Document
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, 2018
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
201 Tresser Boulevard, Suite 400, Stamford, CT
06901
(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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨    NO  þ
As of August 3, 2018, there were 78,186,008 outstanding shares of the registrant’s common shares, par value $0.01 per share.



Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
 
 
 
Page
No.
 
 
Item 1.
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
Consolidated Statements of Income (Loss) for the three and six months ended June 30, 2018 and 2017
 
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I. — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)

 
June 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
142,360

 
$
211,922

Restricted cash and cash equivalents
20,880

 
21,935

Accounts receivable
19,357

 
12,815

Flight equipment held for lease, net of accumulated depreciation of $1,177,448 and $1,125,594, respectively
6,249,406

 
6,188,469

Net investment in finance and sales-type leases
526,738

 
545,750

Unconsolidated equity method investments
80,100

 
76,982

Other assets
174,307

 
141,210

Total assets
$
7,213,148

 
$
7,199,083

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs
$
798,522

 
$
849,874

Borrowings from unsecured financings, net of debt issuance costs
3,392,169

 
3,463,732

Accounts payable, accrued expenses and other liabilities
131,364

 
140,221

Lease rentals received in advance
76,780

 
57,630

Security deposits
131,101

 
130,628

Maintenance payments
719,806

 
649,434

Total liabilities
5,249,742

 
5,291,519

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Preference shares, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding

 

Common shares, $0.01 par value, 250,000,000 shares authorized, 78,244,038 shares issued and outstanding at June 30, 2018; and 78,707,963 shares issued and outstanding at December 31, 2017
782

 
787

Additional paid-in capital
1,519,479

 
1,527,796

Retained earnings
443,900

 
380,331

Accumulated other comprehensive loss
(755
)
 
(1,350
)
Total shareholders’ equity
1,963,406

 
1,907,564

Total liabilities and shareholders’ equity
$
7,213,148

 
$
7,199,083


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

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income (Loss)
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
178,486

 
$
189,098

 
$
355,969

 
$
379,684

Finance and sales-type lease revenue
8,868

 
5,878

 
18,310

 
9,951

Amortization of lease premiums, discounts and incentives
(3,534
)
 
(3,280
)
 
(6,662
)
 
(6,392
)
Maintenance revenue

 
28,944

 
11,991

 
41,231

Total lease revenue
183,820

 
220,640

 
379,608

 
424,474

Gain on sale of flight equipment
19,864

 
13,525

 
25,632

 
14,284

Other revenue
592

 
2,894

 
1,716

 
3,333

Total revenues
204,276

 
237,059

 
406,956

 
442,091

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
76,181

 
78,254

 
151,183

 
157,428

Interest, net
57,398

 
61,672

 
114,506

 
124,740

Selling, general and administrative (including non-cash share-based payment expense of $3,076 and $6,028 for the three months ended and $5,454 and $8,130 for the six months ended June 30, 2018 and 2017, respectively)
18,583

 
22,187

 
36,418

 
38,354

Impairment of flight equipment

 
79,930

 

 
80,430

Maintenance and other costs
1,561

 
2,343

 
2,549

 
5,274

Total expenses
153,723

 
244,386

 
304,656

 
406,226

 
 
 
 
 
 
 
 
Total other income (expense)
901

 
(1,560
)
 
4,075

 
(2,709
)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments
51,454

 
(8,887
)
 
106,375

 
33,156

Income tax provision
3,132

 
495

 
2,288

 
2,341

Earnings of unconsolidated equity method investments, net of tax
1,881

 
2,266

 
3,663

 
4,508

Net income (loss)
$
50,203

 
$
(7,116
)
 
$
107,750

 
$
35,323

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.64

 
$
(0.09
)
 
$
1.37

 
$
0.45

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.64

 
$
(0.09
)
 
$
1.37

 
$
0.45

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.28

 
$
0.26

 
$
0.56

 
$
0.52


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

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income (loss)
$
50,203

 
$
(7,116
)
 
$
107,750

 
$
35,323

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net derivative loss reclassified into earnings
294

 
575

 
595

 
1,156

Other comprehensive income
294

 
575

 
595

 
1,156

Total comprehensive income (loss)
$
50,497

 
$
(6,541
)
 
$
108,345

 
$
36,479



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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
107,750

 
$
35,323

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
151,183

 
157,428

Amortization of deferred financing costs
7,042

 
9,125

Amortization of lease premiums, discounts and incentives
6,662

 
6,392

Deferred income taxes
3,126

 
(833
)
Non-cash share-based payment expense
5,454

 
8,130

Cash flow hedges reclassified into earnings
595

 
1,156

Security deposits and maintenance payments included in earnings
(554
)
 
(23,063
)
Gain on sale of flight equipment
(25,632
)
 
(14,284
)
Impairment of flight equipment

 
80,430

Other
(7,491
)
 
1,211

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(7,315
)
 
2,090

Other assets
(3,086
)
 
(11,407
)
Accounts payable, accrued expenses and other liabilities
(14,799
)
 
(2,194
)
Lease rentals received in advance
16,908

 
(2,115
)
Net cash and restricted cash provided by operating activities
239,843

 
247,389

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment
(365,505
)
 
(148,364
)
Proceeds from sale of flight equipment
178,185

 
238,277

Net investment in finance and sales-type leases
(16,256
)
 
(119,971
)
Collections on finance and sales-type leases
13,127

 
17,185

Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits
(3,965
)
 
(2,892
)
Other
2,956

 
88

Net cash and restricted cash used in investing activities
(191,458
)
 
(15,677
)
Cash flows from financing activities:
 
 
 
Repurchase of shares
(14,987
)
 
(2,513
)
Proceeds from secured and unsecured debt financings

 
500,000

Repayments of secured and unsecured debt financings
(128,342
)
 
(667,472
)
Deferred financing costs
(1,615
)
 
(8,540
)
Security deposits and maintenance payments received
108,653

 
87,185

Security deposits and maintenance payments returned
(38,718
)
 
(77,593
)
Dividends paid
(43,993
)
 
(40,948
)
Net cash and restricted cash used in financing activities
(119,002
)
 
