Aircastle LTD 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under Item 1A. — “Risk Factors” and elsewhere in this Annual Report. Please see “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our consolidated financial statements are prepared in accordance with U.S. GAAP and, unless otherwise indicated, the other financial information contained in this Annual Report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this Annual Report are to, and all monetary amounts in this Annual Report are presented in, U.S. dollars. OVERVIEW Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. We are a leading secondary market investor that sources aircraft through various acquisition channels that primarily include other aircraft lessors, airlines through purchase-leaseback transactions, financial institutions and other aircraft owners, and aircraft manufacturers. We have significant experience in successfully managing aircraft throughout their life cycle, including lease and technical management, aircraft redeliveries, transitions, and sales or disposals. We sell aircraft and engine assets, either with a lease attached or on a part-out basis, with the aim of generating profits and reinvesting proceeds. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. As of February 29, 2024, we owned and managed on behalf of our joint venture 252 aircraft leased to 75 lessees located in 43 countries. The Net Book Value of our flight equipment was $7.2 billion as February 29, 2024, up 9% from $6.6 billion as of February 28, 2023. The weighted average age of our fleet was 9.3 years and the weighted average remaining lease term was 5.4 years. The weighted average utilization rate of our fleet was 98% for the year ended February 29, 2024, which improved to 99% during the second half of 2023. Our revenues, net income and Adjusted EBITDA were $855.4 million, $83.3 million, and $759.5 million for the year ended February 29, 2024, respectively, and $796.0 million, $62.8 million and $732.3 million for the year ended February 28, 2023, respectively. The Company’s financial performance reflects the continued expansion of global air traffic and strong demand for our aircraft through lease extension requests, primarily due to OEM production issues and delivery delays, as well as the improved financial health of our airline customers. Our financial results are also partly driven by end-of-lease maintenance payments, strong gains on sales and cash settlement proceeds received in respect of 4 aircraft formerly on lease to Russian airlines. Acquisitions and Sales During the year ended February 29, 2024, we acquired 30 aircraft for $1.2 billion. As of February 29, 2024, we had commitments to acquire 17 aircraft for $525.1 million, with delivery between March 2024 and June 2026, which include estimated amounts for pre-delivery deposits, contractual price escalations and other adjustments. As of April 19, 2024, we have acquired 5 additional aircraft and have commitments to acquire 12 aircraft for $393.3 million. 27 During the year ended February 29, 2024, we sold 28 aircraft and other flight equipment for net proceeds of $361.8 million. We recognized gains on the sale or disposition of aircraft totaling $121.6 million, which included $43.2 million related to settlement proceeds received in respect of 4 aircraft formerly on lease to Russian airlines – see “Russian Aircraft Insurance Settlements” below. As of April 19, 2024, we have sold 1 additional aircraft. Russian Aircraft Insurance Settlements The Company leased 9 aircraft to Russian airlines that were unrecoverable following Russia’s invasion of Ukraine in February 2022. The Company filed claims against the reinsurers of the Russian airlines’ insurance and the Company’s contingent and possessed insurance policies (“C&P Policies”) seeking indemnity. On December 26, 2023, the Company received cash settlement proceeds of $43.2 million in settlement of the Company’s claims under the insurance policies of Joint Stock Company Aurora Airlines and Joint Stock Company Rossiya Airlines (collectively, the “Airlines”) in respect of 4 aircraft (collectively, the “Aircraft”) formerly on lease to the Airlines. The settlement resolves claims against the Airlines, their respective insurers, and transfers the Aircraft title to a Russian insurer. The Company is in ongoing settlement discussions for the 5 other aircraft that were not included in the insurance settlement. However, it is uncertain whether any of these discussions will result in any settlement and, if so, in what amount. Settlement proceeds, net of any related costs, were recorded as a component of gain on sale or disposition of flight equipment for the three months ending February 29, 2024. The receipt of the insurance settlement proceeds serve to mitigate, in part, the Company’s losses under its aviation insurance policies. The Company reserves all rights under its C&P Policies. The collection, timing and amount of any future recoveries, including those related to insurance litigation, remain uncertain. Accordingly, at this time, the Company can give no assurance as to when or what amounts it may ultimately collect with respect to these