Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 05/04/2017 16:09:52)

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, 2017
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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES   ¨     NO   þ
As of April 28, 2017 , there were 78,713,705 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 March 31, 2017 and December 31, 2016
 
Consolidated Statements of Income for the three months ended March 31, 2017 and 2016
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016
 
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)

 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
871,858

 
$
455,579

Restricted cash and cash equivalents
50,754

 
53,238

Accounts receivable
7,442

 
6,035

Flight equipment held for lease, net of accumulated depreciation of $1,284,855 and $1,224,899, respectively
6,295,690

 
6,247,585

Net investment in finance and sales-type leases
299,969

 
260,853

Unconsolidated equity method investments
74,653

 
72,977

Other assets
140,544

 
148,398

Total assets
$
7,740,910

 
$
7,244,665

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs
$
1,189,423

 
$
1,219,034

Borrowings from unsecured financings, net of debt issuance costs
3,781,761

 
3,287,211

Accounts payable, accrued expenses and other liabilities
144,384

 
127,527

Lease rentals received in advance
60,302

 
62,225

Security deposits
123,673

 
122,597

Maintenance payments
585,283

 
591,757

Total liabilities
5,884,826

 
5,410,351

 
 
 
 
Commitments and Contingencies


 


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

 

Common shares, $0.01 par value, 250,000,000 shares authorized, 78,717,916 shares issued and outstanding at March 31, 2017; and 78,593,133 shares issued and outstanding at December 31, 2016
787

 
786

Additional paid-in capital
1,520,405

 
1,521,190

Retained earnings
337,863

 
315,890

Accumulated other comprehensive loss
(2,971
)
 
(3,552
)
Total shareholders’ equity
1,856,084

 
1,834,314

Total liabilities and shareholders’ equity
$
7,740,910

 
$
7,244,665


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,
 
2017
 
2016
Revenues:
 
 
 
Lease rental revenue
$
190,586

 
$
179,570

Finance and sales-type lease revenue
4,073

 
3,498

Amortization of lease premiums, discounts and incentives
(3,112
)
 
(1,070
)
Maintenance revenue
12,287

 
1,260

Total lease revenue
203,834

 
183,258

Other revenue
439

 
407

Total revenues
204,273

 
183,665

 
 
 
 
Operating expenses:
 
 
 
Depreciation
79,174

 
76,647

Interest, net
63,068

 
64,241

Selling, general and administrative (including non-cash share-based payment expense of $2,102 and $1,643 for the three months ended March 31, 2017 and 2016, respectively)
16,167

 
15,492

Impairment of flight equipment
500

 

Maintenance and other costs
2,931

 
1,403

Total expenses
161,840

 
157,783

 
 
 
 
Other income (expense):
 
 
 
Gain on sale of flight equipment
759

 
12,833

Other
(1,149
)
 
(73
)
Total other income (expense)
(390
)
 
12,760

 
 
 
 
Income from continuing operations before income taxes and earnings of unconsolidated equity method investments
42,043

 
38,642

Income tax provision
1,846

 
3,939

Earnings of unconsolidated equity method investments, net of tax
2,242

 
1,559

Net income
$
42,439

 
$
36,262

 
 
 
 
Earnings per common share — Basic:
 
 
 
Net income per share
$
0.54

 
$
0.46

 
 
 
 
Earnings per common share — Diluted:
 
 
 
Net income per share
$
0.54

 
$
0.46

 
 
 
 
Dividends declared per share
$
0.26

 
$
0.24


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,
 
2017
 
2016
 
 
 
 
Net income
$
42,439

 
$
36,262

Other comprehensive income, net of tax:
 
 
 
Net change in fair value of derivatives, net of tax expense of $0 and $0 for the three months ended March 31, 2017 and 2016, respectively

 
(1
)
Net derivative loss reclassified into earnings
581

 
5,372

Other comprehensive income
581

 
5,371

Total comprehensive income
$
43,020

 
$
41,633



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,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
42,439

 
$
36,262

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
79,174

 
76,647

Amortization of deferred financing costs
4,155

 
5,607

Amortization of lease premiums, discounts and incentives
3,112

 
1,070

Deferred income taxes
1,309

 
(392
)
Non-cash share-based payment expense
2,102

 
1,643

Cash flow hedges reclassified into earnings
581

 
5,372

Security deposits and maintenance payments included in earnings
(10,524
)
 
(1,648
)
Gain on sale of flight equipment
(759
)
 
(12,833
)
Impairment of flight equipment
500

 

Other
112

 
(1,558
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(1,407
)
 
992

Other assets
(1,000
)
 
(1,137
)
Accounts payable, accrued expenses and other liabilities
14,334

 
15,066

Lease rentals received in advance
(2,552
)
 
(3,827
)
Net cash and restricted cash provided by operating activities
131,576

 
121,264

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment
(142,053
)
 
(96,524
)
Proceeds from sale of flight equipment
16,819

 
306,029

Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits
(1,935
)
 
(7,162
)
Net investment in finance and sales-type leases
(35,785
)
 

Collections on finance and sales-type leases
5,614

 
3,663

Unconsolidated equity method investments and associated costs

 
(7,731
)
Other
88

 
(176
)
Net cash and restricted cash provided by (used in) investing activities
(157,252
)
 
198,099

Cash flows from financing activities:
 
 
 
Repurchase of shares
(2,513
)
 
(33,250
)
Proceeds from secured and unsecured debt financings
500,000

 
500,000

Repayments of secured and unsecured debt financings
(31,178
)
 
(352,928
)
Deferred financing costs
(8,038
)
 
(9,454
)
Security deposits and maintenance payments received
41,049

 
33,147

Security deposits and maintenance payments returned
(39,383
)
 
(20,936
)
Dividends paid
(20,466
)
 
(18,915
)
Net cash and restricted cash provided by financing activities
439,471

 
97,664

Net increase in cash and restricted cash
413,795

 
417,027

Cash and restricted cash at beginning of period
508,817

 
254,041

Cash and restricted cash at end of period
$
922,612

 
$
671,068






6


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
37,778

 
$
39,539

Cash paid for income taxes
$
872

 
$
1,604

Supplemental disclosures of non-cash investing activities:
 
 
 
Advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
65

 
$
1,564

Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment
$
3,373

 
$
25,559


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

7


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017


Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is acquiring, leasing, managing and selling commercial jet aircraft.
Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all of the outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment: leasing, financing, selling and managing commercial flight equipment. Our chief executive officer is the chief operating decision maker.
The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .
Effective January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash . For the three months ended March 31, 2017 , the Company revised the presentation in our Consolidated Statements of Cash Flows to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. For the three months ended March 31, 2016 , our Consolidated Statement of Cash Flows reflected: (1) changes in restricted cash related to the sale of flight equipment within investing activities; and (2) changes in restricted cash and restricted cash equivalents related to rents, maintenance payments and security deposits within financing activities. Therefore, the amounts included for the three months ended March 31, 2016 have been reclassified to conform to the current period presentation.
The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of March 31, 2017 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 five 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.


