June 13, 2019, Aircastle issued $650,000 aggregate principal amountDuring the year ended February 28, 2022, we entered into various amendments for 1 of Senior Notes due 2026 (the “Senior Notes due 2026”) at an issue priceour unsecured revolving credit facilities that, among other things, expanded the size of 99.515%. The Senior Notes due 2026the facility and split the commitment into 2 tranches. As a result, the existing $300,000 commitment was expanded to $365,000, with $135,000 and $230,000 of the commitment allocated to Tranche A and Tranche B, respectively. Tranche A matured on the facility’s previously stated maturity date of December 27, 2021 and Tranche B will mature on June 15, 2026 and bear interest at the rate of 4.250% per annum, payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2019. Interest accrues on the Senior Notes due 2026 from June 13, 2019.Prior to April 15, 2026, we may redeem all or part of the aggregate principal amount of the Senior Notes due 2026 at any time at a redemption price equal to the greater of (a) 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest thereon to, but not including, the redemption date and (b) the sum of the present values of 100% of the principal amount of the notes redeemed and the remaining scheduled payments of interest on the notes from the redemption date through April 15, 2026 (computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the Senior Notes due 2026) as of such redemption date plus 0.35%, plus accrued and unpaid interest thereon to, but not including, the redemption date). In addition, on or after April 15, 2026, we may redeem all or part of the aggregate principal amount of the Senior Notes due 2026 at a redemption price equal to 100%, plus accrued and unpaid interest thereon to, but not including, the redemption date. If the Company undergoes a change of control (as defined in the indenture governing the Senior Notes due 2026) and, as a result of the change of control, the rating of the Senior Notes due 2026 is downgraded to below an investment grade rating by certain rating agencies in the manner specified in the indenture governing the Senior Notes due 2026, it must offer to repurchase the Senior Notes due 2026 at a price of 101% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the purchase date. The Senior Notes due 2026 are not guaranteed by any of the Company's subsidiaries or any third-party.The net proceeds from the issuance were used to repay amounts drawn under our existing revolving credit facility and to redeem the balance of our 6.25% Senior Notes due 2019, including accrued interest of $3,733 and call premium of $7,183, on July 15, 2019.Unsecured Term LoanFebruary 28, 2023.The new Unsecured Term Loan replaced our existing term loanthe amount of $120,000 that matured on April 28, 2019.Revolving Credit Facility$100,000.At December 31, 2019,February 28, 2022, we had $150,000$20,000 in borrowings outstanding under our revolving credit facilities and had $950,000 available.$1,360,000 available for borrowing.
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Aircastle LimitedOn July 30, 2021, we redeemed all of the $500,000 outstanding aggregate principal amount of our 5.5% Senior Notes due 2022, including $12,604 of accrued interest and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
The maximum number of Common Shares reserved for issuance under the Amended and Restated 2014 Plan is 6,750,000 Common Shares. Restricted common shares outstanding under prior plans in the amount of 333,974 shares will continue to vest subject to the terms and conditions of the prior plans and the applicable awards agreements which are included in the below table.The purpose of the Amended and Restated 2014 Plan is to provide an incentive to selected officers, employees, non-employee directors, independent contractors, and consultants of the Company or its affiliates whose contributions are essential to the growth and success of the business of the Company and its affiliates, to strengthen the commitment of such persons to the Company and its affiliates, motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in the long-term growth and profitability of the Company and its affiliates. To accomplish such purposes, the Company may grant options, share appreciation rights, restricted shares, restricted share units, share bonuses, other share-based awards, cash awards or any combination of the foregoing. The Amended and Restated 2014 Plan provides that grantees of restricted common shares will have all of the rights of shareholders, including the right to receive dividends, other than the right to sell, transfer, assign or otherwise dispose of the shares until the lapse of the restricted period. Generally, the restricted common shares vest over three to five-year periods based on continued service and are being expensed on a straight-line basis over the requisite service period of the awards. The terms of the grants provide for accelerated vesting under certain circumstances, including termination without cause following a change of control.
A summary of the fair value of non-vested restricted common shares for the years ended December 31, 2019, 2018 and 2017 is as follows:
_______________(1) See “Share-based Compensation RelatedDividends on the Preference Shares, when, as and if declared by the Company’s board of directors are payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2021. Dividends will be payable: (i) from the date of original issue to, Proposed Merger” below.The fair valuebut excluding September 15, 2026 (the “original reset date”) at a fixed rate per annum of the restricted common shares granted in 2019, 20185.250%; (ii) from, and 2017 were determined based upon the market price of the shares at the grant date.Performance Share UnitsDuring 2019, the Company issued performance share units (“PSUs”) to certain employees. These awards were made under the Amended and Restated 2014 Plan. The PSUs are denominated in share units without dividend rights, each of which is equivalent to one common share, and are subject to market and performance conditions and time vesting.The PSUs granted in 2019 vest at the end of a three-year performance period which ends on December 31, 2021. Half of the PSUs vest on achieving relative total stockholder return goals (the “TSR PSUs”) while the other half vest on attaining annual Adjusted Return on Equity goals (the “AROE PSUs”). The table below shows the PSU awards issued during 2019, including, the number of common shares underlying the awardsoriginal reset date to, but excluding, September 15, 2031 (the “2031 reset date”), at the time of issuance:
The fair value of the time-based TSR PSUs was determined at the grant date using a Monte Carlo simulation model. Included in the Monte Carlo simulation model were certain assumptions regarding a number of highly complex and subjective variables, such as expected volatility, risk-free interest rate and dividend yield. To appropriately value the award, the risk-free interest rate is estimated for the time period from the valuation date until the vesting date and the historical volatilities were estimated based on a historical time frameper annum equal to the time from the valuation date until the end datefive-year treasury rate as of the performance period. The numbermost recent reset dividend determination date plus 4.410%; (iii) from, and including, the 2031 reset date to, but excluding, September 15, 2046 (the “2046 reset date”), during each reset period at a rate per annum equal to the five-year treasury rate as of TSR PSUs that will ultimately vest is basedthe most recent reset dividend determination date plus 4.660%; and (iv) from, and including, the 2046 reset date, during each reset period at a rate per annum equal to the five-year treasury rate as of the most recent reset dividend determination date plus 5.410%. Dividends on the percentile ranking of the Company’s TSR among the S&P Midcap 400 Index. The number of shares thatPreference Shares will ultimately vest will rangeaccumulate daily and be cumulative from, 0% to 200% of the target TSR PSUs.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
The following table summarizes the assumption ranges used in calculating the fair value of TSR PSUs during the following periods:
The number of shares vesting from the AROE PSUs at the end of the three-year performance period will depend on the Company’s Adjusted Return on Equity as measured against the targets set by the Compensation Committee annually during the performance period, consistent with the business plan approved by the Board. The fair value of the 2019 AROE PSUs was determined based on the closing market price of the Company’s common shares onincluding, the date of grant reduced by the present value of expected dividends to be paid. The number of shares that will ultimately vest will range from 0% to 200%original issuance of the target AROE PSUs.Preference Shares.During 2019,The Company may not redeem the Preference Shares before the date that is 90-days prior to the original reset date. The Company may, at its option, redeem the Preference Shares, in whole or in part, from time to time during the period beginning 90-days prior to each reset date and ending on such reset date at a redemption price in cash equal to $1,000 per Preference Share, plus all accumulated and unpaid dividends (whether or not declared) to, but excluding, such redemption date. In addition, the Company grantedmay redeem the Preference Shares, in whole but not in part, at the Company’s option under certain other limited conditions.
The following table summarizesCompany’s Preference Shares in the activities for our unvested PSUsamount of $5,658, which was paid on September 15, 2021. Additionally, on January 6, 2022, the Company’s Board of Directors approved a quarterly dividend for the years ended December 31, 2019, 2018Company’s Preference Shares in the amount of $10,500, which was paid on March 15, 2022.
______________
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Aircastle Limited and Subsidiaries(DollarsOn December 6, 2021, the Company entered into a $100,000 senior unsecured revolving credit facility with Mizuho Marubeni Leasing America Corporation, a related party – see Note 7 in thousands, except per share amounts)
As of December 31, 2019, the Company has unrecognized compensation cost, adjusted for actual forfeitures, of $2,965 related to non-vested restricted common shares and $3,367 related to PSUs, which is expected to be recognized over a weighted average period of 1.96 years. In addition, there is $15,149 of unrecognized expense dueadministrative services to the accelerationCompany. The Company also entered into a parts management services and supply agreement with an affiliate of RSAs and PSUs related toMarubeni under which we purchased parts totaling $5,857 during the Merger Agreement, which will be amortized through the estimated closing date.year ended February 28, 2022.Share-based Compensation Related to Proposed MergerIn connection with the Merger, the Company reserved the right to take certain actions, following reasonable consultation with Parent, to reduce the amount of any potential “parachute payments” subject to the excise tax imposed under Section 4999 of the Internal Revenue Code (including amounts payable to the Company’s executive officers), including accelerating the vesting and payment of certain equity and restricted cash awards and the payment of certain incentive compensation payments into 2019.Effective as of December 24, 2019, the Company accelerated the vesting and payment of certain PSUs and the vesting of certain restricted share awards held by the Company’s executive officers provided that, as set forth in the employment agreement amendments, if the executive officer is terminated for cause or resigns without “good reason” (as defined in the executive officer’s employment agreement) prior to the earlier of the consummation of the Merger or the termination of the Merger Agreement, the executive officer must repay to the Company the gross amount of the accelerated awards. In addition, the Merger Agreement contains additional repayment provisions as such if the Merger Agreement terminates.Cash bonuses were accelerated and paid based on the target level of performance. Any difference between the amounts accelerated for PSUs or bonuses paid in 2019 and the amounts earned based on actual performance for 2019 will be trued-up and paid to the executive officer (or repaid by the executive officer, if applicable) on the normal payment dates for such compensation in 2020.On May 17, 2019, our Board of Directors increased the authorization to repurchase the Company’s common shares to $100,000 from the $76,019 that was remaining under the previous authorization. During 2019, we repurchased 973,528 common shares at an aggregate cost of $18,382, including commissions. At December 31, 2019, the remaining dollar value of common shares that may be purchased under the repurchase program is $90,351. We also repurchased 640,452 shares totaling $18,357 from our employees and directors to settle tax obligations related to share vesting.
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
Note 9. DividendsThe following table sets forth the quarterly dividends declared by our Board of Directors for the three years ended December 31, 2019:
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic and diluted EPS calculations using the two-class method. All of our restricted common shares are currently participating securities. Our unvested PSUs are contingently issuable shares which are included in our diluted earnings per share calculations which do not include voting or dividend rights. The PSUs that vested as of December 31, 2019 are included in basic and diluted EPS as issued shares.Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period as follows:
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
The calculations of both basic and diluted earnings per share for the years ended December 31, 2019, 2018 and 2017 are as follows:
_____________
Note 11. Income TaxesThe sources of income from continuing operations before income taxes and earnings of unconsolidated equity method investment for the years ended December 31, 2019, 2018 and 2017 were as follows:
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Aircastle Limited and SubsidiariesNotes to Consolidated Financial Statements(Dollars in thousands, except per share amounts)
Note 12. Interest, Net
The following table shows the components of interest, net for the years ended December 31, 2019, 2018 and 2017:
______________
Remaining commitments, including $120,887$76,675 of remaining progress payments, contractual price escalations and other adjustments for these aircraft at December 31, 2019,February 28, 2022, net of amounts already paid, are as follows:
As of February 10, 2020, we have commitments to acquire 31 aircraft for $1,112,825.As of December 31, 2019, two lawsuits related to the Merger Agreement were filed against the Company by purported shareholders. The Company has not recognized a contingent liability as a result of these lawsuits as it believes the claims asserted are without merit.Note 14. Other AssetsThe following table describes the principal components of Other assets on our Consolidated Balance Sheets as of:
Note 16. Quarterly Financial Data (Unaudited)Quarterly results of our operations for the years ended December 31, 2019 and 2018 are summarized below:
The sum of the quarterly earnings per share amounts may not equal the annual amount reported since per share amounts are computed independently for each period presented.
TABLE OF CONTENTS
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements included or incorporated by reference in this Annual Report on Form 10-K (this “Annual Report”), other than characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA Adjusted EBITDA and Adjusted Net IncomeEBITDA and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on our historical performance and that of our subsidiaries and on our current plans, estimates and expectations and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any such forward-looking statements which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Annual Report. These risks or uncertainties include, but are not limited to, those described from time to time in Aircastle’s filings with the Securities and Exchange Commission (“SEC”), including as described in Item 1A, and elsewhere in this report.Annual Report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this Annual Report. Aircastle expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.
WEBSITE AND ACCESS TO COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website under “Investors — SEC Filings” as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are also available free of charge through our website under “Investors — FinancialTax Information — SEC Filings”(PFIC)”.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance”. In addition, our Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 201 Tresser Boulevard, Suite 400, Stamford, Connecticut 06901.
The information on the Company’s website is not part of, or incorporated by reference, into this Annual Report, or any other report we file with, or furnish to, the SEC.
PART I
INTRODUCTION
ITEM 1. BUSINESS
Unless the context suggests otherwise, references in this Annual Report to “Aircastle,” the “Company,” “we,” “us,” or “our” refer to Aircastle Limited and its subsidiaries. References in this Annual Report to “Aircastle Bermuda” refer to Aircastle Holding Corporation Limited and its subsidiaries. Throughout this Annual Report, when we refer to our aircraft, we include aircraft that we have transferred into grantor trusts or similar entities for purposes of financing such assets through securitizations and term financings. These grantor trusts or similar entities are consolidated for purposes of our financial statements. All amounts in this Annual Report are expressed in U.S. dollars and the financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of December 31, 2019, we owned and managed on behalf of our joint venture 287 aircraft leased to 85 lessees located in 49 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. InHowever, in many cases however, we are obligated to pay a specified portion of specified maintenance or modification costs. As of December 31, 2019,February 28, 2022, we owned and managed on behalf of our joint venture 260 aircraft leased to 81 lessees located in 45 countries. During the year ended February 28, 2022, we purchased eighteen aircraft and sold fifteen aircraft and other flight equipment. As of February 28, 2022, the net book value of our flight equipment (includingfleet (comprised of flight equipment held for lease and net investment in direct financing and sales-type leases, or “net book value”“Net Book Value”) was $7.79 billion compared$6.5 billion. The weighted average age of our fleet was 10.2 years and the weighted average remaining lease term was 4.9 years. As of February 28, 2022, we had commitments to $7.40 billion at the end of 2018. purchase 23 aircraft with delivery through 2024 for $819.3 million, which includes estimated amounts for pre-delivery deposits, contractual price escalations and other adjustments.
Our total revenues, net loss and net incomeAdjusted EBITDA were $769.8 million, $278.2 million, and $752.3 million for the year ended December 31, 2019 were $917.9February 28, 2022, and $832.3 million, $333.2 million and $156.6$774.4 million respectively, and for the fourth quarter of 2019 were $243.7year ended February 28, 2021. Cash flow provided by operating activities was $372.9 million and $47.3$175.0 million for the years ended February 28, 2022 and 2021, respectively. Our business and financial results, customers, and the aviation industry has and will continue to be impacted by the COVID-19 pandemic and the Russian invasion of Ukraine. We believe our platform and personnel position us to effectively manage through these crises and will enable us to take advantage of new investment opportunities when they arise. Our Company employs a team of experienced senior professionals with extensive industry and financial experience. Our leadership team has an average of more than twenty years of relevant industry experience, including managing through prior downturns in the aviation industry, like the 2008 global financial crisis and the September 11, 2001 terror attacks.
We believe that our long-standing business strategy of maintaining conservative leverage, limiting long-term financial commitments, and focusing our portfolio on more liquid narrow-body aircraft will enable us to manage through recent crises, such as the COVID-19 pandemic and the Russian invasion of Ukraine. Our portfolio of primarily mid-life, narrow-body aircraft should remain attractive relative to new technology aircraft due to their lower capital costs in an environment of tight airline margins.
We believe that we have sufficient liquidity to meet our contractual obligations over the next twenty years. Aircraft leasing companies own approximately 45%twelve months and as of April 1, 2022, total liquidity of $2.1 billion includes $1.4 billion of undrawn credit facilities, $0.2 billion of unrestricted cash, $0.1 billion of contracted asset sales and $0.4 billion of projected adjusted operating cash flows through April 1, 2023. As of February 28, 2022, we have commitments to acquire 23 aircraft for $819.3 million between 2022-2024.
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Update on Impact of COVID-19 Pandemic
The COVID-19 pandemic and related mitigation efforts has had an unprecedented negative impact on the world’s commercial jet aircraft.
As of April 25, 2022, four of our customers are subject to judicial insolvency proceedings or similar protection. These customers lease eighteen aircraft, which represent 12% of our Net Book Value and 9% of our lease rental and direct financing and sales-type lease revenue as of and for the year ended February 28, 2022. One of these customers is LATAM, our second largest customer, which represents 7% of our Net Book Value and 8% of our lease rental revenue as of and for the year ended February 28, 2022. We have generally been experiencing greater increasessigned restructured leases for all thirteen of our LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process, which we expect to occur in air traffic, driven by rising levelslate 2022.
We are actively engaged in these judicial proceedings to protect our economic interests. However, the outcome of per capita income leading to an increased propensity to fly. Mature markets,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.
Russian Invasion of Ukraine
On February 24, 2022, the Russian Federation invaded Ukraine. This has resulted in the closing of airspace in several countries as well as the placement of sanctions on a variety of Russian entities and certain activities involving Russia or Russian entities, such as North Americathe leasing of aircraft. We have and Western Europe, have been growing more slowly in tandem with their economies. Air traffic growth is also being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices. The outlook for airlines operating in areas with political instability or weakening economies is more uncertain. On balance, we believe air travel will increase over time and, as a result, we expect demand for modern aircraft will continue to remain strong overfully comply with all applicable sanctions.
As of February 24, 2022, we had twelve aircraft on lease with six Russian airlines and one aircraft with a Ukrainian airline. We have since terminated the long-term.
During the fourth quarter of 2021, we recorded net non-cash impairment charges of $251.9 million related to capture investment opportunities that ariseour Russian and Ukrainian aircraft – see Note 3 in the context of changing market circumstances. As such, we limit large, long-term capital commitments and are less reliant on orders for newNotes to the Consolidated Financial Statements. These thirteen aircraft from aircraft manufacturers as a source of new investments than manycomprised 6% of our competitors.Net Book Value before impairment and 1% of our Net Book Value after impairment. Excluding lease rentals received in advance recognized into revenue, they represented 7% of our lease rental and direct financing and sales-type lease revenue for the year ended February 28, 2022. Basic lease rentals for our Russian lessees were approximately $3.5 million for the month of February 2022. The termination of our Russian leases will result in reduced revenues and operating cash flows.
We have insurance, through the airlines’ insurance and our own policies, and have filed claims against the relevant policies seeking an indemnity of approximately $350 million. The ten aircraft that are not in our possession had a pre-impairment book value $0.01 per share, of the Company (the “Common Shares”) (other than (i) shares to be canceled or converted into shares of the surviving company pursuant to the Merger Agreement and (ii) restricted shares to be canceled and exchanged pursuant to the Merger Agreement), shall be converted into the right to receive $32.00 in cash, without interest (the “Merger Consideration”).
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unprecedented scenario and the transactions contemplated thereby bymagnitude of potential claims, insurers and reinsurers may raise various defenses. Accordingly, at this stage we can give no assurance as to when or what amounts we may ultimately collect. Insurance recoveries are generally recognized when they are realized or realizable, which typically occurs at the affirmative votes oftime cash proceeds are received or a majority ofclaim agreement is executed, and also considers the votes cast by holders of outstanding Common Shares at a meeting of the Company’s shareholders; (ii) the receipt of any applicable pre-clearance or similar approval of certain remaining specified jurisdictions (i.e., Chile, Mexico and Morocco), and all required regulatory approvals being in full force and effect; (iii) the absence of any law, judgment or other legal restraint that prevents, makes illegal or prohibits the consummation of the Merger and the other transactions contemplated by the Merger Agreement; (iv) the accuracy of each party’s representations and warranties (subject to certain qualifications); (v) each party’s performance in all material respects of its obligations contained in the Merger Agreement; and (vi) the absence of a material adverse effect on the Company since the date of the Merger Agreement.
Our Competitive Strengths
We believe that the following competitive strengths will allow us to capitalize on future growth opportunities in the global aviation industry:
•Diversified Portfolio of Modern Aircraft: We have a portfolio of modern aircraft that is diversified with respect to lessees, geographic markets, lease maturities and aircraft types. As of February 28, 2022, our owned and managed aircraft portfolio consisted of 260 aircraft leased to 81 lessees in 45 countries. Lease expirations for our owned aircraft are well dispersed, with a weighted-average remaining lease term of 4.9 years. This provides us with a long-dated base of contracted revenues. We believe our focus on portfolio diversification reduces the risks associated with individual lessee defaults and adverse geopolitical or economic issues, and results in generally predictable cash flows.
• | •Significant Experience in Successfully Selling Aircraft Throughout Their Life Cycle: Our team is adept at managing and executing the sale of aircraft. Since our formation, we have sold 274 aircraft to 82 buyers for $6.3 billion as of February��28, 2022. These sales produced net gains of $443.3 million and involved a wide range of aircraft types and buyers. Of these aircraft, 186, or 68%, were over fourteen years old at the time of sale; often being sold on a part-out disposition basis, where the airframe and engines may be sold to various buyers. We believe our competence in selling older aircraft is one of the capabilities that sets us apart from many of our competitors. •Strong Capital Raising Track Record and Access to a Wide Range of Financing Sources: Since our inception, we have raised approximately $2.1 billion in equity capital from private and public investors as of February 28, 2022. We maintain a strong, strategic relationship with Marubeni Corporation (“Marubeni”), which is our controlling shareholder. We have obtained $18.9 billion in debt capital from a variety of sources including the unsecured bond market, commercial banks, export credit agency-backed debt, and the aircraft securitization market. The diversity and global nature of our financing sources demonstrates our ability to adapt to changing market conditions and seize new opportunities. •Our Capital Structure Provides Investment Flexibility: We have $1.4 billion available from unsecured revolving credit facilities, $0.9 billion of which does not expire until 2025, thereby limiting our near-term financial markets exposure. Given our relatively limited future capital commitments, we have the resources to take advantage of future investment opportunities. Our large, unencumbered asset base and our unsecured revolving lines of credit give us access to the unsecured bond market, which we expect will allow us to pursue a flexible and opportunistic investment strategy over the long-term. •Experienced Management Team with Significant Expertise: Each member of our management team has more than twenty years of industry experience and we have expertise in the acquisition, leasing, financing, technical management, restructuring/repossession and sale of aviation assets. This experience spans several industry cycles and a wide range of business conditions and is global in nature. We believe our management team is highly qualified to manage and grow our aircraft portfolio and to address our long-term capital needs. •Global and Scalable Business Platform: We operate through offices in the United States, Ireland and Singapore, using a modern asset management system designed specifically for aircraft operating lessors and capable of handling a significantly larger aircraft portfolio. We believe that our current facilities, systems and personnel are capable of supporting an increase in our revenue base and asset base without a proportional increase in overhead costs. 3 |
Business Strategy
Our business strategy entails the following elements:
•Pursuing a disciplined and differentiated investment strategy. In our view, the relative values of different aircraft change over time. We evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices as market conditions and relative investment values change. We believe our team’s experience with a wide range of asset types and the financing flexibility offered through unsecured debt provides us with a competitive advantage. In response to the COVID-19 pandemic, we have intentionally limited large, long-term capital commitments and are less reliant on orders for new aircraft from aircraft manufacturers as a source of new investments than many of our competitors. While our current position is defensive given the macro situation, over the long-term we plan to grow our business and profits while maintaining a conservative and flexible capital structure. |
| Declaration Date | Dividend per Common Share | Aggregate Dividend Amount | Record Date | Payment Date | ||||||||
| October 28, 2019 | $ | 0.32 | $ | 23,884 | November 29, 2019 | December 13, 2019 | ||||||
| August 2, 2019 | $ | 0.30 | $ | 22,390 | August 30, 2019 | September 16, 2019 | ||||||
| April 30, 2019 | $ | 0.30 | $ | 22,536 | May 31, 2019 | June 14, 2019 | ||||||
| February 8, 2019 | $ | 0.30 | $ | 22,518 | February 28, 2019 | March 15, 2019 | ||||||
| October 30, 2018 | $ | 0.30 | $ | 22,867 | November 30, 2018 | December 14, 2018 | ||||||
| August 3, 2018 | $ | 0.28 | $ | 21,870 | August 31, 2018 | September 14, 2018 | ||||||
| May 1, 2018 | $ | 0.28 | $ | 21,908 | May 31, 2018 | June 15, 2018 | ||||||
| February 2, 2018 | $ | 0.28 | $ | 22,085 | February 28, 2018 | March 15, 2018 | ||||||
| October 31, 2017 | $ | 0.28 | $ | 22,039 | November 30, 2017 | December 15, 2017 | ||||||
| August 4, 2017 | $ | 0.26 | $ | 20,464 | August 31, 2017 | September 15, 2017 | ||||||
| May 2, 2017 | $ | 0.26 | $ | 20,482 | May 31, 2017 | June 15, 2017 | ||||||
| February 9, 2017 | $ | 0.26 | $ | 20,466 | February 28, 2017 | March 15, 2017 | ||||||
•Leveraging our strategic relationships. We intend to capture the benefits provided through the extensive global contacts and relationships maintained by our shareholders, Marubeni and Mizuho Leasing, which have enabled greater access to Japanese-based financing and helped source and develop our joint venture.
•Capturing the value of our efficient operating platform and strong operating track record. We believe our team’s capabilities in the global aircraft leasing market place us in a favorable position to explore new income-generating activities as capital becomes available for such activities. We intend to continue to focus our efforts on investment opportunities in areas where we believe we have competitive advantages and on transactions that offer attractive risk/return profiles. There can be no assurance, however, that we will be able to access capital on
•Maintaining a cost-effective basisbalanced and a failure to do so coulddiversified lease portfolio. We have a materialdefined Risk Appetite articulated through our Risk Guardrails, which we use to manage portfolio risk and highlight areas where action to mitigate risk may be appropriate. Our Risk Guardrails set limits on lessee concentration by risk rating, geographic concentrations, aircraft type concentrations, overall portfolio credit quality distribution, and lease maturity distribution. We believe that our balanced and diversified fleet, as well as continued focus on portfolio concentration, has and will enable us to reduce the risks associated with the impact of adverse effect on our business, financial condition or resultsgeopolitical and economic events, such as the COVID-19 pandemic and the Russian invasion of operations.Ukraine.
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Acquisitions and Sales
We originate acquisitions and sales through well-established relationships with airlines, other aircraft lessors, financial institutions and brokers, as well as other sources. We believe that sourcing such transactions globally through multiple channels provides for a broad and relatively consistent set of opportunities.
Our objective is to develop and maintain a diverse operating lease portfolio. We review our operating lease portfolio to sell aircraft opportunistically, to manage our portfolio diversification and to exit fromsell aircraft investmentsopportunistically when we believe selling will achieve better expected risk-adjusted cash flows than reinvesting in and re-leasing the aircraft. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Acquisitions and Sales.”
We have an experienced acquisition and sales team based in Stamford, Connecticut; Dublin, Ireland; and Singapore that maintains strong relationships with a wide variety of market participants throughout the world. We believe that our seasoned personnel and extensive industry contacts facilitate our access to acquisition and sales opportunities and that our strong operating track record facilitates our access to debt and equity capital markets.
Potential investments and sales are evaluated by teams comprised of marketing, technical, risk management, finance and legal professionals. These teams consider a variety of aspects before we commit to purchase or sell an aircraft, including price, specification/configuration, age, condition and maintenance history, operating efficiency, lease terms, financial condition and liquidity of the lessee, jurisdiction, industry trends and future redeployment potential and values. We believe that utilizing a cross-functional team of experts to consider investment parameters helps us assess more completely the overall risk and return profile of potential acquisitions and helps us move forward expeditiously on letters of intent and acquisition documentation.
Finance
We believe that cash on hand, payments received from lessees and other funds generated from operations, unsecured borrowings, borrowings from our revolving credit facilities, secured borrowings for aircraft, and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. We may choose to repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Secured Debt Financings” and “ — Unsecured Debt Financings” under Item 7.
Segments
The Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment: leasing, financing, selling and managing commercial flight equipment. Our chief executive officer is the chief operating decision maker.
Aircraft Leases
Our aircraft are net leases whereby we retain the benefit, and bear the risk, of re-leasing and of the residual value of the aircraft at the end of the lease. Leasing can be an attractive alternative to ownership for an airline because leasing increases an airline’s fleet flexibility, requires lower capital commitments, and significantly reduces aircraft residual value risks for the airline. Typically, the lessee agrees to lease an aircraft for a fixed term, although certain of our leases allow the lessee the option to extend the lease for an additional term or, in rare cases, terminate the lease prior to its expiration. As a percentage of lease rental revenue for the year ended December 31, 2019, our two largest customers, IndiGo and Lion Air, accounted for 9% and 6%, respectively.
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The scheduled maturities of our aircraft leases by aircraft type grouping currently are as follows, taking into account sales, sale agreements, lease placements and renewal commitments as of February 10, 2020:April 25, 2022, by fiscal year:
| Aircraft Type | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | Off-Lease(1) | Sold or Sale Agreement | Total(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A319/A320/A321 | 8 | 25 | 27 | 12 | 7 | 4 | 7 | 13 | 3 | 7 | 3 | — | 2 | 1 | 1 | 120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A320neo/A321neo | — | — | 8 | 3 | — | 1 | 1 | — | — | 1 | 2 | 5 | — | — | — | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A330-200/300 | — | 1 | — | 3 | — | 5 | 3 | — | 2 | — | — | — | — | 2 | 1 | 17 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 737-700/800/900ER | 6 | 7 | 10 | 9 | 4 | 8 | 3 | 7 | 7 | — | — | 2 | — | — | 2 | 65 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 737-MAX8 | — | — | — | — | — | — | — | — | — | — | 1 | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 777-300ER | — | — | — | 1 | — | 3 | — | — | — | — | — | — | — | 1 | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| E195 | — | 2 | — | 3 | — | — | — | — | — | — | — | — | — | — | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| E2-195 | — | — | — | — | — | — | — | — | — | 5 | — | — | — | — | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Freighters | — | — | 2 | — | — | — | — | — | — | — | — | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 14 | 35 | 47 | 31 | 11 | 21 | 14 | 20 | 12 | 13 | 6 | 7 | 2 | 4 | 4 | 241 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | Off-Lease(1) | Sold or Sale Agreement | Total | ||||||||||||||||||||||||||||||
| A319/A320/A320neo/A321 | 9 | 13 | 16 | 21 | 40 | 22 | 10 | 10 | 3 | — | — | — | — | 21 | 165 | |||||||||||||||||||||||||||||
| A330-200/300 | 2 | 1 | — | — | 2 | 3 | 1 | 4 | 1 | 1 | 3 | 1 | — | — | 19 | |||||||||||||||||||||||||||||
| 737-700/800/900ER | 1 | 4 | 18 | 17 | 12 | 5 | 5 | 5 | 2 | 5 | — | — | 1 | 5 | 80 | |||||||||||||||||||||||||||||
| 777-300ER | — | — | — | — | — | 2 | 2 | 1 | — | — | — | — | — | — | 5 | |||||||||||||||||||||||||||||
| E195 | — | — | — | 3 | 2 | — | — | — | — | — | — | — | — | — | 5 | |||||||||||||||||||||||||||||
| Freighters | — | — | — | 1 | 2 | — | — | — | 1 | — | — | — | — | — | 4 | |||||||||||||||||||||||||||||
| Total | 12 | 18 | 34 | 42 | 58 | 32 | 18 | 20 | 7 | 6 | 3 | 1 | 1 | 26 | 278 | |||||||||||||||||||||||||||||
Fiscal Year 2022 Lease Expirations and Lease Placements
Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the period 2021-2024,fiscal years 2023-2026, representing the percentage of our net book valueNet Book Value at December 31, 2019,February 28, 2022, specified below:
•2026: 11 aircraft, representing 4%.
Lease Payments and Security. OEach of ourur leases requiresrequire the lessee to pay periodic rentals during the lease term. As of December 31, 2019, rentals on more than 93%February 28, 2022, all but one of our leases as a percentage of net book value, arehave fixed andrentals that do not vary according to changes in interest rates. For the remaining leases,one variable rate lease, rentals are payable on a floating interest-rate basis. Virtually all lease rentals are payable monthly in advance, and all lease rentals are payable in U.S. dollars.
Under our leases, the lessee must pay operating expenses payable or accrued during the term of the lease, which normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges, certain taxes, licenses, consents and approvals, aircraft registration and insurance premiums. Typically, the lessee is required to make payments for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and are either made monthly in arrears or at the end of the lease term. Our determination of whether to require such payments to be made monthly or to permit a lessee to make a single maintenance payment at the end of the lease term or to require such payments to be made monthly, depends on a variety of factors, including the creditworthiness of the lessee, the amount of security deposit which may be provided by the lessee and market conditions at the time. If a lessee is making monthly maintenance payments, we would typically be obligated to use the funds paid by the lessee during the lease term to reimburse the lessee for costs they incur for heavy maintenance, overhaul or replacement of certain high-value components, usually following completion of the relevant work. If a lease requires anlessee makes a single end of lease maintenance payment, the lessee would typically be required to pay us for its utilization of the
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aircraft during the lease. In some cases, however, we may owe a net payment to the lessee in the event heavy maintenance is performed and the aircraft is returned to us in better condition than at lease inception.
Many of our leases also contain provisions requiring us to pay a portion of the cost of modifications to the aircraft performed by the lessee at its expense if such modifications are mandated by recognized airworthiness authorities. Typically,
Our leases generally provide that the lessees’ payment obligations are absolute and unconditional under any and all circumstances and require lessees to make payments without withholding payment on account of any amounts the lessor may owe the lessee or any claims the lessee may have against the lessor for any reason, except that under certain of the leases a breach of quiet enjoyment by the lessor may permit a lessee to withhold payment. The leases also generally include an obligation of the lessee to gross up payments under the lease where lease payments are subject to withholding and other taxes, although there may be some limitations to the gross up obligation, including provisions which do not require a lessee to gross up payments if the withholdings arise out of our ownership or tax structure. In addition, changes in law may result in the imposition of withholding and other taxes and charges that are not reimbursable by the lessee under the lease or that cannot be so reimbursed under applicable law. Our leases also generally require the lessee to indemnify the lessor for tax liabilities relating to the leases and the aircraft, including in most cases, value added tax and stamp duties, but excluding income tax or its equivalent imposed on the lessor.
Lease Management and Remarketing
Our aircraft re-leasing strategy is to develop opportunities proactively, well in advance of scheduled lease expiration, to enableexpiration. This enables consideration of a broad set of alternatives, including deployment, sale or part-out, and to allow for reconfiguration or maintenance lead times where needed. We also take a proactive approach to monitoring the credit quality of our customers, and may seek early return and redeployment of aircraft if we feel that a lessee is unlikely to perform its obligations under a lease. We have invested significant resources in developing and implementing what we consider to be state-of-the-art lease management information systems and processes to enable efficient management of aircraft in our portfolio.
Portfolio Risk Management
Our objective is to build and maintain a lease portfolio that is balanced and diversified and delivers returns commensurate with risk. We have a defined Risk Appetite to assist in portfolio risk management and highlight areas where action to mitigate risk may be appropriate, and take into account the following:
• individual lessee exposures;
• geographic concentrations;
• aircraft type concentrations;
• portfolio credit quality distribution; and
• lease maturity distribution.
We have a risk management team that undertakes detailed due diligence on lessees when aircraft are acquired with a lease already in place and for placement of aircraft with new lessees following lease expiration or termination. They also monitor the portfolio on an ongoing basis.
Other Aviation Assets and Alternative New Business Approaches
We believe investment opportunities may arise in related areas such as financing secured by commercial jet aircraft as well as jet engine and spare parts leasing, trading and financing. In the future, we may make opportunistic investments in these or other sectors or in other aviation-related assets, and we intend to continue to explore other income-generating activities and investments.
We source and service investments for our joint venture and provide marketing, asset management and administrative services to it. We are paid market basedmarket-based fees for these services, which are recorded in Other revenue in our Consolidated Statements of Income.Income (Loss).
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We believe we have a world class servicing platform and may also pursue opportunities to capitalize on these capabilities such as providing aircraft management services for third party aircraft owners.
Competition
The aircraft leasing and trading industry is highly competitive with a significant number of active participants. We face competition for the acquisition, of aircraft, for the placement of aircraft and ultimately for the sale of aircraft which we may wish to divest.
aircraft. Competition for aircraft acquisitions comes from many sources, ranging from large established aircraft leasing companies to smaller players and new entrants. Competition has increased across most asset types and has drawn many new investors to our business.
Larger lessors are generally more focused on acquiring new aircraft via direct orders with the original equipment manufacturers and through purchase and lease-back transactions with airlines. These larger lessors include AerCap Holdings, GE Capital Aviation Services, Air Lease Corporation, SMBC Aviation Capital, BOC Aviation, Avolon Holdings, Aviation Capital Group, and Dubai Aerospace Enterprise. In addition, several major Chinese financial institutions’ leasing subsidiaries are aggressively pursuing business, includingEnterprise, Industrial and Commercial Bank of China (“ICBC”) and China Development Bank (“CDB”). In October 2019, Accipter and MCAP merged to create AMCK Aviation. In November 2019, DVB sold its aviation finance activities to MUFG Bank Ltd. In December 2019, GE Capital sold its PK AirFinance subsidiary to Apollo Global Management and Athene Holding. Tokyo Century Corporation, part of the Mizuho Group, acquired the remaining 80% interest in Aviation Capital Group it did not own in December 2019.Bank.
Competition for mid-aged and older aircraft typically comes from other competitors that, in many cases, rely on private equity or hedge fund capital sources. Such competitors include Carlyle Aviation Partners, Castlelake, Alterna Capital PartnersMerx Aviation and other players funded by alternative investment funds and companies. These companies are typically fund-based, rather than having permanent capital structures, and have benefited from the substantially improved availability of debt financing for mid-aged aircraft. Recently, however, some of these companies have started to set up some permanent capital structure so as to be able to access the unsecured debt market.
