Willis Lease Finance Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The company acquires, leases, and selectively sells commercial aircraft engines and related equipment. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $35.7 | $40.8 | Down 12.4% |
| Earnings from operations | $5.0 | $7.9 | Down 37.0% |
| Net income | $3.3 | $5.1 | Down 35.0% |
| Net income attributable to common shareholders | $2.5 | $4.3 | Down 41.4% |
| Diluted earnings per common share | $0.29 | $0.47 | Down 38.3% |
| Operating margin | 13.9% | 19.4% | Down 5.5 percentage points |
| Net margin | 9.2% | 12.4% | Down 3.2 percentage points |
| Operating cash flow | $7.9 | $(0.9) | Improved |
Revenue included lease rent of $24.1 million, maintenance reserve revenue of $8.6 million, and equipment-sale gains of $2.6 million. The income tax expense was $2.1 million; the effective tax rate was 38.8%.
Balance sheet, debt, and liquidity
- Total assets were $1,126.5 million and shareholders’ equity was $238.5 million at March 31, 2012.
- Notes payable were $705.0 million net of discount ($706.953 million in reported aggregate maturities). Debt declined from $718.1 million net at year-end 2011. Debt-to-equity was approximately 3.0x using net debt.
- The $345.0 million revolving facility had $116.0 million available and matures in November 2016. The company reported compliance with its financial covenants.
- Cash and cash equivalents were $5.6 million; restricted cash was $86.1 million and is not generally available for corporate use. Contractual debt payments due within one year were $65.1 million, including $13.9 million on a term loan with a $13.0 million bullet payment due December 31, 2012.
- Net cash provided by investing activities was $7.0 million; financing activities used $15.7 million. Cash and cash equivalents declined $0.8 million during the quarter.
Changes and management commentary
- Lease rent revenue fell 11.8%, primarily because average fleet utilization declined to 84% from 89% and the lease portfolio was smaller. Approximately 85% of equipment by book value was on lease at quarter-end.
- Equipment-sale gains fell to $2.6 million from $5.1 million, despite five engines and related equipment sold versus three in Q1 2011. Equipment purchases for the lease portfolio were $14.3 million, compared with $36.0 million a year earlier.
- Net finance costs declined to $7.9 million from $9.2 million, reflecting lower average debt and reduced swap notionals. General and administrative expense rose 6.4% to $8.7 million; technical expense fell 42.8% to $1.3 million.
- Management believes equity, internally generated funds, and existing debt facilities are sufficient to maintain operations for the next 12 months. It cautions that weaker internally generated cash or reduced facility availability could constrain operations and growth. No earnings or revenue guidance is provided.
Risks, contingencies, and unusual items
- Interest-rate exposure is significant: all but $23.2 million of borrowings were variable-rate, mostly tied to one-month LIBOR. Management estimated that a 1 percentage-point rate change would alter annual interest expense by approximately $3.7 million, net of derivatives. Swaps had $315.0 million notional value and a $12.1 million net liability; management estimated they would increase net finance costs by approximately $6.7 million over the 12 months ending March 31, 2013.
- Fixed-rate leases may not adjust quickly enough to offset higher borrowing costs. Lower utilization or lease rates could also reduce earnings and cash flows. 83% of lease revenue came from non-U.S.-domiciled lessees, though leases require U.S.-dollar payments; currency weakness could impair lessees’ ability to pay. The largest customer generated 12.3% of lease rent revenue.
- The company recorded a $0.282 million equipment write-down related to engines sold in April 2012. It also committed to purchase four engines and related equipment for $37.5 million, with delivery scheduled from 2012 to 2015.
- Related-party exposures include Island Air, which owed $2.9 million in overdue rent and late charges; the company had agreed to forgive 65% and collect the balance under a settlement. J.T. Power, an entity related to the CEO’s son, restructured a $1.3 million payment obligation into quarterly payments over five years with a balloon payment.
- The company disclosed estimation risks involving equipment residual values, useful lives, impairment, and collectability. It reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether fleet utilization recovers from 84% and lease rent revenue stabilizes.
- Availability of unrestricted liquidity, renewal or extension of financing, and ability to meet near-term debt and bullet-payment obligations.
- Sensitivity of earnings and cash flows to LIBOR movements, hedge costs, and the fixed-rate lease portfolio.
- Collections under the Island Air settlement and J.T. Power restructuring, including the related-party nature of these arrangements.
- Whether expected equipment sale proceeds and residual values support carrying values and the committed engine purchases.