8


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.
Recent Accounting Pronouncements
On February 25, 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “ Leases ,” which replaced the existing guidance in ASC 840, Leases . The accounting for leases by lessors basically remained unchanged from the concepts that existed in ASC 840 accounting. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct finance lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective. The standard will be effective for public entities beginning after December 15, 2018. The standard is applied on a modified retrospective approach. We plan to adopt the standard on its required effective date of January 1, 2019. We are evaluating the impact that ASC 842 will have on our consolidated financial statements and related disclosures. We do not believe that the adoption of the standard will significantly impact our existing or potential lessees' economic decisions to lease aircraft.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments . The standard affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The update is applied on a modified retrospective approach. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as early as the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of determining the impact the standard will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments . The standard clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The update should be applied using a retrospective transition method to each period presented. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of determining the impact the standard will have on our consolidated financial statements and related disclosures.
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) and related updates. 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 plan to adopt the standard on its required effective date of January 1, 2018, using the modified retrospective approach. We do not expect the impact of this standard to be material to our consolidated financial statements and related disclosures.



9


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Note 2. Fair Value Measurements
Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.
The valuation techniques that may be used to measure fair value are as follows:
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The following tables set forth our financial assets as of March 31, 2017 and December 31, 2016 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. 
 
 
 
Fair Value Measurements at March 31, 2017
Using Fair Value Hierarchy
 
Fair Value as of March 31, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
Technique
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
871,858

 
$
871,858

 
$

 
$

 
Market
Restricted cash and cash equivalents
50,754

 
50,754

 

 

 
Market
Derivative assets
4,585

 

 
4,585

 

 
Market
Total
$
927,197

 
$
922,612

 
$
4,585

 
$

 
 
 
 
 
Fair Value Measurements at December 31, 2016
Using Fair Value Hierarchy
 
Fair Value as of December 31, 2016
 
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
$
455,579

 
$
455,579

 
$

 
$

 
Market
Restricted cash and cash equivalents
53,238

 
53,238

 

 

 
Market
Derivative assets
5,735

 

 
5,735

 

 
Market
Total
$
514,552

 
$
508,817

 
$
5,735

 
$

 
 

10


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

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 derivative included in Level 2 consists of United States dollar-denominated interest rate cap, and the fair value is based on market comparisons for similar instruments. We also considered the credit rating and risk of the counterparty providing the interest rate cap based on quantitative and qualitative factors.
For the three months ended March 31, 2017 and the year ended December 31, 2016 , we had no transfers into or out of Level 3.
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our investments in unconsolidated joint ventures and aircraft. We account for our investments in unconsolidated joint ventures under the equity method of accounting and record impairment when its fair value is less than its carrying value. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on an income approach which uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.
Financial Instruments
Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under financings and interest rate derivatives. The fair value of cash, cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.
The fair value of our senior notes is estimated using quoted market prices. The fair values of all our other financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of our financial instruments at March 31, 2017 and December 31, 2016 are as follows:
 
March 31, 2017
 
December 31, 2016
 
Carrying  Amount
of Liability
 
Fair Value
of Liability
 
Carrying
Amount
of Liability
 
Fair Value
of Liability
Unsecured Term Loan
$
120,000

 
$
120,000

 
$
120,000

 
$
120,000

ECA Financings
294,759

 
303,965

 
305,276

 
316,285

Bank Financings
913,219

 
905,921

 
933,541

 
925,783

Senior Notes
3,700,000

 
3,881,290

 
3,200,000

 
3,387,125

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







11


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

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, 2017 were as follows:
Year Ending December 31,
 
Amount
Remainder of 2017
 
$
540,380

2018
 
671,875

2019
 
575,721

2020
 
474,723

2021
 
393,078

Thereafter
 
905,983

Total
 
$
3,561,760

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended March 31,
Region
2017
 
2016
Asia and Pacific
40
%
 
41
%
Europe
22
%
 
25
%
Middle East and Africa
12
%
 
10
%
North America
7
%
 
5
%
South America
19
%
 
19
%
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.
The following table shows the number of lessees with lease rental revenue of at least 5% and their combined total percentage of lease rental revenue for the years indicated:
 
Three Months Ended March 31,
 
2017
 
2016
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
 
Number of Lessees
 
Combined % of Lease
Rental Revenue
Largest lessees by lease rental revenue
3
 
19%
 
5
 
30%
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) in any year based on each lessee’s principal place of business for the years indicated:
 
Three Months Ended March 31,
 
2017
 
2016
Country
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
Indonesia (1)
$

 
—%
 
$
19,543

 
11%
_______________
(1)
Total revenue attributable to Indonesia was less than 10% for the three months ended March 31, 2017.

12


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in finance and sales-type leases, or "net book value") was as follows:
 
March 31, 2017
 
December 31, 2016
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
64

 
39
%
 
61

 
38
%
Europe
67

 
23
%
 
66

 
23
%
Middle East and Africa
14

 
10
%
 
14

 
11
%
North America
27

 
8
%
 
26

 
8
%
South America
26

 
19
%
 
23

 
18
%
Off-lease
2

(1)  
1
%
 
3

(2)  
2
%
Total
200

 
100
%
 
193

 
100
%
 
_______________
(1)
Consisted of two Airbus A321-200 aircraft scheduled to be delivered to a customer in Europe in the second quarter of 2017.
(2)
Consisted of one Airbus A330-200 aircraft, which was delivered on lease to a customer in February 2017, and two Airbus A321-200 aircraft, which were subject to a commitment to lease.
At March 31, 2017 and December 31, 2016 , no country represented at least 10% of net book value of flight equipment based on each lessee’s principal place of business.
At March 31, 2017 and December 31, 2016 , the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $15,153 and $14,931 , respectively.
Note 4. Net Investment in Finance and Sales-Type Leases
At March 31, 2017 , our net investment in finance and sales-type leases consisted of fifteen aircraft . The following table lists the components of our net investment in finance and sales-type leases at March 31, 2017 :
 
 
Amount
Total lease payments to be received
 
$
207,894

Less: Unearned income
 
(92,960
)
Estimated residual values of leased flight equipment (unguaranteed)
 
185,035

Net investment in finance and sales-type leases
 
$
299,969

At March 31, 2017 , minimum future lease payments on finance and sales-type leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2017
 
$
28,731

2018
 
33,119

2019
 
32,784

2020
 
32,363

2021
 
26,007

Thereafter
 
54,890

Total lease payments to be received
 
$
207,894



13


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Note 5. Unconsolidated Equity Method Investments
We have joint ventures with an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) and with the leasing arm of the Industrial Bank of Japan, Limited (“IBJL”).
At March 31, 2017 , the net book value of both joint ventures’ thirteen aircraft was approximately $ 682,000 .
 