Competition for leasing or leasing/re-leasing of aircraft, as well as aircraft sales, is based principally upon the availability, type and condition of the aircraft, user base, lease rates, prices, and other lease terms. Aircraft manufacturers, leasing companies, airlines and other operators, distributors, equipment managers, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft compete with us, although their focus may be on different market segments and aircraft types.
Some of our competitors have or may obtain, greater financial resources and may have/ or a lower cost of capital. A number also commit to speculative orders of new aircraft to be placed on operating lease upon delivery from the manufacturer, which compete with new and used aircraft offered by other lessors. However, weWe believe that we are able tocan compete favorably in aircraft acquisition, leasing and sales activities due to the reputation of our team of experienced professionals, extensive market contacts and expertise in sourcing and acquiring aircraft. We also believe our access to unsecured debt provides us with a competitive advantage in pursuing investments quickly and reliably and in acquiring aircraft in situations where it may be more difficult to finance on a secured, non-recourse basis.
Insurance
We require our lessees to carry general third-party legal liability insurance, all-risk aircraft hull insurance (both with respect to the aircraft and with respect to each engine when not installed on our aircraft) and war-risk hull and legal liability insurance. We are named as an additional insured on liability insurance policies carried by our lessees, and we or one of our lenders would typically be designated as a loss payee in the event of a total loss of the aircraft. We maintain contingent hull and liability insurance coverage with respect to our aircraft which is intended to provide coverage for certain risks, including the risk of cancellation of the hull or liability insurance maintained by any of our lessees without notice to us, but which excludes coverage for other risks such as the risk of insolvency of the primary insurer or reinsurer.
We maintain insurance policies to cover non-aviation risks related to physical damage to our equipment and property, as well as with respect to third-party liabilities arising through the course of our normal business operations (other than aircraft operations). We also maintain limited business interruption insurance to cover a portion of the costs we would expect to incur in connection with a disruption to our main facilities, and we maintain directors’ and officers’ liability insurance providing coverage for liabilities related to the service of our directors, officers and certain employees. Consistent with industry practice, our insurance policies are generally subject to deductibles or self-retention amounts.
We believe the insurance coverage currently carried by our lessees and by Aircastle provides adequate protection against the accident-related and other covered risks involved in the conduct of our business. However, there can be no assurance that we have adequately insured against all risks, that lessees will at all times comply with their obligations to maintain insurance, that our lessees’ insurers and re-insurers will be or will remain solvent and able to satisfy any claims, that any particular claim will ultimately be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.
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Environmental, Social and Governance
We believe that our commitment to identifying and implementing positive environmental and social related business practices strengthens our Company, and better serves our customers, our communities and the broader environment within which we conduct our business.
Our Commitment to Environmental Sustainability
Ambitious targets have been made towards the ultimate the goal of curbing the adverse effects of climate change. In October 2021, IATA announced its Fly Net Zero commitment to achieve net zero carbon by 2050. This commitment was echoed by the United States Aviation Climate Action Plan, released in November 2021. In February 2022, a collective of airlines, airports, and aviation manufacturers operating in the E.U., U.K., and EFTA unveiled the flagship sustainability measure, Destination 2050.
For these ambitious measures to reach implementation, a wide political and administrative consensus will be required. Due to the inherent complexities of jet aircraft, decarbonizing aviation requires more radical new technology as compared to other modes of transportation. Sustainable aviation fuels (“SAFs”) provide the most readily available means for airline operators to reduce their carbon emissions while using existing technology. Hydrogen and electronic propulsion for commercial jet aircraft are far-reaching initiatives.
The Company believes the operations of our customers could be affected by the potential impacts of both climate change and sustainability targets and initiatives aimed at curbing its effect, so we are committed to monitoring sustainability developments. The Company’s long-term strategic plan takes these rapidly developing initiatives into consideration when we evaluate the technology behind the aircraft we target for investment. For the fiscal year ended 2021, fourteen out of the Company’s eighteen total acquisitions were in new technology aircraft with higher efficiency and lower emissions.
Our People
As of February 28, 2022, we had 108 employees. None of our employees are covered by a collective bargaining agreement, and we believe that we maintain excellent employee relations.
We believe that our commitment to our employees is critical to our continued success, leading to high employee satisfaction and low employee turnover. To facilitate talent attraction and retention, we strive to have a diverse, inclusive and safe workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs, and by programs that build connections between our employees and their communities. Each year, we review employee career development and succession planning internally and with our Compensation Committee.
During the COVID-19 pandemic, the physical and mental health and safety of our employees, customers and business partners was a key priority for us, and we continue to monitor related safety precautions. After working remotely, we have begun a gradual, staggered return to in-office work at our three locations, although we continue to monitor trends and local government regulations and guidelines, and may adjust plans accordingly to ensure the health and safety of our employees.
Our Culture & Governance
Our Company was formed in 2004 on the values of integrity, common decency and respect for others. These values continue to this day and are shared by our employees. In addition, these values are embodied in our Code of Business Conduct and Ethics, which has been adopted by the Board of Directors of the Company to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business.
The Company also maintains independent third-party whistle-blower platforms for anonymous reporting of fraud or ethics violations. Our cyber security initiatives provide protection through malware detection, cloud penetration testing, threat hunting and incident responsiveness.
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We believe that our commitment to our Company, our employees and the communities in which we operate has led to high employee satisfaction and low employee turnover, as discussed above, and our commitment to our customers and business partners has resulted in high customer satisfaction, as evidenced by long-time relationships with our customers and new/repeat transactions with our business partners.
Government Regulation
The air transportation industry is highly regulated. In general, we areregulated, although Aircastle itself is generally not directly subject to most air transportation regulations becauseas we do not operate aircraft. In contrast, our lessees are subject to extensive, direct regulation under the laws of the jurisdictions in which they are registered and where they operate. Such laws govern, among other things, the registration, operation, security, and maintenance of our aircraft, as well as environmental issues and the financial oversight regulation of their operations.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Annual Report, you should carefully consider the following factors, which could materially adversely affect our business, financial condition, results of operations or ability to pay dividends in future periods or our ability to meet our debt obligations. The risks described below are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, results of operations or ability to pay dividends in future periods.operations.
Risks Related to Our Business
Risks affecting the airline industry may materially adversely affect our customers and have a material adverse impact on our financial results.customers.
We operate as a supplier to airlines and are indirectly impacted by all the risks facing airlines today. The ability of each lesseelessees to perform itstheir obligations under the relevant lease will depend primarilydepends on the lessee’stheir financial condition, and cash flow, which may be affected by factors beyond our control, including:
•passenger and air cargo demand;
•operating costs, including the price and availability of jet fuel, labor costs and insurance costs and coverages;
•restrictions in labor contracts and labor difficulties, including pilot shortages;
•availability of financing, and other circumstances affecting airline liquidity, including covenants in financings, terms imposed by credit card issuers, collateral posting requirements contained in hedging contracts and the ability of airlines to make or refinance principal payments as they come due;payments;
•economic conditions, including recession, financial system distress and currency fluctuations in the countries and regions in which the lessee operates or from which the lessee obtains financing;fluctuations;
•aircraft accidents;
•the continuing availability of government support whether through subsidies, loans, guarantees, equity investments or otherwise;investments;
•changing political conditions, including risk of rising protectionism, travel restrictions, on immigration or imposition of new trade barriers;
•geopolitical and other events, including war, acts or threats of terrorism, outbreaks of epidemic diseases (including the COVID-19 pandemic) and natural disasters;
•impact of climate change and emissions on demand for air travel;
•cyber risk, including information hacking, viruses and malware; and
•governmental regulation of, or affecting the air transportation business, including noise regulations, emissions regulations, climate change initiatives, and aircraft age limitations.
These factors, and others, may lead to defaults by our customers, or may delay or prevent aircraft deliveries or transitions, result in payment restructurings or other lease term restructurings, and may increase our costs from repossessions and reduce our revenues due to downtime or lower re-lease rates.
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The Russian invasion of Ukraine and resulting sanctions by various countries, including the United States, the European Union, and the United Kingdom, has significantly impacted our financial marketcondition, results of operations and cash flows and will continue to have an adverse impact on our business.
On February 24, 2022, the Russian Federation invaded Ukraine. This has resulted in the closing of airspace in several countries as well as the placement of sanctions on a variety of Russian entities and certain activities involving Russia or Russian entities, such as the leasing of aircraft. We have and will continue to fully comply with all applicable sanctions.
As of February 24, 2022, we had twelve aircraft on lease with six Russian airlines and one aircraft with a Ukrainian airline. We have since terminated the leasing activities for all our Russian aircraft and have sought to repossess the aircraft and remove them from Russia. We have successfully repossessed two of the twelve Russian aircraft. Nine aircraft remain in Russia and one aircraft was undergoing maintenance outside of Russia and is not operational. Our aircraft with a Ukrainian airline is in temporary storage outside of Ukraine. It is unclear whether we will be able to recover the remaining aircraft from our former Russian airline customers or what the condition of the aircraft will be at the time of repossession if we do so or whether we will be able to recover the related technical records and documentation. Failure to repossess any of our aircraft could adversely affect our business and financial results. Many of these Russian airlines have continued to fly our aircraft notwithstanding the leasing terminations and our repeated demands for the return of our assets. Our aircraft that remain in Russia may suffer damage or deterioration due to inadequate maintenance and lack of spare parts.
During the fourth quarter of 2021, we recorded net non-cash impairment charges of $251.9 million related to our Russian and Ukrainian aircraft – see Note 3 in the Notes to the Consolidated Financial Statements. These thirteen aircraft comprised 6% of our Net Book Value before impairment and 1% of our Net Book Value after impairment. Excluding lease rentals received in advance recognized into revenue, they represented 7% of our lease rental and direct financing and sales-type lease revenue for the year ended February 28, 2022. Basic lease rentals were approximately $3.5 million for the month of February 2022. The termination of our Russian leases will result in reduced revenues and operating cash flows.
We had letters of credit of $49.5 million as of February 28, 2022 related to our aircraft leased to Russian airlines. We have presented requests for payment to the various financial institutions and have received about half of the proceeds. We are pursuing collection on remaining letters of credit, but the timing and amount of any further recovery are uncertain.
We have insurance, through the airlines’ insurance and our own policies, and have filed claims against the relevant policies seeking an indemnity of approximately $350 million. The ten aircraft that are not in our possession had a pre-impairment book value of $314.1 million. Our claims are subject to the terms of the applicable policies, and given the unprecedented scenario and the magnitude of potential claims, insurers and reinsurers may raise various defenses. Accordingly, at this stage we can give no assurance as to when or what amounts we may ultimately collect. Insurance recoveries are generally recognized when they are realized or realizable, which typically occurs at the time cash proceeds are received or a claim agreement is executed, and also considers the counterparty’s ability to pay the claim amount.
It is not possible to predict the broader or longer-term consequences of the Russian invasion of Ukraine, which could include new or additional sanctions (including counter responses by the Russian government or other jurisdictions), embargoes, further escalation or regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, mayavailability and cost of insurance, security conditions, fuel prices, currency exchange rates and financial markets. Such geopolitical instability and uncertainty could have a negative impact on our ability to lease aircraft, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space, and could materially and adversely affect our business.
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The effects of terrorist attacks and geopolitical conditions might adversely impact our liquidity, our access to capitalthe financial condition of the airlines and our costlessees might not be able to meet their lease payment obligations.
War, armed hostilities or terrorist attacks, or the fear of capitalsuch events, could decrease demand for air travel or increase the operating costs of our customers. They may lead to: (i) decreased passenger demand and may adverselyrevenue due to safety concerns or the inconvenience of additional security measures; (ii) higher price of jet fuel; (iii) higher financing costs and difficulty in raising funds on favorable terms, or at all; (iv) higher costs of aircraft insurance coverage for future claims caused by acts of war, terrorism, sabotage, hijacking and other similar perils, and the extent to which such insurance has been or will continue to be available; (v) higher costs due to the increased security measures; and (vi) special charges, such as those related to the impairment of aircraft and other long lived assets stemming from the above conditions.
War, armed hostilities, terrorist attacks, large protests or government instability, or the fear of such events, could negatively impact the airline industry and the financial condition of our lessees.
Adverse currency movements could negatively impact the levelprofitability of our lessees.
Many of our lessees are exposed to currency risk as they earn revenues in local currencies while a significant portion of their liabilities and timing of capital expenditures, principal repaymentsexpenses, including fuel, debt service, and other capital needs; maintaininglease payments are denominated in U.S. dollars. If the local currency is devalued, our credit ratings, our results of operations, financial condition and liquidity; legal restrictions on the payment of dividends, including a statutory dividend test and other limitations under Bermuda law; and general business conditions and other factors that our Board of Directors deems relevant. Additionally, the Merger Agreement permits the Company to declare and pay a regular quarterly dividend of up to $0.32 per common share. Some of these factors are beyond our control. In the future, we may choose to not pay dividends orlessees may not be able to pay dividends, maintain our current levelincrease revenue sufficiently to offset the impact of dividends, or increase them over time. The failureexchange rates on these expenses. Currency depreciation could impact the ability of customers to maintain or pay dividends may adversely affect our share price.meet their contractual obligations in a timely manner. Shifts in foreign exchange rates can be significant, are difficult to predict, and can occur quickly.
Fuel costs represent a major expense to airlines and we are responsible on a full recourse basis for timely payment when due and compliance with covenants under the related debt documentation. As a result of our substantial amount of indebtedness, we may be unable to generate sufficient cash to pay, when due, the principal of, interest on or other amounts due with respect to our indebtedness, and our substantial amount of indebtedness may increase our vulnerability to adverse economic and industry conditions, reduce our flexibility in planning for or reaction to changes in the business environment or in our business or industry, and adversely affect our cash flow and our ability to operate our business and compete with our competitors.
Severe weather conditions, natural disasters or their perceived effects may negatively impact the airline industry.
Demand for our aircraft, which would have an adverse effect on our financial results and growth prospects.
Lessee defaults could materially adversely affect our business, financial condition and results of operations.
We may not correctly assess the credit risk of a lessee or that risk could change over time. We may not be in a positionable to charge risk-adjusted lease rates, and lessees may not be able to continue to perform their financial and other obligations under our leases in the future. A delayed, reduced or missed rental payment from a lessee decreases our revenues and cash flow and may adversely affect our ability to make payments on our indebtedness or to comply with debt service coverage or interest coverage ratios. A default, delay or deferral of payments from a lessee where we have a significant exposure or concentration risk could have a materially adverse impact on our revenue and cash flows. We may experience some level of delinquency under our leases and default levels may increase over time, particularly as our aircraft portfolio ages and if economic conditions deteriorate.time. A lessee may experience periodic difficulties that are not financial in nature, which could impair its performance of maintenance obligations under the leases. These difficulties may include the failure to perform required aircraft maintenance and labor-management disagreements or disputes.
In the event that a lessee defaults under a lease, any security deposit paid or letter of credit provided by the lessee may not be sufficient to cover the lessee’s outstanding or unpaid lease obligations and required maintenance and transition expenses.
Significant costs resulting from lease defaults could have a material adverse effect on our business.
While we have the right to repossess the aircraft and to exercise other remedies upon a lessee default, repossession of an aircraft could lead to significant costs for us. Those costs include legal and other expenses of court or other governmental proceedings, particularly if the lessee is contesting the proceedings, and costs to obtain possession and/or
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deregistration of the aircraft and flight and export permissions. Delays resulting from these proceedings would increase the period of time during which the aircraft is not generating revenue. We may incur maintenance, refurbishment or repair costs that a defaulting lessee has failed to incur or pay and that are necessary to put the aircraft in suitable condition for re-lease or sale. We may be required to pay off liens, claims, taxes and other governmental charges to obtain clear possession and to remarket the aircraft for re-lease or sale. We may also incur maintenance, storage or other costs while we have physical possession of the aircraft.
We may suffer other adverse consequences due to a lessee default and the repossession of the aircraft. Our rights upon a lessee default vary significantly depending upon the jurisdiction and may include the need to obtain a court order for repossession of the aircraft and/or consents for deregistration or re-export of the aircraft. When a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may apply. Certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease or to assign it to a third party, or entitle the lessee or another third party to retain possession of the aircraft without paying lease rentals or without performing all of the obligations under the lease. There can be no assurance that jurisdictions that have adopted the Cape Town Convention will enforce it as written. Certain of our lessees are owned in whole or in part by government-related entities, which could complicate our efforts to repossess the relevant aircraft. Accordingly, we may be delayed in, or prevented from, enforcing our rights under a lease and in re-leasing or selling the affected aircraft.
If we repossess an aircraft, we may not necessarily be able to export or deregister and redeploy the aircraft. When a lessee or other operator flies only domestic routes, repossession may be more difficult, especially if the jurisdiction permits the lessee or the other operator to resist deregistration. Significant costs may also be incurred in retrieving or recreating aircraft records required for registration of the aircraft and obtaining a certificate of airworthiness. A default and exercise of remedies involving a lessee where we have a significant exposure or concentration risk could have a materially adverse impact on our future revenue and cash flows.
If our lessees encounter financial difficulties and we decide to restructure our leases with those lessees, this could result in less favorable leases and in significant reductions in our cash flow or adversely affect our financial results.flow.
When a lessee is late in making payments or fails to make payments in full, or in part under the lease or has otherwise advised us that it will in the future fail to make payments in full or in part under the lease, we may elect to or be required to restructure the lease. Restructuring may involve anything from a simple rescheduling of payments to the termination of a lease without receiving all or any of the past due amounts. If requests for payment restructuring or rescheduling are made and granted, reduced or deferred rental payments may be payable over all or some part of the remaining term of the lease,
and the terms of any revised payment schedules may be unfavorable or such payments may not be made. We may be unable to agree upon acceptable terms for any requested restructurings and as a result may be forced to exercise our remedies under those leases and we may be unable to repossess our aircraft on a timely basis. If we, in the exercise of our remedies, repossess the aircraft, we may not be able to re-lease the aircraft promptly at favorable rates, or at all.
The terms and conditions of payment restructurings or reschedulings, particularly involving lessees where we have significant exposure, or concentration risk, may result in significant reductions of rental payments, which may adversely affect our cash flows or our financial results.
Airline reorganizations could have an adverse effect on our financial results.
As a result of economic conditions, significant volatility in oil prices and financial markets distress, airlines may be forced to reorganize. Bankruptcies and reduced demand may lead to the grounding of significant numbers of aircraft and negotiated reductions in aircraft lease rental rates, with the effect of depressing aircraft market values. Additional grounded aircraft and lower market values would adversely affect our ability to sell certain of our aircraft on favorable terms, or at all, or re-lease other aircraft at favorable rates comparable to the then current market conditions, which collectively would
have an adverse effect on our financial results. We may not recover any of our claims or damages against an airline under bankruptcy or insolvency protection.
If our lessees fail to appropriately discharge aircraft liens, we might find it necessary to pay such claims.
In the normal course of business, liens that secure the payment of airport fees and taxes, custom duties, air navigation charges (including charges imposed by Eurocontrol), landing charges, crew wages, repairer’s charges, salvage or other liens, are likely, depending on the jurisdiction, to attach to the aircraft. These liens may secure substantial sums that may, in certain jurisdictions or for certain types of liens (particularly “fleet liens”), exceed the value of the relevant aircraft. Although the financial obligations relating to these liens are the responsibility of our lessees, if they fail to fulfill their obligations, these liens may attach to our aircraft and ultimately become our responsibility. Until these liens are discharged, we may be unable to repossess, re-lease or sell the aircraft or unable to avoid detention or forfeiture of the aircraft.
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Our lessees may not comply with their obligations under their respective leases to discharge liens arising during the terms of their leases, whether or not due to financial difficulties.leases. If they do not do so, we may in some cases, find it necessary to pay the claims secured by any liens in order to repossess the aircraft.
Risks associated with the concentration of our lessees in certain geographical regions could harm our business or financial results.
Many of our lessees operate in emerging markets and growth prospects.we are indirectly subject to the economic and political risks associated with such markets.
RisksRelatedtoOurAviationAssets
The variability of supply and demand for aircraft could depress lease rates for our aircraft.
The aircraft leasing and sales industry has experienced periods of aircraft oversupply. The oversupply of a specific type of aircraft in the market is likely to depress aircraft lease rates for, and the value of, that type of aircraft. The supply and demand for aircraft is affected by various cyclical and non-cyclical factors that are not under our control, including:
•passenger and air cargo demand;
•operating costs, representincluding fuel costs, and general economic conditions affecting our lessees’ operations;
•interest and foreign exchange rates, and the availability of credit;
•airline restructurings and bankruptcies;
•changes in control of, or restructurings of, other aircraft leasing companies;
•manufacturer production levels and technological innovation;
•new-entrant manufacturers, or existing manufacturers producing new aircraft models;
•geopolitical events, including war, prolonged armed conflict and acts of terrorism;
•governmental regulation, tariffs and other restrictions, such as sanctions, on trade or the leasing of aircraft;
•climate change initiatives, technological change, aircraft noise and emissions regulations, aircraft age limits and other factors leading to reduced demand for, early retirement or obsolescence of aircraft models;
•outbreaks of communicable diseases and natural disasters;
•reintroduction into service of aircraft previously grounded or in storage; and
•airport and air traffic control infrastructure constraints.
These and other factors may produce movements in aircraft values and lease rates, which would impact our cost of acquiring aircraft, or which may result in lease defaults or prevent aircraft from being re-leased or sold on favorable terms.
Other factors that could cause a major expensedecline in aircraft value and lease rates.
In addition to airlines. Fuel prices fluctuate widely depending primarilyfactors linked to the aviation industry generally, other factors that may affect the value and lease rates of our aircraft include:
•the age of the aircraft;
•the particular maintenance and operating history of the airframe and engines;
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•the number of operators using that type of aircraft;
•whether the aircraft is subject to a lease and, if so, whether the lease terms are favorable to us;
•the demand for and availability of such aircraft;
•applicable airworthiness directives or manufacturer’s service bulletins that have not yet been performed;
•grounding orders or other regulatory action that could prevent or limit utilization of our aircraft;
•regulatory and legal requirements that must be satisfied before the aircraft can be purchased, sold or re-leased; and
•compatibility of our aircraft configurations or specifications with those desired by operators.
Any decrease in the values of and lease rates for commercial aircraft which may result from the above factors or other unanticipated factors may have a material adverse effect on our financial results.
Climate change may have a long-term impact on our business.
There are inherent climate-related risks wherever our business is conducted. Changes in market dynamics, stakeholder expectations, local, national and international market conditions, geopoliticalclimate change policies, all have the potential to disrupt our business and operations. Various countries, including the United States and the European Union, have announced sustainability initiatives that, among other things, aim to reduce carbon emissions, explore sustainable aviation fuels and establish sustainability measures and targets. Climate and environmental eventsobjectives may impact the types of aircraft we target for investment and currency/exchange rates. the demand for certain aircraft and engine types, and could result in a significant increase in our costs and expenses and adversely affect future revenue, cash flows and financial performance. Failure to address climate change could result in greater exposure to economic and other risks and impact our ability to adhere to developing climate goals.
The advent of superior aircraft technology and higher production levels could cause our existing aircraft portfolio to become outdated and therefore less desirable.
As manufacturers introduce technological innovations and new types of aircraft, including the Boeing 787, the Airbus A350, the Airbus A220 and re-engined models of the Boeing 737, Boeing 777, Airbus A320, Airbus A330 and Embraer E-Jet families of aircraft, certain aircraft in our existing aircraft portfolio may become less desirable to potential lessees or purchasers. This next generation of aircraft generally delivers improved fuel consumption and reduced noise and emissions with lower operating costs compared to prior-technology aircraft. The Boeing 787 and 737 MAX and the Airbus A350, A320neo and A220 are all currently in production. The Boeing 777X is expected to enter service in 2023. The Commercial Aircraft Corporation of China Ltd. is developing aircraft models that will compete with the Airbus A320 family aircraft, the Boeing 737 and the Embraer E-Jet. The introduction of these new models and the potential resulting overcapacity in aircraft supply, could adversely affect the residual values and the lease rates for our aircraft, our ability to lease or sell our aircraft on favorable terms, or at all.
The effects of emissions and noise regulations and policies may negatively affect the airline industry. This may cause lessees to default on their lease payment obligations and may limit the market for certain aircraft in our portfolio.
The U.S. and other jurisdictions have imposed limits on aircraft engine emissions, such as NOx, CO and CO2, consistent with current ICAO standards. In 2015, over 190 countries, including the United States, reached an agreement to reduce global GHG emissions at the United Nations Framework Convention on Climate. The agreement does not expressly reference aviation, but if the agreement is implemented in the United States and other countries there could be an adverse effect on the aviation industry.
Recent actions taken by various organizations continue to prioritize the UNFCCC’s overall initiatives. In October 2021, IATA announced its Fly Net Zero commitment to achieve net zero carbon by 2050. This commitment was echoed by the U.S. Aviation Climate Action Plan, released November 2021. In February 2022, a result, fuel costs arecollective of airlines, airports, and aviation manufacturers operating in the E.U., U.K., and EFTA unveiled the flagship sustainability measure, Destination 2050.
The E.U. Taxonomy is a green classification system that translates the E.U.’s climate and environmental objectives into criteria for specific economic activities for investment purposes. In addition, the E.U. Taxonomy can be used by organizations to plan their climate and environmental transition and raise finance for this transition. While the E.U. Taxonomy is not a mandatory list of economic activities for investors to invest in, it is expected to act as an enabler of change and encourage a transition towards the E.U.’s climate and environmental objectives.
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European countries have relatively strict environmental regulations that can restrict operational flexibility and decrease aircraft productivity. The E.U. has included the aviation sector in its emissions trading scheme (“ETS”) but its application to flights within the European Economic Area (“EEA”) deferred any further application until 2024, pending a review of the results of a new initiative introduced by the promulgated by ICAO.
In October 2016, ICAO adopted a global market-based measure to control CO2 emissions from international aviation. This measure is the “Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) with the aim of lesseesachieving carbon-neutral growth from 2020 onwards. The CORSIA pilot phase (2021-2023) and significant changes would materially affect their operating results.
Over time, it is possible that governments will adopt additional regulatory requirements and/or market-based policies to reduce emissions and noise levels from aircraft. Such initiatives may be unable to passbased on increasesconcerns regarding climate change, energy security, public health, local impacts, or other factors, and may impact the global market for certain aircraft and cause behavioral shifts that result in fuel prices to their customers by increasing fares in a manner that fully compensates for the costs incurred. Higher and more volatile fuel prices may also have an impact on consumer confidence and spending, and thus may adversely impactdecreased demand for air transportation. In addition, airlines may not be able to successfully manage their exposure to fuel price fluctuations. If fuel prices increase due totravel. These concerns could result in limitations on the operation of our fleet, particularly aircraft equipped with older technology engines.
Compliance with current or future terrorist attacks, acts of war, armed hostilities, rebellion or political instability, natural disasters or for any other reason, they are likely toregulations could cause our lessees to incur higher costs and/or generateand lead to higher ticket prices, which could mean lower revenues, resulting in andemand for travel and adverse impactimpacts on theirthe financial condition and liquidity. Fuel cost volatilityof our lessees. Such compliance may contribute to the reluctance of airlines to make future commitments to leased aircraft and reduce the demand for lease aircraft. Consequently, these conditions may: (i)also affect our lessees’ ability to make rental and other lease payments; (ii)payments and limit the market for aircraft in our portfolio.
The older age of some of our aircraft may expose us to higher maintenance related expenses.
In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Additionally, older aircraft typically are less fuel-efficient than newer aircraft and may be more difficult to re-lease or sell, particularly if, due to increasing production rates by aircraft manufacturers or airline insolvencies, older aircraft are competing with an excess of newer aircraft in the lease or sale market. Expenses like fuel, carbon charges, aging aircraft inspections, maintenance or modification programs and related airworthiness directives could make the operation of older aircraft less economically viable and may result in increased lessee defaults. We may also incur some of these increased maintenance expenses and regulatory costs upon acquisition or re-leasing of our aircraft. Re-leasing larger wide-body aircraft may result in higher reinvestment and maintenance expenditures than re-leasing narrow-body aircraft.
The concentration of aircraft types in our aircraft portfolio could lead to adverseeffects on our business should any difficulties specific toa particular type of aircraft occur.
Our portfolio is concentrated in certain aircraft types. Should any aircraft types or any aircraft manufacturers encounter technical, financial or other difficulties, it would cause a decrease in value of these aircraft, an inability to lease restructurings and/them on favorable terms or at all, or a potential grounding of these aircraft, repossessions;which may adversely impact our financial results, to the extent the affected type comprises a significant percentage of our portfolio.
We operate in a highly competitive market for investment opportunities and for the leasing and sale of aircraft.
We compete with other lessors, airlines, aircraft manufacturers, financial institutions, aircraft brokers and other investors with respect to aircraft acquisitions, leasing and sales. The aircraft leasing industry is highly competitive and may be divided into three basic activities: (i) aircraft acquisition; (ii) leasing or re-leasing of aircraft; and (iii) increaseaircraft sales.
A number of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances, lower investment return expectations or different risk or residual value assessments, which could allow them to consider a wider variety of investments, establish more relationships, bid more aggressively on aviation assets available for sale and offer lower lease rates or sales prices than we can. Some of our competitors may provide financial services, maintenance services or other inducements to potential lessees or buyers that we cannot provide. As a result of competitive pressures, we may not be able to take advantage of attractive investment opportunities, and we may not be able to identify and make investments that are consistent with our investment objectives. Additionally, the barriers to entry in the aircraft acquisition and
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leasing market are comparatively low, and new entrants appear from time to time. We may not be able to compete effectively against present and future competitors in the aircraft acquisition, leasing or sales market.
Risks Related to Our Leases
If lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease.
The standards of maintenance observed by lessees and the condition of the aircraft may affect the future values and rental rates for our aircraft.
Under our leases, the lessee is responsible for maintaining the aircraft and complying with all governmental requirements applicable to the lessee and the aircraft, including, operational, maintenance, and registration requirements and airworthiness directives, although in certain cases we may agree to share certain of these costs. Failure of a lessee to perform required aircraft maintenance or required airworthiness directives could result in a decrease in value of such aircraft, an adverse effect on our ability to lease the aircraft at favorable rates or at all, or a potential grounding of such aircraft, and will likely require us to incur increased maintenance and modification costs upon the expiration or earlier termination of the applicable lease, which could be substantial, to restore such aircraft to an acceptable condition. If any of our aircraft are not subject to a lease, we would be required to bear the entire cost of maintaining that aircraft and performing any required airworthiness directives.
Many of our leases provide that the lessee is required to make periodic payments to us during the lease term to provide reserves for major maintenance events. In these leases there is an associated liability for us to reimburse the lessee after such maintenance is performed. A substantial number of our leases do not provide for any periodic maintenance reserve payments to be made to us. Typically, these lessees are required to make payments at the end of the lease term. However, in the event such lessees default, the value of the aircraft could be negatively affected by the maintenance condition and we may be required to fund the entire cost of performing major maintenance on the relevant aircraft without having received compensating maintenance payments from these lessees.
Even if we receive maintenance payments, these payments may not cover the entire expense of the scheduled maintenance they are intended to fund. In addition, maintenance payments typically cover only certain scheduled maintenance requirements and do not cover all required maintenance and all scheduled maintenance. As a result, we may incur unanticipated or significant costs at the conclusion of a lease.
Failure to pay certain potential additional operating costs could result in the grounding or arrest of our aircraft and prevent the re-lease, sale or other use of our aircraft.
As in the case of maintenance costs, we may incur other operational costs upon a lessee default or where the terms of the lease require us to pay a portion of those costs. Such costs include:
•the costs of re-leasingcasualty, liability and political risk insurance and the liability costs or sellinglosses when insurance coverage has not been or cannot be obtained as required, or is insufficient in amount or scope;
•the costs of licensing, exporting or importing an aircraft, airport charges, customs duties, air navigation charges, landing fees and similar governmental or quasi-governmental impositions, which can be substantial;
•penalties and costs associated with the failure of lessees to keep aircraft registered under all appropriate local requirements or obtain required governmental licenses, consents and approvals; and
•carbon taxes or other fees, taxes or costs imposed under emissions limitations, climate change regulations or other initiatives.
The failure to pay certain of these costs can result in liens on the aircraft. The failure to register the aircraft can result in a loss of insurance. These matters could result in the grounding or arrest of the aircraft and prevent the re-lease, sale or other use of the aircraft until the problem is cured.
Our lessees may have inadequate insurance coverage or fail to fulfill their respective indemnity obligations, which could result in us not being covered for claims asserted against us.
By virtue of holding title to the aircraft, lessors may be held strictly liable for losses resulting from the operation of aircraft or may be held liable for those losses based on other legal theories. Liability may be placed on an aircraft lessor in certain jurisdictions even under circumstances in which the lessor is not directly controlling the operation of the aircraft.
Lessees are required under our aircraft;leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or (iv) impairinjury to persons and damage to property for which we
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may be deemed liable. Lessees are required to maintain public liability, property damage and hull all risk and hull war risk insurance on the aircraft at agreed upon levels. However, they are not generally required to maintain political risk insurance. Following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to airlines for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events. At the same time, they significantly increased the premiums for such third-party war risk and terrorism liability insurance and coverage in general. Aviation insurers may take similar actions in response to the potential losses arising from aircraft not being returned from Russia as a result of sanctions. As a result, the amount of such third-party war risk and terrorism liability insurance that is commercially available at any time may be below the amount stipulated in our leases.
Our lessees’ insurance, including any available governmental supplemental coverage, may not be sufficient to cover all types of claims that may be asserted against us. Any inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations will reduce the proceeds that would be received by us upon an event of loss under the respective leases or upon a claim under the relevant liability insurance.
Failure to obtain certain required licenses and approvals could negatively affect our ability to re-lease or sell aircraft.
A number of our lessees must obtain licenses, consents or approvals in order to import or operate the aircraft onor comply with the leases. These include consents from governmental or regulatory authorities for certain payments under the leases and for the import, export or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase such requirements and a timely basis at favorable ratesgovernmental consent, once given, might be withdrawn. Consents needed in connection with future re-leasing or terms,sale of an aircraft may not be forthcoming. Any of these events could adversely affect our ability to re-lease or at all.sell aircraft.
Risks Related to Our Operations
The effectsCOVID-19 pandemic has significantly impacted our results of terrorist attacksoperations and geopolitical conditions might adverselymay continue to have an adverse impact on our business.
The COVID-19 pandemic and related mitigation efforts have had an unprecedented negative impact on the aviation sector, resulting in a dramatic slowdown in air traffic. Substantially all the world’s airlines have experienced financial conditiondifficulties and liquidity challenges, including many of our customers. While there have been improvements in many markets, particularly in terms of domestic travel, according to IATA, as of February 2022, air travel was still down to approximately 55% compared to normal levels. A full recovery to pre-pandemic levels is not expected for several years and will depend on the effectiveness of vaccinations efforts and the continued easing of travel restrictions, among other things. While the extent and duration of the impact of the COVID-19 pandemic remain unknown, we continue to believe long-term demand for air travel will return to historical trends over time.
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, and request concessions from lessors, and in certain cases, seek judicial protection. If air traffic remains depressed and our lessees mightcustomers 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 meet theircollect all the amounts we have deferred.
While we continued to receive requests from our customers for lease payment obligations.concessions, such as deferrals of lease payments or broader lease restructurings, the number of requests for such concessions during the year ended February 28, 2022 has declined compared to 2021. As of February 28, 2022, we had deferred rent receivables of $55,478 related to nine customers that were included in other assets. Approximately 93% of these deferrals have been agreed to as part of broader lease restructurings, which generally include term extensions, better security packages, or other valuable considerations in exchange for short-term economic concessions. The outstanding deferred rent receivables are scheduled to be repaid, on average, within the next seven years.
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result of these proceedings, the recognition of lease rental revenue for certain customers may be done on a cash basis of accounting rather than the accrual method depending on the customers lease security arrangements.
We believe that our platform, personnel, and other international tensionslong-standing business strategy of maintaining conservative leverage, limiting long-term financial commitments, and focusing our portfolio on more liquid narrow-body aircraft have enabled and will enable us to manage through the COVID-19 crisis. While we cannot currently reasonably estimate the extent to which the COVID-19 pandemic will impact our business, we expect our business, results of operations and financial condition will continue to be negatively impacted in the near term.
Volatile financial market conditions may leadadversely impact our liquidity, our access to regional or broader international instability. Future terrorist attacks, war or armed hostilities, large protests or government instability, or the fearcapital and our cost of such events, could further negativelycapital and may adversely impact the airline industry and may have an adverse effect on the financial condition and liquidity of our lessees,lessees.
The availability and pricing of capital in the commercial bank market and in the unsecured bond market remain susceptible to global events, including political changes, rising interest rates, currency fluctuations, the rate of international economic growth and implications from changes in oil prices. If we need, but cannot obtain, adequate capital on satisfactory terms, or at all, as a result of negative conditions in the capital markets or otherwise, our business, financial condition, results of operations could be materially adversely affected.
We bear the risk of re-leasing and selling our aircraft.
We bear the risk of re-leasing or selling our aircraft valuesin order to continue to generate cash flows. Only a portion of an aircraft’s value is covered by contractual cash flows from leases, so we are exposed to the risk that the residual value will not be sufficient to permit us to fully recover our investment and that we may have to record impairment charges. In certain cases we commit to purchase aircraft that are not subject to lease and therefore are subject to lease placement risk.
Other factors that may affect our ability to fully realize our investment in our aircraft and that may increase the likelihood of impairment charges include credit deterioration of a lessee, higher fuel prices which may reduce demand for older, less fuel-efficient aircraft, additional environmental regulations, age restrictions, customer preferences and other factors that may effectively shorten the useful life of older aircraft.
We own and lease long-lived assets and have written down the value of some of our assets. If market conditions worsen, or in the event of a customer default, we may be required to record further write-downs.
We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis annually. In addition, a recoverability assessment is performed whenever events or changes in circumstances indicate that the carrying amount or net book value of an asset may not recoverable. Possible indicators include a significant lease restructuring or early lease termination, a significant change in aircraft model’s storage levels, the introduction of newer technology aircraft or engines, an aircraft type that is no longer in production or significant airworthiness directive that is issued.
