Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 08/03/2012 06:03:30)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _______________________________________________________________
FORM 10-Q
  _______________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File number 001-32959
_______________________________________________________________
  AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
  _______________________________________________________________
Bermuda
98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
c/o Aircastle Advisor LLC
300 First Stamford Place, 5 th  Floor, Stamford, CT
06902
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code     (203) 504-1020
_______________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
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 July 27, 2012 , there were 72,249,408 outstanding shares of the registrant’s common shares, par value $0.01 per share.


Table of Contents

Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
 
 
 
Page
No.
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


Table of Contents

PART I. — FINANCIAL INFORMATION
Item 1.        Financial Statements
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
 
 
December 31,
2011
 
June 30,
2012
 
 
 
(Unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
295,522

 
$
291,062

Accounts receivable
3,646

 
3,129

Restricted cash and cash equivalents
247,452

 
137,803

Restricted liquidity facility collateral
110,000

 
107,000

Flight equipment held for lease, net of accumulated depreciation of $981,932 and $1,094,244
4,387,986

 
4,604,493

Net investment in finance leases

 
90,024

Aircraft purchase deposits and progress payments
89,806

 
5,150

Other assets
90,047

 
162,876

Total assets
$
5,224,459

 
$
5,401,537

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings (including borrowings of ACS Ireland VIEs of $295,952 and $231,242, respectively)
$
2,535,759

 
$
1,924,435

Borrowings from unsecured financings
450,757

 
1,250,700

Accounts payable, accrued expenses and other liabilities
105,432

 
104,852

Lease rentals received in advance
46,105

 
48,061

Liquidity facility
110,000

 
107,000

Security deposits
83,037

 
82,032

Maintenance payments
347,122

 
349,125

Fair value of derivative liabilities
141,639

 
67,939

Total liabilities
3,819,851

 
3,934,144

 
 
 
 
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 72,249,408 shares issued and outstanding at June 30, 2012
723

 
722

Additional paid-in capital
1,400,090

 
1,400,443

Retained earnings
191,476

 
218,690

Accumulated other comprehensive loss
(187,681
)
 
(152,462
)
Total shareholders’ equity
1,404,608

 
1,467,393

Total liabilities and shareholders’ equity
$
5,224,459

 
$
5,401,537

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

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
143,355

 
$
153,624

 
$
284,471

 
$
305,866

Amortization of lease premiums, discounts and lease incentives
(3,030
)
 
2,044

 
(6,132
)
 
446

Maintenance revenue
8,162

 
13,535

 
25,006

 
26,182

Total lease rentals
148,487

 
169,203

 
303,345

 
332,494

Other revenue
351

 
2,978

 
3,407

 
4,602

Total revenues
148,838

 
172,181

 
306,752

 
337,096

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Depreciation
58,576

 
67,097

 
118,167

 
131,611

Interest, net
55,893

 
64,121

 
101,512

 
113,102

Selling, general and administrative (including non-cash share based payment expense of $1,178 and $929 for the three months ended, and $3,073 and $2,105 for the six months ended June 30, 2011 and 2012, respectively)
11,578

 
11,511

 
24,109

 
24,709

Impairment of Aircraft
5,200

 
10,111

 
5,200

 
10,111

Maintenance and other costs
3,369

 
5,243

 
6,899

 
8,017

Total expenses
134,616

 
158,083

 
255,887

 
287,550

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Gain on sale of flight equipment
10,299

 
2,855

 
19,961

 
3,051

Other
323

 
717

 
(36
)
 
604

Total other income (expense)
10,622

 
3,572

 
19,925

 
3,655

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
24,844

 
17,670

 
70,790

 
53,201

Income tax provision
1,535

 
1,346

 
4,804

 
4,275

Net income
$
23,309

 
$
16,324

 
$
65,986

 
$
48,926

 
 
 
 
 
 
 
 
Earnings per common share — Basic:
 
 
 
 
 
 
 
Net income per share
$
0.30

 
$
0.23

 
$
0.84

 
$
0.68

 
 
 
 
 
 
