FTAI INFRASTRUCTURE INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help you understand FTAI Aviation
Ltd. Our MD&A should be read in conjunction with our consolidated financial
statements and the accompanying notes, and with Part I, Item 1A, "Risk Factors"
and "Forward-Looking Statements" included elsewhere in this Annual Report on
Form 10-K.
A discussion of our cash flows for 2021 compared to 2020 is included in our
Annual Report on Form 10-K for the year ended December 31, 2021 , under Part II,
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We own, lease and sell aviation equipment. We also develop and manufacture
through a joint venture, and repair and sell, through exclusivity arrangements,
aftermarket components for aircraft engines. Additionally, we own and lease
offshore energy equipment. We target assets that, on a combined basis, generate
strong cash flows with potential for earnings growth and asset appreciation. We
believe that there is a large number of acquisition opportunities in our markets
and that our Manager's expertise and business and financing relationships,
together with our access to capital, will allow us to take advantage of these
opportunities. We are externally managed by FIG LLC (the "Manager"), an
affiliate of Fortress Investment Group LLC ("Fortress"), which has a dedicated
team of experienced professionals focused on the acquisition of transportation
assets since 2002. As of December 31, 2022 , we had total consolidated assets of
$2.4 billion and total equity of $19.4 million .
Impact of
Due toRussia's invasion ofUkraine during the first quarter of 2022,the United States ,European Union ,United Kingdom , and others have imposed economic sanctions and export controls againstRussia andRussia's aviation industry. The sanctions include but are not limited to the ban on the export and sale or lease of all aircraft, engines, and equipment and on all related repair and maintenance services toRussia and Russian airlines. We have complied, and will continue to comply, with all applicable sanctions and we have terminated the leases of all our aircraft and engines with Russian airlines. As a result of the sanctions imposed on Russian airlines and related lease terminations, we recognized approximately$47.1 million in provision for credit losses during the year endedDecember 31, 2022 . We continue to pursue efforts to remove and repossess all of our aircraft and engines fromRussia andUkraine . As ofDecember 31, 2022 , four aircraft and one engine were still located inUkraine and eight aircraft and seventeen engines were still located inRussia . We determined that it is unlikely that we will regain possession of the aircraft that had not been recovered fromUkraine andRussia during the first quarter of 2022. As a result, we recognized an impairment charge totaling$120.0 million , net of maintenance deposits, to write-off the carrying value of leasing equipment assets that we have not recovered fromUkraine andRussia for the year endedDecember 31, 2022 . Our lessees are required to provide insurance coverage with respect to leased aircraft and engines, and we are named as insureds under those policies in the event of a total loss of an aircraft or engine. We also purchase insurance which provides us with coverage when our aircraft or engines are not subject to a lease or where a lessee's policy fails to indemnify us. The insured value of the aircraft and engines that remain inUkraine andRussia is approximately$274.0 million . We are pursuing all our claims under these policies. However, the timing and amount of any recoveries under these policies are uncertain. The extent of the impact ofRussia's invasion ofUkraine and the related sanctions on our operational and financial performance, including the ability for us to recover our leasing equipment in the region, will depend on future developments, including the duration of the conflict, sanctions and restrictions imposed by Russian and international governments, all of which remain uncertain.
Spin-Off of
OnAugust 1, 2022 , Fortress Transportation and Infrastructure Investors LLC ("we", "us", "our", "FTAI" or the "Company" pre-Merger, as defined below, andFTAI Aviation Ltd. post-Merger) effected a spin-off of the Company's infrastructure business held byFTAI Infrastructure (a wholly-owned subsidiary of the Company as a distribution of all of the shares owned by the Company of common stock ofFTAI Infrastructure to the holders of the Company's ordinary shares as ofJuly 21, 2022 .FTAI Infrastructure is a corporation forU.S. federal income tax purposes and holds, among other things, the Company's previously held interests in the (i)Jefferson Terminal business, (ii) Repauno business, (iii)Long Ridge investment, and (iv) Transtar business.FTAI Infrastructure retained all related project-level debt of those entities. In connection with the spin-off,FTAI Infrastructure paid a dividend of$730.3 million to the Company. The Company used these proceeds to repay all outstanding borrowings under its 2021 bridge loans,$200.0 million of its 6.50% senior unsecured notes due 2025, and approximately$175.0 million of the outstanding borrowings under its revolving credit facility. FTAI retained the aviation business and certain other assets, and FTAI's remaining outstanding corporate indebtedness. In connection with the spin-off, the Company and the Manager assigned the Company's then-existing management agreement toFTAI Infrastructure , andFTAI Infrastructure and the Manager executed an amended and restated agreement. The Company and 31 -------------------------------------------------------------------------------- certain of its subsidiaries executed a new management agreement with the Manager. The new management agreement has an initial term of six years. The Manager is entitled to a management fee and reimbursement of certain expenses on substantially similar terms as the previous arrangements with the Manager, which were assigned toFTAI Infrastructure . Prior to the Merger described below, our Manager remained entitled to incentive allocations (comprised of income incentive allocation and capital gains incentive allocation) on the same terms as they existed prior to spin-off. Following the Merger, the Company entered into a Services and Profit Sharing Agreement (the "Services and Profit Sharing Agreement"), with a subsidiary of the Company andFortress Worldwide Transportation and Infrastructure Master GP LLC ("Master GP"), pursuant to which Master GP is entitled to incentive payments on substantially similar terms as the previous arrangements. OnNovember 10, 2022 , the Company completed the transactions set forth in the Agreement and Plan of Merger (the "Merger") between Fortress Transportation and Infrastructure Investors LLC ("FTAI") andFTAI Aviation Ltd. ("FTAI Aviation ") and certain other parties, with FTAI becoming a subsidiary of the company. As a result of the merger, the FTAI became aCayman Islands exempted company. Upon merger completion, Fortress Transportation and Infrastructure Investors LLC public common shareholders' shares of the Company were exchanged automatically for shares ofFTAI Aviation Ltd. without any further action from the shareholders.
