UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____ to ____
Commission file number 001-37386
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
(Registrant’s telephone number, including area code) (332 ) 239-7600
(Former name, former address and former fiscal year, if changed since last report) N/A
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class: | Trading Symbol: | Name of exchange on which registered: | ||||||||||||
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| þ | Accelerated filer | ¨ | |||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
There were 102,211,402 ordinary shares outstanding representing limited liability company interests at August 7, 2024.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS SUMMARY
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact but instead are based on our present beliefs and assumptions and on information currently available to us. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us, that the future plans, estimates or expectations contemplated by us will be achieved.
Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. The following is a summary of the principal risk factors that make investing in our securities risky and may materially adversely affect our business, financial condition, results of operations and cash flows. This summary should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth in Part II, Item 1A. “Risk Factors” of this report. We believe that these factors include, but are not limited to:
•changes in economic conditions generally and specifically in our industry sectors, and other risks relating to the global economy, including, but not limited to, the Russia-Ukraine conflict, and any related responses or actions by businesses and governments;
•reductions in cash flows received from our assets, as well as contractual limitations on the use of our aviation assets to secure debt for borrowed money;
•our ability to take advantage of acquisition opportunities at favorable prices;
•a lack of liquidity surrounding our assets, which could impede our ability to vary our portfolio in an appropriate manner;
•the relative spreads between the yield on the assets we acquire and the cost of financing;
•adverse changes in the financing markets we access affecting our ability to finance our acquisitions;
•customer defaults on their obligations;
•our ability to renew existing contracts and enter into new contracts with existing or potential customers;
•the availability and cost of capital for future acquisitions;
•concentration of a particular type of asset or in a particular sector;
•competition within the aviation industry;
•the competitive market for acquisition opportunities;
•risks related to operating through joint ventures, partnerships, consortium arrangements or other collaborations with third parties;
•our ability to successfully integrate acquired businesses;
•obsolescence of our assets or our ability to sell, re-lease or re-charter our assets;
•exposure to uninsurable losses and force majeure events;
•the legislative/regulatory environment and exposure to increased economic regulation;
•exposure to the oil and gas industry’s volatile oil and gas prices;
•difficulties in obtaining effective legal redress in jurisdictions in which we operate with less developed legal systems;
•our ability to maintain our exemption from registration under the Investment Company Act of 1940 and the fact that maintaining such exemption imposes limits on our operations;
•our ability to successfully utilize leverage in connection with our investments;
•foreign currency risk and risk management activities;
•effectiveness of our internal control over financial reporting;
•exposure to environmental risks, including natural disasters, increasing environmental legislation and the broader impacts of climate change;
•changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;
•actions taken by national, state, or provincial governments, including nationalization, or the imposition of new taxes, could materially impact the financial performance or value of our assets;
•our ability to attract and retain highly skilled management and other personnel;
•risks relating to the Company entering into an Internalization Agreement (the “Internalization Agreement”) with FIG LLC (the “Former Manager”) and the impact on the Company’s management functions and business operations;
2
•volatility in the market price of our shares;
•the inability to pay dividends to our shareholders in the future;
•impacts from our past and future acquisitions, and our ability to successfully integrate acquired assets and assumed liabilities; and
•other risks described in the “Risk Factors” section of this report.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
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FTAI AVIATION LTD.
INDEX TO FORM 10-Q
| PART I - FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
4
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FTAI AVIATION LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
| (Unaudited) | |||||||||||||||||
| Notes | June 30, 2024 | December 31, 2023 | |||||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | 2 | $ | $ | ||||||||||||||
| Restricted cash | |||||||||||||||||
| Accounts receivable, net | 2 | ||||||||||||||||
| Leasing equipment, net | 4 | ||||||||||||||||
| Property, plant, and equipment, net | 2 | ||||||||||||||||
| Investments | 5 | ||||||||||||||||
| Intangible assets, net | 6 | ||||||||||||||||
| Goodwill | 3 | ||||||||||||||||
| Inventory, net | 2 | ||||||||||||||||
| Other assets | 2 | ||||||||||||||||
| Total assets | $ | $ | |||||||||||||||
| Liabilities | |||||||||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||||||||
| Debt, net | 7 | ||||||||||||||||
| Maintenance deposits | 2 | ||||||||||||||||
| Security deposits | 2 | ||||||||||||||||
| Other liabilities | |||||||||||||||||
| Total liabilities | $ | $ | |||||||||||||||
| Commitments and contingencies | 14 | ||||||||||||||||
| Equity | |||||||||||||||||
Ordinary shares ($ | $ | $ | |||||||||||||||
Preferred shares ($ | |||||||||||||||||
| Additional paid in capital | |||||||||||||||||
| Accumulated deficit | ( | ( | |||||||||||||||
| Shareholders' equity | |||||||||||||||||
| Non-controlling interest in equity of consolidated subsidiaries | |||||||||||||||||
| Total equity | |||||||||||||||||
| Total liabilities and equity | $ | $ | |||||||||||||||
See accompanying notes to consolidated financial statements.