(209,881
)
Net (decrease) increase in cash and restricted cash
(70,617
)
 
21,831

Cash and restricted cash at beginning of period
233,857

 
508,817

Cash and restricted cash at end of period
$
163,240

 
$
530,648







6


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
108,078

 
$
117,420

Cash paid for income taxes
$
5,533

 
$
2,200

Supplemental disclosures of non-cash investing activities:
 
 
 
Advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
28,348

 
$
3,653

Advance lease rentals, security deposits, and maintenance payments, other liabilities and other assets settled in sale of flight equipment
$
40,116

 
$
44,603

Transfers from Flight equipment held for lease to Net investment in finance and sales-type leases and Other assets
$
40,198

 
$
99,162


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

7

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018


Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is acquiring, leasing, managing and selling commercial jet aircraft.
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 (“U.S. GAAP”). The Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment: leasing, financing, selling and managing commercial flight equipment. Our Chief Executive Officer is the chief operating decision maker.
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 U.S. 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, 2017.
As part of the Company’s adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), we have reclassified Gain on sale of flight equipment from Other income (expense) to Revenues on our Consolidated Statements of Income for the three and six months ended June 30, 2018. We believe this better reflects the sale of flight equipment as part of our ordinary activities and conforms our presentation to those of our publicly traded peers. The presentation for the three and six months ended June 30, 2017, has also been reclassified to conform to the current period presentation:
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Total revenues as previously reported
$
223,534

 
$
427,807

Gain on sale of flight equipment
13,525

 
14,284

Total revenues
$
237,059

 
$
442,091

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, 2018, through the date on which the consolidated financial statements included in this Form 10-Q were issued.
Effective January 1, 2018, the Company adopted FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The standard clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The update is applied using a retrospective transition method to each period presented. The standard did not have a material impact on our consolidated financial statements and related disclosures.
Effective January 1, 2018, the Company adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related updates, as noted above. Lease contracts within the scope of Accounting Standards Codification (“ASC”) 840, Leases, are specifically excluded from ASU No. 2014-09. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The update is applied using the modified retrospective approach. The standard did not have a material impact on our consolidated financial statements and related disclosures.

8

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

Effective January 1, 2018, the Company adopted FASB ASU No. 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. In addition, when applicable, disclosure is required to indicate that compensation expense has not changed. The update is applied using a prospective transition method to each period presented. The standard did not have a material impact on our consolidated financial statements and related disclosures.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates four 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
Recent Accounting Pronouncements
On February 25, 2016, the FASB issued ASC 842, Leases (“ASC 842”) which, together with all subsequent amendments, replaced the existing guidance in ASC 840, Leases (“ASC 840”). The accounting for leases by lessors basically remained unchanged from the concepts that existed in ASC 840 accounting. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct finance lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective. The standard will be effective for reporting periods beginning after December 15, 2018. We plan to adopt the standard on its required effective date of January 1, 2019, using the “modified retrospective” approach and are reviewing which, if any, practical expedients to use. We are also evaluating the impact that ASC 842 will have on our consolidated financial statements and related disclosures. We do not believe that the adoption of the standard will significantly impact our existing or potential lessees' economic decisions to lease aircraft.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The standard is applied on a modified retrospective approach. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as early as the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of determining the impact the standard will have on our consolidated financial statements and related disclosures.


9

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

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 as of June 30, 2018 and December 31, 2017 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets 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 June 30, 2018
Using Fair Value Hierarchy
 
Fair Value as of June 30, 2018
 
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
$
142,360

 
$
142,360

 
$

 
$

 
Market
Restricted cash and cash equivalents
20,880

 
20,880

 

 

 
Market
Derivative assets
7,329

 

 
7,329

 

 
Market
Total
$
170,569

 
$
163,240

 
$
7,329

 
$

 
 
 
 
 
Fair Value Measurements at December 31, 2017
Using Fair Value Hierarchy
 
Fair Value as of December 31, 2017
 
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
$
211,922

 
$
211,922

 
$

 
$

 
Market
Restricted cash and cash equivalents
21,935

 
21,935

 

 

 
Market
Derivative assets
3,254

 

 
3,254

 

 
Market
Total
$
237,111

 
$
233,857

 
$
3,254

 
$

 
 
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

10

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivative included in Level 2 consists of United States dollar-denominated interest rate cap, and the fair value is based on market comparisons for similar instruments. We also considered the credit rating and risk of the counterparty providing the interest rate cap based on quantitative and qualitative factors.
For the three and six months ended June 30, 2018 and the year ended December 31, 2017, we had no transfers into or out of Level 3.
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our investments in unconsolidated joint ventures and aircraft. We account for our investments in unconsolidated joint ventures under the equity method of accounting and record impairment when its fair value is less than its carrying value. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on an income approach which uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.
Aircraft Valuation
Annual Recoverability Assessment
We completed our annual recoverability assessment of our aircraft in the second quarter this year. We also performed aircraft-specific analyses where there were changes in circumstances, such as approaching lease expirations. No impairments were recorded as a result of our annual recoverability assessment.
The recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.
Management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no aircraft were impaired as a consequence of our annual recoverability assessment. However, if our estimates or assumptions change, we may revise our cash flow assumptions and record future impairment charges. While we believe that the estimates and related assumptions used in the annual recoverability assessment are appropriate, actual results could differ from those estimates.
Financial Instruments
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 value of our senior notes is estimated using quoted market prices. The fair values of all our other financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.




