FTAI Aviation Ltd. 10-Q

Item 2. 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, lease and sell aviation equipment. We also develop and manufacture through a joint venture, and repair and sell, through exclusivity arrangements, aftermarket components for aircraft engines. Additionally, we own and lease offshore energy equipment. We target assets that, on a combined basis, generate strong cash flows with potential for earnings growth and asset appreciation. We believe that there is a large number of acquisition opportunities in our markets and that our Manager’s expertise and business and financing relationships, together with our access to capital, will allow us to take advantage of these opportunities. We are externally managed by FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), which has a dedicated team of experienced professionals focused on the acquisition of transportation assets since 2002. As of June 30, 2023, we had total consolidated assets of $2.5 billion and total equity of $91.3 million. Impact of Russia’s Invasion of Ukraine Economic sanctions and export controls against Russia and Russia’s aviation industry were imposed due to its invasion of Ukraine during the three months ended March 31, 2022. As a result of the sanctions imposed on Russian airlines, we terminated all lease agreements with Russian airlines. We determined that it is unlikely that we will regain possession of the aircraft and engines that had not yet been recovered from Ukraine and Russia. As a result, during the six months ended June 30, 2022, 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 did not expect to recover from Ukraine and Russia. As of June 30, 2023, four aircraft were still located in Ukraine and eight aircraft and seventeen engines were still located in Russia. 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 $243.0 million. We intend to pursue 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. Spin-Off of FTAI Infrastructure Inc. (“FTAI Infrastructure”) On August 1, 2022, we effected a spin-off of our infrastructure business held by FTAI Infrastructure (a wholly-owned subsidiary of the Company) as a distribution of all of the shares owned by the Company of common stock of FTAI Infrastructure to the holders of the Company’s ordinary shares as of July 21, 2022. FTAI Infrastructure is a corporation for U.S. federal income tax purposes and holds, among other things, the Company’s previously held interests in the (i) Jefferson Terminal business, (ii) Repauno business, (iii) Long Ridge investment, and (iv) Transtar business. FTAI Infrastructure retained all related project-level debt of those entities. In connection with the spin-off, FTAI Infrastructure paid a dividend of $730.3 million to the Company. The Company used these proceeds to repay all outstanding borrowings under its 2021 bridge loans, $200.0 million of its 6.50% senior unsecured notes due 2025, and approximately $175.0 million of the outstanding borrowings under its revolving credit facility. Fortress Transportation and Infrastructure Investors LLC (“FTAI LLC”) retained the aviation business and certain other assets, and FTAI LLC’s remaining outstanding corporate indebtedness. In connection with the spin-off, the Company and the Manager assigned the Company’s then-existing management agreement to FTAI Infrastructure, and FTAI Infrastructure and the Manager executed an amended and restated agreement. The Company and certain of its subsidiaries executed a new management agreement with the Manager. The new management agreement has an initial term of six years. The Manager is entitled to a management fee and reimbursement of certain expenses on substantially similar terms as the previous arrangements with the Manager, which were assigned to FTAI Infrastructure. Prior to the Merger described below, our Manager remained entitled to incentive allocations (comprised of income incentive allocation and capital gains incentive allocation) on the same terms as they existed prior to spin-off. Following the Merger, the Company entered into a Services and Profit Sharing Agreement (the “Services and Profit Sharing Agreement”), with a subsidiary of the Company and Fortress Worldwide Transportation and Infrastructure Master GP LLC (“Master GP”), pursuant to which Master GP is entitled to incentive payments on substantially similar terms as the previous arrangements. On November 10, 2022, the Company completed the transactions set forth in the Agreement and Plan of Merger (the “Merger”) between FTAI LLC and FTAI Aviation Ltd. and certain other parties, with FTAI LLC becoming a subsidiary of the company. As a result of the merger, FTAI Aviation Ltd. became a Cayman Islands exempted company. Upon merger completion, FTAI LLC 34 public common shareholders’ shares of the Company were exchanged automatically for shares of FTAI Aviation Ltd. without any further action from the shareholders. Operating Segments As a result of the spin-off of FTAI Infrastructure effective August 1, 2022, the Company reevaluated its operating segments. The key factors used to identify the reportable segments are the organization and alignment of our internal operations and the nature of our products and services. Our two reportable segments are (i) Aviation Leasing and (ii) Aerospace Products. The Aviation Leasing segment owns and manages aviation assets, including aircraft and aircraft engines, which it leases and sells to customers. The Aerospace Products segment develops and manufactures through a joint venture, and repairs and sells, through exclusivity arrangements, aircraft engines and aftermarket components for aircraft engines. The interim period discloses the reportable segments on this basis, and prior periods have been restated to reflect the change in accordance with the requirements of ASC 280, Segment Reporting . Corporate and Other primarily consists of debt, unallocated corporate general and administrative expenses, shared services costs, and management fees. Additionally, Corporate