matters. Finance We operate in a capital-intensive industry and have a demonstrated track record of raising substantial amounts of capital from debt and equity investors. Since our inception in late 2004, we raised $2.3 billion in equity capital from private and public investors, including $200.0 million received during the year ended February 29, 2024, in respect of the Subscription Agreement entered into with our Shareholders – see Note 9 in the Notes to Consolidated Financial Statements. We also obtained $21.4 billion in debt capital from a variety of sources including export credit agency-backed debt, commercial bank debt, the aircraft securitization markets and the unsecured bond market. The diversity and global nature of our financing sources demonstrates our ability to adapt to changing market conditions and seize new growth opportunities. We intend to fund new investments through cash on hand, funds generated from operations, maintenance payments received from lessees, equity offerings, unsecured bond offerings, borrowings secured by our aircraft, draws under on our revolving credit facilities and proceeds from any future aircraft sales. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive. See “Liquidity and Capital Resources” below. 28 AIRCASTLE AIRCRAFT INFORMATION (dollars in millions) The following table sets forth certain information with respect to our owned aircraft and aircraft managed by us on behalf of our joint venture as of February 29, 2024 and February 28, 2023: Owned Aircraft As of February 29, 2024 As of February 28, 2023 Net Book Value of Flight Equipment $ 7,223 $ 6,635 Net Book Value of Unencumbered Flight Equipment $ 5,839 $ 5,469 Number of Aircraft 243 239 Number of Unencumbered Aircraft 205 209 Number of Lessees 74 73 Number of Countries 43 44 Weighted Average Age (years) (1) 9.3 9.7 Weighted Average Remaining Lease Term (years) (1) 5.4 5.3 Weighted Average Fleet Utilization during the Fourth Quarter (2) 99.2 % 94.6 % Weighted Average Fleet Utilization for the Year Ended (2) 98.3 % 94.8 % Portfolio Yield for the Fourth Quarter (3) 9.2 % 9.3 % Portfolio Yield for the Year Ended (3) 9.2 % 9.4 % Managed Aircraft on behalf of Joint Venture Flight Equipment $ 272 $ 285 Number of Aircraft 9 9 ____________ (1) Weighted by Net Book Value. (2) Aircraft on lease as a percentage of total days in period weighted by net book value. (3) Lease rental revenue, interest income and cash collections on our net investment in leases for the period as a percent of the average Net Book Value for the period; quarterly information is annualized. 29 PORTFOLIO DIVERSIFICATION Owned Aircraft as of February 29, 2024 Owned Aircraft as of February 28, 2023 Number of Aircraft % of Net Book Value Number of Aircraft % of Net Book Value Aircraft Type Passenger: Narrow-body - new technology (1) 61 37 % 43 28 % Narrow-body - current technology 159 49 % 173 56 % Wide-body 17 11 % 19 14 % Total Passenger 237 97 % 235 98 % Freighter 6 3 % 4 2 % Total 243 100 % 239 100 % Manufacturer Airbus 161 67 % 153 64 % Boeing 63 25 % 69 28 % Embraer 19 8 % 17 8 % Total 243 100 % 239 100 % Regional Diversification Asia and Pacific 63 27 % 62 28 % Europe 90 30 % 88 30 % Middle East and Africa 9 5 % 8 3 % North America 46 23 % 38 20 % South America 32 14 % 29 14 % Off-lease 3 (2) 1 % 14 5 % Total 243 100 % 239 100 % _______________ (1) Includes Airbus A320-200neo and A321-200neo, Boeing 737-MAX8, and Embraer E2 aircraft. (2) Of the 3 off-lease aircraft at February 29, 2024, we have executed leases for 2 narrow-body converted freighter aircraft and 1 narrow-body converted freighter aircraft that we are currently marketing for lease or sale. 30 The top ten customers for our owned aircraft at February 29, 2024 were as follows: Customer Percent of Net Book Value Country Number of Aircraft IndiGo 8.0% India 13 LATAM 6.3% Chile 13 KLM 5.0% Netherlands 11 American Airlines 4.3% United States 11 Lion Air (1) 4.0% Indonesia 10 Viva Aerobus 3.7% Mexico 7 Aerolineas Argentinas 3.6% Argentina 7 Frontier Airlines 3.4% United States 5 Wizz Air 3.2% Hungary 5 Volaris 3.0% Mexico 6 Total top ten customers 44.5% 88 All other customers 55.5% 155 Total all customers 100.0% 243 (1) Includes 6 aircraft on lease with 3 affiliated airlines. 31 COMPARATIVE RESULTS OF OPERATIONS Results of Operations for the year ended February 29, 2024 as compared to the year ended February 28, 2023: Year Ended February 29, Year Ended February 28, 2024 2023 (Dollars in thousands) Revenues: Lease rental revenue $ 603,571 $ 586,508 Direct financing and sales-type lease revenue 16,503 9,030 Amortization of lease premiums, discounts and incentives (20,420) (20,574) Maintenance revenue 132,179 138,099 Total lease revenue 731,833 713,063 Gain on sale or disposition of flight equipment 121,646 70,860 Other revenue 1,937 12,110 Total revenues 855,416 796,033 Operating expenses: Depreciation 348,229 332,663 Interest, net 229,050 204,606 Selling, general and administrative 82,127 76,857 Provision for credit losses 12,081 1,507 Impairment of flight equipment 55,240 85,623 Maintenance and other costs 29,884 22,196 Total operating expenses 756,611 723,452 Other income (expense): Loss