Willis Lease Finance Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2015; balance sheet compared with December 31, 2014. Willis primarily acquires and leases commercial aircraft engines and related equipment, and also buys and sells engines and aircraft parts.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $57.8 | $45.5 | $144.4 | $132.7 |
| Operating earnings | $4.1 | $2.0 | $6.4 | $11.7 |
| Net income | $2.6 | $1.0 | $4.4 | $7.5 |
| Diluted EPS | $0.32 | $0.12 | $0.55 | $0.92 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $69.3 | $46.7 |
Q3 revenue rose about 27% and net income about 163%; nine-month revenue rose about 9%, while operating earnings fell about 45% and net income fell about 42%. Operating margin was approximately 7.2% in Q3 versus 4.4%; for nine months, approximately 4.4% versus 8.8%.
Q3 lease rent revenue increased 11.6% to $28.1 million, with average utilization of 91% versus 82%. Nine-month lease rent revenue rose 2.8% to $79.0 million; average utilization was 85% versus 83%. Spare-parts and equipment sales rose to $15.0 million for nine months from $6.7 million, and gains on leased-equipment sales rose to $7.7 million from $3.7 million.
At September 30, total assets were $1,285.1 million, notes payable $852.2 million, and shareholders’ equity $219.8 million. Cash and cash equivalents were $9.2 million and restricted cash $26.9 million. The filing does not provide a clear current-liquidity ratio. Nine-month investing cash use was $107.1 million, including $132.2 million of equipment purchases; financing provided $33.5 million. Cash declined $4.2 million from year-end.
Material changes and notable items
- Q3 operating earnings improved, but nine-month operating earnings declined. The nine-month comparison reflects higher depreciation and amortization ($52.5 million versus $48.2 million), higher equipment write-downs ($8.6 million versus $2.9 million), and increased general and administrative expense.
- Q3 equipment write-downs were $5.5 million, including charges for engines designated for part-out and lower expected proceeds on consigned parts. Management cited changed market conditions for parts.
- Q3 general and administrative costs rose 28.9%, primarily due to higher contingency bonuses, corporate-aircraft costs, salaries, and stock compensation.
- On March 25, the company repaid $23.1 million of WOLF-related notes at a discount, recording a $1.2 million gain on debt extinguishment. This reduced nine-month net finance costs relative to what they otherwise would have been.
- The filing corrected prior-year revenue and expense classifications for spare-parts sales and equipment-sale gains; it states there was no impact on net income.
Debt, outlook, risks and contingencies
- Debt totaled $852.2 million, with disclosed interest rates generally between 2.4% and 5.5%. About $530.4 million was variable-rate debt; no interest-rate swaps were in place. Management estimated a 1 percentage-point rate change would change annual interest expense by about $5.3 million.
- The $700 million revolving facility had $183 million available at quarter-end and matures in June 2019. WEST II securitization notes outstanding were $305.2 million, supported by securitized engine and lease assets and nonrecourse to the company’s other obligations. Restricted cash and WEST II distributions are subject to debt service, reserves, and other restrictions.
- The company reported compliance with revolving-facility and WEST II covenants at September 30. It disclosed covenant, borrowing-base, eligibility, and cross-default provisions; a breach could restrict further borrowing or accelerate repayment. Approximately $22.4 million of debt was scheduled for repayment within one year.
- Purchase commitments covered seven engines and related equipment for $63.6 million, scheduled for delivery in 2015. Management believed equity, internally generated funds, and existing facilities were sufficient for the next 12 months, but warned that weaker cash generation or reduced facility availability could constrain operations and growth.
- Key risks include higher LIBOR against generally fixed lease rents, off-lease equipment or weaker lease rates, asset residual-value and impairment estimates, and lessee currency pressures. All leases require U.S.-dollar payment; 92% of nine-month lease rent came from non-U.S.-domiciled lessees.
- No formal earnings guidance was provided. Management said interim results are not necessarily indicative of full-year results. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether portfolio utilization and lease placements remain strong, and whether maintenance-reserve revenue and lease yields sustain cash generation.
- Whether equipment write-downs, residual-value assumptions, and parts-market conditions lead to further impairment charges.
- How the $63.6 million equipment purchase commitment will be funded, alongside scheduled debt service and the large disclosed 2019 maturity concentration.
- Available revolver capacity, covenant headroom, and the effect of higher rates on the $530.4 million variable-rate exposure.
- How restricted cash, securitization obligations, foreign-currency risks, and non-U.S. lessee exposure affect cash accessible to the parent company.