5
FTAI AVIATION LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except share and per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| Notes | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Lease income | $ | $ | $ | $ | |||||||||||||||||||||||||
| Maintenance revenue | |||||||||||||||||||||||||||||
| Asset sales revenue | |||||||||||||||||||||||||||||
| Aerospace products revenue | |||||||||||||||||||||||||||||
| Other revenue | |||||||||||||||||||||||||||||
| Total revenues | 12 | ||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||
| Operating expenses | 2 | ||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||
| Acquisition and transaction expenses | |||||||||||||||||||||||||||||
| Management fees and incentive allocation to affiliate | 11 | ||||||||||||||||||||||||||||
| Internalization fee to affiliate | 15 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 4, 6 | ||||||||||||||||||||||||||||
| Asset impairment | |||||||||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||||||||
| Other (expense) income | |||||||||||||||||||||||||||||
| Equity in losses of unconsolidated entities | 5 | ( | ( | ( | ( | ||||||||||||||||||||||||
| Loss on extinguishment of debt | ( | ( | |||||||||||||||||||||||||||
| Other (expense) income | ( | ||||||||||||||||||||||||||||
| Total other (expense) income | ( | ( | ( | ||||||||||||||||||||||||||
| (Loss) income before income taxes | ( | ( | |||||||||||||||||||||||||||
| (Benefit from) provision for income taxes | 10 | ( | ( | ||||||||||||||||||||||||||
| Net (loss) income | ( | ( | |||||||||||||||||||||||||||
| Less: Dividends on preferred shares | |||||||||||||||||||||||||||||
| Net (loss) income attributable to shareholders | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
| (Loss) Earnings per share: | 13 | ||||||||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
6
FTAI AVIATION LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
(Dollars in thousands)
| Three and Six Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Ordinary Shares | Preferred Shares | Additional Paid In Capital | Accumulated Deficit | Non-Controlling Interest in Equity of Consolidated Subsidiaries | Total Equity | ||||||||||||||||||||||||||||||
| Equity - December 31, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||||||||||||||
| Dividends declared - ordinary shares | ( | ( | |||||||||||||||||||||||||||||||||
| Dividends declared - preferred shares | ( | ( | |||||||||||||||||||||||||||||||||
| Equity-based compensation | |||||||||||||||||||||||||||||||||||
| Equity - March 31, 2024 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Total comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Purchase of non-controlling interest | ( | ( | |||||||||||||||||||||||||||||||||
| Dividends declared - ordinary shares | ( | ( | |||||||||||||||||||||||||||||||||
| Dividends declared - preferred shares | ( | ( | |||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | |||||||||||||||||||||||||||||||||||
| Equity-based compensation | |||||||||||||||||||||||||||||||||||
| Equity - June 30, 2024 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
7
FTAI AVIATION LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
(Dollars in thousands)
| Three and Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Ordinary Shares | Preferred Shares | Additional Paid In Capital | Accumulated Deficit | Non-Controlling Interest in Equity of Consolidated Subsidiaries | Total Equity | ||||||||||||||||||||||||||||||
| Equity - December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | |||||||||||||||||||||||||||||||||||
| Dividends declared - ordinary shares | ( | ( | |||||||||||||||||||||||||||||||||
| Issuance of preferred shares | |||||||||||||||||||||||||||||||||||
| Dividends declared - preferred shares | ( | ( | |||||||||||||||||||||||||||||||||
| Equity-based compensation | |||||||||||||||||||||||||||||||||||
| Equity - March 31, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||||||||||||||
| Contributions from non-controlling interest | |||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | |||||||||||||||||||||||||||||||||||
| Dividends declared - ordinary shares | ( | ( | |||||||||||||||||||||||||||||||||
| Dividends declared - preferred shares | ( | ( | |||||||||||||||||||||||||||||||||
| Equity-based compensation | |||||||||||||||||||||||||||||||||||
| Equity - June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
8
FTAI AVIATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Equity in losses of unconsolidated entities | |||||||||||
| Gain on sale of net assets | ( | ( | |||||||||
| Security deposits and maintenance claims included in earnings | ( | ( | |||||||||
| Loss on extinguishment of debt | |||||||||||
| Equity-based compensation | |||||||||||
| Non-cash termination fee to affiliate | |||||||||||
| Depreciation and amortization | |||||||||||
| Asset impairment | |||||||||||
| Change in deferred income taxes | ( | ||||||||||
| Change in fair value of guarantees | ( | ( | |||||||||
| Amortization of lease intangibles and incentives | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Provision for credit losses | |||||||||||
| Other | ( | ( | |||||||||
| Change in: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory | ( | ||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Management fees payable to affiliate | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Investment in unconsolidated entities | ( | ||||||||||
| Principal collections on finance leases | |||||||||||
| Principal collections on notes receivable | |||||||||||
| Acquisition of leasing equipment | ( | ( | |||||||||
| Investments in notes and financing receivable | ( | ||||||||||
| Acquisition of property, plant and equipment | ( | ( | |||||||||
| Acquisition of lease intangibles | ( | ||||||||||
| Investment in promissory notes | ( | ||||||||||
| Purchase deposits for acquisitions | ( | ( | |||||||||
| Proceeds from sale of net assets | |||||||||||
| Proceeds for deposit on sale of aircraft and engine | |||||||||||
| Receipt of deposits for sale of aircraft and engine | |||||||||||
| Return of purchase deposits | |||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
See accompanying notes to consolidated financial statements.
9
FTAI AVIATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from debt | $ | $ | |||||||||
| Repayment of debt | ( | ( | |||||||||
| Payment of deferred financing costs | ( | ( | |||||||||
| Receipt of security deposits | |||||||||||
| Return of security deposits | ( | ||||||||||
| Receipt of maintenance deposits | |||||||||||
| Release of maintenance deposits | ( | ||||||||||
| Capital contributions from non-controlling interests | ( | ||||||||||
| Proceeds from issuance of preferred shares, net of underwriter's discount and issuance costs | |||||||||||
| Cash dividends - ordinary shares | ( | ( | |||||||||
| Cash dividends - preferred shares | ( | ( | |||||||||
| Net cash provided by financing activities | $ | $ | |||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | ( | ||||||||||
| Cash and cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
| Transfers from leasing equipment to inventory | $ | $ | ( | ||||||||
| Transfers from inventory to leasing equipment | ( | ||||||||||
| Sale on and issuance of promissory notes | |||||||||||
| Acquisition of leasing equipment in accrued expenses | ( | ( | |||||||||
| Purchase deposits reclassified to leasing equipment | ( | ( | |||||||||
| Settled security deposits | ( | ( | |||||||||
| Settled maintenance deposits | ( | ( | |||||||||
See accompanying notes to consolidated financial statements.
10
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
1. ORGANIZATION
FTAI Aviation Ltd. (“we”, “us”, “our” or the “Company” and formerly “Fortress Transportation and Infrastructure Investors LLC”) is a Cayman Islands exempted company which through its subsidiaries owns, leases, and sells aviation equipment and also develops and manufactures, through a joint venture, and repairs and sells, through our maintenance facility and exclusivity arrangements, aftermarket components for aircraft engines. Additionally, we own and lease offshore energy equipment. We have two reportable segments, (i) Aviation Leasing and (ii) Aerospace Products (see Note 12).