We continue to closely monitor the impact of COVID-19 on our customers, air traffic, lease rental rates, and aircraft valuations, and will perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may leadimpact 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 restructuringsexpirations, and certain aircraft variants that are more susceptible to the impact of COVID-19 and value deterioration.
The recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors. If our estimates or assumptions change, we may revise our cash flow assumptions and record future impairment charges.
Departure of key officers could harm our business and financial results.
Our senior management’s reputations and relationships with lessees, sellers, buyers and financiers of aircraft repossessions, allare a critical element of whichour business. We encounter intense competition for qualified employees from other companies in the aircraft leasing industry, and we believe there are only a limited number of available qualified executives in our industry. The Company seeks to retain a pipeline of senior management personnel with superior talent to provide continuity of succession, including for the Chief Executive Officer position and other senior positions. Our Board of Directors is involved in succession planning, including review of short- and long-term succession plans for senior positions. Our
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future success depends, to a significant extent, upon the continued service of our senior management personnel, including the Chief Executive Officer, and if we lose one or more of these individuals, our business could be adversely affected.
We are subject to risks related to our indebtedness that may limit our operational flexibility and our ability to compete with our competitors.
As of February 28, 2022, our total indebtedness was $4.5 billion, representing 71.2% of our total capitalization. Aircastle Limited is either the principal obligor or has guaranteed most of this indebtedness, and we are responsible on a full recourse basis for timely payment when due and compliance with covenants under the related debt documentation. We may be unable to generate sufficient cash to pay, when due, the principal of, interest on or other amounts due with respect to our indebtedness, and our substantial amount of indebtedness may increase our vulnerability to adverse economic and industry conditions, reduce our flexibility in planning for or reaction to changes in the business environment or in our business or industry, and adversely affect our financial results.cash flow and our ability to operate our business and compete with our competitors. Our indebtedness subjects us to certain risks, including:
•our failure to comply with the terms of our indebtedness, including restrictive covenants, may result in additional interest being due or will continue to be available; (vi) limited ability of airlines to reduce their operating costs and conserve financial resources, taking into account the increased costs incurred as a consequence of terrorist attacks and geopolitical conditions, including those referred to above; and (vii) special charges recognized by some airlines, such as those related to the impairment of aircraft and other long lived assets stemming from the above conditions.
•non-compliance with covenants prohibiting certain investments and the E.U.other restricted payments, raise additional capital or refinance our existing debt, may reduce our operational flexibility and limit our ability to refinance.
An increase in our borrowing costs may adversely affect our earnings.
We primarily finance our business through the issuance of Senior Notes. As our Senior Notes mature, we will be required to repay them by issuing new Senior Notes, which could result in higher borrowing costs, or repay them by using cash on hand or cash from the sale of our assets.
The provisions of our long-term financings require us to comply with financial and other covenants. Our compliance with these ratios, tests and covenants depends upon, among other things, the timely receipt of lease payments from our lessees and upon our overall financial performance.
•Senior Notes. Our senior note indentures impose operating and financial restrictions on our activities. These restrictions limit our ability to, or in certain cases prohibit us from, incurring or guaranteeing additional indebtedness, refinancing our existing indebtedness, making other restricted payments, making certain investments or entering into joint ventures and a cross-default to certain other financings of the Company.
•Bank Financings. Our secured bank financings contain, among other customary provisions, a $500 million minimum net worth covenant, a cross-default to certain other financings of the Company, and for one portfolio financing, a minimum debt service coverage ratio of 1.15.
•Unsecured Revolving Credit Facilities and Loan. Our unsecured revolving credit facilities/loan contain $750 million minimum net worth covenants, minimum unencumbered asset ratios, minimum interest coverage ratios and cross-defaults to certain other financings of the Company.
•ECA Financings. Our ECA Financings contain a $500 million minimum net worth covenant and also contain, among other customary provisions, a material adverse change default and a cross-default to certain other financings of the Company.
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The terms of our financings also restrict our ability to incur or guarantee additional indebtedness or engage in mergers, amalgamations or consolidations among our subsidiary companies or between a subsidiary company and a third party or otherwise dispose of all or substantially all of our assets.
We are subject to various risks and requirements associated with transacting business in foreign jurisdictions.
The international nature of our business exposes us to trade and economic sanctions and other restrictions imposed by the U.S. and other governments. The U.S. Departments of Justice, Commerce and Treasury, as well as other agencies and authorities have a broad range of civil and criminal penalties, they may seek to impose against companies for violations of export controls, the Foreign Corrupt Practices Act (“FCPA”), and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Increasingly, similar or more restrictive foreign laws, rules and regulations, including the U.K. Bribery Act (“UKBA”), and European laws and regulations may also apply to us. By virtue of these laws and regulations, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws, and we expect the relevant agencies to continue to increase these activities.
We have compliance policies and training programs in place for our employees with respect to FCPA, OFAC Regulations, UKBA and similar laws, but there can be no assurance that our employees, consultants or agents will not engage in conduct for which we may be held responsible. Violations of FCPA, OFAC Regulations, UKBA and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities.
The General Data Protection Regulation (“GDPR”) requires us to protect certain personal data of E.U. citizens. While we have implemented processes and controls to comply with GDPR requirements, the manner in which the E.U. will interpret and enforce certain provisions remains unclear and we could incur significant fines of up to 4% of worldwide revenue, individual damages and reputational risks if the E.U. determines that our controls and processes are ineffective and we have failed to adequately comply with the requirements.
We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration.
We are dependent upon information technology systems to manage, process, store and transmit information associated with our operations, which may include proprietary business information and personally identifiable information of our customers, suppliers and employees. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including malware, ransomware, security breaches, cyber-attacks, employee error and defects in design. There may be an elevated risk of cyber-attacks by Russia tin response to economic sanctions imposed by the U.S., the E.U., the U.K. and other countries resulting from the Russian invasion of Ukraine. Damage, disruption, or failure of information technology systems may result in interruptions to our operations or may require a significant investment to fix or replace them or may result in significant damage to our reputation. Although various measures have been implemented to manage our risks related to the Boeing 737 MAX Groundings
Risks Related to Our Organization and Structure
We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations.
We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends to our shareholders.obligations. Although there are currently no material legal restrictions on our operating subsidiaries’ ability to distribute assets to us,
legal restrictions, including governmental regulations and contractual obligations, could restrict or impair our operating subsidiaries’ ability to pay dividends or make loan or other distributions to us. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions.
Risks Related to Taxation
If Aircastle were treated as engaged in a trade or business in the United States, it would be subject to U.S. federal income taxation on a net income basis, which would adversely affect our business and result in decreased cash available for distribution to our shareholders.business.
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If, contrary to expectations, Aircastle were treated as engaged in a trade or business in the United States, the portion of its net income, if any, that was “effectively connected” with such trade or business would be subject to U.S. federal income taxation at a maximum rate of 35% for taxable years ending on or prior to December 31, 2017 and 21% for taxable years beginning after December 31, 2017 (such rate, the “Federal Rate”). Such reduction in the Federal Rate occurred as a result of the passage of The Tax Cuts and Jobs Act on December 22, 2017 (the “Tax Act”). In addition, Aircastle would be subject to the U.S. federal branch profits tax on its effectively connected earnings and profits at a rate of 30%. The imposition of such taxes would adversely affect our business and would result in decreased cash available for distribution to our shareholders.business.
If there is not sufficient trading in shares of our shares,ultimate parent company, or if 50% of oursuch shares are held by certain 5% shareholders, we could lose our eligibility for an exemption from U.S. federal income taxation on rental income from our aircraft used in “international traffic” and could be subject to U.S. federal income taxation, which would adversely affect our business and result in decreased cash available for distribution to our shareholders.business.
We expect that we are currently eligible for an exemption under Section 883 of the Internal Revenue Code of 1986, as amended (the “Code”), which provides an exemption from U.S. federal income taxation with respect to rental income derived from aircraft used in international traffic by certain foreign corporations. No assurances can be given that we will continue to be eligible for this exemption as our stock is traded on the market and changes in our ownership or the amount of our shares that are traded could cause us to cease to be eligible for such exemption. To qualify for this exemption in respect of rental income, the lessor of the aircraft must be organized in a country that grants a comparable exemption to U.S. lessors (Bermuda and Ireland each do), and certain other requirements must be satisfied. We can satisfy these requirements in any year if, for more than half the days of such year, our shares are primarily and regularly traded on a recognized exchange and certain shareholders, each of whom owns 5% or more of our shares (applying certain attribution rules), do not collectively own more than 50% of our shares. Our shares will be considered to be primarily and regularly traded on a recognized exchange in any year if: (i) the number of trades in our shares effected on such recognized stock exchanges exceed the number of our shares (or direct interests in our shares) that are traded during the year on all securities markets; (ii) trades in our shares are effected on such stock exchanges in more than de minimis quantities on at least 60 days during every calendar quarter in the year; and (iii) the aggregate number of our shares traded on such stock exchanges during the taxable year is at least 10% of the average number of our shares outstanding in that class during that year. Following the Merger, these stock ownership requirements will beare currently tested at the Marubeni and Mizuho Leasing levels such
that Aircastle and its subsidiaries can continue to qualify for the Section 883 exemption if the stock of Marubeni is considered to be primarily and regularly traded on a recognized stock exchange and non-qualifying 5% or greater shareholders are not considered to collectively own more than 50% of Marubeni’s shares, as described above. If our (or, following the Merger, Marubeni’s)Marubeni’s shares cease to satisfy these requirements, then we may no longer be eligible for the Section 883 exemption with respect to rental income earned by aircraft used in international traffic. If we were not eligible for the exemption under Section 883 of the Code, we expect that the U.S. source rental income of Aircastle Bermuda generally would be subject to U.S. federal taxation, on a gross income basis, at a rate of not in excess of 4% as provided in Section 887 of the Code. If, contrary to expectations, Aircastle Bermuda did not comply with certain administrative guidelines of the Internal Revenue Service, such that 90% or more of Aircastle Bermuda’s U.S. source rental income were attributable to the activities of personnel based in the United States, Aircastle Bermuda’s U.S. source rental income would be treated as income effectively connected with the conduct of a trade or business in the United States. In such case, Aircastle Bermuda’s U.S. source rental income would be subject to U.S. federal income taxation on its net income at the Federal Rate as well as state and local taxation. In addition, Aircastle Bermuda would be subject to the U.S. federal branch profits tax on its effectively connected earnings and profits at a rate of 30%. The imposition of such taxes would adversely affect our business and would result in decreased cash available for distribution to our shareholders.business.
Bermuda Economic Substance Act 20182018.
Pursuant to the Economic Substance Act 2018 (as amended) of Bermuda (the “ESA”) that came into force onin January 1, 2019, a registered entity other than an entity which is resident for tax purposes in certain jurisdictions outside Bermuda (“non-resident entity”) that carries on as a business any one or more of the “relevant activities” referred to in the ESA must comply with economic substance requirements. The ESA may require in-scope Bermuda entities which are engaged in such “relevant activities” to be directed and managed in Bermuda, have an adequate level of qualified employees in Bermuda, incur an adequate level of annual expenditure in Bermuda, maintain adequate physical presence in Bermuda or perform core income-generating activities in Bermuda. The list of “relevant activities” includes, among other things, carrying on any one or more of: banking, insurance, fund management, financing and leasing (which excludes operating leases), headquarters, shipping, distribution and service center, intellectual property and holding entities.
Entities subject to the economic substance requirements will beare required to evidence their compliance and file an economic substance declaration with the Registrar of Companies in Bermuda on an annual basis.
Any entity that must satisfy economic substance requirements but fails to do so could face financial penalties, a restriction of its business activities, automatic reporting by the Bermuda authorities to the competent authorities in the European Union or other jurisdiction of the entity’s beneficial owners, on an entity’s non-compliance or being struck-of as a registered entity in Bermuda. If any one of the foregoing were to occur it may adversely affect the business operations of the Company or its Bermuda subsidiaries.
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The Company and its Bermuda subsidiaries believe they have complied with the ESA requirements and have filed, and will continue to file, anannual economic substance declarationdeclarations with the Registrar of Companies in Bermuda.Bermuda as required. The Registrar of Companies in Bermuda will ultimately assessassesses compliance with the ESA requirements.
We may become subject to an increased rate of Irish taxation which would adversely affect our business and would result in decreased earnings available for distribution to our shareholders.business.
Our Irish subsidiaries and affiliates are expected to be subject to corporation tax on their income from leasing, managing, and servicing aircraft at the 12.5% tax rate applicable to trading income. This expectation is based on certain assumptions, including that we will maintain at least the current level of our business operations in Ireland. If we are not successful in achieving trading status in Ireland, the non-trading income activities of our Irish subsidiaries and affiliates would be subject to tax at the rate of 25% and capital gains would be taxed at the rate of 35%, which would adversely affect our business and would result in decreased earnings available for distribution to our shareholders.
We may become subject to income or other taxes in the non-U.S. jurisdictions in which our aircraft operate, where our lessees are located or where we perform certain services which would adversely affect our business and result in decreased cash available for distributions to shareholders.business.
Certain Aircastle entities are expected to be subject to the income tax laws of Ireland Mauritius, Singapore and the United States. In addition, we may be subject to income or other taxes in other jurisdictions by reason of our activities and operations, where our aircraft operate or where the lessees of our aircraft (or others in possession of our aircraft) are located. Although we have adopted operating procedures to reduce the exposure to such taxation, we may be subject to such taxes in the future and such taxes may be substantial. In addition, if we do not follow separate operating guidelines relating to managing a portion of our aircraft portfolio through offices in Ireland and Singapore, income from aircraft not owned in such jurisdictions would be subject to local tax. Changes in tax law could impose withholding taxes on lease payments during the term of a lease. Our leases typically require our lessees to indemnify us in respect of taxes, but some leases may not require such indemnification, or a lessee may fail to make such indemnification payment. The imposition of such taxes could adversely affect our business and result in decreased earnings available for distribution to our shareholders.
The introduction of Base Erosion and Profit Shifting by the Organization for Economic Cooperation and Development'sDevelopment may impact our effective tax rate in future periods.
The Organization for Economic Co-operation and Development (the “OECD”) has introduced an action plan with respect to base erosion and profit shifting (“BEPS”). The plan targets among other things tax avoidance measures such as hybrid instruments, excessive interest deductions, treaty shopping, and permanent establishment avoidance.
As part of its BEPS actions, the OECD published the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (the “MLI”(“MLI”). Since June 7, 2017, representatives from over 9395 jurisdictions have signed up to the MLI. The MLI seeks to incorporate agreed tax treaty-related measures combating tax avoidance into bilateral existing tax treaties without the need to negotiate a new treaty.treaties. The MLI may apply to double tax treaties entered into by other countries in which we have operations (in some cases with effect from as early as January 1, 2019).
The MLI entered into force for Ireland onin May 1, 2019, and became effective for withholding tax on January 1, 2020. The MLI changed Ireland's treaties by including a principal purpose test (“PPT”), which will disallow treaty benefits where it is reasonable to conclude that the main purpose or one of the main purposes of a transaction or arrangement is to obtain directly or indirectly the benefits of the treaty. Given the subjectivity of the PPT, there is a risk that each counterparty jurisdiction will interpret it differently, which creates uncertainty in its application to leasing and other arrangements. Until such time as countries develop guidance on how the test will be applied, it will be difficult to determine its effect on us.
Ireland did not adopt the MLI’s “dependent agent” permanent establishment threshold. Some countries could seek a bilateral re-negotiation on the point to change the dependent agent provisions in their tax treaty with Ireland. Any such change could take some time to be agreed and subsequently ratified before it could come into effect.
Further changes to tax law will be required in order to fully implement the BEPS action plans. At this moment, it is difficult to determine what further BEPS actions the governments of lessee jurisdictions will implement. Depending on the nature of the BEPS action plans adopted, it may result in an increase in our effective tax rate and cash taxes liabilities in future periods.
The introduction of the OECD Action Plan on BEPS to address the tax challenges of the digitalization of the economy and the impact it may have, if any, on our effective tax rate in future periods.
In January 2019, the OECD announced a new program of work (referred to as “BEPS 2.0”) with a view to creating an international consensus on new rules governing international taxation, particularly for businesses with valuable
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intangible assets. The stated aim is to move beyond the arm’s length principle and the scope of current taxing rights are limited to businesses with a physical presence in a country. The new rules, if adopted, would readjust the balance of taxing rights and multinational companies (“MNC”) profit allocation between jurisdictions where MNC assets are owned and the markets where users and consumers are based.
BEPS 2.0 proposes to address this reform through two main pillars of work that are interlinked:
•Pillar 1 - Arriving at a new basis for taxing profits of multinational enterprises (“MNEs”) with global turnover above 20 billion euros and profitability above 10% through the allocation of an amount of taxable profits to market jurisdictions in which those MNEs operate.
•Pillar 2 - Strengthening taxing rights to preserve the tax base and counteract profit shifting to jurisdictions with nil or low effective tax rates, including through the implementation of a global minimum tax rate of 15%.
On October 12, 2020, OECD published Blueprints for Pillar 1 and Pillar 2, together with accompanying documentation including an impact assessment.
On October 7, 2021, Ireland announced it was signing on to the OECD BEPS 2.0 plan. Under this plan, Ireland will increase its corporation tax rate to achieve a 15% effective rate for multinational groups within the scope of Pillar 2. Ireland also agreed to Pillar 1 proposals that reallocate taxing rights to market jurisdictions for in scope multinational groups. These changes are expected to take effect in 2023. The timing of the implementation of the Pillar 1 and Pillar 2 rules will depend on the publication of an E.U. Directive that will ensure consistent implementation of the rules across the E.U.
On March 12, 2022, the E.U. released the latest draft of the E.U. Directive to implement the OECD Pillar 2 model rules in the E.U. This draft includes a proposal to defer the transposition deadline to December 31, 2023 with the rules to become effective for fiscal years beginning as from this same date and an option for Member States to defer the application of the Income and Inclusion Rule and the Undertaxed Profit Rule (“UTPR”) even further provided that they host fewer than ten Ultimate Parent Entities of in-scope groups. The compromise text also proposes that the implementation of UTPR would be deferred so as to apply in respect of fiscal years beginning from December 31, 2024.
Given that the OECD and the E.U. are still developing their plans under BEPS 2.0 and the scope of many unilateral measures remain unclear, it is unclear what impact the eventual implementation of these plans will have on our business.
The E.U. Anti-tax Avoidance proposals may impact our effective rate of tax in future periods.
The Council of the E.U. has implemented the E.U. Anti-Tax Avoidance Directives (“EUE.U. ATAD”) and the amending Directive (“EUE.U. ATAD 2”). These Directives seek to oblige all E.U. member states to introduce a number of anti-tax avoidance measures.
Most of the measures were implemented with effect from January 1, 2019, though certain measures may be deferred to 2024. The EUE.U. ATAD contemplates the introduction of a restriction on the deductibility of interest, measures in respect of certain hybrid transactions and instruments, an exit charge, a switch over rule, controlled foreign company rules as well as a general anti-avoidance rule.
The impact of the other measures in respect of certain hybrid transactions and instruments, an exit charge, a switch over rule, controlled foreign company rules as well as a general anti-avoidance rule will depend on the exact scope of these measures. The impact on the Company’s tax position (if any), will depend on the implementation of these measures in Ireland and other EUE.U. jurisdictions where we have operations.
On December 22, 2021, the European Commission issued a proposal for a Council Directive to issue rules to prevent the Proposed Mergermisuse of shell entities for tax purposes within the E.U. (the “Unshell Proposal”). While the Unshell Proposal
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is subjectexpected to closing conditions, including governmental, regulatorybe adopted and shareholder approvals,published into E.U. Member States’ national laws by June 30, 2023, and to come into effect as well as other uncertainties andof January 1, 2024, there can be no assurances as to whether and when it may be completed. Failure to completeis considerable uncertainty surrounding the Merger could negatively impact our share price, future business and financial results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease office space in Stamford, Connecticut, Dublin, Ireland and in Singapore. The lease for our current office in Stamford, Connecticut expires in August 2028. The lease for our Dublin office expires in JuneOctober 2026 and the lease on our Singapore office expires in July 2022. None of these leases are individually material to the Company’s consolidated financial statements.
We believe our current facilities are adequate for our current needs and that suitable additional space will be available as and when needed.
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Information about our Executive Officers
Executive officers are elected by our Board of Directors, and their terms of office continue until the next annual meeting of the board or until their successors are elected and have been duly qualified. There are no family relationships among our executive officers.
Set forth below is information pertaining to our executive officers who held office as of February 10, 2020:April 25, 2022:
Michael Inglese, 58,61, became our Chief Executive Officer and a member of our Board in June 2017, having served as our Acting Chief Executive Officer from January 2017. He was previously our Chief Financial Officer from April 2007. Prior to joining the Company, Mr. Inglese served as an Executive Vice President and Chief Financial Officer of PanAmSat Holding Corporation, where he served as Chief Financial Officer from June 2000 until the closing of PanAmSat’s sale to Intelsat in July 2006. Mr. Inglese joined PanAmSat in May 1998 as Vice President, Finance after serving as Chief Financial Officer for DIRECTV Japan, Inc. He is a Chartered Financial Analyst who holds a BS in Mechanical Engineering from Rutgers University College of Engineering and his MBA from Rutgers Graduate School of Business Management. Mr. Inglese is also a member of the Board of Directors of the Business Council for Fairfield County.
Aaron Dahlke, 51,53, became our Chief Financial Officer in June 2017. Prior to that, he was our Chief Accounting Officer from June 2005. Prior to joining the Company, Mr. Dahlke was Vice President and Controller of Boullioun Aviation Services Inc. from January 2003 to May 2005. Prior to Boullioun, Mr. Dahlke was at ImageX.com, Inc. and Ernst & Young LLP. He received a BS in Accounting from California State University, San Bernardino. He is a Certified Public Accountant.
Douglas C. Winter, 56,58, became our Chief Commercial Officer in April 2019. Prior to joining Aircastle, Mr. Winter was Vice Chairman of Amedeo, a leading aircraft asset manager, from July 2018 to March 2019, as well as Chief Executive Officer and member of the Board of Managers at Voyager Aviation (“Voyager”) from October 2017 to March 2019. Prior to this, he served as President and Chief Commercial Officer at Voyager from September 2015 to September 2017. Mr. Winter joined Voyager in June 2015 as Chief Commercial Officer. Previously, Mr. Winter was an advisor to GE Capital Aviation Services and Chief Executive Officer of Octagon Aviation from June 2013 to May 2015 and, before this, he served as Head of Global Sales at AWAS in Dublin, Ireland from December 2010 to May 2013. Mr. Winter has
25
over 30twenty years of experience in commercial aviation, having started his career with McDonnell Douglas in 1985, and he holds a BS in Business from Indiana University.
Christopher L. Beers, 55,57, is our Chief Legal Officer & Secretary and became our General Counsel in November 2014. Prior to joining the Company, Mr. Beers held senior positions at GE Capital since 2000, including Senior Vice President and Associate General Counsel at GECAS from 2009 to 2014, and Senior Vice President and General Counsel of GE Transportation Finance from 2006 to 2009. Previously, Mr. Beers was a Senior Associate at the law firm of Milbank Tweed Hadley and McCloy in New York City. Mr. Beers holds a BS in Economics from Arizona State University and a JD from Pace Law School.
Joseph Schreiner, 62,64, became our Chief Technical Officer in March 2020. Mr. Schreiner was previously our Executive Vice President, Technical infrom October 2004.2004 to March 2020. Prior to joining the Company, Mr. Schreiner oversaw the technical department at AAR Corp, a provider of products and services to the aviation and defense industries from 1998 to 2004 where he managed aircraft and engine evaluations and inspections, aircraft lease transitions, reconfiguration and heavy maintenance. Prior to AAR, Mr. Schreiner spent nineteen years at Boeing (McDonnell-Douglas) in various technical management positions. Mr. Schreiner received a BS from the University of Illinois and an MBA from Pepperdine University.
Roy Chandran, 56,58, became our Chief Strategy Officer in March 2020. Mr. Chandran was previously our Executive Vice President, Corporate Finance and Strategy infrom June 2017.2017 to March 2020. He previously served as Executive Vice President of Capital Markets from May 2008. Prior to joining the Company, Mr. Chandran was a Director at Citi in the Global Structured Solutions Group, having originally joined Salomon Brothers in 1997. Mr. Chandran is responsible for all of the Company’s fund raising activities and strategy and has extensive experience in USU.S. and international capital markets. Before 1997, Mr. Chandran spent eight years in Hong Kong focusing on tax-based cross border leasing of transportation equipment for clients in the Asia Pacific region. Mr. Chandran holds a BS in Chemical Engineering from the Royal Melbourne Institute of Technology, Australia and obtained his MBA from the International Institute of Management Development (“IMD”), Switzerland.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||
| October 1 through 31 | — | $ | — | — | $ | 90,351 | |||||||
| November 1 through 30 | — | — | — | 90,351 | |||||||||
| December 1 through 31 | 482,876 | (2) | 31.98 | — | 90,351 | ||||||||
| Total | 482,876 | $ | 31.98 | — | $ | 90,351 | |||||||
| 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | ||||||||||||||||||
| Aircastle Limited | $ | 100.00 | $ | 101.82 | $ | 106.43 | $ | 124.97 | $ | 97.45 | $ | 190.83 | |||||||||||
| S&P Midcap 400 | 100.00 | 97.82 | 118.11 | 137.30 | 122.08 | 154.07 | |||||||||||||||||
| Peer Group | 100.00 | 107.40 | 105.60 | 136.90 | 97.41 | 153.75 | |||||||||||||||||
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (Dollars in thousands, except share data) | |||||||||||||||||||
| Selected Financial Data: | |||||||||||||||||||
| Consolidated Statements of Income: | |||||||||||||||||||
| Lease rental revenue | $ | 777,403 | $ | 722,694 | $ | 721,302 | $ | 725,220 | $ | 733,417 | |||||||||
Total revenues(1) | 917,938 | 890,351 | 851,787 | 812,084 | 877,219 | ||||||||||||||
| Selling, general and administrative expenses | 77,034 | 76,025 | 73,604 | 61,872 | 56,198 | ||||||||||||||
| Depreciation | 356,021 | 310,850 | 298,664 | 305,216 | 318,783 | ||||||||||||||
| Interest, net | 258,070 | 234,504 | 241,231 | 255,660 | 243,577 | ||||||||||||||
| Net income | 156,575 | 247,919 | 147,874 | 151,453 | 121,729 | ||||||||||||||
| Earnings per common share — Basic: | |||||||||||||||||||
| Net income per share | $ | 2.09 | $ | 3.18 | $ | 1.88 | $ | 1.92 | $ | 1.50 | |||||||||
| Earnings per common share — Diluted: | |||||||||||||||||||
| Net income per share | $ | 2.06 | $ | 3.17 | $ | 1.87 | $ | 1.92 | $ | 1.50 | |||||||||
| Cash dividends declared per share | $ | 1.22 | $ | 1.14 | $ | 1.06 | $ | 0.98 | $ | 0.90 | |||||||||
| Other Operating Data: | |||||||||||||||||||
| EBITDA | $ | 815,969 | $ | 814,184 | $ | 705,525 | $ | 734,989 | $ | 707,524 | |||||||||
| Adjusted EBITDA | 862,161 | 839,831 | 801,584 | 767,953 | 832,105 | ||||||||||||||
| Adjusted net income | 196,547 | 257,237 | 169,566 | 168,527 | 142,271 | ||||||||||||||
| Consolidated Statements of Cash Flows: | |||||||||||||||||||
Cash flows provided by operations(1) | $ | 536,418 | $ | 522,592 | $ | 490,871 | $ | 468,092 | $ | 526,285 | |||||||||
Cash flows used in investing activities(1) | (784,029 | ) | (974,687 | ) | (517,107 | ) | (663,155 | ) | (847,662 | ) | |||||||||
| Cash flows provided by (used in) financing activities | 235,201 | 386,091 | (248,724 | ) | 449,839 | 306,878 | |||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 140,882 | $ | 152,719 | $ | 211,922 | $ | 455,579 | $ | 155,904 | |||||||||
| Flight equipment held for lease, net of accumulated depreciation | 7,375,018 | 6,935,585 | 6,188,469 | 6,247,585 | 5,867,062 | ||||||||||||||
| Net investment in direct financing and sales-type leases | 419,396 | 469,180 | 545,750 | 260,853 | 201,211 | ||||||||||||||
| Total assets | 8,202,046 | 7,871,181 | 7,199,083 | 7,244,665 | 6,569,964 | ||||||||||||||
| Borrowings from secured and unsecured financings, net of debt issuance costs | 5,061,836 | 4,761,353 | 4,313,606 | 4,506,245 | 4,041,156 | ||||||||||||||
| Shareholders’ equity | 2,052,684 | 2,008,681 | 1,907,564 | 1,834,314 | 1,779,500 | ||||||||||||||
| Other Data: | |||||||||||||||||||
| Number of aircraft owned and managed on behalf of our joint ventures (at the end of period) | 287 | 261 | 236 | 206 | 167 | ||||||||||||||
| Total debt to total capitalization | 71.1 | % | 70.3 | % | 69.3 | % | 71.1 | % | 69.4 | % | |||||||||
| Total unencumbered assets | $ | 5,978,813 | $ | 6,207,411 | $ | 5,558,294 | $ | 5,069,955 | $ | 4,084,134 | |||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | $ | 151,453 | $ | 121,729 | |||||||||
| Depreciation | 356,021 | 310,850 | 298,664 | 305,216 | 318,783 | ||||||||||||||
| Amortization of lease premiums, discounts and incentives | 22,636 | 15,269 | 11,714 | 10,353 | 10,664 | ||||||||||||||
| Interest, net | 258,070 | 234,504 | 241,231 | 255,660 | 243,577 | ||||||||||||||
| Income tax provision | 22,667 | 5,642 | 6,042 | 12,307 | 12,771 | ||||||||||||||
| EBITDA | $ | 815,969 | $ | 814,184 | $ | 705,525 | $ | 734,989 | $ | 707,524 | |||||||||
| Adjustments: | |||||||||||||||||||
| Impairment of aircraft | 7,404 | — | 80,430 | 28,585 | 119,835 | ||||||||||||||
| Equity share of joint venture impairment | 2,724 | 15,791 | — | — | — | ||||||||||||||
| Loss on extinguishment of debt | 7,577 | — | — | — | — | ||||||||||||||
| Non-cash share-based payment expense | 15,830 | 11,488 | 13,148 | 7,901 | 5,537 | ||||||||||||||
Merger related expenses(1) | 7,886 | — | — | — | — | ||||||||||||||
| Loss (gain) on mark-to-market of interest rate derivative contracts | 4,771 | (1,632 | ) | 2,481 | (3,522 | ) | (791 | ) | |||||||||||
| Adjusted EBITDA | $ | 862,161 | $ | 839,831 | $ | 801,584 | $ | 767,953 | $ | 832,105 | |||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | $ | 151,453 | $ | 121,729 | |||||||||
Loss on extinguishment of debt(1) | 7,577 | — | — | — | — | ||||||||||||||
Ineffective portion and termination of cash flow hedges(2) | — | — | — | — | 455 | ||||||||||||||
Loss (gain) on mark-to-market of interest rate derivative contracts(1) | 4,771 | (1,632 | ) | 2,481 | (3,522 | ) | (791 | ) | |||||||||||
Loan termination (gain) fee(2) | — | (838 | ) | 2,058 | 4,960 | — | |||||||||||||
Write-off of deferred financing fees(2) | 172 | 300 | 4,005 | 2,880 | — | ||||||||||||||
Non-cash share-based payment expense(3) | 15,830 | 11,488 | 13,148 | 7,901 | 5,537 | ||||||||||||||
Merger related expenses and taxes(4) | 11,622 | — | — | — | — | ||||||||||||||
Term Financing No. 1 hedge loss amortization charges(2) | — | — | — | — | 4,401 | ||||||||||||||
Securitization No. 1 hedge loss amortization charges(2) | — | — | — | 4,855 | 10,940 | ||||||||||||||
| Adjusted net income | $ | 196,547 | $ | 257,237 | $ | 169,566 | $ | 168,527 | $ | 142,271 | |||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with Item 6. “Selected Financial Data” and our historical consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under Item 1A. — “Risk Factors” and elsewhere in this Annual Report. Please see “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our consolidated financial statements are prepared in accordance with U.S. GAAP and, unless otherwise indicated, the other financial information contained in this Annual Report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this Annual Report are to, and all monetary amounts in this Annual Report are presented in, U.S. dollars.
OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of December 31, 2019,February 28, 2022, we owned and managed on behalf of our joint ventures 287venture 260 aircraft that were leased to 8581 lessees located in 4945 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, althoughcosts. However, in certainmany cases we are obligated to pay a specified portion of specified maintenance or modification costs. As of December 31, 2019,February 28, 2022, the net book valueNet Book Value of our owned aircraftflight equipment was $7.79 billion compared to $7.40 billion at the end of 2018.$6.5 billion. Our revenues, net loss and net incomeAdjusted EBITDA were $769.8 million, $278.2 million, and $752.3 million for the year ended December 31, 2019 were $917.9February 28, 2022, and $832.3 million, $333.2 million and $156.6$774.4 million respectively, and for the fourth quarter of 2019 were $243.7 million and $47.3 million, respectively.
Acquisitions and Sales
During 2019,the year ended February 28, 2022, we acquired 49eighteen aircraft for $1.28 billion.$763.3 million. As of February 10, 2020, we have not acquired any additional aircraft. At December 31, 2019,28, 2022, we had commitments to acquire 3123 aircraft for $1.11 billion, including 25 new Embraer E-Jet E2 aircraft from Embraer,$819.3 million, with delivery beginning in 2020. These amountsbetween the first quarter of 2022 and the fourth quarter of 2024, which include estimated amounts for pre-delivery deposits, contractual price escalations and other adjustments. As of February 10, 2020,April 25, 2022, we have acquired one additional aircraft and have commitments to acquire 3123 aircraft for $1.11 billion.$842.3 million.
During 2019,the year ended February 28, 2022, we sold twentyfifteen aircraft and other flight equipment for $361.7net proceeds of $210.7 million which resulted inand recognized a net gain on sale of $45.5$26.0 million. As of February 10, 2020,April 25, 2022, we have sold fivetwo additional aircraft.
27
The following table sets forth certain information with respect to the aircraft owned and managed on behalf of our joint ventures by us as of December 31, 2019, 2018February 28, 2022 and 2017:2021, and February 29, 2020:
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
| Owned Aircraft | As of February 28, 2022(1) | As of February 28, 2021(1) | |||||||||||||||
| Net Book Value of Flight Equipment | $ | 6,464 | $ | 6,688 | |||||||||||||
| Net Book Value of Unencumbered Flight Equipment | $ | 5,352 | $ | 5,432 | |||||||||||||
| Number of Aircraft | 251 | 252 | |||||||||||||||
| Number of Unencumbered Aircraft | 219 | 219 | |||||||||||||||
| Number of Lessees | 81 | 75 | |||||||||||||||
| Number of Countries | 45 | 43 | |||||||||||||||
Weighted Average Age (years)(2) | 10.2 | 10.6 | |||||||||||||||
Weighted Average Remaining Lease Term (years)(2) | 4.9 | 4.2 | |||||||||||||||
Weighted Average Fleet Utilization during the Fourth Quarter(3) | 95.6 | % | 93.7 | % | |||||||||||||
Weighted Average Fleet Utilization for the Year Ended(3) | 94.2 | % | 94.5 | % | |||||||||||||
Portfolio Yield for the Fourth Quarter(4) | 10.4 | % | 8.5 | % | |||||||||||||
Portfolio Yield for the Year Ended(4) | 9.1 | % | 9.2 | % | |||||||||||||
| Managed Aircraft on behalf of Joint Venture | |||||||||||||||||
| Flight Equipment | $ | 298 | $ | 312 | |||||||||||||
| Number of Aircraft | 9 | 9 | |||||||||||||||
____________
(1)Calculated using Net Book Value at period end.
(2)Weighted by Net Book Value.
(3)Aircraft on lease as a percentage of total days in period weighted by net book value.
