Willis Lease Finance Corporation — FY 2011 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2011; the filing also provides fourth-quarter results. Willis Lease is a single-segment lessor and manager of commercial aircraft engines and related equipment. At year-end, its portfolio included 194 engines and related equipment, 13 aircraft, and three spare-parts packages, with net book value of $981.5 million; it served 71 lessees in 37 countries. Approximately 80% of 2011 lease rent revenue came from foreign customers.
Financial and operating metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $156.7 million | $148.3 million |
| Lease rent revenue | $104.7 million | $102.1 million |
| Maintenance reserve revenue | $39.2 million | $34.8 million |
| Gain on sale of leased equipment | $11.1 million | $8.0 million |
| Operating earnings | $22.6 million | $18.6 million |
| Net income | $14.5 million | $12.1 million |
| Net income attributable to common shareholders | $11.4 million | $8.9 million |
| Diluted EPS | $1.28 | $0.96 |
| Operating cash flow | $76.7 million | $56.6 million |
| Total assets | $1,133.2 million | $1,126.0 million |
| Debt, net of discount | $718.1 million | $731.6 million |
| Shareholders’ equity | $236.7 million | $227.0 million |
Revenue grew about 5.6% and net income about 20.4%. Operating margin was approximately 14.4% versus 12.5%; net margin was approximately 9.3% versus 8.1%. These percentages are calculated from reported figures. Interest expense was $35.2 million, down from $40.9 million. Depreciation was $51.3 million; general and administrative expense rose to $35.7 million from $29.3 million.
Equipment purchases totaled $144.3 million, exceeding operating cash flow. Cash and cash equivalents were $6.4 million, while restricted cash was $76.3 million and unavailable for general corporate use. The $345 million revolving facility had $117 million available at year-end. Average portfolio utilization was 86% in both years, but year-end utilization fell to 82% from 90%. Minimum future rentals under non-cancelable operating leases totaled $210.1 million.
Fourth-quarter 2011 revenue was $37.7 million and net income was $3.6 million; diluted EPS was $0.33. The filing provides no separate fourth-quarter cash-flow figure.
Material changes versus the prior comparable period
- Lease rent revenue increased 2.4%, reflecting portfolio growth; maintenance reserve revenue rose 12.6%, principally from higher usage on short-term leases.
- Equipment-sale gains increased to $11.1 million from $8.0 million. The 2011 amount included $3.6 million representing the company’s share of a gain on seven engines sold to its 50%-owned WMES joint venture.
- Operating cash flow rose by $20.0 million. Debt declined by $13.5 million, while equity increased by $9.7 million.
- Year-end off-lease and other equipment book value rose to $143.7 million from $83.1 million; year-end utilization consequently declined despite unchanged average utilization.
- The company replaced its prior revolving facility with a $345 million facility maturing in November 2016. It also recorded $3.3 million of equipment write-downs, including $2.3 million on consignment parts inventory.
Outlook, risks, contingencies and unusual items
- Management said equity, internally generated funds and existing debt facilities were sufficient to maintain operations through 2012. It was discussing additions to its capital base; without additional capital, growth could be limited to internally generated funds. No specific earnings or revenue guidance was provided.
- Interest-rate exposure is significant: all but $24 million of debt was variable-rate, while leases are generally fixed-rate. Swaps had $375 million notional value and a $12.3 million net liability. Management estimated a 1% rate change would alter annual interest expense by about $3.2 million, net of derivatives, and forecast approximately $7.1 million of additional 2012 interest expense from existing hedges.
- Approximately $66.5 million of debt was due in 2012, including a $15.2 million loan with a $14.5 million bullet payment due June 30, 2012. Debt covenants were met at year-end; substantially all assets secure debt, and restricted cash cannot fund general needs.
- Three engines and related equipment carried purchase commitments of $28.5 million, for delivery in 2012–2014. Contractual commitments, including debt principal, interest, leases and purchases, totaled $828.5 million.
- Lessee credit and collection are key risks. At year-end, about $1.5 million of rent and $1.5 million of maintenance reserves were more than 30 days past due. American Airlines, which filed Chapter 11 in November 2011, leased three engines with $17.1 million net book value and owed $0.1 million.
- Related-party exposure: Island Air, whose owner is affiliated with the CEO and Chairman, leased aircraft and engines with $3.0 million net book value. A settlement forgave 65% of its $2.9 million overdue rent and late charges; the remaining 35% was payable partly over five years. Revenue on these leases was recognized on a cash basis due to collection uncertainty.
- Other material risks include engine residual-value and obsolescence risk, maintenance and repossession costs, foreign legal and political risks, and dependence on access to capital. Management reported no material legal proceedings and stated that internal control over financial reporting was effective. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether utilization and leasing demand recover from the 82% year-end level, and how much off-lease equipment can be returned to service or sold.
- Collections, restructuring outcomes and asset recovery for American Airlines, Island Air and other delinquent lessees; assess adequacy of receivable reserves.
- Availability of funds for 2012 maturities and engine purchases, including the June 2012 bullet payment and covenant headroom.
- How variable borrowing costs, hedge expense and any changes in LIBOR affect lease margins and cash generation.
- Whether equipment-sale gains, including the WMES transaction, are repeatable and how related-party arrangements are governed.
- Whether residual-value assumptions, maintenance-reserve sufficiency and consignment inventory valuations remain supportable.