AERSALE CORPORATION 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
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
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,
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Results of Operations
Sales and gross profit for
Year ended
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
Asset Management Solutions
Sales in the Asset Management Solutions segment increased by
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Cost of sales in Asset Management Solutions increased by
Aircraft gross profit margins increased to 35.6% for the year ended
TechOps
Cost of sales in TechOps increased by
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
CARES Act Proceeds
No CARES Act Proceeds were received or recognized for the year ended
Unrealized loss on investments
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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
Interest Expense
Interest expense, net decreased by
Other Income, Net
Other Income for the Year ended
Income Taxes
The effective tax rate for the year ended
Financial Position, Liquidity and Capital Resources
As of
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
Cash Flows from Operating Activities
Net cash used in operating activities was
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Cash Flows from Investing Activities
Net cash provided by investing activities was
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended
Debt Obligations and Covenant Compliance
Our amended and restated revolving credit agreement (the "Revolving Credit
Agreement") provided commitments for a
Effective
As of
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
The Company has entered into a purchase commitment with
Critical Accounting Policies and Estimates
The preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in
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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
Recent Accounting Pronouncements
The most recent adopted and to be adopted accounting pronouncements are
described in Note B to
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