Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 11/03/2015 16:50:43)

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 September 30, 2015

or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission File number 001-32959
_______________________________________________________________
  AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
  _______________________________________________________________
Bermuda
98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
c/o Aircastle Advisor LLC
300 First Stamford Place, 5 th  Floor, Stamford, CT
06902
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code     (203) 504-1020
_______________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES   ¨     NO   þ
As of October 30, 2015 , there were 81,187,495 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 September 30, 2015 and December 31, 2014
 
Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014
 
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)
 
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
149,041

 
$
169,656

Accounts receivable
3,046

 
3,334

Restricted cash and cash equivalents
84,258

 
98,884

Restricted liquidity facility collateral
65,000

 
65,000

Flight equipment held for lease, net of accumulated depreciation of $1,403,443 and $1,294,063, respectively
5,885,807

 
5,579,718

Net investment in finance leases
120,882

 
106,651

Unconsolidated equity method investment
49,131

 
46,453

Other assets
131,231

 
105,450

Total assets
$
6,488,396

 
$
6,175,146

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs
$
1,277,361

 
$
1,373,131

Borrowings from unsecured financings, net of debt issuance costs
2,717,859

 
2,371,456

Accounts payable, accrued expenses and other liabilities
154,209

 
140,863

Lease rentals received in advance
60,447

 
53,216

Liquidity facility
65,000

 
65,000

Security deposits
114,594

 
117,689

Maintenance payments
338,515

 
333,456

Total liabilities
4,727,985

 
4,454,811

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Preference shares, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding

 

Common shares, $.01 par value, 250,000,000 shares authorized, 81,181,495 shares issued and outstanding at September 30, 2015; and 80,983,249 shares issued and outstanding at December 31, 2014
812

 
810

Additional paid-in capital
1,567,692

 
1,565,180

Retained earnings
210,310

 
192,805

Accumulated other comprehensive loss
(18,403
)
 
(38,460
)
Total shareholders’ equity
1,760,411

 
1,720,335

Total liabilities and shareholders’ equity
$
6,488,396

 
$
6,175,146


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

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
188,038

 
$
178,886

 
$
550,023

 
$
536,452

Finance lease revenue
1,868

 
1,463

 
5,352

 
9,347

Amortization of lease premiums, discounts and lease incentives
(2,113
)
 
(1,075
)
 
(10,288
)
 
(7,252
)
Maintenance revenue
15,726

 
(4,189
)
 
55,148

 
35,035

Total lease revenue
203,519

 
175,085

 
600,235

 
573,582

Other revenue
8,555

 
2,511

 
10,700

 
6,763

Total revenues
212,074

 
177,596

 
610,935

 
580,345

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
85,324

 
75,519

 
237,538

 
225,230

Interest, net
60,381

 
56,794

 
184,063

 
181,551

Selling, general and administrative (including non-cash share based payment expense of $1,424 and $949 for the three months ended and $3,981 and $3,167 for the nine months ended September 30, 2015 and 2014, respectively)
14,032

 
13,817

 
42,663

 
41,818

Impairment of Aircraft
78,403

 
20,436

 
102,358

 
67,005

Maintenance and other costs
2,520

 
713

 
9,126

 
5,222

Total expenses
240,660

 
167,279

 
575,748

 
520,826

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Gain on sale of flight equipment
15,679

 
11,390

 
43,034

 
13,384

Loss on extinguishment of debt

 

 

 
(36,570
)
Other
70

 
1

 
341

 
758

Total other income (expense)
15,749

 
11,391

 
43,375

 
(22,428
)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
(12,837
)
 
21,708

 
78,562

 
37,091

Income tax provision
2,709

 
3,484

 
12,037

 
10,925

Earnings of unconsolidated equity method investment, net of tax
1,557

 
927

 
4,563

 
1,898

Net income (loss)
$
(13,989
)
 
$
19,151

 
$
71,088

 
$
28,064

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic:
 
 
 
 
 
 
 
Net income (loss) per share
$
(0.17
)
 
$
0.24

 
$
0.88

 
$
0.35

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted:
 
 
 
 
 
 
 
Net income (loss) per share
$
(0.17
)
 
$
0.24

 
$
0.88

 
$
0.35

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.22

 
$
0.20

 
$
0.66

 
$
0.60


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

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income (loss)
$
(13,989
)
 
$
19,151

 
$
71,088

 
$
28,064

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in fair value of derivatives, net of tax expense of $3 and $21 for the three months ended and tax expense of $26 and $825 for the nine months ended September 30, 2015 and 2014, respectively
272

 
1,643

 
708

 
2,025

Net derivative loss reclassified into earnings
5,006

 
8,549

 
19,349

 
26,730

Other comprehensive income
5,278

 
10,192

 
20,057

 
28,755

Total comprehensive income (loss)
$
(8,711
)
 
$
29,343

 
$
91,145

 
$
56,819



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)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
71,088

 
$
28,064

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
237,538

 
225,230

Amortization of deferred financing costs
11,211

 
10,493

Amortization of net lease discounts and lease incentives
10,288

 
7,252

Deferred income taxes
(1,455
)
 
(2,623
)
Non-cash share based payment expense
3,981

 
3,167

Cash flow hedges reclassified into earnings
19,349

 
26,730

Security deposits and maintenance payments included in earnings
(20,645
)
 
(38,257
)
Gain on sale of flight equipment
(43,034
)
 
(13,384
)
Loss on extinguishment of debt

 
36,570

Impairment of aircraft
102,358

 
67,005

Other
269

 
(2,278
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
253

 
(1,603
)
Other assets
(4,382
)
 
(1,691
)
Accounts payable, accrued expenses and other liabilities
14,085

 
17,138

Lease rentals received in advance
7,566

 
4,162

Net cash provided by operating activities
408,470

 
365,975

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment and lease incentives
(1,034,578
)
 
