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Aircastle 10-Q 2011 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2011
or
For the transition period from to
Commission File number 001-32959
AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code (203) 504-1020
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 o
Indicate by check mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 o
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO þ
As of October 31, 2011, there were 72,258,472 outstanding shares of the registrant’s common
shares, par value $0.01 per share.
Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
Table of Contents
PART I. — FINANCIAL INFORMATION
Item 1. Financial Statements.
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts) September 30, 2011 Note 1. Summary of Significant Accounting Policies
Organization
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted
company that was incorporated on October 29, 2004 by Fortress Investment Group LLC and certain of
its affiliates (together, the “Fortress Shareholders” or “Fortress”) under the provisions of
Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation
assets, including leasing, managing and selling commercial jet aircraft to airlines throughout the
world and investing in aircraft related debt investments.
Basis of Presentation
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 (“US GAAP”). We operate in a single segment.
The accompanying consolidated financial statements are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for
interim financial reporting and, in our opinion, reflect all adjustments, including normal
recurring items, which are necessary to present fairly the results for interim periods. Operating
results for the periods presented are not necessarily indicative of the results that may be
expected for the entire year. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with US GAAP have been omitted in
accordance with the rules and regulations of the SEC; however, we believe that the disclosures are
adequate to make information presented not misleading. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2010.
The Company’s management has reviewed and evaluated all events or transactions for potential
recognition and/or disclosure since the balance sheet date of September 30, 2011 through the date
on which the consolidated financial statements included in this Form 10-Q were issued.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its
subsidiaries. Aircastle consolidates eight Variable Interest Entities (“VIEs”) of which Aircastle
is the primary beneficiary. All intercompany transactions and balances have been eliminated in
consolidation.
We consolidate VIEs in which we have determined that we are the primary beneficiary. We use
judgment when deciding (a) whether an entity is subject to consolidation as a VIE, (b) who the
variable interest holders are, (c) the potential expected losses and residual returns of the
variable interest holders, and (d) which variable interest holder is the primary beneficiary. When
determining which enterprise is the primary beneficiary, we consider (1) the entity’s purpose and
design, (2) which variable interest holder has the power to direct the activities that most
significantly impact the entity’s economic performance, and (3) the obligation to absorb losses of
the entity or the right to receive benefits from the entity that could potentially be significant
to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of
VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses
incurred by an entity.
Recent Accounting Pronouncements
In August 2010, the Financial Accounting Standards Board (“FASB”) issued an exposure draft,
“Leases” (the “Lease ED”), which would replace the existing guidance in the Accounting Standards
Codification (“ASC”) 840 (“ASC 840”), Leases. Under the Lease ED, a lessor would be required to
adopt a right-of-use model where the lessor
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 would apply one of two approaches to each lease based
on whether the lessor retains exposure to significant risks or benefits associated with the
underlying asset. In July 2011, the FASB tentatively decided on a new model for lessor accounting
that would require a single approach for all leases, with a few exceptions. Under the new model, a
lease receivable would be recognized for the lessor’s right to receive lease payments, a portion of
the carrying amount of the underlying asset would be allocated between the right of use granted to
the lessee and the lessor’s residual value and profit or loss would only be recognized at
commencement if it is reasonably assured. Even though the FASB has not
completed all of its deliberations, the decisions made to date were sufficiently different
from those published in the Lease ED to warrant re-exposure of the revised proposal. The FASB
intends to complete its deliberations and publish a revised proposed leases standard during the
first half of 2012. We anticipate that the final standard may have an effective date no earlier
than 2016. When and if the proposed guidance becomes effective, it may have a significant impact
on the Company’s consolidated financial statements. Although we believe the presentation of our
financial statements, and those of our lessees could change, we do not believe the accounting
pronouncement will change the fundamental economic reasons for which the airlines lease aircraft.
Therefore, we do not believe it will have a material impact on our business.
In May 2011, the FASB issued ASU 2011-04 (“ASU 2011-04”), Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and
IFRSs, to improve the comparability of fair value measurements presented and disclosed in financial
statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this update change
the wording used to describe the requirements in U.S. GAAP for measuring fair value and for
disclosing information about fair value measurements which include (1) those that clarify the
FASB’s intent about the application of existing fair value measurement and disclosure requirements,
and (2) those that change a particular principle or requirement for measuring fair value or for
disclosing information about fair value measurement. ASU 2011-04 is effective for interim and
annual reporting periods beginning after December 15, 2011. The adoption of ASU 2011-04 will not
have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05 (“ASU 2011-05”),
Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which gives the option to
present the total of comprehensive income either in a single continuous statement of comprehensive
net income or in two separate but consecutive statements. In either option, an entity is required
to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for
comprehensive income. If a two statement approach is used, the statement of other comprehensive
income should immediately follow the statement of net income. This update eliminates the option to
present the components of other comprehensive income as part of the statement of changes in
shareholders’ equity. It also requires the presentation on the face of the financial statements
reclassification adjustments for items that are reclassified from other comprehensive income to net
income in the statement(s) where the components of net income and the components of other
comprehensive income are presented. In October 2011, the FASB decided to propose a deferral of the
new requirement and issue an exposure draft on the decision. The deferral allows the FASB time to
further research the matter, including a proposed requirement to disclose in the notes to the
financial statements amounts reclassified out of other comprehensive income. The deferral, if
finalized, would not change the other requirements stated above. The deferral would be effective
at the same time that the new standard on comprehensive is adopted. ASU 2011-05 is effective for
interim and annual reporting periods beginning after December 15, 2011 and should be applied
retrospectively. The adoption of ASU 2011-05 will not have a material impact on the Company’s
consolidated financial statements.
Note 2. Fair Value Measurements
Fair value measurements and disclosures require the use of valuation techniques to measure
fair value that maximize the use of observable inputs and minimize use of unobservable inputs.
These inputs are prioritized as follows:
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011
The valuation techniques that may be used to measure fair value are as follows:
The following tables set forth our financial assets and liabilities as of December 31, 2010
and September 30, 2011 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.
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Our cash and cash equivalents, along with our restricted cash and cash equivalents
balances, consist largely of money market securities that are considered to be highly liquid and
easily tradable. These securities are valued using inputs observable in active markets for
identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our
interest rate derivatives included in Level 2 consist of United States dollar denominated interest
rate derivatives, and their fair values are determined by applying standard modeling techniques
under the income approach to relevant market interest rates (cash rates, futures rates, swap rates)
in effect at the period close to determine appropriate reset and discount rates and incorporates an
assessment of the risk of non-performance by the interest rate derivative counterparty in valuing
derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.
Our interest rate derivatives included in Level 3 consist of United States dollar denominated
interest rate swaps on Term Financing No. 1 with a guaranteed notional balance. The guaranteed
notional balance has an upper notional band that matches the hedged debt and a lower notional band.
The notional balance is guaranteed to match the hedged debt balance if the debt balance decreases
within the upper and lower notional band. During the year ended December 31, 2010, the notional
balance was adjusted to match the debt balance of Term Financing No. 1 as a result of various
changes to Term Financing No. 1 including supplemental principal payments and debt payoff related
to an aircraft sale. The fair value of the interest rate derivative is determined based on the
adjusted upper notional band using cash flows
discounted at the relevant market interest rates in effect at the period close. It
incorporates an assessment of the risk of non-performance by the interest rate derivative
counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing
derivative liabilities. The range of the guaranteed notional between the upper and lower band
represents an option that may not be exercised independently of the debt notional and is therefore
valued based on unobservable market inputs.
The following tables reflect the activity for the classes of our assets and liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
three and nine months ended September 30, 2010 and 2011:
For the three and nine months ended September 30, 2010 and 2011, we had no transfers
into or out of Level 3 and we had no purchases, issuances, sales or settlements of Level 3 items.
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 We measure the fair value of certain assets and liabilities on a non-recurring basis, when US
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 aircraft. We record aircraft at fair value when we determine the carrying
value may not be recoverable. Fair value measurements for aircraft impaired are based on an income
approach that uses Level 3 inputs, which include our assumptions and appraisal data as to future
cash proceeds from leasing and selling aircraft.
