Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 08/14/2007 16:57:40) Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(mark one)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

[ ]   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.)
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    [X]         NO    [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act (Check one):


Large accelerated filer    [ ] Accelerated filer    [ ] Non-accelerated filer    [X]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    YES    [ ]         NO    [X]

Number of shares outstanding as of August 9, 2007: 67,433,451 common shares, par value $0.01 per share.




Aircastle Limited and Subsidiaries

Form 10-Q

Table of Contents





Table of Contents

Part I. — Financial Information

Item 1.    Financial Statements

Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)


  December 31,
2006
June 30,
2007
    (unaudited)
ASSETS    
Cash and cash equivalents $ 58,118 $ 67,714
Accounts receivable 7,696 5,474
Debt investments 121,273 122,728
Restricted cash and cash equivalents 106,069 629,506
Flight equipment held for sale 31,280
Flight equipment held for lease, net of accumulated depreciation of $64,111 and $113,156 1,559,364 2,672,453
Aircraft purchase deposits and progress payments 4,650 94,063
Leasehold improvements, furnishings and equipment, net of accumulated depreciation of $694 and $993 1,506 1,466
Fair value of derivative assets 313 36,622
Other assets 28,434 41,206
Total assets $ 1,918,703 $ 3,671,232
LIABILITIES AND SHAREHOLDERS’ EQUITY    
LIABILITIES    
Borrowings under credit facilities $ 442,660 $ 339,536
Borrowings from securitizations 549,400 1,708,534
Accounts payable, accrued expenses and other liabilities 31,384 58,238
Aircraft acquisition payable 65,171
Dividends payable 22,584 40,467
Lease rentals received in advance 11,068 14,672
Repurchase agreements 83,694 75,163
Security deposits 39,767 57,836
Maintenance payments 82,914 132,284
Fair value of derivative liabilities 18,035 3,021
Total liabilities 1,281,506 2,494,922
Commitments and Contingencies – Note 13    
SHAREHOLDERS’ EQUITY    
Preference shares, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding at December 31, 2006 and June 30, 2007
Common shares, $.01 par value, 250,000,000 shares authorized, 51,621,279 shares issued and outstanding at December 31, 2006; and 67,433,451 shares issued and outstanding at June 30, 2007 516 674
Additional paid-in capital 630,154 1,127,950
Dividends in excess of earnings (3,382 )   (17,867 )  
Accumulated other comprehensive income 9,909 65,553
Total shareholders’ equity 637,197 1,176,310
Total liabilities and shareholders’ equity $ 1,918,703 $ 3,671,232

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

3




Table of Contents

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,
2006 2007 2006 2007
Revenues        
Lease rentals $ 38,008 $ 81,926 $ 67,760 $ 149,284
Interest income 2,460 2,728 4,101 5,316
Other revenue 460 519
Total revenues 40,468 85,114 71,861 155,119
Expenses        
Depreciation 11,162 27,764 20,238 49,398
Interest (net of interest income of $1,466 and $4,122 for the three months ended and $2,740 and $5,883 for the six months ended June 30, 2006 and 2007, respectively) 12,714 19,345 20,078 36,077
Selling, general and administrative (including non-cash share based payment expense of $5,393 and $2,789 for the three months ended and $6,685 and $4,046 for the six months ended June 30, 2006 and 2007, respectively) 9,973 10,448 15,847 18,944
Other expense (income) 277 (774 )   917 (393 )  
Total expenses 34,126 56,783 57,080 104,026
Income from continuing operations before income taxes 6,342 28,331 14,781 51,093
Income tax provision 1,634 1,173 2,638 3,078
Income from continuing operations 4,708 27,158 12,143 48,015
Earnings from discontinued operations, net of income taxes 342 10,910 4,087 11,594
Net income  $ 5,050 $ 38,068 $ 16,230 $ 59,609
Basic earnings per share:        
Income from continuing operations $ 0.11 $ 0.41 $ 0.28 $ 0.77
Earnings from discontinued operations, net of income taxes 0.01 0.16 0.10 0.18
Net income per share $ 0.12 $ 0.57 $ 0.38 $ 0.95
Diluted earnings per share:        
Income from continuing operations $ 0.10 $ 0.41 $ 0.28 $ 0.77
Earnings from discontinued operations, net of income taxes 0.01 0.16 0.10 0.18
Net income per share $ 0.11 $ 0.57 $ 0.38 $ 0.95
         