(939,651
)
Proceeds from sale of flight equipment
343,020

 
563,882

Restricted cash and cash equivalents related to sale of flight equipment

 
(24,606
)
Aircraft purchase deposits and progress payments
(4,421
)
 
1,315

Net investment in finance leases
(24,000
)
 
(14,258
)
Collections on finance leases
6,768

 
8,096

Unconsolidated equity method investment and associated costs

 
(8,592
)
Distributions from unconsolidated equity method investment in excess of earnings


 
997

Other
(260
)
 
(466
)
Net cash used in investing activities
(713,471
)
 
(413,283
)
Cash flows from financing activities:
 
 
 
Issuance of shares net of repurchases
(1,960
)
 
(2,092
)
Proceeds from secured and unsecured debt financings
800,000

 
803,200

Repayments of secured and unsecured debt financings
(548,359
)
 
(895,459
)
Debt extinguishment costs

 
(32,835
)
Deferred financing costs
(12,185
)
 
(15,843
)
Restricted liquidity facility collateral

 
42,000

Liquidity facility

 
(42,000
)
Restricted cash and cash equivalents related to financing activities
14,626

 
32,987

Security deposits and maintenance payments received
114,644

 
131,136

Security deposits and maintenance payments returned
(28,797
)
 
(72,030
)
Payments for terminated cash flow hedges

 
(33,427
)
Dividends paid
(53,583
)
 
(48,604
)
Net cash provided by (used in) financing activities
284,386

 
(132,967
)
Net increase (decrease) in cash and cash equivalents
(20,615
)
 
(180,275
)
Cash and cash equivalents at beginning of period
169,656

 
654,613

Cash and cash equivalents at end of period
$
149,041

 
$
474,338

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
129,696

 
$
135,880

Cash paid for income taxes
$
9,665

 
$
4,382

Supplemental disclosures of non-cash investing activities:
 
 
 
Purchase deposits, advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
8,461

 
$
20,837

Term debt financings assumed in asset acquisitions
$

 
$
39,061

Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment
$
77,624

 
$
65,831

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

6



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including acquiring, leasing, managing and selling high utility 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 (“US GAAP”). We operate in one segment.
The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 .
The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of September 30, 2015 through the date on which the consolidated financial statements included in this Form 10-Q were issued.
Effective July 1, 2015, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance is applied on a retrospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates seven 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 US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.

7



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Proposed Accounting Pronouncements
In May 2013, the FASB issued re-exposure draft, “Leases” (the “Lease Re-ED”), which would replace the existing guidance in the Accounting Standards Codification (“ASC”) 840 (“ASC 840”), Leases . In March 2014, the FASB decided that the accounting for leases by lessors would basically remain unchanged from the concepts existing in current ASC 840 accounting. In addition, the FASB decided that a lessor should 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. We anticipate that the final standard may have an effective date no earlier than 2018. We believe that when and if the proposed guidance becomes effective, it will not have a material impact on the Company’s consolidated financial statements.
On May 28, 2014, the FASB and the International Accounting Standards Board (the “IASB”) (collectively, the Boards), jointly issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Lease contracts within the scope of 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 standard is effective for public entities beginning after December 15, 2017. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and related disclosures.
On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The standard requires management of public companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management should evaluate whether there are conditions or events, considered in the aggregate, that raises substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). The standard is effective for annual periods ending after December 15, 2016 and interim periods thereafter, and early adoption is permitted. We do not believe the standard will have a material impact on our consolidated financial statements and related disclosures when adopted.

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).

8



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


The following tables set forth our financial assets and liabilities as of September 30, 2015 and December 31, 2014 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. 
 
 
 
Fair Value Measurements at September 30, 2015 Using Fair Value Hierarchy
 
Fair Value as of September 30, 2015
 
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
$
149,041

 
$
149,041

 
$

 
$

 
Market
Restricted cash and cash equivalents
84,258

 
84,258

 

 

 
Market
Total
$
233,299

 
$
233,299

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
2,433

 
$

 
$
2,433

 
$

 
Income

 
 
 
Fair Value Measurements at December 31, 2014 Using Fair Value Hierarchy
 
Fair Value as of December 31, 2014
 
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
$
169,656

 
$
169,656

 
$

 
$

 
Market
Restricted cash and cash equivalents
98,884

 
98,884

 

 

 
Market
Total
$
268,540

 
$
268,540

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
2,879

 
$

 
$
2,879

 
$

 
Income

Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivatives included in Level 2 consist of United States dollar-denominated interest rate derivatives, and their fair values are determined by applying standard modeling techniques under the income approach to relevant market interest rates (cash rates, futures rates, swap rates) in effect at the period close to determine appropriate reset and discount rates and incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.
For the three and nine months ended September 30, 2015 and 2014 , 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 US GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our investment in an unconsolidated joint venture and