and Other also includes offshore energy related assets, which consist of vessels and equipment that support offshore oil and gas activities and production which are typically subject to operating leases. Our Manager On May 22, 2023, Fortress and Mubadala Investment Company, through its wholly owned asset management subsidiary Mubadala Capital (“Mubadala”), announced that they have entered into definitive agreements pursuant to which, among other things, certain members of Fortress management and affiliates of Mubadala will acquire 100% of the equity of Fortress that is currently indirectly held by SoftBank Group Corp. (“SoftBank”). After the closing of the transaction, Fortress will continue to operate as an independent investment manager under the Fortress brand, with autonomy over investment processes and decision making, personnel and operations. Results of Operations Adjusted EBITDA (Non-GAAP) The chief operating decision maker (“CODM”) utilizes Adjusted EBITDA as the key performance measure. Adjusted EBITDA is not a financial measure in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). This performance measure provides the CODM with the information necessary to assess operational performance and make resource and allocation decisions. We believe Adjusted EBITDA is a useful metric for investors and analysts for similar purposes of assessing our operational performance. During the third quarter of 2022, the Company updated its measure of segment profit to include the add back of dividends on preferred shares in Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) attributable to shareholders from continuing operations, adjusted (a) to exclude the impact of provision for (benefit from) income taxes, equity-based compensation expense, acquisition and transaction expenses, losses on the modification or extinguishment of debt and capital lease obligations, changes in fair value of non-hedge derivative instruments, asset impairment charges, incentive allocations, depreciation and amortization expense, dividends on preferred shares and interest expense, (b) to include the impact of our pro-rata share of Adjusted EBITDA from unconsolidated entities and (c) to exclude the impact of equity in earnings (losses) of unconsolidated entities and the non-controlling share of Adjusted EBITDA. 35 Comparison of the three and six months ended June 30, 2023 and 2022 The following table presents our consolidated results of operations: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Revenues Lease income $ 59,541 $ 39,640 $ 19,901 $ 115,519 $ 78,965 $ 36,554 Maintenance revenue 42,065 39,932 2,133 77,206 76,664 542 Asset sales revenue 101,486 — 101,486 210,177 — 210,177 Aerospace products revenue 68,075 26,497 41,578 153,188 40,810 112,378 Other revenue 3,178 5,995 (2,817) 10,973 7,316 3,657 Total revenues 274,345 112,064 162,281 567,063 203,755 363,308 Expenses Cost of sales 104,532 15,141 89,391 250,202 24,191 226,011 Operating expenses 24,797 19,000 5,797 47,331 80,800 (33,469) General and administrative 3,188 3,906 (718) 7,255 8,467 (1,212) Acquisition and transaction expenses 2,672 3,219 (547) 5,934 5,492 442 Management fees and incentive allocation to affiliate 5,563 — 5,563 8,560 — 8,560 Depreciation and amortization 38,514 39,303 (789) 79,440 80,608 (1,168) Asset impairment — 886 (886) 1,220 123,676 (122,456) Interest expense 38,499 47,889 (9,390) 77,791 92,030 (14,239) Total expenses 217,765 129,344 88,421 477,733 415,264 62,469 Other (expense) income Equity in (losses) earnings of unconsolidated entities (380) 35 (415) (1,715) 233 (1,948) Gain on sale of assets, net — 63,645 (63,645) — 79,933 (79,933) Other income 408 1,118 (710) 416 1,246 (830) Total other income (expense) 28 64,798 (64,770) (1,299) 81,412 (82,711) Income (loss) before income taxes 56,608 47,518 9,090 88,031 (130,097) 218,128 Provision for income taxes 1,855 1,829 26 3,881 3,168 713 Net income (loss) from continued operations 54,753 45,689 9,064 84,150 (133,265) 217,415 Net loss from discontinued operations, net of income taxes — (35,929) 35,929 — (86,634) 86,634 Net income (loss) 54,753 9,760 44,993 84,150 (219,899) 304,049 Less: Net loss attributable to non-controlling interest in consolidated subsidiaries: Continued operations — — — — — — Discontinued operations — (8,480) 8,480 — (15,946) 15,946 Less: Dividends on preferred shares 8,335 6,791 1,544 15,126 13,582 1,544 Net income (loss) attributable to shareholders from continuing operations $ 46,418 $ 11,449 $ 34,969 $ 69,024 $ (217,535) $ 286,559 36 The following table sets forth a reconciliation of net income (loss) attributable to shareholders from continuing operations to Adjusted EBITDA: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Net income (loss) attributable to shareholders from continuing operations $ 46,418 $ 38,898 $ 7,520 $ 69,024 $ (146,847) $ 215,871 Add: Provision for income taxes 1,855 1,829 26 3,881 3,168 713 Add: Equity-based compensation expense 510 — 510 618 — 618 Add: Acquisition and transaction expenses 2,672 3,219 (547) 5,934 5,492 442 Add: Losses on the modification or extinguishment of debt and capital lease obligations — — — — — — Add: Changes in fair value of non-hedge derivative instruments — — — — — — Add: Asset impairment charges — 886 (886) 1,220 123,676 (122,456) Add: Incentive allocations 5,324 — 5,324 8,266 — 8,266 Add: Depreciation and amortization expense (1) 48,934 51,108 (2,174) 97,704 104,425 (6,721) Add: Interest expense and dividends on preferred shares 46,834 54,680 (7,846) 92,917 105,612 (12,695) Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) 150 152 (2) (546) 406 (952) Less: Equity in losses (earnings) of unconsolidated entities 380 (35) 415 1,715 (233) 1,948 Less: Non-controlling share of Adjusted EBITDA — — — — — — Adjusted EBITDA (non-GAAP) $ 153,077 $ 150,737 $ 2,340 $ 280,733 $ 195,699 $ 85,034 ___________________________________________________ ( 1) Includes the following items for the three months ended June 30, 2023 and 2022: (i) depreciation and amortization expense of $38,514 and $39,303, (ii) lease intangible amortization of $3,616 and $3,310 and (iii) amortization for lease incentives of $6,804 and $8,495, respectively. Includes the following items for the six months ended June 30, 2023 and 2022: (i) depreciation and amortization expense of $79,440 and $80,608, (ii) lease intangible amortization of $7,599 and $6,968 and (iii) amortization for lease incentives of $10,665 and $16,849, respectively. (2) Includes the following items for the three months ended June 30, 2023 and 2022: (i) net (loss) income of $(380) and $35, (ii) depreciation and amortization expense of $435 and $117 and (iii) acquisition and transaction expense of $95 and $0, respectively. Includes the following items for the six months ended June 30, 2023 and 2022: (i) net (loss) income of $(1,715) and $233, (ii) depreciation and amortization expense of $835 and $173 and (iii) acquisition and transaction expense of $334 and $0, respectively. Revenues Presentation of assets sales During the third quarter of 2022, we updated our corporate strategy based on the opportunities available in the market such that the sale of aircraft and engines is now an output of our recurring, ordinary activities. As a result of this update, the transaction price allocated to the sale of assets is included in Revenues in the Consolidated Statement of Operations beginning in the third quarter of 2022 and are accounted for in accordance with ASC 606. The corresponding net book values of the assets sold are recorded in Cost of sales in the Consolidated Statement of Operations beginning in the third quarter of 2022. Sales transactions of aircraft and engines prior to the third quarter of 2022 were accounted for in accordance with ASC 610-20, Gains and losses from the derecognition of nonfinancial assets and were included in Gain (loss) on sale of assets, net on the Consolidated Statement of Operations, as we were previously only occasionally selling these assets. Generally, assets sold were included in Leasing equipment, net, on the Consolidated Balance Sheets. Comparison of the three months ended June 30, 2023 and 2022 Total revenues increased $162.3 million primarily due to an increase in Asset sales revenue, Aerospace products revenue and Lease income. Asset sales reven ue increased $101.5 million primarily due to an increase in the sale of commercial aircraft and engines in our Aviation Leasing segment during 2023. See above discussion regarding presentation of asset sales. Aerospace products revenue increased $41.6 million primarily driven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continued to ramp-up in 2023. Lease income increased $19.9 million primarily due to an increase in the number of aircraft placed on lease and an increase in the Offshore Energy business driven by increased number of days on-hire for one of our vessels. 37 Comparison of the six months ended June 30, 2023 and 2022 Total revenues increased $363.3 million primarily due to an increase in Asset sales revenue, Aerospace products revenue, Lease income and Other revenue. Asset sales reven ue increased $210.2 million primarily due to an increase in the sale of commercial aircraft and engines in our Aviation Leasing segment during 2023. See above discussion regarding presentation of asset sales. Aerospace products revenue increased $112.4 million primarily driven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continued to ramp-up in 2023. Lease income increased $36.6 million primarily due to an increase in the number of aircraft placed on lease and an increase in the Offshore Energy business driven by increased number of days on-hire for one of our vessels. Other revenue increased $3.7 million primarily due to an increase in end-of-lease redelivery compensation in the Aviation Leasing segment and an increase in the Offshore Energy business driven by increased number of days on-hire for one of our vessels. Expenses Comparison of the three months ended June 30, 2023 and 2022 Total expenses increased $88.4 million , primarily due to higher (i) Cost of sales, (ii) Operating expenses and (iii) Management fees and incentive allocation to affiliate, partially offset by lower (iv) Interest expense. Cost of sales increased $89.4 million primarily as a result of an increase in asset sales and Aerospace Products sales and the gross presentation of Asset sales revenue and Aerospace products revenue as described above. Operating expenses increased $5.8 million, primarily due to an increase of $5.1 million in the Offshore Energy business which reflects increases in crew expenses, project costs and other operating expenses for one of our vessels driven by increased cost of operations based on the operating location of the vessel as well as increased number of days on-hire. Management fees and incentive allocation to affiliate increased $5.6 million primarily due to an increase in incentive fee due to the Manager. Interest expense decreased $9.4 million which reflects a decrease in the average outstanding debt of approximately $581.0 million due to decreases in (i) the 2021 Bridge Loans of $339.8 million, (ii) the Senior Notes due 2025 of $199.4 million, which were partially redeemed in August 2022, and (iii) the Revolving Credit Facility of $41.8 million. Comparison of the six months ended June 30, 2023 and 2022 Total expenses increased $62.5 million , primarily due to higher (i) Cost of sales and (ii) Management fees and incentive allocation to affiliate, partially offset by lower (iii) Asset impairment, (iv) Operating expenses and (v) Interest expense. Cost of sales increased $226.0 million primarily as a result of an increase in asset sales and Aerospace Products sales and the gross presentation of Asset sales revenue and Aerospace products revenue as described above. Management fees and incentive allocation to affiliate increased $8.6 million primarily due to an increase in incentive fee due to the Manager. Asset impairment