In the three and nine months ended September 30, 2010, we recognized an impairment of $7,342
related to one Boeing Model 737-300 aircraft and one Boeing Model 737-500 aircraft, triggered by
the early termination of the lease for one aircraft, a signed forward sales agreement for the other
aircraft and, for each, the change to estimated future cash flows. The Company recorded $4,396
related to maintenance revenue from the previous lessee of the Boeing Model 737-500 aircraft during
the three months ended March 31, 2010 and $1,765 related to maintenance revenue from the previous
lessee of the Boeing Model 737-300 aircraft during the three months ended September 30, 2010.
In the three months ended June 30, 2011, we recognized an impairment of $5,200 related to a
Boeing Model 737-400 aircraft triggered by the early termination of the lease and the change to
estimated future cash flows. During the three months ended September 30, 2011, we recorded an
additional $1,236 impairment for this Boeing Model 737-400 aircraft triggered by our decision to
sell the aircraft, whereupon we adjusted the net book value of the aircraft to its estimated
disposition value. During the three months ended June 30, 2011, we recorded $2,267 related to
maintenance revenue and $878 reversal of lease incentives related to the former lessee of this
aircraft.
Our financial instruments, other than cash, consist principally of cash equivalents,
restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under
financings and interest rate derivatives. The fair value of cash, cash equivalents, restricted cash
and cash equivalents, accounts receivable and accounts payable approximates the carrying value of
these financial instruments because of their short term nature.
The fair values of our securitizations which contain third-party credit enhancements are
estimated using a discounted cash flow analysis, based on our current incremental borrowing rates
of borrowing arrangements that do not contain third-party credit enhancements. The fair values of
our term debt financings are estimated using a discounted cash flow analysis, based on our current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of our financial instruments at December 31, 2010 and
September 30, 2011 are as follows:
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Note 3. Lease Rental Revenues and Flight Equipment Held for Lease
Minimum future annual lease rentals contracted to be received under our existing operating
leases of flight equipment at September 30, 2011 were as follows:
Geographic concentration of lease rental revenue earned from flight equipment held for
lease was as follows:
The classification of regions in the tables above and the table and discussion below is
determined based on the principal location of the lessee of each aircraft.
For the three months ended September 30, 2010, one customer accounted for 10% of lease rental
revenue and three additional customers accounted for a combined 20% of lease rental revenue. No
other customer accounted for more than 5% of lease rental revenue. For the three months ended
September 30, 2011, one customer accounted for 10% of lease rental revenue and three additional
customers accounted for a combined 19% of lease rental revenue. No other customer accounted for
more than 5% of lease rental revenue.
For the nine months ended September 30, 2010, one customer accounted for 11% of lease rental
revenue and three additional customers accounted for a combined 20% of lease rental revenue. No
other customer accounted for more than 5% of lease rental revenue. For the nine months ended
September 30, 2011, one customer accounted for 11% of lease rental revenue and three additional
customers accounted for a combined 18% of lease rental revenue. No other customer accounted for
more than 5% of lease rental revenue.
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 The following tables set forth revenue attributable to individual countries representing at
least 10% of total revenue based on each lessee’s principal place of business:
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 The following table sets forth net book value of flight equipment attributable to
individual countries representing at least 10% of total assets based on each lessee’s principal
place of business as of:
At December 31, 2010 and September 30, 2011, the amounts of lease incentive liabilities
recorded in maintenance payments on the consolidated balance sheets were $26,536 and $24,103,
respectively.
At December 31, 2010 and September 30, 2011, the amounts of prepaid lease incentives and lease
premiums, net of amortization, recorded in other assets on the consolidated balance sheets were
$9,115 and $16,003, respectively.
Note 4. Variable Interest Entities
Aircastle consolidates eight 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 nineteen aircraft discussed below.
Securitizations and Term Financing
In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland
plc (“ACS Ireland”) and ACS Aircraft Finance Bermuda Limited (“ACS Bermuda”) issued Class A-1 notes
and each has fully and unconditionally guaranteed the other’s obligations under the notes. In
connection with Securitization No. 2, two of our subsidiaries, ACS Aircraft Finance Ireland 2
Limited (“ACS Ireland 2”) and ACS 2007-1 Limited (“ACS Bermuda 2”) issued Class A-1 notes and each
has fully and unconditionally guaranteed the other’s obligations under the notes. In connection
with Term Financing No. 1, two of our subsidiaries, ACS Ireland 3 Limited (“ACS Ireland 3”) and ACS
2008-1 Limited (“ACS Bermuda 3”) entered into a seven year term debt facility and each has fully
and unconditionally guaranteed the other’s obligations under the term debt facility. ACS Bermuda,
ACS Bermuda 2 and ACS Bermuda 3 are collectively referred to as the “ACS Bermuda Group”. At
September 30, 2011, the assets of the three VIEs include fifteen aircraft transferred into the VIEs
at historical cost basis in connection with Securitization No. 1, Securitization No. 2 and Term
Financing No. 1.
Aircastle is the primary beneficiary of ACS Ireland, ACS Ireland 2 and ACS Ireland 3
(collectively, the “ACS Ireland VIEs”) as we have both 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 Class E-1 Securities. Although Aircastle
has not guaranteed the ACS Ireland VIEs debt, Aircastle wholly owns the ACS Bermuda Group which has
fully and unconditionally guaranteed the ACS Ireland VIEs obligations. The activity that most
significantly impacts the economic performance is the leasing of aircraft. Aircastle Advisor
(Ireland) Limited (Aircastle’s wholly owned subsidiary) is the Remarketing Servicer and is
responsible for the leasing of the aircraft. An Irish charitable trust owns 95% of the common
shares of the ACS Ireland VIEs. The Irish charitable trust’s risk is limited to its annual dividend
of $2 per VIE.
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 The combined assets of the ACS Ireland VIEs as of September 30, 2011 are $471,380. The
combined liabilities of the ACS Ireland VIEs, net of $96,016 Class E-1 Securities held by the
Company which is eliminated in consolidation, as of September 30, 2011 are $420,543.
ECA Term Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such
entities, collectively the “Air Knight VIEs”), entered into nine different twelve-year term loans,
which are supported by guarantees from Compagnie Francaise d’Assurance pour le Commerce Exterieur,
(“COFACE”), the French government sponsored export credit agency (“ECA”). These loans provided for
the financing for nine new Airbus Model A330-200 aircraft. In June 2011, we repaid one of these
loans from the proceeds of the sale of the related aircraft. At September 30, 2011, Aircastle had
eight outstanding term loans with guarantees from COFACE. We refer to these COFACE-supported
financings as “ECA Term 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 financing leases that are
eliminated in the consolidated financial statements, and deferred financing costs. The related
aircraft, with a net book value as of September 30, 2011 were $666,922, are included in our flight
equipment held for lease. The consolidated debt outstanding of the Air Knight VIEs as of September
30, 2011 is $545,981.
Note 5. Securitizations and Term Debt Financings
The outstanding amounts of our secured and unsecured term debt financings were as follows:
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011
The following securitizations and term debt financing structures include liquidity
facility commitments described in the table below:
Secured Debt Financings:
Term Financing No. 1
In March 2011, we completed the annual maintenance-adjusted appraisal for the Term Financing
No. 1 Portfolio and we have determined that we are in compliance with the loan to value ratio on
the October 2011 payment date.
ECA Term Financings
During 2011, we entered into five twelve-year term loans which are supported by guarantees
from COFACE, for the financing of new Airbus Model A330-200 aircraft totaling $359,393, and we
repaid in full the outstanding principal balance of one of our ECA term financings in the amount of
$61,571.
The obligations outstanding under the ECA Term Financings are secured by, among other things,
a mortgage over the aircraft and a pledge of our ownership interest in our subsidiary company that
leases the aircraft to the operator. The ECA Term Financings documents contain a $500,000 minimum
net worth covenant for Aircastle Limited, as well as a material adverse change default and cross
default to any other recourse obligation of Aircastle Limited, and other terms and conditions
customary for ECA-supported financings being completed at this time. In addition, Aircastle
Limited has guaranteed the repayment of the ECA Term Financings.
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Note 6. Dividends
The following table sets forth the quarterly dividends declared by our Board of Directors for
the periods covered in this report:
Note 7. Shareholders’ Equity and Share Based Payment
In March 2011, the Company’s Board of Directors authorized the repurchase of up to $60,000 of
the Company’s common shares. In June 2011, the Company’s Board of Directors authorized an increase
in the Company’s share repurchase program by up to an additional $30,000 of its common shares, for
a total of up to $90,000 of its common shares in the aggregate. Under the program, the Company may
purchase its common shares from time to time in the open market or in privately negotiated
transactions. The amount and timing of the purchases will depend on a number of factors, including
the price and availability of the Company’s common shares, trading volume and general market
conditions. The Company may also from time to time establish a trading plan under Rule 10b5-1 of
the Securities Exchange Act of 1934 (the “Exchange Act”) to facilitate purchases of its common
shares under this authorization. Through September 30, 2011, we repurchased 7,552,820 shares at a
total cost of $90,000 including commissions, completing the share purchases to the authorized
amounts.
