Willis Lease Finance Corporation — Q3 2013 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2013. The company acquires and leases commercial aircraft engines and related equipment, primarily under operating leases, and selectively buys and sells equipment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Three months ended Sept. 30, 2013 | Three months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2012 |
|---|---|---|---|---|
| Total revenue | $38.0 | $37.5 | $111.2 | $108.4 |
| Operating income (loss) | $(3.3) | $(11.0) | $(2.3) | $(1.2) |
| Net income (loss) | $(2.2) | $(7.2) | $9.1 | $(0.7) |
| Basic EPS | $(0.27) | $(0.92) | $1.12 | $(0.35) |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $59.1 | $53.9 |
Calculated operating margin was approximately (8.8)% for Q3 2013 and (2.1)% for the first nine months of 2013; net margin was approximately (5.9)% and 8.2%, respectively. These ratios are calculated from reported revenue and income.
- Q3 lease rent revenue rose 12.0% to $25.8 million; nine-month lease rent revenue increased 5.8% to $75.0 million. Management attributed the increases to portfolio growth. Average utilization was 84% for Q3 and 83% for the nine-month period, versus 82% in each comparable 2012 period.
- Q3 total revenue was nearly flat year over year. Nine-month revenue increased 2.6%. Nine-month maintenance reserve revenue rose 4.3% to $29.9 million, while gain on equipment sales fell to $3.6 million from $4.6 million.
- Q3 net loss narrowed year over year, primarily against a 2012 comparison that included a $15.4 million debt-extinguishment and derivative-termination loss. Nine-month net income included an $8.6 million tax benefit related to an extraterritorial income adjustment.
- At September 30, assets were $1,139.4 million, notes payable $744.3 million, and shareholders’ equity $206.5 million. Notes payable increased from $697.0 million at December 31, 2012.
- Cash and cash equivalents were $4.0 million and restricted cash was $38.0 million. The $450 million revolving facility had $138 million available. The filing does not provide a current ratio or another single measure of available unrestricted liquidity.
Material changes and unusual items
- Interest expense increased 31.6% in Q3 to $9.9 million and 28.3% for the nine months to $29.0 million, mainly reflecting higher average debt and the cost of WEST II securitization debt.
- Technical expense rose to $4.5 million in Q3 from $2.0 million, and to $10.4 million for nine months from $4.7 million, largely due to increased engine repair activity.
- Equipment write-downs were $4.3 million in Q3 and $6.3 million for nine months, compared with $2.5 million and $2.8 million, respectively, in 2012. Charges reflected revised expected proceeds from engine part-outs and consigned parts.
- A depreciation estimate change for certain older engine types increased Q3 2013 depreciation by $2.0 million and reduced net income by $1.3 million, or diluted EPS by $0.15, compared with the prior estimate.
- On September 18, 2013, the company acquired its partner’s 50% interest in WOLF A340, LLC for $1.0 million, consolidating WOLF. Its two non-recourse term notes had $31.5 million outstanding at quarter-end.
- On November 6, 2013, the company agreed to buy certain assets of related party J.T. Power for $5.9 million; net cash paid was $4.5 million after amounts owed to the company were deducted. The company disclosed that J.T. Power’s owner is the CEO’s son and a company shareholder and director.
Outlook, risks and contingencies
- Management said its equity base, internally generated funds and existing debt facilities should be sufficient for the next 12 months. It was discussing additions to its capital base with commercial and investment banks; inability to obtain additional capital could constrain growth.
- Management identified off-lease equipment, weaker lease rates, and rising interest rates as risks to earnings and operating cash flow. About $343.5 million of debt was variable-rate; the company estimated a 1% rate change would alter annual interest expense by about $2.4 million, net of derivatives.
- Lease rates are generally fixed for specified terms, so higher borrowing costs may compress margins. A $100 million interest-rate swap had a two-month remaining term at quarter-end; management anticipated about $0.3 million of additional net finance costs over the following 12 months from that contract.
- About 87% of nine-month lease revenue came from lessees domiciled outside the United States, although leases require U.S.-dollar payments. Currency weakness could impair some lessees’ ability to pay. No customer represented more than 10% of nine-month lease rent revenue.
- Debt facilities contain financial and other covenants, including leverage and interest coverage tests. The company reported compliance at September 30, 2013. Approximately $45.1 million of debt principal was due within 12 months; total contractual commitments, including interest and purchase obligations, were $962.0 million.
- The company had purchase commitments for four engines and related equipment totaling approximately $39.3 million, including $10.8 million scheduled for delivery by year-end 2013. Management estimates, including equipment residual values and impairment valuations, could differ from actual outcomes.
Important facts for investors to verify
- Whether lease utilization and portfolio expansion can sustain revenue and cash flow as repair costs, depreciation, and financing costs rise.
- The assumptions supporting engine residual values, consignment proceeds, and the $6.3 million nine-month equipment write-down.
- The sustainability and tax treatment of the $8.6 million ETI benefit included in nine-month results.
- Revolver availability, scheduled debt repayments, covenant headroom, and the company’s ability to access additional capital.
- The financial and governance implications of the post-quarter J.T. Power asset purchase and the related-party relationship.