Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically 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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
As of October 31, 2012, there were 69,743,929 outstanding shares of the registrant’s common shares, par value $0.01 per share.
Flight equipment held for lease, net of accumulated depreciation of $981,932 and $1,228,052
4,387,986
4,532,445
Net investment in finance leases
—
121,533
Aircraft purchase deposits and progress payments
89,806
4,802
Other assets
90,047
162,042
Total assets
$
5,224,459
$
5,268,952
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Borrowings from secured financings (including borrowings of ACS Ireland VIEs of $295,952 and $217,541, respectively)
$
2,535,759
$
1,828,883
Borrowings from unsecured financings
450,757
1,250,671
Accounts payable, accrued expenses and other liabilities
105,432
108,954
Lease rentals received in advance
46,105
51,666
Liquidity facility
110,000
107,000
Security deposits
83,037
87,216
Maintenance payments
347,122
372,555
Fair value of derivative liabilities
141,639
67,950
Total liabilities
3,819,851
3,874,895
Commitments and Contingencies
SHAREHOLDERS’ EQUITY
Preference shares, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding
—
—
Common shares, $.01 par value, 250,000,000 shares authorized, 72,258,472 shares issued and outstanding at December 31, 2011; and 69,743,929 shares issued and outstanding at September 30, 2012
723
697
Additional paid-in capital
1,400,090
1,373,033
Retained earnings
191,476
162,397
Accumulated other comprehensive loss
(187,681
)
(142,070
)
Total shareholders’ equity
1,404,608
1,394,057
Total liabilities and shareholders’ equity
$
5,224,459
$
5,268,952
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Amortization of lease premiums, discounts and lease incentives
(4,709
)
(6,838
)
(10,841
)
(6,392
)
Maintenance revenue
—
10,944
25,006
37,126
Total lease rentals
141,181
163,653
444,526
496,147
Other revenue
326
9,213
3,733
13,815
Total revenues
141,507
172,866
448,259
509,962
Expenses:
Depreciation
60,132
68,413
178,299
200,024
Interest, net
48,872
54,101
150,384
167,203
Selling, general and administrative (including non-cash share based payment expense of $1,619 and $1,128 for the three months ended, and $4,692 and $3,233 for the nine months ended September 30, 2011 and 2012, respectively)
12,200
11,907
36,309
36,616
Impairment of Aircraft
1,236
78,676
6,436
88,787
Maintenance and other costs
4,045
3,926
10,944
11,943
Total expenses
126,485
217,023
382,372
504,573
Other income (expense):
Gain on sale of flight equipment
8,997
11
28,958
3,062
Other
(117
)
—
(153
)
604
Total other income (expense)
8,880
11
28,805
3,666
Income (loss) from continuing operations before income taxes
23,902
(44,146
)
94,692
9,055
Income tax provision
1,237
1,701
6,041
5,976
Net income (loss)
$
22,665
$
(45,847
)
$
88,651
$
3,079
Earnings (loss) per common share — Basic:
Net income (loss) per share
$
0.31
$
(0.65
)
$
1.15
$
0.04
Earnings (loss) per common share — Diluted:
Net income (loss) per share
$
0.31
$
(0.65
)
$
1.15
$
0.04
Dividends declared per share
$
0.125
$
0.150
$
0.350
$
0.450
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2011
2012
2011
2012
Net income (loss)
$
22,665
$
(45,847
)
$
88,651
$
3,079
Other comprehensive income, net of tax:
Net change in fair value of derivatives, net of tax expense of $48 and $37 for the three months ended, and $576 and $465 for the nine months ended September 30, 2011 and 2012, respectively
(2,967
)
1,426
21,079
23,708
Net derivative loss reclassified into earnings
5,717
8,966
13,943
21,903
Other comprehensive income
2,750
10,392
35,022
45,611
Total comprehensive income (loss)
$
25,415
$
(35,455
)
$
123,673
$
48,690
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including leasing, managing and selling commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments.
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, 2011.
