Willis Lease Finance Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and results
The company primarily acquires and leases commercial aircraft engines and related equipment. Its newer Willis Aero business buys, sells, and consigns aircraft engine parts. It reports Leasing and Related Operations and Spare Parts Sales segments.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $42.7 | $38.0 | $128.5 | $111.2 |
| Operating income (loss) | $2.0 | ($3.3) | $11.7 | ($2.3) |
| Income (loss) before tax | $2.3 | ($3.6) | $12.6 | $0.9 |
| Net income (loss) | $1.0 | ($2.2) | $7.5 | $9.1 |
| Diluted EPS | $0.12 | ($0.27) | $0.92 | $1.09 |
- Approximate operating margin was 4.7% in Q3 2014 versus a loss in Q3 2013; nine-month operating margin was 9.1% versus a loss in the prior-year period. Net margin was approximately 2.3% for Q3 and 5.9% year to date.
- Lease rent revenue was $25.2 million in Q3, down 2.4% year over year; nine-month lease rent revenue rose 2.5% to $76.9 million.
- Maintenance reserve revenue increased 47.0% in Q3 to $13.1 million and 39.3% year to date to $41.7 million. The increase principally reflected revenue recognized on lease terminations; $3.3 million related to a lease modification that made reserves nonrefundable.
- Spare-parts sales, a business launched in Q4 2013, contributed $1.9 million in Q3 and $2.5 million year to date.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $46.7 million, down from $59.1 million. Investing cash outflow was $17.0 million, versus $76.3 million, including $38.6 million of leased-equipment purchases versus $93.9 million a year earlier. Financing cash outflow was $31.7 million, compared with $15.9 million of inflow.
- Cash and cash equivalents were $10.8 million at September 30, 2014, down from $12.8 million at year-end 2013; restricted cash was $47.1 million. The filing notes that some restricted funds support maintenance obligations and debt service and are not freely available.
- Notes payable totaled $761.2 million, compared with $787.6 million at year-end 2013 and $744.3 million at September 30, 2013. Debt rates ranged from approximately 2.4% to 5.5%. About $383.4 million of borrowings were variable-rate, tied to one-month LIBOR.
- The revolving credit facility was increased from $450 million to $700 million and extended to June 2019. Availability was $357.0 million at quarter-end. The company reported compliance with applicable revolving-facility and WEST II covenants; approximately $32.2 million of debt was due within 12 months.
- Management stated that equity, internally generated funds, and existing facilities should support operations for the next 12 months, while warning that weaker cash generation or reduced facility availability could constrain operations and growth.
Material changes, outlook, and risks
- Q3 revenue rose 12.6% year over year and the company returned to quarterly profitability. Year-to-date net income fell to $7.5 million from $9.1 million, despite higher revenue; the prior-year period included an $8.6 million tax benefit related to an extraterritorial-income adjustment.
- Depreciation and amortization increased 6.0% in Q3 and 10.6% year to date, partly due to revised useful-life and residual-value estimates for older engines. The Q3 estimate change increased depreciation by $1.5 million and reduced net income by $0.6 million, or diluted EPS by $0.08.
- Equipment write-downs were $2.9 million year to date, down from $6.3 million. The 2014 charge principally reflected plans to part out five engines where estimated proceeds were below carrying value.
- General and administrative expense rose 34.1% in Q3 and 15.6% year to date, primarily from employee bonuses and other personnel-related costs. Technical expense declined year to date due to lower repair activity.
- Interest-rate exposure is material: the company estimated that a 1% rate move would change annual interest expense by approximately $3.8 million. It had no swaps outstanding at quarter-end. Management also cited potential margin pressure if borrowing costs rise while lease rates remain fixed, and risk from lessee currency weakness; 86% of nine-month lease rent revenue came from non-U.S.-domiciled lessees, though leases are payable in U.S. dollars.
- A $9.5 million engine and related-equipment purchase is committed for delivery in 2015. In October 2014, after quarter-end, the company contributed $15 million to a new 50%-owned China joint venture; that contribution was not included in September 30 balances.
- The company disclosed a $150,000 SEC civil penalty and an aggregate $125,500 in penalties for certain officers, settling allegations concerning late ownership-report filings without admitting or denying them.
- No specific earnings or revenue guidance was provided. The company is evaluating a revenue-recognition standard effective for it in 2017; it said adoption of a separate income-tax presentation standard in 2014 had no material impact.
Important facts for investors to verify
- How much of the quarter’s and year-to-date maintenance-reserve revenue is recurring versus associated with lease terminations or modifications.
- Whether utilization and on-lease levels recover: average Q3 utilization was 82% versus 84% a year earlier; 82% of lease equipment by book value was on lease versus 85%.
- The assumptions behind engine residual values, useful lives, and part-out proceeds, and whether further impairment charges are likely.
- Floating-rate debt exposure, covenant headroom, restricted-cash availability, and the company’s ability to fund scheduled debt repayments and planned purchases.
- The impact and funding terms of the post-quarter $15 million China joint-venture contribution, and the commercial and financial performance of the new spare-parts business.