(4)Lease rental revenue, interest income and cash collections on our net investment in direct financing and sales-type leases for the period as a percent of the average Net Book Value for the period; quarterly information is annualized. The calculation of portfolio yield includes our net investment in direct financing and sales-type leases in the average Net Book Value, and the interest income and cash collections from our net investment in direct financing and sales-type leases in lease rentals.
| Owned Aircraft | As of December 31, 2019(1) | As of December 31, 2018(1) | As of December 31, 2017(1) | ||||||||
| Net Book Value of Flight Equipment | $ | 7,794 | $ | 7,405 | $ | 6,734 | |||||
| Net Book Value of Unencumbered Flight Equipment | $ | 5,979 | $ | 6,055 | $ | 5,346 | |||||
| Number of Aircraft | 278 | 248 | 224 | ||||||||
| Number of Unencumbered Aircraft | 237 | 217 | 195 | ||||||||
| Number of Lessees | 84 | 81 | 81 | ||||||||
| Number of Countries | 48 | 44 | 43 | ||||||||
Weighted Average Age (years)(2) | 9.9 | 9.1 | 9.1 | ||||||||
Weighted Average Remaining Lease Term (years)(2) | 4.8 | 4.5 | 5.0 | ||||||||
Weighted Average Fleet Utilization during the Fourth Quarter(3) | 99.2 | % | 97.0 | % | 99.5 | % | |||||
Weighted Average Fleet Utilization for the Year Ended(3) | 96.4 | % | 99.6 | % | 99.3 | % | |||||
Portfolio Yield for the Fourth Quarter(4) | 11.2 | % | 11.2 | % | 12.0 | % | |||||
Portfolio Yield for the Year Ended(4) | 10.9 | % | 11.5 | % | 12.2 | % | |||||
| Managed Aircraft on behalf of Joint Ventures | |||||||||||
| Flight Equipment | $ | 328 | $ | 602 | $ | 641 | |||||
| Number of Aircraft | 9 | 13 | 12 | ||||||||
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PORTFOLIO DIVERSIFICATION
Owned Aircraft as of December 31, 2019 | Owned Aircraft as of December 31, 2018 | Owned Aircraft as of February 28, 2022 | Owned Aircraft as of February 28, 2021 | |||||||||||||||||||||||||||||||||||||||||||
Number of Aircraft | % of Net Book Value(1) | Number of Aircraft | % of Net Book Value(1) | Number of Aircraft | % of Net Book Value(1) | Number of Aircraft | % of Net Book Value(1) | |||||||||||||||||||||||||||||||||||||||
| Aircraft Type | Aircraft Type | |||||||||||||||||||||||||||||||||||||||||||||
| Passenger: | Passenger: | |||||||||||||||||||||||||||||||||||||||||||||
| Narrow-body | 250 | 75 | % | 218 | 72 | % | ||||||||||||||||||||||||||||||||||||||||
Narrow-body - new technology(2) | Narrow-body - new technology(2) | 27 | 19 | % | 13 | 9 | % | |||||||||||||||||||||||||||||||||||||||
| Narrow-body - current technology | Narrow-body - current technology | 198 | 63 | % | 213 | 69 | % | |||||||||||||||||||||||||||||||||||||||
| Wide-body | 24 | 21 | % | 26 | 24 | % | Wide-body | 22 | 16 | % | 22 | 18 | % | |||||||||||||||||||||||||||||||||
| Total Passenger | 274 | 96 | % | 244 | 96 | % | Total Passenger | 247 | 98 | % | 248 | 96 | % | |||||||||||||||||||||||||||||||||
| Freighter | 4 | 4 | % | 4 | 4 | % | Freighter | 4 | 2 | % | 4 | 4 | % | |||||||||||||||||||||||||||||||||
| Total | 278 | 100 | % | 248 | 100 | % | Total | 251 | 100 | % | 252 | 100 | % | |||||||||||||||||||||||||||||||||
| Manufacturer | Manufacturer | |||||||||||||||||||||||||||||||||||||||||||||
| Airbus | 184 | 63 | % | 153 | 59 | % | Airbus | 164 | 66 | % | 169 | 64 | % | |||||||||||||||||||||||||||||||||
| Boeing | 89 | 36 | % | 90 | 39 | % | Boeing | 77 | 30 | % | 78 | 34 | % | |||||||||||||||||||||||||||||||||
| Embraer | 5 | 1 | % | 5 | 2 | % | Embraer | 10 | 4 | % | 5 | 2 | % | |||||||||||||||||||||||||||||||||
| Total | 278 | 100 | % | 248 | 100 | % | Total | 251 | 100 | % | 252 | 100 | % | |||||||||||||||||||||||||||||||||
| Regional Diversification | Regional Diversification | |||||||||||||||||||||||||||||||||||||||||||||
| Asia and Pacific | 94 | 38 | % | 78 | 36 | % | Asia and Pacific | 71 | 32 | % | 79 | 37 | % | |||||||||||||||||||||||||||||||||
| Europe | 99 | 26 | % | 87 | 27 | % | Europe | 98 | 30 | % | 92 | 27 | % | |||||||||||||||||||||||||||||||||
| Middle East and Africa | 16 | 7 | % | 17 | 8 | % | Middle East and Africa | 10 | 4 | % | 11 | 4 | % | |||||||||||||||||||||||||||||||||
| North America | 40 | 13 | % | 35 | 10 | % | North America | 36 | 17 | % | 28 | 12 | % | |||||||||||||||||||||||||||||||||
| South America | 26 | 15 | % | 16 | 10 | % | South America | 25 | 13 | % | 26 | 13 | % | |||||||||||||||||||||||||||||||||
| Off-lease | 3 | (2) | 1 | % | 15 | (3) | 9 | % | Off-lease | 11 | (3) | 4 | % | 16 | (4) | 7 | % | |||||||||||||||||||||||||||||
| Total | 278 | 100 | % | 248 | 100 | % | Total | 251 | 100 | % | 252 | 100 | % | |||||||||||||||||||||||||||||||||
29
| Customer | Percent of Net Book Value | Country | Number of Aircraft | |||||||||||||||||
| IndiGo | 7.7% | India | 11 | |||||||||||||||||
LATAM(1) | 7.6% | Chile | 13 | |||||||||||||||||
| Lion Air | 3.7% | Indonesia | 8 | |||||||||||||||||
| Air Canada | 3.6% | Canada | 5 | |||||||||||||||||
| Iberia | 3.5% | Spain | 14 | |||||||||||||||||
| American Airlines | 3.5% | United States | 8 | |||||||||||||||||
| Frontier Airlines | 3.1% | United States | 4 | |||||||||||||||||
| Aerolineas Argentinas | 2.9% | Argentina | 5 | |||||||||||||||||
| easyJet | 2.9% | United Kingdom | 12 | |||||||||||||||||
| Viva Aerobus | 2.6% | Mexico | 5 | |||||||||||||||||
| Total top ten customers | 41.1% | 85 | ||||||||||||||||||
| All other customers | 58.9% | 166 | ||||||||||||||||||
| Total all customers | 100.0% | 251 | ||||||||||||||||||
(1)LATAM filed for Chapter 11 in May 2020. We have signed restructured leases for all thirteen of the LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process.
Finance
We intend to fund new investments through cash on hand, funds generated from operations, maintenance payments received from lessees, secured borrowings for aircraft, draws on our revolving credit facilities and proceeds from any future aircraft sales. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.
See “Liquidity and Capital Resources — Secured Debt Financings” and “Liquidity and Capital Resources — Unsecured Debt Financings”Resources” below.
30
Comparison of the year ended December 31, 2019February 28, 2022 to the year ended December 31, 2018:February 28, 2021:
| Year Ended February 28, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Revenues: | |||||||||||
| Lease rental revenue | $ | 595,236 | $ | 611,421 | |||||||
| Direct financing and sales-type lease revenue | 10,733 | 18,215 | |||||||||
| Amortization of lease premiums, discounts and incentives | (20,190) | (22,842) | |||||||||
| Maintenance revenue | 152,030 | 172,668 | |||||||||
| Total lease revenue | 737,809 | 779,462 | |||||||||
| Gain on sale of flight equipment | 26,001 | 33,536 | |||||||||
| Other revenue | 5,977 | 19,290 | |||||||||
| Total revenues | 769,787 | 832,288 | |||||||||
| Operating expenses: | |||||||||||
| Depreciation | 337,528 | 347,517 | |||||||||
| Interest, net | 214,352 | 235,338 | |||||||||
| Selling, general and administrative | 66,338 | 88,413 | |||||||||
| Provision for credit losses | 930 | 5,258 | |||||||||
| Impairment of flight equipment | 452,250 | 425,579 | |||||||||
| Maintenance and other costs | 31,166 | 20,005 | |||||||||
| Total operating expenses | 1,102,564 | 1,122,110 | |||||||||
| Other income (expense): | |||||||||||
| Loss on extinguishment of debt | (14,156) | (2,640) | |||||||||
| Merger expenses | — | (32,605) | |||||||||
| Other | 57,682 | (191) | |||||||||
| Total other income (expense): | 43,526 | (35,436) | |||||||||
| Loss from continuing operations before income taxes | (289,251) | (325,258) | |||||||||
| Income tax provision (benefit) | (7,998) | 10,236 | |||||||||
| Earnings of unconsolidated equity method investment, net of tax | 3,044 | 2,326 | |||||||||
| Net loss | $ | (278,209) | $ | (333,168) | |||||||
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in thousands) | |||||||
| Revenues: | |||||||
| Lease rental revenue | $ | 777,403 | $ | 722,694 | |||
| Direct financing and sales-type lease revenue | 32,295 | 35,132 | |||||
| Amortization of lease premiums, discounts and incentives | (22,636 | ) | (15,269 | ) | |||
| Maintenance revenue | 74,987 | 105,738 | |||||
| Total lease revenue | 862,049 | 848,295 | |||||
| Gain on sale of flight equipment | 45,532 | 36,766 | |||||
| Other revenue | 10,357 | 5,290 | |||||
| Total revenues | 917,938 | 890,351 | |||||
| Operating expenses: | |||||||
| Depreciation | 356,021 | 310,850 | |||||
| Interest, net | 258,070 | 234,504 | |||||
| Selling, general and administrative | 77,034 | 76,025 | |||||
| Impairment of flight equipment | 7,404 | — | |||||
| Maintenance and other costs | 24,828 | 8,961 | |||||
| Total operating expenses | 723,357 | 630,340 | |||||
| Other income (expense) | |||||||
| Loss on extinguishment of debt | (7,577 | ) | — | ||||
| Other | (11,864 | ) | 1,636 | ||||
| Total other income (expense) | (19,441 | ) | 1,636 | ||||
| Income from continuing operations before income taxes | 175,140 | 261,647 | |||||
| Income tax provision | 22,667 | 5,642 | |||||
| Earnings (loss) of unconsolidated equity method investment, net of tax | 4,102 | (8,086 | ) | ||||
| Net income | $ | 156,575 | $ | 247,919 | |||
Revenues:
Total revenues increased by $27.6decreased $62.5 million for the year ended December 31, 2019February 28, 2022 as compared to the year ended December 31, 2018, primarily as a result of the following:February 28, 2021.
Lease rental revenue increased by $54.7decreased $16.2 million for the year ended December 31, 2019, primarily as a result of:
•a $26.7 million decrease related to the sale of eighteen aircraft since March 1, 2020;
•a $163.2$22.0 million increase in revenue reflecting the partial year impact of 48 aircraft purchased in 2019decrease due to early lease terminations and the full year impactrecognition of 37 aircraft purchasedlease rental revenue for certain customers using a cash basis of accounting rather than an accrual method – see Note 1 in 2018. This increase was partially offset by:the Notes to the Consolidated Financial Statements regarding our lease revenue recognition policy; and
•a $74.2$14.6 million decrease due to lease extensions, amendments, transitions, and other changes ($38.3changes.
These decreases were partially offset by the following:
•a $29.0 million increase in revenue related to 23 aircraft purchased since March 1, 2020; and
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•an $18.1 million increase related to lease rentals received in advance that were recognized into revenue for our Russian lessees resulting from sanctions requiring the termination of which is attributable to aircraft previously on lease to Avianca Brazil and Jet Airways which we have since transitioned to new lessees); and
Direct financing and sales-type lease revenue. revenueFor the year ended December 31, 2019, $32.3decreased $7.5 million of interest income from direct financing and sales-type leases was recognized as compared to $35.1 million for the same period in 2018, primarily attributable to the termination of one lease in 2018 and sales of two aircraft in 2019, as well as a lower average net investment due to lease payments, partially offset by an increase in interest incomeresult of:
•$4.0 million related to the reclassification of twoseven aircraft fromto operating to direct financingleases; and sales-type leases in 2019.
Amortization of lease premiums, discounts and incentives.
| Year Ended February 28, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Amortization of lease premiums | $ | (14,758) | $ | (15,652) | |||||||
| Amortization of lease discounts | 815 | 1,070 | |||||||||
| Amortization of lease incentives | (6,247) | (8,260) | |||||||||
| Amortization of lease premiums, discounts and incentives | $ | (20,190) | $ | (22,842) | |||||||
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in thousands) | |||||||
| Amortization of lease premiums | $ | (16,719 | ) | $ | (12,064 | ) | |
| Amortization of lease discounts | 4,406 | 7,825 | |||||
| Amortization of lease incentives | (10,323 | ) | (11,030 | ) | |||
| Amortization of lease premiums, discounts and incentives | $ | (22,636 | ) | $ | (15,269 | ) | |
The increase in amortization of lease premiums of $4.7incentives decreased $2.0 million for the year ended December 31, 2019 as comparedFebruary 28, 2022 primarily attributable to a $5.7 million write-off of lease incentive liabilities for our Russian lessees resulting from sanctions requiring the termination of leasing activities in Russia – see Note 2 in the Notes to the same period in 2018,Consolidated Financial Statements. This was partially offset by an increase of amortization due to a net increase in amortization resulting from netthe transition of aircraft acquisitions.
Maintenance revenue. For the year ended December 31, 2019,February 28, 2022, we recorded $75.0$152.0 million of maintenance revenue, primarily attributablepartially comprised of $59.9 million related to sixteenthe early lease terminations of seven narrow-body and fourtwo wide-body aircraft that transitioned dueand $28.6 million related to the scheduled lease expirations or early lease terminations, including sevenof eight narrow-body aircraft that had early lease terminations with Jet Airways. For the same period in 2018,aircraft. In addition, we recorded $105.7$61.6 million of maintenance revenue duerelated to nine narrow-body and one wide-body aircraft with Russian lessees, resulting from sanctions requiring the termination of leasing activities in Russia. For the year ended February 28, 2021, we recorded $172.7 million of maintenance revenue, comprised primarily of $95.0 million related to the transitionearly lease terminations of eighteenseventeen narrow-body aircraft, threeand one wide-body aircraft, and one freighter aircraft, includingas well as $57.3 million related to the scheduled lease expirations of ten narrow-body and one wide-body aircraft. In addition, we recorded $16.3 million of maintenance revenue related to three wide-body aircraft duefor which the customers are subject to early lease terminations with Avianca Brazil.judicial insolvency proceedings or similar protection.
Gain on sale of flight equipment increased by $8.8decreased $7.5 million to $45.5$26.0 million for the year ended December 31, 2019,February 28, 2022 as compared to gains of $36.8$33.5 million for the same period in 2018.year ended February 28, 2021. During 2019,the year ended February 28, 2022, we sold twentyfifteen aircraft as compared to the sale of fourteentwelve aircraft during the same period in 2018.year ended February 28, 2021. Gain on sale for the year ended February 28, 2021, included the receipt of insurance proceeds for one aircraft that was disposed.
Other revenue was $10.4$6.0 million duringand $19.3 million for the yearyears ended December 31, 2019, dueFebruary 28, 2022 and 2021, respectively, which primarily comprised of lease termination fees and security deposits recognized into revenue related to $5.4 million in fees earned in relation to the sale of all eight aircraft in our Lancaster joint venture, $2.0 million in fees earned from the sale of four aircraft to our IBJ joint venture and $2.0 million in administrative fees from the Lancaster and IBJ Air joint ventures. For the year ended December 31, 2018, other revenue was $5.3 million, primarily due to $2.6 million in fees earned in connection with the early termination of two leases and $2.1 million in administrative fees from the Lancaster and IBJ Air joint ventures.lease terminations.
Operating Expenses:
Total operating expenses increased by $93.0$19.5 million for the year ended December 31, 2019February 28, 2022 as compared to the year ended December 31, 2018, primarily as a result of:February 28, 2021:
Depreciation expense increased by $45.2decreased $10.0 million for the year ended December 31, 2019 over the same period in 2018, primarily as a result of higherattributable to $23.1 million resulting from nineteen aircraft sold since March 1, 2020 and lower depreciation of $60.7 million duerelated to 85 aircraft acquired during 2019 and 2018. These increases weresubject to aircraft impairments. This was partially offset by a decreasean increase of $16.5$13.2 million resulting from 26related to 21 aircraft sold during 2019 and 2018.purchased since March 1, 2020.
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Interest, net consisted of the following:
| Year Ended February 28, | ||||||||||||||||||
| Year Ended December 31, | 2022 | 2021 | ||||||||||||||||
| 2019 | 2018 | (Dollars in thousands) | ||||||||||||||||
| Interest on borrowings and other liabilities | Interest on borrowings and other liabilities | $ | 200,220 | $ | 221,246 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities(1) | $ | 245,673 | $ | 221,987 | ||||||||||||||
| Amortization of deferred losses related to interest rate derivatives | 184 | 1,166 | ||||||||||||||||
Amortization of deferred financing fees and debt discount | 14,578 | 14,627 | 16,267 | 14,791 | ||||||||||||||
| Interest expense | 260,435 | 237,780 | Interest expense | 216,487 | 236,037 | |||||||||||||
| Less: Interest income | (2,365 | ) | (2,943 | ) | Less: Interest income | (1,209) | (523) | |||||||||||
| Less: Capitalized interest | — | (333 | ) | Less: Capitalized interest | (926) | (176) | ||||||||||||
| Interest, net | $ | 258,070 | $ | 234,504 | Interest, net | $ | 214,352 | $ | 235,338 | |||||||||
Interest, net increased by $23.6 decreased $21.0 million over the year ended December 31, 2018. The net increase was primarily a result of a $23.7 million increase in interest on borrowings due to higherlower weighted average debt outstanding by $383.2 million and a lower average cost of borrowing.
Selling, general and administrative expenses decreased $22.1 million primarily attributable to a decrease in share-based compensation expense of $28.0 million as a result of the completion of the Merger, partially offset by lower weighted average interest ratesan increase in personnel costs.
Provision for credit losses decreased $4.3 million for the year ended February 28, 2022, as compared to the year ended February 28, 2021. The year ended February 28, 2021 included a higher provision for credit losses resulting from changes in estimates of lessee default probabilities and lower amortization of deferred losses on terminated interest rate derivatives of $1.0 million.loss given default percentages for certain customers.
Impairment of aircraft. We recorded impairment charges of $7.4$452.3 million during 2019. Nofor the year ended February 28, 2022, of which $449.0 million were transactional impairments, were recordedprimarily related to sixteen narrow-body, two wide-body and two freighter aircraft. The Company recognized $147.8 million of lease rentals received in advance, maintenance, and security deposits into revenue for these twenty aircraft during the year ended December 31, 2018.February 28, 2022. The impairment charges, in part, resulted from early lease terminations, scheduled lease expirations and lessee defaults. Of the total impairment charges, $341.3 million related to thirteen aircraft that were with Russian and Ukrainian lessees, resulting from the Russian invasion of Ukraine and related sanctions placed on Russia during the fourth quarter of 2021. The Company recognized $89.4 million of lease rentals received in advance, maintenance, security deposits and other revenue for these thirteen aircraft During the year ended February 28, 2021, we recorded impairment charges of $425.6 million, which primarily related to seventeen narrow-body and eight wide-body aircraft. The Company recognized $157.0 million of maintenance and security deposits into revenue related to these 25 aircraft during the year ended February 28, 2021. See “Summary of Recoverability Assessment and Other Impairments”“Aircraft Valuation” below for a detailed discussion of impairment charges related to certain aircraft.
Maintenance and other costs were $24.8$31.2 million for the year ended December 31, 2019,February 28, 2022, an increase of $15.9$11.2 million overas compared to the same period in 2018.year ended February 28, 2021. The net increase is primarily attributable to eighteen unscheduled transitions dueaircraft that have transitioned or will transition to earlynew lessees as a result of lease terminations related to Avianca Brazil and Jet Airways and higher than projected lessor contributions towards the cost of maintenance events for aircraft acquired with attached leases of $3.8 million.or scheduled lease expirations.
Other Income (Expense):
Total other income (expense) decreasedincreased by $21.1$79.0 million for the year ended December 31, 2019,February 28, 2022 as compared to the same periodyear ended February 28, 2021. During the year ended February 28, 2022, the Company recognized $55.2 million of proceeds from the sales of unsecured claims related to the LATAM Bankruptcy into Other income (expense). This was partially offset by a $14.2 million loss on extinguishment of debt related to the early redemption in 2018,full of $500.0 million outstanding aggregate principal amount of our 5.5% Senior Notes due 2022. The year ended February 28, 2021 included $32.6 million of legal and banking costs related to athe Merger. Additionally, we recognized loss on extinguishment of debt of $7.6$2.6 million related to the early retirementredemption in full of $500.0 million outstanding aggregate principal amount of our 6.25%5.125% Senior Notes due 2019, expenses2021 and early repayment of $7.4 million related to the Merger and unfavorable mark-to-market adjustments on our interest rate caps of $4.8 million.secured debt obligations for three wide-body aircraft.
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Income Tax Provision (Benefit):
Our provision for income taxestax benefit was $8.0 million for the yearsyear ended December 31, 2019 and 2018February 28, 2022 as compared to an income tax provision of $10.2 million for the year ended February 28, 2021. The decrease in our income tax provision of $18.2 million was $22.7 million and $5.6 million, respectively. Income taxes have been provided based onprimarily attributable to changes in the applicable tax laws and ratesmix of those countriespre-tax book loss in which operations are conducted and income is earned, primarilyBermuda, Ireland, and the United States. The increaseyear ended February 28, 2022 included certain net non-cash impairment charges of $158.4 million that were recorded in Ireland, resulting in a $19.8 million decrease in our income tax provisionprovision. The year ended February 28, 2021 included discrete items related to stock compensation and the impact of $17.0 million forthe CARES Act.
Aircraft Valuation
Impairment of Flight Equipment
Excluding impairment charges resulting from the Russian invasion of Ukraine, during the year ended December 31, 2019 as comparedFebruary 28, 2022, the Company recorded impairment charges totaling $110.9 million, of which $107.7 million were transactional impairments. These impairments primarily related to the same period in 2018 was primarily attributable to changes in operating income subject to tax in Ireland, the United Statessix narrow-body and other jurisdictions.one wide-body aircraft, and resulted from early lease terminations, a scheduled lease expiration, and a lessee default. The Company recognized $61.4 million of maintenance revenue for these seven aircraft.
During the year ended December 31, 2019 includes taxFebruary 28, 2022, the Company recorded impairment charges of $4.1totaling $341.3 million related to ten narrow-body, one wide-body, and two freighter aircraft that were leased to Russian and Ukrainian airlines. The Company recognized $89.4 million of lease rentals received in advance, maintenance, security deposits and other revenue for these thirteen aircraft. These impairment charges resulted from the limitationRussian invasion of Ukraine and related sanctions placed on Russia during the fourth quarter of 2021, which required the termination of aircraft leasing activities in deductible compensationRussia, as well as our consideration of the likelihood of successfully repossessing our aircraft including the related technical records and $0.4 million related to the vesting of stock. The year ended December 31, 2018 included a $3.0 million tax benefit related to the Singapore rate reduction from 10% to 8%.documentation.
February 28, 2021, the Company recorded impairment charges totaling $425.6 million, of which $378.2 million were transactional impairments, which primarily related to our shareseventeen narrow-body and eight wide-body aircraft. The Company recognized $157.0 million of undistributed lossesmaintenance revenue and anticipated costs recorded by Lancaster for this liquidation. See Note 5 “Unconsolidated Equity Method Investment.”
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in thousands) | |||||||
| Net income | $ | 156,575 | $ | 247,919 | |||
| Derivative loss reclassified into earnings | 184 | 1,166 | |||||
| Total comprehensive income | $ | 156,759 | $ | 249,085 | |||
Annual Recoverability Assessment
We completedperformed our annual recoverability assessment of all our aircraft induring the secondthird quarter of 2019. We also performed aircraft-specific analyses where there were changes in circumstances, such as approaching lease expirations.2021. No impairments were recorded as a result of our annual recoverability assessment.
Although we have completed our annual recoverability assessment, we will continue to closely monitor the impacts of COVID-19 and the Russian invasion of Ukraine on our customers, air traffic, lease rental rates, and aircraft valuations, and have performed and will perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft.We have focused and will focus on our customers that have been significantly impacted by the above crises, entered judicial insolvency proceedings, and any additional customers that may become subject to similar-type proceedings, as well as aircraft with near-term lease expirations and certain aircraft variants that are more susceptible to the impact of the above crises and value deterioration.
The recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.
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Comparison of the year ended December 31, 2018February 28, 2021, to the year ended December 31, 2017:2019:
We have omitted discussion of the earliest of the three yearsabove two periods covered by our consolidated financial statements presented in this Annual Report because that disclosure was already included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,February 28, 2021, filed with the SEC on February 12, 2019.April 21, 2021. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the year ended December 31, 2018February 28, 2021 to the year ended December 31, 2017.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Our estimates and assumptions are based on historical experiences and currently available information. Actual results may differ from such estimates under different conditions, sometimes materially. A summary of our significant accounting policies is presented in the notes to our consolidated financial statements included elsewhere in this Annual Report. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require our most subjective judgments, estimates and assumptions. Our most critical accounting policies and estimates are described below.
Lease Revenue Recognition
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.
Maintenance Payments and Maintenance Revenue
Under our leases, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges; certain taxes, licenses, consents and approvals; aircraft registration; and insurance premiums. Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs.
Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at or near the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we typically do not recognize
36
maintenance revenue during the lease. Maintenance revenue recognition would occur at or near the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. If a lease requires end of lease term maintenance payments, typically the lessee would be required to pay us for its utilization of the aircraft during the lease; however, in some cases, we may owe a net payment to the lessee in the event heavy maintenance is performed and paid for by the lessee during the lease term and the aircraft is returned to us in better condition than at lease inception. End of lease term maintenance payments made to us are recognized as maintenance revenue, and end of lease term maintenance payments we make to a lessee are recorded as contra maintenance revenue.
The amount of maintenance revenue or contra maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee.
Lease Incentives and Amortization
Many of our leases contain provisions whichthat may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. The assumptions supporting these estimates are re-evaluated annually.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability, which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability, and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset, which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.
Flight Equipment Held for Lease and Depreciation
Flight equipment held for lease is stated at cost and depreciated using the straight-line method, typically over a 25-year life from the date of manufacture for passenger aircraft and over a 30 to 35-year life for freighter aircraft, depending on whether the aircraft is a converted or purpose-built freighter, to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% to 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value. Examples of situations where exceptions may arise include but are not limited to:
•flight equipment where estimates of the manufacturers’ realized sales prices are not relevant (e.g., freighter conversions);
•flight equipment where estimates of the manufacturers’ realized sales prices are not readily available; and
•flight equipment which may have a shorter useful life due to obsolescence.
In accounting for flight equipment held for lease, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance assets or liabilities and the estimated residual values. In making these estimates, we rely upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. As part of our due diligence review of each aircraft we purchase, we prepare an estimate of the expected maintenance payments and any excess costs which may become payable by us, taking into consideration the then-current maintenance status of the aircraft and the relevant provisions of any existing lease.
For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance costs by applying the deferral method. Under the deferral method, we capitalize the actual cost of major maintenance events, which are depreciated on a straight-line basis over the period until the next maintenance event is required.
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For purchase and lease back transactions, we account for the transaction as a single arrangement. We allocate the consideration paid based on the fair value of the aircraft and lease. The fair value of the lease may include a maintenance premium and a lease premium or discount.
When we acquire an aircraft with a lease, determining the fair value of the attached lease requires us to make assumptions regarding the current fair values of leases for specific aircraft. We estimate a range of current lease rates of like aircraft in order to determine if the attached lease is within a fair value range. If a lease is below or above the range of current lease rates, we present value the estimated amount below or above fair value range over the remaining term of the lease. The resulting lease discount or premium is amortized into lease rental income over the remaining term of the lease.
Impairment of Flight Equipment
We perform aan annual recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis, at least annually. In addition, abasis. A recoverability assessment is also performed whenever events or changes in circumstances, or indicators, indicatesuggest 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 air traffic decline,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 leases,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 3 in the Notes to the 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 contractedprojected lease rates,rental and maintenance payments, residual values, economic conditions, technology, airline demand for a particular aircraft type and other risk factors discussedsuch as the location of the aircraft and accessibility to records and technical documentation.
We continue to closely monitor the impact of COVID-19 and the Russian invasion of Ukraine on our customers, air traffic, lease rental rates, and aircraft valuations, and have performed and will continue to perform additional customer and aircraft specific reviews should changes in Item 1A. “Risk Factors.” See further discussionfacts and circumstances arise that may impact the recoverability of our aircraft. We will focus on our customers that have been significantly impacted by the above crises, 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 failing our recoverability assessment under “Summarythe impact of Recoverability Assessmentthe above crises and Other Impairments” above and “Fair Value Measurements” below.value deterioration.
Net Investment in Direct Financing and Sales-Type Leases
If a lease meets specific criteria at lease commencement or at the effective date of a lease modification, we recognize the lease as a direct financing or sales-type lease. The net investment in direct financing and sales-type leases consists of the lease receivable, estimated unguaranteed residual value of the leased flight equipment at lease-end and, for direct financing leases, deferred selling profit. For sales-type leases, we recognize the difference between the net book value of the aircraft and the net investment in the lease as a gain or loss on sale of fight equipment. Selling profit on a direct financing lease is deferred and amortized over the lease term, and a selling loss is recognized at lease commencement. Interest income on our net investment in leases is recognized as Direct financing and sales-type lease revenue over the lease term in a manner that produces a constant rate of return on the net investment in the lease.
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our Consolidated Statements of Income (Loss) to adjust the allowance for our Net investment in direct financing and sales-type leases.changes to management’s estimate of expected credit losses.
Fair Value Measurements
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our aircraft and unconsolidated equity investments. 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 ourthe Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft. aircraft discounted using the Company’s weighted average cost of capital.
We account for our investments in unconsolidated joint ventures under the equity method of accounting and recordaccounting. Investments are reviewed for impairment when itswhenever events or changes in circumstances indicate the fair value value is less than its carrying value and the Company determines that the decline is other-than-temporary.other-than-temporary
Income Taxes
The Company records an income tax provision in accordance with the various tax laws for those jurisdictions within which our transactions occur. Aircastle uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable. The Company recognizes the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. We did not have any unrecognized tax benefits.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 - Summary of Significant Accounting Policies - Organization and Basis of Presentation in the Notes to the Consolidated Financial Statements below.
RECENTLY PROPOSED ACCOUNTING PRONOUNCEMENTS
See Note 1 - Summary of Significant Accounting Policies - Proposed Accounting Pronouncements in the Notes to the Consolidated Financial Statements below.
LIQUIDITY AND CAPITAL RESOURCES
Our business is very capital intensive, requiring significant investments in order to expand our fleet and to maintain and improve our existing portfolio. Our operations generatehave historically generated a significant amount of cash, primarily from lease rentals and maintenance collections. We have also met our liquidity and capital resource needs by utilizing several sources over time, including:
•various forms of borrowing secured by our aircraft, including bank term facilities, limited recourse securitization financings, and ECA-backed financings for new aircraft acquisitions;
•unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes;
•asset sales; and
•sales of common and preference shares.
Going forward, we expect to continue to seek liquidity from these sources and other sources, subject to pricing and conditions we consider satisfactory.
During 2019,the year ended February 28, 2022, we met our liquidity and capital resource needs with $536.4$372.9 million of cash flow from operations, $2.12 billion in gross proceeds from the issuance of our Senior Notes due 2026, bank debt and our revolving credit facilities and $361.7$210.7 million of cash from the sale of aircraft sales.and other flight equipment, and $393.0 million in net proceeds from our preference share issuance.
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As of December 31, 2019,February 28, 2022, the weighted average maturity of our secured and unsecured debt financings was 3.43.1 years and we are in compliance with all applicable covenants in our financings. We have also determined that as of December 31, 2019,February 28, 2022, our consolidated subsidiaries’ restricted net assets, as defined by Rule 4-08(e)(3) of Regulation S-X, are less than 25% of our consolidated net assets.
Even as the airline industry begins to recover from the COVID-19 pandemic, 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. While we continued to receive requests from our customers for lease concessions, such as deferral of lease payments or broader lease restructurings, the number of requests for such concessions during the year ended February 28, 2022 has declined compared to 2021. As of February 28, 2022, we had deferred rent receivables of $55.5 million with nine customers that are scheduled to be repaid, on average, within the next seven years – see Note 2 in the Notes to the Consolidated Financial Statements for additional information. If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, government or other sources, we may need to provide further deferrals to certain customers to extend the deferrals we have previously granted. We may ultimately be unable to collect all the amounts we have deferred.
As of February 28, 2022, we hold $69.2 million in security deposits, $459.7 million in maintenance payments and $142.4 million in letters of credit from our lessees. Approximately $49.5 million of our letters of credit are with our Russian lessees, of which we have initiated draws for and received cash of $$25.4 million subsequent to February 28, 2022.
We believe thatwe have sufficient liquidity to meet our contractual obligations over the next twelve months and as of April 1, 2022, total liquidity of $2.1 billion includes $1.4 billion of undrawn credit facilities, $0.2 billion of unrestricted cash, on hand,$0.1 billion of contracted asset sales and $0.4 billion of projected adjusted operating cash flows through April 1, 2023. In addition, we believe payments received from lessees and other funds generated from operations, unsecured bond offerings, secured borrowings for aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments over the next twelve months.
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Cash Flows
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in thousands) | |||||||
| Net cash flow provided by operating activities | $ | 536,418 | $ | 522,592 | |||
| Net cash flow used in investing activities | (784,029 | ) | (974,687 | ) | |||
| Net cash flow provided by (used in) financing activities | 235,201 | 386,091 | |||||
| Year Ended February 28, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Net cash flow provided by operating activities | $ | 372,865 | $ | 175,022 | |||||||||||||
| Net cash flow (used in) provided by investing activities | (586,500) | 21,472 | |||||||||||||||
| Net cash flow (used in) provided by financing activities | (196,281) | 212,667 | |||||||||||||||
Operating Activities:
The COVID-19 pandemic and related mitigation efforts has severely impacted the demand for air travel, which has negatively impacted our customers’ financial performance. While we continued to receive requests from our customers for lease concessions, such as deferrals of lease payments or broader lease restructurings, the number of requests for such concessions during the year ended February 28, 2022 has declined compared to 2021. Our cash flow from operating activities for the year ended February 28, 2022 includes the repayment of certain lease deferrals granted during 2020 at the onset of the pandemic. Even as the airline industry begin to recover, we expect that our collections will remain under pressure due to the impact of COVID.
Cash flow provided by operationsoperating activities was $536.4 million and $522.6 million for the years ended December 31, 2019 and 2018, respectively. The increase in cash flow provided by operations of $13.8$372.9 million for the year ended December 31, 2019 versusFebruary 28, 2022 compared to $175.0 million for the same period in 2018year ended February 28, 2021. The increase of $197.8 million was primarily attributable to:
•a result of:$110.6 million decrease in accounts receivable and other assets, primarily due to an increase in customer collections, including the repayment of existing lease deferrals and a reduction in the requests for new deferrals as compared to the year ended February 28, 2021;
•a $39.0$55.2 million increase in cash resulting from lease rentals, netthe sale of direct financing and sales-type leases,unsecured claims related to the LATAM Bankruptcy – see Note 2 in the Notes to the Consolidated Financial Statements;
•a $25.8 million increase in collections from direct financing and sales-type leases (please refer to Note 1);
•a $31.7$30.2 million increase in in cash paid for interest;
Investing Activities:
Cash flow used in investing activities was $784.0 million and $974.7$586.5 million for the yearsyear ended December 31, 2019 and 2018, respectively.February 28, 2022 as compared to cash flow provided by investing activities of $21.5 million for the year ended February 28, 2021. The decreasenet increase in cash flow used in investing activities of $190.7$608.0 million for the year ended December 31, 2019February 28, 2022 was primarily a result of:
of a $160.9$649.8 million decreaseincrease in the acquisition and improvement of flight equipment and net investment in direct financing and sales-type leases;equipment.
These outflows were partially offset by a $32.9 million increase in distribution from our Lancaster joint venture;
Financing Activities:
Cash flow provided byused in financing activities was $235.2 million and $386.1$196.3 million for the yearsyear ended December 31, 2019 and 2018, respectively. The decrease inFebruary 28, 2022 as compared to cash flow provided by financing activities of $150.9$212.7 million for the year ended December 31, 2019February 28, 2021. The net increase in cash flow used in financing activities of $408.9 million for the year ended February 28, 2022 was primarily attributable to an $862.2 million decrease in proceeds from secured and unsecured debt financings, net of repayments.
These outflows were partially offset by a result:
preference shares, a $28.2$46.3 million increasedecrease in maintenance and security deposits returned, net of deposits received;received, and
Debt Obligations
For complete information on our debt obligations, please refer to Note 7 - “Borrowings from7. Secured and Unsecured Debt”Debt Financings in the Notes to Consolidated Financial Statements below.
Contractual Obligations
Our contractual obligations consist of principal and interest payments on variable and fixed rate liabilities, interest payments on interest rate derivatives,debt financings, aircraft acquisitions and rent payments pursuant to our office leases. Total contractual obligations increaseddecreased to approximately $7.03$6.0 billion at December 31, 2019February 28, 2022 from $6.95$6.8 billion at December 31, 2018February 28, 2021, primarily due to an increase in borrowings, partially offset by a decrease in aircraft purchase obligations.the redemption of all of the $500.0 million outstanding aggregate principal amount of our Senior Notes Due 2022.
The following table presents our actual contractual obligations and their payment due dates as of December 31, 2019.February 28, 2022.
| Payments Due by Period as of December 31, 2019 | Payments Due by Period as of February 28, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | Total | 1 year or less | 2-3 years | 4-5 years | More than 5 years | Contractual Obligations | Total | 1 year or less | 2-3 years | 4-5 years | More than 5 years | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Principal payments: | Principal payments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2020-2026 | $ | 3,600,000 | $ | 300,000 | $ | 1,000,000 | $ | 1,650,000 | $ | 650,000 | ||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2023-2028 | Senior Notes due 2023-2028 | $ | 3,700,000 | $ | — | $ | 1,650,000 | $ | 1,300,000 | $ | 750,000 | |||||||||||||||||||||||||||||||||||||
| DBJ Term Loan | 215,000 | — | 60,000 | 155,000 | — | DBJ Term Loan | 155,000 | — | 155,000 | — | — | |||||||||||||||||||||||||||||||||||||
| Revolving Credit Facilities | 150,000 | — | 150,000 | — | — | Revolving Credit Facilities | 20,000 | — | 20,000 | — | — | |||||||||||||||||||||||||||||||||||||
| ECA Financings | 147,644 | 39,603 | 79,280 | 28,761 | — | ECA Financings | 21,576 | 7,645 | 13,931 | — | — | |||||||||||||||||||||||||||||||||||||
| Bank Financings | 993,593 | 89,721 | 184,984 | 565,962 | 152,926 | Bank Financings | 666,258 | 73,966 | 514,626 | 77,666 | — | |||||||||||||||||||||||||||||||||||||
| Total principal payments | 5,106,237 | 429,324 | 1,474,264 | 2,399,723 | 802,926 | Total principal payments | 4,562,834 | 81,611 | 2,353,557 | 1,377,666 | 750,000 | |||||||||||||||||||||||||||||||||||||
Interest payments on debt obligations(1) | 799,664 | 234,627 | 348,724 | 172,643 | 43,670 | Interest payments on debt obligations(1) | 582,080 | 185,190 | 273,778 | 101,737 | 21,375 | |||||||||||||||||||||||||||||||||||||
Office leases(2) | 15,117 | 1,870 | 3,712 | 3,423 | 6,112 | Office leases(2) | 11,323 | 1,767 | 3,435 | 3,560 | 2,561 | |||||||||||||||||||||||||||||||||||||
Purchase obligations(3) | 1,112,825 | 218,916 | 700,930 | 192,979 | — | Purchase obligations(3) | 819,273 | 462,452 | 356,821 | — | — | |||||||||||||||||||||||||||||||||||||
| Total | $ | 7,033,843 | $ | 884,737 | $ | 2,527,630 | $ | 2,768,768 | $ | 852,708 | Total | $ | 5,975,510 | $ | 731,020 | $ | 2,987,591 | $ | 1,482,963 | $ | 773,936 | |||||||||||||||||||||||||||
(1)Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at February 28, 2022.