decreased $122.5 million p rimarily due to the write down in 2022 of aircraft and engines located in Ukraine and Russia that may not be recoverable. See Note 4 to the consolidated financial statements for additional information. Operating expenses decreased $33.5 million which primarily reflects: • a decrease of $46.9 million in the Aviation Leasing segment primarily as a result of decreases in provision for credit losses and other expenses as a result of the sanctions imposed on Russian airlines in 2022. • an increase of $11.2 million in the Offshore Energy business which reflects increases in offshore crew expenses, project costs and other operating expenses for one of our vessels driven by increased cost of operations based on the operating location of the vessel as well as increased number of days on-hire. • an incr ease of $2.3 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. Interest expense decreased $14.2 million, which reflects a decrease in the average outstanding debt of approximately $503.5 million due to decreases in (i) the 2021 Bridge Loans of $299.9 million and (ii) the Senior Notes due 2025 of $199.3 million, which were partially redeemed in August 2022, and (iii) the Revolving Credit Facility of $4.3 million. 38 Other income (expense) Total other income decreased $64.8 million during the three months ended June 30, 2023 which primarily reflects (i) a decrease of $63.6 million in Gain on sale of assets, net in the Aviation Leasing and Aerospace Products segments due to the change in presentation of asset sales as described above and (ii) a decrease of $0.4 million in Aviation Leasing’s and Aerospace Products’ proportionate share of unconsolidated entities’ net loss. See above discussion regarding presentation of asset sales and impact on Gain on sales of assets, net. Total other income decreased $82.7 million during six months ended June 30, 2023 which primarily reflects (i) a decrease of $79.9 million in Gain on sale of assets, net in the Aviation Leasing and Aerospace Products segments due to the change in presentation of asset sales as described above and (ii) an increase of $1.9 million in Aviation Leasing’s and Aerospace Products’ proportionate share of unconsolidated entities’ net loss. See above discussion regarding presentation of asset sales and impact on Gain on sales of assets, net. Net income from continuing operations Net income from continuing operations increased $9.1 million for the three months ended June 30, 2023 and increased $217.4 million for the six months ended June 30, 2023 as compared to prior years primarily due to the changes noted above. Net loss from discontinued operations Net loss from discontinued operations decreased $35.9 million and $86.6 million for the three and six months ended June 30, 2023, respectively, compared to the prior year as these businesses have spun off and there is no corresponding activity in the current period. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $2.3 million and $85.0 million during the three and six months ended June 30, 2023, respectively, primarily due to the changes noted above. Aviation Leasing Segment As of June 30, 2023, in our Aviation Leasing segment, we own and manage 344 aviation assets, consisting of 97 commercial aircraft and 247 engines, including four aircraft that were still located in Ukraine and eight aircraft and seventeen engines that were still located in Russia. As of June 30, 2023, 77 of our commercial aircraft and 148 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 77% utilized during the three months ended June 30, 2023, 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 43 months, and our engines currently on-lease have an average remaining lease term of 10 months. The table below provides additional information on the assets in our Aviation Leasing segment: Aviation Assets Widebody Narrowbody Total Aircraft Assets at January 1, 2023 8 98 106 Purchases — 20 20 Sales (2) (8) (10) Transfers (1) (18) (19) Assets at June 30, 2023 5 92 97 Engines Assets at January 1, 2023 40 184 224 Purchases 2 43 45 Sales (6) (14) (20) Transfers 2 (4) (2) Assets at June 30, 2023 38 209 247 39 The following table presents our results of operations for our Aviation Leasing segment: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Revenues Lease income $ 48,167 $ 37,298 $ 10,869 $ 96,997 $ 71,256 $ 25,741 Maintenance revenue 42,065 39,932 2,133 77,206 76,664 542 Asset sales revenue 101,486 — 101,486 210,177 — 210,177 Other revenue 313 5,204 (4,891) 6,691 5,226 1,465 Total revenues 192,031 82,434 109,597 391,071 153,146 237,925 Expenses Cost of sales 69,558 — 69,558 161,792 — 161,792 Operating expenses 7,578 7,130 448 14,666 61,602 (46,936) Acquisition and transaction expenses 1,169 168 1,001 2,631 377 2,254 Depreciation and amortization 35,713 37,191 (1,478) 73,853 76,419 (2,566) Asset impairment — 886 (886) 1,220 123,676 (122,456) Total expenses 114,018 45,375 68,643 254,162 262,074 (7,912) Other income Equity in (losses) earnings of unconsolidated entities (35) 246 (281) (134) 798 (932) Gain on sale of assets, net — 54,784 (54,784) — 61,371 (61,371) Other income 408 38 370 416 203 213 Total other income 373 55,068 (54,695) 282 62,372 (62,090) Income (loss) before income taxes 78,386 92,127 (13,741) 137,191 (46,556) 183,747 Provision for income taxes 1,087 715 372 2,082 1,701 381 Net income (loss) 77,299 91,412 (14,113) 135,109 (48,257) 183,366 Less: Net loss attributable to non-controlling interest in consolidated subsidiaries — — — — — — Net income (loss) attributable to shareholders from continuing operations $ 77,299 $ 91,412 $ (14,113) $ 135,109 $ (48,257) $ 183,366 40 The following table sets forth a reconciliation of net income (loss) attributable to shareholders from continuing operations to Adjusted EBITDA: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Net income (loss) attributable to shareholders from continuing operations $ 77,299 $ 91,412 $ (14,113) $ 135,109 $ (48,257) $ 183,366 Add: Provision for