Business context and reporting period
Willis Lease Finance Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. It acquires and leases aircraft, engines and related equipment, and sells aircraft parts and equipment. At quarter-end, its lease portfolio included 337 engines, 12 aircraft and one marine vessel; it also managed 333 engines, aircraft and related equipment for others, and served 79 lessees in 40 countries. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $76.9 | $70.8 | $223.8 | $198.4 |
| Operating income (loss) | $8.7 | $6.1 | $(6.9) | $3.7 |
| Net income (loss) | $6.4 | $2.9 | $(8.9) | $1.6 |
| Net income (loss) attributable to common shareholders | $5.5 | $2.0 | $(11.4) | $(0.9) |
| Basic EPS | $0.91 | $0.33 | $(1.88) | $(0.14) |
| Operating margin | 11.4% | 8.6% | (3.1)% | 1.9% |
Q3 revenue rose 8.6%, led by lease rent, spare-parts sales and managed services; lower maintenance-reserve revenue and gains on leased-equipment sales partly offset growth. Nine-month revenue rose 12.8%. Operating results for the nine months turned to a loss, primarily reflecting a $21.8 million equipment write-down, versus $4.1 million in the prior-year period. Q3 net finance costs were $16.3 million, down from $18.3 million; nine-month costs were $49.2 million, down from $50.3 million.
Operating cash flow was $82.3 million for the nine months, compared with $68.6 million. Investing activities used $143.8 million, principally reflecting $220.7 million of equipment purchases, partly offset by sale proceeds. Financing activities provided $47.2 million. Cash, cash equivalents and restricted cash totaled $81.4 million at September 30, including $11.9 million unrestricted; the comparable total at December 31, 2021 was $95.6 million.
Total assets were $2.542 billion at September 30, 2022, versus $2.463 billion at year-end 2021. Debt obligations were $1.852 billion net of issuance costs ($1.868 billion gross), up from $1.790 billion net. The $702 million revolving credit facility bore one-month LIBOR plus 1.375%; LIBOR was 3.14% at quarter-end. The company reported compliance with its debt covenants. Shareholders’ equity was $389.4 million; redeemable preferred stock was $49.9 million.
Material changes versus prior comparable periods
- Q3 lease rent revenue increased 20.1%, reflecting more engines acquired and placed on lease, partly offset by lower utilization and lease factors. Average portfolio utilization was about 80%, versus 82% in Q3 2021. For the nine-month periods, utilization was 82%, versus 81%.
- Maintenance-reserve revenue was lower in Q3 (down 13.6%) and slightly lower year to date (down 2.0%). Management attributed the mix shift to reduced long-term maintenance revenue and higher usage-based revenue as flight activity recovered.
- Nine-month spare-parts and equipment sales increased 54.2%; other revenue rose 20.4%. The prior-year period included a $6.3 million engine-program transition settlement, while 2022 included a $3.1 million gain from selling notes receivable.
- Nine-month general and administrative expense rose 23.0%, reflecting higher personnel, bonus and travel costs, as well as the absence of prior-year employee-retention credits. Technical expense increased 83.1%, partly due to higher engine maintenance and repairs related to an FAA airworthiness directive.
Outlook, risks, contingencies and unusual items
- Management said its equity base, internally generated funds and existing debt facilities should be sufficient to maintain operations for the next 12 months. It cautioned that weaker internally generated cash, reduced facility availability or higher borrowing costs could impair operations and growth. The filing provides no earnings or revenue guidance.
- Of the nine-month $21.8 million equipment impairment, $20.4 million related to two engines in Russia deemed unrecoverable because of the Russia-Ukraine conflict and related sanctions. Management noted that broader economic and company-specific effects remained uncertain.
- COVID-19-related airline disruption may contribute to customer bankruptcies, early lease returns, payment defaults, concessions and lower demand. The company also identified interest-rate exposure: $702 million of variable-rate debt, with a stated estimated annual interest-expense sensitivity of $2.0 million for each 1% rate change, net of swaps. A portion of exposure is hedged; interest-rate swaps had a $36.4 million net fair-value asset.
- Purchase obligations totaled $465.0 million, including commitments for 19 LEAP-1A engines for $298.5 million and 10 LEAP-1B engines for $166.5 million. The company said certain agreements permit deferrals or cancellations in specified circumstances. Additional future maintenance commitments were disclosed.
- The company stated that no material off-balance-sheet arrangements existed. A material weakness in review controls for the quarterly income-tax provision, identified in Q1 2022, was reported as remediated by September 30; management concluded disclosure controls were effective at period-end.
- One customer accounted for more than 10% of lease rent revenue in both Q3 and the nine-month periods in 2022 and 2021; the filing does not identify that customer in the provided text.
Important facts for investors to verify
- How lease utilization, customer collections and usage-based maintenance revenues develop as airline activity changes.
- Whether the impairment assessment for Russian engines and the remaining carrying value of previously written-down assets (reported at $33.3 million) require further adjustments.
- Exposure to floating interest rates, hedging coverage, liquidity available beyond unrestricted cash, and the timing of debt repayments, including $763.5 million of gross principal scheduled for 2024.
- Execution and financing of engine purchase commitments and related maintenance obligations, and the effect of any deferrals or cancellations.
- The continuing impact of customer concentration, COVID-19-related risks, sanctions and the remediated income-tax control weakness.