Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 05/06/2015 16:18:53)

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 March 31, 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 April 30, 2015 , there were 81,181,133 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 December 31, 2014 and March 31, 2015
 
Consolidated Statements of Income for the three months ended March 31, 2014 and 2015
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2015
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2015
 
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)
 
 
December 31,
2014
 
March 31,
2015
 
 
 
(Unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
169,656

 
$
329,992

Accounts receivable
3,334

 
2,386

Restricted cash and cash equivalents
98,884

 
86,961

Restricted liquidity facility collateral
65,000

 
65,000

Flight equipment held for lease, net of accumulated depreciation of $1,294,063 and $1,362,647
5,579,718

 
5,712,950

Net investment in finance leases
106,651

 
104,377

Unconsolidated equity method investment
46,453

 
47,842

Other assets
157,317

 
174,858

Total assets
$
6,227,013

 
$
6,524,366

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings
$
1,396,454

 
$
1,343,237

Borrowings from unsecured financings
2,400,000

 
2,700,000

Accounts payable, accrued expenses and other liabilities
140,863

 
157,175

Lease rentals received in advance
53,216

 
53,300

Liquidity facility
65,000

 
65,000

Security deposits
117,689

 
107,016

Maintenance payments
333,456

 
345,086

Total liabilities
4,506,678

 
4,770,814

 
 
 
 
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, 80,983,249 shares issued and outstanding at December 31, 2014; and 81,181,133 shares issued and outstanding at March 31, 2015
810

 
812

Additional paid-in capital
1,565,180

 
1,564,881

Retained earnings
192,805

 
218,214

Accumulated other comprehensive loss
(38,460
)
 
(30,355
)
Total shareholders’ equity
1,720,335

 
1,753,552

Total liabilities and shareholders’ equity
$
6,227,013

 
$
6,524,366


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 March 31,
 
2014
 
2015
Revenues:
 
 
 
Lease rental revenue
$
174,335

 
$
177,146

Finance lease revenue
3,987

 
1,607

Amortization of lease premiums, discounts and lease incentives
(6,591
)
 
(3,824
)
Maintenance revenue
3,042

 
18,073

Total lease revenue
174,773

 
193,002

Other revenue
1,830

 
1,294

Total revenues
176,603

 
194,296

 
 
 
 
Operating expenses:
 
 
 
Depreciation
73,927

 
74,846

Interest, net
64,263

 
62,131

Selling, general and administrative (including non-cash share based payment expense of $990 and $1,170 for the three months ended March 31, 2014 and 2015, respectively)
13,944

 
13,932

Impairment of Aircraft
18,263

 

Maintenance and other costs
1,863

 
2,943

Total expenses
172,260

 
153,852

 
 
 
 
Other income (expense):
 
 
 
Gain on sale of flight equipment
1,110

 
6,253

Other
757

 
(6
)
Total other income (expense)
1,867

 
6,247

 
 
 
 
Income from continuing operations before income taxes
6,210

 
46,691

Income tax provision
883

 
4,863

Earnings of unconsolidated equity method investment, net of tax
450

 
1,441

Net income
$
5,777

 
$
43,269

 
 
 
 
Earnings per common share — Basic:
 
 
 
Net income per share
$
0.07

 
$
0.53

 
 
 
 
Earnings per common share — Diluted:
 
 
 
Net income per share
$
0.07

 
$
0.53

 
 
 
 
Dividends declared per share
$
0.200

 
$
0.220


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 March 31,
 
2014
 
2015
 
 
 
 
Net income
$
5,777

 
$
43,269

Other comprehensive income, net of tax:
 
 
 
Net change in fair value of derivatives, net of tax expense of $804 and tax benefit of $3 for the three months ended March 31, 2014 and 2015, respectively
370

 
(128
)
Net derivative loss reclassified into earnings
9,327

 
8,233

Other comprehensive income
9,697

 
8,105

Total comprehensive income
$
15,474

 
$
51,374



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)
 
Three Months Ended March 31,
 
2014
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
5,777

 
$
43,269

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
73,927

 
74,846

Amortization of deferred financing costs
3,420

 
3,699

Amortization of net lease discounts and lease incentives
6,591

 
3,824

Deferred income taxes
1,347

 
2,110

Non-cash share based payment expense
990

 
1,170

Cash flow hedges reclassified into earnings
9,327

 
8,233

Security deposits and maintenance payments included in earnings
(14,786
)
 
(4,481
)
Gain on sale of flight equipment
(1,110
)
 
(6,253
)
Impairment of aircraft
18,263

 

Other
(2,162
)
 
209

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(1,496
)
 
948

Other assets
(1,171
)
 
(7,176
)
Accounts payable, accrued expenses and other liabilities
2,907

 
12,874

Lease rentals received in advance
1,167

 
(344
)
Net cash provided by operating activities
102,991

 
132,928

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment and lease incentives
(663,038
)
 
(264,271
)
Proceeds from sale of flight equipment
28,018

 
50,525

Aircraft purchase deposits and progress payments
3,280

 
(1,250
)
Collections on finance leases
2,773

 
2,274

Other
(19
)
 
(372
)
Net cash used in investing activities
(628,986
)
 
(213,094
)
Cash flows from financing activities:
 
 
 
Issuance of shares net of repurchases
(2,091
)
 
(1,960
)
Proceeds from notes and term debt financings
803,200

 
500,000

Securitization and term debt financing repayments
(287,778
)
 
(253,681
)
Deferred financing costs
(14,755
)
 
(8,971
)
Restricted liquidity facility collateral
42,000

 

