Willis Lease Finance Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. WLFC leases aircraft engines, aircraft and related equipment, and also sells spare parts and provides engine management services.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $105.7 million | $76.9 million | $304.3 million | $223.8 million |
| Operating income (loss) | $20.0 million | $8.7 million | $47.4 million | $(6.9) million |
| Net income (loss) | $14.6 million | $6.4 million | $32.8 million | $(8.9) million |
| Net income (loss) attributable to common shareholders | $13.8 million | $5.5 million | $30.3 million | $(11.4) million |
| Diluted EPS | $2.13 | $0.89 | $4.70 | $(1.88) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $169.0 million | $82.6 million |
Q3 operating margin was approximately 18.9%, versus 11.4% a year earlier; nine-month operating margin was 15.6%, versus a loss margin of 3.1%. Nine-month total comprehensive income was $24.5 million, including an $8.3 million other comprehensive loss, primarily reflecting derivative valuation changes.
Financial position and liquidity
- At September 30, 2023, total assets were $2.60 billion, debt obligations were $1.79 billion net of issuance costs, and shareholders’ equity was $431.9 million. Debt decreased from $1.85 billion at year-end 2022.
- Cash and cash equivalents were $5.4 million and restricted cash was $50.3 million. Nine-month cash, cash equivalents and restricted cash declined by $33.4 million to $55.6 million.
- Operating activities provided $169.0 million; investing activities used $132.1 million and financing activities used $70.2 million. Financing included $221.9 million of debt principal payments and $159.8 million of new borrowings.
- Gross debt principal outstanding was $1.80 billion. The filing’s contractual-obligations table shows $790.6 million of debt due in less than one year. The $1.0 billion revolving credit facility had $730.0 million drawn at quarter-end and carried a floating rate of one-month SOFR plus 1.75%.
- The company reported compliance with debt covenants at quarter-end. It said equity, internally generated funds and existing debt facilities were sufficient to maintain operations for the next 12 months, while warning that reduced cash generation, lower facility availability or higher borrowing costs could constrain operations and growth.
Material changes and operating drivers
- Revenue rose 37.5% in Q3 and 36.0% for the first nine months. Growth was led by lease rent revenue, up 35.6% in Q3 and 41.0% year to date, and maintenance reserve revenue, up 84.4% and 62.3%, respectively.
- Management attributed higher lease revenue to more engines placed on lease and increased utilization. Average utilization based on net book value was 85% in Q3 and 85% year to date, versus 80% and 82% in the comparable 2022 periods.
- Maintenance reserve revenue growth primarily reflected short-term, non-reimbursable usage fees. Long-term maintenance revenue declined to $10.1 million for nine months from $27.8 million. The company reported $24.7 million of deferred in-substance fixed payment use fees in unearned revenue.
- General and administrative expense rose 49.2% in Q3 and 58.0% year to date. The company cited higher personnel costs, outside services, aviation hull war insurance related to the Russia-Ukraine conflict, and India-related taxes. Technical expense also increased, primarily due to engine repair activity and thrust rental fees.
- Net finance costs increased 16.9% in Q3 and 14.9% year to date, mainly because higher short-term rates raised revolving-credit borrowing costs. Spare parts and equipment sales declined; there were no equipment sales in the 2023 periods presented.
- Year-to-date equipment write-downs were $2.4 million, versus $21.8 million in 2022, which included $20.4 million for two Russia-located engines deemed unrecoverable.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects demand for LEAP-1B engines to increase as 737 MAX aircraft return to service, but this is a forward-looking expectation.
- At the report date, purchase commitments included 18 LEAP-1A engines for $282.8 million and nine LEAP-1B engines for $155.8 million. The company stated certain commitments may be deferred or cancelled under specified terms. Contractual purchase obligations totaled $438.6 million.
- On October 31, 2023, WLFC closed a $410.0 million WEST VII fixed-rate note offering secured by a portfolio of 51 engines and four airframes. Also on October 31, it extended the maturity of $500.0 million of its revolving credit facility to June 2025; the full $730.0 million quarter-end borrowing was not stated to have been extended.
- On October 23, a lessee elected to exercise a purchase option on eight engines. WLFC reclassified them as investments in sales-type leases and estimated a loss of approximately $5.9 million.
- Interest-rate exposure is material: $730.0 million of debt was variable rate. The company estimates a 1 percentage-point rate change would change annual interest expense by approximately $2.3 million, net of swaps. Lease rates are often fixed in the short term, limiting the ability to pass through higher financing costs.
- Other risks include customer defaults or bankruptcies, early lease returns, concessions, equipment off-lease, airline-industry and COVID-19 effects, inflation, currency weakness among non-U.S. lessees, and covenant or collateral constraints. 66% of nine-month lease rent revenue came from non-U.S.-domiciled lessees.
- Series A-1 preferred dividends increased from 6.5% to 8.5% annually after October 15, 2023; Series A-2 remains at 6.5%. Preferred holders may require redemption upon specified events, with the earliest call dates amended to September 2024.
Important facts for investors to verify
- How much of the $790.6 million of debt shown due within one year is covered by the facility extension, and the refinancing plan for remaining near-term maturities.
- Whether utilization and maintenance-reserve revenue remain strong, and how the $24.7 million deferred use fees convert into reported revenue and cash.
- Whether rising personnel, repair, insurance and financing costs outpace revenue growth and pressure margins and cash flow.
- The impact and timing of the estimated $5.9 million loss on the eight-engine purchase-option exercise and the WEST VII securitization on debt, assets and future earnings.
- The company’s ability to fund $438.6 million in engine purchase commitments and other obligations while maintaining covenant compliance and liquidity.