Business context and reporting period
Willis Lease Finance Corporation acquires and leases commercial aircraft, engines and related equipment, and sells aircraft parts. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. At quarter-end, the company had 250 engines, 14 aircraft and 10 other items in its lease portfolio, with a net book value of $1,590.5 million, and managed 423 assets for other parties.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $78.0m | $65.9m | $216.2m | $211.7m |
| Earnings from operations | $12.8m | $5.2m | $32.9m | $26.8m |
| Net income | $9.7m | $5.3m | $25.1m | $19.4m |
| Net income attributable to common shareholders | $8.8m | $4.9m | $22.6m | $18.4m |
| Diluted EPS | $1.47 | $0.80 | $3.72 | $2.97 |
| Operating margin | 16.4% | 7.9% | 15.2% | 12.6% |
Revenue and operating earnings are in millions; margins are calculated as earnings from operations divided by revenue. Q3 revenue rose 18.4% and nine-month revenue rose 2.1%. Net income increased 82.8% for Q3 and 29.2% for the nine-month period.
- Revenue mix and operations: Q3 lease rent revenue rose 40.4% to $47.0m, primarily from higher lease rates and a larger leased-asset base. Nine-month lease rent revenue grew 36.5% to $129.7m. Nine-month maintenance reserve revenue declined 11.5% to $56.9m; spare parts and equipment sales fell 47.4% to $21.7m, largely because the prior-year period included $19.3m of airframe sales.
- Costs and margins: Nine-month depreciation increased 14.0% to $55.6m, G&A rose 24.5% to $50.5m, and interest expense rose 28.1% to $46.6m. Equipment write-downs declined to $4.8m from $19.7m. Q3 G&A growth reflected new-facility transition costs and higher performance-related bonus accruals.
- Cash flow: Nine-month operating cash flow was $100.8m, down from $112.0m. Investing cash outflow was $270.0m, including $320.2m of operating-lease equipment purchases. Financing cash inflow was $285.7m. Cash, cash equivalents and restricted cash totaled $163.9m at September 30; $155.4m of that balance was restricted.
- Balance sheet and debt: Total assets were $1,965.2m, up from $1,603.4m at December 31, 2017. Debt, net of issuance costs, was $1,392.1m versus $1,085.4m; gross principal was $1,413.4m. Shareholders’ equity was $270.7m and redeemable preferred stock was $49.5m. The $890m revolving facility had $466m drawn and matures in April 2021.
Material changes, outlook and risks
- In August, subsidiary WEST IV issued $373.4m of fixed-rate notes, secured by a portfolio including 55 engines and one airframe. The notes carry coupons of 4.75% and 5.44%; their stated final maturity is 2043, with expected maturity of approximately eight years. WEST IV assets and cash flows are restricted to its obligations and distributions to the parent are subject to debt service and reserve requirements.
- 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, difficulty leasing off-lease engines or limited access to capital could constrain operations and growth. No quantitative earnings or revenue guidance was provided.
- Interest-rate exposure is material: $466m of debt was variable-rate. The company estimated a 1 percentage-point rate movement would change annual interest expense by approximately $3.7m. Higher borrowing costs may not be recoverable through lease pricing. Lease utilization averaged 88% for the nine months, down from 89%; management attributed the decline to new acquisitions, many initially off-lease. Approximately 92% of lease assets by book value were on lease at quarter-end, compared with 89% at year-end 2017.
- Approximately $5.0m of lease rent and $2.1m of maintenance-reserve receivables were more than 30 days past due. The filing warns that collection failures or inability to repossess equipment could materially harm results. Lessees in 51 countries create geographic and currency exposure; 78% of nine-month lease rent revenue came from non-U.S.-domiciled lessees.
- Debt agreements contain financial and other covenants, cross-default provisions and asset eligibility restrictions. The company reported compliance with its covenants at September 30, 2018. It also identified changes in trade policies, tariffs, sanctions and import/export rules as a potential adverse risk.
- The effective tax rate fell to 27.1% for the nine-month period from 40.7%, principally reflecting the U.S. corporate tax-rate reduction under the Tax Cuts and Jobs Act and other tax-mix factors. The company repurchased $14.5m of common stock in the first nine months and paid $2.4m in preferred dividends; preferred shares carry a 6.5% annual dividend rate.
Most important facts for investors to verify
- Whether lease utilization and occupancy improve as recent equipment purchases are placed on lease, and whether lease rates remain adequate.
- Collection status of past-due lease and maintenance-reserve receivables, and the adequacy of related allowances.
- Debt balances, variable-rate exposure, covenant headroom, and restrictions on access to subsidiary cash and assets.
- Whether operating cash generation can fund planned equipment purchases while supporting debt service and liquidity needs.
- The recurring cost and expected duration of facility-transition expenses, elevated G&A, and equipment impairments.