Liquidity facility
(42,000
)
 

Restricted cash and cash equivalents related to financing activities
20,310

 
11,923

Security deposits and maintenance payments received
41,901

 
33,365

Security deposits and maintenance payments returned
(25,681
)
 
(22,314
)
Payments for terminated cash flow hedges
(33,427
)
 

Dividends paid
(16,201
)
 
(17,860
)
Net cash provided by financing activities
485,478

 
240,502

Net increase (decrease) in cash and cash equivalents
(40,517
)
 
160,336

Cash and cash equivalents at beginning of period
654,613

 
169,656

Cash and cash equivalents at end of period
$
614,096

 
$
329,992

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
36,089

 
$
23,858

Cash paid for income taxes
$
1,467

 
$
2,662

Supplemental disclosures of non-cash investing activities:
 
 
 
Purchase deposits, advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
1,522

 
$
3,050

Term debt financings assumed in asset acquisitions
$
39,061

 
$

Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment
$
3,655

 
$
11,162



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)
March 31, 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 March 31, 2015 through the date on which the consolidated financial statements included in this Form 10-Q were issued.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates 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.
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.

7



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


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 disclosu res. The Company is currently evaluating the impacts of adoption and the implementation approach to be used.
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 are currently evaluating the effect of the ASU on our consolidated financial statements and related disclosures.
On April 7, 2015, the FASB issued 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 will be applied on a retrospective basis. We are currently evaluating the effect of the ASU on our consolidated financial statements and related disclosures.

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)
March 31, 2015


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

 
 
 
Fair Value Measurements at March 31, 2015 Using Fair Value Hierarchy
 
Fair Value as of March 31, 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
$
329,992

 
$
329,992

 
$

 
$

 
Market
Restricted cash and cash equivalents
86,961

 
86,961

 

 

 
Market
Total
$
416,953

 
$
416,953

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
3,121

 
$

 
$
3,121

 
$

 
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 months ended March 31, 2014 and 2015 , 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 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

9



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


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
During the first quarter of 2014, we impaired two aircraft, one Boeing 737-400, which was returned to us as scheduled by the lessee, and one Boeing 747-400 converted freighter, for which we agreed to an early lease termination with our customer which we refer to as “Transactional Impairments.” For these two aircraft, we recorded impairment charges totaling $18,263 and recorded maintenance revenue of $17,176 during the three months ended March 31, 2014.
During the first quarter of 2015, we did not incur any impairment charges.
        
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, 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 December 31, 2014 and March 31, 2015 are as follows:
 
December 31, 2014
 
March 31, 2015
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
Securitization
$
(391,680
)
 
$
(376,752
)
 
$
(361,011
)
 
$
(347,596
)
Credit Facilities
(200,000
)
 
(200,000
)
 

 

ECA term financings
(449,886
)
 
(471,918
)
 
(438,673
)
 
(463,800
)
Bank financings
(554,888
)
 
(560,285
)
 
(543,553
)
 
(551,017
)
Senior Notes
(2,200,000
)
 
(2,300,615
)
 
(2,700,000
)
 
(2,913,534
)
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 March 31, 2015 were as follows:

10



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


Year Ending December 31,
Amount
Remainder of 2015
$
527,280

2016
644,305

2017
543,005

2018
446,092

2019
378,953

Thereafter
1,139,065

Total
$
3,678,700


Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended March 31,
Region
2014
 
2015
Asia and Pacific
42
%
 
42
%
Europe
29
%
 
29
%
South America
9
%
 
14
%
Middle East and Africa
10
%
 
9
%
North America
10
%
 
6
%
Total
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 March 31, 2014 , one customer accounted for 6% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
For the three months ended March 31, 2015 , one customer accounted for 7% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue based on each lessee’s principal place of business:
 
Three Months Ended March 31,
 
2014
 
2015
Country
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
 
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
Netherlands (1)
$

 
%
 

 
$
22,947

 
12
%
 
1

China (2)
21,601

 
12
%
 
4

 

 
%
 

            
(1) Total revenue was less than 10% for the three months ended March 31, 2014. Total revenue for the three months ended March 31, 2015 includes $13,186 of maintenance revenue related to a lease termination.
(2) Total revenue for the three months ended March 31, 2014 includes $11,264 of maintenance revenue related to a lease termination. Total revenue was less than 10% for the three months ended March 31, 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:

11



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


 
December 31, 2014
 
March 31, 2015
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
46

 
40
%
 
44

 
39
%
Europe
65

 
29
%
 
65

 
28
%
South America
13

 
14
%
 
15

 
15
%
Middle East and Africa
6

 
10
%
 
6

 
9
%
North America
17

 
7
%
 
17

 
7
%
Off-lease
1

(1)  
%
 
5

(2)  
2
%
Total
148

 
100
%
 
152

 
100
%
 
_______________

(1)
Consisted of one Airbus A320-200 aircraft which was subject to a commitment to lease and was delivered to our customer in February 2015.
(2)
Consisted of five 737-800 aircraft, all of which are all subject to lease commitments and are expected to be delivered to customers during the second quarter of 2015.

At December 31, 2014 and March 31, 2015 , no country represented at least 10% of net book value of flight equipment based on each lessee’s principal place of business.
  At December 31, 2014 and March 31, 2015 , the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $22,833 and $24,944 , respectively.