on extinguishment of debt — (636) Other 5,571 14,092 Total other income: 5,571 13,456 Income from continuing operations before income taxes 104,376 86,037 Income tax provision 23,265 25,466 Earnings of unconsolidated equity method investment, net of tax 2,205 2,188 Net income $ 83,316 $ 62,759 Revenues: Total revenues increased $59.4 million, attributable to: Lease rental revenue increased $17.1 million, primarily attributable to an increase of $84.0 million related to 52 aircraft purchased since March 1, 2022. This was partially offset by: • a $28.3 million decrease related to the sale of 30 aircraft since March 1, 2022; • a $13.3 million decrease, as the year ended February 28, 2023 included a cumulative catch-up adjustment to lease revenues for certain customers which the collectability assessment of lease payments changed to probable during the respective period – see Note 1 in the Notes to Consolidated Financial Statements regarding our lease revenue recognition policy; • a $12.9 million decrease due to lease extensions, amendments, transitions, and other changes; and • a $12.4 million decrease due to lease terminations. 32 Direct financing and sales-type lease revenue increased $7.5 million, primarily related to the reclassification of 12 aircraft to sales-type leases, partially offset by the sale of 9 aircraft since March 1, 2022. Amortization of lease premiums, discounts and incentives: Year Ended February 29, Year Ended February 28, 2024 2023 (Dollars in thousands) Amortization of lease premiums $ (11,112) $ (11,214) Amortization of lease discounts 931 765 Amortization of lease incentives (10,239) (10,125) Amortization of lease premiums, discounts and incentives $ (20,420) $ (20,574) Maintenance revenue. For the year ended February 29, 2024, we recorded $132.2 million of maintenance revenue primarily related to maintenance payments received by us and recognized into income as a result of scheduled aircraft lease expirations and engine redeliveries. For the year ended February 28, 2023, we recorded $138.1 million of maintenance revenue, comprised primarily of $46.4 million related to scheduled lease expirations and $49.9 million related to the early lease terminations of 5 narrow-body, 1 wide-body, and 1 freighter aircraft. We also received $41.8 million of maintenance security letters of credit for our former Russian lessees during the year ended February 28, 2023, which was recognized in maintenance revenue. Gain on sale or disposition of flight equipment. During the year ended February 29, 2024, we sold 28 aircraft and recognized gains on the sale or disposition of aircraft totaling $121.6 million, which included $43.2 million related to settlement proceeds received in respect of 4 aircraft formerly on lease to Russian airlines, and gains of $32.7 million related to the reclassification of 10 aircraft from operating leases to sales-type leases. During the year ended February 28, 2023, we sold 25 aircraft for gains totaling $70.9 million. Other revenue. During the year ended February 28, 2023, we received $7.1 million of payments on general security letters of credit for our former Russian lessees. We also recognized other revenue totaling $4.4 million for security deposits retained by us in connection with aircraft lease terminations and amendments. During the year ended February 29, 2024, we collected the remaining general security letters of credit totaling $0.6 million. Operating Expenses: Total operating expenses increased $33.2 million attributable to: Depreciation expense increased $15.6 million, primarily attributable to an increase of $37.2 million related to 52 aircraft purchased since March 1, 2022. This was partially offset by a decrease of $21.6 million related to 27 aircraft sold since March 1, 2022. Interest, net increased $24.4 million due to a higher average cost of borrowing and higher weighted average debt outstanding of $83.0 million. Selling, general and administrative expense s increased $5.3 million primarily due to an increase in personnel costs and ongoing Russian litigation expenses. Provision for credit losses increased $10.6 million, primarily related to our credit provision for net investment in leases as a result of 12 aircraft that were reclassified from operating leases to sales-type leases – see Note 15 in the Notes to Consolidated Financial Statements. We also recognized a credit provision for debt securities received by us as part of an airline restructuring, as well as certain restructured receivables, during the year ended February 29, 2024. Impairment of aircraft. During the year ended February 29, 2024, the Company recorded impairment charges totaling $55.2 million, of which $39.5 million were transactional impairments related to scheduled aircraft lease expirations and engine redeliveries. The Company recognized $48.0 million of maintenance revenue for these aircraft 33 and engines. We also recorded impairments of $9.5 million resulting from the completion of our annual fleet review during the third quarter of fiscal 2023. During the year ended February 28, 2023, the Company wrote off the remaining book values of 8 narrow-body and 1 freighter aircraft