Willis Lease Finance Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company acquires and leases commercial aircraft engines and related equipment, and selectively buys and sells equipment. Financial figures below are in millions of dollars unless otherwise noted.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $39.5 | $40.2 | $119.0 | $108.7 |
| Operating earnings | $5.9 | $4.9 | $19.3 | $12.1 |
| Net income | $2.3 | $3.1 | $10.9 | $8.0 |
| Net income attributable to common shareholders | $1.5 | $2.3 | $8.5 | $5.7 |
| Diluted EPS | $0.17 | $0.25 | $0.96 | $0.62 |
| Operating margin | 15.0% | 12.2% | 16.3% | 11.1% |
- Q3 revenue decreased 1.8% year over year, while operating earnings rose 21.2%. Net income and diluted EPS fell, principally reflecting higher income tax expense; the Q3 effective tax rate was 62.4%, versus 40.4%.
- For the first nine months, revenue grew 9.5%, operating earnings rose 59.8%, and net income increased 35.1%. Diluted EPS was $0.96 versus $0.62.
- Q3 lease rent revenue rose 5.5% to $26.5 million; maintenance reserve revenue fell 8.0% to $9.0 million. Nine-month lease rent revenue increased 3.9% to $79.4 million, and maintenance reserve revenue rose 15.2% to $27.3 million.
- Q3 gain on equipment sales was $3.6 million versus $5.2 million. Nine-month gain was $11.2 million versus $7.5 million. The 2011 Q3 gain included $3.6 million recognized on the transfer of seven engines to the company’s 50%-owned JVCO.
- Q3 general and administrative expense rose 19.3% to $8.7 million; nine-month expense rose 28.4% to $26.1 million, largely due to employment-related costs. Nine-month depreciation increased 7.3% to $38.7 million.
- Operating cash flow for the first nine months was $56.3 million, versus $17.5 million. Investing cash flow was positive $3.9 million; financing cash flow was negative $56.4 million. Cash and cash equivalents ended at $6.0 million, compared with $2.2 million at year-end 2010.
Balance sheet, debt and liquidity
- Total assets were $1.095 billion at September 30, 2011, down from $1.126 billion at December 31, 2010. Equipment held for operating lease was $960.5 million; shareholders’ equity was $232.0 million.
- Notes payable were $684.1 million, net of discount, compared with $731.6 million at year-end 2010. The company reported $686.3 million in aggregate scheduled debt maturities, including $67.5 million due within 12 months.
- A $285 million revolving facility had $105 million available and matures in November 2012. The company stated it was in compliance with financial covenants at quarter-end. Approximately $80.3 million of cash was restricted and not generally available for corporate use.
- Management believed equity, internally generated funds and existing facilities were sufficient for the next 12 months. It cautioned that lower internally generated cash or reduced facility availability could impair operations and constrain growth.
- Contractual commitments included $36.0 million to purchase four engines, with deliveries scheduled over 2011–2014, and $2.4 million of operating lease obligations. A separate, non-binding memorandum of understanding to acquire Sukhoi Superjet aircraft was excluded from purchase commitments.
Outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year results.
- Interest-rate exposure is significant: all but $24.7 million of borrowings were variable-rate, largely tied to one-month LIBOR, while leases generally have fixed rates. A 1 percentage-point rate change was estimated to change annual interest expense by $2.9 million, net of derivatives.
- Interest-rate swaps had $375 million notional value and a $15.0 million net liability. Management expected the swaps to increase net finance costs by approximately $8.1 million over the 12 months ending September 30, 2012; a separate market-risk estimate put the 2011 annual increase at approximately $11.4 million.
- About 86% of equipment by book value was on lease at quarter-end, versus 89% a year earlier; nine-month average utilization improved to 86% from 85%. Management warned that lower utilization, weaker lease rates, or rising rates not passed through to customers could reduce earnings and operating cash flow.
- Non-U.S.-domiciled lessees generated 81% of nine-month lease revenue, with all lease payments denominated in U.S. dollars. The largest customer represented 12.7% of nine-month lease rent revenue.
- A $2.3 million equipment write-down was recorded for consigned engines, compared with $2.7 million in the prior-year period. The company also adjusted depreciation estimates for certain older engine types; management said the Q3 effect was less than $0.1 million.
- The company recognized $1.3 million of tax expense on the full gain from the JVCO engine transfer while recording only 50% of the gain for book purposes, contributing to the higher effective tax rate.
- Related-party matters include Island Air, associated with the CEO, which owed overdue rent and late charges. The company forgave 65% of a $2.9 million claim and arranged collection of the remaining amount over time; a $1.0 million note receivable had an offsetting reserve. J.T. Power, an entity linked to the CEO’s son, reported it could not make a $1.3 million consignment guarantee payment in one installment; the company reduced the consigned assets’ carrying value by $0.9 million and said independent directors were reviewing a proposed payment plan.
- One $16.5 million term loan was due December 31, 2011, including a $15.2 million bullet payment. The company was discussing an extension and stated it had sufficient availability under other facilities to repay it if not extended.
Important facts for investors to verify
- Availability, renewal, and covenant terms of the revolving facilities, and resolution of the $16.5 million loan maturity.
- Whether utilization and lease rates hold up, and how variable-rate funding costs compare with fixed lease revenue.
- Realized cash collections and recoverability of the Island Air note and J.T. Power consignment guarantee.
- Performance and financing of JVCO, including the economic impact of the engine transfer and related tax treatment.
- Cash available for general use versus restricted cash, and the company’s ability to fund committed engine purchases and future growth.