income taxes 1,087 715 372 2,082 1,701 381 Add: Equity-based compensation expense 105 — 105 127 — 127 Add: Acquisition and transaction expenses 1,169 168 1,001 2,631 377 2,254 Add: Losses on the modification or extinguishment of debt and capital lease obligations — — — — — — Add: Changes in fair value of non-hedge derivative instruments — — — — — — Add: Asset impairment charges — 886 (886) 1,220 123,676 (122,456) Add: Incentive allocations — — — — — — Add: Depreciation and amortization expense (1) 46,133 48,996 (2,863) 92,117 100,236 (8,119) Add: Interest expense and dividends on preferred shares — — — — — — Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) 28 307 (279) (8) 859 (867) Less: Equity in losses (earnings) of unconsolidated entities 35 (246) 281 134 (798) 932 Less: Non-controlling share of Adjusted EBITDA — — — — — — Adjusted EBITDA (non-GAAP) $ 125,856 $ 142,238 $ (16,382) $ 233,412 $ 177,794 $ 55,618 ________________________________________________________ (1) Includes the following items for the three months ended June 30, 2023 and 2022: (i) depreciation expense of $35,713 and $37,191, (ii) lease intangible amortization of $3,616 and $3,310 and (iii) amortization for lease incentives of $6,804 and $8,495, respectively. Includes the following items for the six months ended June 30, 2023 and 2022: (i) depreciation expense of $73,853 and $76,419, (ii) lease intangible amortization of $7,599 and $6,968 and (iii) amortization for lease incentives of $10,665 and $16,849, respectively. (2) Includes the following items for the three months ended June 30, 2023 and 2022: (i) net (loss) income of $(35) and $246 and (ii) depreciation and amortization of $63 and $61, respectively. Includes the following items for the six months ended June 30, 2023 and 2022: (i) net (loss) income of $(134) and $798 and (ii) depreciation and amortization of $126 and $61, respectively. Revenues Comparison of the three months ended June 30, 2023 and 2022 Total revenue increased $109.6 million driven by an increase in Asset sales revenue, Lease income and Maintenance revenue, partially offset by a decrease in Other revenue. • Asset sales revenue increased $101.5 million primarily due to an increase in the sale of commercial aircraft and engines. See above discussion regarding presentation of asset sales. • Lease income increased $10.9 million primarily due to an increase in the number of aircraft and engines placed on lease. • Maintenance revenue increased $2.1 million primarily due an increase in the number of aircraft and engines placed on lease, and higher aircraft and engine utilization, partially offset by lower end-of-lease return compensation. • Other revenue decreased $4.9 million primarily due to lower end-of-lease redelivery compensation. Comparison of the six months ended June 30, 2023 and 2022 Total revenue increased $237.9 million driven by an increase in Asset sales revenue, Lease income and Other revenue. • Asset sales revenue increased $210.2 million primarily due to an increase in the sale of commercial aircraft and engines. See above discussion regarding presentation of asset sales. • Lease income increased $25.7 million primarily due to primarily due to an increase in the number of aircraft and engines placed on lease. • Other revenue increased $1.5 million primarily due to an increase in end-of-lease redelivery compensation. 41 Expenses Comparison of the three months ended June 30, 2023 and 2022 Total expenses increased $68.6 million primarily driven by an increase in Cost of sales, partially offset by a decrease in Depreciation and amortization expense. • Cost of sales increased $69.6 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. • Depreciation and amortization expense decreased $1.5 million driven by an increase in the number of aircraft redelivered and parted out into our engine leasing pool, partially offset by an increase in the number of assets owned and on lease. Comparison of the six months ended June 30, 2023 and 2022 Total expenses decreased $7.9 million primarily driven by a decrease in Asset impairment and Operating expenses, partially offset by an increase in Cost of sales. • Asset impairment decreased $122.5 million primarily due to the write down in 2022 of aircraft and engines located in Ukraine and Russia that may not be recoverable. See Note 4 to the consolidated financial statements for additional information. • Operating expenses decreased $46.9 million primarily as a result of decreases in provision for credit losses and other expenses as a result of the sanctions imposed on Russian airlines in 2022. • Cost of sales increased $161.8 million 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. Other income (expense) Total other income decreased $54.7 million during the three months ended June 30, 2023 primarily due to a decrease of $54.8 million in Gain on sale of assets, net in 2022 due to the change in presentation of asset sales as described above. Total other income decreased $62.1 million during the six months ended June 30, 2023 primarily due to a decrease of $61.4 million in Gain on sale of assets, net in 2022 due to the change in presentation of asset sales as described above and a decrease of $0.9 million in Aviation Leasing’s proportionate share of unconsolidated entities’ net income. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA decreased $16.4 million and increased $55.6 million during the three and six months ended June 30, 2023, respectively, primarily due to lower gain on sales period over period and the changes noted above. Aerospace Products Segment The Aerospace Products segment develops and manufactures through a joint venture, and repairs and sells, through exclusivity arrangements, aircraft engines and aftermarket components primarily for the CFM56-7B and CFM56-5B commercial aircraft engines. Our engine and module sales are facilitated through The Module Factory, a dedicated commercial maintenance program, designed to focus on modular repair and refurbishment of CFM56-7B and CFM56-5B engines, performed by a third party. Used serviceable material is sold through our exclusive partnership with AAR Corp, who is responsible for the teardown, repair, marketing and sales of spare parts from our CFM56 engine pool. We also hold a 25% interest in the Advanced Engine Repair JV which focuses on developing new cost savings programs for engine repairs and a 50% interest in Quick Turn Engine Center LLC or “Quick Turn” (previously iAero Thrust LLC), a hospital maintenance and testing facility dedicated to the CFM56 engine. 