Prior to May 28, 2024, FTAI Aviation Ltd. operated under a management agreement (the “Management Agreement”) with FIG LLC (the “Former Manager”), and Fortress Worldwide Transportation and Infrastructure Master GP LLC (the “Master GP”), each an affiliate of Fortress Investment Group LLC (“Fortress”). For their services, the Former Manager was entitled to management fees and the Master GP was entitled to certain incentive allocations, both defined in, and in accordance with the terms of, the Management Agreement. On May 28, 2024, the Company entered into an Internalization Agreement with the Former Manager and the Master GP (the “Internalization Agreement”), pursuant to which the Management Agreement was terminated effective May 28, 2024 (the “Effective Date”), except that certain indemnification and other obligations survive, and the Company internalized its management functions (such transactions, the “Internalization”). As a result of the Internalization, the Company ceased to be externally managed and operates as an internally managed company. In connection with the termination of the Management Agreement, the Company (i) agreed to pay the Former Manager (for itself and on behalf of the Master GP, as applicable) $150.0 million (the “Cash Consideration”), the compensation accrued and payable, but not yet paid, under the Management Agreement, and the expenses that were reimbursable, but not yet reimbursed, under the Management Agreement; (ii) issued to the Former Manager (for itself and on behalf of the Master GP, as applicable) 1,866,949 ordinary shares of the Company (the “Share Consideration”); and (iii) purchased from Master GP all of its partnership interests in FTAI Aviation Holdco Ltd., a subsidiary of the Company, in exchange for $30 . In addition, the Former Manager will repay to the Company certain annual bonus payments due to certain employees of the Former Manager or its affiliates who provide services to the Company with respect to the 2024 calendar year on a pro rata basis. The Company financed the cash payments through one or more debt financings, along with cash on hand.
On May 28, 2024, the Company also entered into a Transition Services Agreement (the “Transition Services Agreement”) with the Former Manager. Under the Transition Services Agreement, the Former Manager is required to continue to provide the Company and its affiliates with all of the services provided by the Former Manager to the Company and its affiliates immediately prior to May 28, 2024 (the “Services”) for a transition period during which the Company will procure replacements for the Services. The Services will be provided to the Company for a fee equal to the Former Manager’s cost of providing the Services, plus a mark-up of ten percent (10 %). Unless the Transition Services Agreement is terminated earlier or the Company elects to terminate a Service by providing written notice to the Former Manager, the Former Manager is required to provide certain Services to the Company until October 31, 2024. In addition, the Former Manager is required to continue to provide the services that are reasonably required by the Company to prepare its quarterly and annual financial statements until May 31, 2025. The Transition Services Agreement may be terminated earlier (x) by mutual agreement of the parties, (y) by either the Former Manager or the Company in the event of a material breach by the non-terminating party that is not cured within thirty (30 ) days following written notification thereof, or (z) by the Former Manager if the Company fails to pay any undisputed sum overdue and payable for a period of at least thirty (30 ) days.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting—The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of us and our subsidiaries. These financial statements and related notes should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Principles of Consolidation—We consolidate all entities in which we have a controlling financial interest and control over significant operating decisions. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The ownership interest of other investors in consolidated subsidiaries is recorded as non-controlling interest.
We use the equity method of accounting for investments in entities in which we exercise significant influence but which do not meet the requirements for consolidation. Under the equity method, we record our proportionate share of the underlying net income (loss) of these entities.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Restructuring Charges—The termination of the Management Agreement was a material change in the management structure of the business and is accounted for under ASC 420, Exit or Disposal Cost Obligations. The termination fee payment to the
11
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
Reclassifications—Certain amounts from prior periods in the Company’s consolidated financial statements have been reclassified to align with the presentation in the current period.
Risks and Uncertainties—In the normal course of business, we encounter several significant types of economic risk including credit, market, and capital market risks. Credit risk is the risk of the inability or unwillingness of a lessee or customer to make contractually required payments or to fulfill its other contractual obligations. Market risk reflects the risk of a downturn or volatility in the underlying industry segments in which we operate, which could adversely impact the pricing of the services offered by us or a lessee’s or customer’s ability to make payments, increase the risk of unscheduled lease terminations and depress lease rates and the value of our leasing equipment or operating assets. Capital market risk is the risk that we are unable to obtain capital at reasonable rates to fund the growth of our business or to refinance existing debt facilities. We, through our subsidiaries, also conduct operations outside of the United States; such international operations are subject to the same risks as those associated with our United States operations as well as additional risks, including unexpected changes in regulatory requirements, heightened risk of political and economic instability, potentially adverse tax consequences and the burden of complying with foreign laws. We do not have significant exposure to foreign currency risk as all of our leasing arrangements are denominated in U.S. dollars.
Cash and Cash Equivalents—We consider all highly liquid short-term investments with a maturity of 90 days or less when purchased to be cash equivalents.
Inventory, net—We hold aircraft engine modules, spare parts and used material inventory for trading, repairs and to support operations. Inventory is carried at the lower of cost or net realizable value.
Revenues—We disaggregate our revenue by products and services. Revenues are within the scope of ASC 842, Leases, and ASC 606, Revenue from contracts with customers, unless otherwise noted. We have elected to exclude sales and other similar taxes from revenues.
Operating Leases—We lease equipment pursuant to operating leases. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the lease, assuming no renewals. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received.
Generally, under our aircraft lease and engine agreements, the lessee is required to make periodic maintenance payments calculated based on the lessee’s utilization of the leased asset or at the end of the lease. Typically, under our aircraft lease agreements, the lessee is responsible for maintenance, repairs and other operating expenses throughout the term of the lease. These periodic maintenance payments accumulate over the term of the lease to fund major maintenance events, and we are contractually obligated to return maintenance payments to the lessee up to the cost of maintenance events paid by the lessee. In the event the total cost of maintenance events over the term of a lease is less than the cumulative maintenance payments, we are not required to return any unused or excess maintenance payments to the lessee.
Maintenance payments received for which we expect to repay to the lessee are presented as Maintenance deposits. All excess maintenance payments received that we do not expect to repay to the lessee are recorded as Maintenance revenue. Estimates in recognizing revenue include mean time between removal, projected costs for engine maintenance and forecasted utilization of aircraft which are affected by historical usage patterns and overall industry, market and economic conditions. Significant changes to these estimates could have a material effect on the amount of revenue recognized in the period.