 
 
Earnings per common share — Diluted:
 
 
 
 
 
 
 
Net income per share
$
0.30

 
$
0.23

 
$
0.84

 
$
0.68

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.125

 
$
0.150

 
$
0.225

 
$
0.300


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

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
 
 
 
 
 
 
 
 
Net income
$
23,309

 
$
16,324

 
$
65,986

 
$
48,926

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in fair value of derivatives, net of tax expense of $128 and $139 for the three months ended, and $528 and $428 for the six months ended June 30, 2011 and 2012, respectively
578

 
5,799

 
24,046

 
22,282

Net derivative loss reclassified into earnings
5,391

 
8,866

 
8,226

 
12,937

Other comprehensive income
5,969

 
14,665

 
32,272

 
35,219

Total comprehensive income
$
29,278

 
$
30,989

 
$
98,258

 
$
84,145


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

5


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2011
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
65,986

 
$
48,926

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
118,167

 
131,611

Amortization of deferred financing costs
9,417

 
7,691

Amortization of net lease discounts and lease incentives
6,132

 
(446
)
Deferred income taxes
2,712

 
2,457

Non-cash share based payment expense
3,073

 
2,105

Cash flow hedges reclassified into earnings
8,226

 
12,937

Ineffective portion of cash flow hedges
(598
)
 
366

Security deposits and maintenance payments included in earnings
(25,282
)
 
(25,818
)
Gain on sale of flight equipment
(19,961
)
 
(3,051
)
Impairment of Aircraft
5,200

 
10,111

Other
566

 
(1,222
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(1,366
)
 
(4,434
)
Restricted cash and cash equivalents related to operating activities
9,379

 

Other assets
(1,276
)
 
(1,970
)
Accounts payable, accrued expenses and other liabilities
(11,861
)
 
12,183

Lease rentals received in advance
(5,231
)
 
662

Net cash provided by operating activities
163,283

 
192,108

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment and lease incentives
(196,132
)
 
(324,831
)
Proceeds from sale of flight equipment
151,577

 
36,013

Restricted cash and cash equivalents related to sale of flight equipment

 
4,762

Aircraft purchase deposits and progress payments
(76,897
)
 
(23,955
)
Net investment in finance leases

 
(91,500
)
Collections on finance leases

 
1,476

Purchase of debt investment

 
(43,626
)
Principal repayments on debt investment

 
3,245

Other
(10
)
 
(126
)
Net cash used in investing activities
(121,462
)
 
(438,542
)
Cash flows from financing activities:
 
 
 
Repurchase of shares
(61,403
)
 
(2,129
)
Proceeds from term debt financings
230,333

 
877,100

Securitization and term debt financing repayments
(252,912
)
 
(688,424
)
Deferred financing costs
(11,253
)
 
(17,710
)
Restricted secured liquidity facility collateral
(37,000
)
 
3,000

Secured liquidity facility collateral
37,000

 
(3,000
)
Restricted cash and cash equivalents related to financing activities
(3,572
)
 
104,887

Security deposits received
10,317

 
8,310

Security deposits returned
(7,764
)
 
(3,067
)
Maintenance payments received
57,571

 
62,496

Maintenance payments returned
(43,257
)
 
(27,020
)
Payments for terminated cash flow hedges

 
(50,757
)
Dividends paid
(15,821
)
 
(21,712
)
Net cash (used in) provided by financing activities
(97,761
)
 
241,974

Net increase (decrease) in cash and cash equivalents
(55,940
)
 
(4,460
)
Cash and cash equivalents at beginning of period
239,957

 
295,522

Cash and cash equivalents at end of period
$
184,017

 
$
291,062

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
83,754

 
$
83,143

Cash paid for income taxes
$
1,525

 
$
1,642

Supplemental disclosures of non-cash investing activities:
 
 
 
Purchase deposits, advance lease rentals and security deposits assumed in asset acquisitions
$

 
$
15,388

Security deposits, maintenance liabilities and other liabilities settled in sale of flight equipment
$
9,566

 
$
4,135

Supplemental disclosures of non-cash financing activities:
 
 
 
Security deposits converted to advance lease rentals
$
546

 
$
178

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

6


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 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 by Fortress Investment Group LLC and certain of its affiliates (together, the “Fortress Shareholders” or “Fortress”) under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including leasing, managing and selling commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments.
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 six months ended June 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 six months ended June 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 June 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.

