FTAI Aviation Ltd. 10-Q

Item 1. Financial Statements FTAI AVIATION LTD. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share data) (Unaudited) September 30, December 31, Notes 2022 2021 Assets Cash and cash equivalents 2 $ 15,597 $ 2,158 Accounts receivable, net 2 82,877 121,257 Leasing equipment, net 3 1,559,575 1,714,136 Finance leases, net 4 7,094 7,583 Investments 5 22,280 22,917 Intangible assets, net 6 29,416 30,962 Inventory, net 2 160,019 100,308 Other assets 2 141,294 97,531 Total assets $ 2,018,152 $ 2,096,852 Liabilities Accounts payable and accrued liabilities $ 26,982 $ 32,058 Management fees payable to affiliate 11 46,095 43,477 Loans payable to affiliate 7 27,090 25,181 Maintenance deposits 2 51,430 106,164 Security deposits 2 25,905 38,639 Other liabilities 47,383 31,274 Total liabilities $ 224,885 $ 276,793 Commitments and contingencies 14 Equity Ordinary shares ( $ 1.00 par value per share; 50,000 shares authorized; 105.2 and 100.0 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively) — — Additional paid in capital 1,087,534 1,139,628 Retained earnings 705,733 680,431 Total equity 1,793,267 1,820,059 Total liabilities and equity $ 2,018,152 $ 2,096,852 See accompanying notes to consolidated financial statements. 5 Index FTAI AVIATION LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (Dollars in thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, Notes 2022 2021 2022 2021 Revenues 9 $ 218,249 $ 93,938 $ 412,205 $ 228,482 Expenses Operating expenses 2 14,612 10,130 83,651 20,641 Cost of sales 2 95,948 5,367 120,139 8,577 General and administrative 3,354 2,862 9,125 7,166 Acquisition and transaction expenses 2,848 1,132 5,449 3,710 Management fees and incentive allocation to affiliate 11 539 2,116 4,692 7,027 Depreciation and amortization 3 32,877 34,825 106,567 102,194 Asset impairment 3 4,495 859 128,171 3,048 Interest expense 644 584 1,910 1,734 Total expenses 155,317 57,875 459,704 154,097 Other income (expense) Equity in losses of unconsolidated entities 5 ( 358 ) ( 369 ) ( 125 ) ( 1,050 ) Gain on sale of assets, net — 12,685 79,933 17,467 Other income (expense) 42 ( 1,341 ) 245 ( 717 ) Total other income (expense) ( 316 ) 10,975 80,053 15,700 Income before income taxes 62,616 47,038 32,554 90,085 Provision for income taxes 10 3,818 500 7,252 1,037 Net income attributable to shareholders $ 58,798 $ 46,538 $ 25,302 $ 89,048 Earnings per share: 13 Basic $ 558.92 $ 465.38 $ 244.46 $ 890.48 Diluted $ 558.92 $ 465.38 $ 244.46 $ 890.48 Weighted average shares outstanding: Basic 105.2 100.0 103.5 100.0 Diluted 105.2 100.0 103.5 100.0 See accompanying notes to consolidated financial statements. 6 Index FTAI AVIATION LTD. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited) (Dollars in thousands) Three and Nine Months Ended September 30,2022 Additional Paid In Capital Retained Earnings Total Equity Equity - December 31, 2021 $ 1,139,628 $ 680,431 $ 1,820,059 Net loss — ( 33,496 ) ( 33,496 ) Capital contributions 230,766 — 230,766 Capital distributions ( 104,821 ) — ( 104,821 ) Equity - June 30, 2022 $ 1,265,573 $ 646,935 $ 1,912,508 Net income — 58,798 58,798 Capital contributions 11,365 — 11,365 Capital distributions ( 189,404 ) — ( 189,404 ) Equity - September 30, 2022 $ 1,087,534 $ 705,733 $ 1,793,267 Three and Nine Months Ended September 30,2021 Additional Paid In Capital Retained Earnings Total Equity Equity - December 31, 2020 $ 897,089 $ 550,560 $ 1,447,649 Net income — 42,510 42,510 Capital contributions 140,273 — 140,273 Capital distributions ( 88,159 ) — ( 88,159 ) Equity - June 30, 2021 $ 949,203 $ 593,070 $ 1,542,273 Net income — 46,538 46,538 Capital contributions 109,191 — 109,191 Capital distributions ( 56,803 ) — ( 56,803 ) Equity - September 30, 2021 $ 1,001,591 $ 639,608 $ 1,641,199 See accompanying notes to consolidated financial statements. 7 Index FTAI AVIATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income $ 25,302 $ 89,048 Adjustments to reconcile net income to cash provided by operating activities: Equity in losses of unconsolidated entities 125 1,050 Gain on sale of assets, net ( 106,169 ) ( 17,467 ) Security deposits and maintenance claims included in earnings ( 31,558 ) ( 30,866 ) Depreciation and amortization 106,567 102,194 Payment-in-kind interest 1,910 1,734 Asset impairment 128,171 3,048 Change in deferred income taxes 6,614 ( 23 ) Amortization of lease intangibles and incentives 30,315 21,348 Provision for credit losses 47,128 821 Change in: Accounts receivable, net ( 25,933 ) ( 38,575 ) Inventory, net ( 11,041 ) ( 11,918 ) Other assets ( 1,211 ) 972 Accounts payable and accrued liabilities ( 19,659 ) ( 3,677 ) Management fees payable to affiliate 2,618 15,692 Other liabilities ( 1,875 ) ( 1,553 ) Net cash provided by operating activities 151,304 131,828 Cash flows from investing activities: Distribution from unconsolidated entities 512 — Principal collections on finance leases 2,165 1,707 Acquisition of leasing equipment ( 360,642 ) ( 298,912 ) Acquisition of property, plant and equipment ( 949 ) ( 1,121 ) Acquisition of lease intangibles ( 6,542 ) ( 7,403 ) Purchase deposits for aircraft and engines ( 28,621 ) ( 13,790 ) Proceeds from sale of leasing equipment 262,096 78,463 Proceeds from deposit of sale of aircraft and engines 7,801 600 Return of purchase deposits — 1,010 Net cash used in investing activities $ ( 124,180 ) $ ( 239,446 ) See accompanying notes to consolidated financial statements. 8 Index FTAI AVIATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) Nine Months Ended September 30, 2022 2021 Cash flows from financing activities: Receipt of security deposits 2,636 1,390 Return of security deposits ( 935 ) ( 1,034 ) Receipt of maintenance deposits 37,586 23,075 Release of maintenance deposits ( 878 ) ( 19,615 ) Capital contributions from Parent 242,131 249,464 Capital distributions to Parent ( 294,225 ) ( 144,962 ) Net cash (used in) provided by financing activities ( 13,685 ) 108,318 Net increase in cash and cash equivalents 13,439 700 Cash and cash equivalents, beginning of period 2,158 1,388 Cash and cash equivalents, end of period $ 15,597 $ 2,088 Supplemental disclosure of non-cash investing and financing activities: Acquisition and transfers of leasing equipment $ 124,932 $ 66,988 Assumed and settled security deposits ( 12,161 ) ( 1,909 ) Assumed and settled maintenance deposits ( 73,136 ) ( 30,302 ) See accompanying notes to consolidated financial statements. 9 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 1. BACKGROUND AND BASIS OF PRESENTATION Background FTAI Aviation Ltd. (“we”, “us”, “our” or the “Company and formerly FTAI Finance Holdco Ltd.”) is a Cayman Islands exempted company which, through its subsidiaries, owns and leases aviation equipment. The Company was incorporated on December 8, 2017 and as of September 30, 2022, was wholly owned by Fortress Transportation and Infrastructure Investors LLC (the “Parent”). On November 10, 2022, pursuant to the Agreement and Plan of Merger dated August 12, 2022, by and among the Company, the Parent, and FTAI Aviation Merger Sub LLC, the Parent became a wholly-owned subsidiary of the Company. In connection with the consummation of the merger, the Company’s corporate name was changed to FTAI Aviation Ltd., and the Company replaced the Parent as the publicly traded company. We consist of an equipment leasing business that owns and leases aviation equipment and also develops, manufactures, repairs and sells aftermarket components for aircraft engines. We have two reportable segments, (i) Aviation Leasing and (ii) Aerospace Products (see Note 12). During the third quarter of 2021, the Parent announced its plan to spin off its infrastructure business and separate into two distinct, publicly traded companies (the ‘‘Separation’’) comprising the infrastructure business and the equipment leasing business. As part of a restructuring for the Separation, the Company, the Parent and its subsidiaries completed a series of transactions which included the contribution of remaining interests in aviation legal entities to the Company. As a result, on March 31, 2022 the Company acquired a 100 % interest in FTAI CHR JV Holdings LLC, a subsidiary that owns a 25 % ownership interest in the Advanced Engine Repair JV, and a 100 % interest in WWTAI Aviation LLC, a subsidiary that owns aviation assets. The Parent completed the spin-off of its infrastructure business into an independent publicly traded company on August 1, 2022. Basis of Presentation The accompanying consolidated financial statements were prepared on a standalone legal entity basis. These financial statements reflect the consolidated historical results of operations, financial position and cash flows of FTAI Aviation Ltd. in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The transfer of a business between entities under common control that result in a change in reporting entity require retrospective combination of the entities for all periods presented as if the combination had been in effect since the inception of common control. The transfer of remaining aviation legal entities, as described above, represents a transfer of a business under a common control transaction which has been recorded at carrying value and accounted for retrospectively for all periods presented. Historically, separate financial statements have not been prepared for the Company and it has not operated as a standalone business separate from the Parent. The accompanying consolidated financial statements have been prepared from Parent’s historical accounting records and are presented on a standalone basis as if the operations had been conducted independently from Parent. The historical results of operations, financial position, and cash flows of FTAI Aviation Ltd. represented in the consolidated financial statements may not be indicative of what they would have been had the Company actually been a separate standalone entity during such periods, nor are they necessarily indicative of our future results of operations, financial position, and cash flows. The assets and liabilities in the consolidated financial statements have been reflected on a historical cost basis. Corporate Function The consolidated financial statements include all revenues and costs directly attributable to FTAI Aviation Ltd. and an allocation of certain expenses. The Parent is externally managed by Fortress Investment Group LLC (the ‘‘Manager’’), which performs the Parent’s corporate function (‘‘Corporate’’), and incurs a variety of expenses including, but not limited to, information technology, accounting, treasury, tax, legal, corporate finance and communications. For purposes of the Consolidated Statements of Operations, an allocation of these expenses is included to reflect our portion of such corporate overhead from the Parent. The charges reflected have either been specifically identified or allocated based on an estimate of time spent on the Company. These allocated costs are recorded in General and administrative, and Acquisition and transaction expenses in the Consolidated Statements of Operations. We believe the assumptions regarding allocations of the Parent’s corporate expenses are reasonable. Nevertheless, the allocations may not be indicative of the actual expense that would have been incurred had FTAI Aviation Ltd. operated as an independent, standalone public entity, nor are they indicative of FTAI Aviation Ltd.’s future expenses. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. The Parent funded our operating and investing activities as needed. Cash transfers to and from the Parent are reflected in the Consolidated Statements of Cash Flows as ‘‘Capital contributions from Parent” and “Capital distributions to Parent”. Refer to Note 11 for additional discussion on corporate costs allocated from the Parent that are included in these consolidated financial statements. Unaudited interim financial information The accompanying interim consolidated balance sheet as of September 30, 2022, the consolidated statements of operations, changes in equity and cash flows for the nine months ended September 30, 2022 and 2021 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP. In the opinion of our management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair statement of our financial position as of September 30, 2022, the results of operations, changes in equity and cash flows for the nine months ended September 30, 2022 and 2021. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other period. 10 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 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 and include both our accounts and those of our subsidiaries. Principles of Consolidation —We consolidate all entities in which we have a controlling financial interest and control over significant operating decisions. All intercompany transactions and balances have been eliminated. 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, including allocations from the Parent. Actual results could differ from those estimates. 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 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. 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 and customer 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 and to support operations. Inventory, net is carried at the lower of cost or net realizable value on our Consolidated Balance Sheets. 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: Asset Range of Estimated Useful Lives Residual Value Estimates Aircraft 25 years from date of manufacture Generally not to exceed 15 % of manufacturer’s list price when new Aircraft engines 2 - 6 years, based on maintenance adjusted service life Sum of engine core salvage value plus the estimated fair value of life limited parts Aviation tooling and equipment 3 - 6 years from date of purchase Scrap value at end of useful life Furniture and fixtures 3 - 6 years from date of purchase None Major improvements and modifications incurred in connection with the acquisition of property, plant and equipment and leasing equipment that are required to get the asset ready for initial service are capitalized and depreciated over the remaining life of the asset. Property, plant and equipment is included in Other Assets in the Consolidated Balance Sheets. We review our depreciation policies on a regular basis to determine whether changes have taken place that would suggest that a change in our depreciation policies, useful lives of our equipment or the assigned residual values is warranted. For planned major maintenance or component overhaul activities for aviation equipment off lease, the cost of such major maintenance or component overhaul event is capitalized and depreciated on a straight-line basis over the period until the next maintenance or component overhaul event is required. 11 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) In accounting for leasing equipment, we make estimates about the expected useful lives, residual values and the fair value of acquired in-place leases and acquired maintenance liabilities. In making these estimates, we rely upon observable market data for the same or similar types of equipment and our own estimates with respect to a lessee’s anticipated utilization of the aircraft or engine. When we acquire leasing equipment subject to an in-place lease, determining the fair value of the in-place lease requires us to make assumptions regarding the current fair values of leases for identical or similar equipment, in order to determine if the in-place lease is within a fair value range of current lease rates. If a lease is below or above the range of current lease rates, the resulting lease discount or premium is recognized as a lease intangible and amortized into lease income over the remaining term of the lease. 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; a significant change in market conditions; or the introduction of newer technology aircraft 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, 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. Security Deposits —Our operating leases generally require the lessee to pay a security deposit or provide a letter of credit. Security deposits are held until specified return dates stipulated in the lease or lease expiration. 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 deposit liabilities 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, 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 revenue 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 payment. Lease Incentives and Amortization —Lease incentives, which include lease acquisition costs related to reconfiguration of the aircraft cabin, other lessee specific modifications and other direct costs, are capitalized and amortized as a reduction of lease income over the primary term of the lease, assuming no lease renewals. Intangibles and Amortization —Intangibles include the value of acquired favorable and unfavorable leases. In accounting for acquired leasing equipment, we make estimates about the fair value of the acquired leases. In determining the fair value of these leases, we make assumptions regarding the current fair values of leases for identical or similar equipment in order to determine if the acquired lease is within a fair value range of current lease rates. If a lease is below or above the range of current lease rates, the resulting lease discount or premium is recognized as a lease intangible and amortized into lease income over the remaining term of the lease. 12 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) Revenues Operating Leases— We lease equipment pursuant to op erating 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 in our Consolidated Balance Sheets. All excess maintenance payments received that we do not expect to repay to the lessee are recorded as Maintenance revenues. 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. 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 finance 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 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 9 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. Leasing Arrangements —At contract inception, we evaluate whether an arrangement is or contains a lease for which we are the lessee (that is, arrangements which provide us with the right to control a physical asset for a period of time). Operating lease right-of-use (“ROU”) assets and lease liabilities are included in Other assets and Other liabilities in our Consolidated Balance Sheets. 13 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) All lease liabilities are measured at the present value of the unpaid lease payments, discounted using our incremental borrowing rate based on the information available at commencement date of the lease. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for prepaid rent and lease incentives. Operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for prepaid or accrued lease payments and lease incentives. Operating lease expenses are recognized on a straight-line basis over the lease term. With respect to finance leases, amortization of the ROU asset is presented separately from interest expense related to the finance lease liability and is recorded in Operating expenses in the Consolidated Statements of Operations. Variable lease payments, which are primarily based on usage, are recognized when the associated activity occurs. We have elected to combine lease and non-lease components for all lease contracts where we are the lessee. Additionally, for arrangements with lease terms of 12 months or less, we do not recognize ROU assets, and lease liabilities and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is 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 and, when deemed necessary, enter into collateral arrangements. During the three and nine months ended September 30, 2022, no customer accounted for more than 10% of total revenue. During the three and nine months ended September 30, 2021, one customer in the Aviation Leasing segment accounted for approximately 14 % of total revenue in both periods. As of September 30, 2022, there were two customers that represented 32 % and 14 % of total Accounts receivable, net. As of December 31, 2021, there were two customers that represented 52 % and 19 % of total Accounts receivable, net. We maintain 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. Allowance for Doubtful Accounts —We determine the allowance for doubtful accounts based on our assessment of the collectability of our receivables on a customer-by-customer basis. The allowance for doubtful accounts was $ 54.7 million and $ 16.0 million as of September 30, 2022 and December 31, 2021, respectively. There was no provision for credit losses and $ 1.5 million of provision for credit losses for the three months ended September 30, 2022 and 2021, respectively. There were provisions for credit losses of $ 47.1 million and $ 0.8 million for the nine months ended September 30, 2022 and 2021, respectively, and is included in Operating expenses in the Consolidated Statements of Operations. Economic sanctions and export controls against Russia and Russia’s aviation industry have been imposed due to its invasion of Ukraine during the first quarter of 2022. As a result of the sanctions imposed on Russian airlines, we terminated all lease agreements with Russian airlines and recognized approximately $ 47.1 million in provision for credit losses during the nine months ended September 30, 2022. Our allowance for doubtful accounts as of September 30, 2022 includes all accounts receivable exposure to Russian and Ukrainian customers. Expense Recognition —Expenses are recognized on an accrual basis as incurred. Acquisition and Transaction Expenses —Acquisition and transaction expenses is comprised of indirect costs related to asset acquisitions, dispositions and terminated deal costs, including salaries, advisory, legal, accounting, valuation and other professional or consulting fees. Foreign Currency —Our functional and reporting currency is the U.S. dollar. Purchases and sales of assets and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. 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 U.S. federal, state and foreign corporate income tax in locations where they conduct bu siness. We account for these taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management believes it is more likely than not that a deferred tax asset will not be realized. 