11

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

The carrying amounts and fair values of our financial instruments at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
 
Carrying  Amount
of Liability
 
Fair Value
of Liability
 
Carrying
Amount
of Liability
 
Fair Value
of Liability
Credit Facilities
$
100,000

 
$
100,000

 
$
175,000

 
$
175,000

Unsecured Term Loan
120,000

 
120,000

 
120,000

 
120,000

ECA Financings
208,448

 
208,823

 
227,491

 
232,030

Bank Financings
600,883

 
602,468

 
634,898

 
634,132

Senior Notes
3,200,000

 
3,246,700

 
3,200,000

 
3,367,245

All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.
Note 3. Lease Rental Revenues and Flight Equipment Held for Lease
Minimum future annual lease rentals contracted to be received under our existing operating leases of flight equipment at June 30, 2018 were as follows:
Year Ending December 31,
 
Amount
Remainder of 2018
 
$
373,563

2019
 
679,349

2020
 
576,304

2021
 
459,712

2022
 
367,244

Thereafter
 
725,712

Total
 
$
3,181,884

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
2018
 
2017
 
2018
 
2017
Asia and Pacific
35
%
 
37
%
 
35
%
 
39
%
Europe
29
%
 
24
%
 
29
%
 
23
%
Middle East and Africa
11
%
 
12
%
 
11
%
 
12
%
North America
8
%
 
8
%
 
8
%
 
7
%
South America
17
%
 
19
%
 
17
%
 
19
%
 
 
 
 
 
 
 
 
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.




12

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

The following table shows the number of lessees with lease rental revenue of at least 5% and their combined total percentage of lease rental revenue for the years indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
Largest lessees by lease rental revenue
3
 
19%
 
3
 
19%
 
3
 
19%
 
3
 
19%
At June 30, 2018 and December 31, 2017, no country represented at least 10% of total revenue based on each counterparty’s principal place of business.
Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in finance and sales-type leases, or “net book value”) was as follows:
 
June 30, 2018
 
December 31, 2017
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
62

 
30
%
 
59

 
30
%
Europe
87

 
30
%
 
92

 
32
%
Middle East and Africa
17

 
9
%
 
15

 
9
%
North America
36

 
12
%
 
32

 
10
%
South America
26

 
19
%
 
25

 
19
%
Off-lease


%
 
1

(1) 
%
Total
228

 
100
%
 
224

 
100
%
 
_______________
(1)
Consisted of one Airbus A321-200 aircraft, which was delivered on lease to a customer in the second quarter of 2018.
At June 30, 2018 and December 31, 2017, no country represented at least 10% of net book value of flight equipment based on each lessee’s principal place of business.
At June 30, 2018 and December 31, 2017, the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $15,709 and $11,496, respectively.
Note 4. Net Investment in Finance and Sales-Type Leases
At June 30, 2018, our net investment in finance and sales-type leases consisted of 30 aircraft. The following table lists the components of our net investment in finance and sales-type leases at June 30, 2018:
 
 
Amount
Total lease payments to be received
 
$
298,808

Less: Unearned income
 
(148,283
)
Estimated residual values of leased flight equipment (unguaranteed)
 
376,213

 
 
 
Net investment in finance and sales-type leases
 
$
526,738




13

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

At June 30, 2018, minimum future lease payments on finance and sales-type leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2018
 
$
35,080

2019
 
66,285

2020
 
63,840

2021
 
53,057

2022
 
42,460

Thereafter
 
38,086

Total lease payments to be received
 
$
298,808

Note 5. Unconsolidated Equity Method Investments
We have joint ventures with an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) and with the leasing arm of the Industrial Bank of Japan, Limited (“IBJL”).
At June 30, 2018, the net book value of both joint ventures’ twelve aircraft was approximately $628,000.
 
 
Amount
Investment in joint ventures at December 31, 2017
 
$
76,982

Investment in joint ventures
 
355

Earnings from joint ventures, net of tax
 
3,663

Distributions
 
(900
)
Investment in joint ventures at June 30, 2018
 
$
80,100

The Company has recorded in its Consolidated Balance Sheet a $13,200 guarantee liability in Maintenance payments and a $5,100 guarantee liability in Security deposits representing its share of the respective exposures.
Note 6. Variable Interest Entities
Aircastle consolidates four 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 six aircraft discussed below.
ECA Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), has entered into six different twelve-year term loans, which are supported by guarantees from Compagnie Française d'Assurance pour le Commerce Extérieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). We refer to these COFACE-supported financings as “ECA 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. The related aircraft, with a net book value as of June 30, 2018 of $403,835, were included in our flight

14

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

equipment held for lease. The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of June 30, 2018 is $203,882.
Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At June 30, 2018
 
At
December 31, 2017
Debt Obligation
Outstanding
Borrowings
 
Number of Aircraft
 
Interest Rate
 
Final Stated
Maturity
 
Outstanding
Borrowings
Secured Debt Financings:
 
 
 
 
 
 
 
 
 
ECA Financings(1)
$
208,448

 
6

 
3.02% to 3.96%
 
12/03/21 to 11/30/24
 
$
227,491

Bank Financings(2)
600,883

 
23

 
2.22% to 4.49%
 
09/11/18 to 01/19/26
 
634,898

Less: Debt Issuance Costs
(10,809
)
 

 
 
 
 
 
(12,515
)
Total secured debt financings, net of debt issuance costs
798,522

 
29

 
 
 
 
 
849,874

 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
 
 
Senior Notes due 2018
400,000

 
 
 
4.625%
 
12/15/18
 
400,000

Senior Notes due 2019
500,000

 
 
 
6.25%
 
12/01/19
 
500,000

Senior Notes due 2020
300,000

 
 
 
7.625%
 
04/15/20
 
300,000

Senior Notes due 2021
500,000

 
 
 
5.125%
 
03/15/21
 
500,000

Senior Notes due 2022
500,000

 
 
 
5.50%
 
02/15/22
 
500,000

Senior Notes due 2023
500,000

 
 
 
5.00%
 
04/01/23
 
500,000

Senior Notes due 2024
500,000

 
 
 
4.125%
 
05/01/24
 
500,000

Unsecured Term Loan
120,000

 
 
 
4.335%
 
04/28/19
 
120,000

Revolving Credit Facilities
100,000

 
 
 
4.19%
 
11/21/19 to 06/27/22
 
175,000

   Less: Debt Issuance Costs
(27,831
)
 
 
 
 
 
 
 
(31,268
)
Total unsecured debt financings, net of debt issuance costs
3,392,169

 
 
 
 
 
 
 
3,463,732

Total secured and unsecured debt financings, net of debt issuance costs
$
4,190,691

 
 
 
 
 
 
 
$
4,313,606

 
        
(1)
The borrowings under these financings at June 30, 2018 have a weighted-average rate of interest of 3.58%.
(2)
The borrowings under these financings at June 30, 2018 have a weighted-average fixed rate of interest of 4.24%.
Unsecured Debt Financings:
Revolving Credit Facility
On June 27, 2018, we increased the size of one of our unsecured revolving credit facilities from $675,000 to $800,000 and extended its maturity by more than two years to June 2022 and the interest rate decreased from LIBOR plus 2.25% to LIBOR plus 1.50%. At June 30, 2018, we had $100,000 outstanding under our revolving credit facilities.
As of June 30, 2018, we were in compliance with all applicable covenants in our financings.