For the year ended December 31, 2011, we revised the presentation in our consolidated statements of cash flows to reflect the net change in restricted cash and cash equivalents from security deposits and maintenance payments as financing activities. For the nine months ended September 30, 2011, our consolidated statements of cash flows reflected the net change in restricted cash and cash equivalents from security deposits and maintenance payments as cash flows from operating activities. Therefore, the amounts included for the nine months ended September 30, 2011 have been reclassified to conform to the current period presentation.
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, 2012 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.
Effective January 1, 2012, the Company adopted Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) 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 US GAAP and IFRS. The amendments in this update change the wording used to describe the requirements in US GAAP for measuring fair value
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
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 did not have a material impact on the Company’s consolidated financial statements.
Also effective January 1, 2012, the Company adopted ASU 2011-12 (“ASU 2011-12”) Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU defers the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The FASB expects to complete a project to reconsider the presentation requirement for reclassification adjustments in 2012. The deferral allows the FASB time to further research the matter. ASU 2011-12 is effective for interim and annual reporting periods beginning after December 15, 2011 and should be applied retrospectively. The adoption of ASU 2011-12 did not have a material impact on the Company’s consolidated financial statements.
Risk and Uncertainties
In the normal course of business, Aircastle encounters several significant types of economic risk including credit, market, aviation industry and capital market risks. Credit risk is the risk of a lessee’s inability or unwillingness to make contractually required payments and to fulfill its other contractual obligations. Market risk reflects the change in the value of derivatives and financings due to changes in interest rate spreads or other market factors, including the value of collateral underlying derivatives and financings. Aviation industry risk is the risk of a downturn in the commercial aviation industry which could adversely impact a lessee’s ability to make payments, increase the risk of unscheduled lease terminations and depress lease rates and the value of the Company’s aircraft. Capital market risk is the risk that the Company is unable to obtain capital at reasonable rates to fund the growth of our business or to refinance existing debt facilities.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.
Investment in Finance Leases
If a lease meets specific criteria at the inception of a new lease or at any lease modification date, we recognize the lease as a Net investment in finance lease on our Consolidated Balance Sheets. The net investment in finance leases consists of lease receivables, less the unearned income, plus the estimated unguaranteed residual value of the leased flight equipment at the lease end date. The unearned income is recognized as Other revenue in our Consolidated Statements of Income over the lease term in a manner that produces a constant rate of return on the Net investment in finance lease.
Collectability of finance leases is evaluated periodically on an individual customer level. The evaluation of the collectability of the finance leases considers the credit of the lessee and the value of the underlying aircraft.
Recent Unadopted Accounting Pronouncements
In August 2010, the 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. In June 2012, the FASB decided that leases would be classified as either leases of property or leases of assets other than property. Leases of property will
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
continue to use operating lease accounting. Leases of other than property would use the receivable residual approach. Under the receivable residual approach, 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. The FASB completed all of its deliberations and decided to re-expose the Lease ED in the first quarter of 2013. 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.
Note 2. Fair Value Measurements
Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:
•
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
•
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.
The valuation techniques that may be used to measure fair value are as follows:
•
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
•
The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
•
The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The following tables set forth our financial assets and liabilities as of December 31, 2011 and September 30, 2012 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Fair Value Measurements at December 31, 2011 Using Fair Value Hierarchy
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Fair Value Measurements at September 30, 2012 Using Fair Value Hierarchy
Fair Value as of September 30, 2012
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Valuation
Technique
Assets:
Cash and cash equivalents
$
223,959
$
223,959
$
—
$
—
Market
Restricted cash and cash equivalents
109,375
109,375
—
—
Market
Total
$
333,334
$
333,334
$
—
$
—
Liabilities:
Derivative liabilities
$
67,950
$
—
$
67,950
$
—
Income
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.
On April 4, 2012, the interest rate derivatives included in Level 3 were terminated when the related hedged debt was repaid with proceeds from the Senior Notes due 2017 and the Senior Notes due 2020 (See Note 6. Securitizations and Term Debt Financings — Unsecured Debt Financings below).