For purchase and lease back transactions, we account for the transaction as a single arrangement. We allocate the consideration paid based on the relative fair value of the aircraft and lease and other related assets/liabilities acquired. The fair value of the lease may include a lease premium or discount, which is recorded as a favorable or unfavorable lease intangible.
Finance Leases—From time to time we enter into finance lease arrangements that include a lessee obligation to purchase the leased equipment at the end of the lease term, a bargain purchase option, or provides for minimum lease payments with a present value that equals or exceeds substantially all of the fair value of the leased equipment at the date of lease inception. Net investment in finance leases represents the minimum lease payments due from lessee, net of unearned income. The lease payments are segregated into principal and interest components similar to a loan. Unearned income is recognized on an effective interest method over the lease term and is recorded as lease income. The principal component of the lease payment is reflected as a reduction to the net investment in finance leases. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received.
Asset sales revenue—Asset sales revenue primarily consists of the transaction price related to the sale of aircraft and aircraft engines from our Aviation Leasing segment. From time to time, the Company may also assign the related lease agreements to the customer as part of the sale of these assets. We routinely sell leasing equipment to customers and such transactions are considered recurring and ordinary in nature to our business. As such, these sales are accounted for within the scope of ASC 606. Revenue is recognized when a performance obligation is satisfied by transferring control over an asset to a customer. Revenue is recorded with corresponding costs of sales, presented on a gross basis.
12
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
Aerospace products revenue—Aerospace products revenue primarily consists of the transaction price related to the sale of repaired CFM56-7B, CFM56-5B and V2500 engines, engine modules, spare parts and used material inventory, and are accounted for within the scope of ASC 606. Revenue is recognized when a performance obligation is satisfied by transferring control over the related asset to a customer. Revenue is recorded with corresponding costs of sales, presented on a gross basis. Aerospace products revenue also consists of engine management service contracts, where the Company has a stand-ready obligation to provide replacement CFM56-7B and CFM56-5B engines to customers as they become unserviceable during the contract term. The Company recognizes revenue over time using a straight-line attribution method and the costs related to fulfilling the performance obligation are expensed as incurred.
Concentration of Credit Risk—We are subject to concentrations of credit risk with respect to amounts due from customers. We attempt to limit our credit risk by performing ongoing credit evaluations. We earned 19 % and 13 % of our revenue from one customer in the Aerospace Products segment during the three and six months ended June 30, 2024. We earned 10 % and 11 % of our revenue from one customer in the Aviation Leasing segment during the three and six months ended June 30, 2023, respectively.
As of June 30, 2024, there was one customer in the Aerospace Products segment that represented 11 % of total accounts receivable, net. As of December 31, 2023, no single customer accounted for greater than 10% of total accounts receivable, net.
We maintain cash and restricted cash balances, which generally exceed federally insured limits, and subject us to credit risk, in high credit quality financial institutions. We monitor the financial condition of these institutions and have not experienced any losses associated with these accounts.
Comprehensive Income—Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. Our comprehensive income represents net income, as presented in the Consolidated Statements of Operations.
Other Assets—Other assets is primarily comprised of lease incentives of $57.7 million and $43.5 million, purchase deposits of $46.0 million and $23.9 million, notes receivable of $125.2 million and $102.3 million, operating lease right-of-use assets, net of $3.3 million and $3.4 million, finance leases, net of $1.4 million and $3.0 million, maintenance right assets of $14.0 million and $16.3 million and prepaid expenses of $77.4 million and $7.8 million as of June 30, 2024 and December 31, 2023, respectively.
Dividends—Dividends are recorded if and when declared by the Board of Directors. For the three and six months ended June 30, 2024 and 2023, the Board of Directors declared cash dividends of $0.30 0.60
Additionally, in the quarter ended June 30, 2024, the Board of Directors declared cash dividends on the Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares and Series D Preferred Shares of $0.52 , $0.50 , $0.52 and $0.59 per share, respectively.
Recent Accounting Pronouncements—In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. This ASU modifies the disclosure and presentation requirements of reportable segments. The new guidance requires the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit and loss. In addition, the new guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. This standard is effective retrospectively for all public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently assessing the impact this guidance will have on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. This ASU enhances the transparency and decision usefulness of income tax disclosures by expanding the disclosures of an entity’s income tax rate reconciliation and disaggregation of income taxes paid and income tax expense. Under the new guidance, public business entities must annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (loss) by the applicable statutory income tax rate. This standard is effective prospectively for all public entities for annual periods beginning after December 15, 2024, with early adoption and retrospective application permitted. We are currently assessing the impact this guidance will have on our consolidated financial statements and related disclosures.
13
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
In March 2024, the FASB issued ASU 2024-02, Codification Improvements - Amendments to Remove References to the Concept Statements. This ASU amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and we are currently assessing the impact this guidance will have on our consolidated financial statements and related disclosures.
3. ACQUISITION OF QUICKTURN
On December 1, 2023, we completed the acquisition of the remaining equity interest of Quick Turn Engine Center LLC (“QuickTurn”) from Unical Aviation Inc. (“Unical”) for total cash consideration of $30.3 million to obtain full ownership.
We acquired QuickTurn to better position the Company to have tighter integration over the development and delivery of aerospace products. QuickTurn is a hospital maintenance and testing facility dedicated to the CFM56 engine located in Miami, Florida that operates within our Aerospace Products segment. The results of operations at QuickTurn have been included in the Consolidated Statements of Operations beginning on the acquisition date.
In accordance with ASC 805, Business Combinations. The following fair values were assigned to assets acquired and liabilities assumed based on management’s estimates and assumptions and are preliminary. The significant assumptions used to estimate the fair value of the property, plant, and equipment included replacement cost estimates and market data for similar assets where available. The significant assumptions used to estimate the value of the customer relationship intangible assets included discount rate and future revenues and operating expenses. The final valuation and related allocation of the purchase price is subject to change as additional information is received and will be completed no later than 12 months after the closing date. The final acquisition accounting adjustments may be materially different and may include (i) changes in fair values of Property, plant and equipment and associated salvage values; (ii) changes in fair values of Inventory; (iii) changes in allocations to Intangible assets, as well as goodwill; and, (iv) other changes to assets and liabilities, including working capital accounts.
