Willis Lease Finance Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. The company leases commercial aircraft, engines and related equipment, and sells aircraft parts. Its portfolio included 295 engines, eight aircraft, one marine vessel and other equipment; it also managed 385 assets for others. All figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $61.1 | $81.6; down 25.1% |
| Operating income (loss) | $(1.2) | $8.3 |
| Net income (loss) | $(1.3) | $4.3 |
| Net income (loss) attributable to common shareholders | $(2.2) | $3.5 |
| Basic and diluted EPS | $(0.36) | $0.59 basic; $0.56 diluted |
| Operating cash flow | $22.6 | $28.3 |
| Cash, cash equivalents and restricted cash | $64.8, including $26.5 unrestricted | $78.9 at Dec. 31, 2020 |
| Debt obligations, net of issuance costs | $1,724.1 | $1,693.8 at Dec. 31, 2020 |
| Total assets | $2,409.7 | $2,364.9 at Dec. 31, 2020 |
Investing activities used $65.5 million, primarily for $39.8 million of notes receivable and $26.5 million of leased equipment purchases. Financing activities provided $28.7 million, including $54.0 million in new borrowings and $24.6 million in principal payments. Cash, cash equivalents and restricted cash decreased $14.2 million during the quarter. The company reported $88.8 million in maintenance reserves and $19.7 million in security deposits at quarter-end.
Material changes and drivers
- Lease rent revenue fell 32.1% to $31.5 million, principally reflecting lower utilization amid the pandemic. Average utilization by net book value declined to 80% from 86%; 76% of assets by book value were on lease at quarter-end, versus 78% at year-end.
- Spare parts and equipment sales declined 49.9% to $4.6 million. There were no gains on leased-equipment sales, compared with $2.1 million in Q1 2020.
- Maintenance reserve revenue decreased 3.5% to $19.8 million. Long-term maintenance revenue rose to $17.2 million from $8.6 million, while short-term, usage-related maintenance revenue fell to $2.7 million from $11.9 million.
- General and administrative expense decreased 17.5% to $16.2 million, reflecting no bonus accrual in the quarter and lower travel costs. Net finance costs declined to $15.0 million from $20.4 million, largely because the prior-year quarter included a $4.7 million debt-extinguishment loss.
- The company recorded a $1.9 million write-down on one airframe. It reported no additional impairment from its quarterly interim impairment analysis. Other comprehensive income was $7.7 million, mainly from derivative and currency gains.
Outlook, risks and unusual items
No specific financial guidance was provided. Management said it plans to maintain cost control and prudence in capital spending, while noting that pandemic-related market uncertainty remains significant. COVID-19 has reduced air-travel demand, leasing utilization and parts demand, and may contribute to customer bankruptcies, defaults, early lease returns, concessions and delayed payments. Rent concessions reduced Q1 rent revenue by $0.1 million.
Interest-rate exposure remains material: $822.8 million of debt was variable-rate, and the company estimated a 1 percentage-point rate movement would change annual interest expense by about $2.2 million, net of swaps. Foreign-exchange risk also exists because 55% of Q1 lease rent revenue came from non-U.S.-domiciled lessees, although substantially all leases require U.S.-dollar payment.
The company was in compliance with debt covenants at March 31, 2021. Contractual commitments included $1.742 billion of gross debt principal, $256.5 million of estimated interest payments, and $466.0 million of purchase obligations. These obligations include commitments to buy 17 additional LEAP-1B engines and future overhaul and maintenance services estimated at $67.1 million to $112.0 million for 25 engines purchased under agreements entered into in December 2020.
In March 2021, the CEO and a senior executive indicated interest in acquiring shares they did not already own for $42 per share. An independent committee was negotiating, but no complete proposal, including financing terms, had been submitted; completion is uncertain and could affect customers, employees, costs and the share price. Subsequent to quarter-end, the company proposed a $336.7 million WEST VI securitization, secured by a portfolio of 29 engines and one airframe.
Important facts for investors to verify
- Whether leasing utilization, rent collections and parts demand recover, and how customer credit quality and concessions evolve.
- Progress, financing terms and potential costs or business effects of the proposed take-private transaction.
- Capacity to meet debt service, covenant requirements and significant engine-purchase and maintenance commitments, including access to unrestricted liquidity.
- Interest-rate and currency exposures, and the effectiveness and ongoing terms of the company’s hedges.
- Whether impairment assumptions, previously written-down asset values and expected residual values remain supportable as aviation markets change.