AerSale Corp: Form 10-Q for the period ended Sep 30, 2024

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 and the accompanying financial statements and related notes together with AerSale’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 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 2023 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 Flight Equipment acquisitions either as whole assets or by disassembling for used serviceable material (“USM”), and TechOps, comprised of MRO activities for aircraft and their components, and sales of internally developed engineered solutions and other serviceable products.

Our Asset Management Solutions segment focuses on mid-life Flight Equipment. 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. Revenue from this segment is segregated between Aircraft and Engine depending on the asset type that generated the revenue. Lease revenue and the related depreciation from aircraft and engines installed on those aircraft are recognized under the Aircraft category. Revenue 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 to all Flight Equipment. 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 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 for which we obtained Federal Aviation Administration (“FAA”) approval to sell as a solution for compliance with the FAA’s fuel tank flammability regulations. Another example of these solutions is our AerAware™ product, an industry-leading, next generation Enhanced Flight Vision System (“EFVS”) that has recently received approval by the FAA for the Boeing B737NG product line. 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.

Recent Accounting Pronouncements

The most recently adopted and to be adopted accounting pronouncements are described in Note B of our condensed consolidated financial statements included in this Quarterly Report, as well as in, Note B within our consolidated annual financial statements in Part II, Item 8 of the 2023 Form 10-K.

Results of Operations

Three months ended September 30, 2024 compared to the three months ended September 30, 2023

Sales and gross profit for AerSale’s two business segments for the three months ended September 30, 2024 and 2023 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Total revenue for the three months ended September 30, 2024 decreased $9.8 million or 10.6% compared to the three months ended September 30, 2023, driven by an decrease of $14.6 million, or 22.5%, in revenues within Asset Management Solutions, offset by an increase of $4.8 million, or 17.6%, in revenues within TechOps.

Asset Management Solutions

Sales in the Asset Management Solutions segment decreased $14.6 million or 22.5%, to $50.4 million for the three months ended September 30, 2024, due to $11.9 million, or 57.2%, decrease in revenue from Aircraft and a $2.7 million, or 6.1%, decrease in revenue from Engines. The decrease in Aircraft revenue is a result of lower Flight Equipment sales in the amount of $12.7 million due to the timing and availability of assets, primarily attributable to decreased activity in the B757 product line, offset by higher USM sales. The decrease in Engines revenue is primarily attributable to lower activity across most product lines due to lower Flight Equipment sales in the amount of $9.5 million.

Cost of sales in Asset Management Solutions decreased $15.4 million or 33.1%, to $31.1 million for the three months ended September 30, 2024, compared to the prior year period. The decrease in cost of sales was primarily driven by the sales decrease discussed above. Gross profit in the Asset Management Solutions segment increased $0.8 million to $19.3 million, or 4.1%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The gross profit increase is mainly attributable to higher margins on Flight Equipment sales for the three months ended September 30, 2024.

Engines gross profit margin was 39.3% for the three months ended September 30, 2024, an increase from 26.9% for the three months ended September 30, 2023, which was primarily the result of higher margins on Flight Equipment sales and leasing revenues. Aircraft gross profit margins increased to 33.7% for the three months ended September 30, 2024, from 31.9% for the three months ended September 30, 2023 due to higher margin contribution from USM sales.

TechOps

Our revenue from TechOps increased by $4.8 million or 17.6%, to $32.3 million for the three months ended September 30, 2024, compared to the prior year period. The increase was driven by higher contributions by component and landing gear repair activities.

Cost of sales in TechOps increased $5.4 million or 24.0%, to $27.9 million for the three months ended September 30, 2024 compared to the prior year period. This was driven by higher revenue discussed above. Gross profit in TechOps decreased $0.5 million, or 11.1% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, driven by lower gross profit of $0.7 million on MRO services. Gross profit margin decreased to 13.6% for the three months ended September 30, 2024 compared to 18.0% for the prior year period, and was largely attributable to lower margin on MRO services of 11.3% for the three months ended September 30, 2024 compared to 16.8% for the prior year period, driven by lower margin generated on our heavy and component MROs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $3.7 million, or 14.7% to $21.7 million for the three months ended September 30, 2024, compared to the prior year period. The decrease was primarily related to lower repair and maintenance and lower payroll related costs.