The following table summarizes the preliminary allocation of the Net assets acquired as presented in our Consolidated Balance Sheets:
| December 1, 2023 | |||||
| Fair value of assets acquired: | |||||
| Cash and cash equivalents | $ | ||||
| Restricted cash | |||||
| Accounts receivable, net | |||||
| Property, plant, and equipment, net | |||||
| Intangible assets | |||||
| Inventory, net | |||||
| Other assets | |||||
| Total assets | |||||
| Fair value of liabilities assumed: | |||||
| Accounts payable and accrued liabilities | |||||
| Other liabilities | |||||
| Total liabilities | |||||
Goodwill (1) | |||||
| Net assets acquired | $ | ||||
________________________________________________________
14
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
The following table presents the identifiable intangible assets and their estimated useful lives:
| Estimated useful life in years | Estimated Fair value | ||||||||||
| Above market leases | $ | ||||||||||
| Customer relationships | $ | ||||||||||
| Total | $ | ||||||||||
The following table presents the property, plant and equipment and their estimated useful lives:
| Estimated useful life in years | Estimated Fair value | ||||||||||
| Land | N/A | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Other | |||||||||||
| Total | $ | ||||||||||
The financial information in the table below summarizes the combined results of operations of FTAI and QuickTurn on a pro forma basis. These pro forma results were based on estimates and assumptions which we believe are reasonable. The pro forma adjustments are primarily comprised of the following:
•The allocation of the purchase price and related adjustments, including adjustments to depreciation and amortization expense related to the fair value of property, plant and equipment and intangible assets acquired;
•Associated tax-related impacts of adjustments.
The following pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2023.
| Three Months Ended | Six Months Ended | |||||||
| June 30, 2023 | June 30, 2023 | |||||||
| Total revenue | $ | $ | ||||||
| Net income attributable to shareholders | $ | $ | ||||||
4. LEASING EQUIPMENT, NET
Leasing equipment, net is summarized as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Leasing equipment | $ | $ | |||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Leasing equipment, net | $ | $ | |||||||||
We identified certain assets in our leasing equipment portfolio with indicators of impairment. As a result, we adjusted the carrying value of these assets to fair value and recognized transactional impairment charges of $0.0 million and $1.0 million, net of redelivery compensation, for the three and six months ended June 30, 2024, respectively. In comparison, for the three and six months ended June 30, 2023, respectively, the Company recognized transactional impairment charges of $0.0 million and $1.2 million, net of redelivery compensation.
Depreciation expense for leasing equipment is summarized as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Depreciation expense for leasing equipment | $ | $ | |||||||||||||||||||||
15
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
5. INVESTMENTS
The following table presents the ownership interests and carrying values of our investments:
| Carrying Value | |||||||||||||||||||||||
| Investment | Ownership Percentage | June 30, 2024 | December 31, 2023 | ||||||||||||||||||||
| Advanced Engine Repair JV | Equity method | $ | $ | ||||||||||||||||||||
| Falcon MSN 177 LLC | Equity method | ||||||||||||||||||||||
| Quick Turn Engine Center LLC | Equity method | ||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
* 45
We did not recognize any other-than-temporary impairments for the three and six months ended June 30, 2024 and 2023.
The following table presents our proportionate share of equity in losses:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Advanced Engine Repair JV | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Falcon MSN 177 LLC | ( | ( | ( | ( | |||||||||||||||||||
| Quick Turn Engine Center LLC | ( | ( | |||||||||||||||||||||
| Total | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Equity Method Investments
Advanced Engine Repair JV
In December 2016, we invested $15 million for a 25 % interest in an advanced engine repair joint venture. This joint venture is focused on developing new cost savings programs for engine repairs. We exercise significant influence over this investment and account for this investment as an equity method investment.
In August 2019, we expanded the scope of our joint venture and invested an additional $13.5 million and maintained a 25 % interest.
Falcon MSN 177 LLC
In November 2021, we invested $1.6 million for a 50 % interest in Falcon MSN 177 LLC, an entity that consists of one Dassault Falcon 2000 aircraft. Falcon MSN 177 LLC leases the aircraft to charter operators on aircraft, crew maintenance, and insurance contracts. We account for our investment in Falcon as an equity method investment as we have significant influence through our interest.
On May 3, 2024, we purchased the remaining interest from S7 Aerospace for total cash consideration of $0.8 million and obtained full ownership of the aircraft with a 100 % equity interest. On the acquisition date, the Company accounted for the Falcon investment on a consolidated basis and derecognized it as an equity method investment.
Quick Turn Engine Center LLC
On January 4, 2023, we invested $19.5 million for a 50 % interest (45 % pro rata distribution of income until return of the JV partner’s initial investment) in Quick Turn Engine Center LLC or “QuickTurn” (previously iAero Thrust LLC), a hospital maintenance and testing facility dedicated to the CFM56 engine. We account for our investment in QuickTurn as an equity method investment as we have significant influence through our interest.
On December 1, 2023, we purchased the remaining interest in QuickTurn from the joint venture partner for total cash consideration of $30.3 million to obtain full ownership with a 100 % equity interest. On the acquisition date, the Company accounted for QuickTurn on a consolidated basis and derecognized it as an equity method investment. See Note 3 for additional information.
16
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
6. INTANGIBLE ASSETS AND LIABILITIES, NET
Intangible assets and liabilities, net are summarized as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Intangible assets | |||||||||||
| Acquired favorable lease intangibles | $ | $ | |||||||||
| Less: Accumulated amortization | ( | ( | |||||||||
| Acquired favorable lease intangibles, net | |||||||||||
| Acquired customer relationships | |||||||||||
| Less: Accumulated amortization | ( | ( | |||||||||
| Acquired customer relationships, net | |||||||||||
| Total intangible assets, net | $ | $ | |||||||||
| Intangible liabilities | |||||||||||
| Acquired unfavorable lease intangibles | $ | $ | |||||||||
| Less: Accumulated amortization | ( | ( | |||||||||
| Acquired unfavorable lease intangibles, net | $ | $ | |||||||||
Intangible liabilities relate to unfavorable lease intangibles and are included as a component of Other liabilities.
