Willis Lease Finance Corporation — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. The company acquires and leases aircraft, engines and related equipment, and sells spare parts. At quarter-end, it had 83 lessees in 43 countries, a lease portfolio of 243 engines and related equipment, 15 aircraft and 9 other leased assets, and managed 436 assets for others.
Financial performance and position
- Revenue: $63.9 million, down 18.0% from $77.9 million. Lease rent rose 31.1% to $39.6 million; maintenance reserve revenue fell 51.7% to $15.4 million. Spare parts and equipment sales declined 50.1% to $6.3 million.
- Profit: Operating earnings were $8.9 million, down from $12.6 million; net income was $7.1 million versus $8.2 million. Net income attributable to common shareholders was $6.3 million versus $7.8 million. Diluted EPS was $1.00 versus $1.25. Operating margin was approximately 13.9%, compared with 16.1%.
- Cash flow: Operating cash flow was $30.4 million, versus $45.9 million. Investing used $112.2 million, primarily reflecting $138.6 million of equipment purchases. Financing provided $91.7 million, including $123.0 million of debt proceeds and $29.8 million of principal payments.
- Assets, debt and liquidity: Total assets were $1.725 billion, up from $1.603 billion at year-end 2017. Debt obligations, net of issuance costs, were $1.180 billion, versus $1.085 billion. Cash and cash equivalents were $12.7 million; restricted cash was $44.5 million. The $890 million revolving facility had $604 million drawn. The company reported compliance with debt covenants.
- Other metrics: Equipment held for operating lease totaled $1.466 billion. Average utilization by book value was approximately 86%, versus 89% in Q1 2017. The effective tax rate declined to 26.4% from 43.3%.
Material changes versus Q1 2017
- Lease rent growth reflected higher lease rates and a larger leased-asset base; 20 engines were acquired for the lease portfolio during Q1 2018 at a reported total cost of $154.9 million, including capitalized costs.
- Maintenance reserve revenue was lower primarily because Q1 2017 included $21.5 million recognized when five non-reimbursable leases terminated; Q1 2018 included $2.4 million from one lease modification.
- Q1 2017 included a $12.1 million equipment write-down; there was no equipment write-down in Q1 2018. Q1 2018 did include a $0.5 million spare-parts write-down.
- Interest expense increased to $13.6 million from $10.9 million, reflecting higher debt and borrowing costs. One-month LIBOR was 1.88% at March 31, 2018, compared with 0.98% a year earlier.
- General and administrative expense increased 18.3% to $15.6 million, primarily due to personnel and other transition costs associated with a new facility. Technical expense rose 60.4% to $3.7 million, mainly due to higher engine maintenance and freight costs.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management believes equity, internally generated funds and existing debt facilities are sufficient for the next 12 months, but says reduced internally generated funds or difficulty leasing off-lease engines could constrain funding and growth.
- Management estimates that a 1% change in rates on $604 million of variable-rate debt would change annual interest expense by approximately $5.0 million. Lease revenue is fixed in the short term, limiting the ability to pass higher borrowing costs to customers.
- Approximately 88% of lease assets by book value were on lease at March 31, versus 91% at December 31, 2017. Management attributes lower utilization partly to new purchases, many of which were off-lease. Higher off-lease levels or weaker lease rates could hurt earnings and operating cash flow.
- Lease rent receivables of approximately $3.1 million and maintenance reserve receivables of $4.9 million were more than 30 days past due. The company also disclosed currency-devaluation exposure because most leases are payable in U.S. dollars and 77% of Q1 lease rent came from non-U.S.-domiciled lessees.
- Contractual purchase obligations were $195.5 million, all shown as due within one year. The filing warns that failure to place newly purchased engines on lease could result in lost deposits, costs, damages or reputational harm.
- The company repurchased 297,367 common shares for approximately $10.2 million during the quarter; approximately $19.2 million remained under the repurchase plan. Preferred stock carries a 6.5% annual dividend rate.
- The company adopted the new revenue standard using the modified retrospective method and reported no change in revenue timing or amounts. It plans to adopt the new lease accounting standard on January 1, 2019 and was evaluating its impact.
Investor verification points
- Reconcile equipment acquisition spending and purchase commitments, and assess how quickly recently acquired off-lease assets can be placed on lease.
- Review the past-due lease and maintenance reserve receivables, collection assumptions, and any subsequent collections or defaults.
- Assess variable-rate exposure, future debt maturities, covenant headroom and actual availability of the revolving facility after collateral and eligibility limits.
- Check the drivers of lower utilization and the sustainability of maintenance reserve revenue, which varied substantially with lease terminations and modifications.
- Verify the cash and share-count effects of the quarter’s repurchases; the filing reports repurchases of approximately $10.2 million while cash-flow repurchase payments were $0.1 million and accrued share repurchases were $10.1 million.