Willis Lease Finance Corporation — Q3 2017 Form 10-Q
Business and period. The company acquires and leases commercial aircraft engines and related equipment, and selectively sells equipment and spare parts. This unaudited report covers the three and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $65.9 | $51.5 | $211.7 | $151.8 |
| Earnings from operations | $5.2 | $5.9 | $26.8 | $18.5 |
| Earnings from joint ventures | $3.0 | $0.6 | $6.1 | $0.9 |
| Net income | $5.3 | $4.0 | $19.4 | $11.4 |
| Net income attributable to common shareholders | $4.9 | $4.0 | $18.4 | $11.4 |
| Diluted earnings per common share | $0.80 | $0.62 | $2.97 | $1.66 |
- Revenue mix and change: Nine-month lease rent revenue rose 7% to $95.0; maintenance reserve revenue rose 41% to $64.2; and spare parts and equipment sales rose to $41.3 from $10.5. The latter reflected increased equipment and parts sales. Nine-month gains on leased equipment sales were $4.7 versus $3.4.
- Profit and margins: Nine-month net income increased about 71%, while Q3 earnings from operations declined year over year despite higher revenue. Parts-sales gross margin improved to 32.9% for the nine months from 25.2% (Q3: 31.0% versus 25.6%). No consolidated gross-margin figure is provided.
- Cash flow: For the nine months, operating cash flow was $110.2 versus $65.7; investing cash outflow was $122.0 versus $60.8, chiefly reflecting equipment purchases; financing cash flow was $51.4 versus an outflow of $8.7. Purchases of equipment held for operating lease totaled $177.3. Cash, cash equivalents and restricted cash ended at $71.9.
- Balance sheet and liquidity: At September 30, total assets were $1,435.9, notes payable were $932.1 net of issuance costs ($951.2 principal), and shareholders’ equity was $215.6. Cash and cash equivalents were $7.9; restricted cash was $64.1 and is not freely available. Approximately $48.5 of debt is due within 12 months. Management said equity, internally generated funds and existing facilities should support operations for the next 12 months.
- Leasing activity: Average utilization was 90% for the nine-month period; approximately 91% of equipment held for lease by book value was on lease at quarter-end. Lease equipment net book value increased 7.3% year over year to $1,199.9.
Material changes and financing
- Nine-month revenue increased 39%, led by maintenance reserve revenue and equipment/parts sales. Earnings from operations increased about 45% year over year for the nine months, but were lower in Q3, in part as write-downs, operating expenses and finance costs rose.
- Equipment write-downs rose to $22.2 for the nine months from $5.9, including $16.7 associated with engines designated for part-out or sale and $5.5 related to spare parts. Q3 write-downs were $7.0 versus $2.0.
- Interest expense increased with higher average debt and higher LIBOR. Nine-month net finance costs rose 18% to $36.4. The company reported $339.4 of variable-rate borrowings and estimated a $2.4 annual interest-expense change for each 1 percentage-point change in rates.
- WEST III issued $335.7 of asset-backed notes in August, secured by 56 engines; proceeds were used in part to repay revolving-credit borrowings. Series A and B coupons are 4.69% and 6.36%, respectively. WEST III debt and assets remain consolidated, but its assets are restricted to that trust’s obligations; related restricted cash rose substantially.
- The company issued $29.7 net proceeds of additional 6.5% Series A-2 preferred stock. Preferred stock carrying value was $49.5 at quarter-end; preferred dividends and issuance-cost accretion reduced income attributable to common shareholders.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of the remainder of 2017.
- Management reported compliance with revolving-facility, WEST II and WEST III covenants at September 30. The revolving facility requires, among other tests, interest coverage of at least 2.25-to-1 and total leverage below 4.25-to-1. Financing agreements include cross-default provisions, collateral and borrowing eligibility limits; covenant or eligibility failures could restrict borrowing or accelerate repayment.
- Key risks include higher borrowing costs against generally fixed-rate leases, off-lease equipment or weaker lease rates, and the availability of capital to fund equipment purchases. Approximately 85% of lease rent revenue came from non-U.S.-domiciled lessees, creating indirect currency-devaluation and collection risk. No customer accounted for more than 10% of lease rent revenue.
- The company uses an interest-rate swap to hedge part of its exposure; management estimated hedging would increase 2017 interest expense by approximately $0.6. Estimates of equipment residual values, useful lives and impairment depend on management judgments and could differ from actual recoveries.
- Other notable items: a $1.3 insurance settlement contributed to other revenue; Q3 joint-venture earnings benefited from a GE90 engine sale at WMES. Adoption of stock-compensation guidance produced a $1.3 cumulative adjustment to retained earnings. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether equipment utilization, lease rates and collections sustain cash generation, especially if interest rates or off-lease levels rise.
- The nature and recoverability of the $22.2 in year-to-date equipment and spare-parts write-downs, and future residual-value assumptions.
- Debt maturities, covenant headroom, restricted-cash requirements and the extent to which WEST III cash flows are available to the parent.
- Whether the increase in sales and maintenance-reserve revenue is repeatable, and how joint-venture earnings and asset-sale gains contribute to results.
- The dividend, redemption and liquidity implications of the 6.5% preferred stock, including its specified redemption rights.