Willis Lease Finance Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results. Amounts below are in millions of dollars unless otherwise stated.
Business context
WLFC leases commercial aircraft, engines and related equipment, and sells spare parts. At quarter-end, its operating-lease portfolio included 313 engines, eight aircraft, one marine vessel and other equipment; it also reported $196.1 million of notes receivable and managed 488 assets for others. The company operated in 40 countries with 71 lessees.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $70.8 | $70.6 | $198.4 | $227.2 |
| Earnings from operations | $6.1 | $4.6 | $3.7 | $21.7 |
| Net income | $2.9 | $3.0 | $1.6 | $12.6 |
| Net income (loss) attributable to common shareholders | $2.0 | $2.1 | $(0.9) | $10.1 |
| Basic EPS | $0.33 | $0.36 | $(0.14) | $1.70 |
| Operating margin | 8.6% | 6.5% | 1.9% | 9.6% |
Q3 revenue was nearly unchanged year over year. Lease rent revenue rose 9.6% to $32.9 million, while maintenance reserve revenue fell 26.8% to $23.7 million. Spare-parts and equipment sales increased 76.3% to $5.1 million; a $2.4 million gain on leased-equipment sales also contributed. Q3 operating earnings improved partly because the prior-year quarter included a $5.2 million equipment write-down.
Nine-month revenue declined 12.7%, primarily reflecting lower lease utilization and maintenance reserve revenue. The period included a $6.3 million asset transition fee and $2.4 million in equipment-sale gains. Common shareholders recorded a year-to-date loss despite positive net income, after preferred dividends and preferred-stock accretion.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $68.6 million, down from $83.5 million. Investing activities used $180.9 million, mainly for $170.3 million of leased-equipment purchases and $44.4 million of notes receivable issued. Financing activities provided $104.9 million.
- At September 30, cash and cash equivalents were $15.1 million; restricted cash was $56.5 million. Combined cash, cash equivalents and restricted cash totaled $71.6 million, compared with $78.9 million at year-end 2020.
- Debt obligations, net of issuance costs, were $1.814 billion, up from $1.694 billion at December 31, 2020. Gross principal was $1.835 billion. Debt included $603 million of floating-rate credit-facility borrowings and fixed-rate securitized notes.
- In May, WLFC completed a $336.7 million WEST VI fixed-rate note issuance, with stated coupons of approximately 3.10%, 5.44% and 7.39%. Substantially all assets are pledged to creditors. The company reported compliance with its financial covenants at quarter-end.
Changes, outlook and risks
- Average utilization based on net book value was 82% in Q3 and 81% for the first nine months, versus 86% for each comparable 2020 period. Management attributed weaker year-to-date lease revenue mainly to lower utilization amid COVID-19-related disruption.
- Rent concessions reduced revenue by $0.3 million in Q3 and $0.5 million year to date, compared with $2.1 million and $5.2 million in the respective 2020 periods. Management said it would emphasize cost control and prudent capital expenditures for the remainder of the year; the filing gives no numerical earnings or revenue guidance.
- Management cited ongoing risks from airline-industry disruption, customer defaults or bankruptcies, early lease returns, lower usage and spare-parts demand, and reduced collections. It also highlighted interest-rate exposure: $603 million of debt was variable-rate; management estimated a 1 percentage-point rate change would alter annual interest expense by about $1.0 million after swaps.
- Contractual commitments included $447.9 million of purchase obligations, as well as future maintenance commitments. WLFC had purchased three new LEAP-1B engines and was committed to purchase 12 more; management expected demand to improve as 737 MAX aircraft returned to service.
- A proposed $42-per-share acquisition offer from the CEO-led group was withdrawn in August 2021, and discussions were terminated. The company repurchased 135,118 shares for about $5.1 million year to date.
Important facts for investors to verify
- Whether utilization, lease demand and maintenance-reserve revenue recover, and how much of reported revenue depends on sales, transition fees or other non-recurring items.
- Debt maturities, refinancing needs, covenant headroom and the availability of cash held in restricted or securitized entities.
- Customer concentration, receivable collectability, asset impairment assumptions and the continuing effects of COVID-19 on lessees.
- Execution and funding of engine purchase and maintenance commitments, and sensitivity to interest rates and foreign-currency stress among non-U.S. lessees.