42 The following table presents our results of operations: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Aerospace products revenue $ 68,075 $ 26,497 $ 41,578 $ 153,188 $ 40,810 $ 112,378 Expenses Cost of sales 34,974 15,141 19,833 88,410 24,191 64,219 Operating expenses 3,236 2,980 256 6,891 4,603 2,288 Acquisition and transaction expenses 272 — 272 1,027 — 1,027 Depreciation and amortization 97 67 30 183 101 82 Total expenses 38,579 18,188 20,391 96,511 28,895 67,616 Other (expense) income Equity in losses of unconsolidated entities (345) (211) (134) (1,581) (565) (1,016) Gain on sale of assets, net — 8,861 (8,861) — 18,562 (18,562) Total other (expense) income (345) 8,650 (8,995) (1,581) 17,997 (19,578) Income before income taxes 29,151 16,959 12,192 55,096 29,912 25,184 Provision for income taxes 584 1,887 (1,303) 1,500 1,958 (458) Net income 28,567 15,072 13,495 53,596 27,954 25,642 Less: Net loss attributable to non-controlling interest in consolidated subsidiaries — — — — — — Net income attributable to shareholders from continuing operations $ 28,567 $ 15,072 $ 13,495 $ 53,596 $ 27,954 $ 25,642 43 The following table sets forth a reconciliation of net income attributable to shareholders from continuing operations to Adjusted EBITDA: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Net income attributable to shareholders from continuing operations $ 28,567 $ 15,072 $ 13,495 $ 53,596 $ 27,954 $ 25,642 Add: Provision for income taxes 584 1,887 (1,303) 1,500 1,958 (458) Add: Equity-based compensation expense 70 — 70 85 — 85 Add: Acquisition and transaction expenses 272 — 272 1,027 — 1,027 Add: Losses on the modification or extinguishment of debt and capital lease obligations — — — — — — Add: Changes in fair value of non-hedge derivative instruments — — — — — — Add: Asset impairment charges — — — — — — Add: Incentive allocations — — — — — — Add: Depreciation and amortization expense 97 67 30 183 101 82 Add: Interest expense and dividends on preferred shares — — — — — — Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (1) 122 (155) 277 (538) (453) (85) Less: Equity in losses of unconsolidated entities 345 211 134 1,581 565 1,016 Less: Non-controlling share of Adjusted EBITDA — — — — — — Adjusted EBITDA (non-GAAP) $ 30,057 $ 17,082 $ 12,975 $ 57,434 $ 30,125 $ 27,309 ________________________________________________________ (1) Includes the following items for the three months ended June 30, 2023 and 2022: (i) net loss of $345 and $211, (ii) depreciation and amortization expense of $372 and $56 and (iii) acquisition and transaction expense of $95 and $0, respectively. Includes the following items for the six months ended June 30, 2023 and 2022: (i) net loss of $1,581 and $565, (ii) depreciation and amortization expense of $709 and $112 and (iii) acquisition and transaction expense of $334 and $0, respectively . Revenues Total Aerospace products revenue increased $41.6 million and $112.4 million during the three and six months ended June 30, 2023 primarily driven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continued to ramp-up in 2023. Expenses Total expenses increased $20.4 million during the three months ended June 30, 2023 primarily due to an increase in Cost of sales of $19.8 million as a result of an increase in Aerospace product sales and the gross presentation described above. Total expenses increased $67.6 million primarily due to an increase in Cost of sales and Operating expenses during the six months ended June 30, 2023. • Cost of sales increased $64.2 million primarily as a result of an increase in Aerospace products sales and the gross presentation described above. • Operating expenses increased $2.3 million primarily due to an increase in commission expenses due to the increase in sales from the used material program. Other income (expense) Total other income decreased $9.0 million primarily due to a decrease of $8.9 million in Gain on sale of assets, net during the three months ended June 30, 2023. See above discussion regarding presentation of asset sales. Total other income decreased $19.6 million primarily due to a decrease of $18.6 million in Gain on sale of assets, net and an increase of $1.0 million in our proportionate share of unconsolidated entities’ net loss during the six months ended June 30, 2023. See above discussion regarding presentation of asset sales. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $13.0 million and $27.3 million during the three and six months ended June 30, 2023, respectively, primarily due to the changes noted above. 44 Corporate and Other The following table presents our results of operations: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Revenues Lease income $ 11,374 $ 2,342 $ 9,032 $ 18,522 $ 7,709 $ 10,813 Other revenue 2,865 791 2,074 4,282 2,090 2,192 Total revenues 14,239 3,133 11,106 22,804 9,799 13,005 Expenses Operating expenses 13,983 8,890 5,093 25,774 14,595 11,179 General and administrative 3,188 3,906 (718) 7,255 8,467 (1,212) Acquisition and transaction expenses 1,231 3,051 (1,820) 2,276 5,115 (2,839) Management fees and incentive allocation to affiliate 5,563 — 5,563 8,560 — 8,560 Depreciation and amortization 2,704 2,045 659 5,404 4,088 1,316 Interest expense 38,499 47,889 (9,390) 77,791 92,030 (14,239) Total expenses 65,168 65,781 (613) 127,060 124,295 2,765 Other income Other income — 1,080 (1,080) — 1,043 (1,043) Total other income — 1,080 (1,080) — 1,043 (1,043) Loss before