Willis Lease Finance Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. The company leases commercial aircraft, engines and related equipment, and also sells spare parts and provides maintenance and fleet services. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $119.1 | $89.5 |
| Income from operations | $27.2 | $8.0 |
| Net income | $20.9 | $4.4 |
| Net income attributable to common shareholders | $20.0 | $3.6 |
| Diluted earnings per share | $3.00 | $0.55 |
| Operating cash flow | $59.8 | $51.9 |
| Interest expense | $23.0 | $18.4 |
Revenue increased 33.0%. Operating margin was approximately 22.9%, versus 8.9% in Q1 2023; net margin was approximately 17.5%, versus 4.9%. These calculated margins use reported total revenue and income from operations or net income.
- Revenue growth reflected maintenance reserve revenue of $43.9 million, up 86.7%, and a $9.2 million gain on sale of leased equipment, compared with a $0.1 million loss in the prior-year quarter. The company sold eight leased engines in Q1 2024 versus two in Q1 2023.
- Lease rent revenue was nearly flat at $52.9 million, down 0.6%; average utilization based on net book value declined to approximately 84% from 86%.
- Operating cash flow increased 15.3%. Investing activities used $63.8 million, principally for $62.8 million of equipment purchases; financing activities used $69.9 million, including $138.8 million of debt principal payments and $70.0 million of new borrowings.
- At March 31, cash and cash equivalents were $7.6 million and restricted cash was $86.6 million. Debt obligations were $1,735.6 million net of issuance costs and discounts ($1,758.2 million gross principal), down from $1,802.9 million net at year-end. Total assets were $2,674.5 million and shareholders’ equity was $461.8 million.
Material changes and management commentary
- Maintenance reserve revenue included $6.3 million of long-term maintenance revenue, versus none in the comparable quarter, and $37.6 million of short-term maintenance revenue. Management linked higher usage-fee revenue to strong travel activity and supply-chain constraints.
- Interest expense increased 25.1%, primarily due to higher short-term rates, the 8.0% fixed-rate WEST VII notes, and the maturity of two interest-rate swaps. Derivative-related receipts partly offset borrowing costs.
- General and administrative expense increased 6.3% to $29.6 million; technical expense rose to $8.3 million from $4.3 million, principally from increased engine repairs and thrust-rental fees. A $0.3 million write-down related to one airframe.
- Leasing and Related Operations reported $27.9 million of operating income; Spare Parts Sales reported an operating loss of $0.7 million.
Outlook, risks and commitments
- No specific earnings or revenue guidance was provided. Management said equity, internally generated funds and existing debt facilities should be sufficient to maintain operations for the next 12 months, while noting that reduced internally generated cash, less facility availability or significantly higher borrowing costs could impair operations and constrain growth.
- The company had $445.2 million of purchase commitments for eight LEAP-1B and 18 LEAP-1A engines through 2027. It said agreements permit deferrals or cancellations in certain situations, generally without penalties beyond potential year-over-year list-price increases. It also anticipates $88.5 million to $121.5 million of future overhaul and maintenance services related to 25 engines purchased under agreements entered in 2020.
- Principal debt payments due in 2024 were listed at $54.4 million, while contractual debt obligations due within one year were $72.3 million; the filing presents these in different debt schedules. The revolving facility includes $158.2 million maturing in June 2024 and $500.0 million revolving to June 2025.
- The company was in compliance with its financial covenants at quarter-end. It identified interest-rate exposure, equipment utilization and off-lease levels, customer concentration, and foreign-currency pressure on non-U.S. lessees as risks. Approximately 69% of lease rent revenue came from non-U.S.-domiciled lessees, and two customers each accounted for more than 10% of lease rent revenue.
- Preferred stock carries quarterly dividends; Series A-1’s rate rose to 8.5% annually after October 15, 2023, while Series A-2 remains at 6.5%. Holders may require redemption in specified circumstances, with the earliest redemption dates in September 2024.
- Management reported no material changes to the risk factors in the 2023 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls at March 31, 2024.
Important facts for investors to verify
- How much of the sharp increase in maintenance reserve revenue and Q1 earnings is repeatable, versus timing-related long-term maintenance recognition and engine-sale gains.
- Whether utilization, lease rates and collections remain adequate to support cash generation, particularly if equipment moves off lease.
- Near-term refinancing and liquidity plans for the June 2024 revolving tranche, alongside scheduled debt service and committed engine purchases.
- Exposure to higher floating-rate borrowing costs, the effect of swap maturities, and the company’s capacity to maintain covenant compliance.
- The terms and potential cash impact of preferred-stock redemption rights beginning in September 2024, and the timing and funding of overhaul commitments.