Willis Lease Finance Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with 2018. The filing was signed March 12, 2020. WLFC leases aircraft engines, aircraft and related equipment, and also sells spare parts and provides asset-management services.
Business context and performance
At year-end, WLFC’s owned lease portfolio comprised 263 engines and related equipment, 12 aircraft, 10 other leased parts and equipment, and one marine vessel, with net book value of $1.651 billion. It served 85 lessees in 41 countries and managed 450 additional engines, aircraft and related assets for others. Approximately 79% of lease rent revenue came from non-U.S. lessees.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $409.2 million | $348.3 million | +17.5% |
| Lease rent revenue | $190.7 million | $175.6 million | +8.6% |
| Maintenance reserve revenue | $109.0 million | $87.0 million | +25.3% |
| Gain on sale of leased equipment | $20.0 million | $6.9 million | Higher |
| Earnings from operations | $80.3 million | $52.5 million | +53.0% |
| Net income | $66.9 million | $43.2 million | +54.8% |
| Net income attributable to common shareholders | $63.6 million | $39.9 million | +59.4% |
| Diluted EPS | $10.50 | $6.60 | +59.1% |
Revenue growth reflected higher lease rates and maintenance reserve revenue, increased equipment-sale gains and higher other revenue. Operating expenses included $86.2 million of depreciation and amortization, $86.5 million of general and administrative expense, and $18.2 million of equipment write-downs. Net finance costs were $67.1 million, up 4.5%; income tax expense was $22.0 million. Earnings from joint ventures rose to $8.6 million from $3.8 million.
Fourth quarter: Revenue was $89.2 million versus $118.2 million in Q4 2018; net income attributable to common shareholders was $4.2 million versus $17.3 million. Diluted EPS was $0.68 versus $2.91. The filing provides quarterly revenue and common-shareholder income, but not a clear Q4 cash-flow or margin breakdown.
Cash flow, debt and liquidity
- Operating cash flow was $230.3 million, up from $188.7 million. Investing cash use was $147.4 million, compared with $380.5 million; financing cash use was $101.2 million, versus $226.4 million provided in 2018.
- Cash and cash equivalents were $6.7 million and restricted cash was $56.9 million at year-end, totaling $63.7 million. Most restricted cash supports securitization debt service, maintenance reserves and lease security deposits and is not generally available for corporate purposes.
- Debt obligations were $1.251 billion net of issuance costs ($1.270 billion gross), down from $1.337 billion net at year-end 2018. Substantially all assets secure creditor obligations. The $1.0 billion revolving facility matures in June 2024; $397 million was drawn and $603 million was reported available, subject to borrowing-base and covenant terms.
- Variable-rate debt was $404.3 million. Management estimated that a 1 percentage-point rate change would change annual interest expense by approximately $2.0 million. Two interest-rate swaps had $200 million combined notional; their net fair value was a $1.7 million liability.
- WLFC reported compliance with its debt covenants at year-end, including a minimum interest coverage ratio of 2.25:1 and total leverage ratio below 4.50:1. Management said equity, internally generated funds and existing facilities were sufficient to maintain operations through 2020, while noting that weaker cash generation, reduced borrowing availability or higher funding costs could impair operations.
Material changes, outlook and risks
- Portfolio net book value declined 1.3% year over year despite $289.4 million of equipment additions; 86% of assets by book value were on lease at year-end, compared with 88% a year earlier. Average utilization was approximately 88%, versus 89%.
- Equipment write-downs increased to $18.2 million from $10.7 million. They included $11.8 million related to a decision to monetize 11 engines and $6.4 million for seven impaired engines. The filing says $37.8 million of book value remained in specified assets associated with these write-downs.
- At year-end, WLFC had $459.3 million of equipment purchase commitments within four fiscal years, including $104.4 million due in 2020. It had purchased three new LEAP-1B engines and remained committed to 15 more, compatible only with the grounded Boeing 737 MAX; WLFC expected to lease them after the aircraft returned to service.
- The filing identifies COVID-19 as a material uncertainty for airline demand, asset utilization and lessee payment capacity. This risk was forward-looking as of the filing date; the report does not quantify its subsequent financial impact.
- An independent board committee was reviewing a potential take-private merger proposal from the CEO/largest shareholder and other parties. No complete proposal, including indicative financing terms, had been submitted; acceptance and completion were uncertain. The CEO beneficially owned or controlled approximately 46% of common shares.
- Other key exposures include airline lessee defaults and repossession costs, residual-value and obsolescence risk, maintenance shortfalls, international legal and political risks, foreign-currency weakness affecting lessees, LIBOR transition, interest-rate exposure, and restrictions under secured debt. Lease rent and maintenance reserve payments more than 30 days past due were approximately $2.7 million and $3.8 million, respectively.
- Common shareholders received no dividends, and WLFC stated it did not intend to pay common dividends in the foreseeable future. Preferred stock carried a 6.5% annual dividend. The company adopted ASC 842 in 2019; it reported no material financial-statement impact.
Important facts for investors to verify
- Progress and terms, if any, of the proposed take-private transaction and associated costs or conflicts.
- COVID-19 effects on lessee credit, lease rates, utilization, collections and aircraft-equipment values.
- 737 MAX return-to-service timing and the ability to lease the committed LEAP-1B engines; also funding and delivery schedules for the broader purchase commitments.
- Availability of unrestricted liquidity versus restricted cash, revolver borrowing-base headroom, covenant compliance and upcoming debt maturities.
- Assumptions behind asset residual values, impairment estimates and maintenance reserves, including the value and remarketing prospects of off-lease equipment.
- Whether higher earnings are sustained after the unusually large year-over-year gains on equipment sales and maintenance reserve revenue.