7


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


The amendments in this update change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements which include (1) those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements, and (2) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurement. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of ASU 2011-04 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 the lease, 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

8


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


that leases would be classified as either leases of property or leases of assets other than property. Leases of property will 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 fourth quarter of 2012. We anticipate that the final standard may have an effective date no earlier than 2016. When and if the proposed guidance becomes effective, it may have a significant impact on the Company’s consolidated financial statements. Although we believe the presentation of our financial statements, and those of our lessees could change, we do not believe the accounting pronouncement will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we do not believe it will have a material impact on our business.

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 June 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
 
Fair Value as of December 31, 2011
 
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
$
295,522

 
$
295,522

 
$

 
$

 
Market
Restricted cash and cash equivalents
247,452

 
247,452

 

 

 
Market
Total
$
542,974

 
$
542,974

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
141,639

 
$

 
$
85,410

 
$
56,229

 
Income

9


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


 
 
 
Fair Value Measurements at June 30, 2012 Using Fair Value Hierarchy
 
Fair Value as of June 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
$
291,062

 
$
291,062

 
$

 
$

 
Market
Restricted cash and cash equivalents
137,803

 
137,803

 

 

 
Market
Total
$
428,865

 
$
428,865

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
67,939

 
$

 
$
67,939

 
$

 
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 5. 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 six months ended June 30, 2011 and 2012 , respectively:
 
 Derivative Liabilities
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2011
Balance at beginning of period
$
(48,764
)
 
$
(55,181
)
Total gains/(losses), net:
 
 
 
Included in other income (expense)
(119
)
 
(242
)
Included in interest expense
(45
)
 
(39
)
Included in other comprehensive income
(5,598
)
 
936

Balance at end of period
$
(54,526
)
 
$
(54,526
)
 
Derivative Liabilities
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2012
Balance at beginning of period
$
(50,942
)
 
$
(56,229
)
Total gains/(losses), net:
 
 
 
Included in other income (expense)
712

 
599

Included in interest expense

 
73

Included in other comprehensive income
(527
)
 
4,800

Settlements
50,757

 
50,757

Balance at end of period
$

 
$


10


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


For the three and six months ended June 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 six months ended June 30, 2012 , we had no transfers into or out of Level 3; however 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.
During the second quarter of 2011, we recorded an impairment of $5,200 related to a Boeing Model 737-400 aircraft. The Company recorded $2,267 of maintenance revenue and reversed $878 of lease incentive accruals related to the terminated lease 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 .
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.
 The carrying amounts and fair values of our financial instruments at December 31, 2011 and June 30, 2012 are as follows:
 
December 31, 2011
 
June 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
)
 
$
(1,211,810
)
 
$
(1,067,231
)
ECA term financings
(536,107
)
 
(524,373
)
 
(593,216
)
 
(609,943
)
Bank financings
(126,000
)
 
(126,000
)
 
(119,409
)
 
(122,917
)
Senior Notes
(450,757
)
 
(482,625
)
 
(1,250,700
)
 
(1,309,738
)

All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.



11


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


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 June 30, 2012 were as follows:
Year Ending December 31,
Amount
Remainder of 2012
$
315,721

2013
574,698

2014
477,727

2015
419,535

2016
360,598

2017
247,181

Thereafter
477,737

Total
$
2,873,197

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Region
2011
 
2012
 
2011
 
2012
Europe
45
%
 
40
%
 
46
%
 
41
%
Asia and Pacific
23
%
 
30
%
 
23
%
 
29
%
North America
13
%
 
12
%
 
13
%
 
12
%
Latin America
9
%
 
7
%
 
9
%
 
7
%
Middle East and Africa
10
%
 
11
%
 
9
%
 
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 June 30, 2011 , one customer accounted for 10% 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 three months ended June 30, 2012 , one customer accounted for 10% of lease rental revenue and four additional customers accounted for a combined 26% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
For the six months ended June 30, 2011 , one customer accounted for 10% 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 six months ended June 30, 2012 , one customer accounted for 10% of lease rental revenue and four additional customers accounted for a combined 26% 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 June 30,
 