 
Amount
Investment in joint ventures at December 31, 2016
 
$
72,977

Investment in joint ventures
 
634

Earnings from joint ventures, net of tax
 
2,242

Distributions
 
(1,200
)
Investment in joint ventures at March 31, 2017
 
$
74,653

The Company has recorded in its Consolidated Balance Sheet a $10,483 guarantee liability in Maintenance payments and a $5,100 guarantee liability in Security deposits representing its share of the respective exposures.
Note 6. Variable Interest Entities
Aircastle consolidates five 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 seven aircraft discussed below.
ECA Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), has entered into seven different twelve -year term loans, which are supported by guarantees from Compagnie Française d'Assurance pour le Commerce Extérieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). We refer to these COFACE-supported financings as “ECA Financings.”
Aircastle is the primary beneficiary of the Air Knight VIEs, as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which our wholly owned subsidiary is the servicer and is responsible for managing the relevant aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.
The only assets that the Air Knight VIEs have on their books are financing leases that are eliminated in the consolidated financial statements. The related aircraft, with a net book value as of March 31, 2017 of $510,335 , were included in our flight equipment held for lease. The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of March 31, 2017 is $286,500 .






14


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At March 31, 2017
 
At December 31, 2016
Debt Obligation
Outstanding
Borrowings
 
Number of Aircraft
 
Interest Rate
 
Final Stated
Maturity
 
Outstanding
Borrowings
Secured Debt Financings:
 
 
 
 
 
 
 
 
 
ECA Financings (1)
$
294,759

 
7

 
3.02% to 3.96%
 
12/03/21 to 11/30/24
 
$
305,276

Bank Financings (2)
913,219

 
30

 
1.88% to 4.45%
 
10/26/17 to 01/19/26
 
933,541

Less: Debt Issuance Costs
(18,555
)
 

 
 
 
 
 
(19,783
)
Total secured debt financings, net of debt issuance costs
1,189,423

 
37

 
 
 
 
 
1,219,034

 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
 
 
Senior Notes due 2017
500,000

 
 
 
6.75%
 
04/15/17
 
500,000

Senior Notes due 2018
400,000

 
 
 
4.625%
 
12/15/18
 
400,000

Senior Notes due 2019
500,000

 
 
 
6.250%
 
12/01/19
 
500,000

Senior Notes due 2020
300,000

 
 
 
7.625%
 
04/15/20
 
300,000

Senior Notes due 2021
500,000

 
 
 
5.125%
 
03/15/21
 
500,000

Senior Notes due 2022
500,000

 
 
 
5.50%
 
02/15/22
 
500,000

Senior Notes due 2023
500,000

 
 
 
5.00%
 
04/01/23
 
500,000

Senior Notes due 2024
500,000

 
 
 
4.125%
 
05/01/24
 

Unsecured Term Loan
120,000

 
 
 
3.131%
 
04/28/19
 
120,000

Revolving Credit Facilities

 
 
 
N/A
 
11/21/19 to 05/13/20
 

   Less: Debt Issuance Costs
(38,239
)
 
 
 
 
 
 
 
(32,789
)
Total unsecured debt financings, net of debt issuance costs
3,781,761

 
 
 
 
 
 
 
3,287,211

 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings, net of debt issuance costs
$
4,971,184

 
 
 
 
 
 
 
$
4,506,245

 
        
(1)
The borrowings under these financings at March 31, 2017 have a weighted-average rate of interest of 3.52% .
(2)
The borrowings under these financings at March 31, 2017 have a weighted-average fixed rate of interest of 3.34% .

Unsecured Debt Financings:
Senior Notes due 2024
On March 6, 2017, Aircastle issued $500,000 aggregate principal amount of Senior Notes due 2024 (the "Senior Notes due 2024") at par. The Senior Notes due 2024 will mature on May 1, 2024 and bear interest at the rate of 4.125% per annum, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2017. Interest accrues on the Senior Notes due 2024 from March 20, 2017.
Prior to February 1, 2024, we may redeem the Senior Notes due 2024 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 0.5% ). In addition, prior to May 1, 2020, we may redeem up to 40% of the aggregate principal amount of the notes issued under the indenture at a redemption

15


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

price equal to 104.125% 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 2024 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2024 are not guaranteed by any of the Company's subsidiaries or any third-party.
On April 17, 2017, we paid off our Senior Notes due 2017.
Revolving Credit Facilities
At March 31, 2017 , we had no amounts outstanding under these facilities.
As of March 31, 2017 , we were in compliance with all applicable covenants in our financings.
Note 8. Shareholders' Equity and Share-Based Payment
During the three months ended March 31, 2017 , the Company issued 315,588 restricted common shares and issued 152,933 performance share units (“PSUs”). These awards were made under the Aircastle Limited 2014 Omnibus Incentive Plan.
During the three months ended March 31, 2017 , the Company incurred share-based compensation expense of $1,575 related to restricted common shares and share-based compensation expense of $527 related to PSUs. As of March 31, 2017 , there was $11,237 of unrecognized compensation cost related to unvested restricted common share-based payments and $6,280 of unrecognized compensation cost related to unvested PSU share-based payments that are expected to be recognized over a weighted-average remaining period of 2.5 years .
Note 9. Dividends
The following table sets forth the quarterly dividends declared by our Board of Directors for the periods covered in this report:
Declaration Date
Dividend per
Common  Share
 
Aggregate
Dividend
Amount
 
Record Date
 
Payment Date
February 9, 2017
$
0.26

 
$
20,466

 
February 28, 2017
 
March 15, 2017
October 28, 2016
$
0.26

 
$
20,434

 
November 29, 2016
 
December 15, 2016
August 2, 2016
$
0.24

 
$
18,872

 
August 26, 2016
 
September 15, 2016
May 2, 2016
$
0.24

 
$
18,915

 
May 31, 2016
 
June 15, 2016
February 9, 2016
$
0.24

 
$
18,915

 
February 29, 2016
 
March 15, 2016
Note 10. 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. Our PSUs are contingently issuable shares which are included in our diluted earnings per share calculations which do not include voting or dividend rights.
Under the two-class method, earnings per common share is computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed

16


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

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,
 
2017
 
2016
Weighted-average shares:
 
 
 
Common shares outstanding
78,176,705

 
78,543,457

Restricted common shares
503,802

 
572,356

Total weighted-average shares
78,680,507

 
79,115,813

 
 
 
 
Percentage of weighted-average shares:
 
 
 
Common shares outstanding
99.36
%
 
99.28
%
Restricted common shares
0.64
%
 
0.72
%
Total percentage of weighted-average shares
100.00
%
 
100.00
%
The calculations of both basic and diluted earnings per share are as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Earnings per share – Basic:
 
 
 
Net income
$
42,439

 
$
36,262

Less: Distributed and undistributed earnings allocated to restricted common shares (1)
(272
)
 
(262
)
Earnings available to common shareholders – Basic
$
42,167

 
$
36,000

 
 
 
 
Weighted-average common shares outstanding – Basic
78,176,705

 
78,543,457

 
 
 
 
Earnings per common share – Basic
$
0.54

 
$
0.46

 
 
 
 
Earnings per share – Diluted:
 
 
 
Net income
$
42,439

 
$
36,262

Less: Distributed and undistributed earnings allocated to restricted common shares (1)
(272
)
 
(262
)
Earnings available to common shareholders – Diluted
$
42,167

 
$
36,000

 
 
 
 
Weighted-average common shares outstanding – Basic
78,176,705

  
78,543,457

Effect of dilutive shares (2)
194,848

 

Weighted-average common shares outstanding – Diluted
78,371,553

  
78,543,457

 
 
 
 
Earnings per common share – Diluted
$
0.54

  
$
0.46

 
        
(1)
For the three months ended March 31, 2017 and 2016 , distributed and undistributed earnings to restricted shares are 0.64% and 0.72% of net income, respectively. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(2)
For the three months ended March 31, 2017 , dilutive shares represented contingently issuable shares related to the Company’s PSUs. For the three months ended March 31, 2016 , we had no dilutive shares.
Note 11. Income Taxes
Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland, Singapore and the United States.

17


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

The sources of income from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three months ended March 31, 2017 and 2016 were as follows: 
 
Three Months Ended March 31,
 
2017
 
2016
U.S. operations
$
596

 
$
586

Non-U.S. operations
41,447

 
38,056

Income from continuing operations before income taxes and earnings of unconsolidated equity method investments
$
42,043

 
$
38,642


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, 2017 and 2016 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2017 and 2016, respectively.
The Company’s effective tax rate for the three months ended March 31, 2017 was 4.4% , compared to 10.2% for the three months ended March 31, 2016 . 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 from continuing operations consisted of the following:
 
Three Months Ended March 31,
 
2017
 
2016
Notional U.S. federal income tax expense at the statutory rate
$
14,715

 
$
13,525

U.S. state and local income tax, net
41

 
47

Non-U.S. operations:
 
 
 
Bermuda
(8,828
)
 
(9,092
)
Ireland
542

 
1,879

Singapore
(2,927
)
 
(1,335
)
Other low tax jurisdictions
(1,440
)
 
(1,211
)
Non-deductible expenses in the U.S.
(249
)
 
135

Other
(8
)
 
(9
)
Provision for income taxes
$
1,846

 
$
3,939






18


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Note 12. Interest, Net
The following table shows the components of interest, net: 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Interest on borrowings and other liabilities (1)
 
$
58,839

 
$
53,324

Amortization of deferred losses related to interest rate derivatives
 
581

 
5,372

Amortization of deferred financing fees and debt discount (2)
 
4,155

 
5,607

Interest expense
 
63,575

 
64,303

Less: Interest income
 
(414
)
 
(62
)
Less: Capitalized interest
 
(93
)
 

Interest, net
 
$
63,068

 
$
64,241

        
(1)
Includes $1,509 in loan termination fees related to the sale of one aircraft during the three months ended March 31, 2016 .
(2)
Includes $1,972 in deferred financing fees written off related to the sale of one aircraft during the three months ended March 31, 2016 .
Note 13. Commitments and Contingencies
At March 31, 2017 , we had commitments to acquire 35 aircraft for $1,164,088 , including 25 Embraer E-Jet E2 aircraft.
Commitments, including $133,308 of progress payments, contractual price escalations and other adjustments for these aircraft, at March 31, 2017 , net of amounts already paid, are as follows:
Year Ending December 31,
 
Amount
Remainder of 2017
 
$
242,390

2018
 
143,855

2019
 
361,746

2020
 
277,819

2021
 
138,278

Thereafter
 

Total
 
$
1,164,088

Note 14. Other Assets
The following table describes the principal components of other assets on our Consolidated Balance Sheets as of:
 
March 31,
2017
 
December 31,
2016
Deferred income tax asset
$
1,584

 
$
1,902

Lease incentives and lease premiums, net of amortization of $43,026 and $39,638, respectively
95,170

 
96,587

Flight equipment held for sale
3,820

 
3,834

Aircraft purchase deposits and progress payments
15,207

 
12,923

Fair value of interest rate cap
4,585

 
5,735

Other assets
20,178

 
27,417

Total other assets
$
140,544

 
$
148,398

 


19


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2017

Note 15. Accounts Payable, Accrued Expenses and Other Liabilities
The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our Consolidated Balance Sheets as of:
 
March 31,
2017
 
December 31,
2016
Accounts payable and accrued expenses
$
18,473

 
$
24,337

Deferred income tax liability
45,232

 
44,241

Accrued interest payable
64,048

 
43,107

Lease discounts, net of amortization of $31,540 and $29,016, respectively
16,631

 
15,842

Total accounts payable, accrued expenses and other liabilities
$
144,384

 
$
127,527

Note 16. Accumulated Other Comprehensive Loss
The following table describes the principal components of accumulated other comprehensive loss recorded on our Consolidated Balance Sheets:
Changes in accumulated other comprehensive loss by component (1)
 
Three Months Ended March 31,
 
 
2017
 
2016
Beginning balance
 
$
(3,552
)
 
$
(13,213
)
Amounts recognized in other comprehensive loss on derivatives, net of tax expense of $0 and $0 for the three months ended March 31, 2017 and 2016, respectively
 

 
(502
)
Amounts reclassified from accumulated other comprehensive loss into income, net of tax expense of $0 and $0 for the three months ended March 31, 2017 and 2016, respectively
 
581

 
5,873

   Net current period other comprehensive income
 
581

 
5,371

Ending balance
 
$
(2,971
)
 
$
(7,842
)
        
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Reclassifications from accumulated other comprehensive loss (1)
 
Three Months Ended March 31,
 
 
2017
 
2016
Amount of effective amortization of net deferred interest rate derivative losses (2)
 
$
581

 
$
5,372

Effective amount of net settlements of interest rate derivatives, net of tax expense of $0 and $0 for the three months ended March 31, 2017 and 2016, respectively
 

 
501

Amount of loss reclassified from accumulated other comprehensive loss into income
 
$
581

 
$
5,873

        
(1) All amounts are net of tax.
(2) Included in interest expense.
At March 31, 2017 , the amount of deferred net loss expected to be reclassified from OCI into interest expense over the next twelve months related to our terminated interest rate derivatives is $1,922 .

