Willis Lease Finance Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company acquires and leases commercial aircraft, engines and related equipment, and also sells aftermarket parts. At quarter-end, its owned lease portfolio included 241 engines, 12 aircraft and other equipment, with a net book value of $1.60 billion; it managed 475 assets for other parties.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $95.8 million | $78.7 million | $199.6 million | $149.2 million |
| Operating earnings | $20.1 million | $11.3 million | $47.0 million | $20.2 million |
| Net income | $17.0 million | $8.4 million | $37.9 million | $15.4 million |
| Net income attributable to common shareholders | $16.1 million | $7.5 million | $36.2 million | $13.8 million |
| Diluted EPS | $2.66 | $1.26 | $6.01 | $2.25 |
| Operating margin, approximate | 21.0% | 14.3% | 23.5% | 13.5% |
Q2 revenue rose 21.7%; first-half revenue rose 33.8%. Growth reflected higher lease and maintenance-reserve revenue, spare-parts sales, and substantially larger gains on equipment sales. Q2 net margin was approximately 17.7%, versus 10.6% a year earlier.
- Revenue drivers: Q2 lease rent revenue increased 4.5% and maintenance-reserve revenue increased 20.1%. First-half increases were 12.9% and 38.3%, respectively. First-half gains on leased-equipment sales were $14.7 million, compared with $0.6 million a year earlier.
- Costs and margins: Q2 general and administrative expense increased 27.5%, primarily from higher performance-related bonus accruals and technology investment. Interest expense increased to $16.8 million from $15.1 million. Spare-parts gross margin improved to 14% in Q2 and 15% for the first half, from 12% in each prior-year period.
- Cash flow: First-half operating cash flow was $91.5 million, compared with $82.0 million. Investing used $24.5 million, including equipment purchases of $145.3 million and equipment-sale proceeds of $158.0 million. Financing used $60.9 million, including $220.7 million of debt principal payments; cash, cash equivalents and restricted cash increased $6.1 million.
Financial position and debt
At June 30, 2019, total assets were $1.93 billion, total liabilities $1.56 billion, and shareholders’ equity $320.4 million. Debt obligations were $1.286 billion net of unamortized issuance costs ($1.307 billion gross), down from $1.337 billion net at December 31, 2018. Cash and cash equivalents were $11.6 million; restricted cash was $76.4 million, so the reported combined cash and restricted-cash balance of $88.1 million should not be treated as wholly available liquidity.
In June, the company amended and extended its revolving credit facility to $1.0 billion, with maturity in June 2024 and an accordion feature allowing expansion to $1.3 billion. $397.0 million was outstanding at quarter-end. The company reported compliance with debt covenants. Debt is substantially secured by company assets; borrowing availability is also subject to borrowing-base and other eligibility requirements.
Changes, outlook and risks
- Management cited higher lease rates and a larger lease portfolio as drivers of lease revenue; average utilization by net book value was approximately 88%, versus 87% a year earlier. About 86% of assets were on lease at June 30.
- Write-downs of equipment were $3.3 million in Q2 and $4.4 million for the first half, related to engines management decided to part out or sell. The first half also included a $0.2 million loss on debt extinguishment. These items, along with equipment-sale gains, affected period comparisons.
- The company expects its equity, internally generated funds and existing debt facilities to support operations for the next 12 months, but says reduced internally generated funds, difficulty leasing off-lease engines, limited access to funding, or higher borrowing costs could constrain operations and growth. No specific earnings or revenue guidance is provided.
- Interest-rate exposure is material: $404.8 million of debt was variable-rate; management estimated a 1 percentage-point rate change would alter annual interest expense by about $3.0 million. A $100 million interest-rate swap was outstanding. Lease demand, margins and cash flow may be affected by rates and equipment utilization.
- First-half lease rent revenue included one customer representing more than 10% of the total; 79% came from lessees domiciled outside the U.S. The filing notes currency-devaluation and customer-concentration risks.
- Purchase obligations totaled $179.5 million, due within one year. The company had purchased three LEAP-1B engines and was committed to buy two more; these engines are compatible only with Boeing 737 MAX aircraft, whose worldwide fleet was grounded at the time of the filing. Management expected to lease the engines when the aircraft returned to service.
- Effective January 1, 2019, the company adopted the new lease accounting standard; it recorded approximately $4.5 million of right-of-use assets and $4.3 million of lease liabilities, with no material overall financial-statement impact. On July 3, it closed a sale-leaseback of 27 engines and purchased five engines.
Important facts for investors to verify
- How much of revenue and earnings growth is repeatable versus driven by equipment-sale gains, maintenance reserves and performance fees.
- Availability of unrestricted liquidity after considering restricted cash, borrowing-base limits, debt maturities and the $179.5 million purchase commitments.
- Progress leasing the LEAP-1B engines and the financial consequences if the 737 MAX return to service is delayed.
- Exposure to variable rates, customer concentration, non-U.S. lessees and future equipment impairments or off-lease assets.