2011
 
2012
Country
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
 
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
United States (1)
$
16,683

 
11
%
 
4

 
$

 
%
 

China
16,128

 
11
%
 
4

 
18,638

 
11
%
 
4

Russia (2)

 
%
 

 
17,376

 
10
%
 
8

Denmark (2)

 
%
 

 
16,523

 
10
%
 
2


12


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


(1) Total revenue attributable to the United States was less then 10% for the three months ended June 30, 2012.
(2) Total revenue attributable to Russia and Denmark were less than 10% for the three months ended June 30, 2011. Total revenue attributable to Denmark for the three months ended June 30, 2012 includes $7,656 of maintenance revenue.

 
Six Months Ended June 30,
 
2011
 
2012
Country
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
 
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
United States
$
33,418

 
11
%
 
4

 
$
43,681

 
13
%
 
6

China
32,401

 
11
%
 
5

 
36,857

 
11
%
 
4

Russia (1)

 
%
 

 
32,807

 
10
%
 
8

 
(1) Total revenue attributable to Russia was less than 10% for the three months ended June 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
 
June 30, 2012
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Europe
66

 
41
%
 
69

 
38
%
Asia and Pacific
39

 
28
%
 
45

 
31
%
North America
16

 
9
%
 
18

 
10
%
Latin America
10

 
6
%
 
11

 
6
%
Middle East and Africa
9

 
15
%
 
8

 
13
%
Off-lease
4

(1)  
1
%
 
4

(2)  
2
%
Total
144

 
100
%
 
155

 
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 the other 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)
Includes one Boeing Model 747-400 passenger aircraft which we have begun parting-out, one Boeing Model 737-700 aircraft which was delivered to a customer in Europe in July, 2012, one Airbus Model A330-200 aircraft which was delivered to a customer in North America in July, 2012 and one Boeing Model 767-300ER aircraft that we delivered to a customer in Asia in July 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
 
June 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

 
$
528,251

 
11
%
 
4

Russia (1)
453,695

 
10
%
 
8

 

 
%
 
8

(1) The net book value of flight equipment attributable to Russia was less than 10% as of June 30, 2012.

  At December 31, 2011 and June 30, 2012 , the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $28,412 and $14,767 , respectively.


13


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012



Note 4. Net Investment in Finance Leases
At June 30, 2012 , our net investment in finance leases represents six aircraft leased to a customer in Germany.        The following table lists the components of our net investment in finance leases at June 30, 2012 :
 
 
Amount
Total lease payments to be received
 
$
109,591

Less: Unearned income
 
(60,767
)
Estimated residual values of leased flight equipment (unguaranteed)
 
41,200

    Net investment in finance leases
 
$
90,024


At June 30, 2012 , minimum future lease payments on finance leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2012
 
$
8,040

2013
 
16,080

2014
 
16,080

2015
 
16,080

2016
 
16,080

2017
 
16,080

Thereafter
 
21,151

    Total
 
$
109,591



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 22 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 June 30, 2012 , the assets of the two VIEs include 13 aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1 and Securitization No. 2.

14


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012



The combined assets of the ACS Ireland VIEs as of June 30, 2012 are $359,057 . 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 June 30, 2012 are $337,292 .

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 June 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 June 30, 2012 were $745,564 , are included in our flight equipment held for lease. The consolidated debt outstanding of the Air Knight VIEs as of June 30, 2012 is $593,216 .