Operating Segments
As a result of the spin-off ofFTAI Infrastructure effectiveAugust 1, 2022 , the Company reevaluated its operating segments. The key factors used to identify the reportable segments are the organization and alignment of our internal operations and the nature of our products and services. Our two reportable segments are (i)Aviation Leasing and (ii) Aerospace Products.The Aviation Leasing segment owns and manages aviation assets, including aircraft and aircraft engines, which it leases and sells to customers. The Aerospace Products segment develops and manufactures through a joint venture, and repairs and sells, through exclusivity arrangements, aircraft engines and aftermarket components for aircraft engines. Prior periods have been restated to reflect the change in accordance with the requirements of ASC 280, Segment Reporting. Corporate and Other primarily consists of debt, unallocated corporate general and administrative expenses, shared services costs, and management fees. Additionally, Corporate and Other also includes offshore energy related assets, which consist of vessels and equipment that support offshore oil and gas activities and production which are typically subject to operating leases.
Our Manager
On
Results of Operations
Adjusted EBITDA (non-GAAP)
The chief operating decision maker ("CODM") utilizes Adjusted EBITDA as the key
performance measure. Adjusted EBITDA is not a financial measure in accordance
with U.S. generally accepted accounting principles ("U.S. GAAP"). This
performance measure provides the CODM with the information necessary to assess
operational performance and make resource and allocation decisions. We believe
Adjusted EBITDA is a useful metric for investors and analysts for similar
purposes of assessing our operational performance.
During the third quarter of 2022, the Company updated its measure of segment
profit to include the add back of dividends on preferred shares in Adjusted
EBITDA. Adjusted EBITDA is defined as net income (loss) attributable to
shareholders from continuing operations, adjusted (a) to exclude the impact of
provision for (benefit from) income taxes, equity-based compensation expense,
acquisition and transaction expenses, losses on the modification or
extinguishment of debt and capital lease obligations, changes in fair value of
non-hedge derivative instruments, asset impairment charges, incentive
allocations, depreciation and amortization expense, dividends on preferred
shares and interest expense, (b) to include the impact of our pro-rata share of
Adjusted EBITDA from unconsolidated entities and (c) to exclude the impact of
equity in earnings (losses) of unconsolidated entities and the non-controlling
share of Adjusted EBITDA.
32--------------------------------------------------------------------------------
The following table presents our consolidated results of operations:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Revenues
Lease income $ 178,874 $ 172,117 $ 177,476 $ 6,757 $ (5,359)
Maintenance revenue 148,846 128,819 101,462 20,027 27,357
Finance lease income 440 1,747 2,260 (1,307) (513)
Asset sales revenue 208,500 - - 208,500 -
Aerospace products revenue 153,550 23,301 - 130,249 23,301
Other revenue 18,201 9,599 16,736 8,602 (7,137)
Total revenues 708,411 335,583 297,934 372,828 37,649
Expenses
Cost of sales 248,385 14,308 - 234,077 14,308
Operating expenses 132,264 59,615 40,121 72,649 19,494
General and administrative 14,164 13,448 14,106 716 (658)
Acquisition and transaction expenses 13,207 17,911 9,868 (4,704) 8,043
Management fees and incentive
allocation to affiliate 3,562 684 5,446 2,878 (4,762)
Depreciation and amortization 152,917 147,740 141,286 5,177 6,454
Asset impairment 137,219 10,463 33,978 126,756 (23,515)
Interest expense 169,194 155,017 87,442 14,177 67,575
Total expenses 870,912 419,186 332,247 451,726 86,939
Other income (expense)
Equity in losses of unconsolidated
entities (369) (1,403) (1,932) 1,034 529
Gain (loss) on sale of assets, net 77,211 49,015 (300) 28,196 49,315
Loss on extinguishment of debt (19,859) (3,254) (6,943) (16,605) 3,689
Other income (expense) 207 (490) 94 697 (584)
Total other income (expense) 57,190 43,868 (9,081) 13,322 52,949
Loss from continuing operations before
income taxes (105,311) (39,735) (43,394) (65,576) 3,659
Provision for (benefit from) income
taxes 5,300 3,126 (4,343) 2,174 7,469
Net loss from continuing operations (110,611) (42,861) (39,051) (67,750) (3,810)
Net loss from discontinued operations,
net of income taxes (101,416) (87,845) (64,641) (13,571) (23,204)
Net loss (212,027) (130,706) (103,692) (81,321) (27,014)
Less: Net loss attributable to
non-controlling interest in
consolidated subsidiaries:
Continuing operations - - - - -
Discontinued operations (18,817) (26,472) (16,522) 7,655 (9,950)
Less: Dividends on preferred shares 27,164 24,758 17,869 2,406 6,889
Net loss attributable to shareholders
$ (105,039) $ (91,382) $ (23,953) 33
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The following table sets forth a reconciliation of net loss attributable to shareholders from continuing operations to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Net loss attributable to shareholders
from continuing operations $ (137,775) $ (67,619)
5,300 3,126 (4,343) 2,174 7,469
Add: Equity-based compensation expense - - - - -
Add: Acquisition and transaction expenses 13,207 17,911 9,868 (4,704) 8,043
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations 19,859 3,254 6,943 16,605 (3,689)
Add: Changes in fair value of non-hedge
derivative instruments - - - - -
Add: Asset impairment charges 137,219 10,463 33,978 126,756 (23,515)
Add: Incentive allocations 3,489 - - 3,489 -
Add: Depreciation & amortization expense
(1) 190,031 175,718 171,632 14,313 4,086
Add: Interest expense and dividends on
preferred shares 196,358 179,775 105,311 16,583 74,464
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (2) 40 (1,203) (1,932) 1,243 729
Less: Equity in losses of unconsolidated
entities 369 1,403 1,932 (1,034) (529)
Less: Non-controlling share of Adjusted
EBITDA - - - - -
Adjusted EBITDA (non-GAAP) $ 428,097 $ 322,828 __________________________________________________
(1) Includes the following items for the years endedDecember 31, 2022 , 2021 and 2020: (i) depreciation and amortization expense of$152,917 ,$147,740 and$141,286 , (ii) lease intangible amortization of$13,913 ,$4,993 and$3,747 and (iii) amortization for lease incentives of$23,201 ,$22,985 and$26,599 , respectively. (2) Includes the following items for the years endedDecember 31, 2022 , 2021 and 2020: (i) net loss of$(369) ,$(1,403) and$(1,932) , and (ii) depreciation and amortization expense of$409 ,$200 and$0 , respectively.