15

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

Note 8. Shareholders' Equity and Share-Based Payment
During the six months ended June 30, 2018, the Company issued 291,876 restricted common shares and issued 306,359 performance share units (“PSUs”). These awards were made under the Aircastle Limited Amended and Restated 2014 Omnibus Incentive Plan.
During the six months ended June 30, 2018, the Company incurred share-based compensation expense of $2,813 related to restricted common shares and $2,641 related to PSUs.
As of June 30, 2018, there was $7,249 of unrecognized compensation cost related to unvested restricted common share-based payments and $9,276 of unrecognized compensation cost related to unvested PSU share-based payments that are expected to be recognized over a weighted-average remaining period of 1.95 years.
During the six months ended June 30, 2018, we repurchased 638,636 common shares at an aggregate cost of $12,492, including commissions. At June 30, 2018, the remaining dollar value of shares that may be repurchased under the repurchase program approved by our Board of Directors on February 9, 2016 is $83,396.
Note 9. 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
May 1, 2018
$
0.28

 
$
21,908

 
May 31, 2018
 
June 15, 2018
February 9, 2018
$
0.28

 
$
22,085

 
February 28, 2018
 
March 15, 2018
October 31, 2017
$
0.28

 
$
22,039

 
November 30, 2017
 
December 15, 2017
August 4, 2017
$
0.26

 
$
20,464

 
August 31, 2017
 
September 15, 2017
May 2, 2017
$
0.26

 
$
20,482

 
May 31, 2017
 
June 15, 2017
Note 10. Earnings (Loss) Per Share
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities. Our PSUs are contingently issuable shares which are included in our diluted earnings per share calculations which do not include voting or dividend rights.
Under the two-class method, earnings per common share is 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 the holders of the participating restricted common shares are not contractually required to share in the Company’s losses, in applying the two-class method to compute the basic and diluted net loss per common share no allocation to restricted common shares was made for the three months ended June 30, 2017.

16

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
77,910,513

 
78,176,705

 
78,137,290

 
78,176,705

Restricted common shares
498,433

 
634,217

 
464,983

 
569,370

Total weighted-average shares
78,408,946

 
78,810,922

 
78,602,273

 
78,746,075

 
 
 
 
 
 
 
 
Percentage of weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
99.36
%
 
99.20
%
 
99.41
%
 
99.28
%
Restricted common shares
0.64
%
 
0.80
%
 
0.59
%
 
0.72
%
Total percentage of weighted-average shares
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,
 
2018
 
2017
 
2018
 
2017
Earnings (loss) per share – Basic:
 
 
 
 
 
 
 
Net income (loss)
$
50,203

 
$
(7,116
)
 
$
107,750

 
$
35,323

Less: Distributed and undistributed earnings allocated to restricted common shares(1)
(319
)
 

 
(637
)
 
(255
)
Earnings (loss) available to common shareholders – Basic
$
49,884

 
$
(7,116
)
 
$
107,113

 
$
35,068

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
77,910,513

 
78,176,705

 
78,137,290

 
78,176,705

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Basic
$
0.64

 
$
(0.09
)
 
$
1.37

 
$
0.45

 
 
 
 
 
 
 
 
Earnings (loss) per share – Diluted:
 
 
 
 
 
 
 
Net income (loss)
$
50,203

 
$
(7,116
)
 
$
107,750

 
$
35,323

Less: Distributed and undistributed earnings allocated to restricted common shares(1)
(319
)
 

 
(637
)
 
(255
)
Earnings (loss) available to common shareholders – Diluted
$
49,884

 
$
(7,116
)
 
$
107,113

 
$
35,068

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
77,910,513

 
78,176,705

 
78,137,290

  
78,176,705

Effect of dilutive shares(2)
337,716

 

 
282,868

 
227,350

Weighted-average common shares outstanding – Diluted
78,248,229

 
78,176,705

 
78,420,158

  
78,404,055

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Diluted
$
0.64

 
$
(0.09
)
 
$
1.37

  
$
0.45

 
        
(1)
For the three months ended June 30, 2018, distributed and undistributed earnings to restricted shares was 0.64% of net income. For the three months ended June 30, 2017, the effect of any diluted shares on distributed and undistributed earnings to restricted shares would have been anti-dilutive and was excluded from the calculation. For the six months ended June 30, 2018 and 2017, distributed and undistributed earnings to restricted shares were 0.59% and 0.72%, respectively, of net income. The amount of restricted share forfeitures for all periods presented is immaterial to the allocation of distributed and undistributed earnings.
(2)
For the three months ended June 30, 2018 and for the six months ended June 30, 2018 and 2017, dilutive shares represented contingently issuable shares. For the three months ended June 30, 2017, the effect of 170,116 contingently issuable shares related to the Company’s PSUs would have been anti-dilutive and were excluded from the calculation.
Note 11. Income Taxes
Income taxes have been provided based on 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

17

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland and the United States.
The sources of income (loss) from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and six months ended June 30, 2018 and 2017 were as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
U.S. operations
$
788

 
$
902

 
$
1,471

 
$
1,498

Non-U.S. operations
50,666

 
(9,789
)
 
104,904

 
31,658

Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments
$
51,454

 
$
(8,887
)
 