Note 6. Securitizations and Term Debt Financings
The outstanding amounts of our secured and unsecured term debt financings were as follows:
 
At December 31, 2011
 
At June 30, 2012
Debt Obligation
Outstanding
Borrowings
 
Outstanding
Borrowings
 
Interest Rate (1)
 
Final Stated
Maturity (2)
Secured Debt Financings:
 
 
 
 
 
 
 
Securitization No. 1
$
387,124

 
$
361,278

 
0.51%
 
06/20/31
Securitization No. 2
891,452

 
850,532

 
0.55%
 
06/14/37
Term Financing No. 1
595,076

 

 
—%
 
N/A
ECA Term Financings
536,107

 
593,216

 
2.65% to 3.96%
 
12/03/21 to 04/03/24
Bank Financings
126,000

 
119,409

 
4.22% to 4.57%
 
09/15/15 to 10/26/17
Total secured debt financings
2,535,759

 
1,924,435

 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
Senior Notes due 2017

 
500,000

 
6.75%
 
04/15/17
Senior Notes due 2018
450,757

 
450,700

 
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

 
1,250,700

 
 
 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings
$
2,986,516

 
$
3,175,135

 
 
 
 
 

15


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


(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
 
June 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 June 30, 2012 , we are in compliance with all applicable covenants in all of our financings.

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


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 June 30, 2012 , we did not repurchase any shares under the repurchase program.


16


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012



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 and diluted earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities.
Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
75,701,045

 
71,723,014

 
77,234,869

 
71,709,976

Restricted common shares
1,017,879

 
589,163

 
956,232

 
609,601

Total weighted-average shares
76,718,924

 
72,312,177

 
78,191,101

 
72,319,577

 
 
 
 
 
 
 
 
Percentage of weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
98.67
%
 
99.19
%
 
98.78
%
 
99.16
%
Restricted common shares
1.33
%
 
0.81
%
 
1.22
%
 
0.84
%
Total
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%
The calculations of both basic and diluted earnings per share are as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2011
 
2012
 
2011
 
2012
 
Earnings per share – Basic:
 
 
 
 
 
 
 
 
Net income
$
23,309

 
$
16,324

 
$
65,986

 
$
48,926

  
Less: Distributed and undistributed earnings allocated to  restricted common shares (a)
(309
)
 
(133
)
 
(807
)
 
(412
)
 
Earnings available to common shareholders – Basic
$
23,000

 
$
16,191

 
$
65,179

 
$
48,514

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
75,701,045

 
71,723,014

 
77,234,869

 
71,709,976

 
 
 
 
 
 
 
 
 
 
Earnings per common share – Basic
$
0.30

 
$
0.23

 
$
0.84

 
$
0.68

 
 
 
 
 
 
 
 
 
 
Earnings per share – Diluted:
 
 
 
 
 
 
 
 
Net income
$
23,309

 
$
16,324

 
$
65,986

 
$
48,926

 
Less: Distributed and undistributed earnings allocated to  restricted common shares(a)
(309
)
 
(133
)
 
(807
)
 
(412
)
 
Earnings available to common shareholders – Diluted
$
23,000

 
$
16,191

 
$
65,179

 
$
48,514

  
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
75,701,045

 
71,723,014

 
77,234,869

  
71,709,976

  
Effect of dilutive shares

(b)  

(b)  

(b)   

(b)   
Weighted-average common shares outstanding – Diluted
75,701,045

 
71,723,014

 
77,234,869

  
71,709,976

  
 
 
 
 
 
 
 
 
 
Earnings per common share – Diluted
$
0.30

 
$
0.23

 
$
0.84

  
$
0.68

  
 

17


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


(a)
For the three months ended June 30, 2011 and 2012 , distributed and undistributed earnings to restricted shares is 1.33% and 0.81% , respectively, of net income. For the six months ended June 30, 2011 and 2012 , distributed and undistributed earnings to restricted share is 1.22% and 0.84% , 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 six months ended June 30, 2011 and 2012 , we have no dilutive shares.