Note 4. Net Investment in Finance Leases
At March 31, 2015 , our net investment in finance leases represents six aircraft leased to three customers in the United States, one aircraft leased to a customer in Canada and one aircraft leased to a customer in Croatia. The following table lists the components of our net investment in finance leases at March 31, 2015 :
 
 
Amount
Total lease payments to be received
 
$
72,212

Less: Unearned income
 
(19,124
)
Estimated residual values of leased flight equipment (unguaranteed)
 
51,289

    Net investment in finance leases
 
$
104,377


At March 31, 2015 , minimum future lease payments on finance leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2015
 
$
12,128

2016
 
16,009

2017
 
15,024

2018
 
6,980

2019
 
6,900

Thereafter
 
15,171

    Total
 
$
72,212





12



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


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 more than 9.7% of our outstanding common shares.
The Company has recorded a $4,613 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
 
1,337

Earnings from joint venture, net of tax
 
1,441

Distributions
 
(1,389
)
Investment in joint venture at March 31, 2015
 
$
47,842

 
 
 

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 14 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 March 31, 2015 , the assets of ACS Ireland 2 include six aircraft transferred into the VIE at historical cost basis in connection with Securitization No. 2.
The assets of the ACS Ireland 2 as of March 31, 2015 are $168,500 . The liabilities of the ACS Ireland 2, net of $40,351 Class E-1 Securities held by the Company, which is eliminated in consolidation, as of March 31, 2015 are $123,955 .

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 and deferred financing costs. The related aircraft, with a net book value as of March 31, 2015 of $637,982 were included in our flight equipment held for lease. The consolidated debt outstanding of the Air Knight VIEs as of March 31, 2015 is $438,673 .

13



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015



Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At December 31, 2014
 
At March 31, 2015
Debt Obligation
Outstanding
Borrowings
 
Outstanding
Borrowings
 
Number of Aircraft
 
Interest Rate (1)
 
Final Stated
Maturity (2)
Secured Debt Financings:
 
 
 
 
 
 
 
 
 
Securitization No. 2
391,680

 
361,011

 
32
 
0.49%
 
06/14/37
ECA Term Financings
449,886

 
438,673

 
8
 
3.02% to 3.96%
 
12/3/21 to 11/30/24
Bank Financings
554,888

 
543,553

 
13
 
1.18% to 5.09%
 
09/15/15 to 04/19/25
Total secured debt financings
1,396,454

 
1,343,237

 
53
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
 
 
Senior Notes due 2017
500,000

 
500,000

 
 
 
6.75%
 
04/15/17
Senior Notes due 2018
400,000

 
400,000

 
 
 
4.625%
 
12/05/18
Senior Notes due 2019
500,000

 
500,000

 
 
 
6.250%
 
12/01/19
Senior Notes due 2020
300,000

 
300,000

 
 
 
7.625%
 
04/15/20
Senior Notes due 2021
500,000

 
500,000

 
 
 
5.125%
 
03/15/21
Senior Notes due 2022

 
500,000

 
 
 
5.50%
 
02/15/22
Revolving Credit Facility
200,000

 

 
 
 
N/A
 
03/31/18
Total unsecured debt financings
2,400,000

 
2,700,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings
$
3,796,454

 
$
4,043,237

 
 
 
 
 
 
 
        
(1)
Reflects the floating rate in effect at the applicable reset date plus the margin for Securitization No. 2, three 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
 
December 31,
2014
 
March 31,
2015
 
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 Limited has guaranteed the repayment of the ECA Term Financings. The borrowings under these financings at March 31, 2015 have a weighted average rate of interest of 3.57% .





14



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


Bank Financings

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 Limited has guaranteed the repayment of the Bank Financings. The borrowings under these financings at March 31, 2015 have a weighted average fixed rate of interest of 3.44% .

Unsecured Debt Financings:

Senior Notes due 2022

On January 15, 2015, Aircastle Limited 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.

Revolving Credit Facility

On January 26, 2015, we increased the size of our Revolving Credit Facility from $450,000 to $600,000 . The facility was undrawn as of March 31, 2015 .

As of March 31, 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
February 21, 2014
$
0.200

 
$
16,201

 
March 7, 2014
 
March 14, 2014
May 5, 2014
$
0.200

 
$
16,202

 
May 30, 2014
 
June 13, 2014
July 28, 2014
$
0.200

 
$
16,201

 
August 29, 2014
 
September 12, 2014
October 31, 2014
$
0.220

 
$
17,817

 
November 28, 2014
 
December 15, 2014
February 17, 2015
$
0.220

 
$
17,860

 
March 6, 2015
 
March 13, 2015




15



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015



Note 9. Earnings Per Share
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic 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 as follows:
 
Three Months Ended March 31,
 
2014
 
2015
Weighted-average shares:
 
 
 
Common shares outstanding
80,387,371

 
80,564,440

Restricted common shares
500,524

 
515,477

Total weighted-average shares
80,887,895

 
81,079,917

 
 
 
 
Percentage of weighted-average shares:
 
 
 
Common shares outstanding
99.38
%
 
99.36
%
Restricted common shares
0.62
%
 
0.64
%
Total
100.00
%
 
100.00
%

The calculations of both basic and diluted earnings per share are as follows: 
 
Three Months Ended March 31,
 
2014
 
2015
Earnings per share – Basic:
 
 
 
Net income
$
5,777

 
$
43,269

Less: Distributed and undistributed earnings allocated to restricted common shares (a)
(36
)
 
(275
)
Earnings available to common shareholders – Basic
$
5,741

 
$
42,994

 
 
 
 
Weighted-average common shares outstanding – Basic
80,387,371

 
80,564,440

 
 
 
 
Earnings per common share – Basic
$
0.07

 
$
0.53

 
 
 
 
Earnings per share – Diluted:
 
 
 
Net income
$
5,777

 
$
43,269

Less: Distributed and undistributed earnings allocated to restricted common shares (a)
(36
)
 
(275
)
Earnings available to common shareholders – Diluted
$
5,741

 
$
42,994

 
 
 
 
Weighted-average common shares outstanding – Basic
80,387,371

 
80,564,440

Effect of dilutive shares (b)

 

Weighted-average common shares outstanding – Diluted
80,387,371

 
80,564,440

 
 
 
 
Earnings per common share – Diluted
$
0.07

 
$
0.53

 

16



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


        
(a)
For the three months ended March 31, 2014 and 2015, distributed and undistributed earnings to restricted shares is 0.62% and 0.64% of net income. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(b)
For the three months ended March 31, 2014 and 2015 , we had no dilutive shares.


