Willis Lease Finance Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with 2011 unless otherwise noted. The filing also reports unaudited fourth-quarter results. Willis leases commercial aircraft engines and related equipment, operating in one reportable segment. At year-end, its portfolio included 184 engines and related equipment, 7 aircraft and 4 spare-parts packages, with net book value of $961.5 million; it served 78 lessees in 42 countries.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $148.1 million | $156.7 million |
| Lease rent revenue | $94.6 million | $104.7 million |
| Maintenance reserve revenue | $41.4 million | $39.2 million |
| Net income | $1.5 million | $14.5 million |
| Net income (loss) attributable to common shareholders | $(3.8) million | $11.4 million |
| Diluted earnings (loss) per common share | $(0.43) | $1.28 |
| Operating cash flow | $67.3 million | $76.7 million |
| Total assets | $1,078.7 million | $1,133.2 million |
| Debt | $697.0 million | $718.1 million |
| Shareholders’ equity | $199.6 million | $236.7 million |
Revenue declined 5.5%; net income fell about 89%. Operating earnings were $0.9 million, approximately 0.6% of revenue, and net income was approximately 1.0% of revenue. The common-shareholder loss also reflects $2.5 million of preferred dividends and $2.8 million of preferred-stock redemption costs.
Cash and cash equivalents were $5.4 million and restricted cash was $24.6 million at year-end. The $430 million revolving facility had $148 million available, maturing in November 2016. Debt-to-equity was approximately 3.5x based on reported balances. Operating cash flow was $67.3 million; investing cash flow was $(32.0) million and financing cash flow was $(36.4) million. The filing does not provide a conventional current ratio in the supplied text.
Material changes and unusual items
- Lease rent revenue decreased 9.6%, primarily due to lower average portfolio size and utilization. Average utilization fell to 83% from 86%, although year-end on-lease assets rose to approximately 86% of portfolio net book value from 82%.
- Maintenance reserve revenue rose 5.7%, while gains on equipment sales fell to $5.5 million from $11.1 million. Other revenue increased to $6.6 million, including a $2.0 million gain on an engine exchange and a $0.2 million insurance settlement gain.
- In September, the Company refinanced prior WEST securitization debt through WEST II, issuing $390 million of notes and receiving $384.9 million net proceeds. WEST II notes carried a fixed 5.50% rate; $386.7 million was outstanding at year-end. The refinancing and swap terminations produced a $15.5 million loss on debt extinguishment and derivatives, materially reducing 2012 earnings.
- Equipment write-downs increased to $5.9 million from $3.3 million, including write-downs related to engines designated for part-out and changes in expected consignment proceeds. A 2012 depreciation-estimate change increased depreciation by $2.0 million and reduced net income by an estimated $1.0 million, or $0.12 per diluted share.
- The Company redeemed all $34.8 million of its 9% preferred stock in November 2012. It repurchased 928,261 common shares for approximately $12.7 million and authorized a buyback program of up to $100 million over five years. It reported no cash dividends to common shareholders and no intention to pay them in the foreseeable future.
- Fourth-quarter 2012 revenue was $39.7 million and net income was $2.2 million; the loss attributable to common shareholders was $0.8 million, or $(0.09) per diluted share.
Outlook, risks and contingencies
- Management said existing equity, internally generated funds and debt facilities should support operations through 2013. It cautioned that weaker internally generated cash or reduced facility availability could impair operations, and that inability to raise additional capital would limit portfolio growth.
- After year-end, Willis and its joint venture agreed to a $119.5 million purchase-and-leaseback of 19 SAS engines, funded through the Company’s revolver and the joint venture’s borrowing capacity. The Company’s portion was $65.0 million.
- Interest-rate exposure is material: $282 million of debt was variable-rate, while leases are generally fixed-rate. Management estimated that a 1 percentage-point rate movement would change annual interest expense by about $1.8 million, net of derivatives. The remaining $100 million swap was expected to add approximately $1.7 million to 2013 interest expense.
- Risks include airline and MRO credit deterioration, lease defaults and repossession costs, off-lease utilization and engine residual-value declines, maintenance and recordkeeping shortfalls, foreign legal and political risks, currency weakness affecting customers’ ability to pay U.S.-dollar rents, and financing covenant or liquidity pressure. Approximately 88% of 2012 lease rent revenue came from foreign lessees. About $3.0 million of rent and $2.6 million of maintenance reserves were reported more than 30 days past due in the risk-factor disclosure; another note reports approximately $2.9 million and $2.7 million, respectively.
- Related-party exposure included Island Air, then owned by the CEO, which had previously received amended lease terms and owed $4.5 million under a finance lease and $0.65 million on a note at year-end. Island Air was sold to an unrelated party in February 2013 and prepaid the note at a 45% discount, conditional on similar creditor reductions. The filing reports no legal proceedings. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported past-due rent and maintenance-reserve figures and assess subsequent collections and credit-loss allowances.
- Review the WEST II note terms, restricted-cash requirements, refinancing loss, covenant compliance and remaining revolver availability.
- Assess whether portfolio utilization, lease rates and asset sales can recover after the 2012 decline, and test engine residual-value and impairment assumptions.
- Track the SAS transaction’s financing, lease performance and effect on leverage and liquidity.
- Examine Island Air’s discounted note repayment and continuing lease exposure, as well as governance and related-party controls.
- Confirm whether management’s stated liquidity outlook through 2013 was borne out; the filing provides no quantified earnings guidance.