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 from continuing operations before income taxes for the three and six months ended June 30, 2011 and 2012 were as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
U.S. operations
$
389

 
$
357

 
$
823

 
$
681

Non-U.S. operations
24,455

 
17,313

 
69,967

 
52,520

Total
$
24,844

 
$
17,670

 
$
70,790

 
$
53,201

All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. We also have a U.S. based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Notional U.S. federal income tax expense at the statutory rate
$
8,696

 
$
6,184

 
$
24,777

 
$
18,620

U.S. state and local income tax, net
24

 
25

 
48

 
49

Non-U.S. operations:
 
 
 
 
 
 
 
Bermuda
(4,239
)
 
(2,132
)
 
(16,235
)
 
(10,764
)
Ireland
(1,850
)
 
(1,645
)
 
(2,921
)
 
(1,675
)
Other
(1,121
)
 
(1,138
)
 
(1,643
)
 
(2,058
)
Non-deductible expenses in the U.S.
31

 
57

 
788

 
112

Other
(6
)
 
(5
)
 
(10
)
 
(9
)
Provision for income taxes
$
1,535

 
$
1,346

 
$
4,804

 
$
4,275



18


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


Note 11. Interest, Net
The following table shows the components of interest, net: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities (a)
$
46,413

 
$
48,798

 
$
87,691

 
$
93,767

Hedge ineffectiveness (gains) losses
(123
)
 
1,885

 
(598
)
 
366

Amortization of interest rate derivatives related to deferred losses (b)
5,391

 
8,866

 
8,226

 
12,937

Amortization of deferred financing fees (c)
5,889

 
4,975

 
9,417

 
7,691

Interest Expense
57,570

 
64,524

 
104,736

 
114,761

Less interest income
(99
)
 
(173
)
 
(260
)
 
(344
)
Less capitalized interest
(1,578
)
 
(230
)
 
(2,964
)
 
(1,315
)
Interest, net
$
55,893

 
$
64,121

 
$
101,512

 
$
113,102

(a)
For the three and six months ended June 30, 2011 , includes the loan termination fee of $3,196 related to an aircraft sold in June, 2011.
(b)
For the three and six months ended June 30, 2011 , includes accelerated amortization of deferred hedge losses in the amount of $1,839 related to an aircraft sold in June 2011.
(c)
For the three and six months ended June 30, 2011 , includes the write-off of deferred financing fees of $2,456 related to an aircraft sold in June, 2011. For the three and six months ended June 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 June 30, 2012 , we had a commitment to convert one aircraft and no commitments to acquire 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.

19


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


We held the following interest rate derivatives as of June 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
$
353,470

 
Jun-06
 
Jun-16
 
$
353,470

 
1M LIBOR
+ 0.27%
 
5.78%
 
Fair value of
derivative
liabilities
 
$
56,257

Securitization No. 2
645,543

 
Jun-12
 
Jun-17
 
645,543

 
1M LIBOR
 
1.26%
to
1.28%
 
Fair value of
derivative
liabilities
 
11,682

Total interest rate derivatives designated as cash flow hedges
$
999,013

 
 
 
 
 
$
999,013

 
 
 
 
 
 
 
$
67,939

 

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 June 30, 2012 were 5.04% and 2.87% , respectively.
For the six months ended June 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 $34,455 . 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 $22,130 .
Our interest rate derivatives involve counterparty credit risk. As of June 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 June 30, 2012 , accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $345 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 six months ended June 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
 
$(11,505)
 
Interest expense
 
$(46,724)
 
Interest expense
 
$(2,041)
 
(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 six months ended June 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 six months ended June 30, 2012 plus any effective amortization of net deferred interest rate derivative losses.
(c)
This represents both realized and unrealized ineffectiveness incurred during the six months ended June 30, 2012 .