9



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


aircraft. We account for our investment in an unconsolidated joint venture 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 Fleet-Wide Review
We perform our annual fleet-wide recoverability assessment during the third quarter of each year. This 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.
In our 2015 assessment, we reduced forecasted future cash flows for our six Boeing 747-400 converted freighter aircraft not subject to sales agreements, all of which are more than twenty years old. Our new forecast reflects the persisting glut of supply in the air cargo market resulting from weak growth in demand combined with the growth in capacity arising from new production air freighters and higher belly capacity in latest generation wide-body passenger aircraft. In addition to these market-wide impacts, our older freighters were affected specifically by the imposition of age limits in certain countries and by lower utilization levels.
As a result, we determined that each of our older converted freighter aircraft was on its last lease, and we reduced our residual value assumptions for these aircraft and expect to scrap them following lease expiry. During the third quarter of 2015, we therefore impaired four of these aircraft, which had an aggregate net book value as of August 31, 2015 of $115,888 , writing down their book values by a total of $34,575 , with a fair value date of September 1, 2015. For one of these aircraft, we recorded maintenance revenue of $5,858 , as we no longer plan to reinvest these funds.
In the 2014 assessment, we determined that the cash flows expected to be generated by two of our McDonnell Douglas MD-11 freighter aircraft did not support their carrying values. As a result, during the third quarter of 2014, we impaired these two aircraft, which had an aggregate net book value as of June 30, 2014 of $53,777 , writing down their book values by a total of $19,515 . We also shortened their expected lives from 25 to 21 years and reduced their residual values.
Other Impairments
In September 2015, Malaysian Airline System (“MAS”) informed us that it was effectively rejecting the lease on our Boeing 777-200ER aircraft as part of its restructuring. This aircraft, which was manufactured in 1998, is the only one of its type in our fleet and the only aircraft we had on lease to MAS. We repossessed it in October 2015. We reduced the carrying value of this aircraft to our best estimate of scrap value. While we haven’t made a decision to dispose of the aircraft, this write-down was driven by weak overall demand tor older widebody aircraft, an increase in the supply of competing aircraft and the difficulty of recovering high redeployment costs given the proliferation of aircraft age limits across the world. This write-down resulted in an impairment of $37,770 , partially offset by $1,200 of other revenue from a letter of credit we drew following the lease rejection.
Also in September 2015, we modified the lease agreement with respect to one Airbus A321-200 aircraft. We elected not to reinvest in certain major maintenance events during the lease term, and the lessee agreed to release its rights to certain maintenance payments. As a result, we recorded an impairment of $6,058 and maintenance revenue of $7,109 for this aircraft.
In the second quarter of 2015, we impaired two McDonnell Douglas MD-11 freighter aircraft and one Boeing 737-800 aircraft and recorded impairment charges totaling $23,955 and maintenance revenue of $18,234 .



10



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


During the nine months ended September 30, 2014 , we impaired three Boeing 747-400 converted freighter aircraft and one Boeing 737-400 aircraft and recorded impairment charges totaling $46,570 . For these aircraft, we recorded maintenance revenue of $24,262 and other revenue of $137 and reversed lease incentives of $3,626 .
Other than the aircraft discussed above, management believes that the net book value of each of our aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no other aircraft were impaired as a consequence of this recoverability assessment. 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 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 Securitization No. 2, which contains a third party credit enhancement, is estimated using a discounted cash flow analysis, based on our current incremental borrowing rates of borrowing arrangements that do not contain third party credit enhancements. The fair values of our ECA term financings and bank financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices.
 The carrying amounts and fair values of our financial instruments at September 30, 2015 and December 31, 2014 are as follows:
 
September 30, 2015
 
December 31, 2014
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
Securitization No. 2
$
(229,969
)
 
$
(226,385
)
 
$
(391,680
)
 
$
(376,752
)
Credit Facilities
(50,000
)
 
(50,000
)
 
(200,000
)
 
(200,000
)
ECA term financings
(415,988
)
 
(441,218
)
 
(449,886
)
 
(471,918
)
Bank financings
(653,486
)
 
(674,706
)
 
(554,888
)
 
(560,285
)
Senior Notes
(2,700,000
)
 
(2,820,988
)
 
(2,200,000
)
 
(2,300,615
)
All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.










11



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Note 3. Lease Rental Revenues and Flight Equipment Held for Lease
Minimum future annual lease rentals contracted to be received under our existing operating leases of flight equipment at September 30, 2015 were as follows:
Year Ending December 31,
Amount
Remainder of 2015
$
182,038

2016
701,166

2017
614,693

2018
535,419

2019
469,377

Thereafter
1,531,375

Total
$
4,034,068


Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Region
2015
 
2014
 
2015
 
2014
Asia and Pacific
43
%
 
39
%
 
42
%
 
40
%
Europe
28
%
 
29
%
 
28
%
 
29
%
South America
16
%
 
13
%
 
15
%
 
12
%
Middle East and Africa
9
%
 
9
%
 
9
%
 
9
%
North America
4
%
 
10
%
 
6
%
 
10
%
Total
100
%
 
100
%
 
100
%
 
100
%


The classification of regions in the tables above and in the table and discussion below is determined based on the principal location of the lessee of each aircraft.
For the three months ended September 30, 2015 , our two largest customers each accounted for more than 5% of lease rental revenue for a combined 12% . No other customer accounted for more than 5% of lease rental revenue. For the three months ended September 30, 2014 , our four largest customers each accounted for more than 5% of lease rental revenue for a combined 24% . No other customer accounted for more than 5% of lease rental revenue.
For the nine months ended September 30, 2015 , our three largest customers each accounted for more than 5% of lease rental revenue for a combined 17% . No other customer accounted for more than 5% of lease rental revenue. For the nine months ended September 30, 2014 , our three largest customers each accounted for more than 5% of lease rental revenue for a combined 17% . No other customer accounted for more than 5% of lease rental revenue.

For the three and nine months ended September 30, 2015 and 2014 , respectively, no country represented at least 10% of total revenue based on each lessee’s principal place of business.






12



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Geographic concentration of net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance leases) was as follows:
 
September 30, 2015
 
December 31, 2014
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
54

 
42
%
 
46

 
40
%
Europe
66

 
27
%
 
65

 
29
%
South America
18

 
17
%
 
13

 
14
%
Middle East and Africa
6

 
9
%
 
6

 
10
%
North America
15

 
5
%
 
17

 
7
%
Off-lease
1

(1)  
%
 
1

(2)  
%
Total
160

 
100
%
 
148

 
100
%
 
_______________

(1)
Consists of one Boeing 777-200ER aircraft, which we are marketing for lease or sale.
(2)
Consisted of one Airbus A320-200 aircraft, which was subject to a commitment to lease and was delivered to our customer in February 2015.

The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance leases) attributable to individual countries representing at least 10% of net book value of flight equipment based on each lessee’s principal place of business as of:
 
September 30, 2015
 
December 31, 2014
Region
Net Book
Value
Net Book
Value %
Number
of
Lessees
 
Net Book
Value
Net Book
Value %
Number
of
Lessees
Indonesia
$
637,810

11
%
3

 
$

%


At September 30, 2015 and December 31, 2014 , the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $27,500 and $22,833 , respectively.