(2)Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore.
(3)At February 28, 2022, we had signed purchase agreements to acquire 23 aircraft for $819.3 million. These amounts include estimates for pre-delivery deposits, contractual price escalation and other adjustments. As of April 25, 2022, we have commitments to acquire 23 aircraft for $842.3 million.
Capital Expenditures
From time to time, we make capital expenditures to maintain or improve our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the years ended February 28, 2022 and 2021, and December 31, 2019, 2018 and 2017, we incurred a total of $31.8$46.6 million, $9.3$26.6 million and $12.9$31.8 million, respectively, of capital expenditures (including lease incentives) related to the acquisition and improvement of aircraft.
As of December 31, 2019,February 28, 2022, the weighted average age (by net book value)Net Book Value) of our aircraft was 9.910.2 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Our lease agreements call for the lessee to be primarily responsible for maintaining the aircraft. We may incur additional maintenance and modification costs in the future in the event we are required to remarket an aircraft or a lessee fails to meet its maintenance obligations under the lease agreement. These maintenance reserves are paid by the lessee to provide for future maintenance events. Provided a lessee performs scheduled maintenance of the aircraft, we are required to reimburse the lessee for scheduled maintenance payments. In certain cases, we are also required to make lessor contributions, in excess of amounts a lessee may have paid, towards the costs of maintenance events performed by or on behalf of the lessee.
Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of factors, including defaults bysuch as in the lessees.event of a lessee default. Maintenance reserves may not cover the entire amount of actual maintenance
expenses incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age. See Item 1A. “Risk Factors — Risks Related to Our Business — Risks related to our leases —If lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease.lease.”
Off-Balance Sheet Arrangements
We entered into twoa joint venture arrangementsarrangement in order to help expand our base of new business opportunities. Neither of theseThis joint ventures qualifiesventure does not qualify for consolidated accounting treatment. The assets and liabilities of these entitiesthis entity are not included in our Consolidated Balance Sheetsconsolidated balance sheets and we record our net investment under the equity method of accounting. See Note 5 - “Unconsolidated Equity Method Investment”6 in the Notes to Unauditedthe Consolidated Financial Statements below.
We hold a 25% equity interest in our joint venture with Mizuho Leasing IBJ Air Leasing (“IBJ Air”). At December 31, 2019,and as of February 28, 2022, the net book value of the IBJ Air joint venture’sits nine aircraft was $327.8$298.5 million.
Foreign Currency Risk and Foreign Operations
At December 31, 2019February 28, 2022 all of our leases are payable to us in U.S. dollars. However, we incur Euro- and Singapore dollar-denominated expenses in connection with our subsidiaries in Ireland and Singapore. For the year ended December 31, 2019,February 28, 2022, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated $15.7$17.7 million in U.S. dollar equivalents and represented 20%approximately 26.3% of total SG&Aselling, general and administrative expenses. Our international operations are a significant component of our business strategy and permit us to more effectively source new aircraft, service the aircraft we own and maintain contact with our lessees. Therefore, it is likely that our international operations and our exposure to foreign currency risk will increase over time. Although we have not yet entered into foreign currency hedges because our exposure to date has not been significant, if our foreign currency exposure increases we may enter into hedging transactions in the future to mitigate this risk. For the years ended February 28, 2022 and 2021, and December 31, 2019, 2018 and 2017, we incurred insignificant net gains and losses on foreign currency transactions.
Inflation
Inflation affects our lease rentals, asset values and costs, including SG&Aoperating expenses and maintenance and other expenses.costs. We do not believe that our financial results have been, or will be, adversely affected by inflation in a material way.
Management’s Use of EBITDA and Adjusted EBITDA
We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance.
This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals, as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.
EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our
outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business.
We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants.
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The table below shows the reconciliation of net income to EBITDA for the yearsyear ended February 28, 2022 and 2021, the two months ended February 29, 2020, and for the year ended December 31, 2019, 2018 and 2017, respectively.
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | (Dollars in thousands) | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | ||||||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | (278,209) | $ | (333,168) | $ | 3,659 | $ | 156,575 | |||||||||||||||||||||||||
| Depreciation | 356,021 | 310,850 | 298,664 | Depreciation | 337,528 | 347,517 | 59,853 | 356,021 | ||||||||||||||||||||||||||
| Amortization of lease premiums, discounts and incentives | 22,636 | 15,269 | 11,714 | Amortization of lease premiums, discounts and incentives | 20,190 | 22,842 | 3,669 | 22,636 | ||||||||||||||||||||||||||
| Interest, net | 258,070 | 234,504 | 241,231 | Interest, net | 214,352 | 235,338 | 41,038 | 258,070 | ||||||||||||||||||||||||||
| Income tax provision | 22,667 | 5,642 | 6,042 | |||||||||||||||||||||||||||||||
| Income tax provision (benefit) | Income tax provision (benefit) | (7,998) | 10,236 | 1,675 | 22,667 | |||||||||||||||||||||||||||||
| EBITDA | $ | 815,969 | $ | 814,184 | $ | 705,525 | EBITDA | $ | 285,863 | $ | 282,765 | $ | 109,894 | $ | 815,969 | |||||||||||||||||||
| Adjustments: | Adjustments: | |||||||||||||||||||||||||||||||||
| Impairment of flight equipment | 7,404 | — | 80,430 | Impairment of flight equipment | 452,250 | 425,579 | 62,657 | 7,404 | ||||||||||||||||||||||||||
| Equity share of joint venture impairment | 2,724 | 15,791 | — | Equity share of joint venture impairment | — | — | — | 2,724 | ||||||||||||||||||||||||||
| Loss on extinguishment of debt | 7,577 | — | — | Loss on extinguishment of debt | 14,156 | 2,640 | 3,955 | 7,577 | ||||||||||||||||||||||||||
| Non-cash share-based payment expense | 15,830 | 11,488 | 13,148 | Non-cash share-based payment expense | — | 28,049 | 10,678 | 15,830 | ||||||||||||||||||||||||||
Merger related expenses(1) | 7,886 | — | — | Merger related expenses(1) | — | 35,165 | 321 | 7,886 | ||||||||||||||||||||||||||
| Loss (gain) on mark-to-market of interest rate derivative contracts | 4,771 | (1,632 | ) | 2,481 | ||||||||||||||||||||||||||||||
| Loss on mark-to-market of interest rate derivative contracts | Loss on mark-to-market of interest rate derivative contracts | — | 19 | 96 | 4,771 | |||||||||||||||||||||||||||||
| Contract termination expense | Contract termination expense | — | 172 | — | — | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 862,161 | $ | 839,831 | $ | 801,584 | Adjusted EBITDA | $ | 752,269 | $ | 774,389 | $ | 187,601 | $ | 862,161 | |||||||||||||||||||
(1)Includes $32.6 million in Other income (expense) and $2.6 million in Selling, general and administrative expenses. |
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (Dollars in thousands) | |||||||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | |||||
Loss on extinguishment of debt(1) | 7,577 | — | — | ||||||||
Loss (gain) on mark-to-market of interest rate derivative contracts(1) | 4,771 | (1,632 | ) | 2,481 | |||||||
Loan termination (gain) fee(2) | — | (838 | ) | 2,058 | |||||||
Write-off of deferred financing fees(2) | 172 | 300 | 4,005 | ||||||||
Non-cash share-based payment expense(3) | 15,830 | 11,488 | 13,148 | ||||||||
Merger related expenses and taxes(4) | 11,622 | — | — | ||||||||
| Adjusted net income | $ | 196,547 | $ | 257,237 | $ | 169,566 | |||||
| Year Ended December 31, | ||||||||
| Weighted-average shares: | 2019 | 2018 | 2017 | |||||
| Common shares outstanding | 74,477,865 | 77,447,263 | 78,219,458 | |||||
| Restricted common shares | 495,192 | 476,726 | 556,592 | |||||
| Total weighted-average shares | 74,973,057 | 77,923,989 | 78,776,050 | |||||
| Year Ended December 31, | ||||||||
| Percentage of weighted-average shares: | 2019 | 2018 | 2017 | |||||
| Common shares outstanding | 99.34 | % | 99.39 | % | 99.29 | % | ||
Restricted common shares(1) | 0.66 | % | 0.61 | % | 0.71 | % | ||
| Total | 100.00 | % | 100.00 | % | 100.00 | % | ||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Weighted-average common shares outstanding — Basic | 74,477,865 | 77,447,263 | 78,219,458 | |||||
Effect of dilutive shares(2) | 904,417 | 301,356 | 153,983 | |||||
| Weighted-average common shares outstanding — Diluted | 75,382,282 | 77,748,619 | 78,373,441 | |||||
| Year Ended December 31, | |||||||||||
| Adjusted net income allocation: | 2019 | 2018 | 2017 | ||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||
| Adjusted net income | $ | 196,547 | $ | 257,237 | $ | 169,566 | |||||
Less: Distributed and undistributed earnings allocated to restricted common shares(1) | (1,298 | ) | (1,574 | ) | (1,198 | ) | |||||
| Adjusted net income allocable to common shares — Basic and Diluted | $ | 195,249 | $ | 255,663 | $ | 168,368 | |||||
| Adjusted net income per common share — Basic | $ | 2.62 | $ | 3.30 | $ | 2.15 | |||||
| Adjusted net income per common share — Diluted | $ | 2.59 | $ | 3.29 | $ | 2.15 | |||||
Limitations of EBITDA and Adjusted EBITDA and ANI
An investor or potential investor may find EBITDA and Adjusted EBITDA and ANI important measures in evaluating our performance, results of operations and financial position. We use these non-U.S. GAAP measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
EBITDA and Adjusted EBITDA and ANI have limitations as analytical tools and should not be viewed in isolation or as substitutes for U.S. GAAP measures of earnings (loss). Material limitations in making the adjustments to our earnings (loss) to calculate EBITDA and Adjusted EBITDA, and ANI, and using these non-U.S. GAAP measures as compared to U.S. GAAP net income (loss), income (loss) from continuing operations and cash flows provided by or used in operations, include:
•depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures;
•the cash portion of income tax provision (benefit) provision generally represents charges (gains), which may significantly affect our financial results;
•elements of our interest rate derivative accounting may be used to evaluate the effectiveness of our hedging policy; and
•adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes.notes which may not be comparable to similarly titled measures used by other companies.
EBITDA and Adjusted EBITDA and ANI are not alternatives to net income (loss), income (loss) from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP. You should not rely on these non-U.S. GAAP measures as a substitute for any such U.S. GAAP financial measure. We strongly urge you to review the reconciliations to U.S. GAAP net income (loss), along with our consolidated financial statements included
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elsewhere in this Annual Report.report. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA and Adjusted EBITDA and ANI are not measures of financial performance under U.S. GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA and ANI as presented in this Annual Report,report, may differ from and may not be comparable to similarly titled measures used by other companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. These risks are highly sensitive to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our lease agreements, floating rate debt obligations and interest rate derivatives.obligations. Rent payments under our aircraft lease agreements typically do not vary during the term of the lease according to changes in interest rates. However, our borrowing agreements generally require payments based on a variable interest rate index, such as LIBOR. Therefore, to the extent our borrowing costs are not fixed, increases in interest rates may reduce our net income by increasing the cost of our debt without any corresponding increase in rents or cash flow from our securities.
Sensitivity Analysis
The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our financial condition and results of operations. Although we believe a sensitivity analysis provides the most meaningful analysis permitted by the rules and regulations of the SEC, it is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled.
Although the following results of a sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential interest expense impacts on our financial instruments and, in particular, does not address the mark-to-market impact on our interest rate derivatives. It also does not include a variety of other potential factors that could affect our business as a result of changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and notes thereto, referred to in Item 15(A)(1) of this Form 10-K,Annual Report, are filed as part of this Annual Report and appear in this Form 10-KAnnual Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. An evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2019.February 28, 2022. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.February 28, 2022.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019.February 28, 2022. The assessment was based on criteria established in the Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2019,February 28, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Pursuant to Item 401(b) of Regulation S-K, the requisite information pertaining to our executive officers is reported immediately following Item 4 of Part I of this Annual Report. The identification of our Audit Committee and our Audit Committee financial experts will be containedis posted on our website at www.aircastle.com under the captions “CORPORATE GOVERNANCE“ABOUT - Committees of the Board of Directors - The Audit Committee” in our 2020 Proxy Statement to be filed in connection with our 2020 Annual Meeting (the “2020 Proxy Statement”) or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report.COMMITTEE COMPOSITION” . Information regarding our Code of Business Ethics and Conduct, any material amendments thereto and any related waivers will be contained under the captions “CORPORATE GOVERNANCE - Code of Business Conduct and Ethics” in our 2020 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. Any information required by Item 405 of Regulation S-K will be contained under the caption "OWNERSHIP OF THE COMPANY'S COMMON SHARES - Delinquent Section 16(a) Reports" in our 2020 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. All of the foregoing information is incorporated herein by reference. The Code of Business Conduct and Ethics is posted on our website at www.aircastle.com under Investors“CORPORATE GOVERNANCE - Corporate Governance.GOVERNANCE DOCUMENTS”.
Information about our Directors. The members of the board of directors of the Company (the “Board”) are Douglas A. Hacker, Michael J. Inglese, Taro Kawabe, Takashi Kurihara, Charles W. Pollard, Takayuki Sakakida and Noriyuki Yukawa.
| Name | Age | |||||||
| Douglas A. Hacker | 66 | |||||||
| Michael J. Inglese | 61 | |||||||
| Taro Kawabe | 54 | |||||||
| Takashi Kurihara | 61 | |||||||
| Charles W. Pollard | 64 | |||||||
| Takayuki Sakakida | 50 | |||||||
| Noriyuki Yukawa | 63 | |||||||
Douglas A. Hacker was appointed to our Board on March 27, 2020 following the consummation of the Merger and served on the prior Board of Aircastle Limited from August 2, 2006 to the consummation of the Merger. Mr. Hacker is currently an independent business executive and formerly served as Executive Vice President, Strategy for UAL Corporation, an airline holding company, and has served in such position from December 2002 to May 2006. Prior to that, Mr. Hacker served with UAL Corporation as President, UAL Loyalty Services from September 2001 to December 2002, and as Executive Vice President and Chief Financial Officer from July 1999 to September 2001. Mr. Hacker served as a director of Travelport from 2016 until May 2019. Mr. Hacker serves as the Co-Chair of a series of open-end investment companies that are part of the Columbia family of mutual funds and as an independent director and Chair of the Board of Directors of SpartanNash Company.
Michael J. Inglese was appointed a member of our Board on March 27, 2020 following the consummation of the Merger and served on the prior Board of Aircastle Limited from June 2017 to the consummation of the Merger. He became our Chief Executive Officer in June 2017, having served as Aircastle’s Acting Chief Executive Officer from January 2017. He was previously our Chief Financial Officer from April 2007 to January 2017. Prior to joining the Company, Mr. Inglese served as Chief Financial Officer of PanAmSat Holding Corporation from June 2000 until the closing of PanAmSat’s sale to Intelsat in July 2006. Mr. Inglese joined PanAmSat in May 1998 as Vice President, Finance after serving as Chief Financial Officer for DIRECTV Japan, Inc. He is a Chartered Financial Analyst who holds a BS in Mechanical Engineering from Rutgers University College of Engineering and his MBA from Rutgers Graduate School of Business Management.
Taro Kawabe was appointed to our Board on March 27, 2020 following the consummation of the Merger. Mr. Kawabe is currently an Executive Officer, Chief Operating Officer of the Finance and Leasing Business Division of Marubeni. Previously, he was Senior Operating Officer of the Finance and Leasing Business Division of Marubeni from April 2019 to March 2020. Prior to that, Mr. Kawabe was the General Manager of the Leasing Business Department of Marubeni from April 2016 to March 2019. Mr. Kawabe joined Marubeni in April 1990. Mr. Kawabe received his degree from Waseda University in 1990.
Takashi Kurihara was appointed to our Board on March 27, 2020 following the consummation of the Merger and served on the prior Board of Aircastle Limited from May 2019 to the consummation of the Merger, and was nominated by Marubeni. Mr. Kurihara is the Advisor to the President of Marubeni America Corporation. From January 2017 to March 2019, Mr. Kurihara was a director of the Agricultural Solutions Business Division of Bridgestone. Prior to that,
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Mr. Kurihara was Deputy General Manager, Regional Coordination and Administration Department at Marubeni from April 2016 to September 2016. From July 2013, he was Vice President and a Board member of Gavilon Agriculture Investment until April 2015, when Mr. Kurihara became Executive Vice President and a Board member of Gavilon Agriculture Investment. Mr. Kurihara received his MBA at Columbia Business School in New York and his bachelor’s degree of political science at Keio University in Tokyo. Mr. Kurihara has over 30 years of experience at Marubeni including the structured finance for Energy & Chemical plant projects in various countries, the management of the investment decision making process by conducting the analysis and the recommendation to its CEO, various M&A activities including Gavilon and its post-merger integration, and brings to the Board extensive experience in operations, strategic planning and financial matters.
Charles W. Pollard was appointed to our Board on March 27, 2020 following the consummation of the Merger and served on the prior Board of Aircastle Limited from July 6, 2010 to the consummation of the Merger. Mr. Pollard joined Omni Air International, Inc., a passenger charter carrier, in 1997, where he served variously as Managing Director, President and CEO, and Vice Chairman until 2009. Previously, he spent ten years in senior management positions, including President and CEO, at World Airways, Inc. Prior to joining World Airways, Inc., he practiced corporate law at Skadden, Arps, Slate, Meagher & Flom. He currently serves on the board of directors of Allegiant Travel Company.
Takayuki Sakakida was appointed to our Board on March 27, 2020 upon the consummation of the Merger and served on the prior Board of Aircastle Limited from June 9, 2017 to the consummation of the Merger, and was nominated by Marubeni. In December 2020, Mr. Sakakida was appointed as Senior Advisor to the CEO of the Company. In April 2019, Mr. Sakakida was appointed as General Manager, Finance & Leasing Business Dept. – II, Marubeni. In April 2017, Mr. Sakakida was appointed as Vice President and General Manager, Aerospace and Ship Unit, Marubeni America Corporation, which is a subsidiary of Marubeni, a general trading company, engaged as an intermediary, importer/exporter, facilitator or broker in various types of trade between and among business enterprises and countries. In April 2016, Mr. Sakakida was appointed as Assistant General Manager, Aerospace and Defense Systems Department, Marubeni. From April 2015 to April 2016, he served as General Manager, Business Administration Section, Aerospace and Defense Systems Department of Marubeni. From April 2011 to 2015, he seconded to MD Aviation Capital Pte Ltd (Singapore) as Managing Director. Mr. Sakakida has over seventeen years of experience in the aviation industry and brings to the Board extensive experience in operations, strategic planning and financial matters relevant to the aviation industry. He maintains high-level contacts with major manufacturers in the aviation industry as well as Asian airlines which may in the future be customers of the Company.
Noriyuki Yukawa was appointed to our Board on March 27, 2020 following the consummation of the Merger. Mr. Yukawa is currently an Advisor at Mizuho Leasing, and from April 2013 until March 2020, he also held the title of Managing Executive Officer. From April 2017 to March 2020, he led the Aviation, Finance and Real Estate Departments, and from April 2013 to March 2017 he was in charge of Real Estate. Prior to joining Mizuho Leasing in April 2009, Mr. Yukawa had a 28-year career at Mizuho Bank. His roles included General Manager of the M&A Advisory Division, Joint General Manager of the M&A Finance Division, and Deputy General Manager of the Real Estate Finance Division, as well as an Executive Assistant for the Chairman of the Board. Mr. Yukawa received a Master of Comparative Laws from the University of Illinois, College of Law and a Bachelor of Law from the University of Tokyo. Mr. Yukawa is also a member of the Board of Directors of PLM Fleet LLC.
Information about our Executive Officers. The names of the executive officers of the Company and their ages, titles and biographies may be found in: Information about our Executive Officers.
Code of Business Conduct and Ethics. To help ensure that the Company abides by applicable corporate governance standards, our Board has adopted a Code of Business Conduct and Ethics and a Code of Ethics for Chief Executive and Senior Financial Officers, which are posted on our website at http://www.aircastle.com under “Investors—Governance Documents” and which are available in print to any shareholder of the Company upon request.
Audit Committee of the Board of Directors. Takashi Kurihara (Chairman), Noriyuki Yukawa and Douglas A. Hacker were designated as members of the Audit Committee.
In addition, our Board has determined that Mr. Hacker is qualified as an audit committee financial expert, under the SEC rules.
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ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our 2021 fiscal year began on March 1, 2021 and ended on February 28, 2022. All references herein to a year shall mean our fiscal year unless otherwise noted.
This Compensation Discussion and Analysis describes and analyzes our executive compensation ofphilosophy and programs. This Compensation Discussion and Analysis focuses on the compensation paid for our directors2021 fiscal year to our current Chief Executive Officer, Chief Financial Officer and certainthe three other most highly compensated executive officers, together referred to as our named executive officers will(“NEOs”). For 2021, our NEOs were:
| Named Executive Officer | Title | |||||||
| Michael J. Inglese | Chief Executive Officer | |||||||
| Aaron A. Dahlke | Chief Financial Officer | |||||||
| Douglas C. Winter | Chief Commercial Officer | |||||||
| Christopher L. Beers | Chief Legal Officer & Secretary | |||||||
| Roy Chandran | Chief Strategy Officer | |||||||
Pay for Performance Philosophy
We believe executive compensation should be contained undertied to Company performance weighted in favor of long-term performance, and our compensation program for 2021 rewarded executives and employees in two areas:
•Annual Corporate Performance: Achievement of internal corporate financial metrics focused on: (i) profit before tax; (ii) cash flow; (iii) growth through new investments; and (iv) discrete objectives (as described below); and
•Individual Performance: Achievement of individual performance goals set at the captions “Directors’ Compensation”beginning of each year.
For 2021, we made an annual incentive compensation award in the form of a cash bonus, the payment of which was based on a mix of corporate performance and “EXECUTIVE COMPENSATION,” respectively,individual performance. For more highly compensated employees, including our NEOs, achievement of corporate financial metrics carried a greater weighting relative to individual performance, as illustrated in our 2020 Proxy Statement orthe table below:
| Position | Corporate Performance | Individual Performance | ||||||||||||
| CEO | 85% | 15% | ||||||||||||
| Other NEOs | 80% | 20% | ||||||||||||
2021 Corporate Financial Metrics. We based corporate performance targets on the Company’s business plan and established a performance range for each metric. Results below the low end of each range would yield a minimum contribution of 50% to the Company’s incentive compensation pool for that metric. Conversely, performance above target would result in an amendmentenhanced contribution to this Annual Report not later than 120 days afterthe Company’s incentive compensation pool, up to a 150% contribution at the upper end of the performance range for each metric. For 2021, we established the following targets, performance ranges and relative weightings for the corporate financial metrics:
| Metric | 2021 Target (in millions) | Performance Range | Weighted Score | |||||||||||||||||
Profit before tax(1) | $ | 23.0 | 50%-150% | 20% | ||||||||||||||||
Cash flow(2) | $ | 361.0 | 50%-150% | 40% | ||||||||||||||||
Net investments(3) | $ | 800.0 | 50%-150% | 20% | ||||||||||||||||
Discrete objectives (4) | — | 50%-150% | 20% | |||||||||||||||||
_______________
(1)Profit before tax is Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments, plus earnings of unconsolidated equity method investments.
(2)Cash flow for a period is Cash Flow from Operations plus distributions from our joint venture investment, if any.
(3)New investments measures the total annual amount invested in aviation assets.
(4)Our discrete objectives are a qualitative rating based on our performance in maintaining our investment grade ratings, managing our assets and effectiveness on placements given the market environment.
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Individual Performance Goals and Compensation. We set individual performance goals for every employee at the beginning of each year and measure each employee’s performance against those goals at the end of the year to determine incentive compensation levels. For 2021, we determined incentive pay for each employee by applying the weighted corporate and individual performance metrics. We set individual bonus targets based on an employee’s function, role and seniority within the organization, among other factors. For 2021, our annual incentive compensation awards were paid out to our executive officers in the form of cash. For additional retention purposes, we introduced a new long term incentive award program in 2021 – see below for further discussion regarding our new long term incentive program.
Compensation Overview
For 2021, there were three primary elements of total direct compensation: base salary, annual cash bonus, and annual long term incentive award.
Base Salary. Base salaries provide fixed compensation and allow us to attract and retain talented management. We set base salaries for our named executive officers and review them periodically by taking into account the current market environment and the responsibilities, experience, value to the Company and demonstrated performance of our NEOs.
Annual Incentive Compensation. We make an incentive compensation award in the form of a cash bonus based on the Company’s performance against corporate financial metrics and performance against individual performance goals.
Long-Term Incentive Plan. In 2021, we introduced a new long term incentive (“LTI”) award program, in the form of cash awards, for our executive officers and certain other senior professionals. The LTI awards are intended to enhance management retention by rewarding participants for exceptional performance over a three-year performance period using the internal rate of return with respect to the common shareholders’ equity book equity “Book Equity IRR”) Internal Rate of Return (“IRR”) as the measure of long-term performance. Each fiscal year covered by this Annual Report. Allwithin the three-year performance period constitutes a performance year. Our LTI awards are granted with a target award amount, whereby one-third of the target award relates to each performance year. The annual award earned in respect of a given performance year is adjusted based on the Book Equity IRR achieved, which is calculated as the internal rate of return based on the change in our common shareholders’ equity. The Book Equity IRR for each performance year is evaluated against a performance range in order to determine the target annual award earned. The LTI awards yield a minimum payout of 50% and a maximum payout of 150% of the target annual award.
The LTI awards for our non-executive officers vest ratably over the three-year performance period subject to continued employment through each annual vesting date. For maximum retention, our executive officers’ LTI awards cliff vest at the end of the three-year performance period subject to continued employment through such date.
Our LTI awards granted in May 2021 have the following performance range with results between the minimum and target and the maximum and target being interpolated on a linear basis.
Annual Performance Range for 2021 LTI Awards
| Book Equity (IRR) | % of Target Annual Award Earned | |||||||
| Equal to or greater than 6% | 150% | |||||||
| Greater than 2.5% and less than 6% | Interpolated | |||||||
| Equal to 0.5% through 2.5% | 100% | |||||||
| Greater than -3.0% and less than 0.5% | Interpolated | |||||||
| Less than or equal to -3.0% | 50% | |||||||
Actual Performance for 2021. The Russian invasion of Ukraine and resulting sanctions greatly impacted the global aviation industry and the Company’s financial performance. We recorded net non-cash impairment changes of $252 million. As a result of the impairment charges, the Book Equity IRR for 2021 was below the minimum target. Therefore, the portion of those 2021 LTI awards related to the 2021 performance year were earned and accrued at 50%. For our executive officers, these awards will vest on February 29, 2024.
Other Compensation. We also offered our NEOs severance payments and accelerated vesting of restricted cash awards and LTI awards in certain circumstances, as described in greater detail below in the section entitled “Potential Payments upon Termination or Change in Control.” Severance and change in control benefits provide transitional assistance for separated employees and are essential to recruiting and retaining talented executives in a competitive
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market. In addition, our NEOs are also eligible to participate in our employee benefit plans, including medical, dental, life insurance and 401(k) plans. These plans are available to all employees and do not discriminate in favor of our NEOs.
Recoupment Policy. In January 2016, we adopted a clawback policy covering certain incentive compensation awarded to our executive officers. The policy requires reimbursement of incentive payments awarded to an executive officer based upon financial results that were subsequently the subject of a restatement due to the Company’s material noncompliance with financial reporting requirements. The amount of reimbursement would be to the extent that a lower payment would have been awarded to the executive based on the restated financial results. The policy applies to all incentive compensation awarded or paid to an executive officer in the three years prior to the restatement, even if the executive officer did not engage in conduct which contributed to the restatement. In addition, we may seek to recover any portion of incentive compensation when we determine that an executive officer engaged in a certain misconduct, namely involving: (i) material acts of fraud or dishonesty in connection with employment by the Company; (ii) willfully not complying with material policies or procedures of the Company; or (iii) the commission of a felony or a crime involving material dishonesty.
Retirement. For our executive officers, we have designed a qualifying retirement feature that will allow the LTI awards to continue to vest following retirement, subject to satisfaction of the Book Equity IRR performance objectives. For purposes of the LTI awards, a qualifying retirement means: (a) a retirement date no earlier than March 27, 2024; (b) the executive provides at least twelve months' notice; (c) the executive is at least 55 years old on the date of retirement and (d) such individual is not an executive officer (or serving in any other senior commercial role) with certain competitors prior to the vesting date.
Summary. The primary goals of our compensation programs are to attract, motivate and retain the most talented and dedicated employees and to align incentive compensation.
What We Don’t Pay or Provide
•Individual contractual rights to change in control benefits based on a single trigger;
•Deferred compensation plans;
•Company cars or aircraft;
•Individual contractual rights to income tax gross-ups; and
•Special or enhanced pension or retirement programs.
2021 Compensation
Performance versus Corporate Financial Metrics. For 2021, the Company’s performance against its corporate financial metrics resulted in an incentive compensation pool equal to 95% of the total target, as shown in the table below. Certain financial metrics, such as profit before tax, were impacted by the continuing effects of the COVID-19 pandemic on the commercial aviation industry, as well as the Russian invasion of Ukraine in late fiscal year 2021.
| Metric | 2021 Target (in millions) | Weighting | 2021 Performance (in millions) | Performance Range | Performance | Weighted Score | ||||||||||||||||||||||||||||||||
| Profit before tax | $ | 23.0 | 20% | $ | 286.2 | 50% - 150% | 50 | % | 10 | % | ||||||||||||||||||||||||||||
Cash flow(1) | $ | 361.0 | 40% | $ | 372.9 | 50% - 150% | 111 | % | 44 | % | ||||||||||||||||||||||||||||
| New investments (in millions) | $ | 800.0 | 20% | $ | 763.3 | 50% - 150% | 95 | % | 19 | % | ||||||||||||||||||||||||||||
| Discrete objectives | — | 20% | — | 50% - 150% | 110 | % | 22 | % | ||||||||||||||||||||||||||||||
| Total | 95 | % | ||||||||||||||||||||||||||||||||||||
_______________
The Compensation Committee took the following actions related to fiscal year 2021 annual incentive compensation for our NEOs, which was determined solely based on corporate and individual performance levels.
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| Named Executive Officer | 2021 Incentive Compensation | |||||||
| Michael J. Inglese | $729,375 cash | |||||||
| Aaron A. Dahlke | $465,500 cash | |||||||
| Douglas C. Winter | $563,500 cash | |||||||
| Christopher L. Beers | $563,500 cash | |||||||
| Roy Chandran | $465,500 cash | |||||||
How We Make Decisions
Risk. The Compensation Committee reviews the risks and rewards associated with the Company’s compensation programs. We believe that our compensation programs encourage prudent business judgment and appropriate risk-taking, with the overall goal of building sustainable and profitable growth.
We believe none of our compensation programs create risks that are reasonably likely to have a material adverse impact on the Company. Base salary is a fixed amount that does not encourage risk taking, and our annual incentive compensation program and LTI award program are both limited to a maximum payout of 150% of target.
Role of Executive Officers. For 2021, the Committee set the corporate financial metrics at the beginning of the year based on the annual business plan endorsed by the Board. We set performance goals for the Chief Executive Officer, who in turn established individual performance goals for the other NEOs. Regularly during the year, the senior management team presented to us the Company’s actual performance against the corporate performance metrics. We shared these discussions with the full Board on a regular basis.
Tax Implications of Our Compensation
The Tax Cuts and Jobs Act, enacted on December 22, 2017, substantially modified Section 162(m) of the Internal Revenue Code and, among other things, eliminated the performance-based exception to the $1.0 million deduction limit effective as of January 1, 2018. As a result, beginning in 2018, compensation paid to certain executive officers in excess of $1.0 million will generally be nondeductible, whether or not it is performance-based. In addition, beginning in 2018, the executive officers subject to Section 162(m) (the “Covered Employees”) will include any individual who served as the CEO or Chief Financial Officer (“CFO”) at any time during the taxable year and the three other most highly compensated officers (other than the CEO and CFO) for the taxable year, and once an individual becomes a Covered Employee for any taxable year beginning after December 31, 2016, that individual will remain a Covered Employee for all future years.
Effective as of the closing of the Merger, Section 162(m) no longer applied to the Company.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board is currently comprised of three Directors and operates pursuant to a written charter, which is available at http://www.aircastle.com under “Investors—Governance Documents.”
The Compensation Committee is primarily responsible for reviewing, approving and overseeing the Company’s compensation plans and practices and works with management to establish the Company’s executive compensation philosophy and programs.
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management and based on that review and discussion, has recommended to the Board that it be included in this Form 10-K.
Respectfully submitted,
The Compensation Committee
Charles W. Pollard, Chair
Takashi Kurihara
Michael J. Inglese
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Summary Compensation Table for 2021
The table below sets forth information regarding fiscal years 2021 and 2020, the Transition Period (“2020 (2mo)”) and 2019 compensation for each of our NEOs.
Awards(1) | ||||||||||||||||||||||||||||||||||||||||||||
| Name and Principal Position | Fiscal Year | Salary | Bonus | Annual Equity Award(3) | Long Term Equity Incentive Plan(3)(6) | All Other Compensation(4) | Total | |||||||||||||||||||||||||||||||||||||
| Michael J. Inglese | 2021 (FY) | $ | 750,000 | $ | 678,060 | $ | — | $ | — | $ | 13,340 | $ | 1,441,400 | |||||||||||||||||||||||||||||||
| Chief Executive Officer | 2020 (FY) | 675,000 | 1,076,868 | — | — | 12,840 | 1,764,708 | |||||||||||||||||||||||||||||||||||||
| 2020 (2mo) | 112,500 | 469,123 | — | — | 2,140�� | 583,763 | ||||||||||||||||||||||||||||||||||||||
| 2019 | 675,000 | 717,930 | 1,522,966 | 7,717,531 | 126,114 | 10,759,541 | ||||||||||||||||||||||||||||||||||||||
| Aaron A. Dahlke | 2021 (FY) | $ | 475,000 | $ | 300,240 | $ | — | $ | — | $ | 13,340 | $ | 788,580 | |||||||||||||||||||||||||||||||
| Chief Financial Officer | 2020 (FY) | 400,000 | 344,331 | — | — | 12,840 | 757,171 | |||||||||||||||||||||||||||||||||||||
| 2020 (2mo) | 66,667 | 181,349 | — | — | 2,140 | 250,156 | ||||||||||||||||||||||||||||||||||||||
| 2019 | 400,000 | 425,440 | 449,194 | 1,860,818 | 42,543 | 3,177,995 | ||||||||||||||||||||||||||||||||||||||
| Douglas C. Winter | 2021 (FY) | $ | 575,000 | $ | 375,300 | $ | — | $ | — | $ | 13,508 | $ | 963,808 | |||||||||||||||||||||||||||||||
| Chief Commercial Officer | 2020 (FY) | 500,000 | 506,803 | — | — | 21,527 | 1,028,330 | |||||||||||||||||||||||||||||||||||||
| 2020 (2mo) | 83,333 | 233,631 | — | — | 2,094 | 319,058 | ||||||||||||||||||||||||||||||||||||||
| 2019 | 337,180 | 531,800 | 696,850 | 1,090,700 | 44,767 | 2,701,297 | ||||||||||||||||||||||||||||||||||||||
| Christopher L. Beers | 2021 (FY) | $ | 575,000 | $ | 375,300 | $ | — | $ | — | $ | 13,987 | $ | 964,287 | |||||||||||||||||||||||||||||||
| Chief Legal Officer & | 2020 (FY) | 500,000 | 506,803 | — | — | 13,250 | 1,020,053 | |||||||||||||||||||||||||||||||||||||
| Secretary | 2020 (2mo) | 83,333 | 233,631 | — | — | 2,208 | 319,172 | |||||||||||||||||||||||||||||||||||||
| 2019 | 500,000 | 531,800 | 567,047 | 3,155,948 | 65,010 | 4,819,805 | ||||||||||||||||||||||||||||||||||||||
Roy Chandran(5) | 2021 (FY) | $ | 475,000 | $ | 300,240 | $ | — | $ | — | $ | 13,440 | $ | 788,680 | |||||||||||||||||||||||||||||||
| Chief Strategy Officer | 2020 (FY) | 400,000 | 344,331 | — | — | 12,840 | 757,171 | |||||||||||||||||||||||||||||||||||||
| 2020 (2mo) | 66,667 | 181,349 | — | — | 2,140 | 250,156 | ||||||||||||||||||||||||||||||||||||||
| 2019 | 400,000 | 425,440 | 454,826 | 1,880,591 | 43,279 | 3,204,136 | ||||||||||||||||||||||||||||||||||||||
_______________
(1)The amounts reported in the Annual Equity Award column for 2019 reflect, in part, the aggregate fair value on the grant date of the restricted share awards granted to our NEOs determined in accordance with FASB ASC Topic 718. The amounts reported in the Long-Term Equity Incentive Plan column for 2019 reflect, in part, the aggregate fair value on the grant date of the adjusted return on equity (“AROE”) performance share units (“PSUs”) and the total stockholder return (“TSR”) PSUs granted to our NEOs determined in accordance with FASB ASC Topic 718 based on the probable achievement of the applicable AROE and TSR performance conditions as of the grant date. The aggregate fair value on the grant date that would have been included for the AROE PSUs and TSR PSUs, assuming that the highest level of the performance conditions would be achieved, is incorporated hereinas follows: Mr. Inglese $2,475,000; Mr. Winter $1,000,000; Mr. Dahlke $600,000; Mr. Beers $1,000,000; and Mr. Chandran $600,000. For a summary of the assumptions made in the valuation of these awards, please see Note 8 in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. Pursuant to SEC guidance, the amounts included in both columns also include the incremental fair value of certain restricted share awards and PSUs that were materially modified in December 2019 as a result of their accelerated vesting in connection with the 280G mitigation actions taken in connection with the Merger.