in Russia which have not been returned to it. As a result, the Company recorded impairment charges totaling $31.9 million during the year ended February 28, 2023. The Company also recognized $20.3 million of maintenance and other revenue for these 9 aircraft related to payments received on maintenance and general security letters of credit. In addition to the asset write-offs above, during the year ended February 28, 2023, the Company recorded impairment charges totaling $53.7 million primarily related to the scheduled lease expirations of 3 narrow-body aircraft and lease terminations of 2 narrow-body aircraft, as well as 1 wide-body aircraft resulting from our annual fleet review. The Company recognized $58.9 million of maintenance and lease rentals received in advance into revenue for these aircraft during the year ended February 28, 2023. Maintenance and other costs increased $7.7 million, primarily attributable to higher aircraft insurance premiums and higher costs due to the timing of transition of aircraft to new lessees . Higher transition costs are largely related to aircraft for which the previous lease was terminated early, and the aircraft was repossessed from the prior operator. Other Income (Expense) : Total other income decreased by $7.9 million. During the year ended February 29, 2024, the Company recognized $5.6 million of other income primarily consisting of cash received in connection with claims settlements from various airline customers that had entered into bankruptcy proceedings or similar-type restructurings. During the year ended February 28, 2023, the Company recognized $14.1 million of other income related to claims settlements received in the form of cash, notes, or equity securities from various airline customers that had entered into bankruptcy proceedings or similar-type restructurings, partially offset by a $0.6 million loss on extinguishment of debt. Income Tax Provision : Our income tax expense was $23.3 million and $25.5 million and our effective tax rate was 22.3% and 29.6% for the years ended February 29, 2024 and February 28, 2023, respectively. The year ended February 28, 2023 included higher income taxes of $10.4 million related to certain intra-entity transfers of aircraft assets to Irish aircraft-owning entities. This was partially offset by an increase in taxes attributable to changes in the mix of profits in taxable and non-taxable jurisdictions, and, in particular, incremental profits earned in Ireland. Results of Operations for the year ended February 28, 2023 as compared to the year ended February 28, 2022: We have omitted discussion of the above two periods covered by our consolidated financial statements presented in this Annual Report because that disclosure was already included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023, filed with the SEC on April 25, 2023. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the year ended February 28, 2023 to the year ended February 28, 2022. Aircraft Valuation For complete information on impairment of flight equipment, see Note 2 in the Notes to the Consolidated Financial Statements and “Comparative Results of Operations” above. 34 APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Our estimates and assumptions are based on historical experiences and currently available information. Actual results may differ from such estimates under different conditions, sometimes materially. A summary of our significant accounting policies is presented in the notes to our consolidated financial statements included elsewhere in this Annual Report. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require our most subjective judgments, estimates and assumptions. Our most critical accounting policies and estimates are described below. Lease Revenue Recognition We lease flight equipment under net operating leases with lease terms typically ranging from three to seven years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease, and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues. In certain instances, we may provide lease concessions to customers, generally in the form of lease rental deferrals. While these deferral arrangements affect the timing of lease rental payments, the total amount of lease rental payments required over the lease term is generally the same as that which was required under the original lease agreement. We account for the deferrals as if no modifications to the lease agreements were made and record the deferred rentals as a receivable within other assets. Should we determine that the collectability of rental payments is no longer probable, including any deferral thereof, we will recognize lease rental revenue using a cash basis of accounting rather than an accrual method. In the period we conclude that collection of lease payments is no longer probable, we recognize any difference between revenue amounts recognized to date under the accrual method and payments that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to lease rental revenue. Maintenance Payments and Maintenance Revenue Under our leases, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges; certain taxes, licenses, consents and approvals; aircraft registration; and insurance premiums. Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. Typically, under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. Our determination of whether to require such payments to be made monthly or to permit a lessee to make a single maintenance payment at the end of the lease term depends on a variety of factors, including the creditworthiness of the lessee, the level of security deposit which may be provided by the lessee and market conditions at the time we enter into the lease. If a lease requires monthly maintenance payments, we would typically be obligated to reimburse the lessee for 35 costs they incur for heavy maintenance, overhaul or replacement of certain high-value components to the extent of maintenance payments received in respect of the specific maintenance event, usually shortly following completion of the relevant work. If a lease requires end of lease term maintenance payments, typically the lessee would be required to pay us for its utilization of the aircraft during the lease; however, in some cases, we may owe a net payment to the lessee in the event heavy maintenance is performed and paid for by the lessee during the lease term and the aircraft is returned to us in better condition than at lease inception. We record monthly maintenance payments by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we typically do not recognize maintenance revenue during the lease. Reimbursements to the lessee upon the receipt of evidence of qualifying maintenance work are charged against the existing accrued maintenance payments liability. We currently defer maintenance revenue recognition of most monthly maintenance payments until we are able to determine the amount, if any, by which the monthly maintenance payments received from a lessee exceed costs to be incurred by that lessee in performing heavy maintenance, which generally occurs at or near the end of a lease. End of lease term maintenance payments made to us are recognized as maintenance revenue and end of lease term maintenance payments we make to a lessee are recorded as contra maintenance revenue. The amount of maintenance revenue or contra maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled expiries and early lease terminations, the timing of maintenance events and the utilization of the aircraft by the lessee. Lease Incentives and Amortization Many of our leases contain provisions that may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. The assumptions supporting these estimates are reevaluated annually. This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability, which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability, and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset, which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease. Flight Equipment Held for Lease and Depreciation Flight equipment held for lease is stated at cost and depreciated using the straight-line method, typically over a 25-year life from the date of manufacture for passenger aircraft and over a 30 to 35-year life for freighter aircraft, depending on whether the aircraft is a converted or purpose-built freighter, to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% to 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value. Examples of situations where exceptions may arise include but are not limited to: • flight equipment where estimates of the manufacturers’ realized sales prices are not relevant (e.g., freighter conversions); • flight equipment where estimates of the manufacturers’ realized sales prices are not readily available; and • flight equipment which may have a shorter useful life due to obsolescence. In accounting for flight equipment held for lease, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance assets or liabilities and the estimated residual values. In making these estimates, we rely upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. As part of our due diligence review of each aircraft we purchase, we prepare an estimate of the expected 36 maintenance payments and any excess costs which may become payable by us, taking into consideration the then-current maintenance status of the aircraft and the relevant provisions of any existing lease. For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance costs by applying the deferral method. Under the deferral method, we capitalize the actual cost of major maintenance events, which are typically depreciated on a straight-line basis over the period until the next maintenance event is required. For purchase-lease back transactions, we account for the transaction as a single arrangement. We allocate the consideration paid based on the fair value of the aircraft and lease. The fair value of the lease may include a maintenance premium and a lease premium or discount. When we acquire an aircraft with a lease, determining the fair value of the attached lease requires us to make assumptions regarding the current fair values of leases for specific aircraft. We estimate a range of current lease rates of like aircraft in order to determine if the attached lease is within a fair value range. If