You should read the following management's discussion and analysis together with
the financial statements and related notes included elsewhere in this Annual
Report. This discussion contains forward-looking statements about AerSale's
business, operations and industry that involve risks and uncertainties, such as
statements regarding AerSale's plans, objectives, expectations and intentions.
AerSale's future results and financial condition may differ materially from
those currently anticipated by AerSale because of the factors described in the
sections entitled "Risk Factors" and "Cautionary Note Regarding Forward Looking
Statements." A discussion of the year ended December 31, 2021 compared to
the year ended December 31, 2020 is included in our Annual Report on Form 10-K
for the year ending December 31, 2021, filed with the SEC on March 15, 2022
under Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company
We operate as a platform for serving the commercial aviation aftermarket sector.
Our top executives have on average over 30 years of experience in aircraft and
engine ("Flight Equipment") management, sales and maintenance services, and are
supported by an experienced management team. We have established a global
purpose built and fully integrated aviation company focused on providing
products and services that maximize the value of Flight Equipment in the middle
to end of its operating life cycle.
We are a worldwide provider of aftermarket commercial aircraft, engines, and
their parts to passenger and cargo airlines, leasing companies, original
equipment manufacturers ("OEM"), government and defense contractors, and
maintenance, repair and overhaul ("MRO") service providers. We report our
activities in two business segments: Asset Management Solutions, comprised of
activities that extract value from strategic asset acquisitions either as whole
assets or by disassembling for used serviceable material ("USM"), and TechOps,
comprised of MRO activities for aircraft and their components, sales of
internally developed engineered solutions and other serviceable products.
We focus on mid-life Flight Equipment and monetize them through our Asset
Management Solutions segment. Asset Management Solutions' activities include
monetization of assets through the lease or sale of whole assets, or through
disassembly activities in support of our USM-related activities. Our monetizing
services have been developed to maximize returns on mid-life Flight Equipment
throughout their operating life, in conjunction with realizing the highest
residual value of Flight Equipment at its retirement. We accomplish this by
utilizing deep market and technical knowledge related to the management of
Flight Equipment sales, leasing and MRO services. To extract value from the
remaining flight time on whole assets, we provide flexible short-term (generally
less than five years) leasing solutions of Flight Equipment to passenger and
cargo operators across the globe. Once the value from the Flight Equipment's
flight time has been extracted, Flight Equipment is considered to be at or near
the end of its useful life and is analyzed for return maximization as either
whole asset sales or disassembled for sale as USM parts. Revenues from this
segment are segregated between Aircraft and Engine depending on the asset type
that generated the revenue. Lease revenues and the related depreciation from
aircraft and engines installed on those aircrafts is recognized under the
Aircraft category. Revenues from sales of whole aircraft and related cost of
sales are allocated between the Aircraft and Engine categories based on the
allocated cost basis of the asset sold.
Our TechOps segment provides internal and third-party aviation services,
including internally developed engineered solutions, full heavy aircraft
maintenance and modification, component MRO, as well as end-of-life disassembly
services. Our MRO business also engages in longer-term projects such as aircraft
modifications, cargo and tanker conversions of aircraft, and aircraft storage.
The TechOps segment also includes MRO services for landing gear, thrust
reversers, hydraulic systems, and other aircraft components.
We utilize these capabilities to support our customers' Flight Equipment, as
well as to maintain and improve our own Flight Equipment, which is subsequently
sold or leased to our customers. These processes require a high degree of
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expertise on each individual aircraft or component that is being serviced. Our
knowledge of these processes allows us to assist customers to comply with
applicable regulatory and OEM requirements. A significant amount of skilled
labor is required to support this process, which the Company has accumulated
through its diversified offerings.
In addition to our aircraft and USM parts offerings, we develop Engineered
Solutions consisting of Supplemental Type Certificates ("STCs") that can be
installed on existing Flight Equipment to improve performance, comply with
regulatory requirements, or improve safety. An example of these solutions is the
AerSafe® product line, which we designed and obtained Federal Aviation
Administration ("FAA") approval to sell as a solution for compliance with the
FAA's fuel tank flammability regulations. These products are proprietary in
nature and function as non-OEM solutions to regulatory requirements and other
technical challenges, often at reduced delivery time and cost for operators. In
order to develop these products, we engage in research and development
activities that are expensed as incurred.