Revenues
Presentation of assets sales
During the third quarter of 2022, we updated our corporate strategy based on the opportunities available in the market such that the sale of aircraft and engines is now an output of our recurring, ordinary activities. As a result of this update, the transaction price allocated to the sale of assets is included in Revenues in the Consolidated Statement of Operations for the third and fourth quarters of 2022 and are accounted for in accordance with ASC 606. The corresponding net book values of the assets sold are recorded in Cost of sales in the Consolidated Statement of Operations for the third and fourth quarters of 2022. Sales transactions of aircraft and engines prior to the third quarter of 2022 were accounted for in accordance with ASC 610-20, Gains and losses from the derecognition of nonfinancial assets and were included in Gain (loss) on sale of assets, net on the Consolidated Statement of Operations, as we were previously only occasionally selling these assets. Generally, assets sold were under leasing arrangements with customers prior to sales and are included in Leasing equipment, net, on the Consolidated Balance Sheets.
Comparison of the years ended
Total revenues increased$372.8 million , primarily due to an increase in Asset sales revenue, Aerospace Products revenue, maintenance revenue, other revenue and lease income. Asset sales revenue increased$208.5 million primarily due to an increase in the sale of commercial aircraft and engines in ourAviation Leasing segment during 2022. See above discussion regarding presentation of asset sales. Aerospace Products revenue increased$130.2 million driven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continue to ramp-up in 2022. See above discussion regarding presentation of asset sales. Maintenance revenue increased$20.0 million primarily due to an increase in the number of aircraft and engines placed on lease, higher aircraft and engine utilization and higher end-of-lease return compensation, partially offset by a decrease in the recognition of maintenance deposits due to the early redelivery of aircraft in the prior year and lower maintenance billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines during the first quarter of 2022. 34 --------------------------------------------------------------------------------
Other revenue increased
Lease income increased$6.8 million primarily due to an increase in the Offshore Energy business as two of our vessels were on-hire longer in 2022 compared to 2021. This increase was partially offset by the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines during the first quarter of 2022. Basic lease revenues from our owned aircraft and engines leased to Russian airlines was approximately$39.8 million for the year endedDecember 31, 2021 . This decrease is partially offset by an increase in the number of aircraft and engines placed on lease during the year.
Expenses
Total expenses increased$451.7 million primarily due to higher (i) cost of sales, (ii) asset impairment charges, (iii) operating expenses, (iv) interest expense, (v) depreciation and amortization, and (vi) management fees and incentive allocation to affiliate partially offset by lower (vii) acquisition and transaction expenses.
Cost of sales increased
Asset impairment increased$126.8 million primarily due to the write down of aircraft and engines located inUkraine andRussia that may not be recoverable. See Note 4 to the consolidated financial statements for additional information.
Operating expenses increased
•an increase of
•an increase of$17.6 million in the Offshore Energy business which reflects increases in offshore crew expenses, project costs and other operating expenses as our vessels were on-hire longer in 2022 compared to 2021, as well as crane repairs on one of our vessels. •an increase of$6.5 million in the Aerospace Products segment primarily due to an increase in commission expenses due to the increase in sales from the used material program as well as an increase in professional fees and other operating expenses due to the ramp-up of Aerospace Products. Interest expense increased$14.2 million , which reflects an increase in the average outstanding debt of approximately$354.7 million due to increases in (i) the Senior Notes due 2028 of$459.7 million , (ii) the 2021 Bridge Loans issued inDecember 2021 andFebruary 2022 of$169.9 million and (iii) the Revolving Credit Facility of$49.7 million , partially offset by a decrease in (iv) the Bridge Loans of$108.3 million , (v) the Senior Notes due 2022 of$133.1 million , which was redeemed in full inMay 2021 , and (vi) the Senior Notes due 2025 of$83.2 million , which were partially redeemed inAugust 2022 .
Depreciation and amortization increased
Management fees and incentive allocation to affiliate increased
Acquisition and transaction expenses decreased
Other income (expense)
Total other income increased$13.3 million primarily due to (i) an increase of$28.2 million in gain on sale of assets, net in the Aviation Leasing and Aerospace Products segments from more opportunistic asset sales transactions, partially offset by (ii) an increase of$16.6 million in loss on extinguishment of debt primarily related to the 2022 paydown of the 2021 Bridge Loan and the partial redemption of the Senior Notes due 2025 in connection with the spin-off ofFTAI Infrastructure . See above discussion regarding presentation of asset sales and impact on gain on sales of assets, net.
Provision for income taxes
The provision for income taxes increased
Net loss from continuing operations
Net loss from continuing operations increased
Net loss from discontinued operations
Net loss from discontinued operations increased
•An increase in net loss of$34.7 million in the Ports and Terminals business in 2022 of which$32.6 million relates to our equity pick-up in net losses for theLong Ridge investment.
•An increase in acquisition and transaction expense of
35
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•Offset by a decrease in net loss of $22.6 million in the Jefferson business in
2022 which is primarily driven by seven months of activity during 2022 compared
to a full year of activity in 2021; and
•An increase in net income of
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
Comparison of the years ended
Total revenues increased
Maintenance revenue increased$27.4 million primarily due to an increase in aircraft and engine utilization and the recognition of maintenance deposits due to the redelivery of aircraft, partially offset by the increase in the number of aircraft and engines redelivered.
Aerospace Products revenue increased
Lease income decreased
Other revenue decreased
Expenses
Total expenses increased$86.9 million primarily due to higher interest expense, operating expenses, cost of sales, acquisition and transaction expenses, and depreciation and amortization, partially offset by lower asset impairment charges and management fees and incentive allocation to affiliate. Interest expense increased$67.6 million , which reflects an increase in the average outstanding debt of approximately$724.0 million primarily due to increases in (i) the Senior Notes due 2028 of$542.5 million , (ii) the Senior Notes due 2025 of$373.1 million , (iii) the Senior Notes due 2027 of$200.0 million , (iv) the Bridge Loans of$108.3 million and (v) the Revolving Credit Facility of$37.9 million , partially offset by a decrease in (vi) the Senior Notes due 2022 of$540.2 million , which were redeemed in full inMay 2021 . Operating expenses increased$19.5 million primarily as a result of an increase of bad debt expense as certain customers continued to experience liquidity issues due to the on-going effects of COVID, commissions related to sales from the used serviceable material program, shipping and storage fees, repairs and maintenance expense and other operating expenses.
