Willis Lease Finance Corporation — FY 2016 Form 10-K
Business context and reporting period. The company leases commercial aircraft engines, aircraft and related equipment, sells aircraft parts, and provides asset-management services. This filing covers the year ended December 31, 2016; quarterly figures below are unaudited. Unless stated otherwise, amounts are U.S. dollars in millions.
At year-end, its owned lease portfolio had a net book value of $1,136.6 million and comprised 208 engines and related equipment, 11 aircraft and five spare-parts packages, leased to 80 customers in 43 countries. It also managed 542 engines for other parties. The 2016 acquisition of TES’s engine-management and consulting business added 502 engines under management.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $207.3 | $198.1 | +4.7% |
| Lease rent revenue | $119.9 | $108.0 | +11.0% |
| Maintenance reserve revenue | $57.1 | $53.4 | +6.9% |
| Earnings from operations | $22.1 | $11.6 | +90.8% |
| Net income | $14.1 | $6.5 | +117.8% |
| Net income attributable to common shareholders | $13.8 | $6.5 | +113.3% |
| Diluted EPS | $2.05 | $0.81 | — |
| Operating margin / net margin | 10.7% / 6.8% | 5.9% / 3.3% | Improved |
| Operating cash flow | $100.9 | $107.4 | −6.1% |
Revenue growth reflected improved lease-portfolio utilization: average utilization rose to 90% from 87%, and 93% of equipment by net book value was on lease at year-end versus 90% a year earlier. Spare-parts and equipment sales fell to $17.8 million from $25.6 million, while gains on leased-equipment sales declined to $3.5 million from $8.3 million. Other revenue increased to $9.0 million, including $4.0 million of aircraft security payments recognized after a lessee default and a $0.6 million China subsidy.
Expenses included $66.3 million of depreciation and amortization, $47.8 million of general and administrative costs, and $9.5 million of equipment write-downs. Net finance costs rose to $41.3 million, reflecting higher average debt, higher LIBOR and the absence of the prior-year $1.2 million debt-extinguishment gain. The effective tax rate was 41.2%, down from 49.4%.
Fourth quarter: Revenue was $55.5 million, compared with $55.2 million in Q4 2015. Net income attributable to common shareholders was $2.4 million versus $3.0 million; diluted EPS was $0.39 versus $0.38.
Balance sheet and liquidity: Total assets were $1,337.9 million, notes payable were $900.3 million, and shareholders’ equity was $196.3 million at December 31, 2016. Cash and cash equivalents were $10.1 million; restricted cash was $22.3 million and is not generally available for corporate purposes. The revolving credit facility had $282 million available. Operating cash flow was $100.9 million; equipment purchases totaled $173.7 million. Debt principal due in 2017 was $23.6 million. The company reported compliance with its debt covenants and said existing equity, internally generated funds and debt facilities should support operations through 2017.
About $619.7 million of debt bore floating rates tied to one-month LIBOR; management estimated a one-percentage-point rate change would change annual interest expense by approximately $5.2 million. A $100 million interest-rate swap was outstanding at year-end. Substantially all company assets are pledged to creditors.
Material changes, outlook and risks
- The company increased its revolving credit commitment from $700 million to $890 million, extended maturity to April 2021 and retained an accordion feature up to $1 billion.
- It issued 1 million shares of 6.5% Series A cumulative redeemable preferred stock for $20 million gross proceeds ($19.8 million net). The preferred stock has a $20-per-share liquidation preference and holder redemption rights upon specified events.
- It repurchased 1,212,230 common shares for approximately $29.0 million during 2016. No common dividends were paid, and management said it had no foreseeable plan to pay them.
- Equipment write-downs totaled $9.5 million, including impairments of six engines and one aircraft, an engine designated for part-out, and parts inventory affected by market conditions. The company’s results depend on estimates of asset lives, residual values, impairment and customer collectability.
- At year-end, approximately $3.6 million of rent and $2.4 million of maintenance-reserve payments were more than 30 days past due. Foreign lessees generated 89% of lease revenue; all current lease payments were denominated in U.S. dollars, creating customer repayment exposure to local-currency depreciation.
- Management cited interest-rate exposure, aviation-sector cyclicality, lessee defaults and repossession costs, engine obsolescence and residual-value risk, maintenance obligations, foreign legal and political risks, and competition. No specific earnings guidance was provided.
- Prior-period statements were adjusted for immaterial errors in accounting for maintenance rights on equipment acquired with in-place leases. The filing reports the 2015 year-end equipment balance was reduced by $13.7 million and maintenance rights increased by $12.1 million; 2015 net income was reduced by $0.9 million. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether higher utilization and lease revenue persist, and whether the $264.2 million of minimum future rentals under non-cancelable leases convert to cash as scheduled.
- Debt capacity, covenant headroom and refinancing exposure, particularly the $608 million drawn on the revolving facility and the disclosed 2021 maturity profile.
- Performance and cash implications of variable-rate debt, the $100 million swap, and any increase in rates or borrowing spreads.
- Collectability of past-due rent and maintenance reserves, and the adequacy of maintenance reserves and asset-return condition at lease termination.
- Assumptions supporting equipment valuations and the sustainability of earnings excluding unusual security-payment revenue, asset-sale gains and impairment charges.
- Preferred-stock redemption triggers and dividend terms, common-share repurchase activity, and the effect of these capital actions on liquidity and common shareholders.