Business context and reporting period
Willis Lease Finance Corporation acquires and leases commercial aircraft engines and related equipment, and selectively buys and sells engines and parts. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. The company also operates a spare-parts business through Willis Aeronautical Services.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $43.2 | $43.9 | $86.0 | $87.2 |
| Operating income (loss) | $(1.1) | $3.3 | $2.3 | $9.7 |
| Net income (loss) | $(0.5) | $2.2 | $1.8 | $6.5 |
| Basic earnings (loss) per share | $(0.06) | $0.28 | $0.23 | $0.82 |
| Operating margin | (2.6%) | 7.5% | 2.6% | 11.2% |
| Net margin | (1.1%) | 5.0% | 2.1% | 7.5% |
At June 30, 2015, total assets were $1,282.2 million, notes payable $861.0 million, and shareholders’ equity $217.9 million. Cash and cash equivalents were $16.2 million and restricted cash $50.7 million. The $700 million revolving facility had $205 million available. Operating cash flow for the first half was $32.1 million, versus $35.0 million a year earlier; investing cash flow was $(61.0) million, including $74.8 million of equipment purchases. Financing cash flow was $31.6 million. The company reported $23.7 million of scheduled debt repayments due within 12 months.
Material changes versus prior periods
- Second-quarter revenue declined 1.5%; first-half revenue declined 1.3%. Lower maintenance-reserve revenue and other revenue more than offset stronger spare-parts sales and equipment-sale gains.
- Second-quarter results moved from profit to loss; first-half net income fell 72%. Depreciation and amortization rose 12% in Q2 and 13% for the half, while interest expense increased with higher average debt.
- Lease rent revenue increased 4% in Q2, with average utilization at 84% versus 81%. For the first half, rent revenue declined 1.5% and average utilization was 82% versus 84%. At quarter-end, 87% of lease equipment by book value was on lease, compared with 82% a year earlier.
- First-half spare-parts sales increased to $5.0 million from $2.1 million; reported gross margin rose to 26.6% from 5.2%, principally due to the mix of parts sold.
- In March, the company repaid $23.1 million of WOLF-related term notes at a discount, recording a $1.2 million debt-extinguishment gain. It also repurchased 108,000 shares for approximately $2.0 million during the half.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said equity, internally generated funds and existing debt facilities were sufficient to maintain operations for the next 12 months, while warning that reduced internally generated funds or borrowing availability could constrain operations and growth.
- Management attributed the Q2 loss in part to lower maintenance-reserve revenue recognized on lease terminations, higher depreciation, and a $3.1 million equipment write-down. The write-down reflected engines designated for part-out where carrying value exceeded estimated proceeds. The first-half write-down was also $3.1 million.
- Depreciation estimates for certain older engine types were changed effective July 1, 2014. The change increased first-half 2015 depreciation by $2.9 million and reduced net income by an estimated $1.8 million, or $0.23 per diluted share.
- $508.8 million of borrowings were variable-rate and tied to one-month LIBOR; the company had no interest-rate swaps outstanding. Management estimated that a 1 percentage-point rate change would change annual interest expense by about $5.1 million. Fixed lease rates may not adjust promptly if borrowing rates rise.
- Risks include lower lease utilization or lease rates, covenant or borrowing-base restrictions, cross-default provisions, and foreign lessee currency pressures. 92% of first-half lease-rent revenue came from non-U.S.-domiciled lessees, although leases require payment in U.S. dollars. The company reported compliance with its revolving-credit and WEST II covenants at June 30.
- WEST II debt is serviced from its own engine and lease cash flows; related assets are not generally available to satisfy other company obligations. Restricted cash also supports maintenance obligations and lease security deposits. Management stated it did not intend to repatriate $11.3 million of cash and restricted cash held in foreign subsidiaries.
- The company corrected immaterial 2014 presentation errors involving spare-parts sales, related costs, equipment-sale gains and cash-flow classification. It said there was no impact on net income; first-half 2014 operating cash flow had been understated by $0.6 million.
Important facts for investors to verify
- Whether stronger Q2 utilization and equipment additions can persist, and how off-lease levels affect lease income and cash generation.
- Whether maintenance-reserve revenue and engine-sale gains are recurring; assess the judgments behind asset residual values, depreciation estimates and equipment write-downs.
- Debt availability and covenant headroom, including the large 2019 contractual debt payment concentration and the borrowing-base restrictions.
- Exposure to rising LIBOR, restricted cash availability, and the extent to which foreign lessee currency weakness could affect collections.
- The implications of the corrected comparative presentation and the company’s ongoing review of new accounting standards.