Willis Lease Finance Corporation — Q3 2020 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. The company leases aircraft, engines and related equipment, and sells spare parts and equipment. Its portfolio included 258 engines, 9 aircraft, other leased equipment and one marine vessel; it also managed 408 assets for others.
Financial performance
- Revenue: Q3 revenue was $70.6 million, down 41.3%; nine-month revenue was $227.2 million, down 29.0%. Q3 lease rent revenue fell 38.8% to $30.0 million; spare parts and equipment sales fell 88.2% to $2.9 million. For nine months, lease rent revenue fell 19.4% to $114.9 million and spare parts and equipment sales fell 73.7% to $14.8 million.
- Profit and margins: Q3 operating earnings were $4.6 million versus $28.9 million; net income was $3.0 million versus $24.1 million. Nine-month operating earnings were $21.7 million versus $75.9 million; net income was $12.6 million versus $61.9 million. Operating margin was approximately 6.5% in Q3 and 9.5% year to date, versus 24.0% and 23.7%, respectively, in 2019. Nine-month diluted EPS was $1.66 versus $9.83; Q3 diluted EPS was $0.35 versus $3.81.
- Cash flow: Nine-month operating cash flow was $83.5 million, down from $170.8 million. Investing used $188.5 million; financing provided $199.2 million. Cash, cash equivalents and restricted cash totaled $157.9 million at period-end, including $91.5 million of unrestricted cash.
- Debt and liquidity: Debt obligations, net of issuance costs, were $1.463 billion, up from $1.251 billion at year-end 2019. Gross principal was $1.483 billion. Total assets were $2.149 billion and shareholders’ equity was $364.3 million. Management stated liquidity, equity, internally generated funds and debt facilities were expected to support operations for the next 12 months, while noting substantial pandemic-related uncertainty. The company reported compliance with debt covenants at September 30.
- Other metrics: Average portfolio utilization was approximately 86% for both Q3 and the nine-month period, versus 89% and 88% in 2019. Equipment write-downs totaled $14.4 million for nine months. The effective tax rate rose to 48.0% for nine months from 23.3%, primarily due to the Section 162(m) executive-compensation limitation.
Material changes and management commentary
- Management attributed lower lease revenue, utilization-related fees and spare-parts demand to COVID-19 disruption and reduced global air travel. Rent concessions reduced revenue by $2.1 million in Q3 and $5.2 million year to date. Thirteen percent of employees were furloughed or subject to reduced compensation in Q3.
- Maintenance-reserve revenue declined 17.5% in Q3 and 9.0% year to date. Long-term maintenance revenue increased, but usage-based short-term maintenance revenue fell sharply as flight activity declined.
- General and administrative expense decreased 29.2% in Q3 and 22.4% year to date, reflecting lower bonus accruals and reduced travel and outside-service spending. Interest expense fell with lower rates, but nine-month net finance costs included a $4.7 million loss on extinguishing debt.
- The company issued $366.2 million of WEST V fixed-rate notes in March 2020, with coupons of 3.23% to 6.66%. It repaid WEST II Series A notes, incurring the debt-extinguishment loss. A subsequent October 30 waiver modified customer-concentration calculations under its revolving credit agreement for specified periods.
- Purchase obligations totaled $482.8 million. The company had purchased three new LEAP-1B engines and remained committed to 17 more, which are compatible with the grounded Boeing 737 MAX fleet; management expected to lease them when the aircraft returned to service. Purchase agreements may allow deferral or cancellation in certain situations.
Outlook, risks and unusual items
No quantified earnings or revenue guidance was provided. Management said COVID-19’s duration and effects were uncertain and that it would continue cost control and prudent capital spending. Risks include further declines in air travel, utilization, lease rates and asset values; lessee payment deferrals or defaults; reduced demand for leases and parts; and constrained access to capital. The filing reported $0.5 million of impairment identified through interim analysis for two engines during the nine months, within total equipment write-downs of $14.4 million. One customer generated 12.2% of nine-month lease rent revenue. The company also disclosed a CEO-related vessel lease arrangement approved by independent directors: $500 per day for use of the CEO’s tender, plus insurance costs.
Important facts for investors to verify
- Whether utilization, rent collections and customer demand recover, and whether concessions or lessee credit issues increase.
- Unrestricted liquidity and availability under debt facilities, given $1.483 billion of gross debt and significant restricted cash.
- Compliance with customer-concentration limits and the scope and duration of the October credit-agreement waiver.
- Ability to place or defer/cancel the 17 outstanding LEAP-1B engine commitments, and related funding and asset-value exposure.
- Changes in equipment impairment estimates, customer concentration and the effect of continued aviation-market weakness on collateral and covenant headroom.