Continued impact of COVID-19
The COVID-19 pandemic continues to negatively affect the global economy, our
business and operations, supply chains, inflation, the labor market and the
aviation industry. Commercial air travel has been significantly disrupted by the
pandemic and government and business actions in response. Although we continue
to see signs of ongoing recovery, there continues to be uncertainty with respect
to when commercial air traffic will fully return to and/or exceed pre-COVID-19
levels. For additional information related to the COVID-19 pandemic, see Part I,
Item 1A. "Risk Factors" of this Annual Report.
Impact of Ukraine Conflict and Russia Sanctions
In February of 2022, Russia invaded Ukraine and is still engaged in an active
conflict against the country. As a result, governments in the European Union,
the United States, the United Kingdom, Switzerland, and other countries have
enacted sanctions against Russia and Russian interests. These sanctions include
controls on the export and re-export of certain goods, supplies, and
technologies, supply of aircraft and aircraft components to Russian persons or
for use in Russia, subject to certain wind-down periods, and the imposition of
restrictions on doing business with certain state-owned Russian customers and
other investments and business activities in Russia. In order to comply with
these sanctions, we ceased pursuing future business in Russia and terminated our
three leases with operators doing business in Russia, successfully recovering
two aircraft with one engine still unrecovered. Due to continued uncertainty in
the ability to recover this engine from Russia or to collect insurance coverage,
we have fully impaired this asset. Although the current sanctions prohibit the
continuation of certain business activities, the three leases referenced were
contractually scheduled to expire in 2022 and therefore will have no material
impact on our business or 2022 financial condition. While it is difficult to
predict the short or long term implications of this conflict and sanctions on
the global economy and the aviation industry, we intend to fully comply with all
applicable sanctions and embargoes, and do not expect the current situation will
have a material adverse effect on our results of operations.
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Results of Operations
Sales and gross profit for AerSale's two business segments for the years ended
in December 31, 2022 and 2021 were as follows:
Year ended December 31, 2022 compared to the year ended December 31, 2021
Year Ended December 31,
(in thousands, except percentages) 2022 2021 Percent Change
Revenue
Asset Management Solutions
Aircraft $ 101,511 $ 87,461 16.1 %
Engines 176,096 144,549 21.8 %
277,607 232,010 19.7 %
TechOps
MRO 95,258 99,899 (4.6) %
Product Sales 11,942 8,528 40.0 %
Whole Asset Sale 23,737 - 100.0 %
130,937 108,427 20.8 %
Total $ 408,544 $ 340,437 20.0 %
Year Ended December 31,
(in thousands, except percentages) 2022 2021 Percent Change
Gross Profit
Asset Management Solutions
Aircraft $ 36,156 $ 30,157 19.9 %
Engines 82,075 59,389 38.2 %
118,231 89,546 32.0 %
TechOps
MRO 21,111 28,133 (25.0) %
Product Sales 4,397 1,713 156.7 %
Whole Asset Sale 7,655 - 100.0 %
33,163 29,846 11.1 %
Total $ 151,394 $ 119,392 26.8 %
Total revenues for the year ended December 31, 2022 increased by $68.1 million
or 20.0% compared to 2021, driven by an increase of $45.6 million, or 19.7%,
within Asset Management Solutions and an increase of $22.5 million, or 20.8%,
within TechOps.
Asset Management Solutions
Sales in the Asset Management Solutions segment increased by $45.6 million to
$277.6 million, or 19.7%, for the year ended December 31, 2022 compared to 2021,
due to a $14.1 million increase in revenues from Aircraft, and a $31.5 million
increase in revenues from Engines. The increase in Aircraft revenue is primarily
attributable to increased activity in the B747 product line driven by Flight
Equipment sales, which amounted to a total increase of $18.4 million compared to
2021, which was partly offset by lower leasing volume of $7.8 million driven by
the termination of certain leases as a result of the Ukraine war, as well as the
sale of previously leased Flight Equipment at the end of the lease term. The
increase in Engines revenue is primarily attributable to increased activity in
the CF6-80, CFM56 and PW4000 product lines as a result of higher Flight
Equipment sales of $23.4 million and higher leasing activity of $5.9 million.
