Willis Lease Finance Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results; amounts below are in millions of dollars except per-share data. WLFC leases aircraft, engines and related equipment and also sells spare parts. At quarter-end it reported 264 engines, 11 aircraft and other leased assets with a net book value of $1,624.9 million; it managed 460 assets for others.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $120.4 | $81.0 | $319.9 | $230.2 |
| Earnings from operations | $28.9 | $12.8 | $75.9 | $32.9 |
| Net income | $24.1 | $9.7 | $61.9 | $25.1 |
| Net income attributable to common shareholders | $23.2 | $8.8 | $59.4 | $22.6 |
| Diluted EPS | $3.81 | $1.47 | $9.83 | $3.72 |
| Operating margin | 24.0% | 15.7% | 23.7% | 14.3% |
| Net margin | 20.0% | 12.0% | 19.4% | 10.9% |
Revenue increased 48.7% in Q3 and 39.0% for the nine-month period. Growth included higher maintenance reserve revenue, spare-parts and equipment sales, and gains on leased-equipment sales. Q3 maintenance reserve revenue more than doubled to $39.2 million; Q3 gain on equipment sales was $4.6 million versus $1.1 million. Nine-month gains on leased-equipment sales rose to $19.3 million from $1.7 million.
For the nine months, operating cash flow was $170.8 million, compared with $115.5 million. Investing cash outflow was $82.8 million and financing cash outflow was $89.2 million. Equipment purchases were $220.8 million, partly offset by $189.1 million in equipment-sale proceeds. Cash, cash equivalents and restricted cash totaled $80.7 million at September 30; unrestricted cash was $9.0 million.
Total assets were $1,930.4 million, versus $1,934.9 million at year-end 2018. Debt obligations, net of issuance costs, were $1,259.0 million, down from $1,337.3 million at year-end; gross principal was $1,279.2 million. Shareholders’ equity was $345.5 million. The $1.0 billion revolving facility had $384.0 million outstanding and matures in June 2024. The company reported compliance with its debt covenants.
Material changes and management commentary
- Maintenance reserve revenue increased as long-term reimbursable leases came off lease and as short-term non-reimbursable lease activity grew. Average lease-portfolio utilization was about 88% for the first nine months, unchanged year over year; 86% of assets by book value were on lease at quarter-end.
- Higher portfolio book value supported lease revenue but also increased depreciation. General and administrative expense rose 30.8% for the nine months, primarily due to higher performance-related bonus accruals and stock-based compensation. Nine-month interest expense increased to $51.2 million from $46.6 million, partly due to WEST IV notes and a new loan.
- Equipment write-downs rose to $11.3 million for the nine months from $4.8 million. The 2019 charge primarily reflected a decision to monetize 11 engines by sale or part-out; $19.5 million of book value related to ten of those engines remained in equipment, held-for-sale assets and inventory at quarter-end.
- In June, WLFC increased its revolving facility from $890 million to $1.0 billion, with an accordion feature up to $1.3 billion. It also entered a new $8.1 million engine-secured loan in February and repriced its aircraft-secured note at 3.18% in July.
- A potential take-private transaction was under discussion. A September 16, 2019 revised, non-binding indication of interest offered $58 per share; the group was targeting an assumed $61.50 per share, subject to a complete proposal and independent-committee approval. Financing details had not been provided, and no transaction was assured.
Outlook, risks and unusual items
- Management said equity, internally generated funds and existing facilities were expected to support operations for the next 12 months. It cautioned that weaker internally generated funds, difficulty leasing off-lease equipment, or reduced borrowing availability and higher borrowing costs could impair operations and constrain growth.
- WLFC had $391.6 million of variable-rate debt at quarter-end. It estimated a 1 percentage-point rate movement would change annual interest expense by approximately $2.9 million. Lease rates may not adjust quickly enough to offset higher borrowing costs. A $100 million interest-rate swap was entered into on October 3, 2019; it matures in June 2024.
- About 80% of nine-month lease rent revenue came from lessees domiciled outside the United States, exposing the company to currency-devaluation and customer-payment risks. No customer represented more than 10% of lease rent revenue.
- WLFC had purchased three new LEAP-1B engines and remained committed to buying two more. These engines are compatible only with Boeing 737 MAX aircraft, whose fleet was grounded worldwide at the time; management expected to lease them after the aircraft returned to service.
- The filing reported no material change in risk factors from the 2018 Form 10-K and no material off-balance-sheet arrangements. The company adopted lease-accounting standard ASC 842 in January 2019; management said the effect was not material. Adoption of the expected-credit-loss standard was planned for January 2020, with impact still under evaluation.
Important facts for investors to verify
- Whether the proposed acquisition advanced to a complete, financed proposal and what price and terms the independent committee ultimately considered.
- Whether the Boeing 737 MAX returned to service as expected and whether WLFC could place its committed LEAP-1B engines on lease.
- How sustainable earnings are after considering equipment-sale gains, maintenance-reserve revenue and the $11.3 million of write-downs.
- Future fleet utilization, off-lease levels, lease rates, debt costs, covenant headroom and access to borrowing capacity.
- The effect of adopting the expected-credit-loss accounting standard and developments in foreign-exchange and interest-rate exposure.