(2)Bonus compensation consists of: (i) cash bonuses; (ii) cash-based long-term incentive compensation awarded in 2020 with a one-year vesting period; and (iii) the portion of 2019 bonus restricted cash awards vested in 2020 and 2021.
(3)Please refer to the Company's Form 10K/A for the year ended December 31, 2019 (filed April 22, 2020) for a description of the Annual Equity Awards and Long Term Equity Incentive Plan awards for 2019. No Annual Equity Awards or Long Term Equity Incentive Plan awards were granted after 2019. See Compensation Overview-Long Term Incentive Plan above for information regarding our new cash-based LTI awards granted for the first time in 2021. Pursuant to SEC rules, amounts paid out to our NEOs with respect to our cash-based LTI awards will be reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table for the year earned, not the year granted
(4)The amounts reported in this column consist of Company contributions made to each named executive officer’s 401(k) plan account and certain insurance premiums paid by reference.the Company, in addition to $8,960 paid to Douglas C. Winter as a dividend payment on unvested restricted common shares.
(6)2021 LTI awards granted to our NEOs, which vest on February 29, 2024, and in accordance with SEC rules are not reported in the Summary Compensation Table for 2021 as part of our 2021 compensation, were provided in the following target award amounts: Mr. Inglese $2,500,000; Mr. Dahlke $600,000; Mr. Winter $1,000,000; Mr. Beers $1,000,000; and Mr. Chandran $600,000.
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Grants of Plan-Based Awards for 2021
| Estimated Possible Payouts under Non-Equity Incentive Plan Awards(1) | ||||||||||||||
| Name | Grant Date | Minimum ($) | Target ($) | Maximum ($) | ||||||||||
| Michael J. Inglese | May 20, 2021 | $ | 1,250,000 | $ | 2,500,000 | $ | 3,750,000 | |||||||
| Aaron A. Dahlke | May 20, 2021 | 300,000 | 600,000 | 900,000 | ||||||||||
| Douglas C. Winter | May 20, 2021 | 500,000 | 1,000,000 | 1,500,000 | ||||||||||
| Christopher L. Beers | May 20, 2021 | 500,000 | 1,000,000 | 1,500,000 | ||||||||||
| Roy Chandran | May 20, 2021 | 300,000 | 600,000 | 900,000 | ||||||||||
1.Represents our new cash-based LTI awards granted to our NEOs in May 2021 which vest on February 29, 2024. The LTI awards yield a minimum payout of 50% and a maximum payout of 150% of the target annual award. See Compensation Overview – Long Term Incentive Plan above for information regarding our new cash-based LTI awards granted for the first time in 2021. Pursuant to SEC rules, amounts paid out to our NEOs with respect to our cash-based LTI awards will be reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table for the year earned, not the year granted.
Employment Agreements with NEOs
Through our subsidiary, Aircastle Advisor LLC, we have entered into an employment agreement (as amended) with each of our NEOs. These employment agreements generally provide for payment of an annual base salary and the executives’ eligibility to receive an annual cash bonus with indicated target annual cash bonus and LTI award levels.
Each employment agreement provides that the NEO is employed “at-will” and may be terminated at any time and for whatever reason by either us or him. A summary of the payments and benefits to be provided to the NEOs upon a termination of employment, along with a description of the restrictive covenants applicable to each NEO, is set forth below in the section entitled “Potential Payments upon Termination or Change in Control.”
54
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The following table and summary set forth potential amounts payable to our NEOs upon termination of employment or a change in control, as described below. The table below reflects amounts payable to our NEOs assuming termination of employment on February 28, 2022:
| Name and Principal Position | Voluntary resignation by executive | Termination by us for cause | Termination by us without cause | Termination by us without cause or by executive for good reason following change in control(1) | Termination by executive for good reason | Normal retirement | Death or Disability | |||||||||||||||||||||||||||||||||||||
| Michael J. Inglese | ||||||||||||||||||||||||||||||||||||||||||||
| Cash Severance | $ | — | $ | — | $ | 1,500,000 | $ | 3,000,000 | $ | 1,500,000 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Pro-rata Bonus (assumes February 27 termination) | — | — | 750,000 | 750,000 | 750,000 | — | 750,000 | |||||||||||||||||||||||||||||||||||||
| COBRA Reimbursement | — | — | 60,181 | 60,181 | 60,151 | — | 60,181 | |||||||||||||||||||||||||||||||||||||
| Vacation | 80,769 | 80,769 | 80,769 | 80,769 | 80,769 | 80,769 | 80,769 | |||||||||||||||||||||||||||||||||||||
Remainder of Restricted Cash and LTI Awards(1) | — | — | 2,457,643 | 2,457,643 | 2,457,643 | — | 2,457,643 | |||||||||||||||||||||||||||||||||||||
| Aaron A. Dahlke | ||||||||||||||||||||||||||||||||||||||||||||
| Cash Severance | $ | — | $ | — | $ | 950,000 | $ | 1,900,000 | $ | 950,000 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Pro-rata Bonus (assumes February 27 termination) | — | — | 475,000 | 475,000 | 475,000 | — | 475,000 | |||||||||||||||||||||||||||||||||||||
| COBRA Reimbursement | — | — | 60,181 | 60,181 | 60,181 | — | 60,181 | |||||||||||||||||||||||||||||||||||||
| Vacation | 51,154 | 51,154 | 51,154 | 51,154 | 51,154 | 51,154 | 51,154 | |||||||||||||||||||||||||||||||||||||
Remainder of Restricted Cash and LTI Awards(1) | — | — | 634,907 | 634,907 | 634,907 | — | 634,907 | |||||||||||||||||||||||||||||||||||||
| Douglas C. Winter | ||||||||||||||||||||||||||||||||||||||||||||
| Cash Severance | $ | — | $ | — | $ | 1,150,000 | $ | 2,300,000 | $ | 1,150,000 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Pro-rata Bonus (assumes February 27 termination) | — | — | 575,000 | 575,000 | 575,000 | — | 575,000 | |||||||||||||||||||||||||||||||||||||
| COBRA Reimbursement | — | — | 46,545 | 46,545 | 46,545 | — | 46,545 | |||||||||||||||||||||||||||||||||||||
| Vacation | 61,923 | 61,923 | 61,923 | 61,923 | 61,923 | 61,923 | 61,923 | |||||||||||||||||||||||||||||||||||||
Remainder of Restricted Cash and LTI Awards(1) | — | — | 1,001,967 | 1,001,967 | 1,001,967 | — | 1,001,967 | |||||||||||||||||||||||||||||||||||||
| Christopher L. Beers | ||||||||||||||||||||||||||||||||||||||||||||
| Cash Severance | $ | — | $ | — | $ | 1,150,000 | $ | 2,300,000 | $ | 1,150,000 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Pro-rata Bonus (assumes February 27 termination) | — | — | 575,000 | 575,000 | 575,000 | — | 575,000 | |||||||||||||||||||||||||||||||||||||
| COBRA Reimbursement | — | — | 60,181 | 60,181 | 60,181 | — | 60,181 | |||||||||||||||||||||||||||||||||||||
| Vacation | 61,923 | 61,923 | 61,923 | 61,923 | 61,923 | 61,923 | 61,923 | |||||||||||||||||||||||||||||||||||||
Remainder of Restricted Cash and LTI Awards(1) | — | — | 1,001,967 | 1,001,967 | 1,001,967 | — | 1,001,967 | |||||||||||||||||||||||||||||||||||||
| Roy Chandran | ||||||||||||||||||||||||||||||||||||||||||||
| Cash Severance | $ | — | $ | — | $ | 950,000 | $ | 1,900,000 | $ | 950,000 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Pro-rata Bonus (assumes February 27 termination) | — | — | 475,000 | 475,000 | 475,000 | — | 475,000 | |||||||||||||||||||||||||||||||||||||
| COBRA Reimbursement | — | — | 60,181 | 60,181 | 60,181 | — | 60,181 | |||||||||||||||||||||||||||||||||||||
| Vacation | 51,154 | 51,154 | 51,154 | 51,154 | 51,154 | 51,154 | 51,154 | |||||||||||||||||||||||||||||||||||||
Remainder of Restricted Cash and LTI Awards(1) | — | — | 634,907 | 634,907 | 634,907 | — | 634,907 | |||||||||||||||||||||||||||||||||||||
_______________
(1)Includes the portion of 2019 bonus restricted cash awards vesting on February 28, 2022, the portion of 2020 bonus restricted cash awards vesting on March 1, 2023 and 2024, and the 2021 LTI awards vesting on February 29, 2024.
As described above in the section entitled “Employment Agreements with NEOs,” we, through our subsidiary, Aircastle Advisor LLC, have entered into employment agreements (as amended) with our named executive officers which set forth certain terms and conditions of their employment relating to termination and termination payments.
55
Under the employment agreements for our named executive officers:
•if the employment of such named executive officer is terminated without “cause” or with “good reason” (as defined in such employment agreement), and if he signs a general release of claims and complies with the covenants described below, then he will be entitled to receive: (i) an amount equal to the sum of the base salary and target annual cash bonus for the year of termination, payable over a one-year period (two times such amount and payable in a lump sum if the termination occurs within 120 days prior to or within two years following a “change in control” as defined in such employment agreement); (ii) a pro-rata annual bonus for the year of termination; (iii) reimbursement of COBRA premiums for up to twelve months; (iv) accelerated vesting of any remaining LTI awards, payable within 60 days following the performance period or, if the NEO’s employment is terminated following a change in control event, within 60 days following the date of termination;
•if any amounts to be paid to such named executive officer would constitute “excess parachute payments” subject to the excise tax imposed under Section 4999 of the Internal Revenue Code, the amount will be reduced to the extent necessary to avoid the excise tax, but only if such reduction results in a higher after-tax payment to him; and
•such named executive officer covenants not to compete with Aircastle for six months following termination of his employment for any reason and will not solicit the employees of Aircastle or the clients or customers of Aircastle for competing business, in each case, for a period of twelve months following termination.
Each of the employment agreements were amended effective as of December 19, 2019, to provide that any grants of restricted cash awards in lieu of the annual PSU grants for 2020 and the equity-based portion of the annual bonuses in respect of 2019 will not constitute a good reason event for purposes of the employment agreements or for any other purpose.
Director Compensation Table for 2021
The table below describes our compensation of Directors for the fiscal year ended February 28, 2022:
| Name | Fees Earned or Paid in Cash ($) | Total ($) | ||||||
| Douglas A. Hacker | $ | 180,000 | $ | 180,000 | ||||
| Charles W. Pollard | 180,000 | 180,000 | ||||||
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| Name and Address of Beneficial Owner | Common Shares Held | Percent of Class | ||||||||||||
Marubeni Corporation(1) 7-1 Nihonbashi 2-chome Chuo-ku, Tokyo, 103-6060 Japan | 7,024 | 50 | ||||||||||||
MM Air Limited(2) c/o Compass Administration Services Ltd. Crawford House 50 Cedar Avenue Hamilton, HM11, Bermuda | 7,024 | 50 | ||||||||||||
_______________
(1)Marubeni beneficially owns 7,024 Common Shares through its wholly owned subsidiary MHC. On March 27, 2020, Proxy StatementAircastle consummated the Merger. At the Effective Time, each Common Share issued and outstanding immediately prior to the Effective Time (other than (i) shares canceled or in an amendment to this Annual Report not later than 120 days after the endconverted into shares of the fiscal year coveredsurviving company pursuant to the Merger Agreement and (ii) restricted shares canceled and exchanged pursuant to the Merger Agreement) was canceled and converted into the right to receive the Merger Consideration. The shares that were owned by this Annual Report. AllMHC immediately prior to the Effective Time were converted into the same percentage of shares of the foregoing information is incorporated herein by reference.
(2)MM Air Limited beneficially owns 7,024 Common Shares. MM Air Limited is controlled by this Annual Report.affiliates of Marubeni and Mizuho Leasing. On March 27, 2020, Aircastle consummated the Merger. At the Effective Time, each Common Share issued and outstanding immediately prior to the Effective Time (other than (i) shares canceled or converted into shares of the surviving company pursuant to the Merger Agreement (as described in footnote (1) above) and (ii) restricted shares canceled and exchanged pursuant to the Merger Agreement) was canceled and converted into the right to receive the Merger Consideration. The foregoing information is incorporated hereinshares that were owned by reference.MHC immediately prior to the Effective Time were converted into the same percentage of shares of the surviving company in the Merger. As a result, immediately following the Effective Time, MHC beneficially owned 28.8% of the outstanding common shares of the surviving company in the Merger, and MM Air Limited beneficially owned the remaining 71.2%. On March 27, 2020, MM Air Limited transferred 2,976 Common Shares to MHC, resulting in MM Air Limited owning 7,024 Common Shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following is a summary of material provisions of certain transactions between Aircastlewe entered into with our executive officers, Directors or 5% or greater shareholders. We believe the terms and conditions set forth in such agreements were reasonable and customary for transactions of this type.
On April 26, 2021, we entered into an amendment that reduced the size of our revolving credit facility with Mizuho Bank Ltd., a related party, from $150,000 to $50,000 and extended its affiliatesmaturity date to July 30, 2022. Mizuho Bank, Ltd. is now a lender for our $1,000,000 revolving credit facility with a commitment in the amount of $100,000.
On December 6, 2021, the Company entered into a $100,000 senior unsecured revolving credit facility with Mizuho Marubeni Leasing America Corporation, a related party. The facility bears interest at a rate of LIBOR plus 1.625%, matures on December 6, 2023, and requires the Company to have a minimum of $20,000 revolving credit outstanding throughout the term of the facility. This transaction was approved by our Audit Committee as an arm’s length transaction under our related party policy.
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.
During the year ended February 28, 2022, the Company incurred $5.0 million in fees to Marubeni as part of its intra-company service agreement, whereby Marubeni provides certain management and administrative services to the Company. The Company also entered into a parts management services and supply agreement with an affiliate of Marubeni under which we purchased parts totaling $5.9 million during the year ended February 28, 2022.
57
Policies and Procedures for Review, Approval or Ratification of Transactions with Related Persons
Our Board has adopted a Policy and Procedures with Respect to Related Person Transactions, our Related Person Policy. Pursuant to the terms of the Related Person Policy, the Audit Committee must review and approve in advance any transaction involving an affiliate or related party (as defined under Accounting Standards Codification Topic 850), in which the amount involved exceeds $5.0 million, other personsthan those that are pre-approved pursuant to pre-approval guidelines or rules that may be established by the Audit Committee to cover specific categories of transactions, including the guidelines described below. All Related Persons, as defined below, are required to report to our legal department any such related person transaction prior to its completion, and the legal department will determine whether it should be submitted to the Audit Committee for consideration.
Our Related Person Policy covers all transactions, arrangements or relationships (or any series of similar transactions, arrangements or relationships) in which the Company or any of its subsidiaries was, is or will be contained undera participant, in which the caption “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS”amount involved exceeds $120,000, and in our 2020 Proxy Statementwhich any Related Person had, has or in an amendment to this Annual Report not later than 120 days afterwill have a direct or indirect material interest.
A Related Person is any person who is, or at any time since the endbeginning of the Company’s last fiscal year covered by this Annual Report. Allwas, a Director or executive officer of the Company or a nominee to become a Director of the Company; Marubeni and Mizuho Leasing or their affiliates; any immediate family member of any of the foregoing information is incorporated herein by reference.
Although our Common Shares are no longer listed on the NYSE or any other national securities exchange and we are therefore not required to have a majority of independent directors, the Board considers the current Directors Messrs. Hacker and Pollard to be independent and that Directors Messrs. Inglese, Kawabe, Kurihara, Sakakida and Yukawa to be not independent. Our standing Risk and Governance, Audit and Compensation Committees include independent and non-independent Directors.
In addition, the Board considered transactions described above under “Item 13. Certain Relationships and Related Transactions, and Director Independence—Certain Relationships and Related Party Transactions” in making the independence determinations.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
| Year Ended February 28, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
Audit fees(1) | $ | 2,230,600 | $ | 2,168,000 | ||||||||||
Tax fees(2) | 1,056,500 | 808,000 | ||||||||||||
| All other fees | 5,200 | 5,200 | ||||||||||||
_______________
(1)Represents fees for the audit of the Company’s consolidated financial statements and internal control over financial reporting, the reviews of interim financial statements included in our 2020 Proxy Statement or in an amendment to thisthe Company’s Annual Report not later than 120 days after the endon Form 10-K, Quarterly Reports on Form 10-Q, certain Current Reports on Form 8-K, audits of the fiscal year covered by this Annual Report. The foregoing information is incorporated herein by reference.
(2)Represents fees related primarily to assistance with tax compliance matters, including international, federal and state tax return preparation, and consultations regarding tax matters.
(3)Estimate based on approved fees, subject to finalization upon completion of audit work.
58
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has policies and procedures ofthat require the pre-approval by the Audit Committee willor one of its members of all services performed by the Company’s independent registered public accounting firm and related fee arrangements. In the early part of each year, the Audit Committee approves the proposed services, including the nature, type and scope of services contemplated, and the related fees, to be contained underrendered by these firms during the caption “INDEPENDENT AUDITOR FEES - Pre-Approval Policies and Procedures” in our 2020 Proxy Statementyear. In addition, pre-approval by the Audit Committee or in an amendment to this Annual Report not later than 120 days afterone of its members is also required for those engagements that may arise during the endcourse of the fiscal year coveredthat are outside the scope of the initial services and fees pre-approved by the Audit Committee pursuant to the Sarbanes-Oxley Act. In accordance with this Annual Report. The foregoing information is incorporated hereinpolicy, the Audit Committee pre-approved all services to be performed by reference.the Company’s independent registered accounting firm.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (A) | 1. | Consolidated Financial Statements. | ||||||
| The following is a list of the “Consolidated Financial Statements” of Aircastle Limited and its subsidiaries included in this Annual Report on Form 10-K, which are filed herewith pursuant to Item 8: | ||||||||
| Report of Independent Registered Public Accounting Firm. | ||||||||
| Consolidated Balance Sheets as of | ||||||||
| Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended | ||||||||
| Consolidated Statements of Cash Flows for the years ended February 28, 2022 and 2021, two months ended February 29, 2020, and year ended December 31, | ||||||||
| Consolidated Statements of Changes in Shareholders’ Equity for the years ended February 28, 2022 and 2021, two months ended February 29, 2020, and year ended December 31, | ||||||||
| Notes to Consolidated Financial Statements. | ||||||||
| 2. | Financial Statement Schedules. | |||||||
| There are no Financial Statement Schedules filed as part of this Annual Report, since the required information is included in the Consolidated Financial Statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present. | ||||||||
| 3. | Exhibits. | |||||||
| The exhibits filed herewith are listed on the Exhibit Index filed as part of this Annual Report on Form 10-K. | ||||||||
59
(B) EXHIBIT INDEX
| Exhibit No. | Description of Exhibit | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.10 | ||||||||
| 4.11 | ||||||||
E - 1
| Exhibit No. | Description of Exhibit | |||||||||
| 4.12 | ||||||||||
| 10.1 | ||||||||||
| 10.2 | ||||||||||
| 10.3 | ||||||||||
| 10.4 | ||||||||||
| 10.5 | ||||||||||
| 10.6 | ||||||||||
| 10.7 | ||||||||||
| 10.8 | ||||||||||
| 10.9 | ||||||||||
| 10.10 | ||||||||||
| 10.11 | ||||||||||
| 10.12 | ||||||||||
| 10.13 | ||||||||||
| 10.14 | ||||||||||
| 10.15 | ||||||||||
E - 2
| Description of Exhibit | ||||||||
| 10.16 | ||||||||
| 10.17 | ||||||||
| 10.19 | ||||||||
| 10.20 | ||||||||
| 10.21 | ||||||||
| 10.22 | ||||||||
| 10.23 | ||||||||
| 10.24 | ||||||||
| 10.25 | ||||||||
| 10.26 | ||||||||
| 10.27 | ||||||||
| 10.28 | ||||||||
| 10.29 | ||||||||
| 10.30 | ||||||||
| 10.31 | ||||||||
E - 3
| Exhibit No. | Description of Exhibit | |||||||
| 10.32 | ||||||||
| 10.33 | ||||||||
| 10.34 | ||||||||
| 10.35 | ||||||||
| 10.36 | ||||||||
| 10.37 | ||||||||
| 10.43 | ||||||||
| 10.44 | ||||||||
| 10.45 | ||||||||
| 21.1 | ||||||||
E - 4
| Description of Exhibit | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| The following materials from the Company’s Annual Report on Form 10-K for the year ended | ||||||||
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | |||||||
_____________
# Management contract or compensatory plan or arrangement.
* Filed herewith.
Ø Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
^ Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules to the SEC upon request.
ØØ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
ITEM 16. FORM 10-K SUMMARY
None.
E - 45
Index to Financial Statements
| Page No. | |||||
| Consolidated Financial Statements | |||||
Report of Independent Registered Public Accounting Firm (PCAOB ID 42) | |||||
| Consolidated Balance Sheets as of | |||||
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended | |||||
F - 1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Aircastle Limited and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aircastle Limited and Subsidiaries (the Company) as of December 31, 2019February 28, 2022 and 2018, and2021, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’shareholders' equity and cash flows for each of the three years inthen ended, the periodtwo months ended February 29, 2020, and the year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019February 28, 2022 and 2018,2021, and the results of its operations and its cash flows for each of the three years inthen ended, the periodtwo months ended February 29, 2020, and the year ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F - 2
| Recoverability assessment and Impairment of flight equipment held for lease | |||||
Description of the Matter | Auditing the Company’s assessment of recoverability of flight equipment held for lease was complex and highly judgmental due to the higher estimation required in determining the future | ||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's processes to determine whether the book value of each aircraft is | ||||
To test the estimated | |
F - 3
| Accounting for Income Tax | |||||
Description of the Matter | The Company is incorporated in Bermuda and leases its aircraft within over 40 countries. The Company’s income is subject to U.S. federal, state and local income taxes, as well as foreign income tax in many of the jurisdictions it leases aircraft. As more fully described in Note Auditing the Company’s income tax accounting was complex due to the complicated international tax structure maintained by the Company. Specifically, the auditing of the application of changes in tax law and transactions to transfer, buy or sell aircraft in foreign jurisdictions required increased auditor effort, including the use of tax professionals with specialized skills, to evaluate the Company’s application of the tax laws in relevant jurisdictions and the related income tax. | ||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to prepare the consolidated income tax provision. Our procedures also included, among others, an evaluation of management’s review and consideration of the international tax structure, identification of changes to tax laws in the various jurisdictions in which it operates and its treatment of the transactions to transfer, buy and sell aircraft. To test the income tax related accounts, we performed audit procedures that included, among others, understanding the Company’s tax structure as it relates to current leases through review of its organization chart and various lease documents. We evaluated the Company’s treatment of tax law changes, if any, in the foreign jurisdictions it operates to current tax laws. We also obtained, and assessed the completeness of, a list of transactions to transfer, purchase and sell aircraft during the period and evaluated the tax treatment of a sample of transactions through review of the lease documents and our assessment of the tax law. Our audit procedures were performed with the assistance of our tax professionals with specialized skills and knowledge. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2004.
Stamford, CT
F - 34
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
| February 28, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| ASSETS | |||||||||||||||||
| Cash and cash equivalents | $ | 167,891 | $ | 578,004 | |||||||||||||
| Restricted cash and cash equivalents | 2,791 | 2,594 | |||||||||||||||
| Accounts receivable | 63,666 | 82,572 | |||||||||||||||
| Flight equipment held for lease, net of accumulated depreciation of $2,766,429 and $2,076,972, respectively | 6,313,950 | 6,492,471 | |||||||||||||||
| Net investment in leases, net of allowance for credit losses of $1,764 and $864, respectively | 150,325 | 195,376 | |||||||||||||||
| Unconsolidated equity method investments | 38,317 | 35,377 | |||||||||||||||
| Other assets | 356,326 | 311,944 | |||||||||||||||
| Total assets | $ | 7,093,266 | $ | 7,698,338 | |||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
| LIABILITIES | |||||||||||||||||
| Borrowings from secured financings, net of debt issuance costs | $ | 684,039 | $ | 768,850 | |||||||||||||
| Borrowings from unsecured financings, net of debt issuance costs | 3,835,841 | 4,366,261 | |||||||||||||||
| Accounts payable, accrued expenses and other liabilities | 177,424 | 174,267 | |||||||||||||||
| Lease rentals received in advance | 37,361 | 58,013 | |||||||||||||||
| Security deposits | 69,189 | 80,699 | |||||||||||||||
| Maintenance payments | 459,713 | 519,178 | |||||||||||||||
| Total liabilities | 5,263,567 | 5,967,268 | |||||||||||||||
| Commitments and Contingencies | 0 | 0 | |||||||||||||||
| 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 February 28, 2022 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 February 28, 2022 and 2021 | — | — | |||||||||||||||
| Additional paid-in capital | 1,878,774 | 1,485,777 | |||||||||||||||
| Retained earnings (accumulated deficit) | (49,075) | 245,293 | |||||||||||||||
| Total shareholders’ equity | 1,829,699 | 1,731,070 | |||||||||||||||
| Total liabilities and shareholders’ equity | $ | 7,093,266 | $ | 7,698,338 | |||||||||||||
| December 31, | |||||||
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Cash and cash equivalents | $ | 140,882 | $ | 152,719 | |||
| Restricted cash and cash equivalents | 14,561 | 15,134 | |||||
| Accounts receivable | 18,006 | 15,091 | |||||
| Flight equipment held for lease, net of accumulated depreciation of $1,501,664 and $1,221,985, respectively | 7,375,018 | 6,935,585 | |||||
| Net investment in direct financing and sales-type leases | 419,396 | 469,180 | |||||
| Unconsolidated equity method investments | 32,974 | 69,111 | |||||
| Other assets | 201,209 | 214,361 | |||||
| Total assets | $ | 8,202,046 | $ | 7,871,181 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
| LIABILITIES | |||||||
| Borrowings from secured financings, net of debt issuance costs | $ | 1,129,345 | $ | 798,457 | |||
| Borrowings from unsecured financings, net of debt issuance costs | 3,932,491 | 3,962,896 | |||||
| Accounts payable, accrued expenses and other liabilities | 172,114 | 153,341 | |||||
| Lease rentals received in advance | 108,060 | 87,772 | |||||
| Security deposits | 124,954 | 120,962 | |||||
| Maintenance payments | 682,398 | 739,072 | |||||
| Total liabilities | 6,149,362 | 5,862,500 | |||||
| Commitments and Contingencies | |||||||
| SHAREHOLDERS’ EQUITY | |||||||
| Preference shares, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding | — | — | |||||
| Common shares, $0.01 par value, 250,000,000 shares authorized, 75,122,129 shares issued and outstanding at December 31, 2019; and 75,454,511 shares issued and outstanding at December 31, 2018 | 751 | 754 | |||||
| Additional paid-in capital | 1,446,664 | 1,468,779 | |||||
| Retained earnings | 605,269 | 539,332 | |||||
| Accumulated other comprehensive loss | — | (184 | ) | ||||
| Total shareholders’ equity | 2,052,684 | 2,008,681 | |||||
| Total liabilities and shareholders’ equity | $ | 8,202,046 | $ | 7,871,181 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F - 45
Aircastle Limited and Subsidiaries
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Dollars in thousands, except per share amounts)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenues: | |||||||||||
| Lease rental revenue | $ | 777,403 | $ | 722,694 | $ | 721,302 | |||||
| Direct financing and sales-type lease revenue | 32,295 | 35,132 | 25,716 | ||||||||
| Amortization of lease premiums, discounts and incentives | (22,636 | ) | (15,269 | ) | (11,714 | ) | |||||
| Maintenance revenue | 74,987 | 105,738 | 56,128 | ||||||||
| Total lease revenue | 862,049 | 848,295 | 791,432 | ||||||||
| Gain on sale of flight equipment | 45,532 | 36,766 | 55,167 | ||||||||
| Other revenue | 10,357 | 5,290 | 5,188 | ||||||||
| Total revenues | 917,938 | 890,351 | 851,787 | ||||||||
| Operating expenses: | |||||||||||
| Depreciation | 356,021 | 310,850 | 298,664 | ||||||||
| Interest, net | 258,070 | 234,504 | 241,231 | ||||||||
| Selling, general and administrative (including non-cash share-based payment expense of $15,830, $11,488 and $13,148, respectively) | 77,034 | 76,025 | 73,604 | ||||||||
| Impairment of aircraft | 7,404 | — | 80,430 | ||||||||
| Maintenance and other costs | 24,828 | 8,961 | 9,077 | ||||||||
| Total operating expenses | 723,357 | 630,340 | 703,006 | ||||||||
| Other income (expense): | |||||||||||
| Loss on extinguishment of debt | (7,577 | ) | — | — | |||||||
| Other | (11,864 | ) | 1,636 | (2,476 | ) | ||||||
| Total other income (expense) | (19,441 | ) | 1,636 | (2,476 | ) | ||||||
| Income from continuing operations before income taxes and earnings (loss) of unconsolidated equity method investment | 175,140 | 261,647 | 146,305 | ||||||||
| Income tax provision | 22,667 | 5,642 | 6,042 | ||||||||
| Earnings (loss) of unconsolidated equity method investment, net of tax | 4,102 | (8,086 | ) | 7,611 | |||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | |||||
| Earnings per common share — Basic: | |||||||||||
| Net income per share | $ | 2.09 | $ | 3.18 | $ | 1.88 | |||||
| Earnings per common share — Diluted: | |||||||||||
| Net income per share | $ | 2.06 | $ | 3.17 | $ | 1.87 | |||||
| Dividends declared per share | $ | 1.22 | $ | 1.14 | $ | 1.06 | |||||
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Lease rental revenue | $ | 595,236 | $ | 611,421 | $ | 131,119 | $ | 777,403 | |||||||||||||||
| Direct financing and sales-type lease revenue | 10,733 | 18,215 | 4,447 | 32,295 | |||||||||||||||||||
| Amortization of lease premiums, discounts and incentives | (20,190) | (22,842) | (3,669) | (22,636) | |||||||||||||||||||
| Maintenance revenue | 152,030 | 172,668 | 41,214 | 74,987 | |||||||||||||||||||
| Total lease revenue | 737,809 | 779,462 | 173,111 | 862,049 | |||||||||||||||||||
| Gain on sale of flight equipment | 26,001 | 33,536 | 15,354 | 45,532 | |||||||||||||||||||
| Other revenue | 5,977 | 19,290 | 9,183 | 10,357 | |||||||||||||||||||
| Total revenues | 769,787 | 832,288 | 197,648 | 917,938 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Depreciation | 337,528 | 347,517 | 59,853 | 356,021 | |||||||||||||||||||
| Interest, net | 214,352 | 235,338 | 41,038 | 258,070 | |||||||||||||||||||
| Selling, general and administrative (including non-cash share-based payment expense of $0, $28,049, $10,678 and $15,830, respectively) | 66,338 | 88,413 | 22,901 | 77,034 | |||||||||||||||||||
| Provision for credit losses | 930 | 5,258 | 288 | — | |||||||||||||||||||
| Impairment of flight equipment | 452,250 | 425,579 | 62,657 | 7,404 | |||||||||||||||||||
| Maintenance and other costs | 31,166 | 20,005 | 1,703 | 24,828 | |||||||||||||||||||
| Total operating expenses | 1,102,564 | 1,122,110 | 188,440 | 723,357 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Loss on extinguishment of debt | (14,156) | (2,640) | (3,955) | (7,577) | |||||||||||||||||||
| Merger expenses | — | (32,605) | (321) | (7,372) | |||||||||||||||||||
| Other | 57,682 | (191) | (94) | (4,492) | |||||||||||||||||||
| Total other income (expense) | 43,526 | (35,436) | (4,370) | (19,441) | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investment | (289,251) | (325,258) | 4,838 | 175,140 | |||||||||||||||||||
| Income tax provision (benefit) | (7,998) | 10,236 | 1,675 | 22,667 | |||||||||||||||||||
| Earnings of unconsolidated equity method investment, net of tax | 3,044 | 2,326 | 496 | 4,102 | |||||||||||||||||||
| Net income (loss) | $ | (278,209) | $ | (333,168) | $ | 3,659 | $ | 156,575 | |||||||||||||||
| Preference share dividends | (16,159) | — | — | — | |||||||||||||||||||
| Net income (loss) available to common shareholders | $ | (294,368) | $ | (333,168) | $ | 3,659 | $ | 156,575 | |||||||||||||||
| Net derivative loss reclassified into earnings | — | — | — | 184 | |||||||||||||||||||
| Other comprehensive income | — | — | — | 184 | |||||||||||||||||||
| Total comprehensive income (loss) available to common shareholders | $ | (294,368) | $ | (333,168) | $ | 3,659 | $ | 156,759 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | |||||
| Other comprehensive income, net of tax: | |||||||||||
| Net derivative loss reclassified into earnings | 184 | 1,166 | 2,202 | ||||||||
| Other comprehensive income | 184 | 1,166 | 2,202 | ||||||||
| Total comprehensive income | $ | 156,759 | $ | 249,085 | $ | 150,076 | |||||
F - 6
Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net income (loss) | $ | (278,209) | $ | (333,168) | $ | 3,659 | $ | 156,575 | |||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||||||||
| Depreciation | 337,528 | 347,517 | 59,853 | 356,021 | |||||||||||||||||||
| Amortization of deferred financing costs | 16,267 | 14,791 | 2,446 | 14,578 | |||||||||||||||||||
| Amortization of lease premiums, discounts and incentives | 20,190 | 22,842 | 3,669 | 22,636 | |||||||||||||||||||
| Deferred income taxes | (9,386) | 6,506 | 1,453 | 20,223 | |||||||||||||||||||
| Non-cash share-based payment expense | — | 28,049 | 10,678 | 15,830 | |||||||||||||||||||
| Cash flow hedges reclassified into earnings | — | — | — | 184 | |||||||||||||||||||
| Collections on net investments in leases | 14,297 | 16,859 | 5,658 | 25,842 | |||||||||||||||||||
| Security deposits and maintenance payments included in earnings | (123,969) | (135,115) | (47,293) | (49,029) | |||||||||||||||||||
| Gain on the sale of flight equipment | (26,001) | (33,536) | (15,354) | (45,532) | |||||||||||||||||||
| Loss on extinguishment of debt | 14,156 | 2,640 | 3,955 | 7,577 | |||||||||||||||||||
| Impairment of aircraft | 452,250 | 425,579 | 62,657 | 7,404 | |||||||||||||||||||
| Provision for credit losses | 930 | 5,258 | 288 | — | |||||||||||||||||||
| Other | (3,043) | (2,305) | (402) | 206 | |||||||||||||||||||
| Changes on certain assets and liabilities: | |||||||||||||||||||||||
| Accounts receivable | 16,948 | (57,292) | (6,377) | (13,162) | |||||||||||||||||||
| Other assets | (29,963) | (66,290) | 5,786 | 2,594 | |||||||||||||||||||
| Accounts payable, accrued expenses and other liabilities | (5,716) | (13,655) | 10,205 | (5,483) | |||||||||||||||||||
| Lease rentals received in advance | (23,414) | (53,658) | 143 | 19,954 | |||||||||||||||||||
| Net cash and restricted cash provided by operating activities | 372,865 | 175,022 | 101,024 | 536,418 | |||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Acquisition and improvement of flight equipment | (795,426) | (145,589) | (23,035) | (1,172,370) | |||||||||||||||||||
| Proceeds from sale of flight equipment | 210,718 | 180,342 | 103,679 | 361,747 | |||||||||||||||||||
| Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits | (202) | (13,024) | (4,614) | 760 | |||||||||||||||||||
| Unconsolidated equity method investment and associated costs | — | — | — | (15,175) | |||||||||||||||||||
| Distributions from unconsolidated equity method investment in excess of earnings | 104 | 419 | — | 36,750 | |||||||||||||||||||
| Other | (1,694) | (676) | (56) | 4,259 | |||||||||||||||||||
| Net cash and restricted cash provided by (used in) investing activities | (586,500) | 21,472 | 75,974 | (784,029) | |||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Repurchase of shares | — | (25,536) | (2,370) | (36,739) | |||||||||||||||||||
| Parent contribution at Merger | — | 25,536 | — | — | |||||||||||||||||||
| Net proceeds from preference share issuance | 392,997 | — | — | — | |||||||||||||||||||
| Proceeds from secured and unsecured debt financings | 20,000 | 1,932,943 | 100,000 | 2,116,848 | |||||||||||||||||||
| Repayments of secured and unsecured debt financings | (646,943) | (1,697,662) | (268,799) | (1,817,558) | |||||||||||||||||||
| Deferred financing costs | (5,339) | (12,832) | — | (13,800) | |||||||||||||||||||
| Debt extinguishment costs | (13,372) | (1,524) | (2,685) | (7,183) | |||||||||||||||||||
| Security deposits and maintenance payments received | 88,891 | 87,510 | 29,806 | 202,833 | |||||||||||||||||||
| Security deposits and maintenance payments returned | (26,857) | (71,743) | (16,956) | (117,872) | |||||||||||||||||||
| Dividends paid | (5,658) | (24,025) | — | (91,328) | |||||||||||||||||||
| Net cash and restricted cash provided by (used in) financing activities | (196,281) | 212,667 | (161,004) | 235,201 | |||||||||||||||||||
| Net (decrease) increase in cash and restricted cash | (409,916) | 409,161 | 15,994 | (12,410) | |||||||||||||||||||
| Cash and restricted cash at beginning of year | 580,598 | 171,437 | 155,443 | 167,853 | |||||||||||||||||||
| Cash and restricted cash at end of year | $ | 170,682 | $ | 580,598 | $ | 171,437 | $ | 155,443 | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 156,575 | $ | 247,919 | $ | 147,874 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 356,021 | 310,850 | 298,664 | ||||||||
| Amortization of deferred financing costs | 14,578 | 14,627 | 19,435 | ||||||||
| Amortization of lease premiums, discounts and incentives | 22,636 | 15,269 | 11,714 | ||||||||
| Deferred income taxes | 20,223 | (496 | ) | (8,948 | ) | ||||||
| Non-cash share-based payment expense | 15,830 | 11,488 | 13,148 | ||||||||
| Cash flow hedges reclassified into earnings | 184 | 1,166 | 2,202 | ||||||||
| Collections on direct financing and sales-type leases | 25,842 | — | — | ||||||||
| Security deposits and maintenance payments included in earnings | (49,029 | ) | (80,628 | ) | (17,947 | ) | |||||
| Gain on the sale of flight equipment | (45,532 | ) | (36,766 | ) | (55,167 | ) | |||||
| Loss on extinguishment of debt | 7,577 | — | — | ||||||||
| Impairment of aircraft | 7,404 | — | 80,430 | ||||||||
| Other | 206 | 3,032 | 1,476 | ||||||||
| Changes on certain assets and liabilities: | |||||||||||
| Accounts receivable | (13,162 | ) | (12,328 | ) | (6,734 | ) | |||||
| Other assets | 2,594 | 5,065 | (7,655 | ) | |||||||
| Accounts payable, accrued expenses and other liabilities | (5,483 | ) | 10,526 | 13,857 | |||||||
| Lease rentals received in advance | 19,954 | 32,868 | (1,478 | ) | |||||||
| Net cash and restricted cash provided by operating activities | 536,418 | 522,592 | 490,871 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition and improvement of flight equipment | (1,172,370 | ) | (1,317,497 | ) | (1,038,343 | ) | |||||
| Proceeds from sale of flight equipment | 361,747 | 338,831 | 833,576 | ||||||||
| Net investment in direct financing and sales-type leases | — | (15,783 | ) | (331,721 | ) | ||||||
| Collections on direct financing and sales-type leases | — | 29,961 | 32,184 | ||||||||
| Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits | 760 | (15,494 | ) | (7,681 | ) | ||||||
| Unconsolidated equity method investment and associated costs | (15,175 | ) | �� | (3,350 | ) | — | |||||
| Distributions from unconsolidated equity method investment in excess of earnings | 36,750 | 3,900 | — | ||||||||
| Other | 4,259 | 4,745 | (5,122 | ) | |||||||
| Net cash and restricted cash used in investing activities | (784,029 | ) | (974,687 | ) | (517,107 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of shares | (36,739 | ) | (71,421 | ) | (4,862 | ) | |||||
| Proceeds from secured and unsecured debt financings | 2,116,848 | 1,413,901 | 675,000 | ||||||||
| Repayments of secured and unsecured debt financings | (1,817,558 | ) | (969,139 | ) | (878,534 | ) | |||||
| Deferred financing costs | (13,800 | ) | (11,642 | ) | (8,540 | ) | |||||
| Debt extinguishment costs | (7,183 | ) | — | — | |||||||
| Security deposits and maintenance payments received | 202,833 | 203,925 | 192,830 | ||||||||