a lease is below or above the range of current lease rates, we present value the estimated amount below or above fair value range over the remaining term of the lease. The resulting lease discount or premium is amortized into lease rental income over the remaining term of the lease. Impairment of Flight Equipment We perform an annual recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis. Additional customer or aircraft specific recoverability assessments are also performed whenever events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant change in an aircraft type’s storage levels, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. We focus on aircraft with near-term lease expirations, customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, and certain other customers or aircraft variants that are more susceptible to value deterioration. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted lease rental and maintenance payments, future projected lease rates and maintenance payments, transition costs, estimated down time, and estimated residual or scrap values for an aircraft. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See Note 2 in the Notes to Consolidated Financial Statements. Net Investment in Leases If a lease meets specific criteria at lease commencement or at the effective date of a lease modification, we recognize the lease as a direct financing or sales-type lease. The net investment in leases consists of the lease receivable, estimated unguaranteed residual value of the leased flight equipment at lease-end and, for direct financing leases, deferred selling profit. For sales-type leases, we recognize the difference between the net book value of the aircraft and the net investment in the lease as a gain or loss on sale of fight equipment. Selling profit on a direct financing lease is deferred and amortized over the lease term, and a selling loss is recognized at lease commencement. Interest income on our net investment in leases is recognized as Direct financing and sales-type lease revenue over the lease term in a manner that produces a constant rate of return on the net investment in the lease. The net investment in leases is recorded in the consolidated financial statements net of an allowance for credit losses. The allowance for credit losses is recorded upon the initial recognition of the net investment in the lease based on the Company’s estimate of expected credit losses over the lease term. The allowance reflects the Company’s estimate of lessee default probabilities and loss given default percentages. When determining the credit loss allowance, we consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the net investment in the lease. The allowance also considers potential losses due to non-credit risk related to unguaranteed residual values. A provision for credit losses is recorded as a component of operating expenses in 37 our Consolidated Statements of Income (Loss) to adjust the allowance for changes to management’s estimate of expected credit losses. Fair Value Measurements We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our aircraft and investment in unconsolidated joint venture. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on the average of the market approach Level 2 or 3, which include third party appraisal data and an income approach Level 3, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft discounted using the Company’s weighted average cost of capital. We account for our investments in unconsolidated joint ventures under the equity method of accounting. Investments are reviewed for impairment whenever events or changes in circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary Income Taxes The Company records an income tax provision in accordance with the various tax laws for those jurisdictions within which our transactions occur. Aircastle uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. We did not have any unrecognized tax benefits. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS See Note 1 in the Notes to Consolidated Financial Statements below. RECENTLY PROPOSED ACCOUNTING PRONOUNCEMENTS See Note 1 in the Notes to Consolidated Financial Statements below. LIQUIDITY AND CAPITAL RESOURCES Our business is very capital intensive, requiring significant investments in order to expand our fleet and to maintain and improve our existing portfolio. Our operations have historically generated a significant amount of cash, primarily from lease rentals and maintenance collections. We have also met our liquidity and capital resource needs by utilizing several sources over time, including: • unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes; • various forms of borrowing secured by our aircraft, including term facilities, term financings and limited recourse securitization financings for new aircraft acquisitions; • asset sales; and • issuance of common and preference shares. Going forward, we expect to continue to seek liquidity from these sources and other sources, subject to pricing and conditions we consider satisfactory. During the year ended February 29, 2024, we met our liquidity and capital resource needs with $370.3 million of cash flows from operations and $361.8 million of proceeds from the sale of aircraft and other flight equipment. 