AerSale Corporation 10-Q Summary
Business context and reporting period
AerSale Corporation (Nasdaq: ASLE) is a global provider of commercial aviation aftermarket aircraft, engines, parts, leasing, maintenance, repair and overhaul (MRO), and engineered solutions. Its two reportable segments are Asset Management Solutions and TechOps. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The filing was signed August 8, 2023.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Total revenue | $69.3 million | $139.6 million | $147.6 million | $262.4 million |
| Gross profit | $20.1 million | $55.0 million | $44.5 million | $101.7 million |
| Gross margin | 29.1% | 39.4% | 30.2% | 38.8% |
| Operating income (loss) | $(7.0) million | $31.5 million | $(7.8) million | $54.4 million |
| Net income (loss) | $(2.7) million | $26.5 million | $(2.7) million | $43.7 million |
| Diluted EPS | $(0.08) | $0.47 | $(0.07) | $0.81 |
| Net cash from (used in) operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $(129.2) million | $41.2 million |
Second-quarter revenue declined 50.3% year over year, while gross profit declined 63.4%. Selling, general and administrative expense increased 15.3% to $27.1 million, primarily due to higher payroll, facility and legal costs. Six-month SG&A increased 10.7% to $52.3 million.
- Asset Management Solutions revenue declined 67.6% in the quarter and 54.8% year to date, driven by lower aircraft and engine sales and leasing activity.
- TechOps revenue increased 28.7% in the quarter, supported by component repair and heavy MRO activity, but declined 15.3% year to date because the prior-year period included significant whole-asset sales.
- TechOps second-quarter gross margin improved to 27.2% from 19.3%; six-month gross margin was 24.3%, compared with 27.5%.
- Asset Management Solutions second-quarter gross margin fell to approximately 30.6% from 43.8%, including aircraft margin of 14.6% and engine margin of 38.4%.
- Other income included $1.4 million of warrant-liability fair-value income in the quarter and $1.1 million year to date. Interest income, net, was $0.4 million in the quarter and $1.4 million year to date.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $34.6 million at June 30, 2023, versus $147.2 million at December 31, 2022.
- Total assets were $549.9 million, including $300.7 million of inventory. Inventory increased substantially from $183.5 million at year-end, primarily due to whole-asset inventory and feedstock acquisitions.
- Total liabilities were $101.7 million and stockholders’ equity was $448.3 million at June 30, 2023.
- The Company had no borrowings under its Wells Fargo senior secured revolving credit facility and reported $99.6 million of availability at June 30, 2023. The facility was subsequently amended on July 25, 2023 to increase commitments from $150.0 million to $180.0 million, expandable to $200.0 million, and extend maturity to July 24, 2028, subject to borrowing-base limitations.
- The Company borrowed $8.6 million under a new Synovus property and equipment revolving term loan. The facility has a $10.0 million commitment, bears interest at one-month SOFR plus 3.50%, and becomes a term loan no later than June 30, 2024, with maturity on June 30, 2027.
- Management stated that the Company was in compliance with applicable debt covenants and believes its equity base, internally generated funds and existing debt availability are sufficient to maintain operations through June 30, 2024.
Cash flow and material changes
Operating cash flow changed from $41.2 million of cash provided in the first six months of 2022 to $129.2 million of cash used in the first six months of 2023. The principal driver was $134.3 million of inventory investment and $8.1 million of additional vendor payments, primarily for feedstock acquisitions. Investing activities generated $7.9 million, including $12.7 million of asset-sale proceeds. Financing activities generated $8.8 million, primarily from the Equipment Loan. Cash decreased by $112.5 million during the six months.
The principal operating change was a sharp reduction in Asset Management Solutions sales, particularly B747 and B757 aircraft and RB211 and CF6-80 engine product lines, which management attributed in part to softer freighter-market demand. TechOps MRO activity improved, but did not offset the decline in asset sales. The Company also recorded $0.7 million of inventory reserves year to date in 2023, compared with $1.8 million in the 2022 comparable period.
Guidance, outlook, risks and unusual items
- The filing does not provide specific revenue, earnings or margin guidance.
- Management expects existing liquidity and debt availability to support operations through June 30, 2024, but cautions that adverse events could limit growth to internally generated capital.
- The Company has a $33.1 million purchase commitment for AerAware manufacturing equipment, expected to be satisfied by the fourth quarter of 2024, and a $17.9 million commitment for cargo-conversion kits expected to be satisfied during 2023 and 2024.
- Russia-related sanctions led the Company to cease pursuing future Russian business and terminate three leases. One engine remains unrecovered and has been fully impaired; management does not expect the conflict to have a material adverse effect, although recovery and insurance collection remain uncertain.
- The Company reported no material changes to the risk factors in its 2022 Form 10-K, no off-balance-sheet arrangements, and no material changes in critical accounting estimates.
- The Company remains exposed to aviation aftermarket demand, freighter-market conditions, inventory valuation and liquidation risk, execution of MRO programs, skilled-labor availability, supply-chain conditions, variable interest rates, sanctions, and customer or lessee defaults.
- Controls and procedures were determined to be effective at the reasonable-assurance level as of June 30, 2023.
Most important facts for investors to verify
- Whether the large inventory and feedstock investments convert into asset sales, margins and operating cash flow.
- The sustainability and profitability of improved TechOps MRO activity, particularly at the Goodyear facility.
- Asset Management Solutions sales volume, aircraft and engine margins, and exposure to weaker freighter demand.
- Actual borrowing-base availability under the amended Wells Fargo facility and compliance with all debt covenants.
- Funding requirements and execution risk associated with the $33.1 million AerAware and $17.9 million cargo-conversion commitments.
- The potential impact of warrant-liability fair-value changes, which are noncash but can materially affect reported earnings.
- Recovery or insurance outcomes for the unrecovered Russia-related engine and any other legal or contingent claims.