Note 10. Income Taxes
Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Singapore, Ireland and the United States.
The sources of income from continuing operations before income taxes and earnings of unconsolidated equity method investment for the three months ended March 31, 2014 and 2015 were as follows: 
 
Three Months Ended March 31,
 
2014
 
2015
U.S. operations
$
765

 
$
380

Non-U.S. operations
5,445

 
46,311

Total
$
6,210

 
$
46,691


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 months ended March 31, 2014 and 2015 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2014 and 2015, respectively.
The Company’s effective tax rate for the three months ended March 31, 2014 was 14.2% compared to 10.4% for the three months ended March 31, 2015 . 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.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following: 

17



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


 
Three Months Ended March 31,
 
2014
 
2015
Notional U.S. federal income tax expense (benefit) at the statutory rate
$
2,173

 
$
16,342

U.S. state and local income tax, net
79

 
42

Non-U.S. operations:
 
 
 
Bermuda
3,429

 
(8,527
)
Ireland
(3,289
)
 
(1,122
)
Singapore
(1,195
)
 
(1,356
)
Other
(598
)
 
(678
)
Non-deductible expenses in the U.S.
299

 
170

Other
(15
)
 
(8
)
Income tax provision
$
883

 
$
4,863


Note 11. Interest, Net
The following table shows the components of interest, net: 
 
Three Months Ended March 31,
 
2014
 
2015
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
$
51,685

 
$
50,235

Hedge ineffectiveness losses
53

 

Amortization of interest rate derivatives related to deferred losses
9,327

 
8,233

Amortization of deferred financing fees
3,420

 
3,699

Interest Expense
64,485

 
62,167

Less interest income
(222
)
 
(36
)
Interest, net
$
64,263

 
$
62,131


Note 12. Commitments and Contingencies
At March 31, 2015 , we had commitments to acquire 11 aircraft for $321,925 . As of April 30, 2015, after taking into account additional commitments and aircraft acquisitions during April 2015, we have acquired or have commitments to acquire 25 aircraft for $ 769,225 that we expect to complete by September 30, 2015.

Note 13. Other Assets
The following table describes the principal components of other assets on our consolidated balance sheet as of:
 
December 31,
2014
 
March 31,
2015
Deferred debt issuance costs, net of amortization of $53,094 and $56,329, respectively
$
51,867

 
$
57,595

Deferred federal income tax asset
567

 
490

Lease incentives and lease premiums, net of amortization of $26,477 and $30,664, respectively
75,587

 
77,173

Flight equipment held for sale
7,455

 
5,180

Other assets
21,841

 
34,420

Total other assets
$
157,317

 
$
174,858

 


18



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2015


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:
 
December 31,
2014
 
March 31,
2015
Accounts payable and accrued expenses
$
40,765

 
$
30,708

Deferred federal income tax liability
37,340

 
39,370

Accrued interest payable
27,795

 
54,348

Lease discounts, net of amortization of $9,247 and $11,704 respectively
32,084

 
29,628

Fair value of derivative liabilities
2,879

 
3,121

Total accounts payable, accrued expenses and other liabilities
$
140,863

 
$
157,175


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 March 31,
 
2014
 
2015
Beginning balance
$
(75,905
)
 
$
(38,460
)
Amount recognized in other comprehensive loss on derivatives, net of tax expense of $736 and tax benefit of $14, respectively
(2,380
)
 
(1,078
)
Amounts reclassified from accumulated other comprehensive loss into income, net of tax expense of $68 and $11, respectively
12,077

 
9,183

   Net current period other comprehensive income
9,697

 
8,105

Ending balance
$
(66,208
)
 
$
(30,355
)

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


Reclassifications from accumulated other comprehensive loss (a)
Three Months Ended March 31,
 
2014
 
2015
Amount of effective amortization of net deferred interest rate derivative losses (b)
$
9,327

 
$
8,233

Effective amount of net settlements of interest rate derivatives, net of tax expense of $68 and $11, respectively (b)
2,750

 
950

   Amount of loss reclassified from accumulated other comprehensive loss into income (c)
$
12,077

 
$
9,183


(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.

The amount of deferred net loss expected to be reclassified from OCI into interest expense over the next 12 months related to our terminated interest rate derivatives is $19,749 , of which $2,441 relates to Term Financing No. 1 interest rate derivatives, $10,787 relates to Securitization No. l interest rate derivatives, $5,282 relates to ECA Term Financings for New A330 Aircraft, and $1,239 relates to other financings.
The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months related to net interest settlements on active interest rate derivatives is $2,632 .


19


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 Item 1 A of Aircastle’s 2014 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 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 — 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.