20


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 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 six months ended June 30, 2012 , the amount of deferred net loss reclassified from OCI into interest expense related to our terminated interest rate derivatives was $12,937 . 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 $33,009 of which $23,470 relates to Term Financing No. 1 and $9,303 relates to ECA Term Financings for New A330 Aircraft.
The following table summarizes amounts charged directly to the consolidated statement of income for the three and six months ended June 30, 2011 and 2012 , respectively, related to our interest rate derivatives:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Interest Expense:
 
 
 
 
 
 
 
Hedge ineffectiveness (gains) losses
$
(123
)
 
$
1,885

 
$
(598
)
 
$
366

Amortization:
 
 
 
 
 
 
 
Accelerated amortization of deferred losses (a)
1,847

 

 
1,847

 

Amortization of deferred losses
3,544

 
8,866

 
6,379

 
12,937

Total Amortization
5,391

 
8,866

 
8,226

 
12,937

Total charged to interest expense
$
5,268

 
$
10,751

 
$
7,628

 
$
13,303

 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Mark to market (losses) gains on undesignated interest rate derivatives
$
(257
)
 
$
712

 
$
(616
)
 
$
599

Total charged to other income (expense)
$
(257
)
 
$
712

 
$
(616
)
 
$
599

(a)
For the three and six months ended June 30, 2011 , includes accelerated amortization of deferred hedge losses in the amount of $1,839 related to an aircraft sold in June 2011.


Note 14. Other Assets
The following table describes the principal components of other assets on our consolidated balance sheet as of:
 
December 31,
2011
 
June 30,
2012
Debt investments (1)
$

 
$
41,541

Deferred debt issuance costs, net of amortization of $55,173 and $49,732, respectively
35,960

 
45,922

Deferred federal income tax asset
22,036

 
23,868

Lease incentives and lease premiums, net of amortization of $19,294 and $19,493, respectively
20,490

 
43,266

Other assets
11,561

 
8,279

Total other assets
$
90,047

 
$
162,876

 
(1)
Represents a loan we acquired in March 2012 that is secured by a commercial jet aircraft. The loan matures in May 2013. The loan is classified as available for sale and the fair value was determined using the income approach with unobservable inputs.


21


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2012


Note 15. Accounts Payable, Accrued Expenses and Other Liabilities
The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our consolidated balance sheet as of:
 
December 31,
2011
 
June 30,
2012
Accounts payable and accrued expenses
$
34,931

 
$
21,398

Deferred federal income tax liability
40,410

 
44,751

Accrued interest payable
27,849

 
37,460

Lease discounts, net of amortization of $30,830 and $30,598 respectively
2,242

 
1,243

Total accounts payable, accrued expenses and other liabilities
$
105,432

 
$
104,852


22


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (the “SEC”). Please see “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or US GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with US GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
Certain items in this Quarterly Report on Form 10-Q (this “report”), and other information we provide from time to time, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from Aircastle expectations include, but are not limited to, significant capital markets disruption and volatility and the significant contraction in the availability of bank financing, which may adversely affect our continued ability to obtain additional capital to finance new investments or our working capital needs; volatility in the value of our aircraft; general economic conditions and business conditions affecting demand for aircraft and lease rates; our continued ability to obtain favorable tax treatment in Bermuda, Ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack of access to capital, reduced load factors and/or reduced yields, operational disruptions caused by political unrest in North Africa, the Middle East or elsewhere, uncertainties in the Eurozone arising from the sovereign debt crisis and other factors affecting the creditworthiness of our airline customers and their ability to continue to perform their obligations under our leases; termination payments on our interest rate hedges; and other risks detailed from time to time in Aircastle’s filings with the SEC, including as previously disclosed in Aircastle’s 2011 Annual Report on Form 10-K, and elsewhere in this report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle Limited expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

WEBSITE AND ACCESS TO COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website under “Investors — SEC Filings” as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are also available free of charge through our website under “Investors — SEC Filings”.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and board of directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance”. In addition, our Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief

23

Table of Contents

Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902.
The information on the Company’s website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.

