WILLIS LEASE FINANCE CORP quarterly report, Q2 FY2018

Willis Lease Finance Corporation — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. Unaudited results; amounts below are in millions of dollars unless otherwise noted.

Business context and reporting period

Willis acquires and leases commercial aircraft, engines and related equipment, and selectively sells equipment and spare parts. At quarter-end, its lease portfolio included 246 engines and related equipment, 15 aircraft and 10 other leased items, with a net book value of $1,542.3 million; it managed 471 assets for third parties. It reported 91 lessees in 47 countries.

Key financial metrics

At June 30, cash and cash equivalents were $8.9 million and restricted cash was $37.9 million. Total debt, net of issuance costs, was $1,232.8 million, compared with $1,085.4 million at December 31, 2017. Shareholders’ equity was $265.3 million; redeemable preferred stock was $49.5 million. The company reported $1,249.5 million of gross debt principal and $254.2 million of estimated future interest payments.

Material changes versus comparable periods

• Q2 revenue rose 9.5%, while operating earnings increased 25.4% and net income attributable to common shareholders increased 33.1%. Lease rent revenue grew 37.5%, reflecting higher lease rates and a larger leased-asset base. Maintenance reserve revenue rose 85.5%, including revenue recognized upon lease terminations.
• First-half revenue fell 5.2%, despite lease rent revenue growth of 34.4%, as maintenance reserve revenue declined 14.5% and spare parts and equipment sales fell 58.3%. Prior-year sales included airframes and an engine; no equipment sales were reported in the first half of 2018.
• First-half net income increased 9.1%, but common-shareholder income rose only 2.2%; diluted EPS increased from $2.17 to $2.25. Lower income tax expense reflected the federal corporate tax-rate reduction under the 2017 Tax Cuts and Jobs Act.
• First-half operating cash flow declined to $72.7 million from $79.3 million. Equipment purchases for operating lease rose to $243.1 million from $112.2 million, contributing to higher debt and a larger asset base.
• Interest expense increased to $15.1 million in Q2 from $11.3 million, and to $28.7 million for the first half from $22.2 million, due to higher borrowings and borrowing costs. First-half utilization by book value was approximately 87%, down from 89%.

Outlook, risks and unusual items

• Management said equity, internally generated funds and existing debt facilities should be sufficient to maintain operations for the next 12 months. It cautioned that weaker internally generated funds or inability to obtain lease commitments could limit borrowing capacity, increase borrowing costs, constrain operations and restrict growth.
• The $890 million revolving credit facility had $666 million drawn at quarter-end and matures in April 2021; it includes an accordion feature up to $1 billion. The company reported compliance with debt covenants at June 30, 2018. Debt facilities include borrowing-base and collateral requirements, cross-default provisions and restrictions on actions including dividends and share repurchases.
• $666 million of debt was variable-rate. Management estimated that a one-percentage-point rate change would change annual interest expense by approximately $5.7 million. A portion of borrowings was hedged with a $100 million interest-rate swap. Most leases are at fixed rates in the short term, limiting the ability to pass higher interest costs to customers.
• Approximately 88% of lease assets by book value were on lease at June 30. Management identified off-lease assets, lease-rate deterioration and lower utilization as risks to earnings and cash flow. Seventy-seven percent of first-half lease rent revenue came from non-U.S.-domiciled lessees, creating indirect exposure to currency devaluation. No customer represented more than 10% of lease rent revenue.
• At June 30, approximately $4.1 million of lease rent and $3.5 million of maintenance-reserve receivables were more than 30 days past due; collection or repossession difficulties could materially affect results. A $3.6 million write-down was recorded for three engines selected for part-out.
• Q2 general and administrative expense included costs associated with personnel transition to the Coconut Creek facility. On August 8, 2018, the company announced an offering of approximately $373.4 million of fixed-rate notes through its wholly owned Willis Engine Structured Trust IV subsidiary.
• The company adopted ASC 606 in 2018 and stated that timing and amounts of affected revenue recognition were unchanged. It plans to adopt the new lease accounting standard on January 1, 2019 and was evaluating its impact.

Most important facts for investors to verify

1. Whether recent aircraft-engine purchases can be placed on lease and utilization can recover, supporting the expanded asset base and cash generation.
2. How the announced $373.4 million notes offering affects total debt, interest expense, maturities and liquidity after quarter-end.
3. Exposure to floating interest rates, covenant headroom and the availability of revolving-credit borrowing given collateral and eligibility limits.
4. Collection status of past-due lease and maintenance-reserve receivables, and any resulting allowance, repossession or impairment needs.
5. The sustainability of reported earnings growth given lower first-half revenue, maintenance-reserve timing, equipment-sale variability and higher operating costs.