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 option pricing model. For the three months ended September 30, 2024, we recorded a $0.2 million change in fair value of warrant liability income, compared to a $0.1 million loss in the prior year period.

Interest Expense, Net

Interest expense, net was $1.8 million for the three months ended September 30, 2024, compared to $0.3 million interest expense, net for the three months ended September 30, 2023. The increase in interest expense is primarily driven by higher borrowings under our debt facilities during the current year period to support feedstock acquisitions.

Income Taxes

The effective tax rate for the three months ended September 30, 2024, was 13.0% compared to 93.0% for the three months ended September 30, 2023. The difference between the effective tax rate and the statutory tax rate of 21% for the three months ended September 30, 2024, is primarily due to the impact of state income taxes and stock-based compensation. The difference between the effective tax rate and the statutory tax rate of 21% for the three months ended September 30, 2023 is primarily due to the impact of state income taxes and non-deductible executive compensation, offset by the foreign derived intangible income deduction and R&D credits.

Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023

Sales and gross profit for AerSale’s two business segments for the nine months ended September 30, 2024 and 2023 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Total revenue for the nine months ended September 30, 2024 increased $10.2 million or 4.3% compared to the nine months ended September 30, 2023, driven by an increase of $0.9 million, or 0.6%, in revenues within Asset Management Solutions and an increase of $9.3 million, or 10.4%, in revenues within TechOps.

Asset Management Solutions

Sales in the Asset Management Solutions segment increased $0.9 million or 0.6%, to $151.5 million for the nine months ended September 30, 2024, due to a $24.4 million, or 26.3%, increase in revenue from Engines; offset by a $23.4 million, or 40.5%, decrease in revenue from Aircraft. The increase in Engines revenue is primarily attributable to increased activity in the CFM56 product line as a result of higher Flight Equipment sales in the amount of $10.5 million and higher USM sales. The decrease in Aircraft revenue is primarily attributable to decreased activity in the B757 product line due to lower Flight Equipment sales in the amount of $21.1 million due to softer demand in the freighter market, and lower leasing revenue of $1.9 million, partially offset by higher USM sales activity.

Cost of sales in Asset Management Solutions decreased $8.4 million, or 8.2%, to $94.2 million for the nine months ended September 30, 2024, compared to the prior year period. The decrease in cost of sales was primarily driven by lower costs on Flight Equipment sales. Gross profit in the Asset Management Solutions segment increased $9.3 million to $57.3 million, or 19.5%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The gross profit increase is mainly attributable to the higher margin generated on Flight Equipment sales for the nine months ended September 30, 2024, as noted above.

Aircraft gross profit margin increased to 32.8% for the nine months ended September 30, 2024, from 29.2% for the nine months ended September 30, 2023, due to higher margins on Flight Equipment sales. Engine gross profit margin was 39.3% for the nine months ended September 30, 2024, an increase from 33.5% for the nine months ended September 30, 2023, which was primarily due to changes in the USM product mix, along with higher margins on Flight Equipment sales.

TechOps

Our revenue from TechOps increased by $9.3 million, or 10.4%, to $98.9 million for the nine months ended September 30, 2024, compared to the prior year period. The increase was primarily driven by higher MRO product sales.

Cost of sales in TechOps increased $12.5 million, or 18.0%, to $82.0 million for the nine months ended September 30, 2024, compared to the prior year period, driven by the higher revenues discussed above. Gross profit in TechOps decreased $3.2 million, or 15.8% for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, driven by lower profit generated on MRO services. Gross profit margin decreased to 17.1% for the nine months ended September 30, 2024 compared to 22.4% for the nine months ended September 30, 2023, and was largely attributable to lower margins on MRO services of 15.1% for the nine months ended September 30, 2024, compared to 21.7% during the nine months ended September 30, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $8.3 million, or 10.7% to $69.4 million for the nine months ended September 30, 2024, compared to the prior year period. The decrease was primarily related to lower share-based compensation and lower payroll related costs.

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 option pricing model. For the nine months ended September 30, 2024, we recorded a change in fair value of the warrant liability income of $2.3 million, compared to a $1.0 million income in the prior year period.

