Willis Lease Finance Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; fourth-quarter results are also summarized below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Willis leases commercial aircraft engines and related equipment, primarily through operating leases, and earns lease rent, maintenance-reserve revenue and management fees. In November 2013 it launched Willis Aeronautical Services, Inc. (WASI), a spare-parts sales business. At year-end, the company’s lease portfolio included 202 engines and related equipment, four aircraft and five spare-parts packages, with net book value of $1.033 billion; it served 82 lessees in 41 countries and managed 43 engines and related equipment for third parties. Approximately 86% of portfolio value was on lease, and 86% of lease-rent revenue came from non-U.S. lessees.
Financial and operating performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $158.4 million | $148.1 million |
| Lease-rent revenue | $101.7 million | $94.6 million |
| Maintenance-reserve revenue | $46.7 million | $41.4 million |
| Earnings from operations | $7.8 million | $0.9 million |
| Net income | $15.6 million | $1.5 million |
| Net income (loss) attributable to common shareholders | $15.6 million | $(3.8) million |
| Diluted earnings (loss) per common share | $1.89 | $(0.43) |
| Cash from operating activities | $80.3 million | $67.3 million |
Revenue increased 7.0%. Lease-rent growth reflected a larger average portfolio and average utilization of 84%, versus 83% in 2012. Net income included an $8.7 million tax benefit related to an extraterritorial-income tax-basis adjustment. Excluding that benefit, management reported an effective tax rate of 38.9%. Approximate operating margin was 4.9% versus 0.6%; net margin was 9.9% versus 1.0%, calculated from reported earnings and revenue.
Fourth quarter: Revenue was $47.2 million and net income was $6.6 million, compared with $39.7 million and $2.2 million, respectively, in fourth-quarter 2012. Diluted earnings per share were $0.81 versus a loss of $0.09.
Balance sheet, debt and liquidity
At December 31, 2013, total assets were $1.199 billion, notes payable $787.6 million, shareholders’ equity $212.6 million, cash and cash equivalents $12.8 million, and restricted cash $50.8 million. The $450 million revolving facility had $88 million available and matured in November 2016. Debt included $370.6 million of WEST II securitization notes bearing fixed interest of 5.50%; total borrowings included $392 million at variable rates tied to one-month LIBOR. The company had no interest-rate swaps in place at year-end.
About $42.0 million of debt principal was due in 2014. Management said existing equity, internally generated funds and debt facilities were sufficient to maintain operations through 2014, but warned that growth could be limited without additional capital. The company reported compliance with its debt covenants at year-end. Substantially all assets are pledged to creditors; WEST II and WOLF assets are subject to their respective entity-level debt claims.
Material changes and unusual items
- Interest expense rose 22% to $38.7 million, mainly due to higher average debt and the cost of WEST II debt. A 1% rate change was estimated to affect annual expense on variable-rate debt by about $3.9 million, net of derivatives.
- Technical expense rose 84% to $12.9 million, primarily because of higher engine repair activity. Depreciation and amortization increased 11.6% to $58.7 million.
- Equipment write-downs totaled $6.5 million, including $3.7 million related to engines designated for part-out and $2.8 million for consigned parts affected by market conditions.
- A revised depreciation estimate for older engines increased 2013 depreciation by $3.9 million and reduced net income by $2.3 million, or $0.28 per diluted share, compared with the prior estimate.
- The company acquired the remaining 50% of WOLF in September for $1.0 million, consolidating the business and its related debt. In November, it purchased certain assets of J.T. Power, an entity connected to the CEO’s family, for $5.6 million; the transaction included $3.3 million paid to J.T. Power shareholders.
- The filing disclosed correction of prior-period hedge-accounting errors for 2006–2010, adjusting year-end 2012 accumulated other comprehensive income, retained earnings and deferred tax liabilities.
- During 2013, the company repurchased 395,254 shares for approximately $5.9 million. It reported no cash dividends and no intention to pay dividends in the foreseeable future.
Outlook, risks and contingencies
No numerical earnings or revenue guidance was provided. Management cited expected sufficiency of current resources to sustain 2014 operations, while noting that limited access to capital could constrain portfolio growth. Results remain sensitive to aviation-market cycles, engine residual values, lease utilization and rates, lessee credit quality, maintenance costs, and the ability to remarket or repossess equipment. International operations expose the company to foreign legal, political and currency-related risks; leases are currently payable in U.S. dollars.
The company identified liquidity, leverage, covenant compliance and interest-rate exposure as important risks. Maintenance reserves may be inadequate or uncollected, and restricted cash is not generally available for corporate purposes. As of year-end, approximately $0.8 million of lease rent and $0.8 million of maintenance-reserve payments were more than 30 days past due. In March 2014, the company and three officers agreed in principle to settle an SEC administrative proceeding concerning allegedly late beneficial-ownership filings; the company agreed to a $150,000 penalty, subject to SEC approval. The filing states the matter was not expected to materially affect operations.
KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting. The filing reported no legal proceedings under Item 3.
Important facts for investors to verify
- How much of the reported earnings improvement is recurring, given the $8.7 million tax benefit and changing depreciation estimates.
- Whether utilization, lease rates and maintenance-reserve collections remain adequate, particularly as leases expire and engines come off lease.
- Funding availability and covenant headroom given $787.6 million of debt, $88 million of revolving availability and variable-rate exposure.
- Performance and integration of WASI and the acquired J.T. Power assets, including related-party transaction terms and returns.
- Any developments in the SEC settlement, tax positions, or future impairment and residual-value assessments.