Dividends declared per share $ $ 0.60 $ $ 1.10

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

4




Table of Contents

Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)


  Six Months Ended
June 30,
  2006 2007
Cash flows from operating activities    
Net income $ 16,230 $ 59,609
Adjustments to reconcile net income to net cash provided by operating activities (inclusive of amounts related to discontinued operations)    
Depreciation 21,763 50,158
Amortization of deferred financing costs 3,435 3,166
Amortization of lease premiums and discounts, and other related lease items (1,542 )   (3,493 )  
Deferred income taxes 805 (3,109 )  
Accretion of purchase discounts on debt investments (382 )   (405 )  
Non-cash share based payment expense 6,685 4,046
Cash flow hedges reclassified into earnings (172 )   (2,110 )  
Realized gain on derivative contract (1,154 )  
Ineffective portion of cash flow hedges (858 )   (418 )  
Gain on the sale of flight equipment (2,240 )   (10,219 )  
Changes in certain assets and liabilities:    
Accounts receivable (3,114 )   2,222
Restricted cash and cash equivalents (21,748 )   (22,872 )  
Other assets (804 )   (2,269 )  
Accounts payable, accrued expenses and other liabilities 744 5,187
Lease rentals received in advance 2,646 3,604
Security deposits and maintenance payments 37,531 67,790
Net cash provided by operating activities 58,979 149,733
Cash flows from investing activities    
Acquisition and improvement of flight equipment (385,433 )   (1,070,216 )  
Disposition of flight equipment held for sale 57,157 34,946
Purchase of debt investments (92,726 )   (15,251 )  
Margin deposits 3,688
Leasehold improvements, furnishings and equipment (602 )   (259 )  
Aircraft purchase deposits and progress payments (29,522 )   (88,413 )  
Principal repayments on debt investments 3,589 13,372
Net cash used in investing activities (447,537 )   (1,122,133 )  
Cash flows from financing activities    
Issuance of common shares 38,702 493,056
Issuance of common shares to employees 1,216
Repurchase of shares from employees (364 )  
Proceeds from securitizations 560,000 1,170,000
Credit facility borrowings 294,730 1,009,779
Restricted cash and cash equivalents related to unreleased securitization borrowings (32,865 )   (500,565 )  
Securitization repayments (10,866 )  
Credit facility repayments (522,883 )   (1,112,902 )  
Deferred financing costs (13,872 )   (11,552 )  
Proceeds from repurchase agreements 75,978 894
Proceeds from terminated cash flow hedges 16,142 8,936
Restricted cash from terminated cash flow hedges (16,142 )  
Principal repayments on repurchase agreements (199 )   (9,425 )  
Dividends paid (56,211 )  
Net cash provided by financing activities 399,591 981,996
Net increase in cash and cash equivalents 11,033 9,596
Cash and cash equivalents at beginning of period 79,943 58,118
Cash and cash equivalents at end of period $ 90,976 $ 67,714

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

5




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

Note 1.    Summary of Significant Accounting Policies

Organization

Aircastle Limited, (‘‘Aircastle,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’) is a Bermuda exempted company that was incorporated on October 29, 2004 by funds managed by affiliates of Fortress Investment Group LLC and certain of its affiliates (together, the ‘‘Fortress Shareholders’’ or ‘‘Fortress’’, and such funds the ‘‘Fortress Funds’’) under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including acquiring, managing and leasing commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments. Fortress Shareholders continue to beneficially own a majority of our outstanding common shares.

Basis of Presentation

Aircastle is a holding company that conducts its business through subsidiaries. Aircastle owns, directly or indirectly, all of the outstanding common shares or economic ownership interest of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’).

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 condensed financial statements prepared in accordance with 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, 2006.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates two Variable Interest Entities (‘‘VIEs’’) in accordance with the Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 46, Consolidation of Variable Interest Entities (‘‘FIN 46’’) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (‘‘SFAS No. 159’’). SFAS No 159, which amends SFAS No. 115, allows certain financial assets and liabilities to be recognized, at the company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Currently, the Company records the gains or losses for the period in the statement of comprehensive income and in

6




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

the equity section of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of SFAS No. 159 on its consolidated results of operations and financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements (‘‘SFAS No. 157’’). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies in conjunction with other accounting pronouncements that require or permit fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the potential impacts of SFAS No. 157 on its consolidated results of operations and financial position.