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, 2011 and 2012, respectively:
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Derivative Liabilities
Three Months Ended September 30,
Nine Months Ended September 30,
2012
2012
Balance at beginning of period
$
—
$
(56,229
)
Total gains/(losses), net:
Included in other income (expense)
—
599
Included in interest expense
—
73
Included in other comprehensive income
—
4,800
Settlements
—
50,757
Balance at end of period
$
—
$
—
For the three and nine months ended September 30, 2011 , we had no transfers into or out of Level 3 and we had no purchases, issuances, sales or settlements of Level 3 items. For the three and nine months ended September 30, 2012, we had no transfers into or out of Level 3; however in 2012 we did terminate all Level 3 interest rate derivatives.
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 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 third quarter of 2011, we recorded an additional impairment of $1,236 related to this aircraft triggered by our decision to sell the aircraft, whereupon we adjusted the net book value of the aircraft to the estimated disposition value. During the three months ended June 30, 2011, we recorded $2,267 of maintenance revenue and reversed $878 of lease incentive accruals related to the former lessee of this aircraft.
During the second quarter of 2012, we impaired two aircraft, one Boeing Model 757-200 aircraft that we sold for less than its net book value and one Boeing Model 767-300ER aircraft which was returned to us following its scheduled lease expiration and which failed its recoverability assessment. For these two aircraft, we recorded impairment charges of $10,111, and we recorded $2,447 of maintenance revenue for the three months ended June 30, 2012.
As more fully described in our Annual Report on Form 10-K for the year ended December 31, 2011, 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 2012. Management develops the assumptions used in the recoverability assessment based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors. In particular, many of our assumptions were driven primarily by weak market demand for older technology narrow- and wide-body model aircraft caused by slowing global economic growth rates, declining business confidence levels and higher fuel prices. In the case of Boeing 737 “Classic” aircraft, production rate increases by both Boeing and Airbus for newer generation narrowbody aircraft, coupled with slowing demand growth, is enabling more rapid replacement of earlier generation aircraft. Storage levels for these aircraft types have increased during the last twelve months. While we believe that the estimates and related assumptions used in the recoverability assessment are appropriate, actual results could differ from those estimates.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Following completion of the recoverability analysis, we took the following actions:
•
We determined that the cash flows expected to be generated by certain of our aircraft did not support our carrying values and therefore these aircraft did not pass our recoverability assessment. As a result, we impaired four Boeing Model 767-300ER aircraft, eight Boeing 737 “Classic” aircraft, and one Airbus Model A310-300F freighter aircraft and recorded aggregate impairment charges of $67,370 to write these aircraft down to current market values. For some of these aircraft we also shortened the expected lives and/or reduced the residual values.
•
For seven other aircraft that passed the recoverability assessment, we took the following steps:
◦
Shortened the expected lives of one Airbus A330-300 aircraft, five Boeing Model 767-300ER aircraft and one McDonnell Douglas MD-11SF aircraft, primarily to reflect the specific maintenance schedule that we expect for the airframe and related engines. With weaker expected market demand for these aircraft, we believe significant further investments in these aircraft would not be justified, so we adjusted the remaining lives of these aircraft to end prior to the next expected major maintenance event and/or
◦
In the case of Boeing Model 767-300ER aircraft, reduced the residual value to reflect our current estimates. Again, due to market conditions and the change in expected retirement rates for aircraft with similar engines and other components, we determined that scrap values were likely to fall below our previous residual expectations.
During the third quarter of 2012, we elected not to invest in engine performance restoration maintenance visits for two Airbus Model A320-200 “Classic” aircraft with older technology engines and instead agreed with the lessee to terminate the leases prior to scheduled expiry and pursue part-out sales. Following agreement with our customer to terminate the leases, these aircraft failed the recoverability assessment and we recorded impairment charges of $11,306 and we recorded $10,159 of maintenance revenue and reversed $1,157 of lease incentives for the three months ended September 30, 2012, for these two aircraft.