Amortization of intangible assets and liabilities is recorded as follows:
| Classification in Consolidated Statements of Operations | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||
| Lease intangibles | Lease income | $ | $ | $ | $ | ||||||||||||||||||||||||
| Customer relationships | Depreciation and amortization | ||||||||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||||||||
As of June 30, 2024, estimated net annual amortization of intangibles is as follows:
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
17
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
7. DEBT, NET
Our debt, net is summarized as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Outstanding Borrowings | Stated Interest Rate | Maturity Date | Outstanding Borrowings | ||||||||||||||||||||
| Loans payable | |||||||||||||||||||||||
Revolving Credit Facility (1) | $ | (i) Base Rate + (ii) Adjusted Term SOFR Rate + | 5/22/27 | $ | |||||||||||||||||||
| Total loans payable | |||||||||||||||||||||||
| Bonds payable | |||||||||||||||||||||||
Senior Notes due 2025 (2) | 10/1/25 | ||||||||||||||||||||||
| Senior Notes due 2027 | 8/1/27 | ||||||||||||||||||||||
Senior Notes due 2028 (3) | 5/1/28 | ||||||||||||||||||||||
Senior Notes due 2030 (4) | 12/1/30 | ||||||||||||||||||||||
| Senior Notes due 2031 | 5/1/31 | ||||||||||||||||||||||
| Senior Notes due 2032 | 6/15/32 | ||||||||||||||||||||||
| Total bonds payable | |||||||||||||||||||||||
| Debt | |||||||||||||||||||||||
| Less: Debt issuance costs | ( | ( | |||||||||||||||||||||
| Total debt, net | $ | $ | |||||||||||||||||||||
| Total debt due within one year | $ | $ | |||||||||||||||||||||
________________________________________________________
(1) Requires a quarterly commitment fee at a rate of 0.50 % on the average daily unused portion, as well as customary letter of credit fees and agency fees.
(2) Includes an unamortized discount of $866 at December 31, 2023 and an unamortized premium of $2,908 at December 31, 2023.
(3) Includes an unamortized premium of $1,567 and $1,746 at June 30, 2024 and December 31, 2023, respectively.
(4) Includes unamortized discount of $3,116 and $3,296 at June 30, 2024 and December 31, 2023, respectively.
Revolving Credit Facility—On May 23, 2024, the Company amended and restated its Revolving Credit Facility by executing a Third Amended and Restated Credit Agreement (the “Amendment”) to the Second Amended and Restated Credit Agreement, dated as of September 20, 2022. The Amendment provides for revolving loans to be made available to the Company in an aggregate principal amount of up to $400.0 million, of which up to $25.0 million may be utilized for the issuance of letters of credit.
Senior Notes due 2031—On April 11, 2024, we issued $700.0 million aggregate principal amount of senior unsecured notes due 2031 (the “Senior Notes due 2031”). The Senior Notes due 2031 bear interest at a rate of 7.00 % per annum, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2024. Using a portion of the net proceeds, the Company completed a cash tender offer for $324.6 million aggregate principal amount of 2025 Notes validly tendered on April 11, 2024. Holders whose notes were accepted for purchase received equal consideration per $1,000 principal amount of 2025 Notes, plus accrued and unpaid interest to, but not including, April 11, 2024. The Company used the remaining net proceeds to redeem the remaining $325.4 million aggregate principal amount of Senior Notes due 2025, plus accrued and unpaid interest, and recognized a loss on extinguishment of debt of $2.7 million. The remaining net proceeds were used for general corporate purposes, including the funding of acquisitions and investments.
18
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
Senior Notes due 2032—On June 17, 2024, we issued $800.0 million aggregate principal amount of senior unsecured notes due 2032 (the “Senior Notes due 2032”). These notes bear interest at a rate of 7.00 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2024. The Company utilized the net proceeds from the issuance for several purposes: (i) to fully repay outstanding amounts under our Revolving Credit Facility provided under the Third Amended and Restated Credit Agreement, dated as of May 23, 2024, without reduction in commitments, (ii) to fund the cash termination fee for the previously announced management Internalization described in Note 11, (iii) to complete a cash tender offer for up to $300.0 million in aggregate principal amount of 2027 Notes validly tendered on June 18, 2024, plus accrued and unpaid interest, and recognized a loss on extinguishment of debt of $11.2 million. Holders whose notes were accepted for purchase received $30.00 per $1,000 principal amount of 2027 Notes, plus accrued and unpaid interest to, but not including, June 21, 2024, (iv) to cover fees and expenses related to the aforementioned transactions, and (v) for general corporate purposes.
We were in compliance with all debt covenants as of June 30, 2024.
8. FAIR VALUE MEASUREMENTS
Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:
•Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
•Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.
The valuation techniques that may be used to measure fair value are as follows:
•Market approach—Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
•Income approach—Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts.
•Cost approach—Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Our cash and cash equivalents and restricted cash consist largely of demand deposit accounts with maturities of 90 days or less when purchased that are considered to be highly liquid. These instruments are valued using inputs observable in active markets for identical instruments and are therefore classified as Level 1 within the fair value hierarchy.
The fair values of our bonds payable are presented in the table below and classified as Level 2 within the fair value hierarchy:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Senior Notes due 2025 | $ | $ | |||||||||
| Senior Notes due 2027 | |||||||||||
| Senior Notes due 2028 | |||||||||||
| Senior Notes due 2030 | |||||||||||
| Senior Notes due 2031 | |||||||||||
| Senior Notes due 2032 | |||||||||||
The Company has contingent obligations under ASC 460, Guarantees, in connection with certain sales of aircraft on lease, which are measured at fair value. The guarantees are valued at $7.8 million and $6.8 million as of June 30, 2024 and December 31, 2023, respectively, and are reflected as a component of Other liabilities. The fair values of the guarantees are determined based on the estimated condition of the engines at the end of each lease term and the estimated cost of replacement and applicable discount rates and are classified as Level 3. During the three and six months ended June 30, 2024, the Company recorded a $0.8 million and $1.0 million increase related to the change in fair value, which is recorded as Asset sales revenue. During the six months ended June 30, 2023, the Company recorded a $4.9 million increase in guarantees related to the sale of seven aircrafts and a $1.9 million decrease related to the change in fair value, which is recorded as Asset sales revenue. During the three and six months ended June 30, 2024 and 2023, there were no significant transfers into or out of Level 3.
