Business context and reporting period
Willis Lease Finance Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company acquires and leases commercial aircraft engines and related equipment, and also selectively buys and sells equipment. Its spare-parts business, launched in 2013, had no activity in the year-ago quarter.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $43.0 million | $35.3 million |
| Earnings from operations | $6.4 million | $2.5 million |
| Income before taxes | $6.7 million | $2.6 million |
| Net income | $4.3 million | $1.6 million |
| Diluted earnings per share | $0.53 | $0.19 |
| Operating cash flow | $18.8 million | $18.6 million |
| Cash and cash equivalents, March 31, 2014 | $15.6 million | $12.8 million at December 31, 2013 |
| Restricted cash, March 31, 2014 | $53.4 million | $50.8 million at December 31, 2013 |
| Notes payable, March 31, 2014 | $767.1 million | $787.6 million at December 31, 2013 |
| Total assets / shareholders’ equity, March 31, 2014 | $1,192.6 million / $217.6 million | $1,199.2 million / $212.6 million at December 31, 2013 |
Revenue less expenses produced an operating margin of approximately 15.0%, versus 7.1% a year earlier; net margin was approximately 10.1%, versus 4.6%. Net finance costs were $9.4 million, up from $9.2 million. Investing activities provided $3.1 million, while financing activities used $19.1 million. Restricted cash is subject to financing and maintenance-related restrictions and is not equivalent to unrestricted liquidity.
Material changes versus the prior comparable period
- Revenue increased 21.8%. Lease rent revenue rose 9.9% to $26.9 million, reflecting higher utilization and a larger average lease portfolio. Average utilization was 87%, up from 84%; 84% of equipment by book value was on lease at quarter-end, compared with 82% a year earlier.
- Maintenance reserve revenue increased 52.2% to $14.0 million, primarily because more revenue was recognized following long-term lease terminations.
- Depreciation and amortization increased 15.4% to $15.7 million. A 2013 change in useful-life and residual-value estimates for certain older engines added $2.1 million to Q1 2014 depreciation and reduced net income by an estimated $1.4 million, or diluted EPS by $0.17, versus the amount absent that estimate change.
- General and administrative expense rose 17.1% to $9.7 million, mainly due to higher consulting and accounting, salary, and travel costs. The company also recorded a $0.3 million equipment write-down related to an engine designated for part-out.
- Equipment purchases were $7.9 million, compared with $79.6 million in Q1 2013. Debt issuance proceeds were $5.0 million versus $69.0 million, while principal payments were $25.5 million versus $8.9 million.
Liquidity, debt, outlook, and risks
- The $450 million revolving credit facility had $101 million available at March 31, 2014 and matures in November 2016. The company reported a 3.87 debt-to-equity ratio under the facility’s terms and compliance with its stated covenants, including leverage and interest-coverage requirements. It also reported compliance with WEST II covenants.
- Of $767.1 million in notes payable, $392.3 million was variable-rate debt tied to one-month LIBOR. Management estimated that a one-percentage-point rate increase or decrease would change annual interest expense by approximately $3.9 million, net of derivatives. No interest-rate swaps were in place at quarter-end.
- Management stated that equity, internally generated funds, and existing debt facilities were sufficient to maintain operations for the next 12 months. It was discussing additions to its capital base with commercial and investment banks; inability to access additional capital could constrain asset growth.
- Contractual commitments totaled $969.5 million, including $767.1 million of long-term debt obligations, $163.9 million of estimated interest payments, $4.2 million of operating leases, and $34.2 million of purchase obligations. Separately, the company disclosed commitments to acquire three engines and one aircraft and related equipment for a gross $36.2 million, with delivery in 2014; $2.0 million of non-refundable deposits had been paid.
- Key risks include higher interest rates compressing margins because lease rents are generally fixed for specified terms; increased off-lease equipment or lower lease rates reducing earnings and cash flow; covenant or eligibility breaches potentially restricting borrowing or accelerating repayment; and foreign-currency weakness affecting lessees’ ability to pay. Eighty-six percent of Q1 lease revenue came from non-U.S.-domiciled lessees, although payments are in U.S. dollars. No customer generated more than 10% of lease rent revenue.
- The company disclosed ongoing SEC settlement discussions concerning alleged late public reporting of stock ownership by three current officers and the company. Settlements were not finalized; management did not expect a material impact on business or operations.
Most important facts for investors to verify
- Whether higher utilization and lease revenues persist, and whether lease terminations continue to contribute elevated maintenance reserve revenue.
- The cash impact of restricted balances, upcoming debt service, and the $34.2 million purchase obligations, alongside the separately stated $36.2 million gross equipment commitments.
- Exposure of earnings and liquidity to interest-rate changes, off-lease levels, lease pricing, and continued access to financing.
- The durability of reported profit growth given the depreciation estimate change and the $0.3 million equipment write-down.
- Progress and outcome of the SEC settlement discussions, and continued compliance with debt covenants.