Reducing the expected lives or anticipated residual values for aircraft in our fleet will accelerate the future depreciation on these aircraft, which will be partly offset by reduced depreciation on aircraft that we impaired. As described above, these changes in depreciation going forward will affect 22 aircraft. For these 22 aircraft, our depreciation expense will increase by approximately $838 in the fourth quarter of 2012, as compared to the three months ended September 30, 2012. We estimate an annual increase in depreciation for these 22 aircraft for the year ended December 31, 2013, of approximately $1,442 for these aircraft, although future depreciation is expected to decrease as these aircraft reach the end of their holding periods.
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. In addition our lessees may face financial difficulties and return aircraft to us prior to the contractual lease expiry dates. As a result, our cash flow assumptions may change and future impairment charges may be required.
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 ECA term financings and bank financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
The carrying amounts and fair values of our financial instruments at December 31, 2011 and September 30, 2012 are as follows:
December 31, 2011
September 30, 2012
Carrying Amount
of Asset
(Liability)
Fair Value
of Asset
(Liability)
Carrying Amount
of Asset
(Liability)
Fair Value
of Asset
(Liability)
Securitizations and term debt financings
$
(1,873,652
)
$
(1,681,023
)
$
(1,130,965
)
$
(999,160
)
ECA term financings
(536,107
)
(524,373
)
(581,823
)
(603,439
)
Bank financings
(126,000
)
(126,000
)
(116,095
)
(120,154
)
Senior Notes
(450,757
)
(482,625
)
(1,250,671
)
(1,390,675
)
All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.
Note 3. 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, 2012 were as follows:
Year Ending December 31,
Amount
Remainder of 2012
$
152,159
2013
569,476
2014
477,385
2015
417,623
2016
356,038
2017
246,324
Thereafter
485,645
Total
$
2,704,650
Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
Region
2011
2012
2011
2012
Europe
44
%
37
%
45
%
40
%
Asia and Pacific
25
%
33
%
24
%
30
%
North America
12
%
12
%
13
%
12
%
Latin America
7
%
7
%
8
%
7
%
Middle East and Africa
12
%
11
%
10
%
11
%
Total
100
%
100
%
100
%
100
%
The classification of regions in the tables above and in 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, 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 three months ended September 30, 2012, one customer accounted for 9% of lease rental revenue and four additional customers accounted for a combined 24% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
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. For the nine months ended September 30, 2012, one customer accounted for 10% of lease rental revenue and four additional customers accounted for a combined 25% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) based on each lessee’s principal place of business:
Three Months Ended September 30,
2011
2012
Country
Revenue
Percent of
Total
Revenue
Number
of
Lessees
Revenue
Percent of
Total
Revenue
Number
of
Lessees
China
$
18,431
13
%
4
$
19,303
11
%
4
United States
14,844
10
%
4
17,685
10
%
6
Russia (1)
—
—
%
—
17,472
10
%
8
(1) Total revenue attributable to Russia was less than 10% for the three months ended September 30, 2011.
Nine Months Ended September 30,
2011
2012
Country
Revenue
Percent of
Total
Revenue
Number
of
Lessees
Revenue
Percent of
Total
Revenue
Number
of
Lessees
United States
$
48,261
11
%
4
$
61,366
12
%
6
China
50,832
11
%
5
56,160
11
%
4
Russia(1)
—
—
%
—
50,280
10
%
8
(1) Total revenue attributable to Russia was less than 10% for the nine months ended September 30, 2011.
Geographic concentration of net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance leases) was as follows:
December 31, 2011
September 30, 2012
Region
Number
of
Aircraft
Net Book
Value %
Number
of
Aircraft
Net Book
Value %
Europe
66
41
%
70
37
%
Asia and Pacific
39
28
%
49
33
%
North America
16
9
%
18
11
%
Latin America
10
6
%
11
6
%
Middle East and Africa
9
15
%
8
13
%
Off-lease
4
(1)
1
%
1
(2)
—
%
Total
144
100
%
157
100
%
(1)
Includes two Boeing Model 747-400 aircraft being converted from passenger to freighter configuration, one of these aircraft was delivered to a customer in North America in January 2012 and one was delivered to a customer in North America in April 2012; one Airbus Model A320-200 aircraft which was delivered to a customer in Europe in March, 2012, and one Boeing Model 737-400 aircraft which was sold in January 2012.