19
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
We measure the fair value of certain assets on a non-recurring basis when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include intangible assets, property, plant and equipment and leasing equipment. We record such assets at fair value when it is determined the carrying value may not be recoverable. Fair value measurements for assets subject to impairment tests are based on an income approach which uses Level 3 inputs, which include our assumptions as to future cash flows from operation of the leasing and eventual sale of assets.
9. EQUITY-BASED COMPENSATION
We have a Nonqualified Stock Option and Incentive Award Plan (“Incentive Plan”) which provides for the ability to award equity compensation awards in the form of stock options to eligible employees, consultants, directors, and other individuals who provide services to us, each as determined by the Compensation Committee of the Board of Directors.
As of June 30, 2024, the Incentive Plan provides for the issuance of up to 29.8 million shares. We account for equity-based compensation expense in accordance with ASC 718, Compensation-Stock Compensation and is reported within operating expenses and general and administrative.
The Consolidated Statements of Operations includes the following expense related to our stock-based compensation arrangements:
| Three Months Ended June 30, | Six Months Ended June 30, | Remaining Expense To Be Recognized, If All Vesting Conditions Are Met | Weighted Average Remaining Contractual Term (in years) | |||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| Stock Options | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Restricted Shares | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Options
During the six months ended June 30, 2024, the Former Manager transferred 37,343 of its options to certain of the Former Manager’s employees.
Additionally, the Company granted options to select employees of FTAI Aviation LLC (a wholly owned subsidiary of the Company) related to 60,000 ordinary shares at an exercise price of $79.13 , which had a grant date fair value of $2.1 million. The assumptions used in valuing the options were: a 4.52 % risk-free rate, a 1.50 % dividend yield, a 43.00 % volatility and a 6.8 year term.
Restricted Shares
During the six months ended June 30, 2024, we issued restricted shares of the Company to select employees of FTAI Aviation LLC that had a grant date fair value of $5.7 million and vest over 4.0 years. These awards are subject to continued employment, and the compensation expense is recognized ratably over the vesting periods, with 50 % of the units vesting on June 30, 2027 and the remaining units vesting on June 30, 2028. The fair value of these awards were calculated based on the closing price of FTAI Aviation Ltd.’s ordinary shares on grant date of May 30, 2024.
Additionally, we issued restricted shares of the Company to select officers of FTAI Aviation LLC that had a grant date fair value of $5.5 million and vest over 3.0 years. These awards are subject to continued employment, and the compensation expense is recognized ratably over the three-year vesting period. The fair value of these awards were calculated based on the closing price of FTAI Aviation Ltd.’s ordinary shares on grant date of May 28, 2024.
20
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
10. INCOME TAXES
The current and deferred components of the income tax provision included in the Consolidated Statements of Operations are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Current: | |||||||||||||||||||||||
| Cayman Islands | $ | $ | $ | $ | |||||||||||||||||||
| Bermuda | |||||||||||||||||||||||
| United States: | — | — | — | — | |||||||||||||||||||
| Federal | ( | ( | |||||||||||||||||||||
| State and local | ( | ( | ( | ||||||||||||||||||||
| Non-U.S. | |||||||||||||||||||||||
| Total current provision | |||||||||||||||||||||||
| Deferred: | |||||||||||||||||||||||
| Cayman Islands | |||||||||||||||||||||||
| Bermuda | ( | ( | |||||||||||||||||||||
| United States: | — | — | — | — | |||||||||||||||||||
| Federal | |||||||||||||||||||||||
| State and local | |||||||||||||||||||||||
| Non-U.S. | ( | ( | |||||||||||||||||||||
| Total deferred provision | ( | ( | |||||||||||||||||||||
| Total (benefit from) provision for income taxes | $ | ( | $ | $ | ( | $ | |||||||||||||||||
The Company is an exempted entity domiciled in the Cayman Islands where income taxes are not imposed. The Company is considered a Passive Foreign Investment Company for U.S. income tax purposes and certain income taxes are imposed on our owners. Taxable income or loss generated by our corporate subsidiaries is subject to corporate income tax in locations where they conduct business.
Historically, the Company’s Bermuda operations have not been subject to Bermuda income tax. However, on December 27, 2023, the Government of Bermuda enacted a 15 percent corporate income tax regime (the “Bermuda CIT”) that applies to Bermuda businesses that are part of multinational enterprise groups with annual revenue of €750 million or more and is effective for tax years beginning on or after January 1, 2025. As a result of the Bermuda CIT, the exemption of certain of the Company’s Bermuda subsidiaries from Bermuda corporate income taxes will cease in 2025. For the year ended December 31, 2023, we recorded a deferred tax asset of $72.2 million in connection with the Bermuda law change. As of June 30, 2024, we project the Bermuda subsidiaries to generate a net operating loss for the year ended December 31, 2024. As such, the Company recorded a tax benefit of $7.8 million to increase its Bermuda deferred tax asset.
Our effective tax rate differs from the U.S. federal tax rate of 21% primarily due to a significant portion of our income not being subject to U.S. corporate tax rates, or being deemed to be foreign sourced and thus either not taxable or taxable at effectively lower tax rates.
As of and for the six months ended June 30, 2024, we had not established a liability for uncertain tax positions as no such positions existed. In general, our tax returns and the tax returns of our corporate subsidiaries are subject to U.S. federal, state, local and foreign income tax examinations by tax authorities. Generally, we are not subject to examination by taxing authorities for tax years prior to 2020. We do not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within 12 months of the reporting date.
11. AFFILIATE TRANSACTIONS
On May 28, 2024, the Company entered into definitive agreements with the Former Manager and Master GP to internalize the Company’s management function. As part of the termination of the Management Agreement, the Company (i) paid the Former Manager (for itself and on behalf of the Master GP, as applicable) the Cash Consideration, the compensation accrued and payable, but not yet paid, under the Management Agreement and the expenses that were reimbursable, but not yet reimbursed, under the Management Agreement; (ii) issued to the Former Manager (for itself and on behalf of the Master GP, as applicable) the Share Consideration; and (iii) purchased from Master GP all of its partnership interests in FTAI Aviation Holdco Ltd., a subsidiary of the Company, in exchange for $30 . Following the Internalization, the Company no longer pays management fees or incentive distributions to the Former Manager and Master GP.
