The following discussion and analysis provides information that our management
believes is relevant to an assessment and understanding of our condensed
consolidated results of operations and financial condition. You should read the
following management's discussion and analysis together with the financial
statements and related notes including Part II, Item 7 of AerSale's Annual
Report on Form 10-K for the year ended December 31, 2021 (the 2021 Form 10-K).
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 because of the factors described in the section titled
"Risk Factors" in the 2021 Form 10-K.
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 owned Flight Equipment, which is
subsequently sold or leased to our customers. These processes require a high
degree of 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.
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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.
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 and seeking to recover one engine of material value and for which
we have insurance coverage. Although the current sanctions prohibit the
continuation of certain business activities, the three leases referenced were
naturally 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.
Recent Accounting Pronouncements
The most recent adopted and to be adopted accounting pronouncements are
described in Note A to our condensed consolidated financial statements as well
as in Item 8, Note B of the Annual Report.
Results of Operations
Three months ended March 31, 2022 compared to the three months ended March 31,
2021
Sales and gross profit for AerSale's two business segments for the three months
ended March 31, 2022 and 2021 were as follows:
Three Months Ended March 31,
(in thousands, except percentages) 2022 2021 Percent Change
Revenue
Asset Management Solutions
Aircraft $ 14,983 $ 10,452 43.4 %
Engines 59,547 18,800 216.7 %
74,530 29,252 154.8 %
TechOps
MRO 22,237 27,053 (17.8) %
Product Sales 2,084 2,130 (2.2) %
Whole Asset Sale 23,955 - 100.0 %
48,276 29,183 65.4 %
Total $ 122,806 $ 58,435 110.2 %
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Three Months Ended March 31,
(in thousands, except percentages) 2022 2021 Percent Change
Gross Profit
Asset Management Solutions
Aircraft $ 5,365 $ 4,463 20.2 %
Engines 26,010 $ 9,124 185.1 %
31,375 13,587 130.9 %
TechOps
MRO 6,251 $ 5,026 24.4 %
Product Sales 1,204 $ 1,222 (1.5) %
Whole Asset Sale 7,873 $ - 100.0 %
15,328 6,248 145.3 %
Total $ 46,703 $ 19,835 135.5 %
Total revenues for the three-months ended March 31, 2022 increased $64.4 million
or 110.2% compared to 2021, driven by an increase of $45.3 million, or 154.8%,
within Asset Management Solutions, and an increase of $19.1 million, or 65.4%,
within TechOps.
Asset Management Solutions
Sales in the Asset Management Solutions segment increased $45.3 million or
154.8%, to $74.5 million for the three months ended March 31, 2022, due to a
$40.8 million, or 216.7%, increase in revenues from Engines; and a
$4.5 million, or 43.4%, increase in revenues from Aircraft. The increase in
Engines revenues is primarily attributable to increased activity in the RB211
and CFM56 product line as a result of higher Flight Equipment sales in the
amount of $35.3 million, and higher USM part sales in the RB211 and CFM56
product lines totaling $3.4 million. The increase in Aircraft revenue is
primarily attributable to increased activity in the B757 product line due to
higher Flight Equipment sales in the amount of $6.7 million, offset by lower
B737 Flight Equipment sales in the amount of $3.9 million.
Cost of sales in Asset Management Solutions increased $27.5 million or 175.5%,
to $43.2 million for the three months ended March 31, 2022, compared to the
prior year period. The increase in cost of sales was primarily driven by the
sales increase discussed above. Gross profit in the Asset Management Solutions
segment increased $17.8 million to $31.4 million, or 130.9%, for the three
months ended March 31, 2022, compared to the three months ended March 31, 2021.
The gross profit increase is mainly attributable to higher revenues generated
for the three months ended March 31, 2022, as noted above.
Aircraft gross profit margins decreased to 35.8% for the three months ended
March 31, 2022, from 42.7% for the three months ended March 31, 2021 due to
lower margin on Flight Equipment sales. Engine gross profit margin was 43.7% for
the three months ended March 31, 2022, a decrease from 48.5% for the three
months ended March 31, 2021, which was primarily the result of lower margins on
Flight Equipment sales.
TechOps
Our revenue from TechOps increased by $19.1 million or 65.4%, to $48.3 million
for the three months ended March 31, 2022, compared to the prior year period.
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;
offset by lower revenues from services as a result of a shift in resources to
support our cargo conversion projects on the B757 product line, as well as
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lower storage and related maintenance activities in our Roswell facility as
operators continue to return aircraft into active status.