20


OVERVIEW
We acquire, lease, and sell commercial jet aircraft with large, global operator bases and long useful lives. As of March 31, 2015 , our portfolio consisted of 152 aircraft leased to 54 lessees located in 34 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 March 31, 2015 , the net book value of our flight equipment and finance lease aircraft was $5.82 billion compared to $5.69 billion at December 31, 2014. Our revenues and net income for the three months ended March 31, 2015 were $194.3  million and $43.3  million, respectively.
Growth in commercial air traffic is broadly correlated with world economic activity, and has been expanding at a rate one 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 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.
For the first three months of 2015, air traffic data showed a continued strong trend in passenger market growth, whereas air cargo traffic showed slow improvement as world trade and economic growth increased.  According to the International Air Transport Association, global passenger traffic increased by 6.1% and air cargo traffic increased by 5.3% during the first three months of 2015 as compared to the same period in 2014.  Passenger traffic growth was strong, driven by rising economic growth and business confidence.  The air cargo market, which is more sensitive than the passenger sector to economic conditions, appears to have stabilized but continues to be hampered by overcapacity.
There are significant regional variations in demand for both passenger and air cargo. Emerging market economies have been experiencing significant increases in air traffic, driven by rising levels of per capita air travel. Air traffic in other regions is being driven by long-term structural changes in global traffic flows, particularly the growth in long-haul "hub and spoke" traffic flowing through the Persian Gulf. In contrast, mature markets, such as North America and Western Europe, are likely to grow more slowly in tandem with their economies. Finally, 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, such as the recent Ebola virus outbreak, may also play a role in the near-term development of air traffic in certain regions. However, in aggregate, we believe that passenger and cargo traffic 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 improved globally over the past several years with the recovery from the recent 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 ("ECA") demand. Commercial bank debt continues to play a critical role in the air finance market with traditional aviation lenders, along with a number of new entrants, providing capacity to top tier airlines and lessors, although we believe regulatory pressures have limited the extent of the bank 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. 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.

21


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 more than 70 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 or part-out 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 February 17, 2015 , our board of directors declared a regular quarterly dividend of $0.220 per common share, or an aggregate of $17.9 million for the three months ended March 31, 2015, which was paid on March 13, 2015 to holders of record on March 6, 2015 . These dividends may not be indicative of the amount of any future dividends.

We believe our team’s capabilities and our track record allow us to explore new income-generating activities as capital becomes available for such activities. We intend to continue to pursue investment opportunities where we believe we have competitive advantages and on transactions that offer attractive risk/return profiles after taking into consideration available financing options. However, there can be no assurance that we will be able to access capital on a cost-effective basis, and a failure to do so could have a material adverse effect on our business, financial condition or results of operations.





22


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 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 March 31, 2015, we had five 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 1.6% 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 the majority of these aircraft.

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 March 31, 2015 specified below:
2016: 15 aircraft, representing 7%;

23


2017: 23 aircraft, representing 16%;
2018: 14 aircraft, representing 11%; and
2019: 13 aircraft, representing 10%.


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 have 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 three months of 2015, we acquired six aircraft for $254.0 million. At March 31, 2015 , we had commitments to acquire 11 additional aircraft for $321.9 million. As of April 30, 2015, after taking into account additional commitments and aircraft acquisitions during April 2015, we have acquired or have commitments to acquire 25 aircraft for $ 769.2 million that we expect to complete by September 30, 2015.
During the first three months of 2015, we sold two aircraft leased to an airline based in India and other flight equipment for $50.5 million which resulted in a net gain of $6.3 million.


24


The following table sets forth certain information with respect to the aircraft owned by us as of March 31, 2015 :

AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
 
Owned
Aircraft as of
March 31,  2014 (1)
 
Owned
Aircraft as of
March 31,  2015 (1)
Flight Equipment
$
5,822

 
$
5,817

Unencumbered Flight Equipment
$
3,280

 
$
3,497

Number of Aircraft
164

 
152

Number of Unencumbered Aircraft
104

 
99

Number of Lessees
65

 
54

Number of Countries
37

 
34

Weighted Average Age – Passenger (years) (2)
8.3

 
7.6

Weighted Average Age – Freighter (years) (2)
12.9

 
12.8

Weighted Average Age – Combined (years) (2)
9.1

 
8.3

Weighted Average Remaining Passenger Lease Term (years) (3)
5.0

 
5.9

Weighted Average Remaining Freighter Lease Term (years) (3)
3.8

 
4.2

Weighted Average Remaining Combined Lease Term (years) (3)
4.8

 
5.6

Weighted Average Fleet Utilization during the three months ended March 31, 2014 and 2015 (4)
98.9
%
 
98.7
%
Portfolio Yield for the three months ended March 31, 2014 and 2015 (5)
13.5
%
 
12.6
%
 
        
(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 March 31, 2015 is listed in Exhibit 99.1 to this report.



25



PORTFOLIO DIVERSIFICATION
 
 
Owned Aircraft as  of
March 31, 2015
 
Number of
Aircraft
 
% of Net
Book  Value (1)
Aircraft Type
 
 
 
Passenger:
 
 
 
Narrowbody
99

 
36
%
Midbody
30

 
33
%
Widebody
8

 
17
%
Total Passenger
137

 
86
%
Freighter
15

 
14
%
Total
152

 
100
%
 
 
 
 
Manufacturer
 
 
 
Boeing
74

 
49
%
Airbus
73

 
49
%
Embraer
5

 
2
%
Total
152

 
100
%
 
 
 
 
Regional Diversification
 
 
 
Asia and Pacific
44

 
39
%
Europe
65

 
28
%
South America
15

 
15
%
Middle East and Africa
6

 
9
%
North America
17

 
7
%
Off-lease (2)
5

 
2
%
Total
152

 
100
%
 
        
(1)
Calculated using net book value of flight equipment held for lease and net investment in finance leases at period end.
(2) Consisted of five 737-800 aircraft, all which are subject to lease commitments and are expected to be delivered to customers during the second quarter of 2015.