Interest (Expense) Income, Net

Interest expense, net, was $4.2 million for the nine months ended September 30, 2024, compared to $1.2 million interest income, net, for the nine months ended September 30, 2023. This was primarily related to interest expense incurred on higher borrowings under our debt facilities during the current year period compared to the prior period related to feedstock and MRO expansion investments to grow our business.

Income Taxes

The effective tax rate for the nine months ended September 30, 2024, was 5.2% compared to 59.8% for the nine months ended September 30, 2023. The difference between the effective tax rate and the statutory tax rate of 21% for the nine months ended September 30, 2024, is primarily due to the impact of state income taxes and stock-based compensation. The difference between the effective tax rate and the statutory tax rate of 21% for the nine months ended September 30, 2023 is primarily due to the impact of state income taxes and non-deductible executive compensation, offset by the foreign derived intangible income deduction and R&D credits.

Financial Position, Liquidity and Capital Resources

As of September 30, 2024, we had $9.8 million of cash and cash equivalents. We finance our growth through cash flows generated from operations and borrowings secured by our assets. We had $78.5 million outstanding under the Revolving Credit Agreement (as defined below) as of September 30, 2024, and we had $93.7 million of availability thereunder. We used cash in operations of $26.4 million for the nine months ended September 30, 2024, primarily for feedstock acquisitions, and used cash in investing activities of $11.5 million for the nine months ended September 30, 2024.

During the year ended December 31, 2023, we entered into a revolving term loan collateralized by our property and equipment (the “Equipment Loan”), and borrowed $8.6 million, which was paid off during the nine months ended September 30, 2024. During the nine months ended September 30, 2024, the Company financed additional equipment purchases of $0.6 million, of which $0.6 million remain outstanding as of September 30, 2024.

We believe our equity base, internally generated funds, and existing availability under our debt facilities are sufficient to maintain our level of operations through the next 12 months. Any projections of future cash needs and cash flows beyond the next twelve 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.

We may, from time to time, purchase our outstanding shares of common stock through cash purchases and/or exchanges for equity or debt, open-market purchases, privately negotiated transactions or otherwise. Such purchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, legal and regulatory considerations, contractual restrictions and other factors. Purchases, if any, will be funded through our available cash from operations. The amounts involved may be material.

Cash Flows— Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Cash Flows from Operating Activities

Net cash used in operating activities was $26.4 million for the nine months ended September 30, 2024, compared to cash used of $168.1 million for the same period in 2023. The decrease in cash deployed of $141.7 million was primarily due to lower feedstock acquisitions and the timing of advances to vendors during the nine months ended September 30, 2024 compared to the prior year period.

Cash Flows from Investing Activities

Net cash used in investing activities was $11.5 million for the nine months ended September 30, 2024, compared to cash provided of $6.7 million in the same period for 2023. Cash used in investing activities during the nine months ended September 30, 2024 was driven by purchases of property and equipment in support of TechOps expansion. Cash generated by investing activities during the nine months ended September 30, 2023 was driven by Flight Equipment sales.

Cash Flows from Financing Activities

Net cash provided by financing activities was $41.7 million for the nine months ended September 30, 2024, compared to cash provided of $17.3 million in the same period for 2023. Cash provided by financing activities during the nine months ended September 30, 2024 was primarily related to the proceeds from net borrowings under our Revolving Credit Agreement (as defined below). Cash provided by financing activities during the nine months ended September 30,

2023 is the result of proceeds from net borrowings under the Equipment Loan, as well as net borrowings under the Revolving Credit Agreement (as defined below).

Debt Obligations and Covenant Compliance

Wells Fargo Senior Secured Revolving Credit Facility

Effective July 25, 2023, we amended our revolving credit agreement (as amended, the “Revolving Credit Agreement”) to increase our maximum commitments under the Revolving Credit Agreement to $180.0 million aggregate amount, expandable to $200.0 million, subject to conditions and the availability of lender commitments and borrowing base limitations, and to extend the maturity date to July 24, 2028, subject to certain conditions.

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.

As of September 30, 2024, there was $78.5 million outstanding under the Revolving Credit Agreement and we had $93.7 million of availability thereunder. We were in compliance with our debt covenants for the Revolving Credit Agreement as of September 30, 2024.

