Willis Lease Finance Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise. The company leases commercial aircraft and engines, sells spare parts, and provides related services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $66.5 | $75.0 | $127.6 | $156.6 |
| Operating income (loss) | $(1.2) | $8.8 | $(2.3) | $17.1 |
| Net income (loss) | $0.1 | $5.4 | $(1.3) | $9.7 |
| Net income (loss) attributable to common shareholders | $(0.8) | $4.5 | $(2.9) | $8.0 |
| Basic EPS | $(0.12) | $0.75 | $(0.48) | $1.35 |
- Q2 lease rent revenue fell 15.7% to $32.4 million; maintenance reserve revenue declined 42.4% to $17.3 million. Spare-parts and equipment sales rose 25.0% to $3.6 million.
- Six-month lease rent revenue declined 24.6% to $64.0 million, maintenance reserve revenue fell 26.6% to $37.1 million, and spare-parts and equipment sales decreased 32.0% to $8.1 million.
- A $6.3 million engine-program transition settlement was recorded in 2021, with no comparable revenue in 2020. Lower lease utilization and maintenance-related revenue more than offset this unusual item.
- Q2 write-downs of equipment were $2.2 million, versus $7.0 million a year earlier; six-month write-downs were $4.1 million versus $9.1 million. Q2 general and administrative expense rose 28% to $19.5 million, primarily reflecting higher stock-based compensation.
- Operating cash flow was $42.8 million for the first half, broadly unchanged from $43.0 million. Investing used $101.5 million and financing provided $208.9 million; cash, cash equivalents and restricted cash increased by $150.3 million.
Financial position and capital
- At June 30, 2021, total assets were $2.585 billion, debt obligations net of issuance costs were $1.911 billion, and shareholders’ equity was $368.7 million. Debt increased from $1.694 billion at year-end 2020.
- Cash and cash equivalents were $16.5 million; restricted cash was $212.7 million. The company reported $229.2 million of cash, cash equivalents and restricted cash combined. A substantial portion is restricted, including cash held in consolidated financing structures.
- Gross debt principal was $1.933 billion. The May 2021 WEST VI securitization issued $336.7 million of fixed-rate notes, with coupons of approximately 3.10%, 5.44% and 7.39%. The revolving credit facility had $688 million outstanding at a floating rate of one-month LIBOR plus 1.75%.
- The company stated it was in compliance with applicable debt covenants at quarter-end. Its revolving facility requires an interest coverage ratio of at least 2.25x and a total leverage ratio below 4.50x.
- Preferred stock dividends were $1.6 million for the first half; the preferred shares accrue dividends at 6.5% annually. No common shares were repurchased in the first half.
Business changes, outlook and risks
- COVID-19-related weakness in air travel continued to reduce utilization and demand. Average portfolio utilization was 81% in Q2 versus 86% a year earlier, and 80% for the first half versus 86%. Management said approximately 78% of assets, by book value, were on lease at June 30.
- Management planned to continue cost control and prudent capital expenditure. It said the duration and full business impact of the pandemic remained uncertain; the filing provides no quantified earnings or revenue guidance.
- COVID-related rent concessions reduced revenue by $0.1 million in Q2 and $0.2 million in the first half, compared with $3.1 million in the corresponding 2020 periods. The company also reported $0.3 million of additional impairment indicated by interim analyses.
- Management expected demand for LEAP-1B engines to increase as the 737 MAX returned to service. At the filing date, the company had purchased three such engines and was committed to purchase 17 more, with certain contractual deferral or cancellation options.
- In June, the company agreed to purchase and lease back 20 V2500 engines: four transactions were completed and the remaining 16 were expected to close by September 2021. It also disclosed a $24 million future maintenance-services commitment by 2024 and commitments of $70.2–$112.0 million for overhaul and maintenance services by 2030 tied to a prior engine purchase.
- A non-binding $42-per-share acquisition indication from the CEO and a related party remained under review and negotiation by an independent board committee. The CEO’s June letter stated he did not intend to increase the offer; completion and financing were not assured.
- Key risks include further airline-sector disruption, customer defaults or bankruptcies, lower utilization and lease rates, restricted access to securitized cash, interest-rate and foreign-currency exposure, and covenant or refinancing pressure. The company estimated that a 1 percentage-point rate movement would change annual interest expense by approximately $1.9 million, net of swaps.
Most important facts for investors to verify
- Whether utilization, lease collections, maintenance reserve revenue and spare-parts demand recover, and whether impairment levels change.
- How much of reported cash is unrestricted and available to the parent, given $212.7 million of restricted cash and structural financing restrictions.
- The effect of increased leverage, upcoming debt repayments and interest-rate exposure on liquidity and covenant headroom.
- Status, terms, financing and independent-committee outcome of the proposed $42-per-share transaction.
- Execution, funding and potential deferral or cancellation of engine purchases and the related maintenance commitments.