26


Our largest customer represents less than 7% of the net book value of flight equipment held for lease (includes net book value of flight equipment held for lease and net investment in finance leases) at March 31, 2015 . Our top 15 customers for aircraft we owned at March 31, 2015 , representing 68 aircraft and 62% of the net book value of flight equipment held for lease, are as follows:
Percent of Net Book Value
 
Customer
 
Country
 
Number of
Aircraft
Greater than 6% per customer
 
LATAM
 
Chile
 
3
 
 
Iberia
 
Spain
 
18
 
 
 
 
 
 
 
3% to 6% per customer
 
South African Airways
 
South Africa
 
4
 
 
Thai Airways
 
Thailand
 
2
 
 
Singapore Airlines
 
Singapore
 
4
 
 
AirBridge Cargo (1)
 
Russia
 
3
 
 
Air Asia X
 
Malaysia
 
3
 
 
Emirates
 
United Arab Emirates
 
2
 
 
Garuda
 
Indonesia
 
4
 
 
Virgin Australia
 
Australia
 
2
 
 
 
 
 
 
 
Less than 3% per customer
 
OceanAir (2)
 
Brazil
 
4
 
 
Avianca
 
Colombia
 
2
 
 
Lion Air
 
Indonesia
 
4
 
 
Azul
 
Brazil
 
5
 
 
U.S. Airways (3)
 
United States
 
8
 
        

(1) Guaranteed by Volga-Dnepr Airlines.
(2) OceanAir is doing business as Avianca Brazil.
(3) U.S. Airways has merged with American Airlines.


Finance
We intend to fund new investments through cash on hand, cash flows from operations and through medium-to longer-term financings on a secured or unsecured basis. 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, 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.


27


RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2015 :
 
Three Months Ended March 31,
 
2014
 
2015
 
(Dollars in thousands)
Revenues:
 
 
 
Lease rental revenue
$
174,335

 
$
177,146

     Finance lease revenue
3,987

 
1,607

Amortization of net lease premiums, discounts and lease incentives
(6,591
)
 
(3,824
)
Maintenance revenue
3,042

 
18,073

Total lease revenue
174,773

 
193,002

Other revenue
1,830

 
1,294

Total revenues
176,603

 
194,296

Operating expenses:
 
 
 
Depreciation
73,927

 
74,846

Interest, net
64,263

 
62,131

Selling, general and administrative
13,944

 
13,932

Impairment of aircraft
18,263

 

Maintenance and other costs
1,863

 
2,943

Total operating expenses
172,260

 
153,852

Other income:
 
 
 
Gain on sale of flight equipment
1,110

 
6,253

Other
757

 
(6
)
Total other income
1,867

 
6,247

Income from continuing operations before income taxes
6,210

 
46,691

Income tax provision
883

 
4,863

Earnings of unconsolidated equity method investment, net of tax
450

 
1,441

Net income
$
5,777

 
$
43,269


Revenues:
Total revenues increased by 10.0%, or $17.7 million, for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 , primarily as a result of the following:
Lease rental revenue . The increase in lease rental revenue of $2.8 million for the three months ended March 31, 2015 as compared to the same period in 2014 was primarily the result of:
$40.6 million of revenue reflecting the full quarter impact of 6 aircraft purchased in 2015 and 31 aircraft purchased in 2014.
This increase was offset partially by a decrease in lease rental revenue of:
$26.0 million due to aircraft sales; and
$3.7 million from the effect of lease terminations and other changes and $8.1 million due to lease extensions and transitions.

Finance lease revenue: For the three months ended March 31, 2015 , $1.6 million of interest income from finance leases was recognized as compared to $4.0 million of interest income from finance leases recorded for the same period in 2014 due to the sale of six aircraft during the second quarter of 2014.

28


Amortization of net lease premiums, discounts and lease incentives.
 
Three Months Ended March 31,
 
2014
 
2015
 
(Dollars in thousands)
Amortization of lease incentives
$
(5,772
)
 
$
(3,685
)
Amortization of lease premiums
(2,330
)
 
(2,595
)
Amortization of lease discounts
1,511

 
2,456

Amortization of net lease premiums, discounts and lease incentives
$
(6,591
)
 
$
(3,824
)

As more fully described above under “Revenues,” lease incentives represent our estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain high-value components which is amortized over the life of the related lease. As we enter into new leases, the amortization of lease incentives generally increases and, conversely, if a related lease terminates, the related unused lease incentive liability will reduce the amortization of lease incentives. The decrease in amortization of lease incentives of $2.1 million for the three months ended March 31, 2015 as compared to the same period in 2014 was primarily attributable to the sale of 13 aircraft during 2014.
As more fully described above under “Revenues,” lease discounts represent the present value of the amount below current lease rates for acquired aircraft with attached leases. The increase in amortization of lease discounts of $0.9 million for the three months ended March 31, 2015 as compared to the same period in 2014 primarily resulted from three aircraft purchased during the first quarter of 2014.

Maintenance revenue.
 