14 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and in certain foreign jurisdictions. The income tax returns filed by us and our subsidiaries are subject to examination by the U.S. federal, state and foreign tax authorities. We recognize tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in the Consolidated Statements of Operations. Other Assets— Other assets is primarily comprised of lease incentives of $ 35.5 million and $ 46.2 million, purchase deposits of $ 28.6 million and $ 13.7 million, prepaid expenses of $ 0.7 million and $ 3.1 million, notes receivable of $ 56.0 million and $ 22.9 million, maintenance right assets of $ 12.4 million and $ 5.1 million, and operating lease right-of-use assets, net of $ 3.2 million and $ 2.3 million, as of September 30, 2022 and December 31, 2021, respectively. As a result of the sanctions imposed on Russian airlines, we terminated all lease agreements with Russian airlines and recognized approximately $ 7.5 million in amortization for the remaining lease incentives during the nine months ended September 30, 2022. Accounts Payable and Accrued Liabilities— Accounts payable and accrued liabilities primarily include payables relating to aviation leasing equipment maintenance and aircraft engine modules, spare parts, used material inventory, accrued compensation and operating expenses. Recent Accounting Pronouncements —In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments . This ASU requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (i) the lease would have been classified as a sales-type lease or a direct financing lease under Topic 842 and (ii) the lessor would have otherwise recognized a day-one loss. This standard is effective for all reporting periods beginning after December 15, 2021. We adopted this guidance in the first quarter of 2022, which did not have a material impact on our consolidated financial statements. 3. LEASING EQUIPMENT, NET Leasing equipment, net is summarized as follows: September 30, December 31, 2022 2021 Leasing equipment 1,990,115 $ 2,122,428 Less: Accumulated depreciation ( 430,540 ) ( 408,292 ) Leasing equipment, net $ 1,559,575 $ 1,714,136 Economic sanctions and export controls against Russia and Russia’s aviation industry have been imposed due to its invasion of Ukraine during the nine months ended September 30, 2022. As a result of the sanctions imposed on Russian airlines, we terminated all lease agreements with Russian airlines. As of September 30, 2022, four aircraft and two engines were still located in Ukraine and eight aircraft and seventeen engines were still located in Russia. We determined that it is unlikely that we will regain possession of the aircraft and engines that have not yet been recovered from Ukraine and Russia. As a result, we recognized an impairment charge totaling $ 120.0 million, net of maintenance deposits, to write-off the entire carrying value of leasing equipment assets that we do not expect to recover from Ukraine and Russia. Additionally, 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 transaction impairment charges of $ 8.2 million, net of redelivery compensation during the nine months ended September 30, 2022. The following table presents information related to acquisitions and dispositions of aviation leasing equipment during the nine months ended September 30, 2022: Acquisitions: Aircraft 23 Engines 45 Dispositions: Aircraft 5 Engines 50 15 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) Depreciation expense for leasing equipment is summarized as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Depreciation expense for leasing equipment $ 32,728 $ 34,718 $ 106,180 $ 101,992 4. FINANCE LEASES, NET Finance leases, net are summarized as follows: September 30, December 31, 2022 2021 Finance leases $ 7,697 $ 8,358 Unearned revenue ( 603 ) ( 775 ) Finance leases, net $ 7,094 $ 7,583 During the three months ended September 30, 2022, we entered into a 36 -month sales-type lease arrangement for two airframes. 5. INVESTMENTS The following table presents the ownership interests and carrying values of our investments: Carrying Value Investment Ownership Percentage September 30, 2022 December 31, 2021 Advanced Engine Repair JV Equity method 25 % $ 20,439 $ 21,317 Falcon MSN 177 LLC Equity method 50 % 1,841 1,600 $ 22,280 $ 22,917 We did no t recognize any other-than-temporary impairments for the three and nine months ended September 30, 2022 and 2021. The following table presents our proportionate share of equity in losses: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Advanced Engine Repair JV $ ( 314 ) $ ( 369 ) $ ( 879 ) $ ( 1,050 ) Falcon MSN 177 LLC ( 44 ) — 754 — Total $ ( 358 ) $ ( 369 ) $ ( 125 ) $ ( 1,050 ) Advanced Engine Repair JV In December 2016, we invested $ 15.0 million for a 25 % interest in an advanced engine repair joint venture. We focus on developing new costs 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. 16 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 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. 6. INTANGIBLE ASSETS AND LIABILITIES, NET Our intangible assets and liabilities, net are summarized as follows: September 30, 2022 December 31, 2021 Intangible assets Acquired favorable lease intangibles $ 59,789 $ 67,013 Less: Accumulated amortization ( 30,373 ) ( 36,051 ) Total intangible assets, net $ 29,416 $ 30,962 Intangible liabilities Acquired unfavorable lease intangibles $ 13,114 $ 14,795 Less: Accumulated amortization ( 2,216 ) ( 6,068 ) Acquired unfavorable lease intangibles, net $ 10,898 $ 8,727 Intangible assets and liabilities are all held within the Aviation Leasing segment. Intangible liabilities relate to unfavorable lease intangibles and are included as a component of Other liabilities in the Consolidated Balance Sheets. Amortization of intangible assets and liabilities is as follows: Classification in Consolidated Statements of Operations Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Lease intangibles Revenues $ 3,291 $ 1,266 $ 10,259 $ 3,216 As of September 30, 2022, estimated net annual amortization of intangible assets and liabilities is as follows: Remainder of 2022 3,323 2023 8,398 2024 4,848 2025 1,962 2026 519 Thereafter ( 532 ) Total $ 18,518 17 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 7. LOANS PAYABLE TO AFFILIATE FTAI CHR JV Promissory Note — On December 28, 2016, the Company entered into a Loan Agreement (the “Loan”) with Fortress Worldwide Transportation and Infrastructure General Partnership, an affiliate, pursuant to which it borrowed an initial aggregate amount of $ 9.0 million in connection with its investment in the Advanced Engine Repair JV. In 2019, the Company made additional borrowings of $ 8.1 million. Borrowings under the Loan are unsecured and bear payment-in-kind accrued interest at a rate of 10 % per year. The outstanding loan amount, including payment-in-kind accrued interest, was $ 27.1 million and $ 25.2 million as of September 30, 2022 and December 31, 2021, respectively. Interest expense on the Loan was $ 0.6 million, $ 0.6 million, $ 1.9 million, and $ 1.7 million for the three and nine months ended September 30, 2022 and 2021, respectively. The maturity date of the loan, including payment-in-kind accrued interest, is December 26, 2026 . 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 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 value of the loan payable to affiliate cannot be objectively determined due to the nature of the affiliate transaction. Except as discussed below, our financial instruments other than cash and cash equivalents consist principally of accounts receivable, note receivable, accounts payable and accrued liabilities, security deposits and maintenance deposits, whose fair value approximates their carrying value due to their short maturity profiles. We measure the fair value of certain assets and liabilities 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. 18 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 9. REVENUES We disaggregate our revenue from contracts with customers by products and services provided for each of our segments, as we believe it best depicts the nature, amount, timing and uncertainty of our revenue. 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. During the three months ended September 30, 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 three months ended September 30, 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 three months ended September 30, 2022. Sales transactions of aircraft and engines prior to the three months ended September 30, 2022 were accounted for in accordance with ASC 610-20, Gains and losses from the derecognition of nonfinancial assets and were included in Gain 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. Three Months Ended September 30, 2022 Aviation Leasing Aerospace Products Total Revenues Lease income $ 40,273 $ — $ 40,273 Maintenance revenue 35,507 — 35,507 Finance lease income 119 — 119 Asset sales revenue 85,488 — 85,488 Aerospace products revenue — 53,401 53,401 Other revenue 3,461 — 3,461 Total revenues $ 164,848 $ 53,401 $ 218,249 Three Months Ended September 30, 2021 Aviation Leasing Aerospace Products Total Revenues Lease income $ 40,392 $ — $ 40,392 Maintenance revenue 40,252 — 40,252 Finance lease income 439 — 439 Aerospace products revenue — 7,730 7,730 Other revenue 5,125 — 5,125 Total revenues $ 86,208 $ 7,730 $ 93,938 19 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) Nine Months Ended September 30, 2022 Aviation Leasing Aerospace Products Total Revenues Lease income $ 111,316 $ — $ 111,316 Maintenance revenue 112,171 — 112,171 Finance lease income 332 — 332 Asset sales revenue 85,488 — 85,488 Aerospace products revenue — 94,211 94,211 Other revenue 8,687 — 8,687 Total revenues $ 317,994 $ 94,211 $ 412,205 Nine Months Ended September 30, 2021 Aviation Leasing Aerospace Products Total Revenues Lease income $ 120,389 $ — $ 120,389 Maintenance revenue 87,763 — 87,763 Finance lease income 1,285 — 1,285 Aerospace products revenue — 13,284 13,284 Other revenue 5,761 — 5,761 Total revenues $ 215,198 $ 13,284 $ 228,482 Presented below are the contracted minimum future annual revenues to be received under existing operating and finance leases: September 30, 2022 Remainder of 2022 $ 32,414 2023 104,995 2024 70,428 2025 43,890 2026 24,835 Thereafter 65,820 Total $ 342,382 20 Index 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Current: Cayman Islands $ — $ — $ — $ — United States: Federal 247 336 581 793 State and local ( 437 ) 54 69 218 Non-U.S. 3 32 ( 12 ) 49 Total current (benefit) provision ( 187 ) 422 638 1,060 Deferred: Cayman Islands $ — $ — $ — $ — United States: Federal 3,029 45 4,560 45 State and local 346 14 608 14 Non-U.S. 630 19 1,446 ( 82 ) Total deferred provision (benefit) 4,005 78 6,614 ( 23 ) Total $ 3,818 $ 500 $ 7,252 $ 1,037 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 U.S. federal, state and foreign corporate income tax in locations where they conduct business. 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 nine months ended September 30, 2022, 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 2018. 