Cost of sales increased
Acquisition and transaction expenses increased$8.0 million primarily due an increase in professional fees related to the acquisition of Transtar and other strategic initiatives.
Depreciation and amortization increased
Asset impairment decreased$23.5 million primarily due lower asset impairment charges in 2021, which were primarily related to early lease terminations in 2020. Management fees and incentive allocation to affiliate decreased$4.8 million which reflects a decrease in the base management fee as our average total equity was lower in 2021 compared to 2020.
Other income (expense)
Total other income increased$52.9 million primarily due to an increase of$49.3 million in gain on sale of assets, net in theAviation Leasing and Aerospace Products segments from opportunistic asset sales transactions, partially offset by a decrease of$3.7 million in loss on extinguishment of debt.
Provision for income taxes
The provision for income taxes increased
Net loss from continuing operations
Net loss from continuing operations increased
36
--------------------------------------------------------------------------------Net loss from discontinued operations
Net loss from discontinued operations increased
•An increase in net loss of$21.5 million on the Jefferson business in 2021 which primarily reflects (i) a decrease in crude marketing revenue of$8.2 million due toJefferson Terminal exiting the crude marketing strategy in 2019 and final transactions settling in the first quarter of 2020, (ii) a decrease in terminal services revenues of$6.2 million which reflects lower volumes in the first half of 2021 due to lower global oil demand related to COVID-19 and (iii) increased expenses of$7.5 million . •An increase in net loss of$12.8 million on the Ports and Terminals business in 2021 of which$8.2 million relates to our equity pick-up in net losses for theLong Ridge investment; and
•An increase in acquisition and transaction expense of
•Offset by a partial year of income of
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
Aviation Leasing Segment As ofDecember 31, 2022 , in ourAviation Leasing segment, we own and manage 330 aviation assets, consisting of 106 commercial aircraft and 224 engines, including four aircraft and one engine that were still located inUkraine and eight aircraft and seventeen engines that were still located inRussia . As ofDecember 31, 2022 , 79 of our commercial aircraft and 133 of our engines were leased to operators or other third parties. Aviation assets currently off lease are either undergoing repair and/or maintenance, being prepared to go on lease or held in short term storage awaiting a future lease. Our aviation equipment was approximately 71% utilized during the three months endedDecember 31, 2022 , based on the percent of days on-lease in the quarter weighted by the monthly average equity value of our aviation leasing equipment, excluding airframes. Our aircraft currently have a weighted average remaining lease term of 42 months, and our engines currently on-lease have an average remaining lease term of 11 months. The table below provides additional information on the assets in ourAviation Leasing segment: Aviation Assets Widebody Narrowbody Total Aircraft Assets at January 1, 2022 13 95 108 Purchases 1 38 39 Sales (3) (5) (8) Transfers (3) (30) (33) Assets at December 31, 2022 8 98 106 Engines Assets at January 1, 2022 68 139 207 Purchases 2 62 64 Sales (36) (35) (71) Transfers 6 18 24 Assets at December 31, 2022 40 184 224 37
-------------------------------------------------------------------------------- The following table presents our results of operations for ourAviation Leasing segment: Year Ended December 31, Change (in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20 Revenues Lease income$ 158,628 $ 161,986 $ 166,331 $ (3,358) $ (4,345) Maintenance revenue 148,846 128,819 101,462 20,027 27,357 Finance lease income 440 1,747 2,260 (1,307) (513) Asset sales revenue 208,500 - - 208,500 - Other revenue 11,499 5,569 11,158 5,930 (5,589) Total revenues 527,913 298,121 281,211 229,792 16,910 Expenses Cost of sales 159,490 - - 159,490 - Operating expenses 81,232 32,757 20,667 48,475 12,090 Acquisition and transaction expenses 1,923 982 6,687 941 (5,705) Depreciation and amortization 144,258 139,678 133,904 4,580 5,774 Asset impairment 137,219 10,463 33,978 126,756 (23,515) Total expenses 524,122 183,880 195,236 340,242 (11,356) Other income (expense) Equity in earnings (losses) of 740 1,932 unconsolidated entities 740 -
(1,932)
Gain (loss) on sale of assets, net 58,649 29,098 (300) 29,551 29,398 Other income (expense) 246 (527) 94 773 (621) Total other income (expense) 59,635 28,571 (2,138) 31,064 30,709 Income before income taxes 63,426 142,812 83,837 (79,386) 58,975 Provision for (benefit from) income taxes 2,502 2,073 (4,812) 429 6,885 Net income 60,924 140,739 88,649 (79,815) 52,090 Less: Net loss attributable to non-controlling interest in consolidated subsidiaries - - - - -
Net income attributable to shareholders
$ 88,649 $ (79,815) $ 52,090 38
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The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Net income attributable to shareholders
2,502 2,073 (4,812) 429 6,885
Add: Equity-based compensation expense - - - - -
Add: Acquisition and transaction expenses 1,923 982 6,687 941 (5,705)
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - - - -
Add: Changes in fair value of non-hedge
derivative instruments - - - - -
Add: Asset impairment charges 137,219 10,463 33,978 126,756 (23,515)
Add: Incentive allocations - - - - -
Add: Depreciation and amortization
expense (1) 181,372 167,656 164,250 13,716 3,406
Add: Interest expense and dividends on
preferred shares - - - - -
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (2) 925 - (1,932) 925 1,932
Less: Equity in (earnings) losses of
unconsolidated entities (740) - 1,932 (740) (1,932)
Less: Non-controlling share of Adjusted
EBITDA - - - - -
Adjusted EBITDA (non-GAAP) $ 384,125 $ 321,913 __________________________________________________
(1) Includes the following items for the years endedDecember 31, 2022 , 2021 and 2020: (i) depreciation expense of$144,258 ,$139,678 and$133,904 , (ii) lease intangible amortization of$13,913 ,$4,993 and$3,747 and (iii) amortization for lease incentives of$23,201 ,$22,985 and$26,599 , respectively. (2) Includes the following items for the years endedDecember 31, 2022 , 2021 and 2020: (i) net income (loss) of$740 , $- and$(1,932) and (ii) depreciation and amortization of$185 ,$0 and$0 , respectively.