OVERVIEW
We acquire, lease, and sell high-utility commercial jet aircraft. High-utility aircraft are generally modern and operationally efficient jets with many operators and have long useful lives. As of June 30, 2012, our portfolio consisted of 155 aircraft leased to 67 lessees located in 36 countries. Our aircraft fleet is managed by an experience team based in the United States, Ireland and Singapore. Typically, our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. From time to time, we also make investments in other aviation assets, including debt investments secured by commercial jet aircraft. Our revenues and income from continuing operations for the three and six months ended June 30, 2012 were $172.2 million and $16.3 million, $337.1 million and $48.9 million, respectively.
The commercial jet aircraft market has grown 41% over the past 10 years. Increasing global economic activity together with a proliferation of air travel in emerging economies has driven the long-term growth in the commercial jet aircraft market. At the same time, the share of the world's commercial jet aircraft owned by leasing companies has expanded to 40% as compared to 25% ten years ago. However, the availability of equity and debt capital remains somewhat limited for the type of aircraft investments we are currently pursuing. However, we plan to grow our business and profits over the long-term by continuing to employ our fundamental business strategy by:
Investing in additional commercial jet aircraft and other aviation assets when attractively priced opportunities and cost effective financing are available. We believe the large and growing aircraft market, together with ongoing fleet replacements, will provide significant acquisition opportunities. We regularly evaluate potential aircraft acquisitions and expect to continue our investment program through additional passenger and cargo aircraft purchases when attractively priced opportunities and cost effective financing are available.
Maintaining efficient access to financing from multiple sources. We have financed our aircraft acquisitions using various long-term debt structures obtained through several different markets to obtain cost effective financing. In this regard, we believe having corporate credit ratings from Standard & Poor’s and Moody’s enables us to access a broader pool of capital than many of our peers. Indeed, we believe the contraction in traditional aviation bank debt lending capacity upon which many of our peers and airline customers depend will enhance our competitiveness and ability to source attractive investment opportunities. This, in turn, will allow us to grow our business and profits.
Leveraging our efficient operating platform and strong operating track record. We believe our team's capabilities in the global aircraft leasing market place us in a favorable position to explore new income-generating activities and we intend to continue to focus our efforts in areas where we believe we have competitive advantages and on transactions that offer attractive risk/return profiles after taking into consideration available financing options.
Reinvesting a portion of the cash flows generated by our business in additional aviation assets and/or our own debt and equity securities. Aircraft have finite useful lives, but typically provide reliable cash flows. Our strategy is to reinvest a portion of our cash flows from operations and asset sales in our business to grow our asset base and earnings bases.
Selling assets when attractive opportunities arise and for portfolio management purposes.  We pursue asset sales as opportunities over the course of the business cycle with the aim of realizing profits and reinvesting proceeds where more accretive investments are available. We also use asset sales for portfolio management purposes such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types.



24

Table of Contents

For the first six months of 2012, air traffic data demonstrated improvement in the passenger markets while the air cargo markets shrank slightly. According to the International Air Transport Association, global passenger traffic increased by 6.5% while air cargo traffic, measured in freight ton kilometers, decreased 2.1% as compared to the same period in 2011. There are significant regional variations and airlines operating primarily in areas with slower economic growth, such as Europe, or with political instability, such as North Africa and the Middle East, may see more modest growth. While both passenger and air cargo growth rates are vulnerable to slowing economic growth and uncertain business conditions in the near term, over the long-term, we believe the market will be driven, to a large extent, by expansion of emerging market economies and rising levels of per capita air travel in those markets.
We intend to pay quarterly dividends to our shareholders based on the company’s sustainable earnings levels; however, our ability to pay quarterly dividends will depend upon many factors, including those as previously disclosed in Aircastle’s 2011 Annual Report on Form 10-K. On February 17, 2012, our board of directors declared a regular quarterly dividend of $0.15 per common share, or an aggregate of $10.9 million, for the three months ended March 31, 2012, which was paid on March 15, 2012 to holders of record on February 29, 2012. On May 2, 2012, our board of directors declared a regular quarterly dividend of $0.15 per common share, or an aggregate of $10.8 million, for the three months ended June 30, 2012, which was paid on June 15, 2012 to holders of record on May 31, 2012. This dividend may not be indicative of the amount of any future dividends. On August 1, 2012, our board of directors declared a regular quarterly dividend of $0.15 per common share for the three months ended September 30, 2012, which will be paid on September 15, 2012 to holders of record on August 31, 2012.