Cost of sales in TechOps increased $10.0 million or 43.7%, to $32.9 million for
the three months ended March 31, 2022 compared to the prior year period, driven
by costs generated from the sale of Flight Equipment of $16.1 million; offset by
lower cost of sales on MRO Services due to lower revenues as noted above. Gross
profit in TechOps increased $9.1 million, or 145.3% for the three months ended
March 31, 2022 compared to the three months ended March 31, 2021, driven by the
profit generated from the sale of Flight Equipment of $7.9 million and higher
gross profit of $1.2 million on MRO Services. Gross profit margin increased to
31.8% for the three months ended March 31, 2022 compared to 21.4% for the three
months ended March 31, 2021, and was largely attributable to margin generated on
the sale of Flight Equipment of 32.9%, as well as higher margin on MRO Services
of 28.1% for the three months ended March 31, 2022 compared to 18.6% during the
three month ended March 31, 2021, driven by higher margin maintenance work at
our Goodyear facility.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.5 million, or 78.6%
to $23.8 million for the three months ended March 31, 2022, compared to the
prior year period. The increase was mostly related to stock-based compensation
expense of $3.8 million for performance restricted stock units not deemed
probable of achieving performance targets as of the first quarter of 2021. The
remaining increase relates to higher payroll expenses associated with market
adjustments and additional headcount, as well as repair and maintenance charges
on Flight Equipment.
Payroll Support Program Proceeds
We recognized CARES Act proceeds of $6.4 million during the three months ended
March 31, 2021. No such proceeds have been received or recognized during the
three months ended March 31, 2022.
As of March 31, 2022, we are in compliance with the applicable provisions of the
CARES Act, Payroll Support Extension Law, and American Rescue Plan Act of 2021.
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 is determined using a Black Scholes
simulation model. For the three months ended March 31, 2022, we recorded a $1.2
million loss on the change in fair value of the warrant liability, compared to a
$0.2 million loss in the prior year period.
Interest Expense
Interest expense decreased to $0.2 million for the three months ended March 31,
2022, compared to $0.3 million for the three months ended March 31, 2021 and was
primarily related to unused balance fees on our amended and restated revolving
credit agreement (the "Revolving Credit Agreement").
Income Taxes
The effective tax rate for the three months ended March 31, 2022 was 21.2%
compared to 19.9% for the three months ended March 31, 2021. The difference
between the effective tax rate and the statutory tax rate of 21% for the three
months ended March 31, 2022 is primarily due to the impact of state income taxes
and non-deductible 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 three months ended March 31, 2021 is
primarily due to the impact of state income taxes, offset by the foreign derived
intangible income deduction.
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Financial Position, Liquidity and Capital Resources
As of March 31, 2022, we had $171.7 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 three months ended
March 31, 2022. We had no outstanding balance on the Company's Revolving Credit
Agreement as of March 31, 2022, and we had $111.6 million of availability
thereunder. We generated cash flows from operations of $43.0 million for the
three months ended March 31, 2022, and utilized cash for investing activities of
$1.6 million for the three months ended March 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 through March 31, 2023. 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- Three months ended March 31, 2022 compared to three months ended
March 31, 2021
Cash Flows from Operating Activities
Net cash provided by operating activities was $43.0 million for the three months
ended March 31, 2022, compared to cash used in operating activities of
$14.0 million for the same period in 2021. The increase of $57.0 million was
primarily due to higher net income and the sale of Flight Equipment, offset by
the timing of collections and applications of lease and purchase deposits and
accounts receivable.
Cash Flows from Investing Activities
Net cash used in investing activities was ($1.6) million for the three months
ended March 31, 2022, compared to cash provided of $4.0 million in the same
period for 2021. Cash used in investing activities during the three months ended
March 31, 2022 is primarily related to capital expenditures. Cash provided by
investing activities during the three months ended March 31, 2021 was driven by
the sale of Flight Equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities was $0.1 million for the three months
ended March 31, 2022, compared to cash provided of $0.3 million in the same
period for 2021. Cash provided by financing activities during the three months
ended March 31, 2022 is primarily related to the proceeds from the issuance and
the sale of shares under the Employee Stock Purchase Plan ("ESPP"). Cash
provided by financing activities during the three months ended March 31, 2021 is
the result of proceeds from the exercise of public warrants.
Debt Obligations and Covenant Compliance
Our Revolving Credit Agreement provided commitments for a $110.0 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.
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As of March 31, 2022, there was no outstanding balance under the Revolving
Credit Agreement and we had $111.6 million of availability thereunder. We were
in compliance with our debt covenants as of March 31, 2022.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2022. Refer
to Note M - Commitments and Contingencies within our Condensed Consolidated
Financial Statements for a listing of our non-cancelable contractual obligations
under operating leases.
Critical Accounting Policies and Estimates
The preparation of the Condensed 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 Condensed Consolidated Financial Statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. A summary of our critical
accounting estimates is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the 2021 Annual
Report. We continually review these estimates and their underlying assumptions
to ensure they are appropriate for the circumstances. Changes in the estimates
and assumptions we use could have a material impact on our financial results.
During the three months ended March 31, 2022, there were no material changes in
our estimates and critical accounting policies.
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