Business context and reporting period
Willis Lease Finance Corporation filed this Form 10-K for the fiscal year ended December 31, 2014. The company leases commercial aircraft engines and related equipment, and operates a newer spare-parts sales business through Willis Aero. Its lease portfolio comprised 207 engines and related equipment, five aircraft and five spare-parts packages, with a net book value of $1.066 billion; it served 77 lessees in 39 countries. The filing also reports fourth-quarter results.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $174.3 million | $158.4 million |
| Lease rent revenue | $101.7 million | $101.7 million |
| Maintenance reserve revenue | $53.4 million | $46.7 million |
| Net income | $7.2 million | $15.6 million |
| Diluted EPS | $0.89 | $1.89 |
| Operating earnings | $10.5 million | $7.8 million |
| Cash from operating activities | $62.7 million | $80.3 million |
| Total assets | $1.262 billion | $1.199 billion |
| Debt | $841.0 million | $787.6 million |
| Shareholders' equity | $216.9 million | $212.6 million |
Calculated operating margin was approximately 6.0% (2013: 4.9%); net margin was approximately 4.2% (2013: 9.9%). Fourth-quarter 2014 revenue was $46.3 million and net loss was $0.3 million, versus fourth-quarter 2013 revenue of $47.2 million and net income of $6.6 million.
At year-end, cash and cash equivalents were $13.5 million and restricted cash was $51.3 million. The $700 million revolving credit facility had $270 million available. About $468.5 million of debt carried variable rates; management estimated a 1 percentage-point rate change would alter annual interest expense by about $4.7 million. Average portfolio utilization declined to 83% from 84%; year-end utilization was 79%, compared with 86% a year earlier.
Material changes versus the prior comparable period
- Revenue rose 10.0%, principally reflecting maintenance-reserve revenue recognized upon lease terminations and $8.9 million in spare-parts sales. Lease rent revenue was essentially unchanged; management said portfolio growth was offset by lower utilization.
- Net income fell 53.6%. The prior year benefited from an $8.7 million tax benefit related to an extraterritorial-income tax-basis adjustment. 2014 also included higher depreciation and a $4.6 million income-tax expense.
- Depreciation and amortization increased to $65.4 million from $58.7 million. A 2014 estimate change for certain older engines increased depreciation by $2.9 million and reduced net income by $1.7 million, or $0.21 per diluted share.
- Equipment write-downs were $5.6 million, including $2.6 million associated with six engines designated for part-out, $2.4 million for impaired engines, and $0.6 million for parts inventory.
- Debt increased by $53.3 million. In June 2014, the revolving facility was expanded from $450 million to $700 million and its maturity extended to June 2019.
Outlook, risks and unusual items
- Management stated that equity, internally generated funds and existing facilities were sufficient to maintain operations through 2015, while noting that future portfolio growth could be constrained without additional capital. No numerical earnings or revenue guidance was provided.
- Approximately $35.5 million of debt principal was due in 2015; total disclosed contractual commitments were $1.026 billion, including estimated interest. A $9.5 million engine purchase commitment was due for delivery in 2015.
- Major risks include airline and MRO credit deterioration, lease defaults and repossession costs, off-lease assets and residual-value declines, maintenance and recordkeeping shortfalls, competition, and the company's substantial leverage. About 88% of 2014 lease rent revenue came from non-U.S. lessees, although lease payments were denominated in U.S. dollars.
- Substantially all assets were pledged to creditors. The company reported compliance with debt covenants at year-end, including the revolving-facility interest-coverage minimum and leverage limit; a breach could restrict borrowing or accelerate debt.
- Spare-parts sales produced $8.9 million of revenue against $7.5 million of cost; the spare-parts segment reported a $0.2 million operating loss. The new CASC Willis China joint venture received $15 million from the company in 2014.
- The company agreed to a $150,000 SEC civil penalty in a 2014 settlement concerning alleged late executive ownership filings; certain officers separately agreed to pay $125,500 in aggregate. The company did not admit or deny the allegations. KPMG issued unqualified opinions on the financial statements and internal controls, which management also assessed as effective.
- The company paid no common dividends and stated it did not intend to do so in the foreseeable future. It repurchased 249,105 shares for approximately $5.4 million during 2014.
Important facts for investors to verify
- Whether utilization can recover from the year-end 79% level and how off-lease equipment affects lease revenue, cash generation and asset values.
- The recurring contribution of maintenance-reserve revenue, particularly the portion recognized when long-term leases terminate.
- The assumptions behind engine useful lives, residual values and fair-value estimates, including the $5.6 million of equipment write-downs.
- Liquidity and covenant headroom, variable-rate exposure, and the availability and terms of capital needed to fund portfolio growth.
- Collections and customer credit exposure: $1.4 million of rent and $1.9 million of maintenance-reserve payments were more than 30 days past due at year-end.
- The effects of the new parts business and joint ventures on consolidated profitability, cash flows and capital requirements.