Willis Lease Finance Corporation — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparisons are with FY2019. Amounts are in U.S. dollars unless stated otherwise.
Business context
WLFC leases and services commercial aircraft engines, aircraft and related equipment, and sells spare parts. At year-end it had 70 lessees in 41 countries, with an owned operating-lease portfolio of $1.887 billion, $158.7 million of notes receivable and 400 engines, aircraft and related assets managed for others. Leasing and Related Operations generated 94.1% of consolidated revenue.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $288.7 million | $409.2 million | (29.4%) |
| Lease rent revenue | $142.9 million | $190.7 million | (25.1%) |
| Maintenance reserve revenue | $105.4 million | $109.0 million | (3.3%) |
| Spare parts and equipment sales | $18.6 million | $74.7 million | (75.1%) |
| Operating earnings | $14.7 million | $80.3 million | (81.7%) |
| Net income | $9.7 million | $66.9 million | (85.4%) |
| Net income attributable to common shareholders | $6.4 million | $63.6 million | (89.9%) |
| Diluted EPS | $1.05 | $10.50 | — |
| Operating cash flow | $93.4 million | $230.3 million | (59.4%) |
Operating margin was approximately 5.1% of revenue, versus 19.6% in 2019; net margin was approximately 3.4%, versus 16.4%. Fourth-quarter 2020 revenue was $61.5 million and net income attributable to common shareholders was a loss of $3.7 million, compared with $89.2 million and income of $4.2 million in fourth-quarter 2019.
Year-end assets were $2.365 billion, up from $1.941 billion. Debt obligations were $1.694 billion net of issuance costs ($1.713 billion gross); shareholders’ equity was $364.0 million, and redeemable preferred stock was $49.7 million. Cash and cash equivalents were $42.5 million, plus $36.4 million of restricted cash; $223 million was available under the revolving credit facility. Average equipment utilization fell to 84% from 88%, and 78% of assets by book value were on lease, versus 86%.
Changes and notable items
- COVID-19-related lower utilization, rent concessions and weak aftermarket demand drove most of the revenue decline. Rent concessions reduced 2020 rent revenue by $6.5 million.
- Maintenance reserve revenue declined modestly overall, but long-term maintenance revenue rose to $87.7 million from $37.6 million, while short-term usage-based maintenance revenue fell to $17.7 million from $71.4 million.
- Equipment write-downs were $20.5 million, including assets selected for sale or part-out and impairment adjustments. The company also recorded a $4.7 million loss on extinguishment of debt.
- General and administrative costs fell 21.5% to $67.9 million, reflecting no bonus accrual and reduced travel and outside services. Depreciation increased 9.6% to $94.5 million.
- Debt increased from $1.251 billion net at year-end 2019. In March 2020, WLFC issued $366.2 million of WEST V fixed-rate notes; it also borrowed $973.2 million and repaid $530.8 million of debt during the year.
Outlook, risks and commitments
Management said available liquidity, equity, internally generated funds and existing debt facilities should support operations through 2021, while emphasizing cost control and prudent capital spending. This outlook depends on continued access to credit and customer collections; the company cautioned that pandemic-related effects could continue indefinitely and that its scale of impact remained uncertain.
- Purchase commitments totaled $471.0 million, including $215.5 million due within one year. The company also committed to future overhaul and maintenance services estimated at $67.1 million to $112.0 million.
- Management expected demand for LEAP-1B engines to improve as the Boeing 737 MAX returned to service, but acknowledged uncertainty around market recovery.
- Key risks include lessee defaults or bankruptcies, further rent concessions, lower asset values and lease rates, off-lease equipment, maintenance costs, and difficulty repossessing or remarketing assets. Rent and maintenance reserve receivables more than 30 days past due were $4.6 million and $1.9 million, respectively.
- $783.1 million of debt was variable-rate. The filing estimates a 1 percentage-point rate change would affect annual interest expense by approximately $5.8 million. WLFC had two $100 million interest-rate swaps at year-end and entered four additional $100 million swaps in January 2021.
- Substantially all assets secure borrowings; debt facilities have financial and other covenants. WLFC reported covenant compliance at year-end. Common dividends have not been paid, and management said none were planned for the foreseeable future; preferred shares carry a 6.5% dividend.
- Other investor considerations include 77% of lease rent revenue from foreign lessees, one customer representing 11.4% of lease rent revenue, and the CEO’s beneficial ownership or voting control of approximately 45% of common shares.
Important facts to verify
- Review the audited statements and notes for the $20.5 million equipment write-down, the $4.7 million debt-extinguishment loss and the fourth-quarter common-shareholder loss.
- Assess unrestricted liquidity separately from restricted cash, and confirm revolver availability, borrowing-base capacity, covenant headroom and debt maturities.
- Track portfolio utilization, off-lease assets, collections, customer credit quality and the effect of any further concessions on rent and maintenance cash flows.
- Evaluate the $471.0 million purchase commitments and related overhaul obligations against expected engine demand, financing capacity and management’s 2021 liquidity outlook.
- Consider the assumptions and sensitivity behind equipment appraisals, residual values and impairment testing; the auditor identified lease-equipment valuation as a critical audit matter.