20


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q (this “report”), other than characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on our historical performance and that of our subsidiaries and on our current plans, estimates and expectations and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any such forward-looking statements which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. These risks or uncertainties include, but are not limited to, those described from time to time in Aircastle’s filings with the SEC and previously disclosed under “Risk Factors” in Part I - Item 1A of Aircastle’s 2016 Annual Report on Form 10-K and elsewhere in this report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.
WEBSITE AND ACCESS TO THE COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our website under “Investors — 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 — Tax Information (PFIC).”
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 Internet website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.

21


OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of March 31, 2017 , we owned and managed on behalf of our joint ventures 213 aircraft leased to 72 lessees located in 37 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. In many cases, however, we are obligated to pay a portion of specified maintenance or modification costs. As of March 31, 2017 , the net book value (including flight equipment held for lease and net investment in finance and sales-type leases, or "net book value") was $6.60 billion compared to $6.51 billion at December 31, 2016. Our revenues and net income for the three months ended March 31, 2017 were $204.3 million and $42.4 million , respectively.
Growth in commercial air traffic is broadly correlated with world economic activity. In recent years, it has been expanding at a rate one and a half to two times that of global GDP growth. The expansion of air travel has driven a rise in the world aircraft fleet. There are currently approximately 20,000 commercial mainline passenger and freighter aircraft in operation worldwide. This fleet is expected to continue expanding at three to four percent average annual rate over the next twenty years. In addition, aircraft leasing companies own an increasing share of the world’s commercial jet aircraft and now account for approximately 41% of this fleet.
Notwithstanding the sector’s long-term growth, the aviation markets have been, and are expected to remain, subject to economic variability, as well as to changes in macroeconomic variables such as fuel price levels and foreign exchange rates. The aviation industry is susceptible to external shocks, such as regional conflicts and terrorist events. Mitigating this risk is the portability of the assets, allowing aircraft to be redeployed to locations where demand is higher.
Air traffic data for the past several years has shown strong passenger market growth.  According to the International Air Transport Association, during the first three months of 2017, global passenger traffic increased 7.0% compared to the same period in 2016.  This strong growth was, in part, stimulated by lower air fare prices resulting from the significant drop in fuel prices. Air cargo demand, which is more sensitive to economic conditions, appears to have stabilized. During the first three months of 2017, air cargo traffic increased 9.7% compared to the same period in 2016, and capacity increased 2.6% , resulting in an increase in load factors to 47.4%. While a positive development, the air cargo market continues to be hampered by oversupply arising from the continued growth in belly cargo capacity in passenger aircraft as well as the production of dedicated freighter aircraft.
Demand for air travel varies considerably by region. Emerging market economies have generally been experiencing significant increases in air traffic, driven by rising levels of per capita income. Air traffic growth in some regions is being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices. Mature markets, such as North America and Western Europe, are likely to grow more slowly in tandem with their economies. Persian Gulf-based Emirates, Qatar Airways and Etihad Airways are also showing signs of reaching maturity and their growth rates are slowing. Airlines operating in areas with political instability or weakening economies are under pressure, and their near-term outlook is more uncertain. On balance, we believe air travel will increase over time, and as a result, we expect demand for modern aircraft will continue to remain strong over the long-term.
Low fuel prices and interest rates have had a substantial effect on our industry. The price of oil dropped by $67 to $36 per barrel in the four years prior to December 2015. This allowed airlines to reduce ticket prices and stimulate aircraft traffic while retaining enough of this benefit to achieve record profit levels. A low interest rate environment and the strong overall performance of the aircraft financing sector attracted significant new capital, increasing competition for new investments. The downward trend in fuel prices and interest rates appears to have ended as fuel prices started rising in 2016. In 2017, the price of fuel has averaged approximately $52 per barrel. Likewise, interest rates have started to rise in the U.S., with Federal Reserve guidance suggesting multiple future rate hikes subsequent to the December 2016 increase in the Federal Funds rate.
Capital availability for aircraft has varied over time, and we consider this variability to be a basic characteristic of our business. If pursued properly, this represents an important source of opportunity. Both debt and equity markets have improved globally over the past several years with the recovery from the global financial crisis. Strong U.S. debt capital market conditions benefited borrowers by permitting access to financing at historic lows while higher fees have driven down ECA demand. Recently, ECA availability has been curtailed, both in the U.S. and in Europe, due to political issues and an investigation into possible irregularities, respectively. Commercial bank debt continues to play a critical role for aircraft finance, although we believe regulatory pressures may limit its role over time.