Note 8. Earnings Per Share
We include all common shares granted under our incentive compensation plan which remain
unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend
equivalents, whether paid or unpaid (“participating securities”), in the number of shares
outstanding in our basic and diluted earnings per share calculations using the two-class method.
All of our restricted common shares are currently participating securities.
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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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011
The calculations of both basic and diluted earnings per share are as follows:
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Note 9. Income Taxes
Income taxes have been provided for based upon the tax laws and rates in countries in which
our operations are conducted and income is earned. The Company received an assurance from the
Bermuda Minister of Finance that it would be exempted from local income, withholding and capital
gains taxes until March 2035. This date was recently extended by the Government of Bermuda from
March 2016. 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 the United States and Ireland.
The sources of income from continuing operations before income taxes for the three and nine
months ended September 30, 2010 and 2011 were as follows:
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. We also 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.
Differences between statutory income tax rates and our effective income tax rates applied to
pre-tax income consisted of the following:
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Note 10. Interest, Net
The following table shows the components of interest, net:
Note 11. Commitments and Contingencies
On June 20, 2007, we entered into an acquisition agreement (the “Airbus A330 Agreement”),
under which we agreed to acquire new A330 aircraft (the “New A330 Aircraft”), from Airbus S.A.S. At
September 30, 2011, we had two New A330 Aircraft remaining to be delivered, one of which is
scheduled for delivery in the fourth quarter of 2011 and one of which is scheduled for delivery in
2012. In addition, as of September 30, 2011, we committed to acquire approximately $97,350 of
aircraft which we expect to take delivery of in the fourth quarter of 2011.
Committed amounts to acquire, convert, and modify aircraft including, where applicable, our
estimate of adjustments for configuration changes, engine acquisition costs, contractual price
escalations and other adjustments, net of amounts already paid, are approximately $187,576 in 2011
and $87,692 in 2012.
Note 12. Derivatives
The objective of our hedging policy is to adopt a risk averse position with respect to changes
in interest rates. Accordingly, we have entered into a number of interest rate derivatives to hedge
the current and expected future interest rate payments on our variable rate debt. Interest rate
derivatives are agreements in which a series of interest rate cash flows are exchanged with a third
party over a prescribed period. The notional amount on an interest rate derivative is not
exchanged. Our interest rate derivatives typically provide that we make fixed rate payments and
receive floating rate payments to convert our floating rate borrowings to fixed rate obligations to
better match the largely fixed rate cash flows from our investments in flight equipment.
In September 2011, we entered into a series of interest rate forward contracts with a combined
notional amount of $645,543. These forward starting interest rate derivatives are hedging the
variable rate interest payments related to Securitization No. 2 for the period June 2012 through
June 2017. These interest rate derivatives were designated at inception as cash flow hedges for
accounting purposes.
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Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 We held the following interest rate derivatives as of September 30, 2011:
The weighted average interest pay rate of these derivatives at December 31, 2010 and
September 30, 2011 was 5.01% and 5.03%, respectively.
For the nine months ended September 30, 2011, the amount of loss reclassified from accumulated
other comprehensive income (“OCI”) into interest expense related to net interest settlements on
active interest rate derivatives was $68,321. The amount of loss expected to be reclassified from
OCI into interest expense over the next 12 months related to net interest settlements on active
interest rate derivatives is $70,154.
Our interest rate derivatives involve counterparty credit risk. As of September 30, 2011, our
interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA,
Citibank Canada NA, HSH Nordbank AG and Wells Fargo Bank NA. All of our counterparties or
guarantors of these counterparties are considered investment grade (senior unsecured ratings of A3
or above) by Moody’s Investors Service. All are also considered investment grade (long-term
foreign issuer ratings of A or above) by Standard and Poor’s, except HSH Nordbank AG, which is not
rated. We do not anticipate that any of these counterparties will fail to meet their obligations.
In addition to the derivative liability above, another component of the fair value of our
interest rate derivatives is accrued interest. As of September 30, 2011, accrued interest payable
included in accounts payable, accrued expenses, and other liabilities on our consolidated balance
sheet was $5,123 related to interest rate derivatives designated as cash flow hedges.
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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Historically, the Company acquired its aircraft using short term credit facilities and equity.
The short term credit facilities were refinanced by securitizations or term debt facilities
secured by groups of aircraft. The Company completed two securitizations and two term financings
during the period 2006 through 2008. The Company entered into interest rate derivatives to hedge
interest payments on variable rate debt for acquired aircraft as well as aircraft that it expected
to acquire within certain future periods. In conjunction with its financing strategy, the Company
used interest rate derivatives for periods ranging from 5 to 10 years to fix the interest rates on
the variable rate debt that it incurred to acquire aircraft in anticipation of the expected
securitization or term debt re-financings.
At the time of each re-financing, the initial interest rate derivatives were terminated and
new interest rate derivatives were executed as required by each specific debt financing. At the
time of each interest rate derivative termination, certain interest rate derivatives were in a gain
position and others were in a loss position. Since the hedged interest payments for the variable
rate debt associated with each terminated interest rate derivative were probable of occurring, the
gain or loss was deferred in accumulated other comprehensive income (loss) and is being amortized
into interest expense over the relevant period for each interest rate derivative.
Following is the effect of interest rate derivatives on the statement of financial performance
for the nine months ended September 30, 2011:
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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 The following table summarizes the deferred (gains) losses and related amortization into
interest expense for our terminated interest rate derivative contracts for the nine months ended
September 30, 2010 and 2011:
For the nine months ended September 30, 2011, the amount of deferred net loss
(including $3,551 of accelerated amortization) reclassified from OCI into interest expense related
to our terminated interest rate derivatives was $13,943. The amount of deferred net loss expected
to be reclassified from OCI into interest expense over the next 12 months related to our terminated
interest rate derivatives is $18,097. Over the next twelve months, we expect the amortization of
deferred net losses to increase as the gains on Securitizations No. 1 and No. 2 are either fully
amortized or will be in the near future and the losses on the forward starting A330 swaps begin to
amortize as we take delivery of these aircraft.
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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 The following table summarizes amounts charged directly to the consolidated statement of
income for the three and nine months ended September 30, 2010 and 2011, respectively, related to
our interest rate derivatives:
Note 13. Other Assets
The following table describes the principal components of other assets on our consolidated
balance sheet as of:
Note 14. Accounts Payable, Accrued Expenses and Other Liabilities
The following table describes the principal components of accounts payable, accrued expenses
and other liabilities recorded on our consolidated balance sheet as of:
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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) September 30, 2011 Note 15. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes the changes in the fair value of
derivatives, reclassification into earnings of amounts previously deferred relating to our
derivative financial instruments and the change in unrealized appreciation of debt securities.
Total accumulated other comprehensive income (loss) for the three and nine months ended September
30, 2010 and 2011 was as follows:
The following table sets forth the components of accumulated other comprehensive income
(loss), net of tax where applicable, at December 31, 2010 and September 30, 2011:
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Item 2. 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 our historical consolidated financial statements
and the notes thereto appearing elsewhere in this 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 “Risk Factors”
and included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the
Securities and Exchange Commission (the “SEC”). 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 accounting principles generally accepted in the United States, or US GAAP, and,
unless otherwise indicated, the other financial information contained in this report has also been
prepared in accordance with US GAAP. Unless otherwise indicated, all references to “dollars” and
“$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
Certain items in this Quarterly Report on Form 10-Q (this “report”), and other information we
provide from time to time, may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, but 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 Net Income and Adjusted Net Income
plus Depreciation and Amortization 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
management’s current expectations and beliefs 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 Limited can give no assurance that its expectations will be attained. Accordingly, you
should not place undue reliance on any forward-looking statements contained in this report. Factors
that could have a material adverse effect on our operations and future prospects or that could
cause actual results to differ materially from Aircastle Limited’s expectations include, but are
not limited to, significant capital markets disruption and volatility, which may adversely affect
our continued ability to obtain additional capital to finance our working capital needs; volatility
in the value of our aircraft or in appraisals thereof, which may, among other things, result in
increased principal payments under our term financings and reduce our cash flow available for
investment or dividends; general economic conditions and business conditions affecting demand for
aircraft and lease rates; our continued ability to obtain favorable tax treatment in Bermuda,
Ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack
of access to capital, reduced load factors and/or reduced yields, operational disruptions or
unavailability of capital caused by political unrest in North Africa, the Middle East or elsewhere,
and other factors affecting the creditworthiness of our airline customers and their ability to
continue to perform their obligations under our leases; termination payments on our interest rate
hedges; and other risks detailed from time to time in Aircastle Limited’s filings with the
Securities and Exchange Commission, or the SEC, including “Risk Factors” as previously disclosed in
Aircastle’s 2010 Annual Report on Form 10-K, and elsewhere in this 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 report. Aircastle Limited expressly disclaims any obligation to release publicly any updates
or revisions to any forward-looking statements contained herein to reflect any change in its
expectations with regard thereto or change in events, conditions or circumstances on which any
statement is based.