Comparison of the years ended
Revenues
Total revenues increased$229.8 million driven by an increase in asset sales revenue, maintenance revenue and other revenue, partially offset by a decrease in lease income. •Asset sales revenue increased$208.5 million primarily due to an increase in the sale of commercial aircraft and engines during 2022. See above discussion regarding presentation of asset sales. •Maintenance revenue increased$20.0 million primarily due to an increase in the number of aircraft and engines placed on lease, higher aircraft and engine utilization and higher end-of-lease return compensation, partially offset by a decrease in the recognition of maintenance deposits due to the early redelivery of aircraft in the prior year and lower maintenance billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines during the first quarter of 2022.
•Other revenue increased
•Lease income decreased$3.4 million primarily due to the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines during the first quarter of 2022. Basic lease revenues from our owned aircraft and engines leased to Russian airlines was approximately$39.8 million for the year endedDecember 31, 2021 . This decrease is partially offset by an increase in the number of aircraft and engines placed on lease during the year.
Expenses
Total expenses increased$340.2 million primarily driven by an increase in cost of sales, asset impairment, operating expenses and depreciation and amortization expense. 39 -------------------------------------------------------------------------------- •Cost of sales increased$159.5 million primarily as a result of an increase in asset sales and the gross presentation of asset sales revenues and related costs of sales as described above. •Asset impairment increased$126.8 million primarily due to the write down of aircraft and engines located inUkraine andRussia that may not be recoverable. See Note 4 to the consolidated financial statements for additional information. •Operating expenses increased$48.5 million primarily as a result of an increase in provision for credit losses as a result of the sanctions imposed on Russian airlines, and increases in insurance expense, shipping and storage fees, professional fees, and repairs and maintenance expenses. •Depreciation and amortization expense increased$4.6 million driven by an increase in the number of assets owned and on lease, partially offset by an increase in the number of aircraft redelivered and parted out into our engine leasing pool. Other income Total other income increased$31.1 million primarily due to (i) an increase of$29.6 million in gain on the sale of assets, net due to more opportunistic sales transactions, (ii) a decrease of$0.8 million in other expenses and, (iii) an increase of$0.7 million in our proportionate share of unconsolidated entities' net income. Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
Comparison of the years ended
Revenues
Total revenues increased
•Maintenance revenue increased$27.4 million primarily due to an increase in aircraft and engine utilization due to additional travel and recoveries from COVID and the recognition of maintenance deposits due to the redelivery of aircraft, partially offset by the increase in the number of aircraft and engines redelivered.
•Other revenue decreased
•Lease income decreased
Expenses
Total expenses decreased
•Asset impairment decreased$23.5 million primarily due lower asset impairment charges in 2021 which were primarily related to early lease terminations due to COVID in 2020. •Operating expenses increased$12.1 million primarily as a result of an increase in bad debt expense, shipping and storage fees, repairs and maintenance expenses and other operating expenses. •Depreciation and amortization expense increased$5.8 million driven by an increase in the number of assets owned and on lease, partially offset by an increase in the number of aircraft redelivered and parted out into our engine leasing pool. Other income Total other income increased$30.7 million primarily due to an increase of$29.4 million in gain on sale of assets, net and a decrease of$1.9 million in our proportionate share of unconsolidated entities' net loss.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
Aerospace Products Segment The Aerospace Products segment develops and manufactures through a joint venture, and repairs and sells, through exclusivity arrangements, aircraft engines and aftermarket components primarily for the CFM56-7B and CFM56-5B commercial aircraft engines. Our engine and module sales are facilitated throughThe Module Factory , a dedicated commercial maintenance program, designed to focus on modular repair and refurbishment of CFM56-7B and CFM56-5B engines, performed by a third party. Used serviceable material is sold through our exclusive partnership with AAR Corp, who is responsible for the teardown, repair, marketing and sales of spare parts from our CFM56 engine pool. We also hold a 25% interest in the Advanced Engine Repair JV which focuses on developing new cost savings programs for engine repairs. 40 --------------------------------------------------------------------------------
The following table presents our results of operations:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Aerospace products revenue $ 153,550 $ 23,301 $ - $ 130,249 $ 23,301
Expenses
Cost of sales 88,895 14,308 - 74,587 14,308
Operating expenses 11,967 5,429 - 6,538 5,429
Acquisition and transaction expenses 243 - - 243 -
Depreciation and amortization 258 66 - 192 66
Total expenses 101,363 19,803 - 81,560 19,803
Other income (expense)
Equity in losses of unconsolidated
entities (1,109) (1,403) - 294 (1,403)
Gain on sale of assets, net 18,562 19,917 - (1,355) 19,917
Total other income 17,453 18,514 - (1,061) 18,514
Income before income taxes 69,640 22,012 - 47,628 22,012
Provision for income taxes 2,961 1,135 - 1,826 1,135
Net income 66,679 20,877 - 45,802 20,877
Less: Net loss attributable to
non-controlling interest in consolidated
subsidiaries - - - - -
Net income attributable to shareholders
$ -
The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Net income attributable to shareholders $ 66,679 $ 20,877 $ -
2,961 1,135 - 1,826 1,135
Add: Equity-based compensation expense - - - - -
Add: Acquisition and transaction expenses 243 - - 243 -
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - - - -
Add: Changes in fair value of non-hedge
derivative instruments - - - - -
Add: Asset impairment charges - - - - -
Add: Incentive allocations - - - - -
Add: Depreciation and amortization expense 258 66 - 192 66
Add: Interest expense and dividends on
preferred shares - - - - -
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (1) (885) (1,203) - 318 (1,203)
Less: Equity in losses of unconsolidated
entities 1,109 1,403 - (294) 1,403
Less: Non-controlling share of Adjusted
EBITDA - - - - -
Adjusted EBITDA (non-GAAP) $ 70,365 $ 22,278 $ -
__________________________________________________
(1) Includes the following items for the years ended
41
--------------------------------------------------------------------------------
Comparison of the years ended
Revenues
Total Aerospace Products revenue increased$130.2 million primarily driven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continued to ramp-up in 2022. See above discussion regarding presentation of asset sales.