(2)
One Boeing Model 767-300ER aircraft that we are marketing for lease or sale.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance leases) attributable to individual countries representing at least 10% of net book value of flight equipment based on each lessee’s principal place of business as of:
December 31, 2011
September 30, 2012
Country
Net Book
Value
Net Book
Value %
Number of
Lessees
Net Book
Value
Net Book
Value %
Number of
Lessees
China
$
526,008
12
%
4
$
521,715
11
%
4
Russia(1)
453,695
10
%
8
—
—
%
—
United States (2)
—
—
%
—
492,530
11
%
5
(1) The net book value of flight equipment attributable to Russia was less than 10% as of September 30, 2012.
(2) The net book value of flight equipment attributable to the United States was less than 10% as of December 31, 2011.
At December 31, 2011 and September 30, 2012, the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $28,412 and $20,189, respectively.
Note 4. Net Investment in Finance Leases
At September 30, 2012, our net investment in finance leases represents six aircraft leased to a customer in Germany and three aircraft leased to a customer in the United States. The net book value of the three aircraft leased to a customer in the United States was transferred from flight equipment held for lease to net investment in finance leases on our consolidated balance sheet during the third quarter of 2012. The following table lists the components of our net investment in finance leases at September 30, 2012:
Amount
Total lease payments to be received
$
134,519
Less: Unearned income
(78,110
)
Estimated residual values of leased flight equipment (unguaranteed)
65,124
Net investment in finance leases
$
121,533
At September 30, 2012, minimum future lease payments on finance leases are as follows:
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Note 5. 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 21 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. ACS Bermuda and ACS Bermuda 2 are collectively referred to as the “ACS Bermuda Group.”
Aircastle is the primary beneficiary of ACS Ireland and ACS Ireland 2 (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. At September 30, 2012, the assets of the two VIEs include 12 aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1 and Securitization No. 2.
The combined assets of the ACS Ireland VIEs as of September 30, 2012 are $353,600. The combined liabilities of the ACS Ireland VIEs, net of $72,068 Class E-1 Securities held by the Company, which is eliminated in consolidation, as of September 30, 2012 are $327,127.
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 ten 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 ten 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, 2012, Aircastle had nine 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, 2012 were $739,689, are included in our flight equipment held for lease. The consolidated debt outstanding of the Air Knight VIEs as of September 30, 2012 is $581,823.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Note 6. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings were as follows:
At December 31, 2011
At September 30, 2012
Debt Obligation
Outstanding
Borrowings
Outstanding
Borrowings
Interest Rate(1)
Final Stated
Maturity(2)
Secured Debt Financings:
Securitization No. 1
$
387,124
$
323,266
0.49%
06/20/31
Securitization No. 2
891,452
807,699
0.54%
06/14/37
Term Financing No. 1
595,076
—
—%
N/A
ECA Term Financings
536,107
581,823
2.65% to 3.96%
12/03/21 to 04/03/24
Bank Financings
126,000
116,095
4.22% to 4.57%
09/15/15 to 10/26/17
Total secured debt financings
2,535,759
1,828,883
Unsecured Debt Financings:
Senior Notes due 2017
—
500,000
6.75%
04/15/17
Senior Notes due 2018
450,757
450,671
9.75%
08/01/18
Senior Notes due 2020
—
300,000
7.625%
04/15/20
2010 Revolving Credit Facility
—
—
N/A
09/28/13
Total unsecured debt financings
450,757
1,250,671
Total secured and unsecured debt financings
$
2,986,516
$
3,079,554
(1)
Reflects floating rate in effect at the applicable reset date plus the margin except for the ECA Term Financings, Bank Financings and the Senior Notes due 2017, 2018 and 2020, which are fixed rate.