WEBSITE AND ACCESS TO COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms
10-K, quarterly reports on Forms 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 Securities Exchange Act of 1934, or
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.
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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
— SEC Filings”.
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, 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902.
The information on the Company’s website is not part of, or incorporated by reference, into
this report, or any other report we file with, or furnish to, the SEC.
OVERVIEW
We are a global company that acquires, leases, and sells high-utility commercial jet aircraft
to passenger and cargo airlines throughout the world. High-utility aircraft are generally modern,
operationally efficient jets with a large operator base and long useful lives. As of September 30,
2011, our aircraft portfolio consisted of 138 aircraft that were leased to 61 lessees located in 34
countries, and managed through our offices in the United States, Ireland and Singapore. Typically,
our aircraft are subject to net operating leases whereby the lessee 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. From time to time, we also make investments in other aviation assets. Our revenues and
income from continuing operations for the three and nine months ended September 30, 2011 were
$141.5 million and $22.7 million and $448.3 million and $88.7 million, respectively.
The availability of equity and debt capital remains limited for the type of aircraft
investments we are currently pursuing. However, we plan to grow our business and profits over the
long term by continuing to employ our fundamental business strategy by:
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We also 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 after taking into consideration available financing options. In any case,
there can be no assurance that we will be able to access capital on a cost-effective basis, and a
failure to do so could have a material adverse effect on our business, financial condition or
results of operations.
Thus far in 2011, air traffic data have continued to demonstrate improvement in both the
passenger and cargo markets. According to the International Air Transport Association, passenger
and cargo traffic demand increased by 6.3% and 0.1%, respectively, for the first nine months of
2011 as compared to the same period in 2010, though we have seen signs that air cargo demand has
softened recently. The effects of the tsunami in Japan on the electronics and automotive
industries’ supply chains and a slowing of growth in some leading economies have been key factors
in a slowdown in the cargo markets. Moreover, there are significant regional variations in both
passenger and cargo demand, and airlines operating primarily in areas with slower economic growth,
such as Europe, or with political instability, such as North Africa and the Middle East, may see
more modest growth. The longer term trends are, nevertheless, encouraging and we believe that
passenger and cargo traffic will likely increase over time. As a result, we expect that demand for
high-utility aircraft will continue to remain strong. We believe the market will be driven, to a
large extent, by expansion of emerging market economies and rising levels of per capita air travel
in those markets.
We intend to pay regular quarterly dividends to our shareholders. On March 8, 2011, our board
of directors declared a regular quarterly dividend of $0.10 per common share, or an aggregate of
$7.9 million, for the three months ended March 31, 2011, which was paid on April 15, 2011 to
holders of record on March 31, 2011. On June 27, 2011, our board of directors declared a regular
quarterly dividend of $0.125 per common share, or an aggregate of $9.4 million, for the three
months ended June 30, 2011, which was paid on July 15, 2011 to holders of record on July 7, 2011.
On September 14, 2011, our board of directors declared a regular quarterly dividend of $0.125 per
common share, or an aggregate of $9.0 million, for the three months ended September 30, 2011, which
was paid on October 14, 2011 to holders of record on September 30, 2011. These dividends may not
be indicative of the amount of any future dividends.
Revenues
Our revenues are comprised primarily of operating lease rentals on flight equipment held for
lease, revenue from retained maintenance payments related to lease expirations and lease
termination payments and lease incentives amortization.
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 credit-worthiness 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.
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,
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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 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 amount of the maintenance event cost 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.
2011 Lease Expirations and Lease Placements
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2012 Lease Expirations and Lease Placements
2013-2015 Lease Expirations and Lease Placements
Operating Expenses
Operating expenses are comprised of depreciation of flight equipment held for lease, interest
expense, selling, general and administrative 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 Provision
We have obtained an assurance from the Minister of Finance of Bermuda under the Exempted
Undertakings Tax Protection Act 1966 that, in the event that 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 31, 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 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. We also 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. In addition,
those subsidiaries that are resident in Ireland are subject to Irish tax.
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Acquisitions and Dispositions
Thus far in 2011, we have acquired 18 aircraft:
Our investments in these aircraft acquisitions in 2011 have totaled approximately $852.9
million, excluding freighter conversion payments.
We also have commitments to acquire four aircraft, including:
These commitments total approximately $244.0 million.
We sold eight aircraft in 2011, four Boeing Model 737-400SF aircraft, one Boeing Model
737-400F aircraft, one Boeing Model 737-500 aircraft and two Airbus Model A330-200 aircraft, for an
aggregate sales price of approximately $330.1 million.
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The following table sets forth certain information with respect to the aircraft owned
by us as of September 30, 2011:
AIRCASTLE AIRCRAFT INFORMATION (Dollars in millions)
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PORTFOLIO DIVERSIFICATION
Our owned aircraft portfolio as of September 30, 2011 is listed in Exhibit 99.1 to this
report. We consider approximately 93% of the total aircraft and 95% of the freighters we owned as
of September 30, 2011 to be the most current technology for the relevant airframe and engine type
and airframe size, as listed under the headings “Latest Generation Narrowbody Aircraft,” “Latest
Generation Midbody Aircraft,” “Latest Generation Widebody Aircraft” and “Latest Generation Widebody
Freighter Aircraft” in Exhibit 99.1 to this report.
Of our owned aircraft portfolio as of September 30, 2011, $3.6 billion, representing 117
aircraft and 86% of the net book value of our aircraft, was encumbered by secured debt financings,
and $0.6 billion, representing 21 aircraft and 14% of the net book value of our aircraft, was
unencumbered by secured debt financings.
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Our largest customer represents less than 9% of the net book value of flight equipment held
for lease at September 30, 2011. Our top 15 customers for aircraft we owned at September 30, 2011,
representing 71 aircraft and 66% of the net book value of flight equipment held for lease, are as
follows:
Finance
Historically, our debt financing arrangements typically have been secured by aircraft and
related operating leases, and in the case of our securitizations and pooled aircraft term
financings, the financing parties have limited recourse to Aircastle Limited. While such financings
have historically been available on reasonable terms given the loan to value profile we have
pursued, current market conditions continue to limit the availability of both debt and equity
capital. Though financing market conditions have recovered recently and we expect them to continue
to improve in time, current market conditions remain difficult with respect to financing mid-age,
current technology aircraft. During 2010, we accessed the unsecured debt market for the first time
by issuing $300.0 million aggregate principal amount of unsecured 9.75% Senior Notes due 2018 and
used the proceeds to repay a secured term loan and to provide funding for incremental aircraft
acquisitions. We also secured a $50.0 million unsecured revolving credit facility, which remains
undrawn. During the near term, we intend to focus our efforts on investment opportunities that are
attractive on an unleveraged basis, that tap commercial financial capacity where it is accessible
on reasonable terms or for which debt financing that benefits from government guarantees either
from the ECAs or from EXIM is available.
We intend to fund new investments through cash on hand and potentially through medium to
longer-term financings on a secured or unsecured basis. 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. Therefore, our ability to execute
our business strategy, particularly the acquisition of additional commercial
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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.”