The increase in Flight Equipment sales is directly related to the sale of
previously leased Flight Equipment and asset acquisitions of Flight Equipment we
carried out during 2021 and 2022, as we identified increased demand in product
lines that served the cargo market as a result of the COVID-19 pandemic.
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Cost of sales in Asset Management Solutions increased by $16.9 million to $159.4
million, or 11.9%, for the year ended December 31, 2022 compared to 2021. The
increase in cost of sales was primarily driven by the sales increase discussed
above. Gross profit in Asset Management Solutions increased by $28.7 million to
$118.2 million, or 32.0%, for the year ended December 31, 2022 compared to 2021.
The margin increase is mainly attributable to higher margins on Flight Equipment
sales and USM sales of $29.8 million, as well as lower impact of inventory
reserves recorded during the year ended December 31, 2022, which amounted to
$1.8 million compared to $6.4 million in 2021.
Aircraft gross profit margins increased to 35.6% for the year ended December 31,
2022, from 34.5% for the year ended December 31, 2021, due to the impact of
Flight Equipment's sales which generated an average margin of 37.9%, as well as
lower inventory reserves. Engines gross profit margins increased to 46.6% for
the year ended December 31, 2022, from 41.1% for the year ended December 31,
2021, mainly due to the impact of Flight Equipment's sales which generated an
average margin of 47.6%, partly offset by the impact of USM sales due to
fluctuations in the product mix.
TechOps
AerSale's revenue from the TechOps segment increased by $22.5 million to $130.9
million, or 20.8%, for the year ended December 31, 2022, compared to 2021. The
increase was primarily driven by the sale of Flight Equipment, which was
purchased and controlled by the TechOps segment prior to its ultimate sale,
along with improved landing gear and component repair activities; offset by
lower revenues from storage and related maintenance activities in our Roswell
facility as operators continue to return aircraft into active status, as well as
a shift in resources at our Goodyear facility to support our cargo conversion
projects on the B757 product line.
Cost of sales in TechOps increased by $19.2 million to $97.7 million, or 24.4%,
for the year ended December 31, 2022 compared to 2021, driven by costs generated
from the sale of Flight Equipment of $16.1 million and cost associated with
revenue fluctuations noted above. Gross profit in TechOps increased $3.3 million
to $33.2 million, or 11.1%, for the year ended December 31, 2022, compared to
2021, driven by the profit generated from the sale of Flight Equipment of $7.6
million, offset by lower gross profit of $7.0 million on MRO services. Gross
profit margin decreased to 25.3% for the year ended December 31, 2022 compared
to 27.5% for the year ended December 31, 2021, and was largely attributable to
lower margins generated on MRO services of 22.2% for the year ended December 31,
2022 compared to 28.2% for the year ended December 31, 2021, driven by lower
margin on storage related maintenance at our Roswell facility.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $18.9 million to $96.3
million, or 24.3%, for the year ended December 31, 2022, as compared to 2021.
The increase was mostly related to higher payroll expenses of $10.7 million
associated with market adjustments, additional headcount, and higher share-based
compensation expense of $3.8 million, as well as higher cost incurred on
improvements with respect to information technology and cybersecurity,
professional consulting fees, and facility costs associated with new facilities.
CARES Act Proceeds
No CARES Act Proceeds were received or recognized for the year ended December
31, 2022, as compared to $14.8 million recognized during 2021. The amount
recognized during 2021 was the result of the Payroll Support Extension Law and
American Rescue Plan Act of 2021, which was enacted into law during 2021.
Unrealized loss on investments
AerLine Holdings, Inc. ("AerLine") was a consolidating VIE prior to August 31,
2018. Refer to Note S for additional disclosures. On August 31, 2018, AerLine
sold the customer relationships of its operating company, XTRA Airways, in
consideration for a 9.99% interest in the buyer ("Buyer"), which rolled into the
equity interest of a larger holding company when the Buyer was acquired. On
November 10, 2021, AerLine transferred this equity interest to us in settlement
of trade amounts due totaling $5.4 million. Based on the deterioration of the
Buyer's financial condition noted by the Company in the fourth quarter of 2021,
we recognized an unrealized loss on the investment of $5.4 million during the
three-month period ended December 31, 2021.
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Change in fair value of warrant liability
We account for our private warrants as a liability at their fair value, with
changes in fair value recognized in our results from operations for the period.
