Willis Lease Finance Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Willis Lease Finance acquires, leases and sells commercial aircraft engines and related equipment; its other reportable segment sells aircraft and engine parts.
Financial results and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $199.6 | $174.3 | +14.5% |
| Operating earnings | $13.0 | $10.5 | +23.4% |
| Income before taxes | $14.1 | $11.8 | +19.4% |
| Net income | $7.4 | $7.2 | +1.5% |
| Diluted EPS | $0.92 | $0.89 | +3.4% |
| Cash from operating activities | $109.1 | $62.7 | +$46.4 |
| Total assets | $1,308.6 | $1,261.6 | +3.7% |
| Debt | $878.7 | $841.0 | +4.5% |
| Shareholders’ equity | $210.3 | $216.9 | -3.0% |
- Revenue growth reflected higher lease portfolio utilization and spare-parts and equipment sales. Lease rent rose 6.0% to $107.9 million; maintenance reserve revenue increased 3.2% to $55.1 million; parts and equipment sales rose to $25.6 million from $8.9 million.
- Operating margin was approximately 6.5% of revenue and net margin approximately 3.7%, based on reported totals. Spare-parts gross margin improved to 22.4% from 16.2%.
- Depreciation and amortization increased 6.3% to $69.6 million; general and administrative expenses rose 19.2% to $42.7 million. Equipment write-downs were $9.2 million, up from $5.6 million.
- Cash and cash equivalents were $9.7 million; restricted cash was $33.0 million and is not generally available for corporate purposes. The $700 million revolving facility had $151 million available at year-end, subject to its borrowing base and covenants.
- Equipment purchases totaled $183.6 million; investing cash outflow was $158.0 million. Financing cash flow was $45.1 million, including $192.7 million in new borrowings and $153.8 million in principal payments.
- Debt included $549.0 million drawn on the revolving facility at LIBOR plus 2.75% and $300.5 million of WEST II notes at a fixed 5.50%. About $562.1 million of borrowings were variable-rate; management estimated a one-percentage-point rate change would alter annual interest expense by about $5.6 million. No swaps were in place.
Material changes and operating developments
- Year-end lease portfolio net book value increased to $1,122.9 million from $1,066.4 million. Approximately 90% of equipment by net book value was on lease, versus 79% a year earlier. The portfolio included 201 engines, 10 aircraft and five spare-parts packages, serving 85 lessees in 46 countries.
- Parts and equipment sales increased with Willis Aero’s expanded inventory sales and sales of two airframes and related equipment. Eight engines were sold from the lease portfolio, generating an $8.4 million net gain, versus $5.8 million in 2014.
- Higher G&A reflected increased contingency bonuses, salaries, corporate aircraft costs, bad-debt expense and stock compensation. Lower engine repair activity reduced technical expense by 23.8%.
- The company repurchased 912,247 shares for approximately $16.5 million during 2015, including 643,821 shares in a modified Dutch-auction tender offer at $18 per share. No cash dividends were paid, and the company stated it had no near-term dividend intention.
- Fourth-quarter revenue was $55.2 million and net income was $3.0 million, compared with $41.6 million and a $0.3 million net loss, respectively, in fourth-quarter 2014.
Outlook, risks and unusual items
- Management said its equity base, internally generated funds and existing debt facilities were sufficient to maintain operations through 2016. It was discussing additions to its capital base; inability to obtain additional capital could constrain portfolio growth.
- Four engines and related equipment were committed for delivery in 2016 at a gross purchase price of $31.6 million. Scheduled 2016 debt repayments were approximately $22.7 million.
- Management cited cyclical airline and MRO customer risk, asset residual-value and obsolescence risk, maintenance and repossession costs, foreign legal and political exposure, and competition. Foreign lessees generated 92% of lease rent revenue; all current lease payments were denominated in U.S. dollars.
- Lease rent and maintenance reserve payments more than 30 days past due totaled approximately $5.3 million and $2.9 million, respectively, at year-end. The largest customer represented 8.4% of lease rent revenue and had no past-due receivables.
- 2015 included a $1.2 million gain from repaying WOLF-related debt at a discount. The effective tax rate increased to 48.0% from 38.8%, primarily reflecting state and foreign taxes and nondeductible executive compensation.
- Management reported compliance with debt covenants at December 31, 2015. Substantially all company assets secure creditor obligations; WEST II assets are ring-fenced for WEST II liabilities. Covenant breaches or reduced collateral values could restrict borrowing or accelerate debt.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. Management also concluded internal control over financial reporting was effective. The filing reported no legal proceedings.
- After year-end, the CFO resigned effective February 18, 2016, and an interim CFO was serving; the President planned to retire effective March 31, 2016, with the Chief Investment Officer selected to succeed him.
Important facts for investors to verify
- Whether lease utilization, collections and customer credit quality remain strong, given year-end past-due balances and substantial exposure to foreign airlines.
- Availability and cost of liquidity under the revolving facility, covenant headroom, and the company’s ability to fund 2016 purchases and debt service.
- Performance and realizable values of older engines, parts inventory and assets designated for part-out, including the assumptions behind the $9.2 million of write-downs.
- Exposure to rising LIBOR without current hedges and the potential for higher financing costs to compress lease margins.
- Execution of the 2016 leadership transition and any resulting effect on operating oversight, financial reporting or growth plans.