Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 05/15/2007 17:03:40)

    

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

FORM 10-Q

(mark one)

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

For the quarterly period ended March 31, 2007

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURTIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission File number 001-32959

AIRCASTLE LIMITED

(Exact name of registrant as specified in its charter)


Bermuda 98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
300 First Stamford Place, 5 th Floor, Stamford, CT 06902
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code      (203) 504-1020

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES     [X]         NO     [ ]

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


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

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

Number of shares outstanding as of May 11, 2007: 67,268,329 common shares, par value $0.01 per share.

    




Aircastle Limited and Subsidiaries

Form 10-Q

Table of Contents





Table of Contents

Part I. — Financial Information

Item 1.    Financial Statements

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


  December 31,
2006
March 31,
2007
ASSETS   (unaudited)
Cash and cash equivalents $ 58,118 $ 49,008
Accounts receivable 7,696 3,516
Debt securities 121,273 124,532
Restricted cash and cash equivalents 106,069 121,442
Flight equipment held for sale 31,280 30,462
Flight equipment held for lease, net of accumulated depreciation of $64,111 and $85,593 1,559,364 1,991,768
Leasehold improvements, furnishings and equipment, net of accumulated depreciation of $694 and $842 1,506 1,340
Fair value of derivative assets 313 163
Aircraft purchase deposits 4,650 13,250
Other assets 28,434 34,767
Total assets $ 1,918,703 $ 2,370,248
LIABILITIES AND SHAREHOLDERS’ EQUITY    
LIABILITIES    
Borrowings under credit facilities $ 442,660 $ 376,283
Borrowings from securitization 549,400 544,000
Accounts payable, accrued expenses and other liabilities 31,384 34,440
Dividends payable 22,584 33,640
Lease rentals received in advance 11,068 14,044
Repurchase agreements 83,694 80,044
Security deposits 39,767 48,734
Maintenance payments 82,914 102,472
Fair value of derivative liabilities 18,035 29,425
Total liabilities 1,281,506 1,263,082
Commitments and Contingencies – Note 13    
SHAREHOLDERS’ EQUITY    
Preference shares, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding at December 31, 2006 and March 31, 2007
Common shares, $.01 par value, 250,000,000 shares authorized, 51,621,279 shares issued and outstanding at December 31, 2006; and 67,268,329 shares issued and outstanding at March 31, 2007 516 670
Additional paid-in capital 630,154 1,124,103
Dividends in excess of earnings (3,382 )   (15,475 )  
Accumulated other comprehensive income (loss) 9,909 (2,132 )  
Total shareholders’ equity 637,197 1,107,166
Total liabilities and shareholders’ equity $ 1,918,703 $ 2,370,248

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

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


  Three Months Ended
March 31,
2006 2007
Revenues    
Lease rentals $ 29,752 $ 67,358
Interest income 1,641 2,588
Other revenue 58
Total revenues 31,393 70,004
Expenses    
Depreciation 9,076 21,633
Interest (net of interest income of $1,035 and $1,761 for 2006 and 2007, respectively) 7,364 16,730
Selling, general and administrative (including non-cash share based payment expense of $1,292 and $1,258 for 2006 and 2007, respectively) 5,874 8,497
Other expenses 640 382
Total expenses 22,954 47,242
Income from continuing operations before income taxes 8,439 22,762
Income tax provision 1,004 1,905
Income from continuing operations 7,435 20,857
Earnings from discontinued operations, net of income taxes 3,745 684
Net income  $ 11,180 $ 21,541
Basic earnings per share:    
Income from continuing operations $ .18 $ .35
Earnings from discontinued operations, net of income taxes .09 .01
Net income per share $ .27 $ .36
Diluted earnings per share:    
Income from continuing operations $ .18 $ .35
Earnings from discontinued operations, net of income taxes .09 .01
Net income per share $ .27 $ .36
Dividends declared per share $ .50

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

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


  Three Months Ended
March 31,
2006 2007
Cash flows from Operating activities    
Net income $ 11,180 $ 21,541
Adjustments to reconcile net income to net cash provided by operating activities (inclusive of amounts related to discontinued operations)    
Depreciation 9,915 22,394
Amortization of deferred financing costs 793 1,514
Amortization of lease premiums and discounts, and other related lease items (163 )   (1,701 )  
Deferred income taxes 155 1,892
Accretion of purchase discounts on debt securities (266 )   (208 )  
Non-cash share based payment expense 1,292 1,258
Cash flow hedges reclassified into earnings (1,007 )  
Ineffective portion of cash flow hedges (253 )   42
Gain on the sale of flight equipment (2,240 )  
Changes in certain assets and liabilities:    
Accounts receivable (377 )   4,180
Restricted cash and cash equivalents (31,689 )   (15,373 )  
Other assets (222 )   (458 )  
Accounts payable, accrued expenses and other liabilities (570 )   (5,056 )  
Lease rentals received in advance 920 2,976
Security deposits and maintenance payments 25,429 28,525
Net cash provided by operating activities 13,904 60,519
Cash flows from investing activities    
Acquisition and improvement of flight equipment (200,456 )   (446,390 )  
Disposition of flight equipment held for sale 57,157
Restricted cash from disposition of flight equipment held for sale (20,325 )  
Purchase of debt securities (92,726 )   (15,251 )  
Margin deposits (5,660 )  
Leasehold improvements, furnishings and equipment (199 )  
Aircraft purchase deposits (1,716 )   (8,600 )  
Principal repayments on debt securities 3,106 12,664
Net cash used in investing activities (255,159 )   (463,237 )  
Cash flows from financing activities    
Issuance of common shares, net 36,932 493,056
Repurchase of shares from employee (210 )  
Credit facility borrowings 114,937 486,584
Securitization repayments (5,400 )  
Credit facility repayments (36,666 )   (552,961 )  
Deferred financing costs (2,106 )   (1,227 )  
Proceeds from repurchase agreements 75,968 140
Principal repayment on repurchase agreement (199 )   (3,790 )  
Dividends paid (22,584 )  
Net cash provided by financing activities 188,866 393,608
Net decrease in cash and cash equivalents (52,389 )   (9,110 )  
Cash and cash equivalents at beginning of period 79,943 58,118
Cash and cash equivalents at end of period $ 27,554 $ 49,008

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

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

Note 1.    Summary of Significant Accounting Policies

Organization

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

Basis of Presentation

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

The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the ‘‘SEC’’) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in condensed financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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

Principles of Consolidation

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

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (‘‘SFAS No. 159’’). SFAS No 159, which amends SFAS No. 115 allows certain financial assets and liabilities to be recognized, at the company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Currently, the Company records the gains or losses for the period in the statement of comprehensive income and in the equity section of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of SFAS No.159 on its consolidated results of operations and financial position.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

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

Note 2.    Fair Value of Financial Instruments

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

Note 3.    Lease Rental Revenues and Flight Equipment Held for Lease

Minimum future annual lease rentals contracted to be received under our existing operating leases at March 31, 2007 were as follows:


Year Ending December 31, Amount
Remainder of 2007 $ 209,053
2008 268,611
2009 237,254
2010 179,473
2011 133,619
2012 83,814
Thereafter 110,350
  $ 1,222,174

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:


  Three Months Ended
March 31,
Region 2006 2007
Europe 39 %   43 %  
Asia 26 %   25 %  
North America 30 %   22 %  
Latin America 5 %   5 %  
Middle East and Africa 5 %  
  100 %   100 %  

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

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

For the three months ended March 31, 2006, two customers accounted for 42% of lease rental revenue. No other customer accounted for more than 6% of lease rental revenue. For the three months ended March 31, 2007, one customer accounted for 17% of lease rental revenue and three additional customers combined accounted for 22% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue.

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


  December 31, 2006 March 31, 2007
Region Number
of
Aircraft
Net Book
Value %
Number
of
Aircraft
Net Book
Value %
Europe 35 45 %   35 46 %  
Asia 15 23 %   16 24 %  
North America 11 22 %   13 18 %  
Latin America 5 6 %   5 5 %  
Middle East and Africa 3 4 %   5 4 %  
Off-lease (a) 3 3 %  
  69 100 %   77 100 %  
(a) At March 31, 2007 three aircraft were classified as off-lease, but were subject to binding lease commitments.

At December 31, 2006 and March 31, 2007, lease acquisition costs included in other assets on the consolidated balance sheets were $794 and $775, respectively. Prepaid lease incentive costs included in other assets on the consolidated balance sheets were $830 and $417 at December 31, 2006 and March 31, 2007, respectively.

Note 4.    Discontinued Operations and Flight Equipment Held for Sale

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

As of March 31, 2007, one of our aircraft was classified as flight equipment held for sale. Lease rents, depreciation, interest expense and other expenses have been recorded as earnings from discontinued operations, net of income tax provision. For the three months ended March 31, 2007 we incurred no interest expense and we had no outstanding borrowings associated with this aircraft.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

Earnings from discontinued operations for the three months ended March 31, 2006 and 2007 related solely to the two aircraft held for sale, were as follows:


  Three Months Ended
March 31,
  2006 2007
Earnings from discontinued operations    
Lease rentals $ 3,754 $ 1,619
Depreciation (840 )   (761 )  
Gain (loss) on disposition 2,240
Interest expense (881 )  
Other expenses (80 )   (138 )  
Earnings before income tax provision 4,193 720
Income tax provision (448 )   (36 )  
Earnings from discontinued operations $ 3,745 $ 684

Note 5.    Debt Securities

As of March 31, 2007, debt securities with an aggregate fair value of $109,427 were U.S. corporate obligations and were classified as available-for-sale. These debt obligations are interests in pools of loans and are collateralized by interests in commercial aircraft of which $86,905 are investment grade and $22,522 are subordinate to other debt related to such aircraft. All of our debt securities which are classified as available-for-sale had unrealized gain positions relative to their net book values, which aggregated to $14,390 and $14,854 at December 31, 2006 and March 31, 2007, respectively.

At March 31, 2007 debt securities with a fair value of $45,226 and $45,024, respectively, have stated maturities in 2010 and 2011, respectively. Debt securities with an aggregate fair value of $19,177 have remaining terms to stated maturity in excess of 10 years after March 31, 2007. All of our debt securities provide for the periodic payment of both principal and interest and are subject to prepayment and/or acceleration depending on certain events, including the sale of the underlying collateral aircraft and events of default. Therefore, the actual maturity of our debt securities may be less than the stated maturities.

In 2007, we acquired a loan secured by a commercial jet aircraft with a cash purchase of $15,251 that was classified as held to maturity. The loan has a stated maturity of December 2007.

Note 6.    Securitization and Borrowings under Credit Facilities

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

Securitization No. 1

On June 15, 2006, we completed our first securitization, a $560,000 transaction comprised of 40 aircraft, which we refer to as Securitization No. 1. In connection with Securitization No. 1, two of

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

our subsidiaries, ACS Aircraft Finance Ireland plc (‘‘ACS Ireland’’) and ACS Aircraft Finance Bermuda Limited (‘‘ACS Bermuda’’), which we refer to together with their subsidiaries as the ‘‘ACS Group,’’ issued $560,000 of Class A-1 notes, or the ‘‘Notes,’’ to a newly formed trust, the ACS 2006-1 Pass Through Trust, or the ‘‘Trust.’’ The Trust simultaneously issued a single class of Class G-1 pass through trust certificates, or the ‘‘Certificates,’’ representing undivided fractional interests in the notes. Payments on the Notes will be passed through to holders of the certificates. The Notes are secured by ownership interests in aircraft-owning subsidiaries of ACS Bermuda and ACS Ireland and the aircraft leases, cash, rights under service agreements and any other assets they may hold. Each of ACS Bermuda and ACS Ireland has fully and unconditionally guaranteed the other’s obligations under the notes. However, the Notes are neither obligations of nor guaranteed by Aircastle Limited. The Notes mature on June 20, 2031. The terms of Securitization No. 1 require the ACS Group to satisfy certain financial covenants, including the maintenance of debt service coverage ratios. The ACS Groups’ compliance with these covenants depends substantially upon the timely receipt of lease payments from their lessees. In particular, during the first five years from issuance, Securitization No. 1 has an amortization schedule that requires that lease payments be applied to reduce the outstanding principal balance of the indebtedness so that such balance remains at 54.8% of the assumed future depreciated value of the portfolio. If the debt service coverage ratio requirements are not met on two consecutive monthly payment dates in the fourth and fifth year following the closing date of Securitization No. 1, and in any month following the fifth anniversary of the closing date, all excess securitization cash flow is required to be used to reduce the principal balance of the indebtedness and will not be available to us for other purposes, including paying dividends to our shareholders.

The Notes provide for monthly payments of interest at a floating rate of one-month LIBOR plus 0.27%, which at March 31, 2007 was 5.59%, and scheduled payments of principal. Financial Guaranty Insurance Company issued a financial guaranty insurance policy to support the payment of interest when due on the Certificates and the payment, on the final distribution date, of the outstanding principal amount of the Certificates. The Certificates are rated Aaa and AAA by Moody’s Investors Service and Standard & Poor’s rating services, respectively. We have entered into a series of interest rate hedging contracts intended to hedge the interest rate exposure associated with issuing floating-rate obligations backed by primarily fixed-rate lease assets. These contracts, together with the guarantee premium, the spread referenced above and other costs of trust administration, result in a fixed rate cost of 6.60% per annum, after the amortization of issuance fees and expenses.

ACS Ireland, which had total assets of $146,485 at March 31, 2007, is a VIE which we consolidate. At March 31, 2007, the outstanding principal amount of ACS Ireland’s notes was $105,262.

Credit Facility No. 2

On February 28, 2006, we entered into a $500,000 revolving credit facility with a group of banks to finance the acquisition of aircraft and related improvements which we refer to as Credit Facility No. 2. The borrowing base is equal to 85% of the net book value of the aircraft. Borrowings under this credit facility incur interest at the one-month LIBOR rate plus 1.25%. Additionally, we are subject to a 0.12% fee on any unused portion of the total committed facility. Credit Facility No. 2 requires the monthly payment of interest and principal, to the extent of 85% of any decrease in the net book value of the assets. Effective June 15, 2006, Credit Facility No. 2 was amended to increase the maximum committed amount to $750,000 and to extend the maturity to November 15, 2007. On December 15, 2006, the $750,000 credit facility was amended to increase the maximum committed amount to $1,000,000 and to extend the maturity to December 15, 2008 (‘‘Amended Credit Facility No. 2’’). In addition, the borrowing base was revised to equal 65% of the purchase price of aircraft secured under the facility. On January 22, 2007, the $1,000,000 Amended Credit Facility No. 2 was

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

amended to increase the maximum committed amount to $1,250,000; provided that such amount will reduce to $1,000,000 on the earlier of (1) the closing of our next securitization financing or (2) June 30, 2007 (or, if we pay a commitment fee to the lenders, December 31, 2007). As of March 31, 2007, we had borrowed $302,951 under Amended Credit Facility No. 2 and the interest rate was 6.57%.

Revolving Credit Facility

On December 15, 2006, the Company entered into a $250,000 revolving credit facility (the ‘‘Revolving Credit Facility’’) with a group of banks. The Revolving Credit Facility provides loans for working capital and other general corporate purposes and also provides for issuance of letters of credit for the account of any borrower up to $125,000 and matures on December 15, 2007. The aggregate amount of borrowings together with the aggregate stated amount of all letters of credit under the Revolving Credit Facility may not exceed $250.0 million. Borrowings under the Revolving Credit Facility bear interest (a) in the case of loans with an interest rate based on the applicable base rate (the ‘‘ABR’’) plus 0.50% per annum or (b) in the case of loans with an interest rate based on the eurodollar rate (the ‘‘EDR’’), the EDR plus 1.50% per annum. Additionally, we are subject to a per annum fee on any unused portion of the total committed facility of 0.25%, during periods when the average outstanding loans under the Revolving Credit Facility are less than $125.0 million, and 0.125% per annum when the average outstanding loans are equal to or greater than $125.0 million. Fees on any outstanding letters of credit will equal 1.625% per annum on the stated amount thereof. We are also required to pay customary agency fees. Additionally, we are required to maintain a net worth determined in accordance with GAAP of not less that $550,000. On January 22, 2007, the Revolving Credit Facility was amended to increase the maximum committed amount to $450,000. However, upon the closing of our follow-on equity offering in February 2007, the maximum committed amount returned to $250,000. We are not permitted to pay dividends on our common shares to the extent a default or an event of default exists under our Revolving Credit Facility. At March 31, 2007, there were no outstanding loans and $53.1 million of letters of credit outstanding under the Revolving Credit Facility.

Credit Facility No. 1

In February 2005, we entered into a revolving credit facility, as subsequently amended, with a group of banks to finance the acquisition of flight equipment and related improvements, which we refer to as Credit Facility No. 1. The interest rate on Credit Facility No. 1 was the one month LIBOR plus 1.50%. Monthly payments of interest were required through repayment. Credit Facility No. 1 was repaid in full and terminated on August 4, 2006. In addition, we wrote off the remaining balance of deferred financing fees of $1,840 upon the termination of Credit Facility No. 1.

Credit Facility No. 3

In October 2005, the Company entered into a credit facility for $109,998 with a bank to finance the acquisition of three aircraft which we refer to as Credit Facility No. 3. The interest rate on this facility is one-month LIBOR plus 1.50%. On March 30, 2006, $36,666 of Credit Facility No. 3 was repaid using a portion of the proceeds from the disposition of flight equipment held for sale which had been financed under this facility. Credit Facility No. 3 was amended on July 18, 2006, to increase the maximum committed amount by approximately $25,116 and to extend the maturity date to March 31, 2007. The increase in the maximum committed amount was reduced by $25,116 with the closing of the initial public offering. On January 26, 2007, Credit Facility No. 3 was amended again to extend the maturity date from March 31, 2007 to the earlier of September 30, 2007 or the closing of the next securitization. As of March 31, 2007, we had borrowed $73,332 under Credit Facility No. 3 and the interest rate was 6.82%.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

The weighted average interest of these credit facilities at December 31, 2006 and March 31, 2007 were 6.64%, and 6.62%, respectively.

Note 7.    Repurchase Agreements

We enter into repurchase agreements to fund a portion of the purchase price of certain of our debt securities. At December 31, 2006 and March 31, 2007 the repurchase agreements are secured by liens on the debt securities with a fair value of $105,550 and $94,037, respectively. The repurchase agreements provide for the payment of interest at LIBOR based rates plus spreads ranging from 0.50% to 0.75%. At March 31, 2007 the rate for LIBOR plus 0.50% was 5.82% and the rate for LIBOR plus 0.75% was 6.09%. The repurchase agreements are substantially all with parties other than those from whom we originally purchased the debt investments. At March 31, 2007, the repurchase agreements are scheduled to mature through March 2008. Upon maturity, we plan to refinance the repurchase agreements on similar terms and conditions. The weighted average interest rate of these repurchase agreements At December 31, 2006 and March 31, 2007 was 5.88% and 5.84%, respectively.

Note 8.    Shareholders’ Equity and Share Based Payment

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

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

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

A summary of the fair value of nonvested shares for the three months ended March 31, 2007 is as follows:


Nonvested Shares Shares
(in 000’s)
Weighted
Average
Grant Date
Fair Value
Fair Value
of
Nonvested
Shares at
Grant Date
Nonvested at January 1, 2007 901.3 $ 18.05 $ 16,266
Granted 119.5 33.22 3,970
Cancelled (0.3 )   (9 )  
Vested (146.1 )   (20.45 )   (2,987 )  
Nonvested at March 31, 2007 874.4 $ 19.71 $ 17,240

The fair value of the restricted shares granted in 2007 was determined based upon the market price of the shares at the grant date. We anticipate that the current requisite service periods will be obtained for employees with awards. The total unrecognized compensation cost as of March 31, 2007 in the amount of $15,057 is expected to be recognized over a weighted average period of four years.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

Note 9.    Dividends

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

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

Note 10.    Earnings Per Share

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


  Three Months Ended
March 31,
  2006 2007
Numerator    
Income from continuing operations $ 7,435 $ 20,857
Earnings from discontinued operations, net of income taxes 3,745 684
Net income $ 11,180 $ 21,541
Denominator    
Weighted-average shares used to compute basic earnings per share 41,322,604 58,864,054
Effect of dilutive restricted shares 78,348 291,573
Weighted-average shares outstanding and dilutive securities used to compute diluted earnings per share 41,400,952 59,155.627

Note 11.    Income Taxes

The sources of income from continuing operations before income taxes for the three months ended March 31, 2006 and 2007 were as follows:


  Three Months Ended
March 31,
  2006 2007
U.S. operations $ 168 $ 445
Non-U.S. operations 8,271 22,317
Total $ 8,439 $ 22,762

Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following:


  Three Months Ended
  March 31,
2006
March 31,
2007
Notional U.S. federal income tax expense at the statutory rate: $ 2,711 $ 7,967
U.S. state and local income tax, net 18 50
Non-U.S. operations (1,913 )   (6,135 )  
Non-deductible expenses in the U.S. 4 14
Other 184 9
Provision for income taxes $ 1,004 $ 1,905

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (‘‘FIN 48’’), on January 1, 2007. FIN 48 addressed the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.

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

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

Note 12.     Comprehensive Income

Comprehensive income includes net income, the changes in the fair value and the reclassification into earnings of amounts previously deferred relating to our derivative financial instruments which qualify for hedge accounting in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and the change in unrealized appreciation of debt securities classified as available-for-sale. Comprehensive income was $26,640 and $9,500 for the three months ended March 31, 2006 and 2007, respectively.

Note 13.    Commitments and Contingencies

At March 31, 2007, we had letters of intent or purchase agreements to acquire 37 aircraft for an estimated purchase price of $1,435,541. The purchase price of the aircraft under these letters of intent or purchase agreements is subject to variable price provisions that typically reduce the final purchase price if the actual closing occurs beyond an initially agreed upon date.

Note 14.    Related Party Transactions

Fortress provides certain support services to Aircastle. Fortress requires Aircastle to reimburse it for costs incurred on behalf of Aircastle. These costs consist primarily of professional services and office supplies purchased from third parties. These expenses are charged to Aircastle at cost and are included in selling, general and administrative expenses in our consolidated statements of income. Total costs of direct operating services for the three months ended March 31, 2006 and 2007 were $0 and $22, respectively.

During 2006, Aircastle employees participated in various benefit plans sponsored by Fortress including a voluntary savings plan (‘‘401(k) Plan’’) and other health and benefit plans. For the three months ended March 31, 2006, Aircastle reimbursed Fortress $272, for its costs under the 401(k) Plan and the health and benefit plans. Aircastle also reimburses Fortress for matching contributions up to

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

3% of eligible earnings. At December 31, 2006, Aircastle accrued $113 in annual contributions for the 2006 plan year for our employees’ participation in the 401(k) Plan sponsored by Fortress which was paid to Fortress in March 2007. In January 2007, Aircastle established a voluntary savings plan (‘‘401(k) Plan’’) and other health and benefit plans.

As of December 31, 2006 and March 31, 2007, $132 and $133, respectively, were payable to Fortress.

In May 2006, two of our operating subsidiaries entered into service agreements to provide certain leasing, remarketing, administrative and technical services to a Fortress entity, with respect to four aircraft owned by the Fortress entity and leased to third parties. Our responsibilities include remarketing the aircraft for lease or sale, invoicing the lessees for expenses and rental payments, reviewing maintenance reserves, reviewing the credit of lessees, arranging for the periodic inspection of the aircraft, securing the return of the aircraft when necessary. The agreements also provide that the Fortress entity will pay us 3.0% of the collected rentals with respect to leases of the aircraft, plus expenses incurred during the service period and will pay us 2.5% of the gross sales proceeds from the sale of any of the aircraft plus expenses incurred during the service period. As of March 31, 2007, we had accrued $58 in fees due from the Fortress entity. The service agreements have an initial term which expires on December 31, 2008, but will continue thereafter unless one party terminates the agreement by providing the other with advance written notice.

On August 10, 2006 we acquired an aircraft from an affiliate of one of the Fortress Shareholders for a purchase price of $11,063 which we believe represented fair value at the acquisition date.

For the three months ended March 31, 2006 and 2007, Aircastle paid $163 and $121, respectively for legal fees related to the establishment and financing activities of our Bermuda subsidiaries, and, for the three months ended March 31, 2006 and 2007, Aircastle paid $85 and $78 for Bermuda corporate services related to our Bermuda companies to a law firm and a corporate secretarial services provider affiliated with a Bermuda resident director serving on certain of our subsidiaries board of directors. The Bermuda resident director serves as an outside director of these subsidiaries.

Note 15.    Derivatives

We held the following interest rate derivative contracts as of March 31, 2007:


Hedged Item Notional
Amount
Effective
Date
Maturity
Date
Floating
Rate
Fixed
Rate
Fair Value of
Derivative
Asset or
(Liability)
  (Dollars in thousands)
Securitization No. 1 $ 544,000 Jun-06 Jun-16 1 Month LIBOR
+ 0.27%
5.78 %   $ (16,385 )  
Amended Credit Facility No. 2 and Credit Facility No. 3 500,000 Mar-06 Mar-11 1 Month LIBOR 5.07 %   (3,744 )  
Amended Credit Facility No. 2 and Credit Facility No. 3 200,000 Jan-07 Aug-12 1 Month LIBOR 5.06 %   (1,674 )  
Future debt and securitization 360,000 Feb-07 Apr-17 1 Month LIBOR 5.14 %   (3,586 )  
Future debt and securitization 90,000 Jul-07 Dec-17 1 Month LIBOR 5.14 %   (1,278 )  
Future debt and securitization 40,000 Jan-08 Feb-17 1 Month LIBOR 5.16 %   (2,758 )  
Repurchase Agreement 48,000 Feb-06 Jul-10 1 Month LIBOR 5.02 %   41
Repurchase Agreement 5,000 Dec-05 Sep-09 3 Month LIBOR 4.94 %   3
Repurchase Agreement 2,900 Jun-05 Mar-13 1 Month LIBOR 4.21 %   119
Total $ 1,789,900         $ (29,262 )  