$
106,375

 
$
33,156

Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions.
We have a U.S. based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
The consolidated income tax expense for the three and six months ended June 30, 2018 and 2017 was determined based on estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2018 and 2017, respectively.
The Company’s effective tax rate (“ETR”) for the three and six months ended June 30, 2018 was 6.1% and 2.2%, respectively, compared to (5.6)% and 7.1%, respectively, for the three and six months ended June 30, 2017. The first quarter 2018 included a $2,779 tax benefit related to the Singapore rate reduction from 10% to 8%, which was treated as a discrete item. Excluding this tax benefit, the ETR would have been 4.8% for the six months ended June 30, 2018. The pre-tax earnings (loss) for the three and six months ended June 30, 2017 included impairment charges of approximately $79,930 and $80,430, respectively, in a non-taxable jurisdiction. Movements in the ETR are generally caused by changes in the proportion of the Company’s pre-tax earnings in taxable and non-tax jurisdictions.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income (loss) from continuing operations consisted of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Notional U.S. federal income tax expense at the statutory rate
$
10,806

 
$
(3,110
)
 
$
22,339

 
$
11,605

U.S. state and local income tax, net
55

 
48

 
103

 
89

Non-U.S. operations:
 
 
 
 
 
 
 
Bermuda
(6,112
)
 
10,456

 
(14,395
)
 
1,628

Ireland
(811
)
 
(796
)
 
(1,128
)
 
(254
)
Singapore

 
(4,662
)
 
(2,824
)
 
(7,589
)
Other low tax jurisdictions
(835
)
 
(1,487
)
 
(1,643
)
 
(2,927
)
Non-deductible expenses in the U.S.
29

 
55

 
(164
)
 
(194
)
Other

 
(9
)
 

 
(17
)
 
 
 
 
 
 
 
 
Income tax provision
$
3,132

 
$
495

 
$
2,288

 
$
2,341



18

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

Note 12. Interest, Net
The following table shows the components of interest, net:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest on borrowings and other liabilities(1)
$
53,979

 
$
56,859

 
$
107,957

 
$
115,698

Amortization of deferred losses related to interest rate derivatives
294

 
575

 
595

 
1,156

Amortization of deferred financing fees and debt discount(2)
3,510

 
4,970

 
7,042

 
9,125

Interest expense
57,783

 
62,404

 
115,594

 
125,979

Less: Interest income
(287
)
 
(614
)
 
(990
)
 
(1,028
)
Less: Capitalized interest
(98
)
 
(118
)
 
(98
)
 
(211
)
Interest, net
$
57,398

 
$
61,672

 
$
114,506

 
$
124,740

        
(1)
Includes $988 in loan termination fees related to the prepayment of debt on three aircraft during the three and six months ended June 30, 2017.
(2)
Includes $986 in deferred financing fees written off related to the prepayment of debt on three aircraft during the three and six months ended June 30, 2017.
Note 13. Commitments and Contingencies
At June 30, 2018, we had commitments to acquire 48 aircraft for $1,876,908, including 25 Embraer E-Jet E2 aircraft.
Commitments, including $125,866 of remaining progress payments, contractual price escalations and other adjustments for these aircraft, at June 30, 2018, net of amounts already paid, are as follows:
Year Ending December 31,
 
Amount
Remainder of 2018
 
$
830,882

2019
 
382,620

2020
 
390,416

2021
 
272,990

2022
 

Thereafter
 

Total
 
$
1,876,908

As of August 3, 2018, we had commitments to acquire 46 aircraft for $1,838,708.










19

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2018

Note 14. Other Assets
The following table describes the principal components of other assets on our Consolidated Balance Sheets as of:
 
June 30,
2018
 
December 31,
2017
Deferred income tax asset
$
491

 
$
497

Lease incentives and lease premiums, net of amortization of $40,460 and $41,246, respectively
84,032

 
74,515

Flight equipment held for sale
2,238

 
707

Aircraft purchase deposits and progress payments
29,569

 
23,704

Fair value of interest rate cap
7,329

 
3,254

Note receivable(1)
6,678

 
10,000

Other assets
43,970

 
28,533

 
 
 
 
Total other assets
$
174,307

 
$
141,210

______________
(1)
Related to the sale of aircraft during the year ended December 31, 2017.
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 Sheets as of:
 
June 30,
2018
 
December 31,
2017
Accounts payable and accrued expenses
$
42,886

 
$
50,948

Deferred income tax liability
39,597

 
36,547

Accrued interest payable
37,927

 
38,129

Lease discounts, net of amortization of $40,106 and $36,111, respectively
10,954

 
14,597

Total accounts payable, accrued expenses and other liabilities
$
131,364

 
$
140,221


20


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, 2017 filed with the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with U.S. 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.
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q (this “report”), other than characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted 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 our historical performance and that of our subsidiaries and on our current plans, estimates and expectations 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 such forward-looking statements which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. These risks or uncertainties include, but are not limited to, those described from time to time in Aircastle’s filings with the SEC and previously disclosed under “Risk Factors” in Part I - Item 1A of Aircastle’s 2017 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 expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.
WEBSITE AND ACCESS TO THE COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our website under “Investors — Financial Information — 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 — PFIC Information.”
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance.” In addition, our Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 201 Tresser Boulevard, Suite 400, Stamford, Connecticut 06901.
The information on the Company’s Internet website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.

