FTAI Aviation Ltd. — 2015 Q2 Form 10-Q Summary
Filing identity: The supplied filing is for Fortress Transportation and Infrastructure Investors LLC, not an entity named FTAI Aviation Ltd. It reports the quarter ended June 30, 2015, and is unaudited. Dollar figures below are in U.S. dollars; financial statement amounts are converted to millions unless noted.
Business context and reporting period
The company owns and leases aviation, offshore energy and shipping-container equipment, and operates the Central Maine and Québec Railway (CMQR) and Jefferson Terminal, a crude-oil and refined-products terminal. Its five reportable segments are Aviation Leasing, Offshore Energy, Shipping Containers, Jefferson Terminal and Railroad.
In May 2015, the company completed its IPO at $17 per share, issuing 20.0 million shares plus 2.2 million shares through the underwriters’ overallotment option. At June 30, public shareholders held 29.3% and the initial shareholders held 70.7%. The company said it intended to use IPO proceeds and other capital for acquisitions, follow-on investments, working capital and general purposes.
Financial results and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue, 2015 | $33.6 million | $67.5 million |
| Total revenue, 2014 | $10.7 million | $18.4 million |
| Net income (loss), consolidated, 2015 | $(5.3) million | $(3.3) million |
| Net income (loss) attributable to shareholders, 2015 | $(0.8) million | $4.6 million |
| Adjusted Net Income, 2015 | $1.6 million | $8.5 million |
| Adjusted EBITDA, 2015 | $23.8 million | $53.0 million |
| Net cash provided by operating activities, 2015 | Not separately reported here | $14.6 million |
Adjusted Net Income and Adjusted EBITDA are non-GAAP measures; the company cautions that they should not replace GAAP results and may not be comparable with similarly named measures at other companies. The six-month shareholder-attributable profit despite a consolidated loss reflects substantial losses attributable to non-controlling interests.
Revenue growth reflected portfolio expansion and the first full comparative-period contribution from Jefferson Terminal and CMQR, both acquired in 2014. Aviation Leasing revenue was $28.1 million for the first half; Offshore Energy $13.8 million; Jefferson Terminal $10.0 million; Railroad $11.8 million; and Shipping Containers $3.8 million.
- Expenses and earnings: First-half total expenses were $73.4 million, up from $22.8 million, including $32.3 million of operating expenses, $21.3 million of depreciation and amortization, and $9.6 million of interest expense. Lower acquisition and transaction costs than in 2014 partly offset higher operating costs, depreciation, management fees and interest.
- Cash flow and investment: First-half investing cash outflow was $89.2 million, primarily reflecting $70.6 million of property, plant and equipment purchases and $26.2 million of leasing equipment acquisitions. Financing cash inflow was $623.8 million, principally from share issuance and shareholder capital contributions. Ending cash was $571.3 million.
- Liquidity: Restricted cash was $17.8 million. The company reported Funds Available for Distribution (FAD), a non-GAAP measure, of $22.1 million for the first half versus $23.0 million in 2014. It states FAD excludes, among other things, acquisition and capital-expenditure needs and changes in working capital.
- Debt and equity: Total debt was $584.3 million at June 30, down from $592.9 million at year-end; $23.5 million was reported due within one year. Total assets were $2.01 billion, total liabilities $668.1 million and total equity $1.34 billion. The balance sheet also included $298.0 million of tendered bonds as an asset and $298.0 million of Series 2010 bonds payable.
- Margins: The filing does not provide a clear consolidated operating-margin measure. Results reflect acquisition-related changes in scale and expense mix.
Changes versus the prior comparable period
- Revenue increased 213% in the quarter and 266% for the first half, mainly from expanded leasing portfolios and the 2014 acquisitions of Jefferson Terminal and CMQR. These comparisons are not wholly like-for-like.
- Shareholder-attributable results improved by $0.5 million in Q2, to a loss of $0.8 million, and by $4.5 million for the first half, to income of $4.6 million. Consolidated results nevertheless worsened: first-half net loss was $3.3 million versus income of $0.4 million in 2014.
- Adjusted Net Income declined by $4.6 million in Q2 and $2.6 million for the first half. Adjusted EBITDA rose by $3.7 million and $15.8 million, respectively. Management attributed the EBITDA increase largely to the expanded asset base, with offsets including higher non-controlling interests and lower contribution from the shipping-container joint venture.
- Operating cash flow increased to $14.6 million from $6.6 million for the first half; investing outflow narrowed to $89.2 million from $103.2 million. Financing inflow rose sharply due to IPO proceeds and capital contributions.
Outlook, commentary, risks and unusual items
- Outlook: No formal earnings or revenue guidance is provided. The company said it was evaluating more than $1.5 billion of potential infrastructure and equipment-leasing transactions, but none was definitive or included in planned liquidity needs.
- Dividend: After quarter-end, the board declared a $0.15-per-share cash dividend for the quarter, payable August 31, 2015 to holders of record August 21. The company described a long-term goal of a 50%–60% FAD payout ratio but warned dividends are discretionary and not assured.
- Operating and market risks: The filing highlights customer defaults, lease renewals and utilization, asset values and obsolescence, oil-and-gas industry volatility, access to capital, competition, leverage and interest rates, international and regulatory exposure, and environmental and catastrophic-event risks. It estimated that an unhedged 100-basis-point rate increase would raise interest expense by approximately $2.3 million over the next 12 months before derivatives.
- Rail and environmental matters: Transport Canada was investigating a possible Railway Safety Act violation concerning March 2015 inspections; management believed the company was compliant and did not expect a material adverse effect. New federal tank-car standards require retrofits and operational controls, with uncertain effects and potentially unrecoverable costs. The filing also discusses the prior Lac-Mégantic derailment on the acquired railway line: no claims had been made or threatened against the company as of June 30, 2015, and it did not anticipate cleanup expenditures.
- Commitments and management structure: The company and its MT6015 joint-venture partner each had an obligation to fund an additional $11.9 million of equity. The company is externally managed by a Fortress affiliate; the post-IPO agreement provides a 1.5% annual management fee based on specified equity values, incentive-allocation provisions, expense reimbursement and a potential termination fee.
- Controls and contingencies: Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It reported ordinary-course legal matters not expected to materially affect results and no goodwill impairment during the first half.
Most important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing names Fortress Transportation and Infrastructure Investors LLC.
- Reconcile GAAP shareholder-attributable earnings with consolidated losses and the substantial non-controlling-interest allocation; review the company’s definitions and reconciliations of Adjusted Net Income, Adjusted EBITDA and FAD.
- Assess how much of revenue growth and cash generation is attributable to the 2014 acquisitions, and whether Jefferson Terminal can improve its reported segment losses.
- Review debt maturities, interest-rate exposure, restrictions on subsidiary distributions, and the use and deployment of IPO proceeds.
- Evaluate the assumptions underlying the $1.5 billion acquisition pipeline and the sustainability and coverage of the declared dividend.
- Monitor rail regulatory and retrofit costs, customer and sector concentration, offshore-energy exposure, and the company’s environmental and legal contingencies.