Willis Lease Finance Corporation — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are with 2022. WLFC leases and services commercial aircraft engines and aircraft, and sells spare parts. Leasing and Related Operations generated 95.1% of 2023 revenue. At year-end, its owned operating-lease portfolio was $2.113 billion, comprising 337 engines, 12 aircraft, a marine vessel and other equipment; it served 74 lessees in 42 countries.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $418.6 million | $311.9 million | +34.2% |
| Lease rent revenue | $213.1 million | $162.6 million | +31.1% |
| Maintenance reserve revenue | $133.7 million | $83.4 million | +60.2% |
| Income from operations | $64.2 million | $9.9 million | Increased |
| Net income | $43.8 million | $5.4 million | Increased |
| Net income attributable to common shareholders | $40.4 million | $2.1 million | Increased |
| Basic / diluted EPS | $6.40 / $6.23 | $0.35 / $0.33 | Increased |
| Net cash from operating activities | $229.7 million | $144.4 million | +59.1% |
- Operating margin was approximately 15.3%, versus 3.2% in 2022; net margin was approximately 10.5%, versus 1.7%.
- Lease rent growth reflected more engines acquired and placed on lease and improved utilization. Average utilization by net book value rose to 84% from 82%.
- Maintenance reserve revenue increased mainly because short-term, non-reimbursable usage-fee revenue rose to $118.3 million from $47.4 million. Long-term maintenance revenue declined to $15.4 million from $36.0 million.
- Other revenue rose 27.9% to $32.1 million, including higher managed-services revenue. Spare-parts and equipment sales fell 24.6% to $20.4 million. Gains on leased-equipment sales were $10.6 million, compared with $3.1 million.
- General and administrative expense increased 56.5% to $144.8 million, including higher personnel and bonus costs, asset-management project costs, and aviation hull-war insurance. Net finance costs rose to $78.8 million from $64.2 million amid higher short-term rates; derivative-related receipts partly offset the increase.
- Equipment write-downs were $4.4 million, compared with $21.8 million in 2022; the prior-year charge included $20.4 million for two Russia-based engines deemed unrecoverable.
Financial position, debt and liquidity
- Year-end total assets were $2.652 billion; shareholders’ equity was $439.0 million. Debt obligations were $1.803 billion net of issuance costs and discounts ($1.827 billion gross). Reported debt interest rates ranged from approximately 3.1% to 8.0%.
- Cash, cash equivalents and restricted cash totaled $168.0 million, including $161.0 million of restricted cash; unrestricted cash and cash equivalents were $7.1 million. Restricted cash is not generally available for corporate purposes and is largely tied to securitizations, maintenance reserves and security deposits.
- Operating cash flow was $229.7 million; investing activities used $92.8 million and financing activities used $57.9 million. Equipment purchases were $163.6 million, partly offset by $85.1 million of equipment-sale proceeds.
- At December 31, the revolving credit facility had $708.0 million in committed capacity, with $353.0 million drawn and $355.0 million available. Certain portions were scheduled to mature in March and June 2024; $500.0 million was extended to June 2025. After the final WEST VII asset novation, the facility commitment was reduced to $658.2 million effective March 8, 2024.
- WLFC issued $410.0 million of WEST VII fixed-rate notes in October 2023 at an 8.00% coupon; expected maturity is October 2029 and final maturity is October 2048. Substantially all company assets are pledged to creditors, and securitized-entity assets are subject to their own debt and payment priorities.
- The company reported compliance with its debt covenants at year-end. Management said existing equity, internally generated funds and debt facilities were sufficient to maintain operations through 2024, while warning that weaker cash generation, higher borrowing costs or reduced facility availability could constrain operations and growth.
Material changes, outlook and risks
- Revenue and profitability improved substantially year over year, alongside higher utilization and maintenance-fee revenue. G&A expense and financing costs also increased materially.
- WLFC had $459.7 million of commitments for 27 new LEAP engines due by 2027, including up to $138.8 million of purchases in 2024. It also disclosed anticipated overhaul and maintenance commitments of $74.5 million to $102.3 million by 2030. Management cited expected demand for LEAP-1B engines as 737 MAX aircraft return to service. No formal earnings or revenue guidance is provided.
- Interest-rate exposure remains significant: $353.0 million of borrowings were variable-rate at year-end, while leases are generally fixed-rate. The company estimated a 1% rate change would affect annual interest expense by approximately $0.5 million, before considering other effects. Five interest-rate swaps had $500.0 million total notional value.
- Approximately 66% of 2023 lease-rent revenue came from non-U.S.-domiciled lessees; substantially all leases are payable in U.S. dollars. Risks include lessee credit deterioration, currency weakness affecting customers’ ability to pay, repossession and remarketing costs, asset-value changes, aviation regulation, geopolitical events, inflation, and access to capital.
- Short-term leasing and off-lease exposure warrants attention: approximately 57% of assets were engines on leases of 12 months or less or off-lease. At year-end, $10.5 million of lease rent and $8.9 million of maintenance reserves were more than 30 days past due, versus $7.4 million and $5.9 million, respectively, in 2022.
- On January 31, 2024, the company detected unauthorized activity on portions of its IT systems. It reported containing the activity, but the investigation into scope, affected data and impact remained ongoing; the company had not determined whether the incident was reasonably likely to materially affect its financial condition or results.
- Preferred-stock dividends totaled $3.2 million in 2023. Series A-1’s annual dividend rate increased from 6.5% to 8.5% after October 15, 2023; Series A-2 remains at 6.5%. The preferred shares have a $20 liquidation preference and specified redemption rights. WLFC does not expect to pay common dividends in the foreseeable future.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. The valuation of leased equipment was identified as a critical audit matter, involving estimates of appraised values, lease rates, maintenance revenues and remaining lease periods.
Key facts for investors to verify
- Whether the January 2024 cybersecurity incident resulted in data exposure, operating disruption, material costs or reporting obligations.
- Liquidity after separating unrestricted from restricted cash, and the timing and availability of revolving-credit capacity and near-term maturities.
- Whether lease utilization, short-term leasing, past-due balances and maintenance-reserve collections remain sustainable.
- Whether the 8.00% WEST VII financing and other debt costs can be supported by fixed-rate lease income, and how much variable-rate exposure is hedged.
- The execution, financing and return prospects for the $459.7 million engine purchase commitments and related future maintenance obligations.
- The assumptions behind equipment residual values and impairment estimates, given the importance of asset appraisals and forecast cash flows to reported results.