21


OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of June 30, 2018, we owned and managed on behalf of our joint ventures 240 aircraft leased to 84 lessees located in 45 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. In many cases, however, we are obligated to pay a portion of specified maintenance or modification costs. As of June 30, 2018, the net book value (including flight equipment held for lease and net investment in finance and sales-type leases, or “net book value”) was $6.78 billion compared to $6.73 billion at December 31, 2017. Our revenues and net income for the three and six months ended June 30, 2018 were $204.3 million and $407.0 million, and $50.2 million and $107.8 million, respectively.
Growth in commercial air traffic is broadly correlated with world economic activity. In recent years, commercial air traffic growth has expanded at a rate 1.5 to 2 times that of global GDP growth. The expansion of air travel has driven an increase in the world aircraft fleet. There are approximately 21,000 commercial mainline passenger and freighter aircraft in current operation worldwide. This fleet is expected to continue expanding at three to four percent average annual rate over the next twenty years. Aircraft leasing companies own approximately 42% of the world’s commercial jet aircraft.
Notwithstanding the sector’s long-term growth, the aviation market has been, and is expected to remain, subject to economic variability due to changes in macroeconomic variables, such as fuel price levels and foreign exchange rates. The aviation industry is also susceptible to external shocks, such as regional conflicts and terrorist events. Mitigating this risk is the portability of the assets, allowing aircraft to be redeployed to locations where there is demand.
Air traffic data continues to show strong passenger market growth.  According to the International Air Transport Association, during the first five months of 2018, global passenger traffic increased 6.8% compared to the same period in 2017. During the first five months of 2018, air cargo traffic increased 5.3% compared to the same period in 2017.
Demand for air travel varies by region. Emerging market economies have generally been experiencing greater increases in air traffic, driven by rising levels of per capita income leading to an increased propensity to fly. Mature markets, such as North America and Western Europe, have been growing more slowly in tandem with their economies. Air traffic growth is also being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices. Airlines operating in areas with political instability or weakening economies are under pressure, and their near-term outlook is more uncertain. On balance, we believe air travel will increase over time and, as a result, we expect demand for modern aircraft will continue to remain strong over the long-term.
Fuel prices and interest rates have had a substantial effect on our industry. After dropping to a low of $36 per barrel in December 2015, the price of fuel has started to rise and averaged $69 per barrel during 2018. While still below historic highs, rising fuel prices are impacting airline profitability. The prolonged low interest rate environment and the strong overall performance of the aircraft financing sector attracted significant new capital, increasing competition for new investments. Interest rates have recently started to rise in the U.S., with Federal Reserve guidance suggesting multiple future rate hikes in the Federal Funds rate in 2018.
Capital availability for aircraft has varied over time, and we consider this variability to be a basic characteristic of our business. If pursued properly, this represents an important source of investment opportunity. Strong U.S. debt capital market conditions benefit borrowers by permitting access to financing at historic lows while export credit agency availability has been curtailed, both in the U.S. and in Europe, due to political issues. Commercial bank debt also continues to play a critical role for aircraft finance.
While financial market conditions remain attractive, geopolitical issues may increase capital costs and limit availability going forward. We believe these market forces should generate attractive additional investment and trading opportunities for which we are well placed to capitalize given our access to different financing sources, our limited capital commitments and our reputation as a reliable trading partner. During the second quarter of 2018, we achieved an investment grade credit rating from Standard & Poors and Fitch, and Moody’s placed our rating on review for potential upgrade. We believe being an investment grade issuer will reduce our borrowing costs and enable more reliable access to debt capital throughout the business cycle.
Our business approach is differentiated from those of other large leasing companies. Our investment strategy is to seek out the best risk-adjusted return opportunities across the commercial jet market, so our acquisition targets and growth rates

22


will vary with market conditions. We plan to grow our business and profits over the long-term while maintaining a countercyclical orientation and a conservative and flexible capital structure. We prefer to have capital resources available to capture investment opportunities that arise in the context of changing market circumstances. As such, we limit large, long-term capital commitments and are therefore less reliant on orders for new aircraft from aircraft manufacturers as a source of new investments than many of our competitors.
Our business strategy entails the following elements:
Pursuing a disciplined and differentiated investment strategy. In our view, values of different aircraft change in different ways over time. We carefully evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices as market conditions and relative investment values change. We believe the financing flexibility offered through unsecured debt and our team’s experience with a wide range of asset types provides us with a competitive advantage. We view orders from equipment manufacturers to be part of our investment opportunity set, but choose to keep our long term capital commitments limited.
Originating investments from many different sources across the globe. Our strategy is to seek out worthwhile investments by leveraging our team’s wide range of contacts. We utilize a multi-channel approach to sourcing acquisitions and have purchased aircraft from a large number of airlines, lessors, original equipment manufacturers, lenders and other aircraft owners. Since our formation in 2004, we have acquired aircraft from 89 different sellers.
Selling assets when attractive opportunities arise. We sell assets with the aim of realizing profits and reinvesting proceeds when a sale generates the greatest expected cash flow or when 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. Since our formation, we have sold 214 aircraft to 62 buyers.
Maintaining efficient access to capital from a wide set of sources and leveraging our recent investment grade credit rating. We believe the aircraft investment market is influenced by the business cycle. Our strategy is to increase our purchase activity when prices are low and to emphasize asset sales when competition for assets is high. To implement this approach, we believe it is important to maintain access to a wide variety of financing sources. During the second quarter of 2018, we achieved our objective of improving our corporate credit ratings to an investment grade level by maintaining strong portfolio and capital structure metrics while achieving a critical size through accretive growth. We believe our improved credit rating will not only reduce our borrowing costs, but also facilitate more reliable access to both unsecured and secured debt capital throughout the business cycle.
Leveraging our strategic relationships. We intend to capture the benefits provided through the extensive global contacts and relationships maintained by Marubeni, which is our biggest shareholder and one of the largest Japanese trading companies. Marubeni has enabled greater access to Japanese-based financing and helped source and develop our joint venture with the leasing arm of the Industrial Bank of Japan, Limited (“IBJL”).
Capturing the value of our efficient operating platform and strong operating track record. We believe our team’s capabilities in the global aircraft leasing market places us in a favorable position to source and manage new income-generating activities. We intend to continue to focus our efforts in areas where we believe we have competitive advantages, including new direct investments as well as ventures with strategic business partners.
Intending to pay quarterly dividends to our shareholders based on the Company’s sustainable earnings levels. Aircastle has paid dividends each quarter since our initial public offering in 2006. On May 1, 2018, our Board of Directors declared a regular quarterly dividend of $0.28 per common share, or an aggregate of $21.9 million for the three months ended June 30, 2018, which was paid on June 15, 2018 to holders of record on May 31, 2018. These dividends may not be indicative of the amount of any future dividends. Our ability to pay quarterly dividends will depend upon many factors, including those as described in Item 1A. “Risk Factors” and elsewhere in our 2017 Annual Report on Form 10-K.
Revenues
Our revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from retained maintenance payments related to lease expirations, lease termination payments, lease incentive amortization, interest recognized from finance and sales-type leases and gains from aircraft sales.
Typically, our aircraft are subject to net leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs arising during the term of the lease. Our

23


aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.
Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee.
Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.

