Willis Lease Finance Corporation — Q1 2020 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Willis Lease acquires and leases commercial aircraft, engines and related equipment, and sells spare parts. At quarter-end, its operating-lease portfolio included 260 engines and 10 aircraft; it served 77 lessees in 41 countries.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenue | $81.6 million | $103.8 million; down 21.4% |
| Operating earnings | $8.3 million | $26.9 million |
| Operating earnings margin | 10.2% | 25.9% |
| Net income | $4.3 million | $20.9 million |
| Net income attributable to common shareholders | $3.5 million | $20.1 million |
| Diluted EPS | $0.56 | $3.35 |
| Operating cash flow | $28.3 million | $35.6 million |
| Investing cash flow | $(143.2) million | $5.3 million provided |
| Financing cash flow | $368.5 million provided | $42.3 million used |
| Cash, cash equivalents and restricted cash | $317.2 million, including $81.4 million unrestricted | $63.7 million at Dec. 31, 2019 |
| Debt obligations | $1,626.2 million net of issuance costs; $1,648.1 million gross principal | $1,251.0 million net at Dec. 31, 2019 |
Equipment held for operating lease was $1,697.7 million, up from $1,650.9 million at year-end. Total assets were $2,326.7 million and shareholders’ equity was $353.0 million at March 31. The filing reports no formal earnings or revenue guidance.
Material changes and drivers
- Revenue declined across maintenance reserve revenue (down 19.0%), spare-parts and equipment sales (down 48.0%), and gains on leased-equipment sales (down 78.4%). Lease rent revenue fell 4.1%, primarily reflecting fewer engines on lease.
- Management attributed lower short-term maintenance revenues and spare-parts demand in part to reduced global flight traffic and the COVID-19 disruption. Average utilization based on portfolio net book value was 86%, versus 89% a year earlier.
- Net finance costs included a $4.7 million loss on extinguishment when WEST II Series A notes were repaid. Interest expense itself fell to $15.7 million from $17.9 million.
- The effective tax rate rose to 49.8% from 25.0%, primarily due to the tax-code Section 162(m) limitation.
- Investing cash use reflected $80.1 million of new notes receivable and $75.7 million of equipment purchases, partly offset by $11.7 million of equipment-sale proceeds. Financing included $643.2 million of new debt proceeds and $265.6 million of principal payments.
Outlook, risks and unusual items
- Management said COVID-19 was affecting Q2 operations and could continue to do so indefinitely; the duration and overall effect on the airline industry and the company remained uncertain. Potential impacts include weaker lease demand, lower usage fees and asset values, delayed or missed customer payments, customer failures, and reduced operating cash flow.
- Management believed cash liquidity, equity, internally generated funds and existing debt facilities were sufficient to maintain operations for the next 12 months, while noting prolonged airline disruption could pressure cash flows and growth or capital access.
- On March 3, the company issued $366.2 million of WEST V fixed-rate notes, secured by a portfolio of engines and airframes. The notes have expected maturities of approximately eight years and final maturities in 2045. Restricted WEST V cash is subject to debt-service and reserve requirements and is not freely available to the parent.
- Debt covenants include leverage and interest-coverage tests; the company reported compliance at March 31. Substantially all assets are pledged, and cross-default provisions could accelerate obligations if triggered.
- Contractual purchase obligations totaled $459.3 million. The company had purchased three new LEAP-1B engines and remained committed to 17 more, compatible only with Boeing 737 MAX aircraft, whose worldwide fleet was grounded. The filing says the company expected to lease these engines after the aircraft returned to service; $104.4 million of purchase obligations was deferred 12 months after quarter-end.
- Approximately $645.0 million of debt was variable-rate. The company estimated a 1 percentage-point rate change would alter annual interest expense by $4.5 million. It had $200 million of interest-rate swaps and reported a $5.0 million net swap liability at quarter-end.
- A $2.1 million equipment write-down reflected three engines marked down after management decided to monetize them through sale or part-out. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Subsequent-quarter trends in lease collections, customer payment deferrals or defaults, utilization, maintenance revenues and spare-parts demand as COVID-19 affected air travel.
- Availability and terms of borrowing facilities, covenant headroom, restricted-cash requirements and the parent’s access to WEST V distributions.
- Timing, deferrals and cancellation rights for the $459.3 million purchase commitments, especially the 17 LEAP-1B engines and their dependence on 737 MAX re-entry into service.
- Portfolio asset values, off-lease levels and further impairment risk, as well as the effect of variable rates and swap valuations on financing costs and equity.