Willis Lease Finance Corporation — Q2 2011 Form 10-Q
Business context and reporting period. The company acquires and leases commercial aircraft engines and related equipment, and selectively buys and sells engines. This unaudited filing covers the quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $38.7 | $32.8 | $79.5 | $68.5 |
| Income from operations | $5.5 | $2.7 | $13.4 | $7.2 |
| Net income | $3.5 | $1.9 | $8.5 | $5.0 |
| Net income attributable to common shareholders | $2.7 | $1.1 | $7.0 | $3.4 |
| Diluted EPS | $0.31 | $0.12 | $0.78 | $0.37 |
| Operating margin | 14.2% | 8.1% | 16.9% | 10.5% |
| Net margin | 9.0% | 5.8% | 10.7% | 7.2% |
Revenue gains reflected higher maintenance reserve revenue and gains on equipment sales, alongside modest lease-rent growth. Q2 maintenance reserve revenue was $10.1 million versus $7.2 million; gain on sale was $2.5 million versus $0.1 million. For the six months, maintenance reserve revenue was $18.4 million versus $14.0 million, and gains on sale were $7.6 million versus $2.3 million.
Lease rent revenue rose 1.5% in Q2 and 3.2% for the six months. Management attributed growth to a larger portfolio, partly offset by lower rates on certain engine types and deferred revenue from customers accounted for on a cash basis. Six-month average utilization improved to 86% from 84%; approximately 83% of equipment by book value was on lease at June 30.
- Expenses and earnings: Six-month depreciation increased 13.9% to $26.3 million, including $1.7 million of additional expense from a 2010 change in useful-life and residual-value estimates. General and administrative expense increased 33.5% to $17.4 million, mainly from employment-related costs, travel, and legal and accounting fees. Net finance costs declined 13.8% to $17.9 million, primarily due to lower LIBOR and lower swap costs.
- Cash flow: Six-month operating cash flow was $25.7 million, compared with $25.2 million. Investing cash outflow was $64.7 million, including $70.7 million of equipment purchases and an $8.0 million joint-venture investment. Financing cash inflow was $45.0 million. Cash and cash equivalents were $8.3 million at June 30, versus $2.2 million at year-end; restricted cash was $106.7 million.
- Balance sheet and debt: Total assets were $1.191 billion and shareholders’ equity was $231.1 million. Notes payable, net of discount, were $713.9 million; other debt was $69.7 million. The $285 million revolving facility had $90 million available and matures in November 2012. Debt rates ranged from approximately 1.4% to 8.0%, before derivative effects. The company reported compliance with financial covenants at quarter-end.
Material changes and notable items
- The company formed a 50/50 engine-leasing joint venture with Mitsui. It invested $8.0 million and transferred seven engines; the $70.0 million proceeds were recorded as other debt to be amortized over 175 months. The joint venture has a credit facility of up to $120 million.
- Other debt of $69.7 million was newly reported at June 30; the balance-sheet notes payable declined from $731.6 million at December 31, 2010.
- The company repurchased 403,000 common shares for $5.3 million during the six months. Common shares outstanding at June 30 were 8.96 million.
- Related-party Island Air leases were converted to a finance lease with a stated principal of $7.0 million. Island Air had $2.9 million of overdue rent and late charges; the company agreed to forgive 65% and collect the remaining 35%, including $963,000 over 60 months at 5%. The settlement depends on Island Air obtaining similar concessions from other major creditors.
Outlook, risks and contingencies
- Management said 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. No specific earnings or revenue guidance was provided.
- Interest-rate exposure is significant: all but $21 million of borrowings were variable-rate, while lease rates are generally fixed for specified terms. Swaps had $375 million notional value and a $13.7 million net liability. Management estimated a 1% rate change would affect annual interest expense by about $3.2 million, net of derivatives, and projected approximately $11.3 million of additional interest expense from hedges for the year ending December 31, 2011.
- Liquidity is affected by restricted cash and securitization structures: restricted balances are not generally available for corporate use, and WEST distributions are subject to debt service and reserve requirements. The filing lists $72.8 million of debt repayable in the next 12 months, including a $17.7 million term loan with a $15.2 million bullet payment due December 31, 2011.
- Contractual commitments included $36.0 million for four engines, with $18.2 million due during the remainder of 2011. A non-binding memorandum to buy six Sukhoi Superjet aircraft, with options for four more, was excluded from purchase commitments.
- Other risks include lease utilization and rate deterioration, customer credit and concentration, foreign-lessee ability to pay in U.S. dollars, and counterparty performance under hedges. The largest customer represented 13.1% of six-month lease-rent revenue; 80% of lease revenue came from non-U.S.-domiciled lessees.
- Management identified estimates of residual values, useful lives, impairment, maintenance reserves, and doubtful accounts as significant judgment areas. No long-lived-asset write-downs were recorded in the first six months. Disclosure controls were considered effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether lease utilization, lease rates, and collections can sustain revenue growth as the portfolio expands.
- Near-term refinancing and repayment capacity, including the December 2011 bullet payment, the November 2012 revolver maturity, and covenant headroom.
- The availability of cash for general use given $106.7 million in restricted cash and WEST distribution restrictions.
- The effect of LIBOR movements and hedge costs on margins, including the stated interest-expense sensitivities and forecast.
- Island Air’s settlement performance and the recoverability of the related-party receivable, and the economics and accounting for the Mitsui joint venture and engine transfer.
- Whether equipment purchase commitments and any future aircraft purchases can be funded without limiting liquidity or growth.