2018 Lease Expirations and Lease Placements
At June 30, 2018, all aircraft with leases expiring in 2018 have been placed or sold.
2019-2022 Lease Expirations and Lease Placements
Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the period 2019-2022, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in finance and sales-type leases) at June 30, 2018, specified below:
2019: 12 aircraft, representing 4%;
2020: 28 aircraft, representing 9%;
2021: 33 aircraft, representing 16%; and
2022: 27 aircraft, representing 10%.



24


Operating Expenses
Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations.
Income Tax Provision
We obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.
Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius, and the U.S. are subject to tax in those respective jurisdictions.
We have a U.S.-based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
Acquisitions and Sales
During the first six months of 2018, we acquired thirteen aircraft for $412.5 million. At June 30, 2018, we had commitments to acquire 48 additional aircraft for $1.88 billion, including the acquisition of 25 new E-Jet E2 aircraft from Embraer, with delivery beginning in 2019. Of this amount, approximately $830 million represents commitments for the remainder of 2018. As of August 3, 2018, we have commitments to acquire 46 aircraft for $1.84 billion.
During the first six months of 2018, we sold eight aircraft for net proceeds of $178.2 million, which resulted in a net gain of $25.6 million.

25


The following table sets forth certain information with respect to the aircraft owned by us as of June 30, 2018:
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
Owned Aircraft
As of
June 30, 
2018(1)
 
As of
June 30, 
2017(1)
Net Book Value of Flight Equipment
$
6,776

 
$
6,173

Net Book Value of Unencumbered Flight Equipment
$
5,419

 
$
4,497

Number of Aircraft
228

 
190

Number of Unencumbered Aircraft
199

 
157

Number of Lessees
84

 
71

Number of Countries
45

 
38

Weighted Average Age (years)(2)
9.5

 
8.3

Weighted Average Remaining Lease Term (years)(2)
4.7

 
4.7

Weighted Average Fleet Utilization during the three months ended June 30, 2018 and 2017(3)
99.5
%
 
99.3
%
Weighted Average Fleet Utilization during the six months ended June 30, 2018 and 2017(3)
99.4
%
 
98.8
%
Portfolio Yield for the three months ended June 30, 2018 and 2017(4)
11.5
%
 
12.3
%
Portfolio Yield for the six months ended June 30, 2018 and 2017(4)
11.5
%
 
12.3
%
 
 
 
 
Managed Aircraft on behalf of Joint Ventures
 
 
 
Net Book Value of Flight Equipment
$
628

 
$
675

Number of Aircraft
12

 
13

 
        
(1)
Calculated using net book value at period end.
(2)
Weighted by net book value.
(3)
Aircraft on-lease days as a percent of total days in period weighted by net book value.
(4)
Lease rental revenue, interest income and cash collections on our net investment in finance and sales-type leases for the period as a percent of the average net book value for the period; quarterly information is annualized.
Our owned aircraft portfolio as of June 30, 2018 is listed in Exhibit 99.1 to this report.


26


PORTFOLIO DIVERSIFICATION
 
 
Owned Aircraft as of
June 30, 2018
 
Owned Aircraft as of
June 30, 2017
 
Number of
Aircraft
 
% of Net
Book Value(1)
 
Number of
Aircraft
 
% of Net
Book Value
(1)
Aircraft Type
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Narrow-body
196

 
67
%
 
153

 
56
%
Wide-body
28

 
29
%
 
31

 
38
%
Total Passenger
224

 
96
%
 
184

 
94
%
Freighter
4

 
4
%
 
6

 
6
%
Total
228

 
100
%
 
190

 
100
%
 
 
 
 
 
 
 
 
Manufacturer
 
 
 
 
 
 
 
Airbus
137

 
56
%
 
105

 
53
%
Boeing
86

 
42
%
 
78

 
44
%
Embraer
5

 
2
%
 
7

 
3
%
Total
228

 
100
%
 
190

 
100
%
 
 
 
 
 
 
 
 
Regional Diversification
 
 
 
 
 
 
 
Asia and Pacific
62

 
30
%
 
56

 
36
%
Europe
87

 
30
%
 
69

 
27
%
Middle East and Africa
17

 
9
%
 
14

 
10
%
North America
36

 
12
%
 
28

 
8
%
South America
26

 
19
%
 
23

 
19
%
Total
228

 
100
%
 
190

 
100
%
 
        
(1)
Calculated using net book value at period end.

27


Our largest single customer represents over 6% of the net book value at June 30, 2018. Our top fifteen customers for aircraft we owned at June 30, 2018, representing 105 aircraft and 54% of the net book value, are as follows:
Percent of Net Book Value
 
Customer
 
Country
 
Number of
Aircraft
Greater than 6% per customer
 
Avianca Brazil
 
Brazil
 
11

 
 
 
 
 
 
 
3% to 6% per customer
 
LATAM
 
Chile
 
3

 
 
TAP Portugal(1)
 
Portugal
 
8

 
 
Lion Air
 
Indonesia
 
10

 
 
South African Airways
 
South Africa
 
4

 
 
easyJet
 
United Kingdom
 
20

 
 
Aerolineas Argentina
 
Argentina
 
5

 
 
Interjet
 
Mexico
 
11

 
 
Iberia
 
Spain
 
11

 
 
 
 
 
 
 
Less than 3% per customer
 
AirBridgeCargo(2)
 
Russia
 
2

 
 
AirAsia X
 
Malaysia
 
2

 
 
Jet Airways
 
India
 
7

 
 
IndiGo
 
India
 
6

 
 
Asiana Airlines
 
South Korea
 
4

 
 
Thai Airways
 
Thailand
 
1

 
 
Total top fifteen customers
 
 
 
105

 
 
All other customers
 
 
 
123

 
 
Total all customers
 
 
 
228

 
        

(1)
Combined with an affiliate.
(2)
Guaranteed by Volga-Dnepr Airlines. We have one additional aircraft on lease with an affiliate.
Finance
We believe that cash on hand, payments received from lessees and other funds generated from operations, secured borrowings for aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.
See “Liquidity and Capital Resources” below.

