Willis Lease Finance Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Willis Lease Finance acquires and leases commercial aircraft, engines and related equipment, and also sells spare parts. At quarter-end, it reported 81 lessees in 47 countries and a leased portfolio with a net book value of $1.605 billion.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $103.8 million | $70.5 million; up 47.2% |
| Operating earnings | $26.9 million | $8.9 million |
| Net income | $20.9 million | $7.1 million |
| Net income attributable to common shareholders | $20.1 million | $6.3 million |
| Basic / diluted EPS | $3.47 / $3.35 | $1.03 / $1.00 |
| Net margin | 20.1% | 10.0% |
| Operating cash flow | $35.6 million | $35.3 million |
| Investing cash flow | $5.3 million provided | $117.1 million used |
| Financing cash flow | $42.3 million used | $91.7 million provided |
| Cash and cash equivalents | $12.2 million | $11.7 million at Dec. 31, 2018 |
| Cash, cash equivalents and restricted cash | $80.6 million | $81.9 million at Dec. 31, 2018 |
| Debt obligations, net of issuance costs | $1.298 billion | $1.337 billion at Dec. 31, 2018 |
Revenue included $48.4 million of lease rent, $25.4 million of maintenance reserve revenue, $17.5 million of spare-parts and equipment sales, and a $9.6 million gain on sale of leased equipment. Interest expense was $17.9 million, up from $13.6 million. The effective tax rate was 25.0%, versus 26.4%. Gross debt principal was $1.318 billion; substantially all assets are pledged to secure debt. Restricted cash includes amounts associated with variable interest entities and is not freely available for general use.
Material changes and management commentary
- Lease rent revenue rose 22.0%, which management attributed to higher lease rates, increased leased-asset value and utilization. Average utilization increased to approximately 89% from 86%; approximately 88% of assets by book value were on lease at quarter-end.
- Maintenance reserve revenue increased 64.2%, including growth in both short-term and long-term maintenance revenue.
- The $9.6 million equipment-sale gain reflected sales of six engines, six aircraft and two airframes, compared with a $0.5 million gain in Q1 2018. Equipment-sale proceeds were $133.8 million.
- General and administrative expense increased 37.3%, primarily due to higher bonus accruals associated with operating performance and technology investment. Depreciation also rose with the larger lease portfolio; technical expense declined.
- Investing cash flow improved substantially from the prior-year period, reflecting higher equipment-sale proceeds and lower lease-fleet purchases. The company purchased $92.2 million of equipment for operating leases, versus $138.6 million in Q1 2018.
- Q1 2019 included a $1.1 million write-down on two engines after management decided to part them out. The company also sold five aircraft to its 50%-owned joint venture WMES for $75.5 million.
- Management said existing equity, internally generated funds and debt facilities should support operations for the next 12 months. It cautioned that weaker internally generated funds or difficulty securing lease commitments could constrain financing, increase borrowing costs and limit growth; it continued discussions with banks about additions to its capital base.
Outlook, risks and other notable items
- No quantified earnings or revenue guidance was provided. Management’s stated liquidity outlook covers maintaining current operations for the next 12 months, subject to the risks described above.
- Interest-rate exposure is material: $400.1 million of debt was variable rate. The filing estimates that a 1 percentage-point rate change would change annual interest expense by approximately $3.0 million. Lease rates may not adjust quickly enough to offset borrowing-cost increases.
- Other disclosed risks include off-lease equipment or weaker lease rates, customer and geographic concentration, currency devaluation affecting non-U.S. lessees, and compliance with debt covenants. One customer generated more than 10% of lease rent revenue; 79% of lease rent revenue came from non-U.S.-domiciled lessees.
- The company reported compliance with its debt covenants at March 31, 2019. Its revolving facility requires an interest coverage ratio of at least 2.25:1 and total leverage below 4.25:1. Contractual commitments totaled $1.721 billion, including $103.4 million of purchase obligations due within one year.
- The company adopted ASC 842 on January 1, 2019, recording $4.5 million of operating lease right-of-use assets and $4.3 million of lease liabilities; management said the adoption did not materially affect the financial statements. Two first-quarter transactions were recorded as notes receivable under failed-sale-leaseback guidance.
- The 2018 comparative figures were reclassified for revenue presentation under ASC 606; the change increased reported sales and costs but did not affect Q1 2018 net income.
Important facts for investors to verify
- How much of the quarter’s earnings growth is repeatable versus dependent on equipment-sale gains and maintenance revenue.
- The sustainability of lease utilization, lease rates and maintenance-reserve collections, and the performance of the aircraft and engine portfolio.
- Variable-rate debt exposure, covenant headroom, facility availability and upcoming maturities, particularly the revolving facility’s April 2021 maturity.
- Cash availability after excluding restricted cash, and the funding needs associated with purchase commitments and planned portfolio growth.
- Customer concentration, non-U.S. lessee exposure and the financial and operational risks related to joint ventures and asset sales to WMES.