38 As of February 29, 2024, the weighted average maturity of our secured and unsecured debt financings was 3.1 years and we were in compliance with all applicable covenants. We have also determined that as of February 29, 2024, our consolidated subsidiaries’ restricted net assets, as defined by Rule 4-08(e)(3) of Regulation S-X, are less than 25% of our consolidated net assets. We believe we have sufficient liquidity to meet our contractual obligations over the next twelve months. As of April 1, 2024, total liquidity of $3.0 billion included $2.1 billion of undrawn credit facilities, $0.5 billion of projected adjusted operating cash flows and sales through April 1, 2025, $0.3 billion of committed equity and $0.1 billion of unrestricted cash. In addition, we believe payments received from lessees and other funds generated from operations, unsecured bond offerings, borrowings secured by our aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments. Cash Flows Year Ended February 29, February 28, 2024 2023 (Dollars in thousands) Net cash flow provided by operating activities $ 370,254 $ 437,737 Net cash flow used in investing activities (879,115) (537,874) Net cash flow provided by financing activities 406,977 161,316 Operating Activities: Cash flow provided by operating activities was $370.3 million and $437.7 million for the years ended February 29, 2024 and February 28, 2023, respectively. The decrease was primarily attributable to higher cash paid for interest of $47.4 million, of which $15.2 million relates to the timing of interest payments, and the remaining increase due to a higher average cost of borrowing and higher weighted average debt outstanding during the year ended February 29, 2024. In addition, the year ended February 28, 2023 included incremental customer collections related to the repayment of lease deferrals and other outstanding receivables that had accumulated during the COVID-19 pandemic, as well as $48.9 million of payments received on maintenance and general security letters of credit for our former Russian lessees. Investing Activities : Cash flow used in investing activities was $879.1 million and $537.9 million for the years ended February 29, 2024 and February 28, 2023, respectively. The net increase of $341.2 million was primarily attributable to a $246.1 million increase in the acquisition and improvement of flight equipment, in addition to lower proceeds from the sale or disposition of flight equipment of $64.6 million. Proceeds from the sale or disposition of flight equipment for the year ended February 29, 2024 includes cash settlement proceeds of $43.2 million received in respect of 4 aircraft formerly on lease to Russian airlines — see Note 3 to the Notes to Consolidated Financial Statements. Aircraft sales deposits received, net of aircraft purchase deposits paid and progress payments decreased $22.7 million. Financing Activities : Cash flow provided by financing activities was $407.0 million and $161.3 million for the years ended February 29, 2024 and February 28, 2023, respectively. The net increase of $245.7 million was primarily attributable to $200.0 million in proceeds from the issuance of our common stock, in addition to a $38.5 million increase in borrowings from secured and unsecured financings, net of repayments. Debt Obligations For complete information on our debt obligations, please see Note 8 in the Notes to Consolidated Financial Statements below. 39 Contractual Obligations Our contractual obligations consist of principal and interest payments on debt financings, aircraft acquisitions and rent payments pursuant to our office leases. Total contractual obligations increased to $6.1 billion at February 29, 2024 from $6.0 billion at February 28, 2023, due to higher outstanding debt and interest obligations, partially offset by lower aircraft purchase commitments. The following table presents our actual contractual obligations and their payment due dates as of February 29, 2024. Payments Due by Period as of February 29, 2024 Contractual Obligations Total 1 year or less 2-3 years 4-5 years More than 5 years (Dollars in thousands) Principal payments: Senior Notes due 2024-2029 $ 3,850,000 $ 500,000 $ 1,300,000 $ 2,050,000 $ — Revolving Credit Facilities 20,000 — 20,000 — — Bank Financings 883,451 324,514 142,574 72,717 343,646 Total principal payments 4,753,451 824,514 1,462,574 2,122,717 343,646 Interest payments on debt obligations (1) 805,973 214,206 352,800 217,849 21,118 Office leases (2) 28,770 2,938 5,504 4,711 15,617 Purchase obligations (3) 525,053 222,834 302,219 — — Total $ 6,113,247 $ 1,264,492 $ 2,123,097 $ 2,345,277 $ 380,381 _____________ (1) Future interest payments on variable rate, SOFR-based debt obligations are estimated using the interest rate in effect at February 29, 2024. (2) Represents contractual payment obligations for our office leases in the United States, Ireland and Singapore. (3) At February 29, 2024, we had signed purchase agreements to acquire 17 aircraft for $525.1 million. These amounts include