Note 4. Net Investment in Finance Leases
At September 30, 2015 , our net investment in finance leases represents six aircraft leased to two customers in the United States, one aircraft leased to a customer in Canada, and one aircraft leased to a customer in Germany. The following table lists the components of our net investment in finance leases at September 30, 2015 :
 
 
Amount
Total lease payments to be received
 
$
93,976

Less: Unearned income
 
(37,227
)
Estimated residual values of leased flight equipment (unguaranteed)
 
64,133

    Net investment in finance leases
 
$
120,882






13



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


At September 30, 2015 , minimum future lease payments on finance leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2015
 
$
3,842

2016
 
15,365

2017
 
14,843

2018
 
9,715

2019
 
9,695

Thereafter
 
40,516

    Total
 
$
93,976



Note 5. Unconsolidated Equity Method Investment
On December 19, 2013, the Company and an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) formed a joint venture (the “JV”), in which we hold a 30% equity interest, to invest in leased aircraft. Teachers’ holds 9.7% of our outstanding common shares.
The Company recorded a $6,270 guarantee liability, which is reflected in Maintenance payments on the balance sheet and a $5,400 guarantee liability, which is reflected in Security deposits on the balance sheet.
Investment in joint venture at December 31, 2014
 
$
46,453

Investment in joint venture
 
2,994

Earnings from joint venture, net of tax
 
4,563

Distributions
 
(4,879
)
Investment in joint venture at September 30, 2015
 
$
49,131

 
 
 

Note 6. Variable Interest Entities
Aircastle consolidates seven 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 12 aircraft discussed below.
Securitization
Aircastle is the primary beneficiary of ACS Ireland 2, as we have both the power to direct the activities of the VIE that most significantly impacts the economic performance of such VIE and we bear the significant risk of loss and participate in gains through Class E-1 Securities. Although Aircastle has not guaranteed the ACS Ireland 2 debt, Aircastle wholly owns ACS Bermuda 2, which has fully and unconditionally guaranteed the ACS Ireland 2 VIE obligations. The activity that most significantly impacts the economic performance is the leasing of aircraft. Aircastle Advisor (Ireland) Limited (Aircastle’s wholly owned subsidiary) is the remarketing servicer and is responsible for the leasing of the aircraft. An Irish charitable trust owns 95% of the common shares of ACS Ireland 2. The Irish charitable trust’s risk is limited to its annual dividend of $2 . At September 30, 2015 , the assets of ACS Ireland 2 include four aircraft transferred into the VIE at historical cost basis in connection with Securitization No. 2.
The assets of the ACS Ireland 2, net of intercompany receivables, as of September 30, 2015 are $88,771 . The liabilities of the ACS Ireland 2, net of $40,351 Class E-1 Securities held by the Company and intercompany payables, which are eliminated in consolidation, as of September 30, 2015 are $64,787 .


14



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015



ECA Term Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), has entered into eight different twelve -year term loans, which are supported by guarantees from Compagnie Francaise d’Assurance pour le Commerce Exterieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). We refer to these COFACE-supported financings as “ECA Term Financings.”
Aircastle is the primary beneficiary of the Air Knight VIEs, as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which our wholly owned subsidiary is the servicer and is responsible for managing the relevant aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.
The only assets that the Air Knight VIEs have on their books are financing leases that are eliminated in the consolidated financial statements. The related aircraft, with a net book value as of September 30, 2015 of $625,680 were included in our flight equipment held for lease. The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of September 30, 2015 is $401,339 .

Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At September 30, 2015
 
At December 31, 2014
Debt Obligation
Outstanding
Borrowings
 
Number of Aircraft
 
Interest Rate (1)
 
Final Stated
Maturity (2)
 
Outstanding
Borrowings
Secured Debt Financings:
 
 
 
 
 
 
 
 
 
Securitization No. 2
$
229,969

 
30

 
0.51%
 
06/14/37
 
$
391,680

ECA Term Financings
415,988

 
8

 
3.02% to 3.96%
 
12/3/21 to 11/30/24
 
449,886

Bank Financings
653,486

 
13

 
1.21% to 5.09%
 
10/26/17 to 01/19/26
 
554,888

Less: Debt Issuance Costs
(22,082
)
 

 
 
 
 
 
(23,323
)
Total secured debt financings, net of debt issuance costs
1,277,361

 
51

 
 
 
 
 
1,373,131

 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
 
 
Senior Notes due 2017
500,000

 
 
 
6.75%
 
04/15/17
 
500,000

Senior Notes due 2018
400,000

 
 
 
4.625%
 
12/05/18
 
400,000

Senior Notes due 2019
500,000

 
 
 
6.250%
 
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
 

Revolving Credit Facility
50,000

 
 
 
2.44%
 
05/13/19
 
200,000

   Less: Debt Issuance Costs
(32,141
)
 
 
 
 
 
 
 
(28,544
)
Total unsecured debt financings, net of debt issuance costs
2,717,859

 
 
 
 
 
 
 
2,371,456

 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings, net of debt issuance costs
$
3,995,220

 
 
 
 
 
 
 
$
3,744,587

 

15



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015

        
(1)
Reflects the floating rate in effect at the applicable reset date plus the margin for Securitization No. 2, five of our Bank Financings, and our Revolving Credit Facility. All other financings have a fixed rate.
(2)
For Securitization No. 2, all cash flows available after expenses and interest are applied to debt amortization.

