Willis Lease Finance Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. The company leases commercial aircraft engines and related equipment and also sells spare parts and equipment. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $77.9 | $50.7 |
| Earnings from operations | $12.6 | $6.9 |
| Net income | $8.2 | $4.0 |
| Net income attributable to common shareholders | $7.8 | $4.0 |
| Diluted earnings per share | $1.26 | $0.55 |
| Net cash from operating activities | $45.9 | $17.1 |
- Revenue rose 53.7%; net income more than doubled. Growth reflected higher maintenance reserve revenue, spare-parts and equipment sales, lease rent, other revenue, and earnings from joint ventures.
- Operating margin was approximately 16.1% versus 13.6%; net margin was approximately 10.5% versus 7.9%.
- Q1 2017 operating cash flow benefited from higher net income, equipment write-downs and changes in receivables. Investing cash flow was a $6.9 million use, compared with $4.5 million provided in Q1 2016; financing cash flow used $30.2 million, mainly for debt principal payments.
- At March 31, cash and cash equivalents were $11.9 million and restricted cash was $29.3 million. Total assets were $1.323 billion; notes payable were $872.2 million net of issuance costs ($884.9 million gross). Shareholders’ equity was $205.5 million, alongside $19.8 million of redeemable preferred stock.
- Debt declined from $900.3 million net at December 31, 2016. Approximately $33.8 million of debt was scheduled for repayment within 12 months. The $890 million revolving facility matures in April 2021 and has an accordion feature up to $1 billion.
Changes and notable items
- Maintenance reserve revenue increased 102% to $32.0 million, including $21.5 million of long-term maintenance revenue as five engines came off lease, versus $6.7 million from two engines in the prior-year quarter.
- Spare-parts and equipment sales rose to $12.6 million from $2.6 million. Parts-sales gross margin declined to 23.9% from 26.6%, primarily due to sales mix.
- Equipment write-downs increased to $13.0 million from $2.0 million. The 2017 charge included $12.1 million for four engines and two aircraft after leases ended or were modified, plus $0.9 million for spare parts.
- Net finance costs rose 8.6% to $10.9 million as average debt and interest rates increased. Average one-month LIBOR was 0.85% versus 0.43%; $596.4 million of borrowings were variable-rate at quarter-end.
- The company adopted new stock-compensation guidance, recording a $1.3 million cumulative adjustment to retained earnings. It also adopted restricted-cash cash-flow presentation guidance. The 2016 comparative statements include corrections of prior-period errors that management deemed immaterial; the filing reports a $0.2 million increase in Q1 2016 net income from the specified correction, plus other immaterial adjustments.
Liquidity, outlook and risks
- Management said equity, internally generated funds and existing debt facilities should support operations for the next 12 months. No specific earnings or revenue guidance was provided. Management cautioned that weaker internally generated cash or reduced borrowing availability could impair operations and growth.
- The company reported compliance with revolving-credit and WEST II covenants at March 31, 2017. The revolving facility requires an interest coverage ratio of at least 2.25:1 and total leverage ratio below 4.25:1. Debt facilities include collateral, eligibility and cross-default provisions; covenant or eligibility failures could restrict borrowing or accelerate repayment.
- Lease revenues are generally fixed for stated terms while a portion of debt is variable-rate. The company estimated a 1 percentage-point interest-rate move would change annual interest expense by approximately $5.0 million. It reported one $100 million interest-rate swap, with a $0.4 million fair-value asset.
- Approximately 86% of lease rent revenue came from lessees domiciled outside the United States. Most leases require U.S. dollar payments, creating potential payment risk if lessees’ currencies weaken. No customer exceeded 10% of lease rent revenue.
- Restricted cash includes maintenance reserves subject to financing-agreement requirements. Management also identified equipment utilization, lease rates, residual values, asset impairments and bad debts as important estimates and risks. Average utilization was 89% versus 87% a year earlier; approximately 89% of equipment held for lease by book value was on lease at quarter-end.
- A $13.5 million purchase commitment covered three engines and related equipment for delivery in 2017. The company stated it did not intend to repatriate $6.4 million held in foreign subsidiaries; repatriation would incur taxes.
Key facts for investors to verify
- Whether the unusually high maintenance reserve revenue and equipment sales are repeatable, and how subsequent lease returns and maintenance receipts develop.
- The valuation assumptions and potential further impairment exposure for engines, aircraft and parts, particularly after the $13.0 million Q1 write-down.
- Variable-rate debt exposure, swap coverage, borrowing capacity and continuing compliance with facility covenants.
- Cash availability after separating restricted cash, expected debt repayments and committed equipment purchases.
- The effects of the disclosed prior-period corrections and accounting-standard adoptions when comparing reported periods.