Three Months Ended March 31,
 
2014
 
2015
 
Dollars
(in  thousands)
 
Number of
Leases
 
Dollars
(in thousands)
 
Number of
Leases
Unscheduled lease terminations
$
180

 
1
 
$

 
Scheduled lease terminations
2,862

 
7
 
18,073

 
8
Maintenance revenue
$
3,042

 
8
 
$
18,073

 
8

Unscheduled lease terminations. For the three months ended March 31, 2014 , we recorded maintenance revenue from unscheduled lease terminations of $0.2 million primarily associated with one aircraft returned in the fourth quarter of 2013 resulting from an early termination agreement with the lessee. Comparatively, for the same period in 2015 , we did not record any revenue from unscheduled lease terminations.
Scheduled lease terminations. For the three months ended March 31, 2014 , we recorded $19.2 million of maintenance revenue from four scheduled lease terminations offset by $16.4 million of contra maintenance revenue related to three scheduled lease terminations. Comparatively, for the same period in 2015 , we recorded $18.1 million of maintenance revenue from eight scheduled lease terminations.
Other revenue. For the three months ended March 31, 2014 , other revenue was $1.8 million which primarily represents additional fees earned from one lessee in connection with the early termination of one lease. For the three months ended March 31, 2015 , other revenue was $1.3 million which primarily represents additional fees earned from two lessees in connection with the early termination of three leases.

Operating expenses:
Total operating expenses decreased by $18.4 million for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 , primarily as a result of the following:

29


Depreciation expense increased by 1.2%, or $0.9 million for the three months ended March 31, 2015 as compared to the same period in 2014 . The net increase is primarily the result of:
a $13.4 million increase in depreciation for aircraft acquired; and
a $2.3 million increase due to changes in asset lives and residual values; and
a $0.3 million increase due to capitalized aircraft improvements being fully depreciated.
This increase was offset by:
a $15.1 million decrease in depreciation for aircraft sales.

Interest, net consisted of the following:
 
Three Months Ended March 31,
 
2014
 
2015
 
(Dollars in thousands)
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
$
51,685

 
$
50,235

Hedge ineffectiveness losses
53

 

Amortization of interest rate derivatives related to deferred losses
9,327

 
8,233

Amortization of deferred financing fees and notes discount
3,420

 
3,699

Interest Expense
64,485

 
62,167

Less interest income
(222
)
 
(36
)
Interest, net
$
64,263

 
$
62,131

Interest, net decreased by $2.1 million, or 3.3%, over the three months ended March 31, 2014 . The net decrease is primarily a result of:
lower interest on borrowings of $1.5 million driven primarily by a lower weighted average interest rate of 5.04% for the three months ended March 31, 2015 as compared to 5.49% a year ago; and
a $1.1 million decrease in amortization of interest rate derivatives related to deferred losses.
Selling, general and administrative expenses for the three months ended March 31, 2015 decreased slightly over the same period in 2014. Non-cash share based expense was $1.0 million and $1.2  million for the three months ended March 31, 2014 and 2015 , respectively.
Impairment of Aircraft - S ee “Summary of Impairments and Recoverability Assessment” below for a detailed discussion of impairment charges related to certain aircraft.
Maintenance and other costs were $2.9 million for the three months ended March 31, 2015 , an increase of $1.1 million over the same period in 2014. The net increase is primarily related to higher maintenance costs of $0.7 million related to unscheduled terminations and $0.3 million related to scheduled terminations and transitions for the three months ended March 31, 2015 versus the same period in 2014. 

Other income (expense):
Total other income (expense) increased $4.4 million for the three months ended March 31, 2015 as compared to the same period in 2014 , primarily as a result of the following:

Gain on sale of flight equipment arose from the sale of two aircraft leased to an airline based in India and other flight equipment for $50.5 million which resulted in a net gain of $6.3 million. During the first three months of 2014, we recorded a net gain of $1.1 million on six aircraft nearing the end of their economic lives.

Other decreased by $0.8 million related to the mark to market value of an undesignated interest rate derivative.

Income tax provision
Our provision for income taxes for the three months ended March 31, 2014 and 2015 was $0.9 million and $4.9 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, Singapore and the United States. The increase in our income tax provision of approximately $4.0 million for the three months ended March 31, 2015 as compared to the same period in 2014 was primarily attributable to changes in operating income subject to tax in Ireland, Singapore, the United States and other jurisdictions.
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 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:
 
Three Months Ended March 31,
 
2014
 
2015
 
(Dollars in thousands)
Net income
$
5,777

 
$
43,269

Net change in fair value of derivatives, net of tax expense of $804 and tax benefit of $3, respectively
370

 
(128
)
Derivative loss reclassified into earnings
9,327

 
8,233

Total comprehensive income
$
15,474

 
$
51,374


Other comprehensive income was $51.4 million for the three months ended March 31, 2015 , an increase of $35.9 million from the $15.5 million of other comprehensive income for the three months ended March 31, 2014 . Other comprehensive income for the three months ended March 31, 2015 primarily consisted of:
$43.3 million of net income; and
$8.2 million of amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives.
Other comprehensive income for the three months ended March 31, 2014 primarily consisted of:
$5.8 million of net income; and
$9.3 million of amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives.



30


Summary of Impairments and Recoverability Assessment
During the first quarter of 2014, we impaired two aircraft, one Boeing 737-400, which was returned to us as scheduled by the lessee, and one Boeing 747-400 converted freighter, for which we agreed to an early lease termination with our customer which we refer to as “Transactional Impairments.” For these two aircraft, we recorded impairment charges totaling $18.3 million and recorded maintenance revenue of $17.2 million during the three months ended March 31, 2014.
During the first quarter of 2015, we did not incur any impairment charges.

