AerSale Corporation 2022 Form 10-K Summary
Business context and reporting period
AerSale Corporation provides aftermarket commercial aviation products and services focused on mid-life aircraft and engines. Its two reporting segments are Asset Management Solutions, which sells, leases and disassembles aircraft and engines for used serviceable material, and TechOps, which provides aircraft, engine and component maintenance, repair and overhaul, modifications, conversions and engineered solutions.
The filing reports the fiscal year ended December 31, 2022, compared primarily with the fiscal year ended December 31, 2021. The filing is an annual report rather than a standalone fourth-quarter filing. AerSale remains an emerging growth company.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $408.5 million | $340.4 million | +20.0% |
| Gross profit | $151.4 million | $119.4 million | +26.8% |
| Gross margin | 37.1% | 35.1% | +200 bps |
| Income from operations | $55.0 million | $56.7 million | -2.9% |
| Operating margin | 13.5% | 16.6% | Down |
| Net income | $43.9 million | $36.1 million | +21.4% |
| Diluted EPS | $0.83 | $0.76 | +9.2% |
| Net cash from operating activities | $(0.1) million | $79.1 million | Down $79.2 million |
- Asset Management Solutions revenue increased 19.7% to $277.6 million, representing approximately 68% of total revenue. Segment gross profit increased 32.0% to $118.2 million.
- TechOps revenue increased 20.8% to $130.9 million, including $23.7 million of whole-asset sales. Segment gross profit increased 11.1% to $33.2 million.
- TechOps gross margin declined to 25.3% from 27.5%, primarily because MRO margins declined to 22.2% from 28.2%, driven partly by lower-margin storage-related maintenance at Roswell.
- Selling, general and administrative expense rose 24.3% to $96.3 million, including higher payroll, headcount, share-based compensation, information technology, cybersecurity, consulting and facility costs.
- No CARES Act proceeds were recognized in 2022, compared with $14.8 million in 2021. The absence of this benefit, along with higher SG&A, contributed to lower operating income despite higher gross profit.
- Interest income, net, was $1.1 million in 2022 versus $1.0 million of net interest expense in 2021. Other income was $2.3 million, including $1.8 million related to an insurance settlement.
- Income tax expense was $14.0 million and the effective tax rate was 24.2%, compared with 24.4% in 2021.
Liquidity, balance sheet and debt
- Cash and cash equivalents were $147.2 million at December 31, 2022, compared with $130.2 million at year-end 2021.
- Total assets were $531.6 million and stockholders’ equity was $445.0 million at December 31, 2022.
- The company had no outstanding debt under its revolving credit facility and reported $106.8 million of availability under the $150.0 million facility, subject to borrowing-base limitations.
- The revolving credit facility matures on March 12, 2024. AerSale was in compliance with its debt covenants at year-end.
- Cash provided by investing activities was $41.4 million, primarily from $52.8 million of Flight Equipment sales. Cash used in financing activities was $24.3 million, primarily reflecting the $22.2 million repurchase of 1.5 million common shares.
- Capital expenditures were $15.6 million in 2022, compared with $3.9 million in 2021.
- Management stated that cash, internally generated funds and existing debt-facility availability should be sufficient to maintain operations over the next 12 months, while noting uncertainty regarding longer-term capital needs.
Material changes versus the prior comparable period
- Revenue growth was driven principally by higher Flight Equipment sales, especially B747 aircraft and CF6-80, CFM56 and PW4000 engines, reflecting demand in cargo-related product lines and sales of previously leased assets.
- Asset Management Solutions margins improved because of higher margins on Flight Equipment and USM sales and lower inventory reserves. Inventory reserves declined to approximately $1.8 million from $6.4 million.
- MRO revenue declined, while TechOps benefited from whole-asset sales and improved landing gear and component repair activity. Storage-related maintenance revenue declined as operators returned aircraft to active service.
- Operating cash flow deteriorated sharply to near breakeven, mainly due to the application of customer deposits to whole-asset sales and the timing of vendor advances.
- Aircraft and engines held for lease, net, declined to $31.3 million from $73.4 million, reflecting sales, depreciation, reclassifications and an impairment charge.
- Inventory increased to $183.5 million from $159.3 million, including higher used serviceable materials and whole assets.
- Operating lease right-of-use assets and lease liabilities were recognized following adoption of ASC 842 on January 1, 2022. The company recorded $13.2 million of right-of-use assets and $13.4 million of lease liabilities at adoption.
Guidance, outlook, commentary and unusual items
The filing does not provide a clear formal revenue, earnings or cash-flow guidance range. Management describes its strategy as expanding MRO capabilities, growing government business, introducing engineered solutions, increasing international activity and pursuing strategic acquisitions.
- Russia’s invasion of Ukraine led AerSale to cease pursuing future Russian business and terminate three leases with Russian operators. Two aircraft were recovered; one engine remained unrecovered and was fully impaired because recovery and insurance collection were uncertain.
- AerSale entered into a $33.1 million purchase commitment for AerAware manufacturing equipment, expected to be satisfied by the fourth quarter of 2023, and a $37.9 million commitment for B757 cargo-conversion kits expected to be satisfied during 2023.
- The company commenced a 10-year lease for a 315,000-square-foot Memphis facility and entered into an 88,000-square-foot Hialeah Gardens lease. In February 2023, it also leased 112,000 square feet of hangar space in Millington, Tennessee, with operations expected to begin in the first quarter of 2024.
- COVID-19 recovery remained uncertain, with potential effects on flight activity, demand, supply chains, labor availability and customer liquidity.
- Principal risks include aviation-cycle volatility, changing aircraft and engine values, inventory impairment, customer defaults or insolvency, supply-chain disruption, skilled-labor shortages, regulatory and export-control compliance, repossession and lien risks, cybersecurity, environmental liabilities, litigation, variable interest rates and the March 2024 debt-facility maturity.
- Management concluded that goodwill and indefinite-lived intangible assets were not impaired as of the 2022 testing dates. Future impairments remain possible if business conditions or projected cash flows deteriorate.
- Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2022. The independent auditor did not provide an internal-control attestation because of the company’s emerging-growth-company exemption.
Important facts for investors to verify
- Verify the sustainability and mix of 2022 revenue growth, particularly the contribution from nonrecurring or whole-asset sales and the concentration of sales in cargo-related product lines.
- Monitor operating cash conversion, inventory growth, customer deposits, vendor advances and the effect of working-capital timing on future liquidity.
- Assess the company’s refinancing or repayment plan before the $150.0 million revolving facility matures in March 2024.
- Review the $33.1 million AerAware equipment commitment and $37.9 million cargo-conversion commitment against expected customer demand and available cash.
- Evaluate TechOps MRO utilization and margins, including the recovery of storage-related maintenance profitability.
- Track aircraft and engine values, inventory reserves, lease recoveries and the status of the unrecovered Russian engine and related insurance claims.
- Consider customer concentration: one customer represented 19% of 2022 revenue, although the filing states no customer exceeded 10% of trade receivables at year-end.
- Review dilution and compensation exposure from outstanding private warrants, restricted stock units and share-based compensation, which totaled $16.5 million of expense in 2022.