22


While financial markets conditions are currently attractive, heightened volatility stemming from global growth concerns and various geopolitical issues may increase capital costs and limit availability going forward. We believe these market forces should generate attractive new investment and trading opportunities for which we are well placed to capitalize given our access to different financing sources, our limited capital commitments and our reputation as a reliable trading partner. 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 and growth rates will vary with market conditions. We prefer to have capital resources available to capture investment opportunities that arise in the context of changing market circumstances. As such, we limit large, long-term capital commitments and are therefore much less reliant on orders for new aircraft from aircraft manufacturers as a source of new investments. In general, we focus on discerning investment value in situations that are often more bespoke and generally less competitive.
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. We carefully evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices as market conditions and relative investment values change. We believe the financing flexibility offered through unsecured debt and our team’s experience with a wide range of asset types enables our value oriented strategy and provides us with a competitive advantage. We view orders from equipment manufacturers to be part of our investment opportunity set, but choose to limit long term capital commitments unless we believe there is an adequate return premium to compensate for risks and opportunity costs. This approach sets us apart from most other large aircraft leasing companies.
Originating investments from many different sources across the globe. Our strategy is to seek out worthwhile investments by leveraging our team’s wide range of contacts 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 85 different sellers.
Selling assets when attractive opportunities arise and for portfolio management purposes. We sell assets with the aim of realizing profits and reinvesting proceeds when more accretive investments are available. We also use asset sales for portfolio management purposes, such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types, and as an exit from investments when a sale generates the greatest expected cash flow.
Maintaining efficient access to capital from a wide set of sources while targeting an investment grade credit rating. We believe the aircraft investment market is influenced by the business cycle. Our strategy is to increase our purchase activity when prices are low and to emphasize asset sales when competition for assets is high. To implement this approach, we believe it is important to maintain access to a wide variety of financing sources. 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 both secured and unsecured debt capital throughout the business cycle.
Leveraging our strategic relationships. We intend to capture the benefits provided through the extensive global contacts and relationships maintained by Marubeni, which is our biggest shareholder and one of the largest Japanese trading companies. Marubeni has already enabled greater access to Japanese-based financing and helped source and develop our joint venture (“IBJ Air”) with IBJL. IBJ Air is targeted at newer narrow-body aircraft leased to premier airlines, providing Aircastle with increased access to this market sector and to these customers. Our joint venture (“Lancaster”) with Teachers’ provides us with an opportunity to pursue larger transactions, manage portfolio concentrations and improve our return on deployed capital.
Capturing the value of our efficient operating platform and strong operating track record. We believe our team’s capabilities in the global aircraft leasing market places us in a favorable position to source and manage

23


new income-generating activities. We intend to continue to focus our efforts in areas where we believe we have competitive advantages, including new direct investments as well as ventures with strategic business partners.
Intending to pay quarterly dividends to our shareholders based on the Company’s sustainable earnings levels. Aircastle has paid dividends each quarter since our initial public offering in 2006. On February 9, 2017 , our Board of Directors declared a regular quarterly dividend of $0.26 per common share, or an aggregate of $20.5 million for the three months ended March 31, 2017 , which was paid on March 15, 2017 to holders of record on February 28, 2017 . These dividends may not be indicative of the amount of any future dividends. Our ability to pay quarterly dividends will depend upon many factors, including those as described in Item 1A. “Risk Factors” and elsewhere in our 2016 Annual Report on Form 10-K.
Revenues
Our revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from retained maintenance payments related to lease expirations, lease termination payments, lease incentive amortization and interest recognized from finance and sales-type leases.
Typically, our aircraft are subject to net leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs arising during the term of the lease. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.
Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee.
Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.


24


2017 Lease Expirations and Lease Placements
At March 31, 2017 , we had four aircraft accounting for 2.8% of our net book value which are scheduled to come off lease during 2017 for which we have not yet secured lease or sales commitments. We plan to sell two of these aircraft and are marketing the remaining two aircraft for lease or sale.
2018-2021 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 2018-2021, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in finance and sales-type leases) at March 31, 2017 , specified below:
2018: 14 aircraft, representing 10%;
2019: 28 aircraft, representing 16%;
2020: 27 aircraft, representing 9%; and
2021: 27 aircraft, representing 12%.
Operating Expenses
Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations.
Income Tax Provision
We obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily 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 2017, we acquired eight aircraft for $189.6 million . At March 31, 2017 , we had commitments to acquire 35 additional aircraft for $1.16 billion , including the acquisition of 25 new E-Jet E2 aircraft from Embraer, which are scheduled to deliver in 2018 to 2021. As of April 28, 2017, we have commitments to acquire 30 aircraft for $ 1.11 billion .
During the first three months of 2017, we sold one aircraft for $16.8 million, which resulted in a net gain of $0.8 million.

25


The following table sets forth certain information with respect to the aircraft owned by us as of March 31, 2017 :
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
Owned Aircraft
As of
March 31, 
2017 (1)
 
As of
March 31, 
2016 (1)
Net Book Value of Flight Equipment
$
6,596

 
$
5,771

Net Book Value of Unencumbered Flight Equipment
$
4,725

 
$
3,752

Number of Aircraft
200

 
153

Number of Unencumbered Aircraft
163

 
111

Number of Lessees
72

 
53

Number of Countries
37

 
33

Weighted Average Age (years) (2)
8.2

 
7.6

Weighted Average Remaining Lease Term (years) (2)
4.8

 
5.6

Weighted Average Fleet Utilization during the three months ended March 31, 2017 and 2016 (3)
98.3
%
 
99.6
%
Portfolio Yield for the three months ended March 31, 2017 and 2016 (4)
12.3
%
 
12.5
%
 
 
 
 
Managed Aircraft on behalf of Joint Ventures
 
 
 
Net Book Value of Flight Equipment
$
682

 
$
590

Number of Aircraft
13

 
9

 
        
(1)
Calculated using net book value at period end.
(2)
Weighted by net book value.
(3)
Aircraft on-lease days as a percent of total days in period weighted by net book value.
(4)
Lease rental revenue, interest income and cash collections on our net investment in finance and sales-type leases for the period as a percent of the average net book value for the period; quarterly information is annualized.
Our owned aircraft portfolio as of March 31, 2017 is listed in Exhibit 99.1 to this report.


26


PORTFOLIO DIVERSIFICATION
 
 
Owned Aircraft as of
March 31, 2017
 
Owned Aircraft as of
March 31, 2016
 
Number of
Aircraft
 
% of Net
Book Value (1)
 
Number of
Aircraft
 
% of Net
Book Value
(1)
Aircraft Type
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Narrow-body
161

 
56
%
 
111

 
45
%
Wide-body
31

 
36
%
 
31

 
44
%
Total Passenger
192

 
92
%
 
142

 
89
%
Freighter
8

 
8
%
 
11

 
11
%
Total
200

 
100
%
 
153

 
100
%
 
 
 
 
 
 
 
 
Manufacturer
 
 
 
 
 
 
 
Airbus
109

 
52
%
 
77

 
51
%
Boeing
84

 
45
%
 
71

 
47
%
Embraer
7

 
3
%
 
5

 
2
%
Total
200

 
100
%
 
153

 
100
%
 
 
 
 
 
 
 
 
Regional Diversification
 
 
 
 
 
 
 
Asia and Pacific
64

 
39
%
 
45

 
38
%
Europe
67

 
23
%
 
56

 
25
%
Middle East and Africa
14

 
10
%
 
10

 
10
%
North America
27

 
8
%
 
19

 
7
%
South America
26

 
19
%
 
22

 
19
%
Off-lease
2

(2)  
1
%
 
1

(3)  
1
%
Total
200

 
100
%
 
153

 
100
%
 
        
(1)
Calculated using net book value at period end.
(2)
Consisted of two Airbus A321-200 aircraft scheduled to be delivered to a customer in Europe in the second quarter of 2017.
(3)
Consisted of one Boeing 737-800 aircraft that was leased to a customer in Asia in the third quarter of 2016.