The following Securitization includes a liquidity facility commitment described in the table below: 
 
 
 
Available Liquidity
 
 
 
 
Facility
Liquidity Facility Provider
 
September 30,
2015
 
December 31,
2014
 
Unused
Fee
 
Interest Rate
on any Advances
Securitization No. 2
HSH Nordbank AG
 
$
65,000

 
$
65,000

 
0.50%
 
1M Libor + 0.75
 

Secured Debt Financings:

ECA Term Financings

As described in Note 6 - Variable Interest Entities, we refer to our COFACE-supported financings as “ECA Term Financings.” In addition, Aircastle has guaranteed the repayment of the ECA Term Financings. The borrowings under these financings at September 30, 2015 have a weighted average rate of interest of 3.57% .

Bank Financings

In May 2015, we entered into two floating rate loans with The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Development Bank of Japan Inc. These loans, which total $150,000 , are secured by two A330-300 aircraft that we acquired in the fourth quarter of 2014.

Our Bank Financings contain, among other customary provisions, a $500,000 minimum net worth covenant and, in some cases, a cross-default to other financings with the same lender. In addition, Aircastle has guaranteed the repayment of the Bank Financings. The borrowings under these financings at September 30, 2015 have a weighted average fixed rate of interest of 3.15% .

Unsecured Debt Financings:

Senior Notes due 2022

On January 15, 2015, Aircastle issued $500,000 aggregate principal amount of Senior Notes due 2022 (the "2022 Senior Notes") at par. The 2022 Senior Notes will mature on February 15, 2022 and bear interest at the rate of 5.50% per annum, payable semi-annually on February 15 and August 15 of each year, commencing on August 15, 2015. Interest accrues on the 2022 Senior Notes from January 15, 2015.

We may redeem the Senior Notes due 2022 at any time at a redemption price equal to (a) 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest thereon to, but not including, the redemption date and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes from the redemption date through the maturity date of the notes (computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the notes) as of such redemption date plus 50 basis points). In addition, on or before February 15, 2018, we may redeem up to 35% of the aggregate principal amount of the notes issued under the indenture at a redemption price equal to 105.50% plus accrued and unpaid interest thereon to, but not including, the redemption date, with the net proceeds of certain equity offerings. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2022 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2022 are not guaranteed by any of the Company's subsidiaries or any third party.


16



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Revolving Credit Facility

On January 26, 2015, we increased the size of our Revolving Credit Facility from $450,000 to $600,000 . On May 13, 2015, we extended the maturity of our Revolving Credit Facility to May 13, 2019. At September 30, 2015 , we had $ 50,000 drawn on the facility.

As of September 30, 2015 , we are in compliance with all applicable covenants in all of our financings.


Note 8. 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
August 4, 2015
$
0.220

 
$
17,860

 
August 31, 2015
 
September 15, 2015
May 4, 2015
$
0.220

 
$
17,863

 
May 29, 2015
 
June 15, 2015
February 17, 2015
$
0.220

 
$
17,860

 
March 6, 2015
 
March 13, 2015
October 31, 2014
$
0.220

 
$
17,817

 
November 28, 2014
 
December 15, 2014
July 28, 2014
$
0.200

 
$
16,201

 
August 29, 2014
 
September 12, 2014
May 5, 2014
$
0.200

 
$
16,202

 
May 30, 2014
 
June 13, 2014
February 21, 2014
$
0.200

 
$
16,201

 
March 7, 2014
 
March 14, 2014

Note 9. 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.
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. Because the holders of the participating restricted common shares were 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 September 30, 2015.








17



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Weighted average shares:
 
 
 
 
 
 
 
Common shares outstanding
80,566,400

 
80,389,996

 
80,565,754

 
80,389,131

Restricted common shares
645,427

 
600,581

 
604,179

 
581,932

Total weighted average shares
81,211,827

 
80,990,577

 
81,169,933

 
80,971,063

 
 
 
 
 
 
 
 
Percentage of weighted average shares:
 
 
 
 
 
 
 
Common shares outstanding
99.21
%
 
99.26
%
 
99.26
%
 
99.28
%
Restricted common shares
0.79
%
 
0.74
%
 
0.74
%
 
0.72
%
Total
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%

The calculations of both basic and diluted earnings per share are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Earnings (loss) per share – Basic:
 
 
 
 
 
 
 
Net income (loss)
$
(13,989
)
 
$
19,151

 
$
71,088

 
$
28,064

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

 
(142
)
 
(529
)
 
(202
)
Earnings (loss) available to common shareholders – Basic
$
(13,989
)
 
$
19,009

 
$
70,559

 
$
27,862

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Basic
80,566,400

 
80,389,996

 
80,565,754

 
80,389,131

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Basic
$
(0.17
)
 
$
0.24

 
$
0.88

 
$
0.35

 
 
 
 
 
 
 
 
Earnings (loss) per share – Diluted:
 
 
 
 
 
 
 
Net income (loss)
$
(13,989
)
 
$
19,151

 
$
71,088

 
$
28,064

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

 
(142
)
 
(529
)
 
(202
)
Earnings (loss) available to common shareholders – Diluted
$
(13,989
)
 
$
19,009

 
$
70,559

 
$
27,862

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Basic
80,566,400

 
80,389,996

 
80,565,754

  
80,389,131

Effect of dilutive shares (b)

 

 

 

Weighted average common shares outstanding – Diluted
80,566,400

 
80,389,996

 
80,565,754

  
80,389,131

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Diluted
$
(0.17
)
 
$
0.24

 
$
0.88

  
$
0.35

 
        
(a)
For the three months ended September 30, 2014 , distributed and undistributed earnings to restricted shares is 0.74% of net income. For the nine months ended September 30, 2015 and 2014 , distributed and undistributed earnings to restricted shares is 0.74% and 0.72% of net income, respectively. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(b)
For the three and nine months ended September 30, 2015 and 2014 , we had no dilutive shares.