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2010 to the three months ended September 30,
2011:
Revenues:
Total revenues increased by 7.0% or $9.3 million for the three months ended September 30, 2011
as compared to the three months ended September 30, 2010, primarily as a result of the following:
Lease rental revenue. The increase in lease rental revenue of $12.4 million for the three
months ended September 30, 2011 as compared to the same period in 2010 was primarily the result of:
This increase was offset partially by a decrease in revenue of:
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Amortization of net lease discounts and lease incentives.
As more fully described above under “Revenues”, lease incentives represent our
estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain
high-value components which is amortized over the life of the related lease. As we enter into new
leases, the amortization of lease incentives generally increases and conversely if a related lease
terminates, the related unused lease incentive liability will reduce the amortization of lease
incentives. The increase in amortization of lease premiums is due to one aircraft acquired during
the third quarter of 2011. The lease on this aircraft will expire at the end of the first quarter
of 2012.
Maintenance revenue.
Unscheduled lease terminations. For the three months ended September 30, 2010, we
recorded maintenance revenue totaling $1.8 million primarily from an unscheduled lease termination
of one aircraft. Comparatively, for the same period in 2011, we did not record any maintenance
revenue from unscheduled lease terminations as we did not have any terminations. See “Summary of
Impairments and Recoverability Assessment” below for a detailed discussion of the related
impairment charges for certain aircraft.
Scheduled lease terminations. For the three months ended September 30, 2010, we recorded
maintenance revenue from scheduled lease terminations totaling $0.1 million associated with
maintenance revenue from one leased engine, as we had no scheduled lease terminations during the
period. Comparatively, for the same period in 2011, we did not record any maintenance revenue from
scheduled lease terminations as we did not have any terminations.
Operating Expenses:
Total operating expenses increased by 2.8%, or $3.5 million for the three months ended
September 30, 2011 as compared to the three months ended September 30, 2010 primarily as a result
of the following:
Depreciation expense increased by $4.4 million for the three months ended September 30, 2011
over the same period in 2010. The net increase is primarily the result of:
This increase was offset partially by:
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Interest, net consisted of the following:
Interest, net increased by $1.4 million, or 3.0%, over the three months ended September
30, 2010. The net increase is primarily a result of:
Selling, general and administrative expenses for the three months ended September 30, 2011
increased by $0.9 million over the same period in 2010 primarily due to increased professional
fees. Non-cash share based expense was $1.5 million and $1.6 million for the three months ended
September 30, 2010 and 2011, respectively.
Impairment of aircraft was $7.3 million during the three months ended September 30, 2010 which
related to one Boeing Model 737-300 aircraft and one Boeing Model 737-500 aircraft. See “Summary of
Impairments and Recoverability Assessment” below for a detailed discussion of the related
impairment charge for these two aircraft.
Impairment of aircraft was $1.2 million during the three months ended September 30, 2011 which
related to a Boeing Model 737-400 aircraft which we had repossessed following termination of the
lease agreement in the second quarter of 2011. The additional impairment for this aircraft during
the three months ended September 30, 2011 was triggered by our decision to sell the aircraft,
whereupon we adjusted the net book value of the aircraft to its estimated disposition value. See
“Summary of Impairments and Recoverability Assessment” below for a detailed discussion of the
related impairment charge for this aircraft.
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Maintenance and other costs of $4.0 million for the three months ended September 30, 2011
increased $2.9 million over the same period in 2010 as a result of an increase in aircraft
maintenance and other transitions costs relating to unscheduled lease terminations for four aircraft returned to us in the first quarter of 2011
and one aircraft returned to us in the second quarter of 2011.
Other income (expense):
Total other income for the three months ended September 30, 2011 was $8.9 million as compared
to $0.5 million of expense for the same period in 2010. The increase is primarily a result of a
$9.0 million increase in the gain on sale of aircraft.
Income Tax Provision:
Our provision for income taxes for the three months ended September 30, 2010 and 2011 was $0.2
million and $1.2 million, respectively. Income taxes have been provided based on the applicable tax
laws and rates of those countries in which operations are conducted and income is earned, primarily
Ireland and the United States. The increase in our income tax provision of approximately $1.1
million for the nine months ended September 30, 2011 as compared to the same period in 2010 was
attributable to an increase in operating income subject to tax in the U.S. and Ireland.
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. We also 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. In addition,
those subsidiaries that are resident in Ireland are subject to Irish tax.
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. This date was
recently extended by the Government of Bermuda from March 2016. 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 the United States
and Ireland.
Other comprehensive income
Other comprehensive income was $25.4 million for the three months ended September 30,
2011, an increase of $22.2 million from the $3.2 million of other comprehensive loss for the three
months ended September 30, 2010. Other comprehensive income for the three months ended September
30, 2011 primarily consisted of:
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Other comprehensive income for the three months ended September 30, 2010 primarily consisted
of:
Comparison of the nine months ended September 30, 2011 to the nine months ended September 30, 2011:
Revenues:
Total revenues increased by 14.1%, or $55.3 million, for the nine months ended September 30,
2011 as compared to the nine months ended September 30, 2010, primarily as a result of the
following:
Lease rental revenue. The increase in lease rental revenue of $38.6 million for the nine
months ended September 30, 2011 as compared to the same period in 2010 was primarily the result of:
This increase was offset partially by a decrease in revenue of:
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Amortization of net lease discounts and lease incentives.
As more fully described above under “Revenues”, lease incentives represent our
estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain
high-value components which is amortized over the life of the related lease. As we enter into new
leases, the amortization of lease incentives generally increases and conversely if a related lease
terminates, the related unused lease incentive liability will reduce the amortization of lease
incentives. The decrease in amortization of lease incentives of $3.7 million for the nine months
ended September 30, 2011 as compared to the same period in 2010 primarily resulted from unscheduled
lease terminations associated with six aircraft.
Maintenance revenue.
Unscheduled lease terminations. For the nine months ended September 30, 2010, we
recorded maintenance revenue of $1.8 million from unscheduled lease terminations primarily
associated with one aircraft returned in 2010. Comparatively, for the same period in 2011, we
recorded maintenance revenue totaling $15.3 million from unscheduled lease terminations primarily
associated with six aircraft returned in 2011. See “Summary of Impairments and Recoverability
Assessment” below for a detailed discussion of the related impairment charges for certain aircraft.
Scheduled lease terminations. For the nine months ended September 30, 2010, we recorded
maintenance revenue from scheduled lease terminations totaling $11.6 million associated with three
aircraft. Comparatively, for the same period in 2011, we recorded $9.7 million, primarily
associated with maintenance revenue from five scheduled lease terminations.
Other revenue was $3.7 million during the nine months ended September 30, 2011, which was
primarily due to additional fees paid by lessees in connection with early termination of four
leases. We did not receive any similar fees from early lease terminations in the nine months ended
September 30, 2010. See “Summary of Impairments and Recoverability Assessment” below for a
detailed discussion of the related impairment charges for certain aircraft.
Operating Expenses:
Total operating expenses increased by 12.1%, or $41.3 million, for the nine months ended
September 30, 2011 as compared to the nine months ended September 30, 2010 primarily as a result of
the following:
Depreciation expense increased by $14.0 million for the nine months ended September 30, 2011
over the same period in 2010. The net increase is primarily the result of:
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This increase was offset partially by:
Interest, net consisted of the following:
Interest, net increased by $21.8 million, or 17.0%, over the nine months ended
September 30, 2010. The net increase is primarily a result of:
Selling, general and administrative expenses for the nine months ended September 30, 2011
increased by $2.3 million over the same period in 2010 primarily due to increased professional fees
and compensation. Non-cash share
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based expense was $5.2 million and $4.7 million for the nine months ended September 30,
2010 and 2011, respectively.
Impairment of aircraft was $7.3 million during the nine months ended September 30, 2010 which
related to one Boeing Model 737-300 aircraft and one Boeing Model 737-500 aircraft. See “Summary of
Impairments and Recoverability Assessment” below for a detailed discussion of the related
impairment charge for these two aircraft.
Impairment of aircraft was $6.4 million during the nine months ended September 30, 2011 which
related to a Boeing Model 737-400 aircraft which we repossessed following termination of the lease
agreement in the second quarter of 2011. See “Summary of Impairments and Recoverability
Assessment” below for a detailed discussion of the related impairment charge for this aircraft.
Maintenance and other costs were $10.9 million for the nine months ended September 30, 2011,
an increase of $4.1 million over the same period in 2010. The net increase is primarily an increase
in aircraft maintenance and other transitions costs relating to unscheduled lease terminations for
four aircraft returned to us in the first quarter of 2011 and one aircraft returned during the
second quarter of 2011.