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. MANAGEMENT AGREEMENT AND AFFILIATE TRANSACTIONS In connection with the Parent’s spin-off of its infrastructure business on August 1, 2022, the Parent assigned the then-existing management and advisory agreement, dated as of May 20, 2015, with its Manager to FTAI Infrastructure Inc. (the entity which holds the infrastructure business of the Parent). On July 31, 2022, the Parent entered into a new management and advisory agreement (the “Management Agreement”), by and among the Parent, and each of the subsidiaries that are party thereto and the Manager, with substantially similar terms and conditions as the existing management and advisory agreement between the Parent and the Manager. The Company, as part of the Parent, is externally managed by the Manager. The Manager is 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 Manager may be reimbursed for various expenses incurred by the Manager on our behalf, including the costs of legal, accounting and other administrative activities. Additionally, we have entered into certain incentive allocation arrangements with Master GP, which owns approximately 0.05 % of the Partnership and is the general partner of the Partnership. 21 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) The Manager is entitled to a management fee, incentive allocations (comprised of Income Incentive Allocation and Capital Gains Incentive Allocation, defined below) and reimbursement of certain expenses. The management fee is 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 1.5 % and is payable monthly in arrears in cash. The income incentive allocation is 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 the Parent’s 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 the Parent’s independent directors. Pre-incentive allocation net income does not include any Income Incentive Allocation or Capital Gains Incentive Allocation (described below) paid to the Master GP during the relevant quarter. The Master GP is entitled to 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 will be prorated for any period of less than three months. Capital Gains Incentive Allocation is calculated and distributable in arrears as of the end of each calendar year and is equal to 10% of the Parent’s pro rata share of cumulative realized gains from the date of the Parent’s IPO through the end of the applicable calendar year, net of the Parent’s 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 the Master GP. A portion of the management fee, income incentive allocation, and capital gains incentive allocation that are attributable to the operations of FTAI Aviation Ltd. is recorded in the Management fees and incentive allocation to affiliate on the Consolidated Statement of Operations. These amounts are allocated on the following basis: Management fee—Management fee is allocated to FTAI Aviation Ltd. from the Parent by applying the calculation methodology described above to the equity of FTAI Aviation Ltd. included in these consolidated financial statements. Income Incentive Allocation and Capital Gains Incentive Allocation—The Income Incentive Allocation and Capital Gains Incentive Allocation are allocated to FTAI Aviation Ltd., from the Parent, by applying the calculation methodology described above to FTAI Aviation Ltd.’s financial results in each respective period. The following table summarizes the management fees and incentive allocations included in these consolidated financial statements: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Management fees $ 539 2,116 $ 4,692 7,027 Income incentive allocation — — — — Capital gains incentive allocation — — — — Total $ 539 $ 2,116 $ 4,692 $ 7,027 22 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) The Parent pays all of its operating expenses, except those specifically required to be borne by the Manager under the Management Agreement. The expenses required to be paid by the Parent include, but are not limited to, issuance and transaction costs incident to the acquisition, disposition and financing of its assets, legal and auditing fees and expenses, the compensation and expenses of the Parent’s independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness of the Parent (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of the Parent, costs and expenses incurred in contracting with third parties (including affiliates of the Manager), the costs of printing and mailing proxies and reports to the Parent’s shareholders, costs incurred by the Manager or its affiliates for travel on the Parent’s behalf, costs associated with any computer software or hardware that is used by the Parent, costs to obtain liability insurance to indemnify the Parent’s directors and officers and the compensation and expenses of the Parent’s transfer agent. The Parent will pay or reimburse the 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 Manager is responsible for all of its other costs incident to the performance of its duties under the Management Agreement, including compensation of the Manager’s employees, rent for facilities and other “overhead” expenses. A portion of the Parent’s reimbursement to the Manager is allocated to FTAI Aviation Ltd. based on an estimate of time incurred by the Manager’s employees on activities related to our operations. A portion of these reimbursable expenses that the Parent paid to the Manager and are attributable to FTAI Aviation Ltd. are included in the consolidated financial statements as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Classification in the Consolidated Statements of Operations: General and administrative expenses $ 1,466 $ 1,195 $ 4,160 $ 3,584 Acquisition and transaction expenses 1,025 273 1,677 820 Total $ 2,491 $ 1,468 $ 5,837 $ 4,404 In addition to the above, the following corporate expenses, which were allocated from the Parent, are also included in the consolidated financial statements: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Classification in the Consolidated Statements of Operations: General and administrative expenses $ 1,888 $ 1,667 $ 4,965 $ 3,582 The following table summarizes amounts due to the Parent, which are included within Management fees payable to affiliate in the Consolidated Balance Sheets: September 30, 2022 December 31, 2021 Management fees payable to affiliate $ 46,095 $ 43,477 23 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 12. SEGMENT INFORMATION During the third quarter of 2022, as a result of the Parent’s spin-off of its infrastructure business effective on August 1, 2022 and its reevaluation of segments, 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, manufactures, repairs, and sells aircraft engines and aftermarket components for aircraft engines. The interim periods disclose the reportable segments under this basis with prior periods restated to reflect the change in accordance with the requirements of ASC 280. Corporate and Other primarily consists of debt, allocated corporate general and administrative expenses, shared services costs, and management fees. The accounting policies of the segments are the same as those described in the summary of significant accounting policies; however, financial information presented by segment includes the impact of intercompany eliminations. Our Chief Executive Officer is our Chief Operating Decision Maker (“CODM”). Segment information is presented in the same manner that our CODM reviews the operating results in assessing performance and allocating resources. The CODM evaluates performance for each reportable segment primarily based on Adjusted EBITDA. Historically, the CODM’s assessment of segment performance included asset information. During the third quarter of 2022, the CODM determined that segment asset information is not a key factor in measuring performance or allocating resources. Therefore, segment asset information is not included in the tables below as it is not provided to or reviewed by our CODM. Adjusted EBITDA is defined as net income (loss) attributable to shareholders, 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, (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. We believe that net income attributable to shareholders, as defined by GAAP, is the most appropriate earnings measurement with which to reconcile Adjusted EBITDA. Adjusted EBITDA should not be considered as an alternative to net income attributable to shareholders as determined in accordance with GAAP. 24 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) The following tables set forth certain information for each reportable segment: I. For the Three Months Ended September 30, 2022 Three Months Ended September 30, 2022 Aviation Leasing Aerospace Products Corporate and Other Total Revenues $ 164,848 $ 53,401 $ — $ 218,249 Expenses Operating expenses 10,533 3,491 588 14,612 Cost of sales 64,855 31,093 — 95,948 General and administrative — — 3,354 3,354 Acquisition and transaction expenses 247 15 2,586 2,848 Management fees and incentive allocation to affiliate — — 539 539 Depreciation and amortization 32,728 77 72 32,877 Asset impairment 4,495 — — 4,495 Interest expense — — 644 644 Total expenses 112,858 34,676 7,783 155,317 Other expense Equity in losses of unconsolidated entities ( 45 ) ( 313 ) — ( 358 ) Other income 42 — — 42 Total other expense ( 3 ) ( 313 ) — ( 316 ) Income (loss) before income taxes 51,987 18,412 ( 7,783 ) 62,616 Provision for income taxes 1,232 2,586 — 3,818 Net income (loss) attributable to shareholders $ 50,755 $ 15,826 $ ( 7,783 ) $ 58,798 The following table sets forth a reconciliation of Adjusted EBITDA to net income attributable to shareholders: Three Months Ended September 30, 2022 Aviation Leasing Aerospace Products Corporate and Other Total Adjusted EBITDA $ 95,994 $ 18,560 $ ( 4,481 ) $ 110,073 Add: Equity in losses of unconsolidated entities ( 358 ) Less: Pro-rata share of Adjusted EBITDA from unconsolidated entities 241 Less: Interest expense ( 644 ) Less: Depreciation and amortization expense ( 39,353 ) Less: Asset impairment charges ( 4,495 ) Less: Acquisition and transaction expenses ( 2,848 ) Less: Provision for income taxes ( 3,818 ) Net income attributable to shareholders $ 58,798 25 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) Summary information with respect to our geographic sources of revenue, based on location of customer, is as follows: Three Months Ended September 30, 2022 Aviation Leasing Aerospace Products Corporate and Other Total Revenues Africa $ 250 $ — $ — $ 250 Asia 23,496 1,200 24,696 Europe 41,869 15,511 — 57,380 North America 90,183 36,690 126,873 South America 9,050 — — 9,050 Total revenues $ 164,848 $ 53,401 $ — $ 218,249 II. For the Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Aviation Leasing Aerospace Products Corporate and Other Total Revenues $ 317,994 $ 94,211 $ — $ 412,205 Expenses Operating expenses 72,135 8,094 3,422 83,651 Cost of sales 64,855 55,284 — 120,139 General and administrative — — 9,125 9,125 Acquisition and transaction expenses 624 15 4,810 5,449 Management fees and incentive allocation to affiliate — — 4,692 4,692 Depreciation and amortization 106,180 178 209 106,567 Asset impairment 128,171 — — 128,171 Interest expense — — 1,910 1,910 Total expenses 371,965 63,571 