income taxes (50,929) (61,568) 10,639 (104,256) (113,453) 9,197 Provision for (benefit from) income taxes 184 (773) 957 299 (491) 790 Net loss (51,113) (60,795) 9,682 (104,555) (112,962) 8,407 Less: Net loss attributable to non-controlling interest in consolidated subsidiaries — — — — — — Less: Dividends on preferred shares 8,335 6,791 1,544 15,126 13,582 1,544 Net loss attributable to shareholders from continuing operations $ (59,448) $ (67,586) $ 8,138 $ (119,681) $ (126,544) $ 6,863 45 The following table sets forth a reconciliation of net loss attributable to shareholders from continuing operations to Adjusted EBITDA: Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2023 2022 2023 2022 Net loss attributable to shareholders from continuing operations $ (59,448) $ (67,586) $ 8,138 $ (119,681) $ (126,544) $ 6,863 Add: Provision for (benefit from) income taxes 184 (773) 957 299 (491) 790 Add: Equity-based compensation expense 335 — 335 406 — 406 Add: Acquisition and transaction expenses 1,231 3,051 (1,820) 2,276 5,115 (2,839) Add: Losses on the modification or extinguishment of debt and capital lease obligations — — — — — — Add: Changes in fair value of non-hedge derivative instruments — — — — — — Add: Asset impairment charges — — — — — — Add: Incentive allocations 5,324 — 5,324 8,266 — 8,266 Add: Depreciation and amortization expense 2,704 2,045 659 5,404 4,088 1,316 Add: Interest expense and dividends on preferred shares 46,834 54,680 (7,846) 92,917 105,612 (12,695) Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities — — — — — — Less: Equity in losses (earnings) of unconsolidated entities — — — — — — Less: Non-controlling share of Adjusted EBITDA — — — — — — Adjusted EBITDA (non-GAAP) $ (2,836) $ (8,583) $ 5,747 $ (10,113) $ (12,220) $ 2,107 Revenues Total revenues increased $11.1 million and $13.0 million during the three and six months ended June 30, 2023 primarily due to an increase in the Offshore Energy business driven by increased number of days on-hire for one of our vessels. Expenses Comparison of the three months ended June 30, 2023 and 2022 Total expenses decreased $0.6 million primarily due to lower Interest expense and Acquisition and transaction expenses, partially offset by higher Management fees and incentive allocation to affiliate and Operating expenses. • Interest expense decreased $9.4 million, which reflects a decrease in the average outstanding debt of approximately $581.0 million due to decreases in (i) the 2021 Bridge Loans of $339.8 million, (ii) the Senior Notes due 2025 of $199.4 million, which were partially redeemed in August 2022, and (iii) the Revolving Credit Facility of $41.8 million. • Acquisition and transaction expense decreased $1.8 million primarily due to lower professional fees related to strategic transactions. • Management fees and incentive allocation to affiliate increased $5.6 million primarily due to an increase in incentive fee due to the Manager. • Operating expenses increased $5.1 million which reflects increases in offshore crew expenses, project costs and other operating expenses for one of our vessels driven by increased cost of operations based on the operating location of the vessel as well as increased number of days on-hire. Comparison of the six months ended June 30, 2023 and 2022 Total expenses increased $2.8 million primarily due to higher Operating expenses and Management fees and incentive allocation to affiliate, partially offset by lower Interest expense and Acquisition and transaction expenses. • Operating expenses increased $11.2 million which reflects increases in offshore crew expenses, project costs and other operating expenses for one of our vessels driven by increased cost of operations based on the operating location of the vessel as well as increased number of days on-hire. • Management fees and incentive allocation to affiliate increased $8.6 million primarily due to an increase in incentive fee due to the Manager. • Interest expense decreased $14.2 million, which reflects a decrease in the average outstanding debt of approximately $503.5 million due to decreases in (i) the 2021 Bridge Loans of $299.9 million and (ii) the Senior Notes due 2025 of $199.3 million, which were partially redeemed in August 2022, and (iii) the Revolving Credit Facility of $4.3 million. 46 • Acquisition and transaction expense decreased $2.8 million primarily due to lower professional fees related to strategic transactions. Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased $5.7 million and $2.1 million during the three and six months ended June 30, 2023, respectively, primarily due to the changes noted above. Liquidity and Capital Resources 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 market volatility. Our principal uses of liquidity have been and continue to be (i) acquisitions of aircraft and engines, (ii) dividends to our ordinary and preferred shareholders, (iii) expenses associated with our operating activities, and (iv) debt service obligations associated with our investments. • Cash used for the purpose of making investments was $380.8 million and $457.9 million during the six months ended June 30, 2023 and 2022, respectively. • Dividends to shareholders and holders of eligible participating securities were $75.0 million and $79.4 million during the six months ended June 30, 2023 and 2022, respectively. • Uses of liquidity associated with our operating expenses are captured on a net basis in our cash flows from operating activities. Uses of liquidity associated with our debt obligations are captured in our cash flows from financing activities. Our principal sources of liquidity to fund these uses have been and continue to be (i) revenues from our aviation assets (including finance lease collections and maintenance reserve collections) net of operating expenses, (ii) proceeds from borrowings or the issuance of securities and (iii) proceeds from asset sales. • Cash flows provided by operating activities, plus the principal collections on finance