18



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Note 10. Income Taxes
Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes 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, Singapore and the United States.
The sources of income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investment for the three and nine months ended September 30, 2015 and 2014 were as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
U.S. operations
$
597

 
$
772

 
$
1,817

 
$
2,293

Non-U.S. operations
(13,434
)
 
20,936

 
76,745

 
34,798

Total
$
(12,837
)
 
$
21,708

 
$
78,562

 
$
37,091


All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and Singapore are subject to tax in those respective jurisdictions.
We have a U.S. based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. 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 nine months ended September 30, 2015 and 2014 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2015 and 2014, respectively.
The Company’s effective tax rate for the three and nine months ended September 30, 2015 was 21.1% and 15.3% respectively, compared to 16.0% and 29.5% for the three and nine months ended September 30, 2014 , respectively. Movements in the effective tax rates are generally caused by changes in the proportion of the Company’s pre-tax earnings in taxable and non-tax jurisdictions. For the three and nine months ended September 30, 2015 , the interim period effective tax rate reflects impairments of $78,403 and $102,358 , respectively, which resulted in a higher effective tax rate. For the nine months ended September 30, 2014 , the interim period effective tax rate reflects the loss on extinguishment of debt in the amount of $36,570 related to Bermuda operations, which was treated as a discrete item with no tax benefit.










19



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Notional U.S. federal income tax expense (benefit) at the statutory rate
$
(4,493
)
 
$
7,598

 
$
27,497

 
$
12,982

U.S. state and local income tax, net
57

 
57

 
167

 
176

Non-U.S. operations:
 
 
 
 
 
 
 
Bermuda
6,696

 
215

 
(9,199
)
 
6,455

Ireland
2,500

 
(2,411
)
 
(407
)
 
(3,163
)
Singapore
(1,385
)
 
(1,418
)
 
(4,116
)
 
(3,895
)
Other
(860
)
 
(692
)
 
(2,439
)
 
(2,061
)
Non-deductible expenses in the U.S.
205

 
146

 
566

 
464

Other
(11
)
 
(11
)
 
(32
)
 
(33
)
Income tax provision
$
2,709

 
$
3,484

 
$
12,037

 
$
10,925


Note 11. Interest, Net
The following table shows the components of interest, net: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
$
51,428

 
$
44,820

 
$
153,076

 
$
144,677

Hedge ineffectiveness losses
215

 
(4
)
 
509

 
55

Amortization of interest rate derivatives related to deferred losses
5,006

 
8,549

 
19,349

 
26,730

Amortization of deferred financing fees and debt discount
3,746

 
3,506

 
11,211

 
10,493

Interest Expense
60,395

 
56,871

 
184,145

 
181,955

Less interest income
(14
)
 
(77
)
 
(82
)
 
(404
)
Interest, net
$
60,381

 
$
56,794

 
$
184,063

 
$
181,551


Note 12. Commitments and Contingencies
On June 12, 2015, Aircastle entered into a purchase agreement with Embraer S.A. (“Embraer”) under which we agreed to acquire 25 new E-Jet E2 aircraft with purchase rights for an additional 25 E-Jet E2 aircraft. Deliveries of the 25 aircraft are scheduled to begin in 2018 for the E190-E2 aircraft and 2019 for the E195-E2 aircraft with the last delivery scheduled in March 2021. At September 30, 2015 , the table below includes $142,170 of progress payments, which begin in May 2016.
At September 30, 2015 , we had commitments to acquire 34 aircraft, including the above referenced 25 Embraer E-2 aircraft, for $1,336,950 .





20



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Commitments, including contractual price escalations and other adjustments, for these aircraft at September 30, 2015 , net of amounts already paid, are as follows:
Year Ending December 31,
Amount
Remainder of 2015
$
130,500

2016
132,122

2017
170,252

2018
258,130

2019
293,267

Thereafter
352,679

   Total
$
1,336,950


Note 13. Other Assets
The following table describes the principal components of other assets on our consolidated balance sheet as of:
 
September 30,
2015
 
December 31,
2014
Deferred federal income tax asset
$
1,072

 
$
567

Lease incentives and lease premiums, net of amortization of $29,813 and $26,477, respectively
96,214

 
75,587

Flight equipment held for sale
5,212

 
7,455

Other assets
28,733

 
21,841

Total other assets
$
131,231

 
$
105,450

 

Note 14. Accounts Payable, Accrued Expenses and Other Liabilities
The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our consolidated balance sheet as of:
 
September 30,
2015
 
December 31,
2014
Accounts payable and accrued expenses
$
38,561

 
$
40,765

Deferred federal income tax liability
36,416

 
37,340

Accrued interest payable
51,728

 
27,795

Lease discounts, net of amortization of $16,775 and $9,247, respectively
25,071

 
32,084

Fair value of derivative liabilities
2,433

 
2,879

Total accounts payable, accrued expenses and other liabilities
$
154,209

 
$
140,863











21



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2015


Note 15. Accumulated Other Comprehensive Loss
The following table describes the principal components of accumulated other comprehensive loss recorded on our consolidated balance sheet as of:
Changes in accumulated other comprehensive loss by component (a)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
(23,681
)
 
$
(57,342
)
 
$
(38,460
)
 
$
(75,905
)
Amount recognized in other comprehensive loss on derivatives, net of tax expense of $10 and $7 for the three months and tax expense of $10 and $728 for the nine months ended September 30, 2015 and 2014, respectively
(545
)
 
509

 
(1,940
)
 
(3,068
)
Amounts reclassified from accumulated other comprehensive loss into income, net of tax benefit of $7 and expense of $14 for the three months and tax expense of $16 and $97 for the nine months ended September 30, 2015 and 2014, respectively
5,823

 
9,683

 
21,997

 
31,823

   Net current period other comprehensive income
5,278

 
10,192

 
20,057

 
28,755

Ending balance
$
(18,403
)
 
$
(47,150
)
 
$
(18,403
)
 
$
(47,150
)

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

Reclassifications from accumulated other comprehensive loss (a)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Amount of effective amortization of net deferred interest rate derivative losses (b)
$
5,006

 
$
8,549

 
$
19,349

 
$
26,730

Effective amount of net settlements of interest rate derivatives, net of tax benefit of $7 and expense of $14 for the three months and tax expense of $16 and $97 for the nine months ended September 30, 2015 and 2014, respectively (b)
817

 
1,134

 
2,648

 
5,093

Amount of loss reclassified from accumulated other comprehensive loss into income (c)
$
5,823

 
$
9,683

 
$
21,997

 
$
31,823


(a) All amounts are net of tax.
(b) Included in interest expense.
(c) This represents the effective amounts of actual cash paid related to the net settlements of the interest rate derivatives plus any effective amortization of net deferred interest rate derivative losses.