Expenses
Total expenses increased
•Cost of sales increased
•Operating expenses increased$6.5 million primarily due to an increase in commission expenses due to the increase in sales from the used material program as well as an increase in professional fees and other operating expenses due to the ramp-up of Aerospace Products.
Other income (expense)
Total other income decreased$1.1 million which primarily reflects a decrease of$1.4 million in gain on sale of assets, net partially offset by a decrease of$0.3 million in our proportionate share of unconsolidated entities' net loss. See above discussion regarding presentation of asset sales.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
Comparison of the years ended
Revenues
Total Aerospace Products revenue increased
Expenses
Total expenses increased
•Cost of sales increased
•Operating expenses increased$5.4 million primarily due to an increase in commission expenses due to the increase in sales from the used serviceable material program as well as an increase in professional fees and other operating expenses due to the ramp-up of Aerospace Products.
Other income (expense)
Total other income increased$18.5 million , which primarily reflects an increase of$19.9 million in gain on sale of assets, net from sales that began in 2021 partially offset by an increase of$1.4 million in our proportionate share of unconsolidated entities' net loss.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
42
--------------------------------------------------------------------------------Corporate and Other
The following table presents our results of operations:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Revenues
Lease income $ 20,246 $ 10,131 $ 11,145 $ 10,115 $ (1,014)
Other revenue 6,702 4,030 5,578 2,672 (1,548)
Total revenues 26,948 14,161 16,723 12,787 (2,562)
Expenses
Operating expenses 39,065 21,429 19,454 17,636 1,975
General and administrative 14,164 13,448 14,106 716 (658)
Acquisition and transaction expenses 11,041 16,929 3,181 (5,888) 13,748
Management fees and incentive allocation
to affiliate 3,562 684 5,446 2,878 (4,762)
Depreciation and amortization 8,401 7,996 7,382 405 614
Interest expense 169,194 155,017 87,442 14,177 67,575
Total expenses 245,427 215,503 137,011 29,924 78,492
Other (expense) income
Loss on extinguishment of debt (19,859) (3,254) (6,943) (16,605) 3,689
Other (expense) income (39) 37 - (76) 37
Total other expense (19,898) (3,217) (6,943) (16,681) 3,726
Loss before income taxes (238,377) (204,559) (127,231) (33,818) (77,328)
(Benefit from) provision for income
taxes (163) (82) 469 (81) (551)
Net loss (238,214) (204,477) (127,700) (33,737) (76,777)
Less: Net loss attributable to
non-controlling interest in consolidated
subsidiaries - - - - -
Less: Dividends on preferred shares 27,164 24,758 17,869 2,406 6,889
Net loss attributable to shareholders
from continuing operations $ (265,378) $ (229,235) $ (145,569) $ (36,143) $ (83,666)
43--------------------------------------------------------------------------------
The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2022 2021 2020 '22 vs '21 '21 vs '20
Net loss attributable to shareholders
from continuing operations $ (265,378) $ (229,235)
(163) (82) 469 (81) (551)
Add: Equity-based compensation expense - - - - -
Add: Acquisition and transaction expenses 11,041 16,929 3,181 (5,888) 13,748
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations 19,859 3,254 6,943 16,605 (3,689)
Add: Changes in fair value of non-hedge
derivative instruments - - - - -
Add: Asset impairment charges - - - - -
Add: Incentive allocations 3,489 - - 3,489 -
Add: Depreciation and amortization
expense 8,401 7,996 7,382 405 614
Add: Interest expense and dividends on
preferred shares 196,358 179,775 105,311 16,583 74,464
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities - - - - -
Less: Equity in (earnings) losses of
unconsolidated entities - - - - -
Less: Non-controlling share of Adjusted
EBITDA - - - - -
Adjusted EBITDA (non-GAAP) $ (26,393) $ (21,363)
Comparison of the years ended
Revenues
Total revenues increased
Expenses
Total expenses increased
•Interest expense increased$14.2 million , which reflects an increase in the average outstanding debt of approximately$354.7 million due to increases in (i) the Senior Notes due 2028 of$459.7 million , (ii) the 2021 Bridge Loans issued inDecember 2021 andFebruary 2022 of$169.9 million and (iii) the Revolving Credit Facility of$49.7 million , partially offset by a decrease in (iv) the Bridge Loans of$108.3 million , (v) the Senior Notes due 2022 of$133.1 million , which was redeemed in full inMay 2021 , and (vi) the Senior Notes due 2025 of$83.2 million , which were partially redeemed inAugust 2022 . •Operating expenses increased$17.6 million which reflects increases in offshore crew expenses, project costs and other operating expenses as our vessels were on-hire longer in 2022 compared to 2021, as well as crane repairs on one of our vessels.
•Management fees and incentive allocation to affiliate increased
•Acquisition and transaction expenses decreased
Other expense
Total other expense increased
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA decreased
44--------------------------------------------------------------------------------
Comparison of the years ended
Revenues
Total revenues decreased
Expenses
Total expenses increased$78.5 million primarily due to higher interest expense and acquisition and transaction expenses, partially offset by lower management fees and incentive allocation to affiliate. •Interest expense increased$67.6 million , which reflects an increase in the average outstanding debt of approximately$724.0 million primarily due to increases in (i) the Senior Notes due 2028 of$542.5 million , (ii) the Senior Notes due 2025 of$373.1 million , (iii) the Senior Notes due 2027 of$200.0 million , (iv) the Bridge Loans of$108.3 million and (v) the Revolving Credit Facility of$37.9 million , partially offset by a decrease in (vi) the Senior Notes due 2022 of$540.2 million , which were redeemed in full inMay 2021 . •Acquisition and transaction expenses increased$13.7 million primarily due an increase in professional fees related to the acquisition of Transtar and other strategic initiatives. •Management fees and incentive allocation to affiliate decreased$4.8 million which reflects a decrease in the base management fee as our average total equity was lower in 2021 compared to 2020.