leases and maintenance reserve collectio ns were $87.3 million during the six months ended June 30, 2023. Cash flows used in operating activities, plus the principal collections on finance leases and maintenance reserve collectio ns were $23.6 million during the six months ended June 30, 2022 • During the six months ended June 30, 2023, additional borrowings and total principal repayments in connection with the Revolving Credit Facility were $325.0 million and $330.0 million, respectively. During the six months ended June 30, 2022, additional borrowings were obtained in connection with the (i) 2021 Bridge Loa ns of $239.5 million, (ii) Revolving Credit Facility of $255.0 million and (iii) EB-5 Loan Agreement of $9.5 million. We made total principal repaymen ts of $224.5 million relating t o the Revolving Credit Facility. • Proceeds from the sale of assets were $273.2 million and $142.3 million d uring the six months ended June 30, 2023 and 2022, respectively. • Proceeds from the issuance of preferred shares, net of underwriter’s discount and issuance costs were $61.7 million and $0.0 million during the six months ended June 30, 2023 and 2022, respectively. We are currently evaluating several potential transactions and related financings, which could occur within the next 12 months. None of these potential transactions, negotiations, or financings are definitive or included within our planned liquidity needs. We cannot assure if or when any such transaction will be consummated or the terms of any such transaction or related financing. 47 Historical Cash Flow Comparison of the six months ended June 30, 2023 and 2022 The following table compares the historical cash flow from continuing and discontinued operations for the six months ended June 30, 2023 and 2022: Six Months Ended June 30, (in thousands) 2023 2022 Cash Flow Data: Net cash provided by (used in) operating activities $ 67,241 $ (48,569) Net cash used in investing activities (101,846) (306,784) Net cash provided by financing activities 2,674 212,097 Net cash provided by operating activities increased $115.8 million, which primarily reflects (i) an increase in Net income of $304.0 million and (ii) Changes in working capital of $50.9 million, partially offset by certain adjustments to reconcile net income to Cash used in operating activities including, (iii) Asset impairment of $122.5 million , (iv) Provision for credit losses of $46.2 million, (v) Equity in losses of unconsolidated entities of $36.1 million and (vi) Depreciation and amortization of $35.5 million. Net cash used in investing activities decreased $204.9 million, primarily due to (i) higher Proceeds from the sale of leasing equipment of $135.2 million and (ii) a decrease in Acquisitions of property, plant and equipment of $116.4 million partially offset by (iii) an increase in Investment in unconsolidated entities of $17.3 million , (iv) a decrease in Proceeds for deposit on sale of aircraft and engine of $6.4 million, (v) an increase in Acquisition of lease intangibles of $5.5 million and (vi) an increase in Acquisitions of leasing equipment of $4.7 million. Net cash provided by financing activities decreased $209.4 million, primarily due to (i) a decrease in Proceeds from debt of $179.0 million, and (ii) an increase in Repayments of debt of $105.3 million partially offset by (iii) an increase in Proceeds from the issuance of preferred shares of $61.7 million, and (iv) a decrease in Payments of deferred financing costs of $13.0 million. We also have current availability for borrowing of up to $155.0 million. Cash Flow of Discontinued Operations The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows for all periods presented. The absence of cash flows from discontinued operations is not expected to adversely affect our liquidity or our ability to fund capital expenditures or working capital needs. The discontinued operations historically generate negative operating and investing cash flows. Contractual Obligations Our material cash requirements include the following contractual and other obligations: Debt Obligations — As of June 30, 2023, we had outstanding principal and interest payment obligations of $2.2 billion and $0.6 billion, respectively, of which only interest payments of $152.2 million are due in the next twelve months. See Note 7 to the consolidated financial statements for additional information about our debt obligations. Lease Obligations —As of June 30, 2023, we had outstanding operating and finance lease obligations of $2.5 million, of which $0.8 million is due in the next twelve months. Other Cash Requirements —In addition to our contractual obligations, we pay quarterly cash dividends on our ordinary shares and preferred shares, which are subject to change at the discretion of our Board of Directors. During the last twelve months, we declared cash dividends of $122.5 million and $28.7 million on our ordinary shares and preferred shares, respectively. We expect to meet our future short-term liquidity requirements through cash on hand, unused borrowing capacity or future financings and net cash provided by our current operations. We expect that our operating subsidiaries will generate sufficient cash flow to cover operating expenses and the payment of principal and interest on our indebtedness as they become due. We may elect to meet certain long-term liquidity requirements or to continue to pursue strategic opportunities through utilizing cash on hand, cash generated from our current operations and the issuance of securities in the future. Management believes adequate capital and borrowings are available from various sources to fund our commitments to the extent required. Critical Accounting Estimates and Policies There were no material changes to our critical accounting estimates described in our Annual Report on Form 10-K for the year ended December 31, 2022. Recent Accounting Pronouncements See Note 2 to our Consolidated Financial Statements for recent accounting pronouncements. 48