21
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
In connection with the termination of the Management Agreement, the Company also entered into a Transition Services Agreement with the Former Manager. Under the Transition Services Agreement, the Former Manager is required to continue to provide the Company and its affiliates with all of the Services for a transition period during which the Company will procure replacements for the Services. The Services will be provided to the Company for a fee equal to the Former Manager’s cost of providing the Services, plus a mark-up of ten percent (10 %). Unless the Transition Services Agreement is terminated earlier or the Company elects to terminate a Service by providing written notice to the Former Manager, the Former Manager is required to provide certain Services to the Company until October 31, 2024. In addition, the Former Manager is required to continue to provide the services that are reasonably required by the Company to prepare its quarterly and annual financial statements until May 31, 2025. The Transition Services Agreement may be terminated earlier (x) by mutual agreement of the parties, (y) by either the Former Manager or the Company in the event of a material breach by the non-terminating party that is not cured within thirty (30 ) days following written notification thereof, or (z) by the Former Manager if the Company fails to pay any undisputed sum overdue and payable for a period of at least thirty (30 ) days. The Company incurred $3.4
Prior to the Internalization, the Former Manager was paid annual fees in exchange for advising us on various aspects of our business, formulating our investment strategies, arranging for the acquisition and disposition of assets, arranging for financing, monitoring performance, and managing our day-to-day operations, inclusive of all costs incidental thereto. In addition, the Former Manager was reimbursed for various expenses incurred by the Former Manager on our behalf, including the costs of legal, accounting and other administrative activities. Additionally, we entered into certain incentive allocation arrangements with Master GP, which owned approximately 0.01 % of FTAI Aviation Holdco Ltd. (a wholly owned subsidiary of the Company).
The Former Manager was entitled to a management fee and reimbursement of certain expenses. The management fee was determined by taking the average value of total equity (excluding non-controlling interests) determined on a consolidated basis in accordance with U.S. GAAP at the end of the two most recently completed months multiplied by an annual rate of 1.50 %, and is payable monthly in arrears in cash.
Prior to the Internalization and the termination of the Management Agreement on May 28, 2024, Master GP, was entitled to incentive allocations (comprised of income incentive allocation and capital gains incentive allocation, defined below). The income incentive allocation was calculated and distributable quarterly in arrears based on the pre-incentive allocation net income for the immediately preceding calendar quarter (the “Income Incentive Allocation”). For this purpose, pre-incentive allocation net income means, with respect to a calendar quarter, net income attributable to shareholders during such quarter calculated in accordance with U.S. GAAP excluding our pro rata share of (1) realized or unrealized gains and losses, and (2) certain non-cash or one-time items, and (3) any other adjustments as may be approved by our independent directors. Pre-incentive allocation net income did not include any Income Incentive Allocation or Capital Gains Incentive Allocation (described below) paid to Master GP during the relevant quarter.
Prior to the Internalization, one of our subsidiaries allocated and distributed to Master GP an Income Incentive Allocation with respect to its pre-incentive allocation net income in each calendar quarter as follows: (1) no Income Incentive Allocation in any calendar quarter in which pre-incentive allocation net income, expressed as a rate of return on the average value of our net equity capital (excluding non-controlling interests) at the end of the two most recently completed calendar quarters, does not exceed 2 % for such quarter (8 % annualized); (2) 100 % of pre-incentive allocation net income with respect to that portion of such pre-incentive allocation net income, if any, that is equal to or exceeds 2 % but does not exceed 2.2223 % for such quarter; and (3) 10 % of the amount of pre-incentive allocation net income, if any, that exceeds 2.2223 % for such quarter. These calculations were prorated for any period of less than three months.
Prior to the Internalization, Capital Gains Incentive Allocation was calculated and distributable in arrears as of the end of each calendar year and was equal to 10 % of our pro rata share of cumulative realized gains from the date of the IPO through the end of the applicable calendar year, net of our pro rata share of cumulative realized or unrealized losses, the cumulative non-cash portion of equity-based compensation expenses and all realized gains upon which prior performance-based Capital Gains Incentive Allocation payments were made to Master GP.
The following table summarizes the management fees, income incentive allocation and capital gains incentive allocation prior to the Internalization on May 28, 2024:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Management fees | $ | $ | $ | $ | |||||||||||||||||||
| Income incentive allocation | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
22
FTAI AVIATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in tables in thousands, unless otherwise noted)
We pay all of our operating expenses, except those specifically required to be borne by the Former Manager under the Management Agreement. The expenses required to be paid by us include, but are not limited to, issuance and transaction costs incident to the acquisition, disposition and financing of our assets, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness of ours (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of ours, costs and expenses incurred in contracting with third parties (including affiliates of the Former Manager), the costs of printing and mailing proxies and reports to our shareholders, costs incurred by the Former Manager or its affiliates for travel on our behalf, costs associated with any computer software or hardware that is used by us, costs to obtain liability insurance to indemnify our directors and officers and the compensation and expenses of our transfer agent.
We paid or reimbursed the Former Manager and its affiliates for performing certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants. The Former Manager was responsible for all of its other costs incident to the performance of its duties under the Management Agreement, including compensation of the Former Manager’s employees, rent for facilities and other “overhead” expenses; we did not reimburse the Former Manager for these expenses.
The following table summarizes our reimbursements to the Former Manager:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Classification in the Consolidated Statements of Operations: | |||||||||||||||||||||||
| General and administrative | $ | $ | $ | $ | |||||||||||||||||||
| Acquisition and transaction expenses | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Upon the successful completion of an offering of our ordinary shares or other equity securities (including securities issued as consideration in an acquisition), we granted the Former Manager options to purchase ordinary shares in an amount equal to 10 % of the number of ordinary shares being sold in the offering (or if the issuance relates to equity securities other than our ordinary shares, options to purchase a number of ordinary shares equal to 10 % of the gross capital raised in the equity issuance divided by the fair market value of a ordinary share as of the date of issuance), with an exercise price equal to the offering price per share paid by the public or other ultimate purchaser or attributed to such securities in connection with an acquisition (or the fair market value of a ordinary share as of the date of the equity issuance if it relates to equity securities other than our ordinary shares). Any ultimate purchaser of ordinary shares for which such options are granted may have been an affiliate of the Former Manager.
The following table summarizes amounts due to the Former Manager, which are included within accounts payable and accrued liabilities in the Consolidated Balance Sheets:
| June | |||||||||||