(2)
For Securitization No. 1 and Securitization No. 2, all cash flows available after expenses and interest is applied to debt amortization.
The following securitizations include liquidity facility commitments described in the table below:
Available Liquidity
Facility
Liquidity Facility Provider
December 31, 2011
September 30, 2012
Unused
Fee
Interest Rate
on any Advances
Securitization No. 1
Crédit Agricole Corporate and Investment Bank
$
42,000
$
42,000
0.45%
1M Libor + 1.00
Securitization No. 2
HSH Nordbank AG
66,859
65,000
0.50%
1M Libor + 0.75
Senior Notes due 2017 and Senior Notes due 2020
In April 2012, we closed an offering of $500,000 aggregate principal amount of 6.75% Senior Notes due 2017 (the “Senior Notes due 2017”) and $300,000 aggregate principal amount of 7.625% Senior Notes due 2020 (the “Senior Notes due 2020”). We used the net proceeds of the private placement to repay outstanding indebtedness under our Term Financing No. 1 and the termination of the associated interest rate derivatives, and for general corporate purposes, including the purchase of aviation assets.
As of September 30, 2012, we are in compliance with all applicable covenants in all of our financings.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Note 7. Dividends
The following table sets forth the quarterly dividends declared by our board of directors for the periods covered in this report:
Declaration Date
Dividend
per Common
Share
Aggregate
Dividend
Amount
Record Date
Payment Date
December 6, 2010
$
0.100
$
7,964
December 31, 2010
January 14, 2011
March 8, 2011
$
0.100
$
7,857
March 31, 2011
April 15, 2011
June 27, 2011
$
0.125
$
9,364
July 7, 2011
July 15, 2011
September 14, 2011
$
0.125
$
9,035
September 30, 2011
October 14, 2011
November 7, 2011
$
0.150
$
10,839
November 30, 2011
December 15, 2011
February 17, 2012
$
0.150
$
10,865
February 29, 2012
March 15, 2012
May 2, 2012
$
0.150
$
10,847
May 31, 2012
June 15, 2012
August 1, 2012
$
0.150
$
10,464
August 31, 2012
September 14, 2012
Note 8. Shareholders' Equity and Share Based Payment
On May 24, 2012, the Company's Board of Directors authorized the repurchase of up to $50,000 of the Company's common shares. 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, 2012, we repurchased 2,500,002 shares from Fortress Investment Group and certain of its affiliates at a total cost of $28,500 under the repurchase program and we paid no commissions on this transaction.
On November 5, 2012, the Company's Board of Directors authorized an increase in the Company's share repurchase program by up to an additional $28,500 of its common shares, bringing the total back up to $50,000 of its common shares in the aggregate.
Note 9. Earnings Per Share
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic earnings per share calculations using the two-class method. We use the more dilutive of the two-class method or the treasury stock method to calculate diluted earnings per share. 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:
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Three Months Ended September 30,
Nine Months Ended September 30,
2011
2012
2011
2012
Weighted-average shares:
Common shares outstanding
72,950,361
70,349,265
75,791,005
71,248,765
Restricted common shares
970,559
571,326
965,655
596,749
Total weighted-average shares
73,920,920
70,920,591
76,756,660
71,845,514
Percentage of weighted-average shares:
Common shares outstanding
98.69
%
99.19
%
98.74
%
99.17
%
Restricted common shares
1.31
%
0.81
%
1.26
%
0.83
%
Total
100.00
%
100.00
%
100.00
%
100.00
%
For the three months ended September 30, 2012, the treasury stock method was used in calculating diluted earnings per share as it resulted in a more dilutive earnings per share amount.