The fair value of our private warrants was determined using the Black-Scholes
option pricing model. For the year ended December 31, 2022, we recorded a $0.5
million loss on the change in fair value of the warrant liability, compared to a
$2.9 loss in the prior year.
Interest Expense
Interest expense, net decreased by $2.1 million to $1.1 million income for the
year ended December 31, 2022, as compared to 2021 and was primarily related to
higher interest yields on our deposits and lack of borrowings under the
Company's revolving credit facility.
Other Income, Net
Other Income for the Year ended December 31, 2022 increased by $1.8 million to
$2.3 million, as compared to 2021 primarily due to the collection of insurance
proceeds in the amount $4.3 million for the full settlement of the Air Indus
insurance claim, of which $1.8 million was classified as other income.
Income Taxes
The effective tax rate for the year ended December 31, 2022 was 24.2% compared
to 24.4% for the year ended December 31, 2021. The modest decrease in the
effective tax rate was mainly a result of a decrease in favorable permanent
differences offset by an increase in credits. The difference between the
effective tax rate and the statutory tax rate of 21% for the year ended December
31, 2022, was primarily due to the impact of state income taxes and executive
compensation, offset by the foreign derived intangible income deduction. The
difference between the effective tax rate and the statutory tax rate of 21% for
the year ended December 31, 2021, was primarily due to the impact of state
income taxes, a valuation allowance and permanent differences partially offset
by the foreign derived intangible income deduction.
Financial Position, Liquidity and Capital Resources
As of December 31, 2022, we had $147.2 million of cash and cash equivalents. We
finance our growth through cash flows generated from operations and borrowings
secured by our assets. There were no borrowings during the year ended December
31, 2022. We had no outstanding balance on the Amended and Restated Credit
Agreement as of December 31, 2022, and we had $106.8 million of availability as
of the end of 2022. Cash used in operations was $0.1 million, cash generated
from investing activities was $41.4 million, and cash used in financing
activities was $24.3 million for the year ended December 31, 2022.
We believe our equity base, internally generated funds, and existing
availability under our debt facility are sufficient to maintain our level of
operations over the next 12 months. Any projections of future cash needs and
cash flows beyond the next 12 months are subject to substantial uncertainty, but
we believe our sources of liquidity as discussed above will be sufficient to
meet our long-term cash requirements. If an event occurs that would affect our
ability to meet our capital requirements, our ability to continue to grow our
asset base consistent with historical trends could be impaired and our future
growth limited to that which can be funded from internally generated capital.
Cash Flows-Year ended December 31, 2022 compared to Year ended December 31, 2021
Cash Flows from Operating Activities
Net cash used in operating activities was $0.1 million for the year ended
December 31, 2022 compared to cash provided of $79.1 million for the same period
in 2021. The decrease of $79.2 million was primarily due to the application of
previously collected deposits to the sale of whole assets during the period,
along with timing of cash advances to vendors.
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Cash Flows from Investing Activities
Net cash provided by investing activities was $41.4 million for the year ended
December 31, 2022, compared to cash provided of $13.2 million in the same period
for 2021. Cash provided from investing activities during the year ended December
31, 2022 was primarily related to the sale of Flight Equipment totaling $52.8
million, compared to $17.1 million during the year ended December 31, 2021.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2022 was
$24.3 million, compared to cash provided of $8.6 million in the same period for
2021. The cash used in financing activities for 2022 is driven by the repurchase
of common stock. The cash provided by financing activities in 2021 is primarily
driven by proceeds from the exercise of warrants.
Debt Obligations and Covenant Compliance
Our amended and restated revolving credit agreement (the "Revolving Credit
Agreement") provided commitments for a $150.0 million revolving credit facility
and includes a $10.0 million sub facility for letters of credit and for
borrowings on same-day notice referred to as "swingline loans." The maximum
amount of such commitments available at any time for borrowings and letters of
credit is determined according to a borrowing base calculation equal to the sum
of eligible inventory and eligible accounts receivable reduced by the aggregate
amount, if any, of trade payables of the loan parties, as defined in the
Revolving Credit Agreement. Extensions of credit under the Revolving Credit
Agreement are available for working capital and general corporate purposes.
