Willis Lease Finance Corporation — Q2 2017 Form 10-Q
Business and period. The company acquires and leases commercial aircraft engines and related equipment, and also sells aircraft equipment and spare parts. This unaudited report covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $67.8 | $49.6 | $145.8 | $100.3 |
| Earnings from operations | $9.0 | $5.7 | $21.5 | $12.6 |
| Net income | $6.0 | $3.4 | $14.2 | $7.4 |
| Net income attributable to common shareholders | $5.7 | $3.4 | $13.5 | $7.4 |
| Diluted earnings per common share | $0.92 | $0.49 | $2.18 | $1.05 |
- Revenue rose about 37% in Q2 and 45% for the first half year over year. Lease rent revenue grew 7% in both periods. Spare-parts and equipment sales, gains on equipment sales, and first-half maintenance-reserve revenue also contributed to growth.
- First-half write-downs of equipment were $15.3 million, versus $3.9 million a year earlier. General and administrative expenses increased 17% to $26.3 million, and net finance costs increased 8% to $22.2 million.
- Operating cash flow was $79.3 million for the first half, compared with $46.8 million in 2016. Investing cash outflow was $72.9 million, mainly reflecting $112.2 million of equipment purchases; financing cash inflow was $15.8 million. Cash, cash equivalents and restricted cash totaled $54.5 million at period-end, including $43.2 million of restricted cash.
- Total assets were $1,386.4 million, up from $1,337.9 million at year-end. Notes payable were $921.8 million net of issuance costs ($934.0 million before those costs); shareholders’ equity was $209.4 million, and redeemable preferred stock was $19.8 million.
Changes, outlook and risks
- Lease-equipment net book value increased 7.3% year over year to $1,160.5 million. Average utilization was 88% in Q2, down from 90%; the six-month average was 89% in both years. About 90% of equipment held for lease by book value was on lease at June 30.
- Q2 spare-parts and equipment sales increased to $19.4 million from $3.7 million, including sales of three airframes. First-half maintenance-reserve revenue increased to $43.8 million from $31.3 million, partly reflecting lease terminations and higher usage. Such movements and asset-sale gains may affect period-to-period comparability.
- Management said equity, internally generated funds and existing facilities should support operations for the next 12 months. No specific earnings or revenue guidance was provided. Approximately $33.6 million of debt was due within 12 months; management reported compliance with revolving-credit and WEST II covenants at June 30.
- The $890 million revolving facility bears interest at LIBOR plus 2.75%, subject to adjustment under its terms, and matures in April 2021. About $651 million of borrowings were variable-rate. The company estimated that a 1 percentage-point rate change would change annual interest expense by about $5.5 million. Fixed-rate leases may limit its ability to pass through higher funding costs; lower utilization or lease rates could also weaken earnings and cash flow.
- On July 31, 2017, after quarter-end, a special-purpose trust issued $335.7 million of notes backed by interests in 56 engines. Proceeds are to be paid to the company as engines are delivered over 270 days and are expected primarily to repay revolving borrowings. The notes include $293.7 million of Series A notes at 4.69% and $42.0 million of Series B notes at 6.36%.
- Significant unusual item: first-half impairment charges included $13.4 million related to engines and $1.8 million related to spare-parts inventory. Management cited lease expirations or modifications, part-out decisions and revised expected proceeds. Impairment estimates depend on asset condition, maintenance reserves, residual values and resale assumptions.
- The company reported that 86% of first-half lease rent revenue came from lessees domiciled outside the United States; currency depreciation could impair lessees’ ability to pay, although most leases require U.S. dollar payments. No customer accounted for more than 10% of lease rent revenue.
Important facts for investors to verify
- Whether the elevated equipment write-downs and assumptions about residual values and part-out proceeds will recur or affect future asset values.
- Whether lease utilization and rental yields can support funding costs as LIBOR changes, and how much borrowing capacity is actually available under facility eligibility and covenant conditions.
- The timing, final use and debt-repayment impact of WEST III proceeds, along with related secured assets and obligations.
- Reported tax-rate disclosures are inconsistent: the income statement amounts imply approximately 41.0% for Q2 and 42.4% for the first half; the notes state 42.3% and 41.8%, respectively. The filing’s MD&A also gives a different Q2 rate. Verify the correct rates and explanations.
- Some MD&A text appears internally inconsistent about first-half equipment additions and equipment-sale costs; refer to the financial statements and underlying filing detail when assessing these trends.