The calculations of both basic and diluted earnings per share are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2011
2012
2011
2012
Earnings (loss) per share – Basic:
Net income (loss)
$
22,665
$
(45,847
)
$
88,651
$
3,079
Less: Distributed and undistributed earnings allocated to restricted common shares (a)
(298
)
369
(1,115
)
(25
)
Earnings (loss) available to common shareholders – Basic
$
22,367
$
(45,478
)
$
87,536
$
3,054
Weighted-average common shares outstanding – Basic
72,950,361
70,349,265
75,791,005
71,248,765
Earnings (loss) per common share – Basic
$
0.31
$
(0.65
)
$
1.15
$
0.04
Earnings (loss) per share – Diluted:
Net income (loss)
$
22,665
$
(45,847
)
$
88,651
$
3,079
Less: Distributed and undistributed earnings allocated to restricted common shares(a)
(298
)
369
(1,115
)
(25
)
Earnings (loss) available to common shareholders – Diluted
$
22,367
$
(45,478
)
$
87,536
$
3,054
Weighted-average common shares outstanding – Basic
72,950,361
70,349,265
75,791,005
71,248,765
Effect of dilutive shares
—
(b)
—
(b)
—
(b)
—
(b)
Weighted-average common shares outstanding – Diluted
72,950,361
70,349,265
75,791,005
71,248,765
Earnings (loss) per common share – Diluted
$
0.31
$
(0.65
)
$
1.15
$
0.04
(a)
For the three months ended September 30, 2011 and 2012, distributed and undistributed earnings to restricted shares is 1.31% and 0.81%, respectively, of net income. For the nine months ended September 30, 2011 and 2012, distributed and undistributed earnings to restricted share is 1.26% and 0.83%, respectively. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(b)
For the three and nine months ended September 30, 2011 and 2012, we have no dilutive shares.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Note 10. 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. 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 (loss) from continuing operations before income taxes for the three and nine months ended September 30, 2011 and 2012 were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2011
2012
2011
2012
U.S. operations
$
372
$
572
$
1,195
$
1,253
Non-U.S. operations
23,530
(44,718
)
93,497
7,802
Total
$
23,902
$
(44,146
)
$
94,692
$
9,055
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.
The consolidated income tax expense for the three and nine months ended September 30, 2011 and 2012 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2011 and 2012, respectively.
The Company's effective tax rates for the three and nine months ended September 30, 2011 were 5.2% and 6.4%, respectively, compared to (3.9)% and 66.0% for the three and nine months ended September 30, 2012, respectively. Movements in the effective tax rates are due primarily to changes in the proportion of the Company's earnings in taxable and non-tax jurisdictions. Because the geographic mix of pre-tax profits and losses in interim periods may not be reflective of full year results, this distorts our interim period effective tax rate. Additionally, the three and nine months ended September 30, 2012 includes a discrete item in the amount of $78,676 related to the impairment of aircraft.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following:
Three Months Ended September 30,
Nine Months Ended September 30,
2011
2012
2011
2012
Notional U.S. federal income tax expense (benefit) at the statutory rate
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Note 11. Interest, Net
The following table shows the components of interest, net:
Three Months Ended September 30,
Nine Months Ended September 30,
2011
2012
2011
2012
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities (a)
$
42,066
$
41,373
$
129,757
$
135,140
Hedge ineffectiveness (gains) losses
(118
)
1,474
(716
)
1,840
Amortization of interest rate derivatives related to deferred losses (b)
5,717
8,966
13,943
21,903
Amortization of deferred financing fees (c)
2,977
2,391
12,394
10,082
Interest Expense
50,642
54,204
155,378
168,965
Less interest income
(95
)
(103
)
(355
)
(447
)
Less capitalized interest
(1,675
)
—
(4,639
)
(1,315
)
Interest, net
$
48,872
$
54,101
$
150,384
$
167,203
(a)
For the nine months ended September 30, 2011, includes the loan termination fee of $3,196 related to an aircraft sold in June, 2011.
(b)
For the three months ended September 30, 2011, includes accelerated amortization of deferred hedge losses in the amount of $1,704 related to an aircraft sold in September 2011. For the nine months ended September 30, 2011, includes accelerated amortization of deferred hedge losses in the amount of $3,543 related to two aircraft sold in 2011.