Other expense
Total other expense decreased
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased
Transactions with Affiliates and Affiliated Entities
We are managed by the Manager, an affiliate of Fortress, pursuant to the Management Agreement which provides for us to bear obligations for management fees and expense reimbursements payable to the Manager. Our Management Agreement requires our Manager to manage our business affairs in conformity with a broad asset acquisition strategy adopted and monitored by our board of directors. From time to time, we may engage (subject to our strategy) in material transactions with our Manager or another entity managed by our Manager or one of its affiliates or other affiliates of Fortress, which may include, but are not limited to, certain financing arrangements, acquisition of assets, acquisition of debt obligations, debt, co-investments, and other assets that present an actual, potential or perceived conflict of interest. Please see Note 13 to our consolidated financial statements included elsewhere in this filing for more information. Geographic Information Please refer to Note 14 of our consolidated financial statements included in Item 8 in this Annual Report on Form 10-K for a report, by geographic area for each segment, of revenues from our external customers, for the years endedDecember 31, 2022 , 2021 and 2020, as well as a report of our total property, plant and equipment as ofDecember 31, 2022 and 2021.
Liquidity and Capital Resources
InApril 2022 , the Board of Directors unanimously approved the spin-off ofFTAI Infrastructure . The spin-off was effected as a distribution of all of the shares owned by the Company of common stock ofFTAI Infrastructure to the holders of the Company's ordinary shares as ofJuly 21, 2022 . The distribution was completed onAugust 1, 2022 . In connection with the spin-off, completed onAugust 1, 2022 ,FTAI Infrastructure paid a dividend of$730.3 million to the Company. The Company used these proceeds to repay all outstanding borrowings under its 2021 bridge loans,$200.0 million of its 6.50% senior unsecured notes due 2025, and approximately$175.0 million of the outstanding borrowings under its revolving credit facility. FTAI retained the aviation business and certain other assets, and FTAI's remaining outstanding corporate indebtedness. 45 -------------------------------------------------------------------------------- We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. This includes limiting discretionary spending across the organization and re-prioritizing our investments amid the COVID-19 pandemic and market volatility. Our principal uses of liquidity have been and continue to be (i) acquisitions of aircraft and engines, (ii) dividends to our ordinary and preferred shareholders, (iii) expenses associated with our operating activities, and (iv) debt service obligations associated with our investments.
•Cash used for the purpose of making investments was
•Distributions to shareholders, including cash dividends, were$155.6 million ,$142.8 million and$131.4 million during the years endedDecember 31, 2022 , 2021 and 2020, respectively. •Uses of liquidity associated with our operating expenses are captured on a net basis in our cash flows from operating activities. Uses of liquidity associated with our debt obligations are captured in our cash flows from financing activities. Our principal sources of liquidity to fund these uses have been and continue to be (i) revenues from our aviation assets (including finance lease collections and maintenance reserve collections) net of operating expenses, (ii) proceeds from borrowings or the issuance of securities and (iii) proceeds from asset sales. •Cash flows from operating activities, plus the principal collections on finance leases and maintenance reserve collections were$29.4 million ,$16.9 million and$110.3 million during the years endedDecember 31, 2022 , 2021, and 2020, respectively. •During the year endedDecember 31, 2022 , additional borrowings were obtained in connection with the (i) 2021 Bridge Loans of$239.5 million (ii) Revolving Credit Facility of$565.0 million and (iii) EB-5 Loan Agreement of$9.5 million . We made total principal repayments of (i)$604.5 million relating to the Revolving Credit Facility, (ii)$340.0 million related to the 2021 Bridge Loans and (iii)$200.0 million related to the Senior Notes due 2025. During the year endedDecember 31, 2021 , additional borrowings were obtained in connection with the (i) Senior Notes due 2028 of$1.0 billion , (ii) Revolving Credit Facility of$690.0 million , (iii) Bridge Loan Agreement of$650.0 million , (iv) Series 2021 Bonds of$425.0 million , (v) 2021 Bridge Loans of$100.5 million and (vi) EB-5 Loan Agreement of$26.1 million . We made principal payments of$1.6 billion related to the Bridge Loan Agreement, Revolving Credit Facility and Senior Notes due 2022. During the year endedDecember 31, 2020 , additional borrowings were obtained in connection with the (i) Senior Notes due 2025 of$407.0 million , (ii) Senior Notes due 2027 of$400.0 million , (iii) Revolving Credit Facility of$270.0 million and (iv) Series 2020 Bonds of$264.0 million . We made principal payments of$852.2 million related to the Senior Notes due 2022, Revolving Credit Facility, Series 2016 Bonds, Jefferson Revolver, Series 2012 Bonds and FTAI Pride Credit Agreement. •Proceeds from the sale of subsidiaries and assets were$414.2 million ,$163.4 million and$72.2 million during the years endedDecember 31, 2022 , 2021, and 2020, respectively. •Proceeds from the issuance of ordinary shares, net of issuance costs were$323.1 million during the year endedDecember 31, 2021 . There were no issuances of ordinary shares in 2022 or 2020. •Proceeds from the issuance of preferred shares, net of underwriters discount and issuance costs, were$101.2 million and$19.7 million during the years endedDecember 31, 2021 and 2020, respectively.. 46 -------------------------------------------------------------------------------- We are currently evaluating several potential transactions and related financings, which could occur within the next 12 months. None of these potential transactions, negotiations, or financings are definitive or included within our planned liquidity needs. We cannot assure if or when any such transaction will be consummated or the terms of any such transaction or related financing.
Historical Cash Flow
The following table presents our historical cash flow from both continuing and
discontinued operations:
Year Ended December 31,
(in thousands) 2022 2021 2020
Cash flow data:
Net cash (used in) provided by operating activities $ (20,657) $ (22,044) $ 63,106
Net cash used in investing activities (411,253) (1,286,958) (509,123)
Net cash provided by financing activities 44,914 1,587,645 364,918
Comparison of the years ended
Net cash used in operating activities decreased$1.4 million , which primarily reflects certain adjustments to reconcile net loss to cash used in operating activities including increases in (i) asset impairment of$126.8 million , (ii) provision for credit losses of$35.0 million , (iii) equity in losses of unconsolidated entities of$34.2 million and (iv) loss on extinguishment of debt of$16.6 million partially offset by (v) an increase in gain on sale of assets of$92.6 million , (vi) an increase in our net loss of$81.3 million , and (vii) a decrease in net working capital of$35.3 million . Net cash used in investing activities decreased$875.7 million primarily due to (i) a decrease in cash used in acquisitions of business, net of cash acquired, of$623.3 million , (ii) higher proceeds from the sale of leasing equipment of$250.0 million and (iii) a decrease in investment of unconsolidated entities of$47.3 million , partially offset by (iv) an increase in acquisition of leasing equipment of$65.7 million and (ii) an increase in acquisition of lease intangibles of$7.1 million . Net cash provided by financing activities decreased$1.5 billion primarily due to (i) a decrease in proceeds from debt of$2.1 billion and (ii) a decrease in proceeds from issuance of ordinary shares, net of underwriter's discount of$323.1 million , partially offset by (iii) a one-time dividend from spin-off ofFTAI Infrastructure , net of cash transferred of$500.6 million and (iv) a decrease in repayments of debt of$408.7 million . Cash Flows of Discontinued Operations The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows for all periods presented. Cash used in operating activities from discontinued operations were$63.9 million ,$61.7 million , and$46.9 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Cash used in investing activities from discontinued operations were$136.3 million ,$828.7 million , and$252.2 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively.