Aircraft Monitoring List
At March 31, 2015, we considered four freighter aircraft with a total net book value of $111.7 million to be more susceptible to failing our recoverability assessments due to their sensitivity to changes in contractual cash flows, future cash flow estimates and aircraft residual or scrap values.

RECENT UNADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 - Summary of Significant Accounting Policies - Proposed Accounting Pronouncements in the Notes to Unaudited Consolidated Financial Statements above.

PROPOSED ACCOUNTING PRONOUNCEMENTS
See Note 1 - Summary of Significant Accounting Policies - Proposed Accounting Pronouncements in the Notes to Unaudited Consolidated Financial Statements above.

LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity currently are cash on hand, cash generated by our aircraft leasing operations, proceeds from aircraft sales, loans secured by additional aircraft we acquire and unsecured borrowings. Our business is very capital intensive, requiring significant investments in order to expand our fleet during periods of growth and investments in maintenance and improvements on our existing portfolio. Our business also generates a significant amount of cash from operations, primarily from lease rentals and maintenance collections. These sources have historically provided liquidity for these investments and for other uses, including the payment of dividends to our shareholders. In the past, we have also met our liquidity and capital resource needs by utilizing several sources, including:
lines of credit, our securitization, term financings, secured borrowings supported by export credit agencies for new aircraft acquisitions and bank financings secured by aircraft purchases;
unsecured indebtedness, including an unsecured revolving credit facility and unsecured senior notes;
sales of common shares; and
asset sales.
Going forward, we expect to continue to seek liquidity from these sources subject to pricing and conditions that we consider satisfactory.
During the first three months of 2015, we met our liquidity and capital resource needs with $132.9 million of cash from operations, $500.0 million in gross proceeds from the issuance of our Senior Notes due 2022, and $50.5 million of cash from aircraft sales.
In addition, we increased our revolving credit facility, which was undrawn at March 31, 2015, from $450.0 million to $600.0 million.
As of March 31, 2015, the weighted average maturity of our secured and unsecured debt financings was 4.4 years and we are in compliance with all applicable covenants.
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 Facility and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest

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payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments over the next twelve months.




Cash Flows
 
Three Months Ended March 31,
 
2014
 
2015
 
(Dollars in thousands)
Net cash flow provided by operating activities
$
102,991

 
$
132,928

Net cash flow used in investing activities
(628,986
)
 
(213,094
)
Net cash flow provided by financing activities
485,478

 
240,502


Operating Activities:
Cash flow from operations was $103.0 million and $132.9 million for the three months ended March 31, 2014 and March 31, 2015 , respectively. The increase in cash flow from operations of approximately $29.9 million for the three months ended March 31, 2015 versus the same period in 2014 was primarily a result of:
a $24.8 million increase in maintenance revenues;
a $6.4 million increase in cash from working capital; and
a $1.3 million increase in cash from lease rentals.
These inflows were offset by:
a $2.4 million decrease in cash interest from finance leases; and
a $1.2 million increase in cash paid for taxes.

Investing Activities:
Cash used in investing activities was $629.0 million and $213.1 million , respectively, for the three months ended March 31, 2014 and March 31, 2015 , respectively. The decrease in cash flow used in investing activities of $415.9 million for the three months ended March 31, 2015 versus the same period in 2014 , was primarily a result of:
a $398.8 million decrease in the acquisition and improvement of flight equipment; and
a $22.5 million increase in net proceeds from the sale of flight equipment.
These inflows were offset by:
a $4.5 million decrease in the aircraft purchase deposits.

Financing Activities:
Cash used in financing activities was $485.5 million for the three months ended March 31, 2014 as compared to $240.5 million for the three months ended March 31, 2015 . The net decrease in cash flow used in financing activities of $245.0 million for the three months ended March 31, 2015 versus the same period in 2014 was a result of:
a $303.2 million decrease in proceeds from our notes and term financing borrowings;
a $8.0 million decrease in security deposits received net of security deposits returned;

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a $8.4 million decrease in restricted cash and cash equivalents related to security deposits and maintenance payments; and
a $1.7 million increase in dividends paid.
These decreases were offset partially by:
a $34.1 million decrease in securitization and term debt financing repayments;
a $33.4 million decrease in payments for terminated cash flow hedges;
a $5.8 million decrease in deferred financing costs; and
a $2.8 million increase in maintenance payments received net of maintenance payments returned.

Debt Obligations
For complete information on our debt obligations, please refer to Note 7 - Secured and Unsecured Debt Financings in the Notes to Unaudited Consolidated Financial Statements above.

Contractual Obligations
Our contractual obligations consist of principal and interest payments on variable and fixed rate liabilities, interest payments on interest rate derivatives, other aircraft acquisition and conversion agreements and rent payments pursuant to our office leases. Total contractual obligations increased from $5.30 billion at December 31, 2014 to approximately $5.35 billion at March 31, 2015 due primarily to:
an increase in borrowings and interest payments as a result of the closing of our Senior Notes due 2022 in January 2015.
These increases were offset by:
the repayment of our Revolving Credit Facility in January 2015; and
a decrease in aircraft purchase obligations.


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The following table presents our actual contractual obligations and their payment due dates as of March 31, 2015 .  
 
Payments Due By Period as of March 31, 2015
Contractual Obligations
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
 
(Dollars in thousands)
Principal payments:

 
 
 
 
 
 
 
 
Senior Notes due 2017 - 2022
$
2,700,000

 
$

 
$
500,000

 
$
900,000

 
$
1,300,000

Securitization No. 2 (1)
361,011

 
172,550

 
188,461