| Security deposits and maintenance payments returned | (117,872 | ) | (90,803 | ) | (141,185 | ) | |||||
| Dividends paid | (91,328 | ) | (88,730 | ) | (83,433 | ) | |||||
| Net cash and restricted cash provided by (used in) financing activities | 235,201 | 386,091 | (248,724 | ) | |||||||
| Net decrease in cash and restricted cash | (12,410 | ) | (66,004 | ) | (274,960 | ) | |||||
| Cash and restricted cash at beginning of year | 167,853 | 233,857 | 508,817 | ||||||||
| Cash and restricted cash at end of year | $ | 155,443 | $ | 167,853 | $ | 233,857 | |||||
Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Reconciliation to Consolidated Balance Sheets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 167,891 | $ | 578,004 | $ | 166,083 | $ | 140,882 | |||||||||||||||
| Restricted cash and cash equivalents | 2,791 | 2,594 | 5,354 | 14,561 | |||||||||||||||||||
| Unrestricted and restricted cash and cash equivalents | $ | 170,682 | $ | 580,598 | $ | 171,437 | $ | 155,443 | |||||||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||||||||
| Cash paid during the year for interest | $ | 200,922 | $ | 241,011 | $ | 21,487 | $ | 246,026 | |||||||||||||||
| Cash paid (received) during the year for income taxes | $ | 240 | $ | 1,469 | $ | (15) | $ | (656) | |||||||||||||||
| Supplemental disclosures of non-cash investing activities: | |||||||||||||||||||||||
| Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment | $ | 12,391 | $ | 70,716 | $ | 7,873 | $ | 90,397 | |||||||||||||||
| Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions | $ | 21,764 | $ | 29,869 | $ | 16,693 | $ | 31,958 | |||||||||||||||
| Transfers from Flight equipment held for lease to Net investment in direct financing and sales-type leases and Other assets | $ | 57,489 | $ | 90,352 | $ | 31,821 | $ | 104,838 | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Reconciliation to Consolidated Balance Sheets: | |||||||||||
| Cash and cash equivalents | $ | 140,882 | $ | 152,719 | $ | 211,922 | |||||
| Restricted cash and cash equivalents | 14,561 | 15,134 | 21,935 | ||||||||
| Unrestricted and restricted cash and cash equivalents | $ | 155,443 | $ | 167,853 | $ | 233,857 | |||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the year for interest | $ | 246,026 | $ | 214,350 | $ | 228,125 | |||||
| Cash (received) paid during the year for income taxes | $ | (656 | ) | $ | 6,254 | $ | 4,576 | ||||
| Supplemental disclosures of non-cash investing activities: | |||||||||||
| Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment | $ | 90,397 | $ | 71,837 | $ | 132,585 | |||||
| Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions | $ | 31,958 | $ | 63,432 | $ | 149,100 | |||||
| Transfers from Flight equipment held for lease to Net investment in direct financing and sales-type leases and Other assets | $ | 104,838 | $ | 11,202 | $ | 154,213 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
Aircastle Limited and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
| Common Shares | ||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||
| Balance, December 31, 2016 | 78,593,133 | $ | 786 | $ | 1,521,190 | $ | 315,890 | $ | (3,552 | ) | $ | 1,834,314 | ||||||||||
| Issuance of common shares to directors and employees | 344,017 | 3 | (3 | ) | — | — | — | |||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | (229,187 | ) | (2 | ) | (4,860 | ) | — | — | (4,862 | ) | ||||||||||||
| Amortization of share-based payments | — | — | 11,469 | — | — | 11,469 | ||||||||||||||||
| Dividends declared | — | — | — | (83,433 | ) | — | (83,433 | ) | ||||||||||||||
| Net income | — | — | — | 147,874 | — | 147,874 | ||||||||||||||||
| Net derivative loss reclassified into earnings | — | — | — | — | 2,202 | 2,202 | ||||||||||||||||
| Balance, December 31, 2017 | 78,707,963 | 787 | 1,527,796 | 380,331 | (1,350 | ) | 1,907,564 | |||||||||||||||
| Issuance of common shares to stockholders, directors and employees | 423,202 | 4 | (4 | ) | — | — | — | |||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | (3,676,654 | ) | (37 | ) | (71,384 | ) | — | — | (71,421 | ) | ||||||||||||
| Amortization of share-based payments | — | — | 10,523 | — | — | 10,523 | ||||||||||||||||
| Reclassification of prior year director stock award liability | — | — | 1,848 | — | — | 1,848 | ||||||||||||||||
| Dividends declared | — | — | — | (88,730 | ) | — | (88,730 | ) | ||||||||||||||
| Net income | — | — | — | 247,919 | — | 247,919 | ||||||||||||||||
| Adoption of accounting standard | — | — | — | (188 | ) | — | (188 | ) | ||||||||||||||
| Net derivative loss reclassified into earnings | — | — | — | — | 1,166 | 1,166 | ||||||||||||||||
| Balance, December 31, 2018 | 75,454,511 | 754 | 1,468,779 | 539,332 | (184 | ) | 2,008,681 | |||||||||||||||
| Issuance of common shares to stockholders, directors and employees | 1,281,598 | 13 | (13 | ) | — | — | — | |||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | (1,613,980 | ) | (16 | ) | (36,723 | ) | — | — | (36,739 | ) | ||||||||||||
| Amortization of share-based payments | — | — | 13,825 | — | — | 13,825 | ||||||||||||||||
| Reclassification of prior year director stock award liability | — | — | 796 | — | — | 796 | ||||||||||||||||
| Dividends declared | — | — | — | (91,328 | ) | — | (91,328 | ) | ||||||||||||||
| Net income | — | — | — | 156,575 | — | 156,575 | ||||||||||||||||
| Adoption of accounting standard | — | — | — | 690 | — | 690 | ||||||||||||||||
| Net derivative loss reclassified into earnings | — | — | — | — | 184 | 184 | ||||||||||||||||
| Balance, December 31, 2019 | 75,122,129 | $ | 751 | $ | 1,446,664 | $ | 605,269 | $ | — | $ | 2,052,684 | |||||||||||
| Common Shares | Preference Shares | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 75,454,511 | $ | 754 | — | $ | — | $ | 1,468,779 | $ | 539,332 | $ | (184) | $ | 2,008,681 | |||||||||||||||||||||||||||||||||
| Issuance of common shares to stockholders, directors and employees | 1,281,598 | 13 | — | — | (13) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | (1,613,980) | (16) | — | — | (36,723) | — | — | (36,739) | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payments | — | — | — | — | 13,825 | — | — | 13,825 | |||||||||||||||||||||||||||||||||||||||
| Reclassification of prior year director stock award liability | — | — | — | — | 796 | — | — | 796 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | — | (91,328) | — | (91,328) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 156,575 | — | 156,575 | |||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | — | — | 690 | — | 690 | |||||||||||||||||||||||||||||||||||||||
| Net derivative loss reclassified into earnings | — | — | — | — | — | — | 184 | 184 | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 75,122,129 | $ | 751 | — | $ | — | $ | 1,446,664 | $ | 605,269 | $ | — | $ | 2,052,684 | |||||||||||||||||||||||||||||||||
| Issuance of common shares to stockholders, directors and employees | 28,568 | 1 | — | — | (1) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares from stockholders, directors and employees | (73,903) | (1) | — | — | (2,369) | — | — | (2,370) | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payments | — | — | — | — | 10,678 | — | — | 10,678 | |||||||||||||||||||||||||||||||||||||||
| Reclassification of prior year director stock award liability | — | — | — | — | 2,005 | — | — | 2,005 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | — | (24,025) | — | (24,025) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 3,659 | — | 3,659 | |||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | — | — | (6,442) | — | (6,442) | |||||||||||||||||||||||||||||||||||||||
| Balance, February 29, 2020 | 75,076,794 | $ | 751 | — | $ | — | $ | 1,456,977 | $ | 578,461 | $ | — | $ | 2,036,189 | |||||||||||||||||||||||||||||||||
| Amortization of share-based payments | — | — | — | — | 28,049 | — | — | 28,049 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (333,168) | — | (333,168) | |||||||||||||||||||||||||||||||||||||||
| Payment of unvested shares at Merger | (101,809) | (1) | — | — | (25,535) | — | — | (25,536) | |||||||||||||||||||||||||||||||||||||||
| Parent contribution at Merger | — | — | — | — | 25,536 | — | — | 25,536 | |||||||||||||||||||||||||||||||||||||||
| Share cancellation and re-issuance at Merger | (74,960,937) | (750) | — | — | 750 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance, February 28, 2021 | 14,048 | $ | — | — | $ | — | $ | 1,485,777 | $ | 245,293 | $ | — | $ | 1,731,070 | |||||||||||||||||||||||||||||||||
| Issuance of preference shares | — | — | 400 | — | 392,997 | — | — | 392,997 | |||||||||||||||||||||||||||||||||||||||
| Preference share dividends | — | — | — | — | — | (16,159) | — | (16,159) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (278,209) | — | (278,209) | |||||||||||||||||||||||||||||||||||||||
| Balance, February 28, 2022 | 14,048 | $ | — | 400 | $ | — | $ | 1,878,774 | $ | (49,075) | $ | — | $ | 1,829,699 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 8
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including acquiring, leasing, managing and selling commercial jet aircraft.
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 of the outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Company manages, analyzes and reports on its business and results of operations based on the basis of 1 operating segment: leasing, financing, selling and managing commercial flight equipment. Our chief executive officerChief 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 sincesubsequent to the balance sheet date of December 31, 2019February 28, 2022, through the date on which the consolidated financial statements included in this Form 10-KAnnual Report were issued.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates 4subsidiaries, including any Variable Interest EntitiesEntity (“VIEs”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.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 unscheduled 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 ourits 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 that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Aircastle considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Restricted cash and cash equivalents consistsconsist primarily of rent collections, maintenance payments and security deposits received from lessees pursuant to the terms of various lease agreements held in lockbox accounts in accordance with our financings.
F - 9
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Virtually all of our cash and cash equivalents and restricted cash and cash equivalents are held or managed by 3 major financial institutions.
Flight Equipment Held for Lease and Depreciation
Flight equipment held for lease is stated at cost and depreciated using the straight-line method, typically over a 25-year25-year life from the date of manufacture for passenger aircraft and over a 30 to 35-year35-year life for freighter aircraft, depending on whether the aircraft is a converted or purpose-built freighter, to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% to 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value. Examples of situations where exceptions may arise include but are not limited to:
•flight equipment where estimates of the manufacturer’s realized sales prices are not relevant (e.g., freighter conversions);
•flight equipment where estimates of the manufacturer’s realized sales prices are not readily available; and
•flight equipment which may have a shorter useful life due to obsolescence.
Major improvements and modifications incurred in connection with the acquisition of aircraft that are required to get the aircraft ready for initial service are capitalized and depreciated over the remaining life of the flight equipment.
For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance costs by applying the deferral method. Under the deferral method, we capitalize the actual cost of major maintenance events, which are depreciated on a straight-line basis over the period until the next maintenance event is required.
In accounting for flight equipment held for lease, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance assets or liabilities and the estimated residual values. In making these estimates, we rely upon actual industry experience with the same or similar aircraft types and our anticipated lessee’s utilization of the aircraft.
For purchase and lease back transactions, we account for the transaction as a single arrangement. We allocate the consideration paid based on the fair value of the aircraft and lease. The fair value of the lease may include a maintenance premium and a lease premium or discount.
When we acquire an aircraft with a lease, determining the fair value of attached leases requires us to make assumptions regarding the current fair values of leases for specific aircraft. We estimate a range of current lease rates of like aircraft in order to determine if the attached lease is within a fair value range. If a lease is below or above the range of current lease rates, we present value the estimated amount below or above the fair value range over the remaining term of the lease. The resulting lease discount or premium is amortized into lease rental income over the remaining term of the lease.
Impairment of Flight Equipment
We perform aan annual recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis annually during the second quarter. In addition, abasis. 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 model’stype’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, economic conditions and other factors.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.3 in the Notes to the Consolidated Financial Statements.
F - 10
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
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 and the Russian invasion of Ukraine on our customers, air traffic, lease rental rates, and aircraft valuations, and have performed 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 fleet for impairment charges, we identify thoseaircraft. 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 other customers or aircraft variants that are mostmore susceptible to failing the recoverability assessmentimpact of the above crises and monitor those aircraft more closely, which may result in more frequent recoverability assessments. The recoverability in the value of these aircraft is more sensitive to changes in contractual cash flows, future cash flow estimates and residual values or scrap values for each aircraft. These are typically older aircraft for which lessee demand is declining.deterioration.
Net Investment in Direct Financing and Sales-Type Leases
If a lease meets specific criteria at lease commencement or at the effective date of a lease modification, we recognize the lease as a direct financing or sales-type lease. The net investment in direct financing and sales-type leases consists of the lease receivable, estimated unguaranteed residual value of the leasedlease flight equipment at lease-end and, for direct financing leases, deferred selling profit. For sales-type leases, we recognize the difference between the net book value of the aircraft and the net investment in the lease as a gain or loss on sale of fightflight equipment. Selling profit on a direct financing lease is deferred and amortized over the lease term, and a selling loss is recognized at lease commencement. Interest income on our net investment in leases is recognized as Direct financing and sales-type leaseleases revenue over the lease term in a manner that produces a constant rate of return on the net investment in the lease.
Unconsolidated Equity Method Investment
Aircastle accounts for its interest in an unconsolidated joint venture using the equity method as we do not control the joint venture entity. Under the equity method, the investment is initially recorded at cost and the carrying amount is affected by its share of the unconsolidated joint venture’s undistributed earnings and losses, and distributions of dividends and capital. The investment may also reflect an equity loss in the event that circumstances indicate an other-than-temporary impairment.
Security Deposits
Most of our operating leases require the lessee to pay Aircastle a security deposit or provide a letter of credit. Security deposits represent cash received from the lessee that is held on deposit until lease expiration. Aircastle’s operating leases also obligate the lessees to maintain flight equipment and comply with all governmental requirements applicable to the flight equipment, including without limitation, operational, maintenance, registration requirements and airworthiness directives.expiration or termination. If a lease is terminated, we recognize security deposits in excess of outstanding lease payments as other revenue.
Maintenance Payments
Typically, under an operating lease, the lessee is responsible for performing all maintenance but they may also be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and are required to be made monthly in arrears or at the end of the lease term. Whether to permit a lessee to make maintenance payments at the end of the lease term, rather than requiring such payments to be made monthly,
F - 11
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
depends on a variety of factors, including the creditworthiness of the lessee, the level of security deposit which may be provided by the lessee and market conditions at the time we enter into the lease. If a lease requires monthly maintenance payments, we would typically be obligated to reimburse the lessee for costs they incur for heavy maintenance, overhaul or replacement of certain high-value components to the extent of maintenance payments received in respect of the specific maintenance event, usually shortly following completion of the relevant work. If a lease requires end of lease term maintenance payments, typically the lessee would be required to pay us for its utilization of the aircraft during the lease; however, in some cases, we may owe a net payment to the lessee in the event heavy maintenance is performed and paid for by the lessee during the lease term and the aircraft is returned to us in better condition than at lease inception.
We record monthly maintenance payments by the lessee as accrued maintenance payments liabilities in recognition of our contractual commitment to refund such receipts. In these contracts, we typically do not recognize such maintenance payments as maintenance revenue during the lease. Reimbursements to the lessee upon the receipt of evidence of qualifying maintenance work are charged against the existing accrued maintenance payments liability. We currently defer maintenance revenue recognition of most monthly maintenance payments collected until the end of the lease, when we are able to determine the amount, if any, by which the monthly maintenance payments received from a lessee exceed costs to be incurred by that lessee in performing heavy maintenance.maintenance, which generally occurs at or near the end of the lease. End of lease term maintenance payments made to us are recognized as maintenance revenue, and end of lease term maintenance payments we make to a lessee are recorded as contra maintenance revenue.
Lease Incentives and Amortization
Many of our leases contain provisions whichthat may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated amount of the maintenance event cost and the estimated amounts the lessee is responsible to pay. The assumptions supporting these estimates are re-evaluated annually.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability, and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset, which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.
Lease acquisition costs related to reconfiguration of the aircraft cabin, other lessee specific modifications and other direct costs are capitalized and amortized into revenue over the initial life of the lease, assuming no lease renewals, and are included in other assets.
Income Taxes
Aircastle uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. We did not have any unrecognized tax benefits.
Fair value measurements
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We measure the fair value of our cash and cash equivalents and restricted cash and cash equivalents on a recurring basis and measure the fair value of our investment in
F - 12
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
unconsolidated joint ventures and aircraft on a non-recurring basis. See Note 3 in the Notes to the Consolidated Financial Statements.
Lease Revenue Recognition
We lease flight equipment under net operating leases with lease terms typically ranging from three to seven years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals. Operating
In certain instances, we may provide lease rentals that adjust based on a London Interbank Offered Rate (“LIBOR”) index are recognized on a straight-line basisconcessions 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 the prevailing rate at lease commencement. Changes to rate-based lease rentals are recognized in the statementsa cash basis of income inaccounting rather than an accrual method. In the period we conclude that collection of change. Revenuelease payments is notno longer probable, we recognize any difference between revenue amounts recognized when collection is not reasonably assured. When collectability is not probable,to date under the customer is placed on non-accrual status,accrual method and revenue is recognized when cash payments are received.that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to lease rental revenue.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income and other gains and losses, net of income taxes, if any, affecting shareholders’ equity that, under U.S. GAAP, are excluded from net income.
Share-Based Compensation
Aircastle recognizesrecognized compensation cost relating to share-based payment transactions in the financial statements based on the fair value of the equity instruments issued. Aircastle usesused the straight-line method of accounting for compensation cost on share-based payment awards that containcontained pro-rata vesting provisions.
Deferred Financing Costs
Deferred financing costs, which are included in borrowings from secured and unsecured financings, net of debt issuance costs, in the Consolidated Balance Sheets, are amortized using the interest method for amortizing loans over the lives of the relevant related debt.
Recent Accounting Pronouncements
In June 2016,March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326)2020-04, Reference Rate Reform Topic 848 (“ASC 848”), Measurementin 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 Credit Losses on Financial Instruments and related updates.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 affects entities holding financial assetsprovides this temporary election through December 31, 2022, and net investments in leasescannot be applied to contract modifications that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The standard takes effect for annual periods beginningoccur after December 15, 2019. The Company’s net investments in direct financing31, 2022.Reference rate reform will primarily impact our lease and sales-type leases compose the financial assets principally affected by the standard. Operatingdebt arrangements for which floating-rate lease receivablesrentals and interest expense are not within the scopebased on LIBOR. As of ASC 326.
Effective, March 1, 2020 adjustment to2021, the opening balance of retained earnings. The adoption ofCompany adopted FASB ASU 2019-12, Income Taxes (Topic 740), Simplifying the standard will not have a material impact on our consolidated financial statements or related disclosures.
F - 1413
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
exceptions to the general principles within the current guidance and by clarifying and amending the current guidance. The guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. This adoption did not have a material impact on our consolidated financial statements.
Note 2. Update on COVID-19 Pandemic and Russian Invasion of Ukraine
COVID-19 Pandemic
The COVID-19 pandemic and related mitigation efforts has had an unprecedented negative impact on the aviation sector, resulting in a dramatic slowdown in air traffic. Substantially all the world’s airlines have experienced financial difficulties and liquidity challenges, including many of our customers. While there have been improvements in certain markets, according to IATA, as of February 28, 2022, air travel was still down approximately 55% compared to normal levels. A full recovery to pre-pandemic levels is not expected for several years and will depend on the effectiveness of vaccination efforts and the continued easing of widespread travel restrictions, among other things. While the extent and duration of the impact of the COVID-19 pandemic remain unknown, we continue to believe long-term demand for air travel will return to historical trends over time.
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. While we continued to receive requests from our customers for lease concessions, such as deferrals of lease payments or broader lease restructurings, the number of requests for such concessions during the year ended February 28, 2022 has declined compared to 2021. As of February 28, 2022, we had deferred rent receivables of $55,478 related to 9 customers that were included in other assets. Approximately 93% of these deferrals have been agreed to as part of broader lease restructurings, which generally include term extensions, better security packages, or other valuable consideration in exchange for near-term economic concessions. The outstanding deferred rent receivables are scheduled to be repaid, on average, within the next seven years.
If air traffic remains depressed and our customers are unable to raise sufficient funds, we may need to grant additional deferrals 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 April 25, 2022, 4 of our customers are subject to judicial insolvency proceedings or similar protection. These customers lease 18 aircraft, which comprise 12% of our Net Book Value and 9% of our lease rental and direct financing and sales-type lease revenue as of and for the year ended February 28, 2022. One of these customers is LATAM, our second largest customer, which represents 7% of our Net Book Value and 8% of our lease rental revenue as of and for the year ended February 28, 2022. We have signed restructured leases for all 13 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).
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. 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.
Russian Invasion of Ukraine
On February 24, 2022, the Russian Federation invaded Ukraine. This has resulted in the closing of airspace in several countries as well as the placement of sanctions on a variety of Russian entities and certain activities involving Russia or Russian entities, such as the leasing of aircraft. We have and will continue to fully comply with all applicable sanctions.
F - 14
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
As of February 24, 2022, we had 12 aircraft on lease with 6 Russian airlines and 1 aircraft with a Ukrainian airline. We have since terminated the leasing activities for all our Russian aircraft and have sought to repossess the aircraft and remove them from Russia. We have successfully repossessed 2 of the 12 Russian aircraft. NaN aircraft remain in Russia and 1 aircraft was undergoing maintenance outside of Russia and is not operational. Our aircraft with a Ukrainian airline is in temporary storage outside of Ukraine. It is unclear whether we will be able to recover the remaining aircraft from our former Russian airline customers or what the condition of the aircraft will be at the time of repossession if we do so or whether we will be able to recover the related technical records and documentation. Failure to repossess any of our aircraft could adversely affect our business and financial results. Many of these Russian airlines have continued to fly our aircraft notwithstanding the leasing terminations and our repeated demands for the return of our assets. Our aircraft that remain in Russia may suffer damage or deterioration due to inadequate maintenance and lack of spare parts.
During the fourth quarter of 2021, we recorded net non-cash impairment charges of $251,878 related to our Russian and Ukrainian aircraft – see Note 3 in the Notes to the Consolidated Financial Statements. These 13 aircraft comprised 6% of our Net Book Value before impairment and 1% of our Net Book Value after impairment. Excluding lease rentals received in advance recognized into revenue, they represented 7% of our lease rental and direct financing and sales-type lease revenue for the year ended February 28, 2022. Basic lease rentals for our former Russian lessees were approximately $3,488 for the month of February 2022. The termination of our Russian leases will result in reduced revenues and operating cash flows.
We had letters of credit of $49,502 as of February 28, 2022 related to our aircraft leased to Russian airlines. We have presented requests for payment to the various financial institutions and have received about half of the proceeds. We are pursuing collection on remaining letters of credit, but the timing and amount of any further recovery are uncertain.
We have insurance, through the airlines’ insurance and our own policies, and have filed claims against the relevant policies seeking an indemnity of approximately $350,000. The 10 aircraft that are not in our possession had a pre-impairment book value of $314,127. Our claims are subject to the terms of the applicable policies, and given the unprecedented scenario and the magnitude of potential claims, insurers and reinsurers may raise various defenses. Accordingly, at this stage we can give no assurance as to when or what amounts we may ultimately collect. Insurance recoveries are generally recognized when they are realized or realizable, which typically occurs at the time cash proceeds are received or a claim agreement is executed, and also considers the counterparty’s ability to pay the claim amount.
Note 2.3. Fair Value Measurements
Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:
•Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
•Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.
The valuation techniques that may be used to measure fair value are as follows:
•The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
•The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
•The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
F - 15
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
The following tables set forth our financial assets and liabilities as of December 31, 2019February 28, 2022 and 20182021, that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities 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 as of February 28, 2022 | Fair Value Measurements at February 28, 2022 Using Fair Value Hierarchy | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | 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 | $ | — | $ | — | |||||||||||||||||||||
Fair Value as of December 31, 2019 | Fair Value Measurements at December 31, 2019 Using Fair Value Hierarchy | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Valuation Technique | ||||||||||||||
Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 140,882 | $ | 140,882 | $ | — | $ | — | Market | ||||||||
| Restricted cash and cash equivalents | 14,561 | 14,561 | — | — | Market | ||||||||||||
| Derivative assets | 115 | — | 115 | — | Market | ||||||||||||
| Total | $ | 155,558 | $ | 155,443 | $ | 115 | $ | — | |||||||||
| Fair Value as of December 31, 2018 | Fair Value Measurements at December 31, 2018 Using Fair Value Hierarchy | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Valuation Technique | ||||||||||||||
Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 152,719 | $ | 152,719 | $ | — | $ | — | Market | ||||||||
| Restricted cash and cash equivalents | 15,134 | 15,134 | — | — | Market | ||||||||||||
| Derivative assets | 4,886 | — | 4,886 | — | Market | ||||||||||||
| Total | $ | 172,739 | $ | 167,853 | $ | 4,886 | $ | — | |||||||||
| Fair Value as of February 28, 2021 | Fair Value Measurements at February 28, 2021 Using Fair Value Hierarchy | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Valuation Technique | ||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 578,004 | $ | 578,004 | $ | — | $ | — | Market | ||||||||||||||||||||
| Restricted cash and cash equivalents | 2,594 | 2,594 | — | — | Market | ||||||||||||||||||||||||
| Total | $ | 580,598 | $ | 580,598 | $ | — | $ | — | |||||||||||||||||||||
Our cash and cash equivalents along withand our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivative included in Level 2 consists of United States dollar-denominated interest rate cap, and its fair value is based on the market comparisons for similar instruments. We also considered the credit rating and risk of the counterparty providing the interest rate cap based on quantitative and qualitative factors.
For the years ended December 31, 2019February 28, 2022 and 2018,2021, we had 0no transfers into or out of Level 3.
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of 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 whichthat uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.aircraft discounted using the Company’s weighted average cost of capital.
We account for our investment in unconsolidated joint ventures under the equity method of accounting. Investments are recorded at cost and are adjusted by undistributed earnings and losses and the distributions of dividends and capital. These investments are also reviewed for impairment whenever events or changes in circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary.
Aircraft Valuation
During the year ended February 28, 2022, the Company recorded impairment charges totaling $341,324 related to 10 narrow-body, 1 wide-body, and 2 freighter aircraft that were leased to Russian and Ukrainian airlines. The Company recognized $89,446 of lease rentals received in advance, maintenance, security deposits and other revenue for
F - 16
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
these 13 aircraft. These impairment charges resulted from the Russian invasion of Ukraine and related sanctions placed on Russia during the fourth quarter of 2021, which required the termination of aircraft leasing activities in Russia, as well as our consideration of the likelihood of successfully repossessing our aircraft including the related technical records and documentation.
During the year ended February 28, 2021, the Company recorded impairment charges totaling $425,579, of which $378,247 were transactional impairments, which primarily related to 17 narrow-body and 8 wide-body aircraft. The Company recognized $157,014 of maintenance revenue and security deposits into revenue related to these 25 aircraft during the year ended February 28, 2021.The impairment charges were attributable to early lease terminations, scheduled lease expirations, lessee defaults and/or judicial insolvency proceedings, or as a result of these lease terminations, the Company recognized net maintenance revenue of $17,554 and impairment charges of $7,404 in the second quarter of 2019. We did not record any transactional impairments during 2018.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 year ended February 28, 2022.
Although we have completed our annual recoverability assessment, we will continue to closely monitor the impact of COVID-19 and the Russian invasion of Ukraine on our customers, air traffic, lease rental rates, and aircraft valuations, and have performed 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 focused 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 inwith near-term lease expirations, and certain other customers or aircraft variants that are more susceptible to the second quarter this year. We also performed aircraft-specific analyses where there were changes in circumstances, such as approaching lease expirations. Other thanimpact of the transactional impairment discussed above 0 other impairments were recorded during 2019.crises and value deterioration.
The recoverability assessment is a comparison of the carrying value of each aircraft to its estimated undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.
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 and interest rate derivatives.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.
F - 1617
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
| December 31, 2019 | December 31, 2018 | ||||||||||||||
Carrying Amount of Liability | Fair Value of Liability | Carrying Amount of Liability | Fair Value of Liability | ||||||||||||
| Credit Facilities | $ | 150,000 | $ | 150,000 | $ | 425,000 | $ | 425,000 | |||||||
| Unsecured Term Loan | 215,000 | 215,000 | 120,000 | 120,000 | |||||||||||
| ECA Financings | 147,644 | 150,805 | 189,080 | 190,216 | |||||||||||
| Bank Financings | 993,593 | 1,010,482 | 619,715 | 623,604 | |||||||||||
| Senior Notes | 3,600,000 | 3,787,268 | 3,450,000 | 3,446,826 | |||||||||||
| February 28, 2022 | February 28, 2021 | ||||||||||||||||||||||||||||||||||
| Carrying Amount of Liability | Fair Value of Liability | Carrying Amount of Liability | Fair Value of Liability | ||||||||||||||||||||||||||||||||
| Credit Facilities | $ | 20,000 | $ | 20,000 | $ | — | $ | — | |||||||||||||||||||||||||||
| Unsecured Term Loan | 155,000 | 152,195 | 215,000 | 210,290 | |||||||||||||||||||||||||||||||
| ECA Financings | 21,576 | 21,931 | 36,423 | 37,942 | |||||||||||||||||||||||||||||||
| Bank Financings | 666,258 | 675,667 | 738,353 | 740,086 | |||||||||||||||||||||||||||||||
| Senior Notes | 3,700,000 | 3,776,997 | 4,200,000 | 4,402,722 | |||||||||||||||||||||||||||||||
All of our financial instruments are classified as Level 2 with the exception of our senior notes, which are classified as Level 1.
Note 3.4. 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 December 31, 2019February 28, 2022 were as follows:
| Year Ended December 31, | Amount | ||
| 2020 | $ | 767,025 | |
| 2021 | 692,351 | ||
| 2022 | 607,368 | ||
| 2023 | 525,677 | ||
| 2024 | 414,660 | ||
| Thereafter | 551,169 | ||
| Total | $ | 3,558,250 | |
| Year Ended February 28/29, | Amount | ||||
| 2023 | $ | 575,556 | |||
| 2024 | 539,694 | ||||
| 2025 | 426,826 | ||||
| 2026 | 300,320 | ||||
| 2027 | 249,832 | ||||
| Thereafter | 714,534 | ||||
| Total | $ | 2,806,762 | |||
Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
| Year Ended December 31, | ||||||||
| Region | 2019 | 2018 | 2017 | |||||
| Asia and Pacific | 43 | % | 36 | % | 37 | % | ||
| Europe | 27 | % | 28 | % | 24 | % | ||
| Middle East and Africa | 10 | % | 11 | % | 12 | % | ||
| North America | 9 | % | 9 | % | 8 | % | ||
| South America | 11 | % | 16 | % | 19 | % | ||
| Total | 100 | % | 100 | % | 100 | % | ||
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| Region | 2022 | 2021 | 2020 | 2019 | |||||||||||||||||||
| Asia and Pacific | 29 | % | 40 | % | 43 | % | 43 | % | |||||||||||||||
| Europe | 36 | % | 31 | % | 26 | % | 27 | % | |||||||||||||||
| Middle East and Africa | 5 | % | 6 | % | 7 | % | 10 | % | |||||||||||||||
| North America | 15 | % | 12 | % | 11 | % | 9 | % | |||||||||||||||
| South America | 15 | % | 11 | % | 13 | % | 11 | % | |||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
The classification of regions in the table above and in the tables and discussion below is determined based on the principal location of the lessee of each aircraft.
F - 18
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
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:
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| 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(1) | 6 | 38% | 4 | 30% | 3 | 21% | 2 | 16% | |||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Number of Lessees | Combined % of Lease Rental Revenue | Number of Lessees | Combined % of Lease Rental Revenue | Number of Lessees | Combined % of Lease Rental Revenue | ||||||
| Largest lessees by lease rental revenue | 2 | 16% | 3 | 18% | 4 | 24% | |||||
For the year ended February 28, 2022, total revenue attributable to India was $82,246, or 11%, and included maintenance and other revenue, including early lease termination fees, totaling $6,141. For the years ended February 28, 2021 and December 31, 2019, total revenue attributable to India was 12% and 13%, respectively. Total revenue attributable to India was less than 10% for the two months ended February 29, 2020.
Geographic concentration of our Net Book Value of flight equipment was as follows:
| February 28, 2022 | February 28, 2021 | ||||||||||||||||||||||||||||||||||
| Region | Number of Aircraft | Net Book Value % | Number of Aircraft | Net Book Value % | |||||||||||||||||||||||||||||||
| Asia and Pacific | 71 | 32 | % | 79 | 37 | % | |||||||||||||||||||||||||||||
| Europe | 98 | 30 | % | 92 | 27 | % | |||||||||||||||||||||||||||||
| Middle East and Africa | 10 | 4 | % | 11 | 4 | % | |||||||||||||||||||||||||||||
| North America | 36 | 17 | % | 28 | 12 | % | |||||||||||||||||||||||||||||
| South America | 25 | 13 | % | 26 | 13 | % | |||||||||||||||||||||||||||||
| Off-lease | 11 | (1) | 4 | % | 16 | (2) | 7 | % | |||||||||||||||||||||||||||
| Total | 251 | 100 | % | 252 | 100 | % | |||||||||||||||||||||||||||||
______________
(1)Of the 11 off-lease aircraft at February 28, 2022, we have 3 wide-body aircraft that we are currently marketing for lease or sale.
(2)Of the 16 off-lease aircraft at February 28, 2021, we have 1 wide-body aircraft that we are currently marketing for lease or sale.
The following table sets forth Net Book Value of flight equipment attributable to individual countries representing at least 10% of Net Book Value of flight equipment based on each lessee’s principal place of business as of:
| February 28, 2022 | February 28, 2021 | ||||||||||||||||||||||||||||||||||
| Region | Net Book Value | Net Book Value % | Number of Lessees | Net Book Value | Net Book Value % | Number of Lessees | |||||||||||||||||||||||||||||
| India | $ | 670,523 | 10% | 3 | $ | 756,514 | 11% | 3 | |||||||||||||||||||||||||||
At February 28, 2022 and 2021, the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $16,481 and $14,673, respectively.