The absence of cash flows from discontinued operations is not expected to adversely affect our liquidity or our ability to fund capital expenditures or working capital needs.
Contractual Obligations
Our material cash requirements include the following contractual and other obligations:
Debt Obligations-As of
Lease Obligations-As of
Other Cash Requirements-In addition to our contractual obligations, we pay quarterly cash dividends on our ordinary shares and preferred shares, which are subject to change at the discretion of our Board of Directors. During 2022, we declared cash dividends of$128.5 million and$27.2 million on our ordinary shares and preferred shares, respectively. We expect to meet our future short-term liquidity requirements through cash on hand, unused borrowing capacity or future financings and net cash provided by our current operations. We expect that our operating subsidiaries will generate sufficient cash flow to cover operating expenses and the payment of principal and interest on our indebtedness as they become due. We may elect to meet certain long-term liquidity requirements or to continue to pursue strategic opportunities through utilizing cash on hand, cash generated from our current operations and the issuance of securities in the future. Management believes adequate capital and borrowings are available from various sources to fund our commitments to the extent required.
Critical Accounting Estimates and Policies
The preparation of financial statements in conformity withU.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 47 --------------------------------------------------------------------------------
could differ from those estimates. Note 2 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
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 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 in our Consolidated Balance Sheets. 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. The fair value of the lease may include a lease premium or discount, which is recorded as a favorable or unfavorable lease intangible. Asset sales revenue-Asset sales revenue primarily consists of the transaction price related to the sale of aircraft and aircraft engines from ourAviation 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 in the Consolidated Statements of Operations. See Note 10 for additional information. Aerospace Products revenue-Aerospace Products revenue primarily consists of the transaction price related to the sale of repaired CFM56-7B and CFM56-5B 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 in the Consolidated Statements of Operations. Maintenance Payments-Typically, under an operating lease of aircraft, the lessee is responsible for performing all maintenance and is generally required to make maintenance payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft or engine. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending on the component, and are generally required to be made monthly in arrears. If a lessee is making monthly maintenance payments, we would typically be obligated to reimburse the lessee for costs they incur for heavy maintenance, overhaul or replacement of certain high-value components to the extent of maintenance payments received in respect of the specific maintenance event, usually shortly following the completion of the relevant work.
We record the portion of maintenance payments paid by the lessee that are expected to be reimbursed as maintenance deposits in the Consolidated Balance Sheets. Reimbursements made to the lessee upon the receipt of evidence of qualifying maintenance work are recorded against the maintenance deposit liability.
In certain acquired leases, we or the lessee may be obligated to make a payment
to the other party at lease termination based on redelivery conditions
stipulated at the inception of the lease. When the lessee is required to return
the aircraft in an improved maintenance condition, we record a maintenance right
asset, as a component of other assets in the Consolidated Balance sheets, for
the estimated value of the end-of-life maintenance payment at acquisition. We
recognize payments received as end-of-lease compensation adjustments, within
lease income or as a reduction to the maintenance right asset, when payment is
received or collectability is assured. In the event we are required to make
payments at the end of the lease for redelivery conditions, amounts are accrued
as additional maintenance liability and expensed when we are obligated and can
reasonably estimate such payments.
48
--------------------------------------------------------------------------------Property, Plant and Equipment, Leasing Equipment and Depreciation-Property, plant and equipment and leasing equipment are stated at cost (inclusive of capitalized acquisition costs, where applicable) and depreciated using the straight-line method, over estimated useful lives, to estimated residual values which are summarized as follows:
Range of Estimated Useful
Asset Lives Residual Value Estimates
Aircraft 25 years from date of Generally not to exceed 15% of
manufacture manufacturer's list price when
new
Aircraft engines 2 - 6 years, based on Sum of engine core salvage value
maintenance adjusted service plus the estimated fair value of
life life limited parts
Aviation tooling and equipment 3 - 6 years from date of Scrap value at end of useful life
purchase
Offshore energy vessels 25 years from date of 10% of new build cost
manufacture
Furniture and fixtures 3 - 6 years from date of None
purchase
Computer hardware and software 2 - 5 years from date of None
purchase
Construction in progress N/A N/A
Impairment of Long-Lived Assets-We perform a recoverability assessment of each
of our long-lived assets whenever events or changes in circumstances, or
indicators, indicate that the carrying amount or net book value of an asset may
not be recoverable. Indicators may include, but are not limited to, a
significant lease restructuring or early lease termination; significant traffic
decline; a significant change in market conditions; or the introduction of newer
technology aircraft, vessels or engines. When performing a recoverability
assessment, we measure whether the estimated future undiscounted net cash flows
expected to be generated by the asset exceeds its net book value. The
undiscounted cash flows consist of cash flows from currently contracted leases
and contracts, future projected leases, transition costs, estimated down time
and estimated residual or scrap values. In the event that an asset does not meet
the recoverability test, the carrying value of the asset will be adjusted to
fair value resulting in an impairment charge.
Management develops the assumptions used in the recoverability analysis based on
its knowledge of active contracts, current and future expectations of the global
demand for a particular asset and historical experience in the leasing markets,
as well as information received from third party industry sources. The factors
considered in estimating the undiscounted cash flows are impacted by changes in
future periods due to changes in contracted lease rates, residual values,
economic conditions, technology, demand for a particular asset type and other
factors.
Recent Accounting Pronouncements
Please see Note 2 to our consolidated financial statements included elsewhere in this filing for recent accounting pronouncements.
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