Willis Lease Finance Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 15, 2018. The company leases and manages commercial aircraft engines and aircraft, and sells aircraft-engine parts. Its two reportable segments are Leasing and Related Operations and Spare Parts Sales.
Business context and operating scale
- At year-end, the owned lease portfolio comprised 225 engines and related equipment, 16 aircraft and 7 other leased items, with a net book value of $1.343 billion, up 18.1% from 2016. The portfolio served 80 lessees in 43 countries; approximately 89% of assets by book value were on lease, versus 93% a year earlier.
- The company also managed 437 engines and related equipment for other parties. Its joint ventures held portfolios of 32 engines and 4 engines, respectively.
- Leasing is conducted through operating leases, generally structured as triple-net arrangements. The business retains residual-value risk and relies on lease rent, maintenance reserves, asset sales and management fees.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change or context |
|---|---|---|---|
| Total revenue | $274.8 million | $207.3 million | +32.6% |
| Lease rent revenue | $130.4 million | $119.9 million | +8.7% |
| Maintenance reserve revenue | $80.2 million | $57.1 million | +40.5%; included $36.0 million from nine engines returning from long-term leases |
| Spare parts and equipment sales | $51.4 million | $17.8 million | Spare-parts gross margin was 19.0%, down from 24.6% |
| Earnings from operations | $28.9 million | $22.1 million | Improved year over year |
| Net income | $62.2 million | $14.1 million | FY2017 included a substantial tax benefit |
| Net income attributable to common shareholders | $60.3 million | $13.8 million | Diluted EPS was $9.69 versus $2.05 |
| Operating cash flow | $135.3 million | $90.4 million | Audited cash-flow statement amounts |
| Debt obligations, net of issuance costs | $1.085 billion | $900.3 million | Gross principal was $1.104 billion at year-end |
- Fourth-quarter revenue was $63.2 million, versus $55.5 million in Q4 2016. Net income attributable to common shareholders was $41.9 million, or $6.87 per basic share, versus $2.4 million, or $0.40 per share. The unusually high 2017 fourth-quarter result was principally affected by the tax-law benefit described below.
- FY2017 operating expenses included $24.9 million of equipment write-downs, compared with $9.5 million in 2016. The 2017 charge included write-downs on nine engines and five aircraft. Net finance costs rose 18.0% to $48.7 million as debt balances and borrowing costs increased.
- Cash and cash equivalents were $7.1 million and restricted cash was $40.3 million at year-end. The company reported $399.0 million available under its $890 million revolving facility. Restricted cash is not generally available for corporate purposes.
- Capital spending on equipment held for lease or sale was $373.5 million in the audited cash-flow statement; management separately reported $384.0 million of equipment purchases including capitalized costs and prepaid deposits. Financing proceeds included $686.2 million of notes payable, and principal repayments were $496.2 million.
Material changes, outlook and risks
- Tax item: The Tax Cuts and Jobs Act produced a reported $26.1 million income-tax benefit for 2017, including a $39.6 million benefit recognized in Q4. The filing attributes this chiefly to remeasurement of deferred taxes following the federal corporate tax-rate reduction. The reported net-income increase therefore substantially overstates the change in underlying operating performance.
- Portfolio growth and financing: The company added 30 engines and 10 aircraft to its lease portfolio during 2017 at a stated total cost of $336.1 million. It closed the WEST III securitization, issuing $293.7 million of Series A notes and $42.0 million of Series B notes, and issued $29.7 million of preferred stock net proceeds. Debt is secured by substantially all assets and is subject to financial and other covenants.
- Management outlook: Management believed equity, internally generated funds and existing debt facilities were sufficient to maintain operations through 2018. It said that reduced asset utilization, weaker lease rates, higher borrowing costs or reduced credit availability could impair that capacity and constrain growth. No specific earnings or revenue guidance was provided.
- Liquidity and interest-rate exposure: $501.3 million of borrowings were variable-rate at year-end. The company estimated that a 1 percentage-point rate change would alter annual interest expense by approximately $4.0 million. Fixed lease rates may not adjust promptly as financing costs rise. A $100 million interest-rate swap was in place.
- Credit and asset risks: Rent receivables of approximately $8.3 million and maintenance-reserve receivables of $5.6 million were more than 30 days past due. Forty-six leases, representing about 26% of on-lease asset net book value, did not require monthly maintenance reserves. Off-lease assets, lessee defaults, repossession costs, maintenance needs and residual-value declines could reduce revenue or require additional spending.
- Other exposures: 84% of lease revenue came from foreign customers; currency devaluation, foreign-law enforcement issues, political risk and regulatory changes may affect collections or asset recovery. The company also had $124.0 million of engine purchase commitments expected to be satisfied within one fiscal year. A large share of debt is collateralized, covenant breaches could trigger restrictions or acceleration, and preferred stock carries a 6.5% dividend.
- Accounting and controls: Adoption of the new revenue-recognition standard began January 1, 2018; management expected no change to the timing of applicable revenue recognition. The company planned to adopt the new lease standard in 2019 and was still assessing its impact. The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Reconcile reported 2017 earnings to recurring performance, particularly the Q4 tax benefit and the $24.9 million of equipment write-downs.
- Confirm operating cash flow and its comparability: the audited cash-flow statement reports $135.3 million for 2017, while the MD&A narrative cites $124.9 million; the filing text does not clearly reconcile the difference.
- Assess the quality and recoverability of overdue lease and maintenance receivables, and the condition and remarketing prospects of off-lease assets.
- Review variable-rate debt exposure, the 2021 revolving-facility maturity, available borrowing capacity, covenant headroom and the restricted-cash structure.
- Evaluate whether portfolio expansion, maintenance obligations and the $124.0 million purchase commitments can be funded without weakening liquidity or returns.