Other income (expense):
Total other income for the nine months ended September 30, 2011 was $28.8 million as compared
to $2.3 million of expense for the same period in 2010. The increase is primarily a result of a
$30.2 million increase in the gain on sale of aircraft.
Income Tax Provision:
Our provision for income taxes for the nine months ended September 30, 2010 and 2011 was $4.0
million and $6.0 million, respectively. Income taxes have been provided based on the applicable tax
laws and rates of those countries in which operations are conducted and income is earned, primarily
Ireland and the United States. The increase in our income tax provision of approximately $2.0
million for the nine months ended September 30, 2011 as compared to the same period in 2010 was
attributable to an increase in operating income subject to tax in the U.S. and Ireland.
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. We also 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. In addition,
those subsidiaries that are resident in Ireland are subject to Irish tax.
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. This date was
recently extended by the Government of Bermuda from March 2016. 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 the United States
and Ireland.
Other comprehensive income
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Other comprehensive income was $123.7 million for the nine months ended September 30,
2011, an increase of $109.2 million from the $14.5 million of other comprehensive income for the
nine months ended September 30, 2010. Other comprehensive income for the nine months ended
September 30, 2011 primarily consisted of:
Other comprehensive income for the nine months ended September 30, 2010 primarily consisted
of:
The amount of loss expected to be reclassified from accumulated other comprehensive income
into interest expense over the next 12 months consists of net interest settlements on active
interest rate derivatives in the amount of $70.2 million and the amortization of deferred net
losses from terminated interest rate derivatives in the amount of $18.1 million. See “Liquidity
and Capital Resources — Hedging” below for more information on deferred net losses as related to
terminated interest rate derivatives.
Summary of Impairments and Recoverability Assessment
In the three and nine months ended September 30, 2010, we recognized an impairment of $7.3
million related to one Boeing Model 737-300 aircraft and one Boeing Model 737-500 aircraft, which
was triggered by the early termination of one of the related leases, a signed forward sales
agreement for the other aircraft and the resulting change to estimated future cash flows. The
Company recorded $4.4 million related to maintenance revenue from the previous lessee at the end of
that lease of the Boeing Model 737-500 aircraft during the three months ended March 31, 2010 and
$1.8 million related to maintenance revenue from the previous lessee of the Boeing Model 737-300
aircraft during the three months ended September 30, 2010.
In the three months ended June 30, 2011, we recognized an impairment of $5.2 million related
to a Boeing Model 737-400 aircraft which we repossessed following termination of the lease
agreement in the second quarter of 2011. During the three months ended September 30, 2011, we
recorded an additional $1.2 million impairment for this Boeing Model 737-400 aircraft triggered by
our decision to sell the aircraft, whereupon we adjusted the net book value of the aircraft to its
estimated disposition value. During the three months ended June 30, 2011, we recorded $2.3 million
related to maintenance revenue and reversed $0.9 million of lease incentive accruals related to the
terminated lease of this aircraft.
As more fully described in our Annual Report on Form 10-K for the year ended December 31,
2010, we perform a recoverability assessment of all aircraft in our fleet, on an
aircraft-by-aircraft basis, at least annually. We performed this recoverability assessment during
the third quarter of 2011. Management develops the assumptions used in the recoverability
assessment based on its knowledge of active lease contracts, 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 contracted lease rates, residual values, economic conditions, technology,
airline demand for a particular aircraft type and other factors. While we believe that
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the
estimates and related assumptions used in the recoverability assessment are appropriate, actual
results could differ from those estimates. Other than the aircraft discussed above, 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 other aircraft were impaired as a consequence of
this recoverability assessment.
Following our recently completed aircraft recoverability assessment, we changed our economic
life assumptions or residual values, or both, for certain aircraft types to reflect changes in
market conditions. More specifically, for Airbus A319 aircraft we shortened our economic useful
life assumption from 25 years to 22.5 years resulting from what we believe to be a long-term
reduction in demand for this lower-capacity variant of the A320 family of aircraft. For “classic”
and less fuel efficient narrow-body aircraft consisting of Boeing Model 737-300 and -400 aircraft
as well as Airbus A320-200 aircraft with previous generation engines, we reduced our end of life
residual value assumptions to reflect weaker market demand and lease rate conditions. As a result
of these changes to our estimates, we expect our future annual depreciation expense for the
aircraft noted above will be $3.3 million higher in total than our previous estimates.
At September 30, 2011 we had a total of 26 aircraft, including those aircraft mentioned in the
preceding paragraph, with a total net book value of $388 million (accounting for 9.2% of the total
net book value of our flight equipment held for lease), that we consider more susceptible to
failing our recoverability assessment. The recoverability in the value of these aircraft is more
sensitive to changes in contractual cash flows, future cash flow estimates and aircraft residual or
scrap. These aircraft fall primarily into a few categories as shown in the table below:
While rental rates on Boeing Model 767-300ER aircraft have remained firm over the past
year and we see continued demand for this aircraft type for many years, we also anticipate a
greater probability that lease rates will soften in time as a result of the continuing success of
the Airbus A330 program and as production of the Boeing 787 production eventually ramps up. As
such, we believe demand for these aircraft will become more sensitive to changes in economic
conditions.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2010, the Financial Accounting Standards Board (“FASB”) issued an exposure draft,
“Leases” (the “Lease ED”), which would replace the existing guidance in the Accounting Standards
Codification (“ASC”) 840 (“ASC 840”), Leases. Under the Lease ED, a lessor would be required to
adopt a right-of-use model where the lessor would apply one of two approaches to each lease based
on whether the lessor retains exposure to significant risks or benefits associated with the
underlying asset. In July 2011, the FASB tentatively decided on a new model for lessor accounting
that would require a single approach for all leases, with a few exceptions. Under the new model, a
lease receivable would be recognized for the lessor’s right to receive lease payments, a portion of
the carrying amount of the underlying asset would be allocated between the right of use granted to
the lessee and the lessor’s residual value and profit or loss would only be recognized at
commencement if it is reasonably assured. Even though the FASB has not completed all of its
deliberations, the decisions made to date were sufficiently different from those published in the
Lease ED to warrant re-exposure of the revised proposal. The FASB intends to complete its
deliberations and publish a revised proposed leases standard during the first half of 2012. We
anticipate that the final standard may have an effective date no earlier than 2016. When and if
the proposed guidance becomes effective, it may have a significant impact on the Company’s
consolidated financial statements. Although we believe the presentation of our financial
statements, and those of our lessees could change, we do not believe the accounting pronouncement
will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we
do not believe it will have a material impact on our business.
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In May 2011, the FASB issued ASU 2011-04 (“ASU 2011-04”), Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and
IFRSs, to improve the comparability of fair value measurements presented and disclosed in financial
statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this update change
the wording used to describe the
requirements in U.S. GAAP for measuring fair value and for disclosing information about fair
value measurements which include (1) those that clarify the FASB’s intent about the application of
existing fair value measurement and disclosure requirements, and (2) those that change a particular
principle or requirement for measuring fair value or for disclosing information about fair value
measurement. ASU 2011-04 is effective for interim and annual reporting periods beginning after
December 15, 2011. The adoption of ASU 2011-04 will not have a material impact on the Company’s
consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05 (“ASU 2011-05”),
Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which gives the option to
present the total of comprehensive income either in a single continuous statement of comprehensive
net income or in two separate but consecutive statements. In either option, an entity is required
to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for
comprehensive income. If a two statement approach is used, the statement of other comprehensive
income should immediately follow the statement of net income. This update eliminates the option to
present the components of other comprehensive income as part of the statement of changes in
shareholders’ equity. It also requires the presentation on the face of the financial statements
reclassification adjustments for items that are reclassified from other comprehensive income to net
income in the statement(s) where the components of net income and the components of other
comprehensive income are presented. In October 2011, the FASB decided to propose a deferral of the
new requirement and issue an exposure draft on the decision. The deferral allows the FASB time to
further research the matter, including a proposed requirement to disclose in the notes to the
financial statements amounts reclassified out of other comprehensive income. The deferral, if
finalized, would not change the other requirements stated above. The deferral would be effective
at the same time that the new standard on comprehensive is adopted. ASU 2011-05 is effective for
interim and annual reporting periods beginning after December 15, 2011 and should be applied
retrospectively. The adoption of ASU 2011-05 will not have a material impact on the Company’s
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity currently are cash on hand, cash generated by our aircraft
leasing operations and loans secured by new aircraft we acquire and unsecured borrowings. Our
business is very capital intensive, requiring significant investments in order to expand our fleet
during periods of growth and investments in maintenance and improvements on our existing portfolio.
