Willis Lease Finance Corporation — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, compared with 2020. Willis Lease Finance Corporation leases and services commercial aircraft engines, aircraft and related equipment, and sells aircraft-engine parts. Its two reportable segments are Leasing and Related Operations and Spare Parts Sales. At year-end, its owned operating-lease equipment portfolio was $1,991.4 million, with $115.5 million in notes receivable; the portfolio included 304 engines and 12 aircraft, among other equipment, serving 76 lessees in 40 countries. The company also managed 475 engines, aircraft and related assets for others.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $274.2 million | $288.7 million |
| Lease rent revenue | $134.8 million | $142.9 million |
| Maintenance reserve revenue | $74.0 million | $105.4 million |
| Earnings from operations | $8.3 million | $14.7 million |
| Net income | $3.4 million | $9.7 million |
| Net income attributable to common shareholders | $18,000 | $6.4 million |
| Net cash provided by operating activities | $90.7 million | $93.4 million |
- Revenue fell 5.0%. Lease rent revenue decreased 5.6%, chiefly due to lower average utilization; maintenance reserve revenue fell 29.8%. Average utilization by net book value was 81%, versus 84%.
- Operating margin was approximately 3.0%, versus 5.1% in 2020; net margin was approximately 1.2%, versus 3.4%. Net income attributable to common shareholders was nearly break-even after preferred dividends and preferred-stock issuance-cost accretion.
- Other revenue included a $10.9 million gain on sale of two notes receivable and a $6.3 million settlement fee for closing an engine transition program. Gain on sale of leased equipment was $6.0 million, compared with $3.4 million.
- Equipment write-downs declined to $7.7 million from $20.5 million. General and administrative expense rose 11.0% to $75.4 million, primarily reflecting higher stock-based compensation; technical expense rose 43.6% to $9.4 million, mainly due to engine repairs.
- Debt obligations were $1,790.3 million net of issuance costs ($1,809.6 million gross), compared with $1,693.8 million net at year-end 2020. Interest rates ranged from approximately 1.8% to 7.4%. The company reported $590.0 million of variable-rate borrowings and $410.0 million available under its $1.0 billion revolving facility.
- Cash, cash equivalents and restricted cash totaled $95.6 million, including $81.3 million of restricted cash; unrestricted cash and cash equivalents were $14.3 million. Shareholders’ equity was $375.9 million. The company paid $3.3 million in preferred dividends and no common-stock dividends.
- Investing activities used $148.0 million, including $205.8 million of equipment purchases, partly offset by asset and note-sale proceeds. Financing activities provided $74.1 million; debt issuance proceeds were $513.7 million and principal payments were $417.0 million.
Material changes versus 2020
- Lease and maintenance-related revenue remained pressured by COVID-19 impacts, while the mix of revenue included new 2021 gains and the transition-program settlement noted above. Rent concessions reduced 2021 revenue by $0.5 million, compared with $6.5 million in 2020.
- Equipment held for operating lease increased to $1,991.4 million from $1,886.6 million; notes receivable declined to $115.5 million from $158.7 million. The portfolio included four more aircraft than in 2020.
- The company issued $336.7 million of WEST VI fixed-rate notes in May 2021 and repaid a note secured by two engines. Its revolving credit facility matures in 2024.
- International lessees generated 54% of lease rent revenue, compared with 77% in 2020. One customer accounted for more than 10% of lease rent revenue in both years.
Outlook, risks and unusual items
- Management said it would prioritize cost control and prudent capital expenditure, and believed equity, internally generated funds and existing debt facilities were sufficient to maintain operations through 2022. This is not quantified earnings guidance. Management expects long-term engine leasing demand to grow, but more slowly during the recovery from COVID-19.
- The pandemic materially affected results and may continue to do so. Risks include weaker airline demand, customer payment defaults or bankruptcies, lease returns and concessions, lower utilization and asset values, and difficulty remarketing off-lease equipment. Lease rent and maintenance reserve receivables more than 30 days past due were $6.8 million and $4.1 million, respectively, at year-end.
- Interest-rate exposure is material because lease rates are generally fixed while some debt is floating-rate. The company had five interest-rate swaps and estimated that a 1 percentage-point rate change would change annual interest expense by approximately $0.9 million, compared with $5.8 million in 2020. LIBOR transition, refinancing costs and counterparty performance remain relevant risks.
- Other risks include leverage and restrictive debt covenants, which encumber substantially all assets; maintenance and residual-value uncertainty; regulatory and environmental changes; foreign-currency and cross-border enforcement risks; and geopolitical disruption, including the escalating Russia-Ukraine conflict cited in the filing.
- Equipment purchase commitments totaled $439.9 million, including $127.7 million due in less than one year. The filing also describes commitments for 12 LEAP-1B engines and 19 LEAP-1A engines through 2025, and future maintenance obligations. Management expected LEAP-1B demand to increase as 737 MAX aircraft returned to service.
- Equipment write-downs depend on appraisals and assumptions about future lease rates, maintenance revenue, lease periods and sale proceeds; valuation of leased equipment was identified as a critical audit matter. The 2021 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
- After year-end, the board appointed Austin C. Willis CEO effective April 1, 2022; Charles F. Willis IV was to become Executive Chairman. The filing disclosed related employment compensation arrangements.
Investor facts to verify
- Whether utilization, rent collections and maintenance-reserve revenue recover, and how much equipment remains off-lease.
- Customer concentration, delinquent balances, concessions, defaults and the ability to repossess and remarket assets.
- Liquidity available for general use versus restricted cash, revolver availability, covenant headroom and the 2024 credit-facility maturity.
- Capacity to fund the $439.9 million purchase commitments and future maintenance obligations without pressuring liquidity or leverage.
- Assumptions supporting equipment residual values and impairment testing, including the $36.0 million carrying value of previously written-down assets.
- Effects of higher interest rates, LIBOR replacement and the timing and effectiveness of hedges on margins and cash flow.
- Related-party transactions, the CEO succession and the implications of the controlling stockholder’s approximately 46% ownership disclosed at year-end.