28


RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2018 to the three months ended June 30, 2017:
 
Three Months Ended June 30,
 
2018
 
2017
 
(Dollars in thousands)
Revenues:
 
 
 
Lease rental revenue
$
178,486

 
$
189,098

Finance and sales-type lease revenue
8,868

 
5,878

Amortization of net lease discounts and lease incentives
(3,534
)
 
(3,280
)
Maintenance revenue

 
28,944

Total lease revenue
183,820

 
220,640

Gain on sale of flight equipment
19,864

 
13,525

Other revenue
592

 
2,894

Total revenues
204,276

 
237,059

Operating expenses:
 
 
 
Depreciation
76,181

 
78,254

Interest, net
57,398

 
61,672

Selling, general and administrative
18,583

 
22,187

Impairment of flight equipment

 
79,930

Maintenance and other costs
1,561

 
2,343

Total operating expenses
153,723

 
244,386

 
 
 
 
Total other income (expense)
901

 
(1,560
)
 
 
 
 
Income (loss) from continuing operations before income taxes and earnings of unconsolidated
equity method investments
51,454

 
(8,887
)
Income tax provision
3,132

 
495

Earnings of unconsolidated equity method investments, net of tax
1,881

 
2,266

Net income (loss)
$
50,203

 
$
(7,116
)
Revenues
Total revenues decreased by $32.8 million for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017.
Lease rental revenue. The decrease in lease rental revenue of $10.6 million for the three months ended June 30, 2018, as compared to the same period in 2017, was primarily the result of:
a $30.9 million decrease due to the sale of 38 aircraft since June 30, 2017; and
a $13.8 million decrease due to lease extensions, amendments, transitions and other changes.
These decreases were partially offset by a $34.2 million increase in revenue, reflecting the partial period impact of twelve aircraft purchased in 2018 and the full period impact due to the acquisition of 42 aircraft since June 30, 2017.
Finance and sales-type lease revenue. For the three months ended June 30, 2018, $8.9 million of interest income from finance and sales-type leases was recognized, as compared to $5.9 million of interest income from finance and sales-type leases recorded for the same period in 2017, due to the addition of sixteen aircraft, partially offset by the sale of six aircraft, over the last twelve months.
Amortization of net lease premiums, discounts and lease incentives were $3.5 million for the three months ended June 30, 2018, essentially flat as compared to the same period in 2017.



29


Maintenance revenue. For the three months ended June 30, 2018, we recorded no maintenance revenue. For the same period in 2017, we recorded $28.9 million of maintenance revenue due to the transition of four narrow-body, three wide-body and three freighter aircraft.
Gain on sale of flight equipment increased by $6.3 million to $19.9 million for the three months ended June 30, 2018, as compared to gains of $13.5 million for the same period in 2017. During the second quarter of 2018, we sold four aircraft while we sold thirteen aircraft during the second quarter of 2017.
Other revenue. For the three months ended June 30, 2018, we recorded $0.6 million of other revenue. For the same period in 2017, we recorded $2.9 million of other revenue, primarily from fees earned from one lessee in connection with the early termination of a lease.
Operating expenses
Total operating expenses decreased by $90.7 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017.
Depreciation expense decreased by $2.1 million for the three months ended June 30, 2018 as compared to the same period in 2017. The decrease is primarily the result of lower depreciation of $16.8 million due to 38 aircraft sold.
This decrease was partially offset by increases of:
$13.6 million due to 54 aircraft acquired; and
$1.1 million due to changes in asset lives, residual values and other changes.
Interest, net consisted of the following:
 
Three Months Ended June 30,
 
2018
 
2017
 
(Dollars in thousands)
Interest on borrowings, net of settlements on interest rate derivatives, and other liabilities(1)
$
53,979

 
$
56,859

Amortization of interest rate derivatives related to deferred losses
294

 
575

Amortization of deferred financing fees and debt discount(2)
3,510

 
4,970

Interest expense
57,783

 
62,404

Less: Interest income
(287
)
 
(614
)
Less: Capitalized interest
(98
)
 
(118
)
Interest, net
$
57,398

 
$
61,672

        
(1) Includes $1.0 million of loan prepayment fees related to the sale of aircraft during the three months ended June 30, 2017.
(2) Includes $1.0 million in deferred financing fees written off related to the sale of aircraft during the three months ended June 30, 2017.
Interest, net decreased by $4.3 million compared to the three months ended June 30, 2017. This decrease was primarily the result of lower interest on our borrowings of $2.9 million due to lower weighted average debt outstanding and lower amortization of deferred financing fees of $1.5 million as the result of aircraft sales in the prior year.
Selling, general and administrative expenses for the three months ended June 30, 2018 decreased by $3.6 million compared to the same period in 2017. During the three months ended June 30, 2017, we had $5.1 million of separation and disability compensation expense related to our former Chief Executive Officer under the terms of his employment and share-based award agreements. This decrease was partially offset by an increase in recurring personnel costs during the three months ended June 30, 2018.
Impairment of aircraft for the three months ended June 30, 2018 decreased $79.9 million compared to the same period in 2017. We had no impairments during the three months ended June 30, 2018. During the three months ended June 30, 2017, we entered into agreements to sell two Boeing 747-400 production freighter aircraft at the end of their respective leases and one older Boeing 747-400 converted freighter aircraft to its lessee, resulting in impairment charges totaling $79.2 million.


30


Other income (expense)
Total other income (expense) increased by $2.5 million for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. The net increase in other income was primarily attributable to mark-to-market on our undesignated hedges.
Income tax provision
Our provision for income taxes for the three months ended June 30, 2018 and 2017 was $3.1 million and $0.5 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland and the United States. The increase in our income tax provision of approximately $2.6 million for the three months ended June 30, 2018, as compared to the same period in 2017, was primarily attributable to changes in operating income subject to tax in Ireland, the United States and other jurisdictions. Pre-tax losses for the three months ended June 30, 2017 included transactional impairment charges of approximately $79.9 million in a non-taxable jurisdiction.
Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions.
We have a U.S. based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
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.
Other comprehensive income (loss)
Other comprehensive income (loss) consisted of the following:
 
Three Months Ended June 30,
 
2018
 
2017
 
(Dollars in thousands)
Net income (loss)
$
50,203

 
$
(7,116
)
Derivative loss reclassified into earnings
294

 
575