Willis Lease Finance Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company acquires and leases commercial aircraft engines and related equipment, and selectively buys and sells equipment. Financial figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $38.0 | $35.2 | $73.3 | $70.9 |
| Operating income (loss) | ($1.5) | $4.8 | $1.0 | $9.8 |
| Net income | $9.7 | $3.2 | $11.3 | $6.5 |
| Net income attributable to common shareholders | $9.7 | $2.4 | $11.3 | $5.0 |
| Diluted earnings per share | $1.17 | $0.28 | $1.36 | $0.56 |
| Operating margin | (3.9%) | 13.8% | 1.4% | 13.8% |
Q2 revenue rose 8.0%, while operating results fell to a loss as technical expense, depreciation, interest expense and a $2.0 million equipment write-down increased. Net income was supported by a $7.8 million income tax benefit and $3.4 million of earnings from joint ventures. The tax benefit included an $8.6 million extraterritorial income adjustment. For the first half, revenue increased 3.3%, but operating income declined 89.5%; the $6.8 million tax benefit and joint-venture earnings contributed to higher net income.
- Lease rent revenue increased 3.9% in Q2 and 2.8% for the first half, primarily from lease portfolio growth. Average utilization was 83% in both first-half periods; 83% of equipment by book value was on lease at June 30, versus 82% a year earlier.
- Maintenance reserve revenue rose 24.9% in Q2 and 16.7% for the first half, mainly reflecting revenue recognized on long-term lease terminations. Equipment sale gains declined to $0.8 million in Q2 and $1.5 million for the first half, from $1.4 million and $4.0 million, respectively.
- Q2 technical expense increased $2.8 million to $4.2 million, mainly due to higher engine repair activity. First-half technical expense increased $3.1 million to $5.9 million.
- Interest expense increased 38.4% in Q2 and 26.6% for the first half, primarily due to higher average borrowings and the cost of WEST II debt. The company recorded $0.8 million of swap-related interest expense for the first half, compared with $4.2 million a year earlier.
Financial position, cash flow and liquidity
- At June 30, 2013, total assets were $1,145.6 million, including $1,015.3 million of equipment held for operating lease. Total liabilities were $932.9 million and shareholders’ equity was $212.7 million.
- Notes payable were $744.5 million, up from $697.0 million at December 31, 2012. Debt interest rates ranged approximately from 3.4% to 5.5%, excluding derivatives. The $450 million revolving facility had $111 million available; it matures in November 2016. The company reported compliance with its debt covenants.
- Cash and cash equivalents were $4.3 million; restricted cash was $35.3 million and is subject to use restrictions, including debt service and maintenance obligations.
- First-half operating cash flow was $38.6 million, versus $33.9 million. Investing cash use was $90.7 million, primarily reflecting $92.1 million of equipment purchases; financing provided $51.1 million. Cash and cash equivalents decreased $1.0 million to $4.3 million.
- Contractual commitments totaled $972.8 million, including $744.5 million of debt obligations, $185.4 million of estimated debt interest, and $38.8 million of purchase obligations. Approximately $35.7 million of debt was due within 12 months. Separately, management disclosed commitments to purchase five engines and related equipment for a gross $40.2 million through 2015.
Material changes, outlook and risks
- The company purchased 11 engines in a sale-leaseback transaction with Scandinavian Airlines for $63.0 million; joint venture WMES purchased another eight. First-half equipment purchases were substantially above the prior-year period.
- The company agreed to acquire the remaining 50% interest in WOLF A340, LLC, subject to conditions expected to be satisfied by September 30, 2013. WOLF completed the return of two aircraft from Emirates; $9.0 million of maintenance reserve payments were recognized by WOLF during the period. The company also agreed to provide WOLF remarketing and servicing functions.
- Management stated that equity, internally generated funds and existing facilities should support operations for the next 12 months. It is discussing additions to its capital base; inability to obtain additional capital could limit future asset growth.
- Key risks include higher borrowing costs against generally fixed-rate lease revenues, increased equipment off-lease or weaker lease rates, and limits on borrowing if covenants or collateral eligibility requirements are not met. A 1% rate change on variable-rate debt, net of derivatives, was estimated to change annual interest expense by $2.4 million.
- About 86% of first-half lease revenue came from non-U.S.-domiciled lessees, although leases are payable in U.S. dollars; currency depreciation could impair lessees’ ability to pay. The company reported no customer above 10% of first-half lease rent revenue.
- Other notable items include the $2.0 million equipment write-down, management’s estimate-sensitive judgments about asset lives, residual values and impairments, and related-party arrangements with J.T. Power, whose principal is related to the CEO and a company director. The filing reports J.T. Power was current on a note with $1.2 million principal outstanding.
- No formal earnings guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $8.6 million tax adjustment is sustainable or nonrecurring, and how it affects comparisons of reported earnings with operating performance.
- Whether utilization, lease rates and maintenance reserve receipts remain sufficient to support revenue and cash generation as the fleet grows.
- Available borrowing capacity, covenant headroom, near-term debt service and funding for equipment purchase commitments.
- Completion and financial impact of the planned WOLF interest acquisition, including aircraft part-out and engine remarketing outcomes.
- The extent to which rising variable-rate debt costs or equipment impairment estimates could pressure future earnings and liquidity.