Note 2.    Fair Value of Financial Instruments

Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, debt investments, accounts payable, amounts borrowed under credit facilities, borrowings from securitization, repurchase agreements and cash flow hedges. 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. Borrowings under our credit facilities, securitizations and repurchase agreements bear floating rates of interest which reset monthly or quarterly to a market benchmark rate plus a credit spread. We believe that, for similar financial instruments with comparable credit risks, the effective rate of these agreements approximates market rates at the balance sheet dates. Accordingly, the carrying amounts of these agreements are believed to approximate their fair values. The fair value of our debt investments and cash flow hedges is generally determined by reference to broker quotations.

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 at June 30, 2007 were as follows:


Year Ending December 31, Amount
Remainder of 2007 $ 195,699
2008 374,351
2009 319,287
2010 258,822
2011 195,845
2012 129,088
Thereafter 169,231
  $ 1,642,323

7




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

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 2006 2007 2006 2007
Europe 45 %   46 %   42 %   45 %  
Asia 22 %   27 %   24 %   26 %  
North America 27 %   18 %   28 %   20 %  
Latin America 4 %   6 %   5 %   6 %  
Middle East and Africa 2 %   3 %   1 %   3 %  
  100 %   100 %   100 %   100 %  

The classification of regions in the tables above and the table and discussion below is determined based on the principal location of the lessee of each aircraft.

For the three months ended June 30, 2006, one customer accounted for 27% of lease rental revenues and three additional customers accounted for a combined 20% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenue. For the three months ended June 30, 2007, one customer accounted for 13% of lease rental revenue and two additional customers accounted for a combined 13% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenues

For the six months ended June 30, 2006, one customer accounted for 29% of lease rental revenues and three additional customers accounted for a combined 22% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenue. For the six months ended June 30, 2007, one customer accounted for 15% of lease rental revenue and three additional customers accounted for a combined 19% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenues.

Geographic concentration of net book value of flight equipment held for lease was as follows:


  December 31, 2006 June 30, 2007
Region Number of
Aircraft
Net Book
Value %
Number of
Aircraft
Net Book
Value %
Europe 35 45 %   47 45 %  
Asia 15 23 %   29 31 %  
North America 11 22 %   12 13 %  
Latin America 5 6 %   6 4 %  
Middle East and Africa 3 4 %   6 7 %  
  69 100 %   100 100 %  

At December 31, 2006 and June 30, 2007, lease acquisition costs included in other assets on the consolidated balance sheets were $794 and $184, respectively. Prepaid lease incentive costs included in other assets on the consolidated balance sheets were $830 and $417 at December 31, 2006 and June 30, 2007, respectively.

Note 4.    Discontinued Operations and Flight Equipment Held for Sale

As of December 31, 2005, one of our aircraft was classified as flight equipment held for sale. During the three months ended March 31, 2006, we completed the sale of this aircraft. In accordance with the credit facility associated with this aircraft, a portion of the proceeds was used to repay $36,666 of debt related to the aircraft plus accrued interest.

8




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

As of March 31, 2007, one of our aircraft was classified as flight equipment held for sale. In May, 2007 we completed the sale of this aircraft. Lease rents, depreciation, other expenses and the gain on disposition related to this aircraft have been recorded as earnings from discontinued operations, net of income tax provision, for the three and six months ended June 30, 2007. For the three and six month periods ended June 30, 2007, we had no outstanding borrowings and incurred no interest expense related to this aircraft.

Earnings from discontinued operations for the three months and the six months ended June 30, 2006 and 2007 related solely to the two aircraft held for sale, were as follows:


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2007 2006 2007
Earnings from discontinued operations        
Lease rentals $ 1,619 $ 745 $ 5,373 $ 2,364
Depreciation (685 )   (1,525 )   (761 )  
Gain on disposition 10,219 2,240 10,219
Interest expense (451 )   (1,332 )  
Other expenses (112 )   (47 )   (192 )   (185 )  
Earnings before income tax provision 371 10,917 4,564 11,637
Income tax provision (29 )   (7 )   (477 )   (43 )  
Earnings from discontinued operations $ 342 $ 10,910 $ 4,087 $ 11,594

Note 5.    Debt Investments

At June 30, 2007, debt investments with an aggregate fair value of $108,074 were U.S. corporate obligations and were classified as available-for-sale. These debt obligations are interests in pools of loans and are collateralized by interests in commercial aircraft of which $86,601 are senior tranche with an investment grade rating and $21,473 are subordinate to other debt related to such aircraft. All of our debt investments which are classified as available-for-sale had unrealized gain positions relative to their net book values, which aggregated to $14,390 and $13,561 at December 31, 2006 and June 30, 2007, respectively.

