Willis Lease Finance Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures compared with December 31, 2012. The unaudited filing covers Willis Lease Finance Corporation and subsidiaries, whose core business is acquiring and leasing commercial aircraft engines and related equipment, with selective equipment sales.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $35.3 million | $35.7 million | Down 1.2% |
| Operating earnings | $2.5 million | $5.0 million | Down 49.3% |
| Net income | $1.6 million | $3.3 million | Down 51.0% |
| Net income attributable to common shareholders | $1.6 million | $2.5 million | Down 35.8% |
| Diluted earnings per share | $0.19 | $0.29 | Down $0.10 |
| Operating margin | 7.1% | 13.9% | Lower |
| Net margin | 4.6% | 9.2% | Lower |
Lease rent revenue grew 1.7% to $24.5 million, reflecting a larger lease portfolio; maintenance reserve revenue rose 7.6% to $9.2 million, partly due to revenue recognized on terminated long-term leases. These increases were offset by a decline in gains on equipment sales, from $2.6 million to $0.7 million. Depreciation rose 8.8% to $13.6 million, while interest expense increased 16.1% to $9.2 million as average debt and the cost of WEST II debt increased. Technical expense increased 26.9% to $1.7 million; general and administrative expense fell 5.4% to $8.3 million.
Cash flow: Operating activities provided $18.6 million, up from $7.9 million. Investing activities used $84.8 million, principally reflecting $79.6 million of equipment purchases and $6.1 million contributed to a joint venture. Financing activities provided $62.2 million, including $69.0 million of note proceeds and $8.9 million of principal payments. Cash and cash equivalents decreased $4.0 million to $1.4 million; restricted cash was $32.5 million.
Financial position and liquidity
Total assets were $1.148 billion, up from $1.079 billion at year-end 2012. Equipment held for operating lease was $1.019 billion. Notes payable rose to $757.1 million from $697.0 million; stated interest rates were approximately 3.0%–5.5%, excluding derivatives. Shareholders’ equity was $201.8 million. The company reported $83.0 million available under its $430 million revolving credit facility, versus $148.0 million at year-end. Approximately $35.3 million of debt principal is due within 12 months.
Management said equity, internally generated funds and existing debt facilities should be sufficient to maintain operations for the next 12 months, but noted that reduced operating cash generation or reduced facility availability could impair operations and constrain growth. The contractual-obligations table reports $996.1 million in total obligations, including debt, estimated interest, leases, purchase obligations and derivative-related payments.
Material changes, outlook and risks
- The company purchased $78.7 million of equipment and capitalized costs for its lease portfolio during the quarter, compared with $14.6 million in Q1 2012. It also entered a purchase-and-leaseback transaction involving 19 SAS aircraft engines: the company purchased 11 for $63.0 million and contributed $5.5 million to WMES toward the joint venture’s purchase of eight engines.
- At March 31, 2013, 82% of equipment held for lease by book value was on lease, compared with 85% a year earlier; average utilization was 84% in both periods. Management cautioned that higher off-lease levels or weaker lease rates could reduce earnings and operating cash flow.
- $347.0 million of borrowings were variable-rate debt tied to one-month LIBOR. The company estimated that a 1 percentage-point rate change would change annual interest expense by approximately $2.4 million, net of derivatives. It estimated hedge-related interest expense increases of about $1.7 million for 2013. One $100 million interest-rate swap remained, with an eight-month term and a 2.10% fixed rate; its fair-value liability was $1.2 million.
- Foreign-domiciled lessees generated 87% of lease revenue; leases are payable in U.S. dollars, exposing customers to currency-devaluation-related payment risk. No customer accounted for more than 10% of Q1 2013 lease rent revenue.
- Commitments included purchases of five engines and related equipment for a gross $46.7 million, with deliveries scheduled for 2013–2015. The company reported compliance with its debt covenants at quarter-end. Covenants, collateral requirements and cross-default provisions may limit borrowing or accelerate repayment if breached.
- A 2012 change in depreciation estimates increased Q1 2013 depreciation by $0.7 million and reduced net income by an estimated $0.4 million, or diluted EPS by $0.05. No equipment write-down was recorded in Q1 2013, versus $0.3 million in Q1 2012. Management stated that Q1 results are not necessarily indicative of the remainder of 2013; the filing provides no specific earnings or revenue guidance.
- A related-party consignment note from J.T. Power, an entity linked to the CEO’s son, had $1.2 million principal outstanding; the company reported payments current. Management identified no material change in critical accounting policies and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether lease utilization, on-lease share and rental yields improve or weaken, and how the large Q1 equipment investment translates into revenue and cash generation.
- Debt availability, refinancing needs and covenant headroom, particularly given $757.1 million of notes payable, $83.0 million of revolving capacity available and upcoming principal payments.
- Exposure to variable interest rates and whether planned additional hedging changes borrowing costs or margins.
- Performance and funding of WMES and WOLF joint ventures, including WMES’s reported negotiations to extend its credit facility and WOLF’s planned financing for continued leasing operations.
- Realization of equipment residual values and the effect of depreciation assumptions, impairment judgments and engine purchase commitments on future results.