FTAI Aviation Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context
FTAI owns, leases and sells aviation equipment; repairs and sells aircraft-engine components; and owns and leases offshore energy equipment. Its reportable segments are Aviation Leasing and Aerospace Products. The infrastructure business was spun off in August 2022 and is presented as discontinued operations in the prior-year comparison. FTAI also completed a reverse merger in November 2022.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $292.7 million | $91.7 million |
| Income (loss) from continuing operations | $29.4 million | $(179.0) million |
| Net income (loss) | $29.4 million | $(229.7) million |
| Net income (loss) attributable to shareholders | $22.6 million | $(229.0) million |
| Adjusted EBITDA, non-GAAP | $127.7 million | $45.0 million |
| Net cash provided by operating activities | $38.7 million | $1.9 million |
| Cash and cash equivalents at period-end | $41.0 million | $33.6 million at Dec. 31, 2022 |
| Debt, net | $2,101.9 million | $2,175.7 million at Dec. 31, 2022 |
Revenue growth chiefly reflected aircraft and engine sales and higher Aerospace Products revenue. GAAP net income was approximately 10% of revenue. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Revenue comparisons are affected by a strategy and accounting-presentation change: from Q3 2022, aircraft and engine sales are reported as revenue with related book value in cost of sales. Comparable Q1 2022 sales were instead reflected in gains on asset sales. Thus, the reported revenue and cost-of-sales increases do not represent a fully like-for-like change in activity.
Segments and operating changes
- Aviation Leasing: Revenue was $199.0 million and Adjusted EBITDA was $107.6 million, versus $70.7 million and $35.6 million, respectively, in Q1 2022. Growth included $108.7 million of asset sales revenue and higher lease income. The prior-year period included a $122.8 million impairment related to aircraft and engines in Russia and Ukraine.
- Aerospace Products: Revenue rose to $85.1 million from $14.3 million as engine, module, spare-parts and used-material sales ramped up. Adjusted EBITDA was $27.4 million, versus $13.0 million.
- Corporate and Other: Adjusted EBITDA was a loss of $7.3 million, compared with a loss of $3.6 million. The company cited higher offshore operating costs and incentive fees, partly offset by lower interest expense.
Operating expenses fell by $39.3 million, chiefly due to lower credit-loss provisions and other Aviation Leasing costs compared with the prior-year period. Interest expense declined by $4.8 million, with lower average debt following 2022 repayments. The company recorded $1.2 million of impairment charges in Q1 2023.
Cash flow, debt and liquidity
Investing activities used $12.3 million of cash, including $127.5 million of leasing-equipment acquisitions and $153.7 million of proceeds from leasing-equipment sales. Financing activities used $38.4 million, including $220.0 million of debt repayments, $36.7 million of cash dividends and $61.7 million of net proceeds from a Series D preferred-share offering. Cash declined by $12.1 million during the quarter, to $41.0 million; there was no restricted cash at March 31.
Debt comprised $75.0 million drawn on the revolving facility and senior notes with stated rates of 6.50% due 2025, 9.75% due 2027 and 5.50% due 2028. No debt principal was due within one year, although the company disclosed $142.1 million of interest payments due over the next 12 months. It reported compliance with debt covenants and up to $225.0 million of current borrowing availability. Total equity was $74.2 million against $2.1 billion of net debt. The company reported $433.2 million of contracted minimum future operating-lease revenue, which is not equivalent to assured cash collection.
Outlook, risks and unusual items
- Management said it believed liquidity was sufficient, while continuing to preserve liquidity, limit discretionary spending and reprioritize investments. It expects short-term needs to be met through cash, unused borrowing capacity, future financings and operating cash flow. No numerical earnings or revenue guidance was provided.
- FTAI was pursuing potential transactions and related financings, but none were definitive or included in planned liquidity needs.
- Four aircraft and one engine remained in Ukraine, and eight aircraft and seventeen engines remained in Russia at quarter-end. Their insured value was approximately $274 million; the timing and amount of insurance recoveries are uncertain. The 2022 impairment was $122.8 million.
- Customer concentration increased: two Aviation Leasing customers generated 18% and 10% of Q1 2023 revenue; one customer represented 15% of accounts receivable at quarter-end.
- Aircraft-sale guarantees had a recorded fair value of $6.3 million. Maximum potential undiscounted payments were $33.5 million and were not considered reasonably expected. A separate offshore-energy charter dispute had a stated potential loss range of $0 to $3.3 million.
- Key risks include aviation and offshore-market demand, customer defaults, asset values and utilization, refinancing and interest-rate exposure, access to capital, Russia-related asset recovery, regulatory and environmental requirements, and conflicts arising from the external Manager. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether asset-sale revenue and Aerospace Products growth are recurring and how much profit and cash they generate after cost of sales and working-capital needs.
- Cash conversion and dividend coverage: operating cash flow was $38.7 million, while ordinary and preferred cash dividends totaled $36.7 million; management also notes that operating cash flow has been below distributions over the last twelve months.
- Debt refinancing and interest costs, especially the 2025 and 2027 note maturities, variable-rate borrowing exposure and access to the revolving facility.
- Progress and recoveries for aircraft and engines in Russia and Ukraine, including insurance claims and any impact on operations or asset values.
- Customer concentration, lease utilization and future lease renewals, along with the performance and cash requirements of the growing Aerospace Products business.
- Manager fees and incentives, preferred-share distributions, and the sustainability of future ordinary-share dividends.