At June 30, 2007, debt investments with a fair value of $44,977 and $44,887, respectively, have stated maturities in 2010 and 2011, respectively. Debt investments with an aggregate fair value of $18,210 have remaining terms to stated maturity in excess of 10 years after June 30, 2007. All of our debt investments provide for the periodic payment of both principal and interest and are subject to prepayment and/or acceleration depending on certain events, including the sale of the underlying collateral aircraft and events of default. Therefore, the actual maturity of our debt investments may be less than the stated maturities.

In 2007, we acquired a loan secured by a commercial jet aircraft with a cash purchase of $15,251 that was classified as held to maturity. The loan has a stated maturity of December 2007 and at June 30, 2007 had a net book value of $14,654, which we believe approximates its fair value as of that date.

Note 6.    Securitization and Borrowings under Credit Facilities

We used three separate credit facilities and two securitizations, as described below, to fund a portion of the purchase price of our acquisitions of flight equipment. These borrowings are secured by our interests in the leases on the flight equipment, including the rights to receive rents and other income from the flight equipment, funds on deposit in lockbox accounts established to collect rents and any security deposits and/or maintenance payments received from lessees and certain other interests.

9




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

Securitization No. 2

On June 8, 2007, we completed our second securitization, a $1,170,000 transaction comprising 59 aircraft, which we refer to as ‘‘Securitization No. 2’’. 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’’), to which we refer together with their subsidiaries as the ‘‘ACS 2 Group’’ issued $1,170,000 of Class A notes, or the ‘‘ACS 2 Notes’’, to a newly formed trust, the ACS 2007-1 Pass Through Trust, or the ‘‘ACS 2 Trust.’’ The ACS 2 Trust simultaneously issued a single class of Class G-1 pass through trust certificates, or the ‘‘ACS 2 Certificates’’, representing undivided fractional interests in the ACS 2 Notes. Payments on the ACS 2 Notes will be passed through to the holders of the ACS 2 Certificates. The ACS 2 Notes are secured by ownership in aircraft owning subsidiaries of ACS Bermuda 2 and ACS Ireland 2 and the aircraft leases, cash, rights under service agreements and any other assets they may hold. Each of ACS Bermuda 2 and ACS Ireland 2 has fully and unconditionally guaranteed the other’s obligations under the ACS 2 Notes. However, the ACS 2 Notes are neither obligations of nor guaranteed by Aircastle Limited. The ACS 2 Notes mature on June 8, 2037.

The terms of Securitization No. 2 require the ACS 2 Group to satisfy certain financial covenants, including the maintenance of debt service coverage ratios. The ACS 2 Group’s compliance with these covenants depends substantially upon the timely receipt of lease payments from their lessees. In particular, during the first five years from issuance, Securitization No. 2 has an amortization schedule that requires that lease payments be applied to reduce the outstanding principal balance of the indebtedness so that such balance remains at 60.6% of an assumed value of the 59 aircraft securing the ACS 2 Notes. If the debt service coverage ratio requirements are not met on two consecutive monthly payment dates in the fourth and fifth year following the closing date of Securitization No. 2, and in any month following the fifth anniversary of the closing date, all excess securitization cash flow is required to be used to reduce the principal balance of the indebtedness and will not be available to us for other purposes, including paying dividends to our shareholders.

As of June 30, 2007, the ACS 2 Group used the proceeds from the sale of the ACS 2 Notes to acquire 39 aircraft from us and we paid certain expenses incurred in connection with the ACS 2 Certificates offering of approximately $12,620. At June 30, 2007, the ACS 2 Group held proceeds in the amount of $500,565 in restricted cash for the purchase of the remaining 20 aircraft, which is expected to occur during the third quarter of 2007. We used a portion of the proceeds from Securitization No. 2 to repay amounts owed under Amended Credit Facility No. 2. The ACS 2 Notes provide for monthly payments of interest at a floating rate of one-month LIBOR plus 0.26%, which at June 30, 2007 was 5.58%, and scheduled payments of principal.