(c)
For the nine months ended September 30, 2011, includes the write-off of deferred financing fees of $2,456 related to an aircraft sold in June, 2011. For the nine months ended September 30, 2012, includes the write-off of deferred financing fees of $2,914 related to the pay-off of Term Financing No. 1.
Note 12. Commitments and Contingencies
At September 30, 2012, we had commitments to acquire three aircraft in the fourth quarter of 2012 for $168,100. We no longer have any commitments to convert passenger aircraft to cargo aircraft.
Note 13. 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.
We held the following interest rate derivatives as of September 30, 2012:
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Derivative Liabilities
Hedged Item
Current
Notional
Amount
Effective
Date
Maturity
Date
Future
Maximum
Notional
Amount
Floating
Rate
Fixed
Rate
Balance Sheet
Location
Fair
Value
Interest rate derivatives designated as cash flow hedges:
Securitization No. 1
$
343,972
Jun-06
Jun-16
$
343,972
1M LIBOR + 0.27%
5.78%
Fair value of derivative liabilities
$
54,526
Securitization No. 2
611,530
Jun-12
Jun-17
611,530
1M LIBOR
1.26% to 1.28%
Fair value of derivative liabilities
13,424
Total interest rate derivatives designated as cash flow hedges
$
955,502
$
955,502
$
67,950
Four interest rate derivatives hedging Securitization No. 2 matured on June 8, 2012. The two interest rate derivatives hedging Term Financing No. 1 were terminated on April 4, 2012 resulting in a net deferred loss of $50,429 which is being amortized into interest expense using the interest rate method.
The weighted average interest pay rates of these derivatives at December 31, 2011 and September 30, 2012 were 5.03% and 2.89%, respectively.
For the nine months ended September 30, 2012, 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 $40,569. 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 $21,290.
Our interest rate derivatives involve counterparty credit risk. As of September 30, 2012, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, and Wells Fargo Bank NA. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of Baa2 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. 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, 2012, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $1,080 related to interest rate derivatives designated as cash flow hedges.
Following is the effect of interest rate derivatives on the statement of financial performance for the nine months ended September 30, 2012:
Effective Portion
Ineffective Portion
Derivatives in
ASC 815
Cash Flow
Hedging
Relationships
Amount of
Gain or (Loss)
Recognized in
OCI on
Derivative
(a)
Location of
Gain or (Loss)
Reclassified from
Accumulated
OCI into Income
Amount of
Gain or (Loss)
Reclassified from
Accumulated
OCI into Income (b)
Location of
Gain or (Loss)
Recognized in
Income on Derivative
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
(c)
Interest rate derivatives
$(16,059)
Interest expense
$(61,670)
Interest expense
$(3,754)
(a)
This represents the change in fair market value of our interest rate derivatives since year end, net of taxes, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives for each of the nine months ended September 30, 2012.
(b)
This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest rate derivatives for each of the nine months ended September 30, 2012 plus any effective amortization of net deferred interest rate derivative losses.
(c)
This represents both realized and unrealized ineffectiveness incurred during the nine months ended September 30, 2012.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2012
Derivatives Not Designated as Hedging Instruments under ASC 815
Location of Gain
or (Loss)
Recognized in Income
On Derivative
Amount of Gain
or (Loss)
Recognized in Income on
Derivative
Interest rate derivatives
Other income (expense)
$
599
On an ongoing basis, terminated interest rate derivative notionals are evaluated against debt forecasts. To the extent that interest payments are deemed remote to occur, deferred gains or losses are accelerated into interest expense as applicable.
For the nine months ended September 30, 2012, the amount of deferred net loss reclassified from OCI into interest expense related to our terminated interest rate derivatives was $21,903. 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 $31,095 of which $17,887 relates to Term Financing No. 1 interest rate derivatives terminated in 2012, $4,094 relates to Term Financing No. 1 derivatives terminated in 2008, $8,559 relates to ECA Term Financings for New A330 Aircraft and $555 relates to other financings.
The following table summarizes amounts charged directly to the consolidated statement of income for the three and nine months ended September 30, 2011 and 2012, respectively, related to our interest rate derivatives:
