FTAI Aviation Ltd. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions unless stated otherwise. Comparisons are with the corresponding 2022 periods. The infrastructure business was spun off in August 2022, so current results reflect continuing operations.
Business context
FTAI owns, leases and sells aviation equipment; repairs and sells aircraft-engine products; and owns and leases offshore energy equipment. Its reportable segments are Aviation Leasing and Aerospace Products. It is externally managed by FIG LLC, an affiliate of Fortress Investment Group.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $274.3 | $112.1 | $567.1 | $203.8 |
| Net income (loss) from continuing operations | $54.8 | $45.7 | $84.2 | $(133.3) |
| Net income (loss) attributable to shareholders | $46.4 | $11.4 | $69.0 | $(217.5) |
| Adjusted EBITDA (non-GAAP) | $153.1 | $150.7 | $280.7 | $195.7 |
| Operating cash flow | Not stated separately | Not stated separately | $67.2 | $(48.6) |
- Q2 revenue included $101.5 million of asset sales revenue, versus none reported as revenue in Q2 2022. The company began presenting routine aircraft and engine sales gross in revenue and cost of sales in Q3 2022; prior-period sales were generally presented as net gains. This limits direct revenue and expense comparability.
- Q2 lease income was $59.5 million, maintenance revenue $42.1 million, aerospace products revenue $68.1 million, and asset sales revenue $101.5 million. Cost of sales was $104.5 million. Interest expense was $38.5 million.
- Adjusted EBITDA rose $2.3 million in Q2 and $85.0 million in the first half. Q2 segment Adjusted EBITDA was $125.9 million for Aviation Leasing and $30.1 million for Aerospace Products; Corporate and Other was $(2.8) million. Adjusted EBITDA is non-GAAP and excludes, among other items, interest, depreciation and preferred dividends.
- First-half investing cash outflow was $101.8 million and financing cash inflow was $2.7 million. Cash and cash equivalents were $21.1 million at June 30, down from $33.6 million at year-end; restricted cash was zero. Management reported up to $155 million of current borrowing availability.
- At June 30, total debt was $2.199 billion gross and $2.173 billion net of issuance costs, with no amount due within one year in the debt table. Debt included $145 million drawn on the revolving facility, $652.5 million of 2025 notes, $400 million of 2027 notes and $1.002 billion of 2028 notes. The company reported compliance with all debt covenants.
- Total assets were $2.526 billion and total equity $91.3 million. Ordinary and preferred dividends paid in the first half totaled $75.0 million. The board declared a $0.30-per-ordinary-share Q2 dividend after quarter-end.
Material changes and management commentary
- Revenue growth reflected increased aircraft and engine sales, higher Aerospace Products activity as operations ramped up, and increased lease income from more assets on lease and higher offshore vessel on-hire days.
- Q2 Aviation Leasing Adjusted EBITDA declined to $125.9 million from $142.2 million; Aerospace Products Adjusted EBITDA increased to $30.1 million from $17.1 million.
- First-half 2022 included a $120.0 million impairment of aircraft and engines in Russia and Ukraine and discontinued-operation losses from the spun-off infrastructure business. These items contributed to the large year-over-year improvement in first-half reported earnings.
- Management said it believes liquidity is sufficient, while noting it is limiting discretionary spending and reprioritizing investments amid market volatility. Potential transactions and financings under evaluation were not definitive and were excluded from planned liquidity needs. No quantified earnings guidance was provided.
- On May 22, 2023, Fortress and Mubadala announced agreements for a transaction under which Fortress management members and Mubadala affiliates would acquire SoftBank’s indirect equity interest in Fortress. The filing says Fortress is expected to remain an independent manager; the transaction’s effects on FTAI and its manager relationship are uncertain.
Risks, contingencies and unusual items
- Four aircraft remained in Ukraine and eight aircraft and seventeen engines remained in Russia at June 30. Their insured value was approximately $243 million; FTAI intends to pursue insurance claims, but recovery timing and amount are uncertain. The filing states recovery of the assets is considered unlikely.
- Three Aviation Leasing customers represented 15%, 14% and 11% of accounts receivable, respectively. One customer generated 10% of Q2 revenue and 11% of first-half revenue. The allowance for doubtful accounts was $66.6 million.
- Aircraft-sale engine-condition guarantees had a recorded fair value of $6.7 million. Maximum potential undiscounted payments were $34.7 million, which management said it did not reasonably expect to pay. An offshore-energy charter dispute had a stated potential loss range of $0 to $3.3 million.
- Management highlighted risks including interest rates, aviation asset values and utilization, customer defaults, access to capital, oil-and-gas market volatility, sanctions and geopolitical instability. A 100-basis-point change in floating borrowing rates was estimated to change interest expense by approximately $1.5 million over the next 12 months, assuming no hedging.
- The management agreement provides for a 1.5% annual management fee and incentive allocations. Q2 management fees and incentive allocation totaled $5.6 million, including $5.3 million of incentive allocation. Management’s disclosure controls were assessed as effective, with no material quarterly change to internal control over financial reporting reported.
Investor verification priorities
- Reconcile asset-sale revenue and cost-of-sales presentation with prior periods, and assess earnings and cash generation excluding asset dispositions.
- Track collections, customer concentration, and the status and expected timing of insurance recoveries for Russia- and Ukraine-located assets.
- Review cash, revolving-credit availability, debt maturities and refinancing needs, covenant headroom, and the sustainability of ordinary and preferred dividends.
- Assess Aerospace Products ramp-up economics and offshore vessel utilization, operating costs and charter coverage.
- Monitor Fortress ownership-change completion and its potential implications for management, incentive payments and related-party conflicts.