Our business also generates a significant amount of cash from operations, primarily from lease
rentals and maintenance collections. These sources have historically provided liquidity for these
investments and for other uses, including the payment of dividends to our shareholders. In the
past, we have also met our liquidity and capital resource needs by utilizing several sources,
including:
Going forward, we expect to continue to seek liquidity from these sources subject to pricing
and conditions that we consider satisfactory.
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We have multiple sources of financing available to us including:
Under the terms of Securitization No. 1 effective June 15, 2011, all cash flows available
after expenses and interest will be applied to debt amortization. We expect that debt amortization
payments over the next twelve months will be approximately $37.9 million dollars, compared to debt
amortization payments, excluding debt repayments from asset sales of $24.8 million made over the
last twelve months.
Under the terms of Securitization No. 2, effective June 8, 2012 all cash flows available after
expenses and interest will be applied to debt amortization. We expect that debt amortization
payments, excluding repayments from asset sales, over the next twelve months will be approximately
$73.7 million, compared to $41.6 million made over the last twelve months. Further, for this
financing, we recently entered into a forward starting interest rate swap arrangement to hedge
approximately 75% of the expected future debt balance beginning in June 2012 at an average rate of
1.27%, which is approximately 400 basis points lower than the existing swap which expires in June
2012.
Our asset base unencumbered by financings has grown to $574.0 million in net book value as of
September 30, 2011. We believe the cash flow contribution for this asset base, together with the
cash flow contribution from our delivered New A330 Aircraft and from Term Financing No. 1, will
provide sufficient amounts of cash flow to meet our liquidity needs and near term growth
objectives.
While the financing structures for our securitizations and certain of our term financings
include liquidity facilities, these liquidity facilities are primarily designed to provide
short-term liquidity to enable the financing vehicles to remain current on principal and interest
payments during periods when the relevant entities incur substantial unanticipated expenditures.
Because these facilities have priority in the payment waterfall and therefore must be repaid
quickly, and because we do not anticipate being required to draw on these facilities to cover
operating expenses, we do not view these liquidity facilities as an important source of liquidity
for us.
As of September 30, 2011, we are in compliance with all applicable covenants in our
financings.
In March 2011, the Company’s Board of Directors authorized the repurchase of up to $60.0
million of the Company’s common shares. In June 2011, the Company’s Board of Directors authorized
an increase in the Company’s share repurchase program by up to an additional $30.0 million in its
common shares, for a total of up to $90.0 million of its common shares in the aggregate. Under the
program, the Company may purchase its common shares from time to time in the open market or in
privately negotiated transactions. The amount and timing of the purchases will depend on a number
of factors including the price and availability of the Company’s common shares, trading volume and
general market conditions. The Company may also from time to time establish a trading plan under
Rule 10b5-1 of the Exchange Act to facilitate purchases of its common shares under this
authorization. Through September 30, 2011, we repurchased approximately 7.6 million shares at a
total cost of $90.0 million including commissions, completing the share purchases to the authorized
amounts.
In addition, as of September 30, 2011, we expect capital expenditures and lessee maintenance
payment draws on our aircraft portfolio during 2011 to be approximately $130.0 million to $140.0
million, excluding purchase obligation payments, and we expect maintenance collections from lessees
on our owned aircraft portfolio to be approximately equal to the expected expenditures and draws
over the next twelve months. There can be no assurance that the capital
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expenditures, our
contributions to maintenance events and lessee maintenance payment draws described above will not
be greater than expected or that our expected maintenance payment collections or disbursements will
equal our current estimates.
We believe that cash on hand, funds generated from operations, maintenance payments received
from lessees, proceeds from contracted aircraft sales and funds we expect to borrow upon delivery
of the New A330 Aircraft we acquire in future periods, including borrowings under export credit
agency-supported loan facilities, will be sufficient to satisfy our liquidity and capital resource
needs over the next twelve months. Our liquidity and capital resource needs
include pre-delivery payments under the Airbus A330 Agreement, payments for buyer furnished
equipment, payments due at delivery of the New A330 Aircraft, payments due under our other aircraft
purchase commitments, required principal and interest payments under our long-term debt facilities,
as well as repayments under our A330 PDP Facility, expected capital expenditures, lessee
maintenance payment draws and lease incentive payments over the next twelve months.
Cash Flows
Operating Activities:
Cash flow from operations was $268.7 million and $244.6 million for the nine months ended
September 30, 2010 and September 30, 2011, respectively. The decrease in cash flow from operations
of approximately $24.1 million for the nine months ended September 30, 2011 versus the same period
in 2010 was primarily a result of:
Investing Activities:
Cash used in investing activities was $320.6 million and $187.8 million for the nine months
ended September 30, 2010 and September 30, 2011, respectively. The decrease in cash flow used in
investing activities of $132.8 million for the nine months ended September 30, 2011 versus the same
period in 2010 was primarily a result of:
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Financing Activities:
Cash provided by financing activities was $220.1 million for the nine months ended September
30, 2010 as compared to cash used of $30.5 million for the nine months ended September 30, 2011.
The net increase in cash flow used in financing activities of $250.6 million for the nine months
ended September 30, 2011 versus the same period in 2010 was a result of:
Debt Obligations
The following table provides a summary of our secured and unsecured debt financings at
September 30, 2011:
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The following securitizations and term debt financing structures include liquidity
facility commitments described in the table below:
Secured Debt Financings:
Term Financing No. 1
In March 2011, we completed the annual maintenance-adjusted appraisal for the Term Financing
No. 1 Portfolio and we have determined that we are in compliance with the loan to value ratio on
the October 2011 payment date.
ECA Term Financings
During 2011, we entered into five twelve-year term loans which are supported by guarantees
from COFACE for the financing of three new Airbus Model A330-200 aircraft totaling $359.4 million
and we repaid in full the outstanding principal balance on one of our ECA term financings in the
amount of $61.6 million.
The obligations outstanding under the ECA Term Financings are secured by, among other things,
a mortgage over the aircraft and a pledge of our ownership interest in our subsidiary company that
leases the aircraft to the operator. The ECA Term Financings documents contain a $500.0 million
minimum net worth covenant for Aircastle Limited, as well as a material adverse change default and
cross default to any other recourse obligation of Aircastle Limited, and other terms and conditions
customary for ECA-supported financings being completed at this time. In addition, Aircastle
Limited has guaranteed the repayment of the ECA Term Financings.
Contractual Obligations
Our contractual obligations consist of principal and interest payments on variable rate
liabilities, interest payments on interest rate derivatives, purchase obligations under the Airbus
A330 Agreement, other aircraft acquisition
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agreements and rent payments pursuant to our office
leases. Total contractual obligations decreased from $3.82 billion at December 31, 2010 to
approximately $3.6 billion at September 30, 2011 due primarily to:
These decreases were partially offset by:
The following table presents our actual contractual obligations and their payment due dates as
of September 30, 2011.
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Capital Expenditures
We make capital expenditures from time to time in connection with improvements made to 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 nine months ended September 30,
2010 and 2011, we incurred a total of $34.2 million and $34.7 million, respectively, of capital
expenditures (including lease incentives) related to the acquisition and improvement of aircraft.
As of September 30, 2011, the weighted average age (by net book value) of our aircraft was
approximately 10.8 years. In general, the costs of operating an aircraft, including maintenance
expenditures, increase with the age of the aircraft. Under our leases, the lessee is 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. At September 30, 2011, we had $327.6 million
of maintenance reserves as a liability on our balance sheet. 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 by the lessees. 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.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2011.
Foreign Currency Risk and Foreign Operations
At September 30, 2011, 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 subsidiary in Ireland and
branch office in Singapore. As of September 30, 2011, 13 of our 76 employees were based in Ireland,
two employees were based in Singapore and one employee was based in the United Kingdom. For the
nine months ended September 30, 2011, expenses, such as payroll and office costs, denominated in
currencies other than the U.S. dollar aggregated approximately $6.9 million in U.S. dollar
equivalents and represented approximately 19.0% of total selling, 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 nine months ended September 30, 2010 and 2011, we incurred insignificant net gains
and losses on foreign currency transactions.