Effective March 12, 2021, we amended our Revolving Credit Agreement to increase
our commitments under the Revolving Credit Agreement to a $150.0 million
aggregate amount, subject to borrowing base limitations, and to extend the
maturity date to March 12, 2024, subject to certain conditions.
As of December 31, 2022, there was no outstanding balance under the Revolving
Credit Agreement, as amended, and we had $106.8 million of availability. We were
in compliance with our debt covenants as of December 31, 2022.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2022.
Refer to Note Q - Leases within our Consolidated Financial Statements in this
Annual Report for a listing of our non-cancelable contractual obligations under
operating leases.
The Company has entered into a purchase commitment with Universal Avionics, a
subsidiary of Elbit Systems, valued at $33.1 million for the acquisition of
technical equipment for manufacturing our AerAware product. The commitment is
expected to be satisfied by the fourth quarter of 2023. The Company has a
commitment for the purchase of cargo conversion kits to support its B757
freighter conversion program in the amount of $37.9 million. The commitment is
expected to be satisfied during 2023.
Critical Accounting Policies and Estimates
The preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States ("U.S. GAAP")
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and 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 periods. Actual
results could differ from those estimates. Refer to Note A to the Consolidated
Financial Statements in Item 8 of this Annual Report, for a listing of our
significant accounting policies and estimates. The following is a summary of
critical accounting estimates and additional information on the level of
uncertainty regarding relevant changes to the estimates and assumptions.
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Revenue Recognition
We measure revenue based on the consideration specified in a contract with a
customer, and exclude any sales commissions and taxes collected and remitted to
government agencies. We recognize revenue when it satisfies a performance
obligation by transferring control over a product or service to a customer. Our
performance obligations are satisfied over time as work progresses or at a point
in time based on transfer of control of products and services to our customers.
For service revenue, we utilize the input method of cost-to-cost to measure
progress and recognize revenue over time as this depicts when control of the
promised goods or services are transferred to the customer. Revenue is
recognized based on the relationship of actual costs incurred to date to the
estimated total cost at completion of the performance obligation. We make
certain judgments and estimates, including estimated revenues and costs, as well
as inflation and the overall profitability of the arrangement. Key assumptions
involved include future labor costs and efficiencies, overhead costs, and
ultimate timing of product delivery. Differences may occur between the judgments
and estimates made by management and actual program results.
Changes in estimates and assumptions related to our arrangements are recorded
using the cumulative catch-up method of accounting. The catch-up adjustment for
the current year due to changes in revenue estimates did not have a material
impact on our financial statements.
Inventory Cost
We record inventory at the lower of cost or market value. For purchases of whole
aircraft and engines for sale or lease, cost is determined using the
specific identification method whereby total cost is the cost paid, including
certain asset acquisition costs that can be capitalized, to acquire such assets
as a whole.
Additionally, we purchase certain whole aircraft and engines to disassemble and
supply material for our engine and airframe USM inventory. For aircraft and
engine parts that originate from such dismantled aircraft and engines, cost is
determined using a ratio calculated based on the relationship of the cost of the
dismantled aircraft or engine at the time of purchase to the total estimated
sales value of the dismantled aircraft or engine at the time of purchase. At the
time of sale, this ratio is applied to the sale price of each individual
airframe and/or engine part to determine its allocated cost. At the time of
sale, the sum of an individual part's allocated cost and actual repair or
overhaul costs incurred represent the total cost for such part. Inventory not
expected to be sold within the operating cycle is classified as non-current
inventory on the Consolidated Balance Sheets.
We evaluate this ratio periodically, and if necessary, update our sales
estimates and make prospective adjustments to this ratio. Any amounts identified
with an estimated sales value lower than the carrying value is reduced to the
estimated sales value at the time of the review. Expenditures required for the
repair of engine and airframe parts are capitalized as inventory and are
expensed as cost of sales when associated parts are sold. During the year ended
December 31, 2022, we adjusted the estimated return in certain product lines as
a result of new material received into inventory as well as changes in demand
for certain product lines. During the year ended December 31, 2022, we recorded
an inventory reserve of $1.8 million mostly related to changes in projected
demand for certain materials driven by changing market conditions.
Recent Accounting Pronouncements
The most recent adopted and to be adopted accounting pronouncements are
described in Note B to AerSale's Consolidated Financial Statements included in
this Annual Report.
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