FTAI Aviation Ltd. / Fortress Transportation and Infrastructure Investors LLC — Q2 2018 Form 10-Q
The filing is by Fortress Transportation and Infrastructure Investors LLC, the registrant named in the report; it covers the quarter and six months ended June 30, 2018. The company owns and leases aviation and offshore-energy equipment and shipping containers, and operates railroad, terminal, port and infrastructure businesses. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $72.0 | $51.2 | $140.8 | $95.9 |
| Consolidated net loss | $(6.4) | $(5.8) | $(15.8) | $(15.0) |
| Net income (loss) attributable to shareholders | $0.8 | $(1.5) | $0.3 | $(5.9) |
| Adjusted Net Income (non-GAAP) | $2.6 | $0.6 | $5.3 | $0.4 |
| Adjusted EBITDA (non-GAAP) | $52.2 | $28.8 | $100.3 | $51.0 |
Quarterly revenue rose about 41%; first-half revenue rose about 47%. Revenue growth was led by aviation leasing, including newly acquired assets and maintenance revenue. Adjusted EBITDA increased substantially, but is a non-GAAP measure. The company recorded no asset impairment charges in the periods shown.
- Margins and costs: Q2 total expenses were $83.9 million, exceeding revenue; first-half expenses were $162.0 million. Depreciation and amortization increased to $32.8 million for Q2 and $62.4 million for the first half. Interest expense rose to $12.9 million and $24.7 million, respectively.
- Cash flow: First-half operating cash flow was $59.2 million, versus $33.3 million in 2017. Investing cash outflow was $325.1 million, principally for leasing equipment and infrastructure property and equipment; financing provided $247.0 million. Cash and cash equivalents were $40.3 million, with restricted cash of $33.5 million, at June 30.
- Debt and equity: Debt, net, was $862.7 million, up from $703.3 million at December 31, 2017; total equity was $1.09 billion. First-half financing included a $100 million senior-note issuance and new revolving borrowings. The company issued 7 million shares in January for net proceeds of $128.5 million. Total assets were $2.21 billion.
- Dividends: The board declared $0.33 per share for Q2, payable August 28, 2018. First-half declared dividends were $0.66 per share, totaling $54.7 million. Management states its long-term goal is a payout ratio of 50–60% of FAD, a non-GAAP measure; it cautions FAD does not include capital expenditures or acquisitions and does not assure dividend coverage.
Material changes and management commentary
- Aviation leasing drove much of the growth: the segment reported 183 aviation assets, 87% utilization by equity value, and higher lease and maintenance revenue. Aviation leasing revenue increased $19.5 million in Q2 year over year.
- Railroad revenue benefited from higher traffic and diverted trains. Jefferson Terminal revenue fell $4.1 million in the first half, primarily due to lower volumes; its expenses rose, including a non-recurring increase associated with transition to a new terminal operator.
- Infrastructure investment continued: property, plant and equipment rose to $599.7 million from $489.9 million, with construction in progress at $178.3 million. Management cited ongoing projects at Repauno, Hannibal and Jefferson Terminal.
- Management said it was evaluating potential acquisitions, but no pipeline transaction was definitive or included in planned liquidity needs. It expected current operations and available capital sources to meet short-term needs; no quantified earnings guidance was provided.
- For Jefferson Terminal, management continued to expect positive Adjusted EBITDA near year-end 2018, while acknowledging delays to anticipated contracts or volumes. Further delays could affect forecasts and goodwill valuation.
Risks, contingencies and unusual items
- Disclosure controls and procedures were concluded to be ineffective as of June 30, 2018, due to a material weakness in internal control over financial reporting previously reported in the 2017 Form 10-K; remediation efforts were ongoing.
- Debt increased and includes covenant requirements. The company reported compliance with debt covenants at June 30. A 100-basis-point change in floating rates was estimated to change annual interest expense by approximately $1.3 million before derivatives.
- Aviation receivables included balances from two customers representing 22% and 10% of total net receivables. Management also reported $1.5 million of first-half bad-debt expense, primarily relating to aviation receivables.
- An offshore-energy lessee failed to meet charter obligations; the stated potential loss range was $0–$3.3 million, and the company was pursuing its contractual rights. Repauno and Long Ridge have environmental remediation and redevelopment dependencies, including obligations of former owners.
- The filing describes broad exposure to customer defaults, asset utilization and resale values, oil-and-gas conditions, environmental and regulatory requirements, construction and development execution, financing access, and conflicts arising from the external manager and affiliates.
- Subsequent to quarter-end, the company increased the Revolving Credit Facility commitment from $75 million to $125 million and extended its maturity from June 2020 to June 2021. The board also declared the Q2 dividend.
Most important facts for investors to verify
- Whether aviation asset additions translate into durable lease revenue and cash generation, including utilization, lease expirations and maintenance claims.
- Whether Jefferson Terminal volumes and contracts recover as anticipated, and whether its operating transition, project costs and environmental matters remain manageable.
- Debt maturities, covenant headroom, floating-rate exposure and the availability of revolving credit after the August amendment.
- Dividend sustainability against operating cash flow and the limitations of management’s FAD calculation, particularly its exclusion of capital spending and acquisitions.
- The status and remediation of the disclosed material weakness in internal controls.
- Customer receivable concentrations, the offshore charter dispute, and remediation obligations or contingent payments relating to Repauno and Long Ridge.