27


Our largest two customers each represent 6% of the net book value at March 31, 2017 . Our top fifteen customers for aircraft we owned at March 31, 2017 , representing 84 aircraft and 58% of the net book value, are as follows:
Percent of Net Book Value
 
Customer
 
Country
 
Number of
Aircraft
Greater than 6% per customer
 
Avianca Brazil
 
Brazil
 
10

 
 
Lion Air
 
Indonesia
 
12

 
 
 
 
 
 
 
3% to 6% per customer
 
LATAM
 
Chile
 
3

 
 
South African Airways
 
South Africa
 
4

 
 
Thai Airways
 
Thailand
 
2

 
 
Singapore Airlines
 
Singapore
 
4

 
 
AirAsia X
 
Malaysia
 
3

 
 
Air Berlin
 
Germany
 
11

 
 
Emirates
 
United Arab Emirates
 
2

 
 
AirBridgeCargo (1)
 
Russia
 
2

 
 
Iberia
 
Spain
 
11

 
 
 
 
 
 
 
Less than 3% per customer
 
Jet Airways
 
India
 
8

 
 
Garuda
 
Indonesia
 
3

 
 
Azul
 
Brazil
 
7

 
 
Avianca
 
Colombia
 
2

 
 
Total top fifteen customers
 
 
 
84

 
 
All other customers
 
 
 
116

 
 
Total all customers
 
 
 
200

 
        

(1)
Guaranteed by Volga-Dnepr Airlines. We have one additional aircraft on lease with an affiliate.

Finance
We intend to fund new investments through cash on hand, funds generated from operations, maintenance payments received from lessees, secured borrowings for aircraft, draws on our revolving credit facilities and proceeds from any future aircraft sales. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.
See “Liquidity and Capital Resources” below.

28


RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2017 to the three months ended March 31, 2016 :
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Revenues:
 
 
 
Lease rental revenue
$
190,586

 
$
179,570

Finance and sales-type lease revenue
4,073

 
3,498

Amortization of lease premiums, discounts and incentives
(3,112
)
 
(1,070
)
Maintenance revenue
12,287

 
1,260

Total lease revenue
203,834

 
183,258

Other revenue
439

 
407

Total revenues
204,273

 
183,665

Operating expenses:
 
 
 
Depreciation
79,174

 
76,647

Interest, net
63,068

 
64,241

Selling, general and administrative
16,167

 
15,492

Impairment of flight equipment
500

 

Maintenance and other costs
2,931

 
1,403

Total operating expenses
161,840

 
157,783

Other income (expense):
 
 
 
Gain on sale of flight equipment
759

 
12,833

Other
(1,149
)
 
(73
)
Total other income (expense)
(390
)
 
12,760

Income from continuing operations before income taxes and earnings of unconsolidated
equity method investments
42,043

 
38,642

Income tax provision
1,846

 
3,939

Earnings of unconsolidated equity method investments, net of tax
2,242

 
1,559

Net income
$
42,439

 
$
36,262

Revenues
Total revenues increased by $20.6 million for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 .
Lease rental revenue . The increase in lease rental revenue of $11.0 million for the three months ended March 31, 2017 as compared to the same period in 2016 was primarily the result of increases in revenue of $38.1 million due to the acquisition of 59 aircraft since March 31, 2016. This increase was partially offset by decreases of:
$22.5 million due to the sale of 24 aircraft since March 31, 2016; and
$4.5 million due to lease extensions, amendments, transitions and other changes.
Finance and sales-type lease revenue. For the three months ended March 31, 2017 , $4.1 million of interest income from finance and sales-type leases was recognized as compared to $3.5 million of interest income from finance and sales-type leases recorded for the same period in 2016 due to the addition of four aircraft, partially offset by the sale of one aircraft, over the last twelve months.



29


Amortization of net lease premiums, discounts and lease incentives.
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Amortization of lease incentives
$
(2,707
)
 
$
(856
)
Amortization of lease premiums
(2,928
)
 
(2,777
)
Amortization of lease discounts
2,523

 
2,563

Amortization of lease premiums, discounts and incentives
$
(3,112
)
 
$
(1,070
)
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 increase in amortization of lease incentives of $1.9 million for the three months ended March 31, 2017 as compared to the same period in 2016 was primarily attributable to changes in estimate related to engines for one freighter aircraft of $2.3 million, partially offset by $0.5 million related to aircraft transitions, extensions and other activity.
Maintenance revenue. For the three months ended March 31, 2017 , we recorded $12.3 million of maintenance revenue due to the transition of two narrow-body and one wide-body aircraft for $10.3 million and maintenance reserves taken into income for two freighter aircraft and two narrow-body aircraft totaling $1.9 million. For the same period in 2016 , we recorded $1.3 million of maintenance revenue from six scheduled lease terminations.
Operating expenses
Total operating expenses increased by $4.1 million for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 .
Depreciation expense increased by $2.5 million for the three months ended March 31, 2017 as compared to the same period in 2016 . The net increase is primarily the result of higher depreciation of $14.7 million due to aircraft acquisitions.
This increase was partially offset by a $12.1 million decrease due to aircraft sold.
Interest, net consisted of the following:
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Interest on borrowings and other liabilities (1)
$
58,839

 
$
53,324

Amortization of interest rate derivatives related to deferred losses
581

 
5,372

Amortization of deferred financing fees and debt discount (2)
4,155

 
5,607

Interest expense
63,575

 
64,303

Less: Interest income
(414
)
 
(62
)
Less: Capitalized interest
(93
)
 

Interest, net
$
63,068

 
$
64,241

        
(1)
Includes $1,509 in loan termination fees related to the sale of one aircraft during the three months ended March 31, 2016 .
(2)
Includes $1,972 in deferred financing fees written off related to the sale of one aircraft during the three months ended March 31, 2016 .
Interest, net decreased by $1.2 million as compared to the three months ended March 31, 2016 . The net decrease is primarily a result of lower amortization of deferred losses on terminated interest rate derivatives of $4.8 million and lower amortization of deferred financing fees of $1.5 million, partially offset by higher interest on borrowings of $5.5 million, primarily due to higher weighted average debt outstanding during the three months ended March 31, 2017 as compared to a year ago.