24,168 459,704 Other expense Equity in earnings (losses) of unconsolidated entities 753 ( 878 ) — ( 125 ) Gain on sale of assets, net 61,371 18,562 — 79,933 Other income 245 — — 245 Total other income 62,369 17,684 — 80,053 Income (loss) before income taxes 8,398 48,324 ( 24,168 ) 32,554 Provision for income taxes 2,197 5,055 — 7,252 Net income (loss) attributable to shareholders $ 6,201 $ 43,269 $ ( 24,168 ) $ 25,302 26 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) The following table sets forth a reconciliation of Adjusted EBITDA to net income attributable to shareholders: Nine Months Ended September 30, 2022 Aviation Leasing Aerospace Products Corporate and Other Total Adjusted EBITDA $ 273,788 $ 48,685 $ ( 17,239 ) $ 305,234 Add: Equity in losses of unconsolidated entities ( 125 ) Less: Pro-rata share of Adjusted EBITDA from unconsolidated entities ( 165 ) Less: Interest expense ( 1,910 ) Less: Depreciation and amortization expense ( 136,860 ) Less: Asset impairment charges ( 128,171 ) Less: Acquisition and transaction expenses ( 5,449 ) Less: Provision for income taxes ( 7,252 ) Net income attributable to shareholders $ 25,302 Summary information with respect to our geographic sources of revenue, based on location of customer, is as follows: Nine Months Ended September 30, 2022 Aviation Leasing Aerospace Products Corporate and Other Total Revenues Africa $ 250 $ 850 $ — $ 1,100 Asia 60,111 2,601 — 62,712 Europe 94,751 26,410 — 121,161 North America 130,362 64,350 — 194,712 South America 32,520 — — 32,520 Total revenues $ 317,994 $ 94,211 $ — $ 412,205 27 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) III. For the Three Months Ended September 30, 2021 Three Months Ended September 30, 2021 Aviation Leasing Aerospace Products Corporate and Other Total Revenues $ 86,208 $ 7,730 $ — $ 93,938 Expenses Operating expenses 7,282 1,774 1,074 10,130 Cost of sales — 5,367 — 5,367 General and administrative — — 2,862 2,862 Acquisition and transaction expenses 234 — 898 1,132 Management fees and incentive allocation to affiliate — — 2,116 2,116 Depreciation and amortization 34,718 40 67 34,825 Asset impairment 859 — — 859 Interest expense — — 584 584 Total expenses 43,093 7,181 7,601 57,875 Other income (expense) Equity in losses of unconsolidated entities — ( 369 ) — ( 369 ) Gain on sale of assets, net 10,961 1,724 — 12,685 Other expense ( 1,341 ) — — ( 1,341 ) Total other income 9,620 1,355 — 10,975 Income (loss) before income taxes 52,735 1,904 ( 7,601 ) 47,038 Provision for (benefit from) income taxes 610 ( 110 ) — 500 Net income (loss) $ 52,125 $ 2,014 $ ( 7,601 ) $ 46,538 The following table sets forth a reconciliation of Adjusted EBITDA to net income attributable to shareholders: Three Months Ended September 30, 2021 Aviation Leasing Aerospace Products Corporate and Other Total Adjusted EBITDA $ 94,990 $ 2,001 $ ( 6,052 ) $ 90,939 Add: Equity in losses of unconsolidated entities ( 369 ) Less: Pro-rata share of Adjusted EBITDA from unconsolidated entities 312 Less: Interest expense ( 584 ) Less: Depreciation and amortization expense ( 41,269 ) Less: Asset impairment charges ( 859 ) Less: Acquisition and transaction expenses ( 1,132 ) Less: Provision for income taxes ( 500 ) Net income attributable to shareholders $ 46,538 28 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) Summary information with respect to our geographic sources of revenue, based on location of customer, is as follows: Three Months Ended September 30, 2021 Aviation Leasing Aerospace Products Corporate and Other Total Revenues Asia $ 36,420 $ — $ — $ 36,420 Europe 35,709 — — 35,709 North America 10,422 7,730 — 18,152 South America 3,657 — — 3,657 Total revenues $ 86,208 $ 7,730 $ — $ 93,938 IV. For the Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Aviation Leasing Aerospace Products Corporate and Other Total Revenues $ 215,198 $ 13,284 $ — $ 228,482 Expenses Operating expenses 14,177 3,519 2,945 20,641 Cost of sales — 8,577 — 8,577 General and administrative — — 7,166 7,166 Acquisition and transaction expenses 804 — 2,906 3,710 Management fees and incentive allocation to affiliate — — 7,027 7,027 Depreciation and amortization 101,992 40 162 102,194 Asset impairment 3,048 — — 3,048 Interest expense — — 1,734 1,734 Total expenses 120,021 12,136 21,940 154,097 Other (expense) income Equity in losses of unconsolidated entities — ( 1,050 ) — ( 1,050 ) Gain on sale of assets, net 15,751 1,716 — 17,467 Other expense ( 717 ) — — ( 717 ) Total other income 15,034 666 — 15,700 Income (loss) before income taxes 110,211 1,814 ( 21,940 ) 90,085 Provision (benefit from) for income taxes 1,048 ( 11 ) — 1,037 Net income (loss) attributable to shareholders $ 109,163 $ 1,825 $ ( 21,940 ) $ 89,048 29 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) The following table sets forth a reconciliation of Adjusted EBITDA to net income attributable to shareholders: Nine Months Ended September 30, 2021 Aviation Leasing Aerospace Products Corporate and Other Total Adjusted EBITDA $ 237,404 $ 1,998 $ ( 17,138 ) $ 222,264 Add: Equity in losses of unconsolidated entities ( 1,050 ) Less: Pro-rata share of Adjusted EBITDA from unconsolidated entities 906 Less: Interest expense ( 1,734 ) Less: Depreciation and amortization expense ( 123,543 ) Less: Asset impairment charges ( 3,048 ) Less: Acquisition and transaction expenses ( 3,710 ) Less: Provision for income taxes ( 1,037 ) Net income attributable to shareholders $ 89,048 Summary information with respect to our geographic sources of revenue, based on location of customer, is as follows: Nine Months Ended September 30, 2021 Aviation Leasing Aerospace Products Corporate and Other Total Revenues Africa $ 235 $ — $ — $ 235 Asia 93,925 — — 93,925 Europe 88,296 812 — 89,108 North America 26,630 12,472 — 39,102 South America 6,112 — — 6,112 Total revenues $ 215,198 $ 13,284 $ — $ 228,482 V. Location of Long-Lived Assets The following tables set forth summarized geographic location of leasing equipment, net: September 30, 2022 Total Leasing equipment, net Africa $ 17,776 Asia 222,830 Europe 602,833 North America 391,219 South America 324,917 Total leasing equipment, net $ 1,559,575 December 31, 2021 Total Leasing equipment, net Asia $ 365,331 Europe 839,555 North America 263,718 South America 245,532 Total leasing equipment, net $ 1,714,136 30 Index FTAI AVIATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in tables in thousands, unless otherwise noted) 13. EARNINGS PER SHARE AND EQUITY Basic earnings per common share (“EPS”) is calculated by dividing net income attributable to shareholders by the weighted average number of common shares outstanding, plus any participating securities. Diluted EPS is calculated by dividing net income attributable to shareholders by the weighted average number of common shares outstanding, plus any participating securities and potentially dilutive securities. Potentially dilutive securities are calculated using the treasury stock method. The calculation of basic and diluted EPS is presented below. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share data) 2022 2021 2022 2021 Net income attributable to shareholders $ 58,798 $ 46,538 $ 25,302 $ 89,048 Weighted average shares outstanding: Basic 105.2 100.0 103.5 100.0 Diluted 105.2 100.0 103.5 100.0 Basic and Diluted Net earnings per share $ 558.92 $ 465.38 $ 244.46 $ 890.48 14. COMMITMENTS AND CONTINGENCIES From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of business. As of September 30, 2022 and December 31, 2021, the Company was not subject to any material litigation and the Company was not aware of any material litigation. Rent expense, primarily for the corporate office facilities, was $ 0.3 million and $ 0.8 million for the three and nine months ended September 30, 2022 . Rent expense, primarily for the corporate office facilities, was $ 0.2 million and $ 0.8 million for the three and nine months ended September 30, 2021. As of September 30, 2022 , the Company is obligated under non-cancelable operating leases relating principally to the office facilities in Miami and New York City for future minimum lease payments as follows: September 30, 2022 2022 $ 203 2023 831 2024 858 2025 864 2026 321 Thereafter — Total $ 3,077 15. SUBSEQUENT EVENTS Merger Transaction On November 10, 2022, pursuant to the Agreement and Plan of Merger dated August 12, 2022, by and among the Company, the Parent, and FTAI Aviation Merger Sub LLC, the Parent became a wholly-owned subsidiary of the Company. 31 Index Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. (the “Company,” “we,” “our” or “us”). Our MD&A should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes, and with Part II, Item 1A, “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q. Overview We own and acquire high quality aviation equipment that is essential for the transportation of goods and people globally. We target assets that, on a combined basis, generate strong cash flows with potential for earnings growth. We believe that there is a large number of acquisition opportunities in our market, and that the Manager’s expertise and business and financing relationships, together with our Parent’s access to capital, will allow us to take advantage of these opportunities. Our Parent is externally managed by the Manager, an affiliate of Fortress, which has a dedicated team of experienced professionals focused on the acquisition of aviation assets since 2002. As of September 30, 2022 we had total consolidated assets of $2.0 billion and total equity of $1.8 billion. Our strategy permits us to acquire a broad array of aviation related assets where we believe there are meaningful opportunities to deploy capital to achieve attractive risk adjusted returns. Commercial air travel and air freight activity have historically been long-term growth sectors and are tied to the underlying demand for passenger and freight movement. We continue to see long-term demand for aviation related assets. Impact of Russia invasion of Ukraine Due to Russia’s invasion of Ukraine during the first quarter of 2022, the United States, European Union, United Kingdom, and others have imposed economic sanctions and export controls against Russia and Russia’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 to Russia 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 nine months ended September 30, 2022. We continue to pursue efforts to remove and repossess all of our aircraft and engines from Russia and Ukraine. As of September 30, 2022, four aircraft and two engines were still located in Ukraine and eight aircraft and seventeen engines were still located in Russia. We determined that it is unlikely that we will regain possession of the aircraft that had not been recovered from Ukraine and Russia 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 from Ukraine and Russia for the nine months ended September 30, 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 in Ukraine and Russia is approximately $294.0 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 of Russia’s invasion of Ukraine 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. Impact of COVID-19 Due to the outbreak of COVID-19, we have taken measures to protect the health and safety of our employees, including having employees work remotely, where possible. Market conditions due to the outbreak of COVID-19 resulted in asset impairment charges and a decline in our revenues during the years ended December 31, 2021 and 2020. However, our revenues have continued to recover during the nine months ended September 30, 2022. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, as well as additional waves of COVID-19 infections and the ultimate impact of related restrictions imposed by the U.S. and international governments, all of which remain uncertain. For additional detail, see Liquidity and Capital Resources and Part II, Item 1A. Risk Factors—“The COVID-19 pandemic has severely disrupted the global economy and may have, and the emergence of similar crises could have, material adverse effects on our business, results of operations or financial condition.” 32 Index Operating Segments During the third quarter of 2022, as a result of the Parent’s spin-off of the infrastructure business on August 1, 2022, and its reevaluation of segments, 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, manufactures, repairs, and sells aircraft engines and aftermarket components for aircraft engines. The interim periods disclose the reportable segments under this basis with prior periods restated to reflect the change in accordance with the requirements of ASC 280. Corporate and Other primarily consists of debt, allocated corporate general and administrative expenses, shared services costs, and management fees. 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, as well as 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. Adjusted EBITDA is defined as net income (loss) attributable to shareholders, 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, 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. 33 Index Comparison of the three and nine months ended September 30, 2022 and 2021 The following table presents our consolidated results of operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Revenues Lease income $ 40,273 $ 40,392 $ (119 ) $ 111,316 $ 120,389 $ (9,073 ) Maintenance revenue 35,507 40,252 (4,745 ) 112,171 87,763 24,408 Finance lease income 119 439 (320 ) 332 1,285 (953 ) Aerospace products revenue 53,401 7,730 45,671 94,211 13,284 80,927 Asset sales revenue 85,488 — 85,488 85,488 — 85,488 Other revenue 3,461 5,125 (1,664 ) 8,687 5,761 2,926 Total revenues 218,249 93,938 124,311 412,205 228,482 183,723 Expenses Operating expenses 14,612 10,130 4,482 83,651 20,641 63,010 Cost of sales 95,948 5,367 90,581 120,139 8,577 111,562 General and administrative 3,354 2,862 492 9,125 7,166 1,959 Acquisition and transaction expenses 2,848 1,132 1,716 5,449 3,710 1,739 Management fees and incentive allocation to affiliate 539 2,116 (1,577 ) 4,692 7,027 (2,335 ) Depreciation and amortization 32,877 34,825 (1,948 ) 106,567 102,194 4,373 Asset impairment 4,495 859 3,636 128,171 3,048 125,123 Interest expense 644 584 60 1,910 1,734 176 Total expenses 155,317 57,875 97,442 459,704 154,097 305,607 Other (expense) income Equity in losses of unconsolidated entities (358 ) (369 ) 11 (125 ) (1,050 ) 925 Gain on sale of assets, net — 12,685 (12,685 ) 79,933 17,467 62,466 Other income (expense) 42 (1,341 ) 1,383 245 (717 ) 962 Total other (expense) income (316 ) 10,975 (11,291 ) 80,053 15,700 64,353 Income before income taxes 62,616 47,038 15,578 32,554 90,085 (57,531 ) Provision for income taxes 3,818 500 3,318 7,252 1,037 6,215 Net income attributable to shareholders 58,798 46,538 12,260 25,302 89,048 (63,746 ) The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Net income attributable to shareholders $ 58,798 $ 46,538 $ 12,260 $ 25,302 $ 89,048 $ (63,746 ) Add: Provision for income taxes 3,818 500 3,318 7,252 1,037 6,215 Add: Acquisition and transaction expenses 2,848 1,132 1,716 5,449 3,710 1,739 Add: Asset impairment charges 4,495 859 3,636 128,171 3,048 125,123 Add: Depreciation and amortization expense (1) 39,353 41,269 (1,916 ) 136,860 123,543 13,317 Add: Interest expense 644 584 60 1,910 1,734 176 Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) (241 ) (312 ) 71 165 (906 ) 1,071 Less: Equity in losses of unconsolidated entities 358 369 (11 ) 125 1,050 (925 ) Adjusted EBITDA (non-GAAP) $ 110,073 $ 90,939 $ 19,134 $ 305,234 $ 222,264 $ 82,970 (1) Includes the following items for the three months ended September 30, 2022 and 2021: (i) depreciation and amortization expense of $32,877 and $34,825, (ii) lease intangible amortization of $3,291 and $1,266 and (iii) amortization for lease incentives of $3,185 and $5,178, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) depreciation and amortization expense of $106,567 and $102,194, (ii) lease intangible amortization of $10,259 and $3,216 and (iii) amortization for lease incentives of $20,034 and $18,133, respectively. (2) Includes the following items for the three months ended September 30, 2022 and 2021: (i) net loss of $358 and $369 and (ii) depreciation and amortization expense of $117 and $57, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) net loss of $125 and $1,050 and (ii) depreciation and amortization expense of $290 and $144, respectively. 34 Index Revenues Presentation of assets sales During the three months ended September 30, 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 three months ended September 30, 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 three months ended September 30, 2022. Sales transactions of aircraft and engines prior to the three months ended September 30, 2022 were accounted for in accordance with ASC 610-20, Gains and losses from the derecognition of nonfinancial assets and were included in Gain 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 three months ended September 30, 2022 and 2021 Total revenues increased $124.3 million driven by an increase in (i) asset sales revenue and (ii) Aerospace Products revenue partially offset by decreases in (iii) lease income, (iv) maintenance revenue and (v) other revenue. Asset sales revenue increased $85.5 million primarily due to an increase in the sale of commercial aircraft and engines in our Aviation Leasing segment during 2022. See above discussion regarding presentation of asset sales. Aerospace Products revenue increased $45.7 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 decreased $4.7 million in the Aviation Leasing segment, primarily due to the early redelivery of aircraft 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, partially offset by an increase in the number of aircraft and engines placed on lease and higher aircraft and engine utilization. Other revenue decreased $1.7 million in the Aviation Leasing segment due to lower end-of lease redelivery compensation. Comparison of the nine months ended September 30, 2022 and 2021 Total revenues increased $183.7 million driven by an increase in (i) asset sales revenue, (ii) Aerospace Products revenue, (iii) maintenance revenue and (iv) other revenue, partially offset by a decreases in (v) lease income. Asset sales revenue increased $85.5 million primarily due to an increase in the sale of commercial aircraft and engines in our Aviation Leasing segment in 2022. See above discussion regarding presentation of asset sales. Aerospace Products revenue increased $80.9 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 $24.4 million in the Aviation Leasing segment, 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 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. Other revenue increased $2.9 million in the Aviation Leasing segment due to an increase in end-of lease redelivery compensation. Lease income decreased $9.1 million, which primarily reflects a decrease of $9.1 million in the Aviation Leasing segment primarily due to the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines. Basic lease revenues from our owned aircraft and engines leased to Russian airlines would have been approximately $30.2 million for the nine months ended September 30, 2022. This decrease is partially offset by an increase in the number of aircraft and engines placed on lease. 35 Index Expenses Comparison of the three months ended September 30, 2022 and 2021 Total expenses increased $97.4 million, primarily due to higher (i) cost of sales, (ii) operating expenses (iii) asset impairment and (iv) acquisition and transaction expenses, partially offset by lower (v) depreciation and amortization and (vi) management fees and incentive allocation to affiliate. Cost of Sales increased $90.6 million primarily as a result of increased asset sales and the gross presentation of asset sales revenue and Aerospace Product revenues as described above. Operating expenses increased $4.5 million which primarily reflects: • an increase of $3.3 million in the Aviation Leasing Segment primarily as a result of an increase in insurance expense, shipping and storage fees, professional fees and other operating expenses, partially offset by a decrease in provision for credit losses. • an increase of $1.7 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. Asset impairment increased $3.6 million for the adjustment of the carrying value of leasing equipment to fair value in our Aviation Leasing segment. See Note 3 to the consolidated financial statements for additional information. Acquisition and transaction expenses increased $1.7 million primarily driven by higher compensation and related costs associated with acquisitions and the merger with FTAI. Depreciation and amortization decreased $1.9 million primarily due to an increase in the number of aircraft redelivered and parted out into our engine leasing pool. Management fees and incentive allocation to affiliate decreased $1.6 million driven by lower management fees allocated to the Company. Comparison of the nine months ended September 30, 2022 and 2021 Total expenses increased $305.6 million, primarily due to higher (i) asset impairment charges, (ii) cost of sales, (iii) operating expenses, (iv) depreciation and amortization, partially offset by lower (v) management fees and incentive allocation to affiliate. Asset impairment increased $125.1 million primarily due to the write down of aircraft and engines located in Ukraine and Russia that may not be recoverable. See Note 3 to the consolidated financial statements for additional information. Cost of sales increased $111.6 million primarily as a result of an increase in asset sales and the gross presentation of asset sales revenue and Aerospace Product revenues as described above. Operating expenses increased $63.0 million which primarily reflects: • an increase of $58.0 million in the Aviation Leasing segment primarily as a result of an increase in provision for credit losses as a result of the sanctions imposed on Russian airlines, an increase in insurance expense, shipping and storage fees, professional fees and repairs and maintenance expenses. • an increase of $4.6 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. Depreciation and amortization increased $4.4 million primarily driven by an increase in the number of assets owned and on lease in the Aviation Leasing segment, partially offset by an increase in the number of aircraft redelivered and parted out into our engine leasing pool. Management fees and incentive allocation to affiliate decreased $2.3 million driven by lower management fees allocated to the Company. Other income (expense) Total other income decreased $11.3 million during three months ended September 30, 2022 which primarily reflects a decrease of $12.7 million in gain on sale of assets, net in the Aviation Leasing and Aerospace Products segments from less opportunistic asset sales. See above discussion regarding presentation of asset sales. Total other income increased $64.4 million during nine months ended September 30, 2022 which primarily reflects an increase of $62.5 million in gain on sale of assets, net in the Aviation Leasing and Aerospace Products segments from opportunistic asset sales transactions. See above discussion regarding presentation of asset sales. 