Financial Guaranty Insurance Company (‘‘FGIC’’) issued a financial guaranty insurance policy to support the payment of interest when due on the ACS 2 Certificates and the payment, on the final distribution date, of the outstanding principal amount of the ACS 2 Certificates. The ACS 2 Certificates are rated Aaa and AAA by Moody’s Investors Service and Standard & Poor’s rating services, respectively. We have entered into a series of interest rate hedging contracts intended to hedge the interest rate exposure associated with issuing floating-rate obligations backed by primarily fixed-rate lease assets. These contracts, together with the related guarantee premium, the spread referenced above and other costs of trust administration, result in a fixed rate cost of 6.20% per annum, after the amortization of issuance fees and expenses.

ACS Ireland 2, which had total assets of $218,705 at June 30, 2007, is a VIE which we consolidate. At June 30, 2007, the outstanding principal amount of ACS Ireland 2’s notes was $190,682. The assets of ACS Ireland 2 as of June 30, 2007 include eight of nine planes to be transferred to ACS Ireland 2 in connection with Securitization No. 2, and the remaining aircraft transferred during the third quarter of 2007.

10




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

Securitization No. 1

In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland plc (‘‘ACS Ireland 1’’) and ACS Aircraft Finance Bermuda Limited (‘‘ACS Bermuda 1’’), which we refer to together with their subsidiaries as the ‘‘ACS 1 Group,’’ issued $560,000 of Class A-1 notes, or the ‘‘ACS 1 Notes’’. As of June 30, 2007, $538,534 of this securitization remains outstanding. The ACS 1 Notes mature on June 20, 2031. The ACS 1 Notes provide for monthly payments of interest at a floating rate of one-month LIBOR plus 0.27%, which at June 30, 2007 was 5.59%, and scheduled payments of principal. We entered into a series of interest rate hedging contracts intended to hedge the interest rate exposure associated with issuing floating-rate obligations backed by primarily fixed-rate lease assets. These contracts, together with the related guarantee premium, the spread referenced above and other costs of trust administration, result in a fixed rate cost of 6.60% per annum, after the amortization of issuance fees and expenses.

ACS Ireland 1, which had total assets of $145,293 at June 30, 2007, is a VIE which we consolidate. At June 30, 2007, the outstanding principal amount of ACS Ireland 1’s notes was $104,296.

Amended Credit Facility No. 2

We are currently utilizing a senior secured credit facility, which we refer to as Amended Credit Facility No. 2, to finance up to 65% of the purchase price of certain aircraft not included in our two securitizations. As of June 30, 2007, we had outstanding borrowings of $266,204 under Amended Credit Facility No. 2 and the interest rate was 6.57%. On June 8, 2007, the maximum committed amount of Amended Credit Facility No. 2 was reduced to $1,000,000 and $509,942 was repaid on Amended Credit Facility No. 2 from the proceeds of Securitization No. 2. Borrowings under Amended Credit Facility No. 2 bear interest (a) in the case of loans with an interest rate based on the applicable base rate (the ‘‘ABR’’), which is the greater of (i) the prime rate and (ii) the federal funds rate plus 0.50%, at an annual rate equal to the ABR plus 0.25% or (b) in the case of loans with an interest rate based on the eurodollar rate (the ‘‘EDR’’), which is one-month LIBOR, at an annual rate equal to the EDR plus 1.25% per annum. Additionally, we are subject to a 0.125% fee on any unused portion of the total committed facility. Amended Credit Facility No. 2 requires the monthly payment of interest and the monthly payment of principal, to the extent of 65% of any decrease in the net book value of the aircraft securing Amended Credit No. 2. Amended Credit Facility No. 2 matures on December 15, 2008.

Revolving Credit Facility

Our $250,000 revolving credit facility, which we refer to as the Revolving Credit Facility, provides loans for working capital and other general corporate purposes, and also provides for issuance of letters of credit with an aggregate stated amount not exceeding $125,000. The aggregate amount of borrowings together with the aggregate stated amount of all letters of credit under the Revolving Credit Facility may not exceed $250,000. Borrowings under the Revolving Credit Facility bear interest (a) in the case of loans with an interest rate based on ABR, at the ABR plus 0.50% per annum, or (b) in the case of loans with an interest rate based on the EDR, at the EDR plus 1.50% per annum. Additionally, we are subject to a per annum fee on any unused portion of the total committed facility of 0.25%, during periods when the average outstanding loans under the Revolving Credit Facility are less than $125.0 million, and 0.125% per annum when the average outstanding loans are equal to or greater than $125,000. Fees on any outstanding letters of credit will equal 1.625% per annum on the stated amount thereof. We are also required to pay customary agency fees. Additionally, we are required to maintain a net worth determined in accordance with GAAP of not less than $750,000 plus

11




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

one-half of the net proceeds of any future equity capital we raise. We are not permitted to pay dividends on our common shares to the extent a default or an event of default exists under our Revolving Credit Facility.

