Willis Lease Finance Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company acquires and leases commercial aircraft engines and related equipment and selectively buys and sells equipment. Financial statements are unaudited; amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $37.5 | $39.5 | $108.4 | $119.0 |
| Operating income (loss) | $(11.0) | $5.9 | $(1.2) | $19.3 |
| Net income (loss) | $(7.2) | $2.3 | $(0.7) | $10.9 |
| Net income (loss) attributable to common shareholders | $(8.0) | $1.5 | $(3.0) | $8.5 |
| Diluted earnings (loss) per common share | $(0.90) | $0.17 | $(0.34) | $0.96 |
| Net cash provided by operating activities | Not presented quarterly | Not presented quarterly | $53.9 | $56.3 |
Revenue fell 5.0% in Q3 and 8.9% for the nine-month period year over year. Calculated operating margins were approximately (29.4)% in Q3 2012 versus 15.0% in Q3 2011, and (1.1)% for the first nine months of 2012 versus 16.3% in 2011. Calculated net margins were approximately (19.2)% and 5.9% for Q3, and (0.6)% and 9.1% for the respective nine-month periods.
Financial position and liquidity
- At September 30, 2012, total assets were $1,110.7 million, total liabilities $868.1 million and shareholders' equity $242.6 million. Cash and cash equivalents were $17.2 million; restricted cash was $54.2 million.
- Notes payable totaled $690.0 million, down from $718.1 million at December 31, 2011. The company reported $159.0 million available under its $430.0 million revolving credit facility. Debt rates ranged from approximately 2.71% to 5.50%, before derivative effects.
- Operating cash flow was $53.9 million. Investing activities used $18.2 million and financing activities used $24.9 million during the first nine months. Equipment purchases were $46.9 million.
- Contractual commitments totaled $926.5 million, including $690.0 million of debt, $193.3 million of estimated debt interest and $37.1 million of purchase obligations. Scheduled debt repayments in the next 12 months were approximately $18.1 million.
Material changes and unusual items
- Lease rent revenue declined 13% in Q3 and 10.7% year to date, primarily because average fleet utilization fell to 82% from 86% and the average lease portfolio was smaller. Approximately 83% of equipment by book value was on lease at quarter-end, versus 86% a year earlier.
- Q3 included a $15.4 million loss on debt extinguishment and derivative termination, following the September 17 refinancing and termination of six swaps. The charge comprised $5.3 million of unamortized debt costs and discount and $10.1 million of swap losses. This was the principal driver of the quarterly loss.
- On September 17, the company completed a $390 million asset-backed securitization through WEST II, receiving $384.9 million net proceeds and using them with revolving-facility funds to repay $435.9 million of prior WEST notes. WEST II notes carry a fixed 5.50% rate and are secured by 79 engines and related leases; repayment is solely from WEST II cash flows. The structure restricts certain cash and distributions.
- Equipment write-downs were $2.5 million in Q3 and $2.8 million year to date, reflecting revised expected proceeds from consigned engine parts and engines designated for part-out. Revised depreciation estimates for certain older engine types increased Q3 depreciation by $1.3 million and reduced net income by $0.8 million, or $0.09 per diluted share.
- Q3 maintenance reserve revenue rose 18.9%, and other income increased to $3.3 million, including a $2.0 million gain on an engine exchange and a $0.2 million insurance-settlement gain. Gains on equipment sales declined to $0.6 million in Q3 and $4.6 million year to date.
Outlook, risks and contingencies
- Management stated that equity, internally generated funds and existing debt facilities should support operations for the next 12 months. It warned that lower internally generated cash, increased off-lease equipment or reduced facility availability could constrain operations and growth. No specific earnings or revenue guidance was provided.
- Fixed lease rates alongside variable-rate borrowings expose margins to rising interest rates. At quarter-end, $271.0 million of debt was variable-rate; management estimated a 1% rate move would change annual interest expense by approximately $1.7 million, net of derivatives. The remaining $100 million swap had a 2.10% fixed rate and a 14-month term; management expected it to increase net finance costs by about $1.5 million over the following 12 months.
- Other risks include customer and lessee credit, residual values and impairment estimates, asset utilization, covenant and borrowing-base requirements, and foreign-currency weakness among overseas lessees. Although leases are payable in U.S. dollars, 87% of nine-month lease revenue came from non-U.S.-domiciled lessees. The largest customer represented 10.0% of lease rent revenue.
- The company reported compliance with its debt covenants at September 30, 2012. Related-party exposure includes Island Air, owned by the CEO and Chairman: it was one month in arrears on a settlement note, with $0.7 million principal outstanding, and owed $5.0 million under a lease arrangement. A separate guarantee owed by J.T. Power, an entity related to the CEO's son, was restructured into quarterly payments and a balloon payment.
- After quarter-end, on November 2, the company redeemed all Series A preferred shares for $34.75 million plus accrued dividends. In October, it repurchased 460,545 common shares for $6.4 million. These transactions followed the quarter-end and affect subsequent liquidity.
Important facts for investors to verify
- Whether fleet utilization and lease revenue stabilize or recover, and whether equipment off-lease levels rise.
- The cash-flow and earnings effects of the WEST II securitization, restricted cash provisions and the preferred-stock redemption.
- Whether revised engine residual values, part-out plans and depreciation assumptions lead to additional write-downs.
- Island Air's collections and remaining obligations, and the collectability and timing of the J.T. Power guarantee payments.
- Debt covenant headroom, revolving-facility availability and sensitivity of margins to interest-rate changes.