Business context and reporting period
Willis Lease Finance Corporation acquires and leases commercial aircraft engines and related equipment, and sells aircraft parts and equipment. This unaudited Form 10-Q covers the three months ended March 31, 2016; comparisons are with the same quarter of 2015 unless noted. Amounts are in U.S. dollars.
Financial performance and position
- Revenue: $50.6 million, up 18.1% from $42.8 million. Lease rent revenue was $28.1 million (+12.1%); maintenance reserve revenue was $15.8 million (+11.8%); and gains on equipment sales were $3.0 million, versus $0.7 million.
- Profit: Operating earnings were $6.5 million versus $3.4 million; net income was $3.8 million versus $2.3 million. Diluted EPS was $0.52 versus $0.29. Approximate operating margin rose to 12.9% from 7.9%, and net margin to 7.5% from 5.4%.
- Expenses and margins: Net finance costs increased to $10.0 million from $8.4 million. General and administrative expense rose 17.8% to $11.8 million. Parts-sales gross margin declined to 26.6% from 31.2%.
- Cash flow: Operating cash flow was $20.1 million, compared with $20.6 million. Investing activities provided $3.2 million, including $52.5 million of equipment-sale proceeds and $44.4 million of equipment purchases. Financing activities used $20.3 million. Cash and cash equivalents ended at $12.7 million; restricted cash was $30.0 million.
- Balance sheet and debt: Total assets were $1.277 billion, down from $1.296 billion at year-end 2015; shareholders’ equity was $210.0 million. Notes payable, net of issuance costs, were $850.0 million ($861.8 million before those costs), versus $866.1 million net at year-end. Approximately $551.7 million of debt was variable-rate.
- Liquidity: Management said equity, internally generated funds and existing debt facilities were sufficient for the next 12 months. Contractual commitments totaled $1.010 billion, including $861.8 million of debt principal and $145.1 million of estimated interest payments. Scheduled debt repayments for the next 12 months were reported as $22.9 million.
Material changes versus the prior comparable period
- Lease-portfolio utilization averaged 87%, up from 81%; approximately 90% of equipment by book value was on lease at quarter-end, versus 83% a year earlier. Lease-equipment net book value increased 4.8% to $1.102 billion.
- Equipment purchases rose to $44.4 million from $17.9 million. Equipment-sale proceeds increased substantially, and the company recorded a $3.0 million net gain on sales, versus $0.7 million.
- Depreciation and amortization declined 6.0% to $16.6 million, mainly because certain engines became fully depreciated. A $1.1 million debt-extinguishment gain benefited the 2015 comparison, while no such gain was recorded in 2016.
- The effective tax rate increased to 43.7% from 38.5%, primarily due to the IRS Section 162(m) calculation for executive compensation. The quarter also included a $2.0 million equipment write-down, compared with $24,000 a year earlier.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management cited higher utilization as a driver of lease and maintenance-reserve revenue and said the first-quarter results are not necessarily indicative of the remainder of 2016.
- On April 20, 2016, after quarter-end, the company amended its revolving credit agreement, increasing the facility from $700 million to $890 million and extending maturity to April 2021. It includes an accordion feature up to $1 billion; the initial rate is LIBOR plus 2.75%, subject to quarterly leverage-based adjustment.
- The company reported compliance with its credit-facility and WEST II covenants at March 31. It warned that covenant or borrowing-eligibility failures could restrict additional borrowing or accelerate payments; facilities are also cross-defaulted.
- Interest-rate exposure is material: fixed-rate lease revenue is partly funded by variable-rate debt, and the company had no interest-rate swaps in place. Management estimated a 1-percentage-point rate change would alter annual interest expense by approximately $5.5 million.
- Foreign-exchange and customer-credit risks include the fact that 91% of first-quarter lease rent revenue came from non-U.S.-domiciled lessees, although lease payments are in U.S. dollars. No customer represented more than 10% of lease rent revenue.
- Other risks include lower utilization or lease rates, asset residual-value and impairment estimates, and access to financing for growth. A $2.0 million write-down reflected a decision to consign an engine for part-out and sale because estimated proceeds were below carrying value.
- Leadership changes: Brian R. Hole became President effective April 1, 2016; the CFO resigned in February, and Ernest J. Furtado was serving as Interim CFO. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Review the amended $890 million credit facility’s terms, leverage-based pricing, covenants and borrowing availability.
- Assess variable-rate exposure and the ability to maintain lease economics if LIBOR rises or utilization and lease rates weaken.
- Evaluate the sustainability of higher utilization, maintenance-reserve revenue and equipment-sale gains, as well as the $2.0 million impairment and parts-sales margin decline.
- Check debt maturities, liquidity available after excluding restricted cash, and the company’s ability to fund equipment purchases and scheduled repayments.
- Monitor foreign-lessee payment capacity, asset residual-value assumptions, and the effects of the CFO transition and other management changes.