Willis Lease Finance Corporation — Q2 2022 Form 10-Q
Business context and reporting period. The company leases commercial aircraft, engines and related equipment, and sells spare parts. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. At quarter-end, the portfolio included 293 engines, 12 aircraft, one marine vessel and other equipment, with 79 lessees in 42 countries. The company also managed 351 assets for other parties.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $78.1m | $66.5m | $146.9m | $127.6m |
| Operating income (loss) | $9.5m | ($1.2m) | ($15.6m) | ($2.3m) |
| Net income (loss) | $5.9m | $0.1m | ($15.3m) | ($1.3m) |
| Net income (loss) attributable to common shareholders | $5.1m | ($0.8m) | ($16.9m) | ($2.9m) |
| Basic EPS | $0.83 | ($0.12) | ($2.81) | ($0.48) |
| Operating cash flow | Not separately presented | $57.8m | $42.8m |
Q2 operating margin was approximately 12.2%, versus a 1.8% operating loss margin a year earlier. For the six-month period, the operating loss margin was approximately 10.6%. Q2 revenue grew 17.5%; six-month revenue grew 15.1%. At June 30, total assets were $2.40bn, debt obligations were $1.73bn net of issuance costs ($1.79bn at year-end 2021), and shareholders’ equity was $374.9m. Cash, cash equivalents and restricted cash totaled $73.8m, including $12.9m unrestricted.
Material changes and drivers
- Higher lease rent revenue reflected more engines on lease and higher utilization. Average utilization by net book value was 82% in Q2 and 83% for the six-month period, compared with 81% and 80%, respectively, in 2021.
- Maintenance reserve revenue rose 40.3% in Q2, mainly as short-term usage-fee revenue increased with global flight activity. Six-month maintenance revenue increased 5.4%; long-term maintenance revenue declined while short-term usage revenue rose.
- Spare-parts sales increased 90.3% in Q2 and 65.0% for the half, reflecting stronger industry utilization and parts demand. Higher sales costs included $1.4m of aged-lot write-downs.
- Q2 included gains of $3.1m on sales of financial assets and $0.5m on leased equipment. The prior-year comparison included a $6.3m asset-transition settlement that did not recur.
- Six-month equipment write-downs were $21.2m, including $20.4m for two engines in Russia deemed unrecoverable due to the Russia-Ukraine conflict. The comparable 2021 write-down was $4.1m.
- Six-month general and administrative expense rose 23.5% to $44.0m, including higher personnel and travel costs; management cited a $1.0m bonus to the Executive Chairman for 25 years of prior service. Technical expense rose to $9.1m, partly due to increased maintenance and FAA airworthiness-directive-related engine hub repairs.
Liquidity, debt and outlook
Operating activities generated $57.8m in cash in the first half. Investing activities used $8.7m, while financing activities used $70.8m, including $119.7m of debt principal payments and $5.2m of share repurchases. The company repurchased 154,215 shares during the half and suspended repurchases under its 10b5-1 plan on June 6.
Debt included $569.0m of variable-rate borrowings under a $1.0bn revolving facility, which matures in June 2024, and fixed-rate secured term debt. The company reported compliance with its debt covenants at quarter-end. It estimated that a one-percentage-point change in rates on variable-rate debt, net of swaps, would change annual interest expense by approximately $0.7m.
No numerical earnings or revenue guidance was provided. Management stated that equity, internally generated funds and existing debt facilities were expected to support operations for the next 12 months, while cautioning that weaker internally generated cash, reduced borrowing availability or higher borrowing costs could constrain operations and growth. Purchase commitments included 19 LEAP-1A engines for $269.3m and 10 LEAP-1B engines for $142.2m; the company said certain deferrals or cancellations may be available under the agreements.
Risks, contingencies and unusual items
- COVID-19-related airline disruption could continue to affect lessee credit, collections, lease demand, utilization, usage fees and asset values. The company said the full impact remained uncertain.
- Russia-related sanctions and the conflict caused the material engine impairment noted above; broader effects were not determinable.
- In July 2022, Scandinavian Airlines System filed for Chapter 11 protection. The reported impact through June 30 was de minimis, but the future effect was not determinable.
- Disclosure controls were deemed ineffective due to a previously identified material weakness in review of the quarterly income-tax provision. The company described a remediation plan involving improved review procedures and additional accounting resources, but gave no assurance of successful remediation.
- The company reported no material off-balance-sheet arrangements. It had $411.5m in purchase obligations in its contractual commitments table, in addition to other disclosed maintenance commitments.
Important facts for investors to verify
- Whether utilization, lease placements and airline activity continue to support lease and maintenance revenue growth.
- Whether the Russia-related impairment is complete and whether further asset impairments or customer credit losses arise.
- Unrestricted liquidity, revolving-credit availability, debt maturities and covenant headroom—particularly around the June 2024 facility maturity.
- Progress in remediating the income-tax control weakness and the effect of tax-rate variability on reported earnings.
- The eventual effect of SAS’s bankruptcy, COVID-19-related risks and the company’s engine purchase and maintenance commitments.