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

The counterparties to these agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap contracts, our exposure is limited to the interest rate differential on the notional amount at each settlement period over the life of the agreements. We do not anticipate any non-performance by the counterparties.

On January 23, 2007, we entered into three interest rate forward contracts to hedge the variable interest payments on debt we expect to incur to finance aircraft acquisitions over the next several years. The notional amounts of the initial contracts are $360,000, $90,000 and $40,000 and will increase to a maximum of $410,000, $150,000 and $360,000 respectively, and will amortize down as we repay the debt. These forward contracts have a mandatory early termination date of August 15, 2007, August 15, 2008 and February 15, 2009, respectively. We have designated these interest rate swaps as cash flow hedges for accounting purposes.

In June, 2006 we terminated two swaps resulting in a net deferred gain of $15,938 which will be amortized into income using the interest method over the life of securitization No. 1 (the anticipated financing), which is expected to be five years. It is expected that approximately $3,926 of these gains will be reclassified into earnings in the next twelve months. For the three months ended March 31, 2007, gains of $1,007 were reclassified into earnings and this amount is included in interest expense on the consolidated statements of income.

For the three months ended March 31, 2006 and 2007, we recognized ineffectiveness gains (losses) of $253 and ($42) related to our cash flow hedges. These amounts are included in interest expense on the consolidated statements of income.

Note 16.    Segment Reporting

We have two reportable segments: Aircraft Leasing and Debt Investments. We present our segment information on a contribution margin basis consistent with the information that our chief executive officer (the Chief Operating Decision Maker (‘‘CODM’’) reviews in assessing segment performance and allocating resources. Contribution margin includes revenue, depreciation, interest expense and other expenses that are directly connected to our business segments. We believe contribution margin is an appropriate measure of performance because it reflects the marginal profitability of our business segments excluding overhead.

Aircraft Leasing

The Aircraft Leasing segment consists of amounts earned from our commercial aircraft leasing operations. All of our aircraft are subject to net operating leases whereby the lessee is generally responsible for maintaining the aircraft and paying all operational and insurance costs. In many of our leases we are obligated to bear a portion of maintenance costs or costs associated with modifications required by manufacturers or regulators. We retain the benefit, and bear the risk, of re-leasing and the residual value of the aircraft upon expiration or early termination of the lease.

Debt Investments

The Debt Investments segment consists of amounts earned from our investments in debt securities secured by commercial jet aircraft including enhanced equipment trust certificates, or EETCs, and other forms of collateralized debt.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2007

Information on reportable segments for the three months ended March 31, 2006 and 2007 is as follows:


  Three Ended March 31, 2006 Three Ended March 31, 2007
  Aircraft
Leasing
Debt
Investments
Total Aircraft
Leasing
Debt
Investments
Total
Revenues            
Lease rentals $ 29,752 $ $ 29,752 $ 67,358 $ $ 67,358
Interest income 1,641 1,641 2,588 2,588
Other revenue 58 58
Total revenues 29,752 1,641 31,393 67,416 2,588 70,004
Expenses            
Depreciation 8,963 8,963 21,485 21,485
Interest 7,530 869 8,399 17,372 1,119 18,491
Other expenses 640 640 382 382
Total expenses 17,133 869 18,002 39,239 1,119 40,358
Contribution Margin $ 12,619 $ 772 $ 13,391 $ 28,177 $ 1,469 $ 29,646
Segment Assets $ 1,064,772 $ 122,853 $ 1,187,625 $ 2,156,854 $ 128,064 $ 2,284,918

Total contribution margin reported as a segment profit for reportable business segments is reconciled to income from continuing operations before income taxes for the three months ended March 31, 2006 and 2007 as follows:


  2006 2007
Contribution Margin $ 13,391 $ 29,646