The Revolving Credit Facility matures on December 15, 2007. At June 30, 2007, there were no outstanding loans and $32,273 of letters of credit outstanding under the Revolving Credit Facility.

Credit Facility No. 3

As of June 30, 2007, we had a secured credit facility to finance the acquisition of two aircraft, which we refer to as Credit Facility No. 3. We had outstanding borrowings of $73,332 under Credit Facility No. 3 as of June 30, 2007, and the interest rate was 6.82%. Credit Facility No. 3 was repaid in full in July of 2007 out of the proceeds of Securitization No. 2. The interest rate on Credit Facility No. 3 was one-month LIBOR plus 1.50%. On January 26, 2007, Credit Facility No. 3 was amended to extend the maturity date from March 31, 2007 to the earlier of September 30, 2007 or the transfer of the related aircraft financed on Credit Facility No. 3 into Securitization No. 2.

The weighted average interest rate of Amended Credit Facility No. 2, the Revolving Credit Facility and Credit Facility No. 3 at December 31, 2006 and June 30, 2007 was 6.64%, and 6.62%, respectively.

Note 7.    Repurchase Agreements

We enter into repurchase agreements to fund a portion of the purchase price of certain of our senior tranche investment grade debt investments. At December 31, 2006 and June 30, 2007 the repurchase agreements are secured by liens on the debt investments with a fair value of $105,550 and $93,593, respectively. The repurchase agreements provide for the payment of interest at LIBOR based rates plus spreads ranging from 0.50% to 0.75%. At June 30, 2007 the rate for LIBOR plus 0.50% was 5.82% and the rate for LIBOR plus 0.75% was 6.11%. The repurchase agreements are substantially all with parties other than those from whom we originally purchased the debt investments. At June 30, 2007, the repurchase agreements are scheduled to mature between September 2007 and June 2008. Upon maturity, we plan to refinance the repurchase agreements on similar terms and conditions. The weighted average interest rate of these repurchase agreements at December 31, 2006 and June 30, 2007 was 5.88% and 5.84%, respectively.

Note 8.    Shareholders’ Equity and Share Based Payments

In August 2006, the Company completed its initial public offering of 10,454,535 common shares at a price of $23.00 per share, raising $240,454 before offering costs. The net proceeds of the initial public offering, after our payment of $16,832 in underwriting discounts and commissions, and $4,027 in offering expenses were $219,595. Approximately $205,470 of the net proceeds was used to repay a portion of Credit Facility No. 2. The remainder of the net proceeds was used for working capital requirements and to fund additional aircraft acquisitions.

On February 8, 2006, Fortress purchased 3,693,200 common shares at $10 per share for a total amount of $36,932. On July 21, 2006, the Company returned $36,932 of cash to Fortress in exchange for the cancellation of 3,693,200 of our common shares at $10 per share.

On February 13, 2007, the Company completed a follow-on public offering of 15,525,000 common shares at a price of $33.00 per share, raising $512,325 before offering costs. Net proceeds of the offering, after our payment of $17,931 in underwriting discounts and commissions and $1,338 in offering expenses, were $493,056. Approximately $473,074 of the net proceeds was used to repay borrowings under Amended Credit Facility No. 2 and the Revolving Credit Facility. The remainder of the net proceeds was used for working capital requirements and to fund additional aircraft acquisitions.

12




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

On April 12, 2007, an officer of the Company was granted 135,000 common shares and purchased an additional 35,000 shares for a total of 170,000 shares.

On April 30, 2007, the Company accelerated the vesting of 50,000 restricted shares of a former officer resulting in a non-cash share based expense of $1,670.