30


Selling, general and administrative expenses for the three months ended March 31, 2017 increased $0.7 million over the same period in 2016 primarily as a result of higher non-cash share-based payment expense.
Maintenance and other costs were $2.9 million for the three months ended March 31, 2017 , an increase of $1.5 million over the same period in 2016 . The net increase is primarily related to higher maintenance costs of $1.0 million related to scheduled terminations and transitions for the three months ended March 31, 2017 versus the same period in 2016 .
Other income (expense)
Gain on sale of flight equipment decreased by $12.1 million, to $0.8 million for the three months ended March 31, 2017 , as compared to gains of $12.8 million for the same period in 2016 , as we sold fewer aircraft in 2017 as compared to 2016 .
Income tax provision
Our provision for income taxes for the three months ended March 31, 2017 and 2016 was $1.8 million and $3.9 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 decrease in our income tax provision of approximately $2.1 million for the three months ended March 31, 2017 as compared to the same period in 2016 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,
 
2017
 
2016
 
(Dollars in thousands)
Net income
$
42,439

 
$
36,262

Net change in fair value of derivatives, net of tax expense of $0 and $0, respectively

 
(1
)
Derivative loss reclassified into earnings
581

 
5,372

Total comprehensive income
$
43,020

 
$
41,633

Other comprehensive income increased by $1.4 million for the three months ended March 31, 2017 , as a result of a $6.2 million increase in net income, partially offset by a decrease of $4.8 million in amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives.

31


Aircraft Monitoring List
At March 31, 2017 , we considered six freighter aircraft and eight passenger aircraft with a total net book value of $614.9 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.
The majority of the aircraft on the Monitoring List by net book value are freighters. Three of the freighters are Boeing 747-400 models that were converted from passenger to cargo configuration and are in excess of 22 years old. It is assumed they will be sold for scrap as their leases expire over the next two years.
The other three freighter aircraft on the Monitoring List are Boeing 747-400 “production” freighter models that are approximately ten years old. Our useful life assumptions for these aircraft were reduced during our Fleet Review in 2014. We expect rental levels will drop from current levels over the next two years once the current leases expire or rentals are reset.
The eight passenger aircraft on the Monitoring List consist of three 22 year old Boeing 757 aircraft, which we anticipate selling as they come off lease; the other five aircraft are older Airbus A330s that are either on lease or subject to a lease commitment. Future rental assumptions for these Airbus A330 aircraft were reduced as part of the Fleet Review completed during the second quarter of 2016.
Aircraft Type
Number of Aircraft
 
Percent of 
Net
Book Value
Passenger aircraft
8
 
4.0%
Freighter aircraft
6
 
5.3%
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 - “Summary of Significant Accounting Policies – Organization and Basis of Presentation” in the Notes to Unaudited Consolidated Financial Statements above.
RECENTLY UNADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 - “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes to Unaudited Consolidated Financial Statements above.

32


LIQUIDITY AND CAPITAL RESOURCES
Our business is very capital intensive, requiring significant investments in order to expand our fleet and to maintain and improve our existing portfolio. Our operations generate a significant amount of cash, primarily from lease rentals and maintenance collections. We have also met our liquidity and capital resource needs by utilizing several sources over time, including:
various forms of borrowing secured by our aircraft, including bank term facilities, limited recourse securitization financings, and ECA-backed financings for new aircraft acquisitions;
unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes;
sales of common shares; and
asset sales.
Going forward, we expect to continue to seek liquidity from these sources and other sources, subject to pricing and conditions we consider satisfactory.
During the first three months of 2017, we met our liquidity and capital resource needs with $131.6 million of cash flow from operations, $500.0 million in gross proceeds from the issuance of our Senior Notes due 2024 and $16.8 million of cash from aircraft sales.
As of March 31, 2017 , the weighted-average maturity of our secured and unsecured debt financings was 3.8 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 facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments over the next twelve months.

33


Cash Flows
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Net cash flow provided by operating activities
$
131,576

 
$
121,264

Net cash flow provided by (used in) investing activities
(157,252
)
 
198,099

Net cash flow provided by financing activities
439,471

 
97,664

Operating Activities:
Cash flow provided by operations was $131.6 million and $121.3 million for the three months ended March 31, 2017 and 2016 , respectively. The increase in cash flow provided by operations of approximately $10.3 million for the three months ended March 31, 2017 versus the same period in 2016 was primarily a result of:
a $12.9 million increase in cash from lease rentals, net of finance and sales-type leases;
a $2.0 million increase in cash received from maintenance revenue; and
a $0.7 million decrease in cash paid for taxes.
These inflows were partially offset by:
a $3.0 million decrease in cash from working capital; and
a $1.5 million increase in cash paid for maintenance.
Investing Activities:
Cash flow used in investing activities was $157.3 million for the three months ended March 31, 2017 as compared to cash flow provided by investing activities of $198.1 million for the three months ended March 31, 2016 . The net increase in cash flow used in investing activities of $355.4 million for the three months ended March 31, 2017 versus the same period in 2016 was primarily a result of:
a $289.2 million decrease in proceeds from the sale of flight equipment;
a $45.5 million increase in the acquisition and improvement of flight equipment; and
a $33.8 million increase in net investments in finance and sales-type leases.
These outflows were offset by:
a $7.7 million decrease in unconsolidated equity method investments compared to the same period in 2016; and
a $5.2 million net decrease in aircraft purchase deposits received.
Financing Activities:
Cash flow provided by financing activities was $439.5 million and $97.7 million for the three months ended March 31, 2017 and 2016 , respectively. The increase in cash flow provided by financing activities of $341.8 million for the three months ended March 31, 2017 versus the same period in 2016 was a result of:
a $321.8 million decrease in Revolver and ECA Financing repayments;
a $30.7 million decrease in shares repurchased; and
a $1.4 million decrease in deferred financing costs.
These outflows were offset by:
a $10.5 million increase in maintenance and security deposits returned, net of deposits received; and
a $1.6 million increase in dividends paid.

34


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 debt, payments on interest rate derivatives, other aircraft acquisition agreements and rent payments pursuant to our office leases. Total contractual obligations increased to $7.20 billion at March 31, 2017 from $6.50 billion at December 31, 2016 due primarily to an increase in borrowings and interest payments as a result of the closing of our Senior Notes due 2024 in March 2017 and an increase in purchase obligations for aircraft to be acquired, partially offset by the amortization of our other financings.
The following table presents our actual contractual obligations and their payment due dates as of March 31, 2017 :
 
Payments Due by Period as of March 31, 2017
Contractual Obligations
Total
 
1 year
or less
 
2-3 years
 
4-5 years
 
More than
5 years
 
(Dollars in thousands)
Principal payments:

 
 
 
 
 
 
 
 
Senior Notes due 2017 - 2024
$
3,700,000

 
$
500,000

 
$
900,000