36 Index Net income attributable to shareholders Net income increased $12.3 million for the three months ended September 30, 2022 and decreased $63.7 million for the nine months ended September 30, 2022 as compared to the same periods during the prior year primarily due to the changes noted above. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $19.1 million and $83.0 million during the three and nine months ended September 30, 2022, respectively, primarily due to the changes noted above. Aviation Leasing Segment As of September 30, 2022, in our Aviation Leasing segment, we own and manage 325 aviation assets, consisting of 96 commercial aircraft and 229 engines, including four aircraft and two engines that were still located in Ukraine and eight aircraft and seventeen engines that were still located in Russia. As of September 30, 2022, 73 of our commercial aircraft and 124 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 72% utilized during the three months ended September 30, 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 39 months, and our engines currently on-lease have an average remaining lease term of 13 months. The table below provides additional information on the assets in our Aviation Leasing segment: Aviation Leasing Assets Widebody Narrowbody Total Aircraft Assets at January 1, 2022 13 95 108 Purchases 1 22 23 Sales (3 ) (2 ) (5 ) Transfers (2 ) (28 ) (30 ) Assets at September 30, 2022 9 87 96 Engines Assets at January 1, 2022 68 139 207 Purchases 2 43 45 Sales (26 ) (24 ) (50 ) Transfers 5 22 27 Assets at September 30, 2022 49 180 229 37 Index The following table presents our results of operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Revenues Lease income $ 40,273 $ 40,392 $ (119 ) $ 111,316 $ 120,389 $ (9,073 ) Maintenance revenue 35,507 40,252 (4,745 ) 112,171 87,763 24,408 Finance lease income 119 439 (320 ) 332 1,285 (953 ) Asset sales revenue 85,488 — 85,488 85,488 — 85,488 Other revenue 3,461 5,125 (1,664 ) 8,687 5,761 2,926 Total revenues 164,848 86,208 78,640 317,994 215,198 102,796 Expenses Operating expenses 10,533 7,282 3,251 72,135 14,177 57,958 Cost of sales 64,855 — 64,855 64,855 — 64,855 Acquisition and transaction expenses 247 234 13 624 804 (180 ) Depreciation and amortization 32,728 34,718 (1,990 ) 106,180 101,992 4,188 Asset impairment 4,495 859 3,636 128,171 3,048 125,123 Total expenses 112,858 43,093 69,765 371,965 120,021 251,944 Other (expense) income Equity in (losses) earnings of unconsolidated entities (45 ) — (45 ) 753 — 753 Gain on sale of assets, net — 10,961 (10,961 ) 61,371 15,751 45,620 Other income (expense) 42 (1,341 ) 1,383 245 (717 ) 962 Total other (expense) income (3 ) 9,620 (9,623 ) 62,369 15,034 47,335 Income before income taxes 51,987 52,735 (748 ) 8,398 110,211 (101,813 ) Provision for income taxes 1,232 610 622 2,197 1,048 1,149 Net income attributable to shareholders 50,755 52,125 (1,370 ) 6,201 109,163 (102,962 ) The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Net income attributable to shareholders $ 50,755 $ 52,125 $ (1,370 ) $ 6,201 $ 109,163 $ (102,962 ) Add: Provision for income taxes 1,232 610 622 2,197 1,048 1,149 Add: Acquisition and transaction expenses 247 234 13 624 804 (180 ) Add: Asset impairment charges 4,495 859 3,636 128,171 3,048 125,123 Add: Depreciation and amortization expense (1) 39,204 41,162 (1,958 ) 136,473 123,341 13,132 Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) 16 — 16 875 — 875 Less: Equity in (earnings) losses of unconsolidated entities 45 — 45 (753 ) — (753 ) Adjusted EBITDA (non-GAAP) $ 95,994 $ 94,990 $ 1,004 $ 273,788 $ 237,404 $ 36,384 (1) Includes the following items for the three months ended September 30, 2022 and 2021: (i) depreciation expense of $32,728 and $34,718, (ii) lease intangible amortization of $3,291 and $1,266 and (iii) amortization for lease incentives of $3,185 and $5,178, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) depreciation expense of $106,180 and $101,992, (ii) lease intangible amortization of $10,259 and $3,216 and (iii) amortization for lease incentives of $20,034 and $18,133, respectively. (2) Includes the following items for the three and nine months ended September 30, 2022: (i) net loss of $45 and net income of $753 and (ii) depreciation and amortization of $61 and $122, respectively. Revenues Comparison of the three months ended September 30, 2022 and 2021 Total revenue increased $78.6 million driven by an increase in asset sales revenue, partially offset by lower maintenance revenue and other revenue. • Asset sales revenue increased $85.5 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 decreased $4.7 million primarily due to the early redelivery of aircraft 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, partially offset by an increase in the number of aircraft and engines placed on lease and higher aircraft and engine utilization. 38 Index • Other revenue decreased $1.7 million primarily due to lower end-of lease redelivery compensation. Comparison of the nine months ended September 30, 2022 and 2021 Total revenue increased $102.8 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 $85.5 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 $24.4 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 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. • Other revenue increased $2.9 million primarily due to an increase in end-of lease redelivery compensation. • Lease income decreased $9.1 million primarily due to the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines. Basic lease revenues from our owned aircraft and engines leased to Russian airlines would have been approximately $30.2 million for the nine months ended September 30, 2022. This decrease is partially offset by an increase in the number of aircraft and engines placed on lease. Expenses Comparison of the three months ended September 30, 2022 and 2021 Total expenses increased $69.8 million primarily driven by an increase in the cost of sales, asset impairment and operating expenses, partially offset by a decrease in depreciation and amortization expense. • Cost of sales increased $64.9 million primarily as a result of an increase in asset sales and the gross presentation of asset sales revenues and related cost of sales as described above. • Asset impairment increased $3.6 million for the adjustment of the carrying value of leasing equipment to fair value. See Note 3 to the consolidated financial statements for additional information. • Operating expenses increased $3.3 million primarily as a result of an increase in insurance expense, shipping and storage fees, professional fees and other operating expenses, partially offset by a decrease in provision for credit losses. • Depreciation and amortization expense decreased $2.0 million driven by an increase in the number of aircraft redelivered and parted out into our engine leasing pool. Comparison of the nine months ended September 30, 2022 and 2021 Total expenses increased $251.9 million primarily driven by an increase in asset impairment, cost of sales, operating expenses and depreciation and amortization expense. • Asset impairment increased $125.1 million primarily due to the write down of aircraft and engines located in Ukraine and Russia that may not be recoverable. See Note 3 to the consolidated financial statements for additional information. • Cost of sales increased $64.9 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. • Operating expenses increased $58.0 million primarily as a result of an increase in provision for credit losses as a result of the sanctions imposed on Russian airlines, an increase in insurance expense, shipping and storage fees, professional fees, and repairs and maintenance expenses. • Depreciation and amortization expense increased $4.2 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 (expense) Total other income decreased $9.6 million during the three months ended September 30, 2022 primarily due to a decrease of $11.0 million in gain on sale of assets, net. See above discussion regarding presentation of asset sales. Total other income increased $47.3 million during the nine months ended September 30, 2022 primarily due to (i) an increase of $45.6 million in gain on the sale of assets, net due to more opportunistic sales transactions and (ii) an increase of $0.8 million in our proportionate share of unconsolidated entities’ net income. 39 Index Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $1.0 million and $36.4 million during the three and nine months ended September 30, 2022, respectively, primarily due to the changes noted above. Aerospace Products Segment The Aerospace Products segment develops, manufactures, repairs, and sells aircraft engines and aftermarket components primarily for the CFM56-7B and CFM56-5B commercial aircraft engines. Our engine and module sales are facilitated through The Module Factory, a dedicated commercial maintenance center designed to focus on modular repair and refurbishment of CFM56-7B and CFM56-5B engines. 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. The following table presents our results of operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Aerospace products revenue $ 53,401 $ 7,730 $ 45,671 $ 94,211 $ 13,284 $ 80,927 Expenses Operating expenses 3,491 1,774 1,717 8,094 3,519 4,575 Cost of sales 31,093 5,367 25,726 55,284 8,577 46,707 Acquisition and transaction expenses 15 — 15 15 — 15 Depreciation and amortization 77 40 37 178 40 138 Total expenses 34,676 7,181 27,495 63,571 12,136 51,435 Other (expense) income Equity in losses of unconsolidated entities (313 ) (369 ) 56 (878 ) (1,050 ) 172 Gain on sale of assets, net — 1,724 (1,724 ) 18,562 1,716 16,846 Total other (expense) income (313 ) 1,355 (1,668 ) 17,684 666 17,018 Income before income taxes 18,412 1,904 16,508 48,324 1,814 46,510 Provision for (benefit from) income taxes 2,586 (110 ) 2,696 5,055 (11 ) 5,066 Net income attributable to shareholders 15,826 2,014 13,812 43,269 1,825 41,444 The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Net income attributable to shareholders $ 15,826 $ 2,014 $ 13,812 $ 43,269 $ 1,825 $ 41,444 Add: Provision for (benefit from) income taxes 2,586 (110 ) 2,696 5,055 (11 ) 5,066 Add: Acquisition and transaction expenses 15 — 15 15 — 15 Add: Depreciation and amortization expense 77 40 37 178 40 138 Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (1) (257 ) (312 ) 55 (710 ) (906 ) 196 Less: Equity in losses of unconsolidated entities 313 369 (56 ) 878 1,050 (172 ) Adjusted EBITDA (non-GAAP) $ 18,560 $ 2,001 $ 16,559 $ 48,685 $ 1,998 $ 46,687 (1) Includes the following items for the three months ended September 30, 2022 and 2021: (i) net loss of $313 and $369 and (ii) depreciation and amortization of $56 and $57, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) net loss of $878 and $1,050 and (ii) depreciation and amortization of $168 and $144, respectively. 