Equipment Loan

On June 30, 2023, the Company entered into the Equipment Loan with a total advance commitment of $10.0 million for the purpose of financing capital expenditures on property and equipment. This facility became a term loan during quarter ended June 30, 2024, with a maturity date of June 26, 2027. The Equipment Loan is collateralized by the property and equipment it finances and requires interest only payment until converted to a term loan, at which point, principal and interest payments will be required.

During the nine months ended September 30, 2024, the Company repaid $8.6 million outstanding under this facility as of December 31, 2023, and borrowed $0.6 million, of which $0.6 million remained outstanding as of September 30, 2024.

We were in compliance with our debt covenants for the Equipment Loan as of September 30, 2024.

Off-Balance Sheet Arrangements and Contractual Obligations

We did not have any off-balance sheet arrangements as of September 30, 2024. Refer to Note Q – Leases, within our consolidated financial statements in our 2023 Form 10-K for a listing of our non-cancelable contractual obligations under operating leases.

The Company has entered into a purchase commitment with Universal Avionics valued at $24.5 million for the acquisition of technical equipment for manufacturing our AerAwareTM product. The commitment is expected to be satisfied by the second quarter of 2025.

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 policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the

2023 Form 10-K. We continually review these policies and 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.

Goodwill

In the first quarter of 2024, the Company identified a triggering event indicating the fair value of one or more of the Company’s reporting units more likely than not did not exceed their carrying values. The triggering event was due to the significant decline in the market price of the Company’s common stock during the quarter. As a result, the Company performed an interim quantitative goodwill impairment test for the Asset Management Solutions and ACT reporting units as of March 31, 2024, and determined that the fair values exceeded the carrying values for each reporting unit. Due to the lack of recovery in the stock price during the second and third quarters of 2024, the Company performed an interim quantitative goodwill impairment test for the Asset Management Solutions and ACT reporting units again as of June 30, 2024 and September 30, 2024, and determined that the fair values exceeded the carrying values for each reporting unit. As such, the interim quantitative tests did not result in a goodwill impairment for the Company’s reporting units.

As part of our quantitative assessment as of September 30, 2024, we noted that our fair value estimates of the Asset Management Solutions and ACT reporting units exceeded their carrying value by a small margin, which indicates a higher potential risk of goodwill impairment in the future; especially if these reporting units are unable to achieve projected performance metrics. As of September 30, 2024, the amount of goodwill in the Asset Management Solutions and ACT reporting units amounted to $13.4 million and $6.0 million, respectively.

The fair value determination of the Company’s reporting units and goodwill is judgmental in nature and requires the use of estimates and assumptions that are sensitive to changes. Such estimates include revenue growth rates, profit margins, and discount rates which consider the risk-free rate as well as company and market specific risk premiums. Revenue estimates for the Asset Management Solutions reporting unit are dependent on our ability to monetize existing Flight Equipment and meet our feedstock acquisition targets. Revenue estimates for the ACT reporting unit consider benefits derived from our facility expansion and certain synergies within the organization. While the Company believes it has made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible a material change could occur. As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill and indefinite-lived intangible impairment tests will prove to be an accurate prediction of future results.

In the normal course of business, we are subject to market risks. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and sales. Our exposure to market risk includes fluctuating interest rates and changes in foreign exchange rates.

Interest Rate Risk

We are exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates associated with borrowings under our Revolving Credit Agreement and the Equipment Loan, which have variable interest rates tied to the Secured Overnight Financing Rate. As of September 30, 2024, we had $78.5 million outstanding variable rate borrowings under the Revolving Credit Agreement. A ten percent increase in the average interest rate affecting our variable rate debt outstanding as of September 30, 2024 would increase our annual interest expense by $0.6 million

Foreign Currency Exchange Risk

We primarily use the U.S. dollar as our functional currency in all markets in which we operate in order to reduce our foreign currency market risk. Only general office expense and payroll transactions for our international locations are denominated in local currency. A hypothetical ten percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on our financial position or continuing operations as of and for the three and nine months ended September 30, 2024.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2024.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There are no material changes in the information reported under Part I – Item 1A “Risk Factors” contained in the 2023 Form 10-K.