Willis Lease Finance Corporation — Q2 2023 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. WLFC acquires and leases commercial aircraft, engines and related equipment, and also sells spare parts and provides engine management services. At quarter-end it reported 80 lessees in 43 countries, 348 engines, 12 aircraft and one marine vessel in its portfolio, and managed 339 assets for others.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $109.0 million | $78.1 million | $198.5 million | $146.9 million |
| Operating income (loss) | $19.4 million | $9.5 million | $27.4 million | $(15.6) million |
| Net income (loss) | $13.8 million | $5.9 million | $18.2 million | $(15.3) million |
| Net income (loss) attributable to common shareholders | $13.0 million | $5.1 million | $16.6 million | $(16.9) million |
| Diluted EPS | $2.02 | $0.81 | $2.57 | $(2.81) |
Margins: Operating margin, calculated as operating income divided by revenue, was approximately 17.8% in Q2 2023 versus 12.2% in Q2 2022; for the six-month periods it was 13.8% versus negative 10.6%. Net margin was approximately 12.7% versus 7.6% for Q2, and 9.2% versus negative 10.4% for the six-month periods.
- Revenue drivers: Q2 lease rent revenue rose 48% to $54.4 million, and maintenance reserve revenue rose 46% to $35.4 million. For the first six months, lease rent revenue increased 44% and maintenance reserve revenue increased 51%. Average utilization by net book value was 84% in Q2 and 85% for the half, compared with 82% and 83% a year earlier.
- Cash flow: Six-month operating cash flow was $98.5 million, compared with $57.8 million. Investing cash outflow was $103.0 million, mainly reflecting $111.4 million of equipment purchases, partly offset by $23.4 million of equipment-sale proceeds. Financing cash outflow was $29.4 million. Cash, cash equivalents and restricted cash totaled $55.0 million at June 30, including $5.9 million unrestricted cash and $49.1 million restricted cash.
- Debt and liquidity: Debt obligations were $1.827 billion net of issuance costs ($1.840 billion gross), down from $1.847 billion net at year-end 2022. Floating-rate borrowings were $758 million; the company estimated a 1 percentage-point rate change would alter annual interest expense by $2.6 million, net of swaps. Interest expense rose 19% in Q2 and 14% for the half, reflecting higher floating-rate debt and LIBOR. The company was in compliance with debt covenants at quarter-end.
- Assets and equity: Total assets were $2.604 billion, including $2.162 billion of equipment held for operating lease. Shareholders’ equity was $417.2 million, plus $49.9 million of redeemable preferred stock.
Material changes versus prior periods
- Revenue growth was driven by a larger leased fleet and higher utilization, increased short-term maintenance usage revenue, and growth in managed services. Q2 gain on leased-equipment sales was $4.5 million versus $0.5 million in the prior-year quarter.
- Spare parts and equipment sales declined 33% in Q2 and 29% for the half. No financial-asset sale gains were recorded in 2023, compared with $3.1 million in the 2022 periods.
- General and administrative expense increased 88% in Q2 and 63% for the half, principally due to personnel costs and bonus accruals, as well as higher project, aviation war-insurance and India-related tax costs.
- Six-month 2023 equipment write-downs were $1.7 million, compared with $21.2 million in 2022, including a $20.4 million prior-year impairment of two Russia-based engines related to the Russia-Ukraine conflict.
Outlook, risks and unusual items
- Management said equity, internally generated funds and existing debt facilities are expected to support operations for the next 12 months. It plans to amend and extend the $1.0 billion revolving credit facility before its June 2024 maturity; the filing does not report a completed extension.
- Gross debt principal scheduled for repayment includes $818.3 million in 2024. The contractual-obligations table lists $827.1 million of debt due in less than one year. These near-term maturities make the planned facility extension and refinancing position important to monitor.
- At the report date, purchase commitments included 18 new LEAP-1A engines for $282.8 million and nine LEAP-1B engines for $141.9 million. The company said some commitments may be deferred or cancelled under specified terms. Separately, future overhaul and maintenance services tied to a 2020 engine purchase are estimated at $77.7 million to $112.0 million by 2030.
- Interest-rate risk remains material because lease rates may be fixed in the short term while some debt costs vary. Other cited risks include aircraft-industry and COVID-19 uncertainty, customer bankruptcies or defaults, equipment off-lease levels, inflation, and currency weakness among non-U.S. lessees. Sixty-six percent of six-month lease rent revenue came from non-U.S.-domiciled lessees.
- Maintenance reserve revenue included $52.1 million of short-term usage revenue for the first half, while long-term maintenance revenue fell to $6.8 million from $23.3 million. The company also reported $19.8 million of deferred in-substance fixed payment use fees in unearned revenue.
- In July 2023, after quarter-end, the company sold an engine for $17.8 million and leased it back under an arrangement expected to last about eight years, with a future call option. The filing reported no material changes in risk factors and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether the revolving credit facility was extended before June 2024 and how the company will address the substantial near-term debt maturities.
- Whether operating cash flow and unrestricted liquidity remain adequate as equipment purchases, debt service and engine commitments proceed.
- How floating-rate borrowing costs, hedge performance and lease pricing affect margins; confirm the effect of interest-rate changes against the reported sensitivity estimate.
- Whether utilization, maintenance usage revenue and managed-services growth persist, and whether customer concentration or off-lease assets increase.
- How the $424.7 million of engine purchase obligations and potential future maintenance commitments are funded or adjusted.
- Performance and collectability of notes receivable, joint-venture investments and customer receivables; the filing notes the expected-credit-loss standard was adopted in 2023 without significant adoption impact.