Hedging
The objective of our hedging policy is to adopt a risk averse position with respect to changes
in interest rates. Accordingly, we have entered into a number of interest rate derivatives to hedge
the current and expected future interest rate payments on our variable rate debt. Interest rate
derivatives are agreements in which a series of interest rate cash flows are exchanged with a third
party over a prescribed period. The notional amount on an interest rate derivative is not
exchanged. Our interest rate derivatives typically provide that we make fixed rate payments and receive floating
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rate payments to convert our floating rate borrowings to fixed rate obligations to
better match the largely fixed rate cash flows from our investments in flight equipment.
In September 2011, we entered into a series of interest rate forward contracts with a combined
notional amount of $645.5 million. These forward starting interest rate derivatives are hedging
the variable rate interest payments related to Securitization No. 2 for the period June 2012
through June 2017. These interest rate derivatives were designated at inception as cash flow
hedges for accounting purposes.
We held the following interest rate derivatives as of September 30, 2011:
The weighted average interest pay rate of these derivatives at December 31, 2010 and
September 30, 2011 was 5.01% and 5.03%, respectively.
For the nine months ended September 30, 2011, the amount of loss reclassified from accumulated
other comprehensive income (“OCI”) into interest expense related to net interest settlements on
active interest rate derivatives was $68.3 million. The amount of loss expected to be reclassified
from OCI into interest expense over the next 12 months related to net interest settlements on
active interest rate derivatives is $70.2 million.
Our interest rate derivatives involve counterparty credit risk. As of September 30, 2011, our
interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA,
Citibank Canada NA, HSH Nordbank AG and Wells Fargo Bank NA. All of our counterparties or
guarantors of these counterparties are considered investment grade (senior unsecured ratings of A3
or above) by Moody’s Investors Service. All are also considered investment grade (long-term
foreign issuer ratings of A or above) by Standard and Poor’s, except HSH Nordbank AG, which is not
rated. We do not anticipate that any of these counterparties will fail to meet their obligations.
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In addition to the derivative liability above, another component of the fair value of our
interest rate derivatives is accrued interest. As of September 30, 2011, accrued interest payable
included in accounts payable, accrued expenses,
and other liabilities on our consolidated balance sheet was $5.1 million related to interest
rate derivatives designated as cash flow hedges.
Historically, the Company acquired its aircraft using short term credit facilities and equity.
The short term credit facilities were refinanced by securitizations or term debt facilities
secured by groups of aircraft. The Company completed two securitizations and two term financings
during the period 2006 through 2008. The Company entered into interest rate derivatives to hedge
interest payments on variable rate debt for acquired aircraft as well as aircraft that it expected
to acquire within certain future periods. In conjunction with its financing strategy, the Company
used interest rate derivatives for periods ranging from 5 to 10 years to fix the interest rates on
the variable rate debt that it incurred to acquire aircraft in anticipation of the expected
securitization or term debt re-financings.
At the time of each re-financing, the initial interest rate derivatives were terminated and
new interest rate derivatives were executed as required by each specific debt financing. At the
time of each interest rate derivative termination, certain interest rate derivatives were in a gain
position and others were in a loss position. Since the hedged interest payments for the variable
rate debt associated with each terminated interest rate derivative were probable of occurring, the
gain or loss was deferred in accumulated other comprehensive income (loss) and is being amortized
into interest expense over the relevant period for each interest rate derivative.
Prior to the securitizations and term debt financings, our interest rate derivatives typically
required us to post cash collateral to the counterparty when the value of the interest rate
derivative exceeded a defined threshold. When the interest rate derivatives were terminated and
became part of a larger aircraft portfolio financing, there were no cash collateral posting
requirements associated with the new interest rate derivative. As of September 30, 2011, we did not
have any cash collateral pledged under our interest rate derivatives, nor do we have any existing
agreements that require cash collateral postings.
The following table summarizes the deferred (gains) losses and related amortization into
interest expense for our terminated interest rate derivative contracts for the nine months ended
September 30, 2010 and 2011:
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For the nine months ended September 30, 2011, the amount of deferred net loss
(including $3.6 million of accelerated amortization) reclassified from OCI into interest expense
related to our terminated interest rate derivatives was $13.9 million. The amount of deferred net
loss expected to be reclassified from OCI into interest expense over the next 12 months related to
our terminated interest rate derivatives is $18.1 million. Over the next twelve months, we expect
the amortization of deferred net losses to increase as the gains on Securitizations No. 1 and No. 2
are either fully amortized or will be in the near future and the losses on the forward starting
A330 swaps begin to amortize as we take delivery of these aircraft.
The following table summarizes amounts charged directly to the consolidated statement of
income for the three and nine months ended September 30, 2010 and 2011, respectively, related to
our interest rate derivatives:
Management’s Use of 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-US 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.
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The table below shows the reconciliation of net income to EBITDA for the three and nine months
ended September 30, 2010 and 2011, respectively.
Management’s Use of Adjusted Net Income and Adjusted Net Income plus Depreciation and
Amortization
Management believes that Adjusted Net Income (“ANI”) and Adjusted Net Income plus Depreciation
and Amortization (“ANIDA”), when viewed in conjunction with the Company’s results under US GAAP and
the below reconciliation, provide useful information about operating and period-over-period
performance, and provide 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 and gains or losses related to flight equipment and debt
investments. Additionally, management believes that ANIDA provides investors with an additional
metric to enhance their understanding of the factors and trends affecting our ongoing cash earnings
from which capital investments are made, debt is serviced, and dividends are paid.
The table below shows the reconciliation of net income to ANI and ANIDA for the three
and nine months ended September 30, 2010 and 2011, respectively.
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Limitations of EBITDA, ANI and ANIDA
An investor or potential investor may find EBITDA, ANI and ANIDA important measures in
evaluating our performance, results of operations and financial position. We use these non-US GAAP
measures to supplement our US GAAP results in order to provide a more complete understanding of the
factors and trends affecting our business.
EBITDA, ANI and ANIDA have limitations as analytical tools and should not be viewed in
isolation or as substitutes for US GAAP measures of earnings. Material limitations in making the
adjustments to our earnings to calculate EBITDA, ANI and ANIDA, and using these non-US GAAP
measures as compared to US GAAP net income, income from continuing operations and cash flows
provided by or used in operations, include:
EBITDA, ANI, and ANIDA are not alternatives to net income, income from operations or cash
flows provided by or used in operations as calculated and presented in accordance with US GAAP. You
should not rely on these non-US GAAP measures as a substitute for any such US GAAP financial
measure. We strongly urge you to review the reconciliations to US GAAP net income, along with our
consolidated financial statements included elsewhere in this Quarterly Report. We also strongly
urge you to not rely on any single financial measure to evaluate our business. In addition, because
EBITDA, ANI and ANIDA are not measures of financial performance under US GAAP and are susceptible
to varying calculations, EBITDA, ANI and ANIDA, as presented in this Quarterly Report, may differ
from and may not be comparable to similarly titled measures used by other companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate 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. 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.
Changes in interest rates may also impact our net book value 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.
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The relationship between spreads on derivative instruments may vary from time to time,
resulting in a net aggregate book value increase or decrease. Changes in the general level of
interest rates can also affect our ability to acquire new investments and our ability to realize
gains from the settlement of such assets.
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. We changed our interest rate risk disclosure to an
alternative that provides a more meaningful analysis of our interest rate risk. 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 minimum contracted rental and interest expense impacts on
our financial instruments and our five variable rate leases 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.
A hypothetical 100-basis point increase/decrease in our variable interest rates would
increase/decrease the minimum contracted rentals on our portfolio as of September 30, 2011 by $0.8
million and $0.4 million, respectively, over the next twelve months. As of September 30, 2011, a
hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings
would result in an interest expense increase/decrease of $1.0 million and $0.6 million,
respectively, net of amounts received from our interest rate derivatives, over the next twelve
months.
Item 4. 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 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, or CEO, and Chief Financial Officer, or 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 September 30, 2011.
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 September 30, 2011.
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 September 30, 2011 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
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PART II. — OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any material legal or adverse regulatory proceedings.
Item 1A. Risk Factors.
There have been no material changes to the disclosure related to the risk factors described in
our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
During the third quarter of 2011, we purchased our common shares as follows:
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Item 6. Exhibits.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 8, 2011
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