AerSale Corporation Form 10-Q Summary
Business context and reporting period
AerSale provides commercial aviation aftermarket products and services through two segments: Asset Management Solutions, which leases, trades, disassembles, and sells aircraft, engines, and parts; and Tech Ops, which provides aircraft and component maintenance, repair and overhaul services and engineered solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021. Results before the December 22, 2020 business combination reflect AerSale Aviation as the accounting acquirer.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $73.3 million | $57.1 million | $223.7 million | $159.6 million |
| Gross profit | $24.6 million | $26.5 million | $75.2 million | $39.7 million |
| Gross margin | 33.6% | 46.4% | 33.6% | 24.9% |
| Income from operations | $1.8 million | $19.3 million | $36.9 million | $11.3 million |
| Net income (loss) | $(1.6) million | $14.7 million | $24.9 million | $7.8 million |
| Diluted EPS | $(0.04) | $397.70 | $0.59 | $211.83 |
| Operating cash flow | Not separately provided | Not separately provided | $26.4 million | $20.0 million |
Q3 revenue increased 28.4% year over year, while nine-month revenue increased 40.2%. Nine-month revenue comprised $124.9 million of products, $20.6 million of leasing, and $78.1 million of services. Nine-month Asset Management Solutions revenue was $138.4 million, and Tech Ops revenue was $85.2 million.
As of September 30, 2021, cash and cash equivalents were $61.9 million, compared with $29.3 million at December 31, 2020. Total assets were $440.0 million and total equity was $385.6 million. The company reported no borrowings under its revolving credit facility, $121.1 million of availability, and compliance with debt covenants. The facility was amended in March 2021 to increase commitments to $150.0 million, subject to borrowing-base limitations, and extend maturity to March 2024.
Net cash provided by investing activities was $5.9 million, primarily from $7.0 million of flight-equipment sales. Financing activities provided $0.3 million, including $0.5 million from warrant exercises. The company stated that its equity, operating cash flows, and available debt capacity were sufficient to maintain operations through September 30, 2022.
Material changes versus the prior comparable period
- Asset Management Solutions revenue increased 64.8% in Q3 and 70.2% for the nine-month period, driven primarily by higher engine trading and parts activity.
- Tech Ops revenue declined 10.9% in Q3 but increased 9.0% for the nine-month period. Nine-month growth reflected maintenance, storage, and preservation programs related to fleet groundings.
- Q3 gross profit declined 7.1% despite higher revenue, largely because the prior-year quarter benefited from unusually high-margin USM sales and $10.8 million of end-of-lease maintenance settlements. Nine-month gross profit increased 89.6%.
- Q3 gross margin fell to 33.6% from 46.4%, while nine-month gross margin improved to 33.6% from 24.9%. Tech Ops nine-month gross margin increased to 30.2% from 21.8%.
- SG&A increased 70.5% in Q3 and 30.7% for nine months. The increase included $8.7 million of Q3 and $8.9 million of nine-month stock-based compensation tied to performance targets, as well as higher costs associated with being a public company.
- Payroll support proceeds declined to zero in Q3 2021 from $6.3 million in Q3 2020. The company recognized $14.8 million of total payroll support proceeds during the first nine months of 2021, versus $12.7 million in the prior-year period.
- The company recorded noncash losses from changes in the fair value of its warrant liability of $2.1 million in Q3 and $2.7 million for nine months. Private warrants were reclassified from equity to liability following SEC guidance, and comparative financial statements were revised for the immaterial error.
- Inventory increased to $158.1 million from $140.7 million at year-end 2020, including higher whole-asset inventory. Nine-month inventory reserves were $4.8 million in 2021 versus $12.9 million in 2020.
Outlook, risks, contingencies, and unusual items
- Management did not provide specific revenue or earnings guidance in the filing. It stated that available equity, internally generated funds, and revolver capacity were sufficient to maintain operations through September 30, 2022.
- COVID-19 and the Delta variant remained material risks to airline demand, flight hours, asset values, leasing activity, customer liquidity, and access to financing. The company previously cancelled approximately $20 million of feedstock opportunities and reduced annualized costs by more than $20 million in response to the pandemic.
- Payroll support funds impose restrictions on use of proceeds, involuntary terminations, compensation, dividends, and stock repurchases. Dividends and repurchases are prohibited through September 30, 2022, and certain compensation restrictions continue through April 1, 2023. The company reported compliance as of September 30, 2021; noncompliance could require repayment of up to 100% of received relief funds.
- Other risks include volatility in aviation-product values, lessee defaults and repossession costs, dependence on airline outsourcing for MRO demand, shortages of skilled personnel and components, regulatory compliance, customer insolvency, international operations, cyber threats, environmental requirements, and restrictive debt covenants.
- Operating lease commitments totaled $15.7 million, while contracted minimum lease rentals receivable from flight-equipment operating leases totaled $25.4 million. The company reported no material legal proceedings and no off-balance-sheet arrangements.
- The company planned to adopt ASC Topic 842 lease accounting in the first quarter of 2022 and was evaluating the effect on its financial statements. It also was evaluating the impact of the expected-credit-loss standard effective January 1, 2023.
- Subsequent to September 30, 2021, the maximum earn-out target was met, resulting in the subsequent issuance of 1,854,169 shares and vesting of the remaining 350,000 unvested founder shares.
Important facts for investors to verify
- Whether the strong nine-month engine and whole-asset trading results are repeatable and how much revenue and margin depend on individual transactions and product mix.
- The sustainability of leasing revenue amid lower global flight hours and the expiration of existing aircraft and engine leases.
- The effect of elevated inventory, inventory reserves, and changing aviation-asset values on liquidity and future gross margins.
- The recurring versus nonrecurring nature of $8.9 million of stock-based compensation and the effect of warrant-liability remeasurement on reported earnings.
- Compliance with CARES Act and related payroll-support restrictions, including potential repayment exposure and limits on dividends, repurchases, and compensation.
- Availability under the revolving facility after borrowing-base adjustments and continued compliance with its covenants.
- The effect of future COVID-19 variants, airline demand, supply-chain constraints, and skilled-labor availability on MRO, leasing, and asset-trading activity.