40 Index Revenues Comparison of the three and nine months ended September 30, 2022 and 2021 Total Aerospace Products revenue increased $45.7 million during the three months ended September 30, 2022 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. Total Aerospace Products revenue increased $80.9 million during the nine months ended September 30, 2022 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. Expenses Comparison of the three months ended September 30, 2022 and 2021 Total expenses increased $27.5 million primarily due to an increase in costs of sales and operating expenses. • Cost of sales increased $25.7 million primarily as a result of an increase in Aerospace product revenues and the gross presentation described above. • Operating expenses increased $1.7 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. Comparison of the nine months ended September 30, 2022 and 2021 Total expenses increased $51.4 million primarily due to an increase in costs of sales and operating expenses. • Cost of sales increased $46.7 million primarily as a result of an increase in Aerospace product revenues and the gross presentation described above. • Operating expenses increased $4.6 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 $1.7 million during three months ended September 30, 2022 which primarily reflects a decrease of $1.7 million in gain on sale of assets, net. See above discussion regarding presentation of asset sales. Total other income increased $17.0 million during nine months ended September 30, 2022 which primarily reflects an increase of $16.8 million in gain on sale of assets, net due to an increase in sales relating to the CFM56-7B and CFM56-5B engines as operations continue to ramp-up in 2022. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $16.6 million and $46.7 million during the three and nine months ended September 30, 2022, respectively, primarily due to the changes noted above. 41 Index Corporate and Other The following table presents our results of operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Revenues $ — $ — $ — $ — $ — $ — Expenses Operating expenses 588 1,074 (486 ) 3,422 2,945 477 General and administrative 3,354 2,862 492 9,125 7,166 1,959 Acquisition and transaction expenses 2,586 898 1,688 4,810 2,906 1,904 Management fees and incentive allocation to affiliate 539 2,116 (1,577 ) 4,692 7,027 (2,335 ) Depreciation and amortization 72 67 5 209 162 47 Interest expense 644 584 60 1,910 1,734 176 Total expenses 7,783 7,601 182 24,168 21,940 2,228 Loss before income taxes (7,783 ) (7,601 ) (182 ) (24,168 ) (21,940 ) (2,228 ) Provision for (benefit from) income taxes — — — — — — Net loss attributable to shareholders (7,783 ) (7,601 ) (182 ) (24,168 ) (21,940 ) (2,228 ) The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 Change 2022 2021 Change Net loss attributable to shareholders $ (7,783 ) $ (7,601 ) $ (182 ) $ (24,168 ) $ (21,940 ) $ (2,228 ) Add: Acquisition and transaction expenses 2,586 898 1,688 4,810 2,906 1,904 Add: Depreciation and amortization expense 72 67 5 209 162 47 Add: Interest expense 644 584 60 1,910 1,734 176 Adjusted EBITDA (non-GAAP) $ (4,481 ) $ (6,052 ) $ 1,571 $ (17,239 ) $ (17,138 ) $ (101 ) Expenses Comparison of the three months ended September 30, 2022 and 2021 Total expenses increased $0.2 million primarily due to an increase in acquisition and transaction expenses driven by higher compensation and related costs associated with acquisitions and the merger with FTAI, partially offset by a decrease in management fees and incentive allocation to affiliate driven by lower management fees allocated to the Company. Comparison of the nine months ended September 30, 2022 and 2021 Total expenses increased $2.2 million primarily driven by an increase in general and administrative expenses and acquisition and transaction expenses driven by higher compensation and related costs associated with acquisitions and the merger with FTAI, partially offset by a decrease in management fees and incentive allocation to affiliate driven by lower management fees allocated to the Company. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $1.6 million and decreased $0.1 million during the three and nine months ended September 30, 2022, respectively, primarily due to the changes noted above. 42 Index Liquidity and Capital Resources The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows, capital contributions from Parent and loan financing. 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) capital distributions to Parent, (iii) release of maintenance and security deposits to our lessees, and (iv) expenses associated with our operating activities. • Cash used for the purpose of making investments was $396.2 million and $321.2 million during the nine months ended September 30, 2022 and 2021, respectively. • Capital distributions to Parent were $294.2 million and $145.0 million during the nine months ended September 30, 2022 and 2021, respectively. • Release of maintenance and security deposits were $0.9 million and $19.6 million during the nine months ended September 30, 2022 and 2021, respectively. • Uses of liquidity associated with our operating expenses are captured on a net basis in our cash flows from operating 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) capital contributions from Parent and (iii) proceeds from asset sales. • Cash flows provided by operating activities, plus the principal collections on finance leases and maintenance reserve collections were $191.1 million and $156.6 million during the nine months ended September 30, 2022 and 2021, respectively. • Capital contributions from Parent were $242.1 million and $249.5 million during the nine months ended September 30, 2022 and 2021, respectively. • Proceeds from the sale of aviation equipment were $262.1 million and $78.5 million during the nine months ended September 30, 2022 and 2021, respectively. We are currently evaluating several potential aviation transactions, 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. Historical Cash Flow Comparison of the nine months ended September 30, 2022 and 2021 The following table compares the historical cash flow for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, (in thousands) 2022 2021 Cash Flow Data: Net cash provided by operating activities $ 151,304 $ 131,828 Net cash used in investing activities (124,180 ) (239,446 ) Net cash (used in) provided by financing activities (13,685 ) 108,318 Net cash provided by operating activities increased $19.5 million, which primarily reflects (i) a decrease in net income of $63.7 million, and certain adjustments to reconcile net income to cash provided by operating activities including (ii) an increase in gain on sale of assets of $88.7 million, and (iii) changes in working capital of $18.0 million, and (iv) increases in asset impairment of $125.1 million. 43 Index Net cash used in investing activities decreased $115.3 million, primarily due to (i) higher proceeds from the sale of leasing equipment of $183.6 million and (ii) an increase in proceeds from the sale of aircraft and engine of $7.2 million, partially offset by (iii) an increase in acquisition of leasing equipment of $61.7 million and (iv) an increase in purchase deposit for aircraft and engines of $14.8 million. Net cash provided by financing activities decreased $122.0 million, primarily due to (i) an increase in capital contributions to Parent of $156.6 million, partially offset by (ii) an increase in receipt of maintenance deposits of $14.5 million and a decrease in the release of maintenance deposits of $18.7 million. Contractual Obligations Our material cash requirements include the following contractual and other obligations: Loan Obligations —As of September 30, 2022 and December 31, 2021, we had outstanding principal and interest payment obligations of $27.1 million and $25.2 million, respectively, of which, $0.0 million and $0.0 million, respectively, are due in the next twelve months. See Note 7 to the consolidated financial statements for additional information about our loan obligations. Lease Obligations —As of September 30, 2022 and December 31, 2021, we had outstanding operating and finance lease obligations of $3.1 million and $2.4 million, of which, $0.8 million and $0.5 million is due in the next twelve months. We expect to meet our future short-term liquidity requirements through cash on hand 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 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. 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 net 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 amount 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 revenues. 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 fair value of the aircraft and lease. The fair value of the lease may include a lease premium or discount. 44 Index 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 lease 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 finance 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. 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 deposit liabilities 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, 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 revenue 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 payment. 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: Asset Range of Estimated Useful Lives Residual Value Estimates Aircraft 25 years from date of manufacture Generally not to exceed 15% of manufacturer’s list price when new Aircraft engines 2 - 6 years, based on maintenance adjusted service life Sum of engine core salvage value plus the estimated fair value of life limited parts Aviation tooling and equipment 3 - 6 years from date of purchase Scrap value at end of useful life Furniture and fixtures 3 - 6 years from date of purchase None 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; a significant change in market conditions; or the introduction of newer technology aircraft 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, 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. 45 Index 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 U.S. federal, state and foreign corporate income tax in locations where they conduct business. We account for these taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management believes it is more likely than not that a deferred tax asset will not be realized. Recent Accounting Pronouncements Please see Note 2 to our consolidated financial statements included elsewhere in this filing for recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and foreign exchange rates. We believe that changes in these factors would not cause significant fluctuations in our results of operations and cash flows.