At September 30, 2015 , the amount of deferred net loss expected to be reclassified from OCI into interest expense over the next twelve months related to our terminated interest rate derivatives is $12,883 , of which $1,154 relates to Senior Notes due 2017 and 2020 interest rate derivatives, $7,547 relates to Senior Notes due 2018 interest rate derivatives, $2,865 relates to ECA Term Financings for New A330 Aircraft, and $1,317 relates to other financings.
At September 30, 2015 , the amount of loss expected to be reclassified from OCI into interest expense over the next twelve months related to net interest settlements on active interest rate derivatives was $1,987 .

22


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended December 31, 2014 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 US GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with US GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
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 1 A of Aircastle’s 2014 Annual Report on Form 10-K and our Form 10-Q filed for the quarter ended June 30, 2015, 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 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 — SEC Filings” as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are also available free of charge through our website under “Investors — SEC Filings.”
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance.” In addition, our Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902.
The information on the Company’s website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.


23


OVERVIEW

We acquire, lease, and sell commercial jet aircraft with large, global operator bases and long useful lives. As of September 30, 2015 , our portfolio consisted of 160 aircraft leased to 51 lessees located in 32 countries. Our aircraft fleet is managed by an experienced team based in the United States, Ireland and Singapore. Typically, our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. As of September 30, 2015 , the net book value of our flight equipment and finance lease aircraft was $6.01 billion compared to $5.69 billion at December 31, 2014. Our revenues and net income (loss) for the three and nine months ended September 30, 2015 were $212.1  million and $(14.0)  million, and $610.9 million and $71.1 million, respectively.
Growth in commercial air traffic is broadly correlated with world economic activity and, in recent years, has been expanding at a rate one and a half to two times the rate of global GDP growth. The expansion of air travel has driven a rise in the world aircraft fleet. There are currently more than 18,000 commercial mainline passenger and freighter aircraft in operation worldwide. This fleet is expected to continue expanding at an average annual rate of three to five percent per annum over the next 20 years. In addition, aircraft leasing companies own an increasing share of the world’s commercial jet aircraft and now account for approximately 40% of this fleet.
Notwithstanding the sector’s long-term growth, the aviation markets have been, and are expected to remain, subject to economic variability on a global basis and regional basis, as well as to changes in macroeconomic relations such as fuel price levels and foreign exchange rates. The industry is susceptible to external shocks, such as regional conflicts, terrorist events, and to disruptions caused by severe weather events and other natural phenomena. Mitigating these risks is the portability of the assets, allowing aircraft to be redeployed in locations where demand is higher.
Air traffic data so far this year continues to show strong passenger market growth.  According to the International Air Transport Association, during the first eight months of 2015, global passenger traffic increased 6.6% compared to the same period in 2014.  Air cargo demand, which is more sensitive to economic conditions, appears to have stabilized but continues to be hampered by overcapacity. During the first eight months of 2015, air cargo increased 2.6% but capacity increased 5.6% , further depressing load factors.
There are significant regional variations in demand for air travel. Emerging market economies have been experiencing significant increases in air traffic, driven by rising levels of per capita income. Air traffic growth in some regions is being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices, and by the expansion of long-haul "hub and spoke" traffic, such as that flowing through the Persian Gulf. Mature markets, such as North America and Western Europe, are likely to grow more slowly in tandem with their economies. Also, airlines operating in areas with political instability or where there are geopolitical conflicts, such as Russia, have seen more modest growth, and their outlook is more uncertain. Periodic health concerns may also play a role in the near-term development of air traffic in certain regions. On balance, we believe that air travel will likely increase over time, and as a result, we expect demand for modern, fuel efficient aircraft will continue to remain strong over the long-term.
Capital availability for aircraft has varied over time, and we consider this variability to be a basic characteristic of our business. However, both debt and equity markets have improved globally over the past several years with the recovery from the global financial crisis. Strong U.S. debt capital markets conditions benefited certain borrowers by permitting access to financing at historic lows while higher fees have driven down export credit agency demand. Commercial bank debt continues to play a critical role in the air finance market, although we believe regulatory pressures have limited the extent of this market's recovery. We believe these market forces should generate attractive new investment and trading opportunities upon which we are well placed to capitalize given our access to the U.S. capital markets and the bank market. Over the longer term, our strategy is to achieve an investment grade credit rating, which we believe will reduce our borrowing costs and enable more reliable access to debt capital throughout the business cycle.
We believe 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 vary with market opportunities. We focus on discerning investment value in situations that are often more bespoke and generally less competitive.