F - 1719
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
| Year Ended December 31, | 2019 | 2018 | 2017 | ||||||||||||||
| Country | Revenue | % of Total Revenue | Revenue | % of Total Revenue | Revenue | % of Total Revenue | |||||||||||
Brazil(1) | $ | — | —% | $ | 116,527 | 13% | $ | — | —% | ||||||||
India(2) | 115,865 | 13% | — | —% | — | —% | |||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||
| Region | Number of Aircraft | Net Book Value % | Number of Aircraft | Net Book Value % | |||||||
| Asia and Pacific | 94 | 38 | % | 78 | 36 | % | |||||
| Europe | 99 | 26 | % | 87 | 27 | % | |||||
| Middle East and Africa | 16 | 7 | % | 17 | 8 | % | |||||
| North America | 40 | 13 | % | 35 | 10 | % | |||||
| South America | 26 | 15 | % | 16 | 10 | % | |||||
| Off-lease | 3 | (1) | 1 | % | 15 | (2) | 9 | % | |||
| Total | 278 | 100 | % | 248 | 100 | % | |||||
| December 31, 2019 | December 31, 2018 | ||||||||||
| Region | Net Book Value | Net Book Value % | Number of Lessees | Net Book Value | Net Book Value % | Number of Lessees | |||||
| India | $ | 924,190 | 12% | 4 | $ | 865,046 | 12% | 4 | |||
Note 4.5. Net Investment in Direct Financing and Sales-Type Leases
At February 28, 2022 and 2021, our net investment in leases consisted of 11 and 15 aircraft, respectively. The components of our net investment in leases at February 28, 2022 and 2021 were as follows:
| February 28, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Lease receivable | $ | 52,021 | $ | 67,075 | ||||||||||||||||
| Unguaranteed residual value of flight equipment | 100,068 | 129,165 | ||||||||||||||||||
| Net investment leases | 152,089 | 196,240 | ||||||||||||||||||
| Allowance for credit losses | (1,764) | (864) | ||||||||||||||||||
| Net investment in leases, net of allowance | $ | 150,325 | $ | 195,376 | ||||||||||||||||
The activity in the allowance for credit losses related to our net investment in leases for the years ended February 28, 2022 and 2021 is as follows:
| Amount | ||||||||
| Balance at February 29, 2020 | $ | 6,558 | ||||||
| Provision for credit losses | 5,258 | |||||||
| Write-offs | (10,952) | |||||||
| Balance at February 28, 2021 | 864 | |||||||
| Provision for credit losses | 930 | |||||||
| Write-offs | (30) | |||||||
| Balance at February 28, 2022 | $ | 1,764 | ||||||
| Amount | |||
| Lease receivable | $ | 164,816 | |
| Unguaranteed residual value of flight equipment | 254,580 | ||
| Net investment in direct financing and sales-type leases | $ | 419,396 | |
wrote-off the corresponding allowance for credit losses. At December 31, 2019,February 28, 2022, future lease payments on direct financing and sales-typenet investment in leases are as follows:
| Year Ending February 28/29, | Amount | |||||||
| 2023 | $ | 13,700 | ||||||
| 2024 | 9,539 | |||||||
| 2025 | 8,609 | |||||||
| 2026 | 7,680 | |||||||
| 2027 | 7,392 | |||||||
| Thereafter | 14,430 | |||||||
| Total lease payments to be received | 61,350 | |||||||
| Present value of lease payments - lease receivable | (52,021) | |||||||
| Difference between undiscounted lease payments and lease receivable | $ | 9,329 | ||||||
| Year Ending December 31, | Amount | ||
| 2020 | $ | 59,963 | |
| 2021 | 43,716 | ||
| 2022 | 33,220 | ||
| 2023 | 27,228 | ||
| 2024 | 8,343 | ||
| Thereafter | 16,030 | ||
| Total undiscounted lease payments | 188,500 | ||
| Present value of lease payments - lease receivable | (164,816 | ) | |
| Difference between undiscounted lease payments and lease receivable | $ | 23,684 | |
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note 5.6. Unconsolidated Equity Method Investment
We have joint ventures with an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) and with Mizuho Leasing.
| Amount | ||||
| Investment in joint ventures at December 31, 2017 | $ | 76,982 | ||
| Investment in joint ventures | 4,115 | |||
| Loss from joint ventures, net of tax | (8,086 | ) | ||
| Distributions | (3,900 | ) | ||
| Investment in joint ventures at December 31, 2018 | $ | 69,111 | ||
| Investment in joint ventures | 15,175 | |||
| Earnings from joint ventures, net of tax | 4,102 | |||
| Distributions | (36,750 | ) | ||
| Guarantee liabilities | (18,664 | ) | ||
| Investment in joint venture at December 31, 2019 | $ | 32,974 | ||
| Amount | ||||||||
| Investment in joint ventures at February 29, 2020 | $ | 33,470 | ||||||
| Distributions | (419) | |||||||
| Earnings from joint venture, net of tax | 2,326 | |||||||
| Investment in joint ventures at February 28, 2021 | 35,377 | |||||||
| Distributions | (104) | |||||||
| Earnings from joint venture, net of tax | 3,044 | |||||||
| Investment in joint ventures at February 28, 2022 | $ | 38,317 | ||||||
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 of December 31, 2019 of $376,630, were included inan arm’s length transaction under our flight equipment held for lease. The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of December 31, 2019 is $145,443.related party policy.
Note 7. Borrowings from Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings were as follows:
| At December 31, 2019 | At December 31, 2018 | At February 28, 2022 | At February 28, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Obligation | Outstanding Borrowings | Number of Aircraft | Interest Rate | Final Stated Maturity | Outstanding Borrowings | Debt Obligation | Outstanding Borrowings | Number of Aircraft | Interest Rate | Final Stated Maturity | Outstanding Borrowings | ||||||||||||||||||||||||||||||||||||||
| Secured Debt Financings: | Secured Debt Financings: | ||||||||||||||||||||||||||||||||||||||||||||||||
ECA Financings(1) | $ | 147,644 | 6 | 3.02% to 3.96% | 12/03/21 to 11/30/24 | $ | 189,080 | ECA Financings(1) | $ | 21,576 | 1 | 3.49% | 11/30/24 | $ | 36,423 | ||||||||||||||||||||||||||||||||||
Bank Financings(2) | 993,593 | 35 | 3.13% to 4.63% | 06/17/23 to 01/19/26 | 619,715 | ||||||||||||||||||||||||||||||||||||||||||||
| Bank Financings | Bank Financings | 666,258 | 31 | 2.25% to 4.55% | 06/17/23 to 03/06/25 | 738,353 | |||||||||||||||||||||||||||||||||||||||||||
| Less: Debt Issuance Costs | (11,892 | ) | (10,338 | ) | Less: Debt Issuance Costs | (3,795) | (5,926) | ||||||||||||||||||||||||||||||||||||||||||
| Total secured debt financings, net of debt issuance costs and discounts | 1,129,345 | 41 | 798,457 | Total secured debt financings, net of debt issuance costs and discounts | 684,039 | 32 | 768,850 | ||||||||||||||||||||||||||||||||||||||||||
| Unsecured Debt Financings: | Unsecured Debt Financings: | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior Notes due 2019(3) | — | 500,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2020 | 300,000 | 7.625% | 04/15/20 | 300,000 | |||||||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2021 | 500,000 | 5.125% | 03/15/21 | 500,000 | |||||||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2022 | 500,000 | 5.500% | 02/15/22 | 500,000 | Senior Notes due 2022 | — | 5.50% | 02/15/22 | 500,000 | ||||||||||||||||||||||||||||||||||||||||
| Senior 5.00% Notes due 2023 | 500,000 | 5.000% | 04/01/23 | 500,000 | Senior 5.00% Notes due 2023 | 500,000 | 5.00% | 04/01/23 | 500,000 | ||||||||||||||||||||||||||||||||||||||||
| Senior 4.40% Notes due 2023 | 650,000 | 4.400% | 09/25/23 | 650,000 | 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 2024 | 500,000 | 4.125% | 05/01/24 | 500,000 | ||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2025 | Senior Notes due 2025 | 650,000 | 5.25% | 08/11/25 | 650,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2026 | 650,000 | 4.250% | 06/15/26 | — | Senior Notes due 2026 | 650,000 | 4.25% | 06/15/26 | 650,000 | ||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2028 | Senior Notes due 2028 | 750,000 | 2.85% | 01/26/28 | 750,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Unsecured Term Loan | 215,000 | 3.359% | 03/07/22 to 03/07/24 | 120,000 | Unsecured Term Loan | 155,000 | 1.753% | 02/27/24 | 215,000 | ||||||||||||||||||||||||||||||||||||||||
| Revolving Credit Facilities | 150,000 | 3.21% to 3.41% | 12/27/21 to 06/27/22 | 425,000 | Revolving Credit Facilities | 20,000 | 1.625% to 2.25% | 06/27/22 to 04/26/25 | — | ||||||||||||||||||||||||||||||||||||||||
| Less: Debt issuance costs and discounts | (32,509 | ) | (32,104 | ) | Less: Debt issuance costs and discounts | (39,159) | (48,739) | ||||||||||||||||||||||||||||||||||||||||||
| Total unsecured debt financings, net of debt issuance costs and discounts | 3,932,491 | 3,962,896 | Total unsecured debt financings, net of debt issuance costs and discounts | 3,835,841 | 4,366,261 | ||||||||||||||||||||||||||||||||||||||||||||
| Total secured and unsecured debt financings, net of debt issuance costs and discounts | $ | 5,061,836 | $ | 4,761,353 | Total secured and unsecured debt financings, net of debt issuance costs and discounts | $ | 4,519,880 | $ | 5,135,111 | ||||||||||||||||||||||||||||||||||||||||
(1)The borrowings under these financings at February 28, 2022 have a weighted-average |
F - 21
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Unsecured Debt Financings:
On February 27, 2019,April 26, 2021, we entered into an aggregate $215,000 floating rate loan commitment with Development Bankamendment that increased the size of Japan Inc. and certain other banks (the “Unsecured Term Loan”). This loan is split into 2 tranches: Tranche A for $60,000 with a three-year term; and Tranche B for $155,000 with a five-year term. The loan contains a $750,000 minimum net worth covenant, along with other customary provisions similar to1 of our revolving credit facilities. This loanfacilities from $800,000 to $1,000,000. The stated maturity date for $900,000 of the total commitment was fundedextended to April 26, 2025, and the remaining $100,000 commitment will mature on the facility’s previously stated maturity date of June 27, 2022.
On April 26, 2021, we entered into an amendment that reduced the size of our revolving credit facility with Mizuho Bank Ltd., a related party, from $150,000 to $50,000 and extended its maturity date to July 30, 2022. Mizuho Bank, Ltd. is now a lender for our $1,000,000 revolving credit facility with a commitment in March 2019.
On December 27, 2018, we6, 2021, the Company entered into a $250,000 three-year,$100,000 senior unsecured revolving credit facility with Mizuho Marubeni Leasing America Corporation, a group of banks based in Asia. This new facility can be increased to a maximum of $350,000. On January 25, 2019, we increased the facility by $30,000 to $280,000. On June 20, 2019, we further increased the facility by $20,000 to $300,000.related party. The facility bears interest at a rate of LIBOR plus 1.50%1.625%, matures on December 6, 2023, and matures in December 2021. The facility contains provisions similarrequires the Company to have a minimum of $20,000 revolving credit outstanding throughout the term of the facility. This transaction was approved by our existing credit facility, including a $750,000 minimum net worth covenant.Audit Committee as an arm’s length transaction under our related party policy.
As a condition to this new facility, on January 9, 2019, we terminated our existing $135,000 revolving credit facility with a group of banks based in Asia.
Maturities of the secured and unsecured debt financings over the next five years and thereafter are as follows:
| Year Ending February 28/29, | Amount | ||||
| 2023 | $ | 81,611 | |||
| 2024 | 1,552,698 | ||||
| 2025 | 800,859 | ||||
| 2026 | 727,666 | ||||
| 2027 | 650,000 | ||||
| Thereafter | 750,000 | ||||
| Total | $ | 4,562,834 | |||
| Year Ending December 31, | Amount | ||
| 2020 | $ | 429,324 | |
| 2021 | 734,330 | ||
| 2022 | 739,934 | ||
| 2023 | 1,417,837 | ||
| 2024 | 981,886 | ||
| Thereafter | 802,926 | ||
| Total | $ | 5,106,237 | |
As of December 31, 2019,February 28, 2022, we were in compliance with all applicable covenants in our financings.
Note 8. Shareholders’ Equity and Share-Based Payment
On March 21, 2017,June 8, 2021, the BoardCompany issued 400 shares of Directors adopted the Aircastle Limited Amended and Restated 2014 Omnibus Incentive Plan5.250% Series A Cumulative Redeemable Perpetual Preference Shares, $0.01 par value, with a liquidation preference of $1,000 per share (the “Amended and Restated 2014 Plan”“Preference Shares”). The AmendedPreference Shares are perpetual and Restated 2014 Plan was approved by shareholders at the Company’s 2017 Annual General Meeting of Shareholders on May 19, 2017.have no maturity date.
F - 2322
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
| Non-vested Shares | Shares (in thousands) | Weighted Average Grant Date Fair Value ($) | ||||
| Non-vested at December 31, 2016 | 676.7 | $ | 17.84 | |||
| Granted | 315.5 | 22.41 | ||||
| Canceled | (4.2 | ) | 20.36 | |||
| Vested | (469.6 | ) | 18.60 | |||
| Non-vested at December 31, 2017 | 518.4 | $ | 19.92 | |||
| Granted | 291.9 | 21.88 | ||||
| Canceled | (16.8 | ) | 21.27 | |||
| Vested | (306.3 | ) | 19.52 | |||
| Non-vested at December 31, 2018 | 487.2 | $ | 21.30 | |||
| Granted | 303.3 | 19.46 | ||||
| Canceled | (16.7 | ) | 21.21 | |||
| Vested | (344.9 | ) | 20.85 | |||
Vesting-accelerated(1) | (94.9 | ) | 32.01 | |||
| Non-vested at December 31, 2019 | 334.0 | $ | 20.31 | |||
| Minimum | Target | Maximum | ||||||
| TSR PSUs | — | 168,784 | 337,568 | |||||
| AROE PSUs | — | 168,780 | 337,560 | |||||
| Total | — | 337,564 | 675,128 | |||||
| Year Ended December 31, | |||||
| 2019 | 2018 | 2017 | |||
| Volatility | 24.8% to 32.6% | 24.8% to 32.6% | 29.4% to 32.6% | ||
| Dividend yield | 4.3% to 5.5% | 4.3% to 4.9% | 4.3% | ||
| Risk-free interest rate | 1.4% to 2.6% | 0.8% to 2.6% | 0.8% to 1.5% | ||
Except with respect to certain amendments to the terms of the Preference Shares, in the case of certain dividend non-payments and as otherwise required by applicable law, the Preference Shares do not have voting rights.
On August 19, 2021, the Company’s Board of Directors approved a target of 225,044 PSUs of which, 168,784 are TSR PSUs and 56,260 are AROE PSUs. As of December 31, 2019, the remaining target AROE PSUs will be considered granted upon the Compensation Committee’s setting the target AROEquarterly dividend for the respective periods:
Remaining AROE Target PSUs | |||||
| 2020 | 2021 | ||||
| 2018 PSUs | 5,652 | — | |||
| 2019 PSUs | 40,652 | 54,092 | |||
Note 9. Related Party Transactions
On April 26, 2021, the Company entered into an amendment that reduced the size and 2017:
| Unvested Performance Stock Units | |||||||||||||
| Number of Units of TSR PSUs | Number of Units of AROE PSUs | TSR PSUs Weighted Fair Value on Date of Grant ($) | AROE PSUs Weighted Fair Value on Date of Grant ($) | ||||||||||
| Unvested at December 31, 2016 | 143,414 | 47,802 | $ | 25.07 | $ | 19.18 | |||||||
Granted(1) | 107,426 | 116,721 | 25.00 | 20.37 | |||||||||
| Vested | (50,899 | ) | (57,637 | ) | 24.83 | 20.02 | |||||||
Canceled/Forfeited(2) | — | (1,697 | ) | — | 20.55 | ||||||||
| Unvested at December 31, 2017 | 199,941 | 105,189 | $ | 25.09 | $ | 20.02 | |||||||
Granted(1) | 169,631 | 266,244 | 22.15 | 19.65 | |||||||||
| Vested | — | (129,522 | ) | — | 20.14 | ||||||||
Canceled/Forfeited(2) | (92,515 | ) | (26,006 | ) | 25.20 | 19.99 | |||||||
| Unvested as of December 31, 2018 | 277,057 | 215,905 | $ | 23.16 | $ | 19.47 | |||||||
Granted(1) | 362,681 | 392,667 | 25.22 | 30.32 | |||||||||
| Vested | (235,120 | ) | (188,740 | ) | 23.25 | 19.67 | |||||||
Canceled/Forfeited(2) | (17,624 | ) | (14,363 | ) | 24.12 | 18.95 | |||||||
Vesting-accelerated(3) | (164,810 | ) | (382,502 | ) | 32.01 | 32.01 | |||||||
| Unvested as of December 31, 2019 | 222,184 | 22,967 | $ | 23.12 | $ | 20.14 | |||||||
| Expected to vest after December 31, 2019 | 222,184 | 22,967 | $ | 23.12 | $ | 20.14 | |||||||
extended the term of our unsecured revolving credit facility with Mizuho Bank Ltd., a related party – see Note 7 in the Notes to the Consolidated Financial Statements for additional information.
During 2019,the year ended February 28, 2022, the Company incurred share-based compensation expense$5,048 in fees to Marubeni as part of $6,602 related to restricted common sharesits intra-company service agreement, whereby Marubeni provides certain management and $9,228 related to PSUs.
| Declaration Date | Dividend per Common Share | Aggregate Dividend Amount | Record Date | Payment Date | |||||||
| October 28, 2019 | $ | 0.32 | $ | 23,884 | November 29, 2019 | December 13, 2019 | |||||
| August 2, 2019 | $ | 0.30 | $ | 22,390 | August 30, 2019 | September 16, 2019 | |||||
| April 30, 2019 | $ | 0.30 | $ | 22,536 | May 31, 2019 | June 14, 2019 | |||||
| February 8, 2019 | $ | 0.30 | $ | 22,518 | February 28, 2019 | March 15, 2019 | |||||
| October 30, 2018 | $ | 0.30 | $ | 22,867 | November 30, 2018 | December 14, 2018 | |||||
| August 3, 2018 | $ | 0.28 | $ | 21,870 | August 31, 2018 | September 14, 2018 | |||||
| May 1, 2018 | $ | 0.28 | $ | 21,908 | May 31, 2018 | June 15, 2018 | |||||
| February 2, 2018 | $ | 0.28 | $ | 22,085 | February 28, 2018 | March 15, 2018 | |||||
| October 31, 2017 | $ | 0.28 | $ | 22,039 | November 30, 2017 | December 15, 2017 | |||||
| August 4, 2017 | $ | 0.26 | $ | 20,464 | August 31, 2017 | September 15, 2017 | |||||
| May 2, 2017 | $ | 0.26 | $ | 20,482 | May 31, 2017 | June 15, 2017 | |||||
| February 9, 2017 | $ | 0.26 | $ | 20,466 | February 28, 2017 | March 15, 2017 | |||||
Note 10. Earnings per Share
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Weighted-average shares: | ||||||||
| Common shares outstanding | 74,477,865 | 77,447,263 | 78,219,458 | |||||
| Restricted common shares | 495,192 | 476,726 | 556,592 | |||||
| Total weighted-average shares | 74,973,057 | 77,923,989 | 78,776,050 | |||||
| Percentage of weighted-average shares: | ||||||||
| Common shares outstanding | 99.34 | % | 99.39 | % | 99.29 | % | ||
| Restricted common shares | 0.66 | % | 0.61 | % | 0.71 | % | ||
| Total | 100.00 | % | 100.00 | % | 100.00 | % | ||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Earnings per common share — Basic: | |||||||||||
| Income from continuing operations | $ | 156,575 | $ | 247,919 | $ | 147,874 | |||||
Less: Distributed and undistributed earnings allocated to restricted common shares(1) | (1,034 | ) | (1,517 | ) | (1,045 | ) | |||||
| Income from continuing operations available to common shareholders — Basic | $ | 155,541 | $ | 246,402 | $ | 146,829 | |||||
| Weighted-average common shares outstanding — Basic | 74,477,865 | 77,447,263 | 78,219,458 | ||||||||
| Net income per common share — Basic | $ | 2.09 | $ | 3.18 | $ | 1.88 | |||||
| Earnings per common share — Diluted: | |||||||||||
| Income from continuing operations | $ | 156,575 | $ | 247,919 | $ | 147,874 | |||||
Less: Distributed and undistributed earnings allocated to restricted common shares(1) | (1,034 | ) | (1,517 | ) | (1,045 | ) | |||||
| Income from continuing operations available to common shareholders — Diluted | $ | 155,541 | $ | 246,402 | $ | 146,829 | |||||
| Weighted-average common shares outstanding — Basic | 74,477,865 | 77,447,263 | 78,219,458 | ||||||||
Effect of diluted shares(2) | 904,417 | 301,356 | 153,983 | ||||||||
| Weighted-average common shares outstanding — Diluted | 75,382,282 | 77,748,619 | 78,373,441 | ||||||||
| Net income per common share — Diluted | $ | 2.06 | $ | 3.17 | $ | 1.87 | |||||
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 an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| U.S. operations | $ | 9,085 | $ | 8,104 | $ | 2,801 | |||||
| Non-U.S. operations | 166,055 | 253,543 | 143,504 | ||||||||
| Income from continuing operations before income taxes and earnings of unconsolidated equity method investment | $ | 175,140 | $ | 261,647 | $ | 146,305 | |||||
F - 2823
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| U.S. operations | $ | 20,803 | $ | 31,848 | $ | 3,084 | $ | 9,085 | |||||||||||||||
| Non-U.S. operations | (310,054) | (357,106) | 1,754 | 166,055 | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investment | $ | (289,251) | $ | (325,258) | $ | 4,838 | $ | 175,140 | |||||||||||||||
The components of the income tax provision (benefit) from continuing operations for the years ended February 28, 2022 and 2021, the two months ended February 29, 2020, and the year ended December 31, 2019, 2018 and 2017 consisted of the following:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Current: | |||||||||||
| United States: | |||||||||||
| Federal | $ | 782 | $ | 2,446 | $ | 6,503 | |||||
| State | 437 | (136 | ) | 1,913 | |||||||
| Non-U.S. | 1,225 | 3,828 | 6,574 | ||||||||
| Current income tax provision | 2,444 | 6,138 | 14,990 | ||||||||
| Deferred: | |||||||||||
| United States: | |||||||||||
| Federal | 7,205 | 2,901 | (5,474 | ) | |||||||
| State | 2,018 | 759 | (1,161 | ) | |||||||
| Non-U.S. | 11,000 | (4,156 | ) | (2,313 | ) | ||||||
| Deferred income tax provision (benefit) | 20,223 | (496 | ) | (8,948 | ) | ||||||
| Total | $ | 22,667 | $ | 5,642 | $ | 6,042 | |||||
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Current: | |||||||||||||||||||||||
| United States: | |||||||||||||||||||||||
| Federal | $ | 247 | $ | (1,232) | $ | 6 | $ | 782 | |||||||||||||||
| State | 161 | 121 | — | 437 | |||||||||||||||||||
| Non-U.S. | 980 | 4,842 | 217 | 1,225 | |||||||||||||||||||
| Current income tax provision | 1,388 | 3,731 | 223 | 2,444 | |||||||||||||||||||
| Deferred: | |||||||||||||||||||||||
| United States: | |||||||||||||||||||||||
| Federal | 5,206 | 3,150 | 1,578 | 7,205 | |||||||||||||||||||
| State | 1,593 | 1,598 | 561 | 2,018 | |||||||||||||||||||
| Non-U.S. | (16,185) | 1,757 | (687) | 11,000 | |||||||||||||||||||
| Deferred income tax (benefit) | (9,386) | 6,505 | 1,452 | 20,223 | |||||||||||||||||||
| Total | $ | (7,998) | $ | 10,236 | $ | 1,675 | $ | 22,667 | |||||||||||||||
Significant components of the Company’s deferred tax assets and liabilities at February 28, 2022 and 2021, February 29, 2020, and December 31, 2019, 2018 and 2017 consisted of the following:
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Deferred tax assets: | |||||||||||||||||||||||
| Non-cash share-based payments | $ | — | $ | — | $ | 215 | $ | 614 | |||||||||||||||
| Net operating loss carry forwards | 117,448 | 95,462 | 74,045 | 69,806 | |||||||||||||||||||
| Other | 34,955 | 37,612 | 54,259 | 72,732 | |||||||||||||||||||
| Total deferred tax assets | 152,403 | 133,074 | 128,519 | 143,152 | |||||||||||||||||||
| Deferred tax liabilities: | |||||||||||||||||||||||
| Accelerated depreciation | (189,083) | (170,382) | (140,363) | (136,268) | |||||||||||||||||||
| Other | (28,873) | (37,179) | (53,448) | (70,551) | |||||||||||||||||||
| Total deferred tax liabilities | (217,956) | (207,561) | (193,811) | (206,819) | |||||||||||||||||||
| Net deferred tax liabilities | $ | (65,553) | $ | (74,487) | $ | (65,292) | $ | (63,667) | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Deferred tax assets: | |||||||||||
| Non-cash share-based payments | $ | 614 | $ | 2,182 | $ | 1,899 | |||||
| Net operating loss carry forwards | 69,806 | 48,660 | 22,804 | ||||||||
| Other | 72,732 | 1,795 | 1,272 | ||||||||
| Total deferred tax assets | 143,152 | 52,637 | 25,975 | ||||||||
| Deferred tax liabilities: | |||||||||||
| Accelerated depreciation | (136,268 | ) | (95,107 | ) | (62,379 | ) | |||||
| Other | (70,551 | ) | (338 | ) | 354 | ||||||
| Total deferred tax liabilities | (206,819 | ) | (95,445 | ) | (62,025 | ) | |||||
| Net deferred tax liabilities | $ | (63,667 | ) | $ | (42,808 | ) | $ | (36,050 | ) | ||
F - 24
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
The Company had $69,332$102,435 of federal net operating loss (“NOL”) carry forwards available at December 31, 2019February 28, 2022 to offset future taxable income subject to U.S. graduated tax rates. If not utilized, $47,850$35,510 of these carry forwards will expire by 2039,2037, with $21,482$66,925 of these carry forwards having no expiration date. The Company also had NOL carry forwards of $488,600$729,749 with no expiration date to offset future Irish and Mauritius taxable income. Deferred tax assets and liabilities are included in Otherother assets and Accountsaccounts payable and accrued liabilities, respectively, in the accompanying Consolidated Balance Sheets.respectively.
We do not expect to incur income taxes on future distributions of undistributed earnings of non-U.S. subsidiaries and accordingly, no deferred income taxes have been provided for the distributions of such earnings. As of December 31, 2019February 28, 2022, we have elected to permanently reinvest our accumulated undistributed U.S. earnings of $27,970.$40,041. Accordingly, no U.S. withholding taxes have been provided. Withholding tax of $1,398$2,002 would be due if such earnings were remitted.
Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland Mauritius and the U.S. are subject to tax in those respective jurisdictions.
We have a U.S.-based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income from continuing operations atfor the years ended February 28, 2022 and 2021, the two months ended February 29, 2020, and the year ended December 31, 2019, 2018 and 2017 consisted of the following:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Notional U.S. federal income tax expense at the statutory rate: | $ | 36,779 | $ | 54,946 | $ | 51,207 | |||||
| U.S. state and local income tax, net | 1,549 | 525 | 168 | ||||||||
| Non-U.S. operations: | |||||||||||
| Bermuda | (16,950 | ) | (41,064 | ) | (21,517 | ) | |||||
| Ireland | (99 | ) | (2,567 | ) | (2,348 | ) | |||||
| Singapore | (28 | ) | (3,232 | ) | (15,839 | ) | |||||
| Other low tax jurisdictions | (2,504 | ) | (3,246 | ) | (5,581 | ) | |||||
| Non-deductible expenses in the U.S. | 3,581 | 157 | (236 | ) | |||||||
| Other | 339 | 123 | 188 | ||||||||
| Provision for income taxes | $ | 22,667 | $ | 5,642 | $ | 6,042 | |||||
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Notional U.S. federal income tax expense at the statutory rate: | $ | (60,742) | $ | (68,304) | $ | 1,016 | $ | 36,779 | |||||||||||||||
| U.S. state and local income tax, net | 1,237 | 1,723 | 390 | 1,549 | |||||||||||||||||||
| Non-U.S. operations: | |||||||||||||||||||||||
| Bermuda | 27,751 | 82,190 | (1,845) | (16,950) | |||||||||||||||||||
| Ireland | 23,510 | 1,545 | (1,147) | (99) | |||||||||||||||||||
| Singapore | 174 | 75 | (6) | (28) | |||||||||||||||||||
| Other low tax jurisdictions | (15) | (381) | 2,533 | (2,504) | |||||||||||||||||||
| Non-deductible expenses in the U.S. | 16 | (1,904) | 734 | 3,581 | |||||||||||||||||||
| Other | 71 | (4,708) | — | 339 | |||||||||||||||||||
| Provision (benefit) for income taxes | $ | (7,998) | $ | 10,236 | $ | 1,675 | $ | 22,667 | |||||||||||||||
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. We did not have any unrecognized tax benefits.
We conduct business globally and, as a result, the Company and its subsidiaries or branches are subject to foreign, U.S. federal and various state and local income taxes, as well as withholding taxes. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Ireland and the United States.
Our policy is that we will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We did not accrue interest or penalties associated with any unrecognized tax benefits, nor was any interest expense or penalty recognized during the year.
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities(1) | $ | 245,673 | $ | 221,987 | $ | 223,260 | |||||
| Amortization of deferred losses related to interest rate derivatives | 184 | 1,166 | 2,202 | ||||||||
Amortization of deferred financing fees and debt discount(2) | 14,578 | 14,627 | 19,435 | ||||||||
| Interest expense | 260,435 | 237,780 | 244,897 | ||||||||
| Less: Interest income | (2,365 | ) | (2,943 | ) | (3,411 | ) | |||||
| Less: Capitalized interest | — | (333 | ) | (255 | ) | ||||||
| Interest, net | $ | 258,070 | $ | 234,504 | $ | 241,231 | |||||
F - 3025
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
The following table shows the components of interest, net.
| Year Ended February 28, | Two Months Ended February 29, | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Interest on borrowings and other liabilities | $ | 200,220 | $ | 221,246 | $ | 38,915 | $ | 245,673 | |||||||||||||||
| Amortization of deferred losses related to interest rate derivatives | — | — | — | 184 | |||||||||||||||||||
| Amortization of deferred financing fees and debt discount | 16,267 | 14,791 | 2,446 | 14,578 | |||||||||||||||||||
| Interest expense | 216,487 | 236,037 | 41,361 | 260,435 | |||||||||||||||||||
| Less: Interest income | (1,209) | (523) | (323) | (2,365) | |||||||||||||||||||
| Less: Capitalized interest | (926) | (176) | — | — | |||||||||||||||||||
| Interest, net | $ | 214,352 | $ | 235,338 | $ | 41,038 | $ | 258,070 | |||||||||||||||
Note 13.12. Commitments and Contingencies
Rent expense, primarily for the corporate office and sales and marketing facilities, was $1,601, $2,865$1,621, $1,626, $278 and $2,143$1,601 for the years ended February 28, 2022 and 2021, the two months ended February 29, 2020, and the year ended December 31, 2019,, 2018 and2017, respectively.
As of December 31, 2019,February 28, 2022, Aircastle is obligated under non-cancelable operating leases relating principally to office facilities in Stamford, Connecticut; Dublin, Ireland; and Singapore for future minimum lease payments as follows:
| Year Ending December 31, | Amount | ||
| 2020 | $ | 1,870 | |
| 2021 | 1,901 | ||
| 2022 | 1,811 | ||
| 2023 | 1,696 | ||
| 2024 | 1,727 | ||
| Thereafter | 6,112 | ||
| Total | $ | 15,117 | |
| Year Ending February 28/29, | Amount | ||||
| 2023 | $ | 1,768 | |||
| 2024 | 1,702 | ||||
| 2025 | 1,733 | ||||
| 2026 | 1,764 | ||||
| 2027 | 1,795 | ||||
| Thereafter | 2,561 | ||||
| Total | $ | 11,323 | |||
At December 31, 2019,February 28, 2022, we had commitments to acquire 31 aircraft23 for $1,112,825,$819,273.
Commitments under signed purchase agreements, including 25 Embraer E2 aircraft.
| Year Ending February 28/29, | Amount | ||||
| 2023 | $ | 462,452 | |||
| 2024 | 171,258 | ||||
| 2025 | 185,563 | ||||
| 2026 | — | ||||
| 2027 | — | ||||
| Thereafter | — | ||||
| Total | $ | 819,273 | |||
| Year Ending December 31, | Amount | ||
| 2020 | $ | 218,916 | |
| 2021 | 508,424 | ||
| 2022 | 192,506 | ||
| 2023 | 119,131 | ||
| 2024 | 73,848 | ||
| Thereafter | — | ||
| Total | $ | 1,112,825 | |
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Deferred income tax asset | $ | 1,007 | $ | 912 | |||
| Lease incentives and premiums, net of amortization of $71,851 and $47,304, respectively | 112,923 | 99,079 | |||||
| Flight equipment held for sale | 333 | 11,707 | |||||
Aircraft purchase deposits and progress payments(1) | 33,754 | 39,948 | |||||
| Fair value of interest rate cap | 115 | 4,886 | |||||
Note receivable(2) | — | 4,292 | |||||
Right-of-use asset(3) | 9,329 | — | |||||
| Other assets | 43,748 | 53,537 | |||||
| Total other assets | $ | 201,209 | $ | 214,361 | |||
F - 3126
Aircastle Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
The following table describes the principal components of other assets on our consolidated balance sheets as of:
| February 28, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Deferred income tax asset | $ | 570 | $ | 637 | |||||||||||||
| Lease incentives and premiums, net of accumulated amortization of $81,553 and $75,126, respectively | 53,513 | 75,169 | |||||||||||||||
| Flight equipment held for sale | 77,636 | 53,289 | |||||||||||||||
| Aircraft purchase deposits and Embraer E-2 progress payments | 56,157 | 52,092 | |||||||||||||||
Right-of-use asset(1) | 7,176 | 8,056 | |||||||||||||||
| Deferred rent receivable | 55,478 | 69,103 | |||||||||||||||
| Other assets | 105,796 | 53,598 | |||||||||||||||
| Total other assets | $ | 356,326 | $ | 311,944 | |||||||||||||
______________
Note 15.14. Accounts Payable, Accrued Expenses and Other Liabilities
The following table describes the principal components of Accountsaccounts payable, accrued expenses and other liabilities recorded on our Consolidated Balance Sheetsconsolidated balance sheets as of:
| December 31, | February 28, | |||||||||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 47,228 | $ | 57,220 | Accounts payable and accrued expenses | $ | 58,882 | $ | 43,088 | |||||||||||||||
| Deferred income tax liability | 64,674 | 43,720 | Deferred income tax liability | 66,123 | 75,124 | |||||||||||||||||||
| Accrued interest payable | 44,694 | 45,277 | Accrued interest payable | 42,013 | 43,676 | |||||||||||||||||||
| Lease liability | 12,800 | — | Lease liability | 9,846 | 11,003 | |||||||||||||||||||
| Lease discounts, net of amortization of $44,696 and $43,935, respectively | 2,718 | 7,124 | ||||||||||||||||||||||
| Lease discounts, net of accumulated amortization of $45,546 and $44,887, respectively | Lease discounts, net of accumulated amortization of $45,546 and $44,887, respectively | 560 | 1,376 | |||||||||||||||||||||
| Total accounts payable, accrued expenses and other liabilities | $ | 172,114 | $ | 153,341 | Total accounts payable, accrued expenses and other liabilities | $ | 177,424 | $ | 174,267 | |||||||||||||||
| Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||
| 2019 | |||||||||||||||
| Revenues | $ | 243,730 | $ | 236,865 | $ | 223,416 | $ | 213,927 | |||||||
| Net income | $ | 47,318 | $ | 43,335 | $ | 31,112 | $ | 34,810 | |||||||
| Basic earnings per share: | |||||||||||||||
| Net income | $ | 0.63 | $ | 0.58 | $ | 0.41 | $ | 0.46 | |||||||
| Diluted earnings per share: | |||||||||||||||
| Net income | $ | 0.62 | $ | 0.57 | $ | 0.41 | $ | 0.46 | |||||||
| 2018 | |||||||||||||||
| Revenues | $ | 292,566 | $ | 190,829 | $ | 204,276 | $ | 202,680 | |||||||
| Net income | $ | 103,837 | $ | 36,332 | $ | 50,203 | $ | 57,547 | |||||||
| Basic earnings per share: | |||||||||||||||
| Net income | $ | 1.36 | $ | 0.47 | $ | 0.64 | $ | 0.73 | |||||||
| Diluted earnings per share: | |||||||||||||||
| Net income | $ | 1.35 | $ | 0.46 | $ | 0.64 | $ | 0.73 | |||||||
F - 3227
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Aircastle Limited has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 13, 2020
April 28, 2022
| Aircastle Limited | |||||||||||
| By: | /s/ Michael Inglese | ||||||||||
| Michael Inglese | |||||||||||
| Chief Executive Officer and Director | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Aircastle Limited and in the capacities and on the date indicated.
| SIGNATURE | TITLE | DATE | ||||||||||||
| /s/ Michael Inglese | Chief Executive Officer and Director | April 28, 2022 | ||||||||||||
| Michael Inglese | ||||||||||||||
| /s/ Aaron Dahlke | Chief Financial Officer | April 28, 2022 | ||||||||||||
| Aaron Dahlke | ||||||||||||||
| /s/ Dane Silverman | Chief Accounting Officer | April 28, 2022 | ||||||||||||
| Dane Silverman | ||||||||||||||
| /s/ Takashi Kurihara | Chairman of the Board | April 28, 2022 | ||||||||||||
| Takashi Kurihara | ||||||||||||||
| /s/ Douglas A. Hacker | Director | April 28, 2022 | ||||||||||||
| Douglas A. Hacker | ||||||||||||||
| Taro Kawabe | ||||||||||||||
| /s/ Charles W. Pollard | Director | |||||||||||||
| Charles W. Pollard | ||||||||||||||
| /s/ Takayuki Sakakida | Director | |||||||||||||
| Takayuki Sakakida | ||||||||||||||
| /s/ Noriyuki Yukawa | Director | April 28, 2022 | ||||||||||||
| Noriyuki Yukawa | ||||||||||||||
S - 1