Willis Lease Finance Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with fiscal 2021. WLFC leases and manages commercial aircraft engines, aircraft and related equipment, and sells aircraft-engine parts. Leasing and Related Operations generated 91.7% of consolidated revenue. At year-end, the company had 80 lessees in 41 countries and managed an additional 324 engines, aircraft and related assets for others.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $311.9 million | $274.2 million |
| Operating income | $9.9 million | $8.3 million |
| Net income | $5.4 million | $3.4 million |
| Net income attributable to common shareholders | $2.1 million | $18,000 |
| Operating cash flow | $144.4 million | $90.7 million |
| Investing cash flow | $(194.4) million | $(148.0) million |
| Financing cash flow | $43.3 million | $74.1 million |
Margins: Derived operating margin was approximately 3.2% and net margin approximately 1.7% in 2022, compared with approximately 3.0% and 1.2%, respectively, in 2021. Common earnings per share were $0.35 basic and $0.33 diluted, versus approximately zero in 2021.
Revenue mix and activity: Lease rent revenue rose 20.6% to $162.6 million; maintenance reserve revenue increased 12.8% to $83.4 million; spare-parts and equipment sales grew 55.1% to $27.0 million. Managed-services revenue rose to $23.6 million from $11.4 million. Average utilization by net book value was approximately 82%, versus 81% in 2021. The company purchased $286.4 million of equipment in 2022.
Liquidity and debt: Year-end cash, cash equivalents and restricted cash totaled $89.0 million, including $12.1 million in cash and cash equivalents and $76.9 million of restricted cash. Debt obligations were $1.847 billion net of issuance costs ($1.862 billion gross); $727.0 million was variable-rate debt. The $1.0 billion revolving facility had $273.0 million available and matures in June 2024. Debt carried stated interest rates of approximately 3.1%–7.4%; substantially all assets secure debt. The company reported compliance with debt covenants at year-end. Preferred dividends paid were $3.3 million.
Contractual obligations included $428.1 million of equipment purchase commitments, including $98.2 million due within one year. Scheduled gross debt payments were $88.1 million within one year and $848.0 million in years one to three. Management said available equity, internally generated funds and existing facilities were sufficient to maintain operations through 2023, subject to risks including lower internally generated cash, reduced facility availability or higher borrowing costs.
Material changes versus 2021
- Revenue increased 13.8%, supported by higher lease rent, short-term maintenance revenue, spare-parts sales and managed-services activity as aviation utilization recovered.
- Net income improved, but common-shareholder earnings remained modest after $3.3 million of preferred dividends and $84,000 of preferred-stock issuance-cost accretion.
- Equipment write-downs increased to $21.8 million from $7.7 million. They included a $20.4 million impairment of two engines in Russia deemed unrecoverable following the Russia-Ukraine conflict.
- General and administrative expense rose 22.8% to $92.5 million, including higher personnel, travel and project costs. Technical expense rose 53.7% to $14.4 million, partly due to increased maintenance and repairs related to an FAA airworthiness directive.
- Debt increased to $1.847 billion net from $1.790 billion. Variable-rate borrowings rose to $727.0 million from $590.0 million, while the one-month LIBOR rate reached 4.39% from 0.10% a year earlier.
- Operating cash flow increased, while the company continued substantial equipment investment. It repurchased 154,215 shares for approximately $5.2 million in 2022; $39.6 million remained available under its repurchase authorization.
Outlook, risks and unusual items
- Management expects long-term growth in engine leasing, but describes recovery and demand as slower and less predictable than historically. It states COVID-19 effects remain uncertain and may continue to affect lessee demand, collections, asset values and lease rates.
- Interest-rate exposure is material: management estimated that a 1 percentage-point change in rates would change annual interest expense on variable-rate debt by approximately $2.3 million, before considering hedges. Lease rates are generally fixed for their terms. Five interest-rate swaps had a $34.8 million net fair-value asset at year-end.
- Approximately 80% of assets by book value were on lease at year-end; off-lease and other equipment represented $418.1 million of the operating-lease portfolio. The filing also says short-term and off-lease engines represented approximately 65% of assets, creating recurring remarketing and cost risks.
- Lease rent from non-U.S.-domiciled lessees was 60% of total in 2022. Although substantially all leases are payable in U.S. dollars, customer currency weakness, foreign legal and repossession barriers, sanctions, geopolitical events and trade restrictions may affect payment and asset recovery.
- Since November 2022, an independent board committee had been reviewing and negotiating a possible take-private proposal involving Mitsui, Fuyo General Lease, JA Mitsui Leasing and CFW-related holders. No complete proposal had been submitted, and there was no assurance a transaction would be agreed or completed. Failure or prolonged uncertainty could affect the stock price, customers, employees and costs.
- Founder Charles F. Willis, IV beneficially owned or controlled approximately 46% of the common shares at year-end. The filing also describes preferred shares with a 6.5% dividend and potential redemption rights upon specified events; the earliest stated holder call dates are October 2023 for Series A and September 2024 for Series A-2.
- The company reported no common-stock dividends planned for the foreseeable future. Debt covenants may restrict dividends and repurchases in certain circumstances.
- The 2022 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. Equipment valuation was identified as a critical audit matter because it depends on appraisals and estimates of lease rates, maintenance revenue and remaining lease periods.
Important facts for investors to verify
- Whether the proposed take-private transaction advances, and its proposed terms, financing, approvals and implications for minority shareholders.
- Lease collections, delinquency and utilization trends: rent more than 30 days past due was $7.4 million and maintenance reserves past due were $5.9 million at year-end.
- Whether equipment valuations and residual-value assumptions remain supportable, particularly for the 16 previously written-down assets with $32.4 million of remaining book value and the Russia-related impairments.
- Liquidity after separating unrestricted from restricted cash; revolver availability and renewal before its 2024 maturity; and the company’s capacity to meet debt maturities and purchase commitments.
- Exposure to variable rates and LIBOR-to-SOFR transition, including the extent to which swaps offset higher interest costs and whether lease pricing can keep pace.
- Future redemption obligations, preferred-dividend burden, covenant headroom and restrictions on common dividends or repurchases.