estimates for pre-delivery deposits, contractual price escalation and other adjustments. As of April 19, 2024, we have commitments to acquire 12 aircraft for $393.3 million. Capital Expenditures From time to time, we make capital expenditures to maintain or improve our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the years ended February 29, 2024, and February 28, 2023 and 2022, we incurred a total of $76.0 million, $90.8 million and $46.6 million, respectively, of capital expenditures, including lease incentives, related to the acquisition and improvement of flight equipment. As of February 29, 2024, the weighted average age by Net Book Value of our aircraft was 9.3 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Our lease agreements call for the lessee to be primarily responsible for maintaining the aircraft. Maintenance reserves are generally 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. 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. Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of factors, such as in the event of a lessee default. Maintenance reserves may not cover the entire amount of actual maintenance expenses incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age. See Item 1A. “Risk Factors — Risks Related to Our Business — Risks related to our leases — If lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease. 40 Off-Balance Sheet Arrangements We entered into a joint venture arrangement in order to help expand our base of new business opportunities. This joint venture does not qualify for consolidated accounting treatment. The assets and liabilities of this entity are not included in our consolidated balance sheets and we record our investment under the equity method of accounting. See Note 5 in the Notes to Consolidated Financial Statements. We hold a 25% equity interest in our joint venture with Mizuho Leasing and as of February 29, 2024, the net book value of its 9 aircraft was $271.7 million. Foreign Currency Risk and Foreign Operations At February 29, 2024, more than 99% of our leases are payable to us in U.S. dollars. However, we incur Euro- and Singapore dollar-denominated expenses in connection with our subsidiaries in Ireland and Singapore. For the year ended February 29, 2024, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar totaled $21.0 million in U.S. dollar equivalents and represented approximately 26% 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 years ended February 29, 2024, and February 28, 2023 and 2022, we incurred insignificant net gains and losses on foreign currency transactions. Management’s Use of EBITDA and Adjusted EBITDA We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals, as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed. EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business. We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants. 41 The table below shows the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the years ended February 29, 2024, and February 28, 2023 and 2022. Year Ended February 29, Year Ended February 28, 2024 2023 2022 (Dollars in thousands) Net income (loss) $ 83,316 $ 62,759 $ (278,209) Depreciation 348,229 332,663 337,528 Amortization of lease premiums, discounts and incentives 20,420 20,574 20,190 Interest, net 229,050 204,606 214,352 Income tax provision (benefit) 23,265 25,466 (7,998) EBITDA $ 704,280 $ 646,068 $ 285,863 Adjustments: Impairment of flight equipment 55,240 85,623 452,250 Loss on extinguishment of debt — 636 14,156 Adjusted EBITDA $ 759,520 $ 732,327 $ 752,269 Limitations of EBITDA and Adjusted EBITDA An investor or potential investor may find EBITDA and Adjusted EBITDA important measures in evaluating our performance, results of operations and financial position. We use these non-U.S. GAAP measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be viewed in isolation or as substitutes for U.S. GAAP measures of income (loss). Material limitations in making the adjustments to our income (loss) to calculate EBITDA and Adjusted EBITDA, and using these non-U.S. GAAP measures as compared to U.S. GAAP net income (loss), income (loss) from continuing operations and cash flows provided by or used in operations, include: • depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures; • the cash portion of income tax provision (benefit) generally represents charges (gains), which may significantly affect our financial results; and • adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes which may not be comparable to similarly titled measures used by other companies. EBITDA and Adjusted EBITDA are not alternatives to net income (loss), income (loss) from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP. You should not rely on these non-U.S. GAAP measures as a substitute for any such U.S. GAAP financial measure. We strongly urge you to review the reconciliations to U.S. GAAP net income (loss), along with our consolidated financial statements included elsewhere in this report. We also strongly urge you not to rely on any single financial measure to evaluate our business. In addition, because EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.