Business context and reporting period
Willis Lease Finance Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. Its business includes leasing and reselling commercial aircraft engines and related equipment, plus aftermarket parts sales.
Financial performance
Amounts below are in millions, except per-share data.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $49.6 | $43.8 | $100.3 | $85.1 |
| Operating income (loss) | $5.7 | $(1.1) | $12.6 | $0.9 |
| Net income (loss) | $3.4 | $(0.5) | $7.4 | $0.9 |
| Diluted EPS | $0.49 | $(0.06) | $1.05 | $0.11 |
| Operating cash flow | Not reported by quarter | $40.8 | $30.4 |
- Q2 revenue rose about 13% year over year; six-month revenue rose about 18%. Higher lease utilization and maintenance reserve revenue were key contributors.
- Average lease-portfolio utilization was 90% in Q2 and 89% for the first half, versus 84% and 83%, respectively, in 2015. Q2 maintenance reserve revenue included $6.2 million associated with termination of three long-term leases.
- Six-month investing cash outflow was $16.9 million, versus $59.3 million in 2015; financing cash outflow was $12.6 million, versus $31.6 million of financing inflow. The company repurchased $22.4 million of shares in the first half.
- At June 30, total assets were $1.292 billion and shareholders’ equity was $196.2 million. Cash and cash equivalents were $21.1 million; restricted cash was a further $38.8 million.
- Notes payable were $876.7 million net of issuance costs ($891.2 million gross), compared with $866.1 million net at year-end 2015. Interest expense was $10.4 million in Q2 and $20.4 million for the first half. Parts-sales gross margin was 22.9% in Q2 versus 23.2%; first-half margin was 24.7% versus 26.6%.
Material changes and notable items
- Improved utilization and lease revenue helped turn Q2’s prior-year operating and net losses into profits. Six-month earnings also increased substantially.
- First-half equipment write-downs were $3.9 million, including $2.0 million related to consigning an engine for part-out and $1.9 million for an impaired engine. Q2 general and administrative expense increased 17%, principally due to higher contingency bonus expense.
- On April 20, 2016, the company increased its revolving facility from $700 million to $890 million and extended maturity to April 2021. It includes an accordion feature up to $1 billion; the initial rate is LIBOR plus 2.75%, subject to leverage-based adjustment. The facility had $574 million drawn at quarter-end.
- The company corrected previously identified accounting errors concerning maintenance rights on equipment acquired with in-place leases, concluding the corrections were immaterial to individual prior periods. The 2015 balance sheet was revised, including a $13.7 million reduction in equipment held for lease and a $12.1 million increase in maintenance rights. Comparative results in this filing reflect specified corrections and other immaterial out-of-period adjustments.
- The company repurchased 742,000 shares in Q2 for approximately $18.5 million; total first-half repurchases were $22.4 million. Shares outstanding were 6,689,244 at June 30.
Outlook, liquidity and risks
- No quantified earnings or revenue guidance is provided. Management believes equity, internally generated funds and existing facilities are sufficient for the next 12 months, but warns that reduced operating cash generation or borrowing availability could constrain operations and growth.
- Approximately $23.2 million of debt principal is due within 12 months. The company also has a $26.9 million commitment to purchase four engines and related equipment for delivery in the second half of 2016.
- The company reported compliance with revolving-facility and WEST II covenants at June 30. Borrowing availability remains subject to covenants, collateral and eligibility requirements; covenant breaches could restrict borrowing or accelerate repayment.
- Approximately $586.4 million of debt was variable-rate. Management estimated that a 1 percentage-point rate change would alter annual interest expense by about $5.9 million. Fixed-rate lease revenue may not adjust quickly enough to offset higher borrowing costs; no interest-rate swaps were in place.
- About 90% of first-half lease rent revenue came from lessees domiciled outside the U.S. Currency weakness could impair lessees’ ability to pay, although most leases require U.S.-dollar payments. No customer exceeded 10% of lease rent revenue.
Important facts for investors to verify
- How sustainable are the higher utilization and maintenance-reserve revenues, particularly the lease-termination-related contribution?
- What are the updated valuation assumptions and potential further impairment exposure for engines and equipment?
- How much of the $890 million revolving facility is actually available after borrowing-base, covenant and other eligibility limits?
- What is the ongoing effect of variable rates, share repurchases and the planned $26.9 million equipment purchase on liquidity and leverage?
- Review the maintenance-right accounting correction and revised comparative figures against the related financial-statement note.