Willis Lease Finance Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company leases commercial aircraft, engines and related equipment, and sells spare parts. At quarter-end it reported 75 lessees in 39 countries, a portfolio of 298 engines, 12 aircraft and one marine vessel, plus other equipment, and managed 349 assets for others. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Total revenue | $68.8 million | $61.1 million; up 12.6% |
| Operating loss | $25.1 million | $1.2 million |
| Net loss | $21.2 million | $1.3 million |
| Net loss attributable to common shareholders; diluted loss per share | $22.0 million; $3.70 | $2.2 million; $0.36 |
| Operating margin, calculated as operating income (loss) divided by revenue | Approximately (36.5)% | Approximately (1.9)% |
| Operating cash flow | $28.3 million | $22.6 million |
| Cash and cash equivalents; restricted cash | $14.1 million; $68.9 million | At December 31, 2021: $14.3 million; $81.3 million |
| Debt obligations, net of issuance costs | $1,759.1 million | $1,790.3 million at December 31, 2021 |
| Total assets | $2,429.9 million | $2,462.9 million at December 31, 2021 |
Revenue growth reflected a 21.0% increase in lease rent revenue, a 45.2% increase in spare parts and equipment sales, and a $2.3 million gain on leased-equipment sales. Maintenance reserve revenue declined 25.1%. Average utilization by net book value improved to approximately 84% from 80%.
The larger loss primarily reflected a $21.1 million equipment write-down (versus $1.9 million a year earlier), higher general and administrative and technical expenses, and higher interest expense. The company reported a $6.5 million income tax benefit, compared with $0.4 million. Other comprehensive income was $14.2 million, mainly from unrealized derivative gains; total comprehensive loss was $7.0 million.
Investing activities used $6.3 million, including $24.2 million of lease-equipment purchases partly offset by $17.3 million of sale proceeds. Financing activities used $34.7 million, including $53.3 million of debt principal payments and $1.8 million of share repurchases, partly offset by $21.0 million of new borrowings. Cash, cash equivalents and restricted cash declined by $12.7 million during the quarter.
Material changes, risks and outlook
- Russia-related impairment: The company wrote down three engines by $21.1 million; $20.4 million related to two engines in Russia that management expected to be unrecoverable at March 31, 2022, in connection with the Russia-Ukraine conflict. The broader effects of the conflict and sanctions were not determinable.
- Expense increases: General and administrative expense rose 46.2% to $23.6 million, including higher personnel and stock-based compensation, accrued legal costs, increased travel, and a $1.0 million bonus to the Executive Chairman for prior service. Technical expense increased to $5.6 million, primarily due to engine maintenance and hub repairs, including work associated with an FAA airworthiness directive. Net finance costs rose 12.4% to $16.9 million, reflecting higher LIBOR rates and revolving-facility pricing.
- Debt and liquidity: The company reported covenant compliance at quarter-end. Its $1.0 billion revolving credit facility matures in June 2024; substantially all assets are pledged, and debt agreements include financial covenants and cross-default provisions. Management said equity, internally generated funds and existing facilities were sufficient for the next 12 months, while warning that weaker cash generation, reduced facility availability or higher borrowing costs could constrain operations and growth.
- Interest-rate and customer exposure: $580 million of debt was variable-rate. After swaps, management estimated a 1 percentage-point rate change would change annual interest expense by approximately $0.8 million. Fixed lease rates may not adjust quickly enough to offset higher borrowing costs. COVID-19-related airline disruption could continue to affect collections, lease demand, customer solvency and asset utilization. Non-U.S. lessees generated 57% of lease rent revenue.
- Commitments: Purchase obligations totaled $439.9 million, including commitments for 12 LEAP-1B engines for $170.6 million and 19 LEAP-1A engines for $269.3 million by 2025. The filing says some purchase agreements allow deferral or cancellation in specified situations. Additional future maintenance commitments were disclosed.
- Control weakness: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2022, due to a material weakness in review of the quarterly income tax provision. A remediation plan was being designed. The weakness raises a need to verify the tax calculation and remediation progress.
- Leadership: Austin C. Willis became CEO effective April 1, 2022; Charles F. Willis IV became Executive Chairman. The latter’s employment agreement includes a $1.0 million signing bonus, in addition to stated salary and target bonus terms.
- Guidance: The filing provides no quantified earnings or revenue guidance. Management expected demand for LEAP-1B engines to increase as 737 MAX aircraft return to service, and stated it may hedge additional floating-rate debt. These are forward-looking statements subject to the risks described in the filing.
Important facts for investors to verify
- Whether the tax-provision control weakness is remediated and whether any tax figures require correction.
- Recoverability of the Russia-linked engines and any further asset impairments or effects from sanctions.
- Lease utilization, collections, maintenance-reserve revenue and customer credit trends as airline activity changes.
- Debt covenant headroom, revolving-credit availability, interest-rate exposure and the schedule of near-term maturities.
- Ability to fund the substantial engine purchase and maintenance commitments while sustaining liquidity and planned growth.