Willis Lease Finance Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2020. Willis Lease Finance acquires and leases aircraft, engines and related equipment, and sells spare parts. At quarter-end, it reported 71 lessees in 43 countries and managed 402 engines, aircraft and related assets for others. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
- Q2 revenue: $75.0, down 21.7% from $95.8 in Q2 2019. Lease rent revenue was $38.5, down 14.6%; spare-parts and equipment sales were $2.9, down 80.4%; and equipment sales shifted from a $5.1 gain to a $0.7 loss. Maintenance reserve revenue rose 13.3% to $30.0.
- Q2 earnings: Operating earnings were $8.8 versus $20.1; net income was $5.4 versus $17.0; and net income attributable to common shareholders was $4.5 versus $16.1. Diluted EPS was $0.74 versus $2.66. The filing reports no consolidated operating margin figure.
- First-half results: Revenue was $156.6, down 21.5% from $199.6. Net income was $9.7 versus $37.9, and diluted EPS was $1.31 versus $6.01. Net finance costs rose to $36.5 from $34.9, including a $4.7 debt-extinguishment loss.
- Cash flow: First-half operating cash flow was $43.0, down from $91.5. Investing used $193.7, primarily for $136.0 of notes receivable and $77.0 of leased-equipment purchases, partly offset by $17.7 of equipment-sale proceeds. Financing provided $258.5. Cash, cash equivalents and restricted cash totaled $171.4 at June 30, including $100.1 unrestricted.
- Debt and equity: Debt obligations, net of issuance costs, were $1,520.2, up from $1,251.0 at year-end 2019. Total assets were $2,209.6 and shareholders’ equity $357.9; redeemable preferred stock was $49.7. The company reported compliance with debt covenants at quarter-end.
Material changes and management commentary
- Management attributed weaker lease rent and parts sales chiefly to COVID-19-related lower aircraft utilization and demand. Average lease-portfolio utilization was approximately 86% in Q2, versus 88% a year earlier. Q2 rent concessions reduced rent revenue by $3.1.
- Maintenance-reserve revenue increased despite sharply lower usage-related collections: long-term maintenance revenue was $27.2 in Q2 versus $6.7, while short-term, non-reimbursable maintenance revenue fell to $2.8 from $19.8.
- First-half equipment write-downs were $9.1 versus $4.4 a year earlier. The filing says these included five engines being monetized through sale or part-out and two engines impaired after analysis; the COVID-related impairment for those two engines was $0.5. Twelve previously written-down engines had $30.5 of remaining book value at June 30.
- In March, the company issued $366.2 of WEST V fixed-rate notes, with stated coupons of 3.228%–6.657% and final maturities in 2045. It also repaid WEST II Series A notes, recognizing the $4.7 extinguishment loss.
- Management said it believed cash liquidity, equity, internally generated funds and existing debt facilities were sufficient to maintain operations for the next 12 months, while emphasizing uncertainty about COVID-19’s effects. No quantified earnings or revenue guidance was provided.
Risks, commitments and unusual items
- The filing identifies continued airline-industry disruption as a material risk to lease collections, utilization, new lease and parts demand, asset values, customer solvency, cash flows and access to capital. Some customers could defer or default on payments or cease operating.
- Debt includes $559.7 of variable-rate borrowings. The company estimated that a 1 percentage-point rate change, net of swaps, would change annual interest expense by approximately $3.6. It also cited currency risk because 79% of first-half lease rent revenue came from non-U.S.-domiciled lessees.
- Purchase commitments totaled $459.3, primarily for 17 additional LEAP-1B engines. These engines are compatible only with Boeing 737 MAX aircraft, whose fleet was grounded at the time of filing; management expected to lease the engines when the aircraft returned to service. Agreements may permit deferral or cancellation in certain situations.
- Substantially all assets are pledged to creditors; some securitization cash and assets are restricted. Management noted that prolonged customer cash pressure, lower collateral values, reduced facility availability or higher borrowing costs could weaken liquidity. The company terminated its 10b5-1 repurchase plan after quarter-end amid market conditions.
Important facts for investors to verify
- Whether lease concessions, delinquencies, defaults and utilization changed after June 30, and how much revenue was deferred or lost.
- The composition, valuation assumptions and potential further impairment of equipment write-downs, including the $30.5 remaining book value of previously written-down engines.
- Liquidity availability and covenant headroom, including the distinction between unrestricted cash and restricted cash and the practical availability of borrowing facilities.
- The status, timing and deferral or cancellation terms of the 17 remaining LEAP-1B engine commitments and the 737 MAX return-to-service assumption.
- Debt maturity and interest-rate exposure, including the WEST V structure, variable-rate borrowings, swaps and scheduled 2024 debt payments.