24


We plan to grow our business and profits over the long-term while maintaining a countercyclical orientation, a bias towards limiting long-dated capital commitments and a conservative and flexible capital structure. Our business strategy entails the following elements:
Pursuing a disciplined and differentiated investment strategy. In our view, aircraft values change in different ways over time. As a consequence, we carefully evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices periodically 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 enables our value oriented strategy and provides us with a competitive advantage for many investment opportunities.
Originating investments from many different sources across the globe. Our strategy is to seek out worthwhile investments broadly leveraging our team’s wide range of contacts around the world. 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 75 different sellers.
Leveraging our strategic relationships. We intend to capture the benefits provided through the extensive global contacts and relationships maintained by Marubeni Corporation, which is both our biggest shareholder and one of the largest Japanese trading companies. Our joint venture with Ontario Teachers’ Pension Plan provides us with an opportunity to pursue larger transactions and to manage portfolio concentrations.
Maintaining efficient access to capital from a wide range of sources while targeting an investment grade credit rating. We believe the aircraft investment market is subject to forces related to the business cycle and our strategy is to increase our purchase activity when prices are low and to emphasize asset sales when competition for assets is high. In order to implement this approach, we believe maintaining access to a wide variety of financing sources over the business cycle is very important. Our strategy is to improve 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 improving our credit rating will not only reduce our borrowing costs but also facilitate more reliable access to debt capital throughout the business cycle.
Selling assets when attractive opportunities arise and for portfolio management purposes.  We pursue asset sales, as opportunities arise over the course of the business cycle, with the aim of realizing profits and reinvesting proceeds where more accretive investments are available. We also use asset sales for portfolio management purposes, such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types, and as an exit from investments when a sale would provide the greatest expected cash flow for us.
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 place 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. However our ability to pay quarterly dividends will depend upon many factors, including those as described in Item 1A. “Risk Factors,” and elsewhere in our 2014 Annual Report on Form 10-K. On August 4, 2015 , our board of directors declared a regular quarterly dividend of $0.22 per common share, or an aggregate of $17.9 million for the three months ended September 30, 2015 , which was paid on September 15, 2015 to holders of record on August 31, 2015 . These dividends may not be indicative of the amount of any future dividends.

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 and interest recognized from finance leases.
Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs arising during the term of the lease. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the credit-worthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues

25


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.

2015 Lease Expirations and Lease Placements
At September 30, 2015 , we had two aircraft which are scheduled to come off lease during 2015 for which we have not yet secured lease or sales commitments. These aircraft account for 0.3% of our net book value of flight equipment (including flight equipment held for lease and net investment in finance leases). We currently expect to sell one of these aircraft and are marketing the other for sale or lease.

2016-2019 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 2016-2019, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in finance leases) at September 30, 2015 specified below:
2016: 4 aircraft, representing 2%;
2017: 20 aircraft, representing 12%;
2018: 12 aircraft, representing 9%; and
2019: 12 aircraft, representing 9%.

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.

26


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 that 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 Ireland, Singapore and the United States.
All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and Singapore are subject to tax in those respective jurisdictions.
We have a U.S. based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. 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 nine months of 2015, we acquired 32 aircraft for $1.04 billion . At September 30, 2015 , we had commitments to acquire 34 additional aircraft for $1.34 billion , including the acquisition of 25 new E-Jet E-2 aircraft from Embraer. As of October 30, 2015, after taking into account one aircraft acquisition October 2015, we have commitments to acquire 33 aircraft for $ 1.29 billion .
During the first nine months of 2015, we sold 20 aircraft and other flight equipment for $343.0 million which resulted in a net gain of $43.0 million. During October 2015, we completed several additional sales including one Boeing 747-400 converted freighter, one older Airbus A330-300 and our last Boeing 767-300ER. In aggregate, these sales have been profitable. In addition, we concluded an agreement to sell our last remaining MD-11 freighter in January 2016 for an amount approximately equal to break-even.

Nine Months Ended September 30, 2015
 
Number
 
Weighted
 
 
 
Gain (Loss) on
 
 
 
 
 
 
of
 
Average Age of
 
Maintenance
 
Sale of Flight
 
 
 
Pre-tax
 
 
Aircraft
 
Aircraft in Years
 
Revenue
 
Equipment
 
Impairment
 
Impact
 
 
 
 
 
 
 
Narrowbody
 
14
 
14.4
 
$
7,034

 
$
30,648

 
$
(5,328
)
 
$
32,354

Widebody
 
4
 
15.8
 

 
12,782

 

 
12,782

Freighter
 
2
 
17.7
 
11,412

 
(396
)
 
(17,852
)
 
(6,836
)
    Total
 
20
 
14.9
 
$
18,446

 
$
43,034

 
$
(23,180
)
 
$
38,300

_______________


27


The following table sets forth certain information with respect to the aircraft owned by us as of September 30, 2015 :

AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
 
Owned
Aircraft as of
September 30, 
2015 (1)
 
Owned
Aircraft as of
September 30, 
2014 (1)
Flight Equipment
$
6,007

 
$
5,304

Unencumbered Flight Equipment
$
3,722

 
$
2,924

Number of Aircraft
160

 
140

Number of Unencumbered Aircraft
109

 
85

Number of Lessees
51

 
61

Number of Countries
32

 
37

Weighted Average Age – Passenger (years) (2)
7.0

 
7.8

Weighted Average Age – Freighter (years) (2)
12.4

 
12.6

Weighted Average Age – Combined (years) (2)
7.7

 
8.6

Weighted Average Remaining Passenger Lease Term (years) (3)
6.2

 
5.3

Weighted Average Remaining Freighter Lease Term (years) (3)
3.9

 
3.5

Weighted Average Remaining Combined Lease Term (years) (3)
5.9

 
5.0

Weighted Average Fleet Utilization during the three months ended September 30, 2015 and 2014 (4)
99.9
%
 
100.0
%
Weighted Average Fleet Utilization during the nine months ended September 30, 2015 and 2014 (4)
99.2
%
 
99.5
%
Portfolio Yield for the three months ended September 30, 2015 and 2014 (5)
12.7
%
 
13.2
%
Portfolio Yield for the nine months ended September 30, 2015 and 2014 (5)
12.6
%
 
13.3
%
 
        
(1)
Calculated using net book value of flight equipment held for lease and net investment in finance leases at period end.
(2)
Weighted average age by net book value.
(3)
Weighted average remaining lease term by net book value.
(4)
Aircraft on-lease days as a percent of total days in period weighted by net book value.
(5)
Lease rental revenue for the period as a percent of the average net book value of flight equipment held for lease for the period; quarterly information is annualized.

Our owned aircraft portfolio as of September 30, 2015 is listed in Exhibit 99.1 to this report.