A summary of the fair value of nonvested shares for the six months ended June 30, 2007 is as follows:


Nonvested Shares Shares
(in 000’s)
Weighted
Average
Grant Date
Fair Value
Fair Value
of
Nonvested
Shares at
Grant Date
Nonvested at January 1, 2007 901.3 $ 18.05 $ 16,266
Granted 254.5 34.01 8,655
Cancelled (1.2 )   (28.89 )   (34 )  
Vested (238.1 )   (18.85 )   (4,487 )  
Nonvested at June 30, 2007 916.5 $ 22.26 $ 20,400

The fair value of the restricted shares granted in 2007 was determined based upon the market price of the shares at the grant date. We anticipate that the current requisite service periods will be obtained for employees with awards. The total unrecognized compensation cost as of June 30, 2007 in the amount of $17,488 is expected to be recognized over a weighted average period of four years.

Note 9.    Dividends

On December 13, 2006 the Board declared a fourth quarter dividend of $0.4375 per common share, or an aggregate of $22,584 to shareholders of record as of December 29, 2006, which was paid on January 15, 2007.

On March 14, 2007, the Board declared a first quarter dividend of $0.50 per Common Share, or an aggregate of $33,634, which was paid on April 13, 2007 to the shareholders of record as of March 30, 2007.

On June 14, 2007, the Board declared a second quarter dividend of $0.60 per Common Share, or an aggregate of $40,460 which was paid on July 13, 2007 to the shareholders of record as of June 29, 2007.

13




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

Note 10.    Earnings Per Share

The following table shows how we computed basic and diluted earnings per share:


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2007 2006 2007
Numerator        
Income from continuing operations $ 4,708 $ 27,158 $ 12,143 $ 48,015
Earnings from discontinued operations, net of income taxes 342 10,910 4,087 11,594
Net income $ 5,050 $ 38,068 $ 16,230 $ 59,609
Denominator        
Weighted-average shares used to compute basic earnings per share 43,922,711 66,554,222 42,610,193 62,730,381
Effect of dilutive restricted shares 204,556 269,235 245,298 227,490
Weighted-average shares outstanding and dilutive securities used to compute diluted earnings per share 44,127,267 66,823,457 42,855,491 62,957,871

Note 11.    Income Taxes

The sources of income from continuing operations before income taxes for the three and six months ended June 30, 2006 and 2007 were as follows:


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2007 2006 2007
U.S. operations $ 238 $ 931 $ 406 $ 1,376
Non-U.S. operations 6,104 27,400 14,375 49,717
Total $ 6,342 $ 28,331 $ 14,781 $ 51,093

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,
  2006 2007 2006 2007
Notional U.S. federal income tax expense at the statutory rate: $ 2,575 $ 9,622 $ 5,650 $ 17,589
U.S. state and local income tax, net 90 56 108 106
Non-U.S. operations (1,723 )   (8,514 )   (3,997 )   (14,649 )  
Non-deductible expenses in the U.S. 368 59 372 73
Other 324 (50 )   505 (41 )  
Provision for income taxes $ 1,634 $ 1,173 $ 2,638 $ 3,078

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (‘‘FIN 48’’), on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return

14




Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2007

should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.

We conduct business globally and, as a result, the Company and its subsidiaries or branches are subject to foreign, U.S. federal and various state income taxes as well as withholding taxes. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States and Ireland. With few exceptions, the Company and its subsidiaries or branches remain subject to examination for all periods since inception.

Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense or penalty recognized during the quarter.

Note 12.     Comprehensive Income

Comprehensive income includes net income, the changes in the fair value and the reclassification into earnings of amounts previously deferred relating to our derivative financial instruments which qualify for hedge accounting in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended and interpreted, and the change in unrealized appreciation of debt investments classified as available-for-sale. Comprehensive income was $18,127 and $105,753 for the three months ended June 30, 2006 and 2007 and $44,767 and $115, 253 for the six months ended June 30, 2006 and 2007, respectively.

Note 13.    Commitments and Contingencies

On June 20, 2007, Aircastle entered into an acquisition agreement (the ‘‘Airbus A330F Agreement’’) with Airbus SAS (‘‘Airbus’’) under which we agreed to acquire 15 new Airbus Model A330-200F freighter aircraft (the ‘‘New A330F Aircraft’’). Five of the aircraft we will acquire under the Airbus A330F Agreement are scheduled to be delivered in 2010 with the remainder to be delivered in 2011.

On January 22, 2007, Aircastle entered into an acquisition agreement (the ‘‘GAIF Acquisition Agreement’’ and t