Willis Lease Finance Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparison with Q1 2014. Financial statement amounts below are in millions of dollars unless otherwise noted. The company leases commercial aircraft engines and related equipment and also sells aircraft parts.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $42.8 | $43.3 | Down 1.2% |
| Earnings from operations | $3.4 | $6.4 | Down 47.4% |
| Income before taxes | $3.7 | $6.7 | Down 44.5% |
| Net income | $2.3 | $4.3 | Down 46.9% |
| Diluted EPS | $0.29 | $0.53 | Down 45.3% |
| Operating margin | 7.9% | 14.8% | Down 6.9 percentage points |
| Net margin | 5.4% | 10.0% | Down 4.6 percentage points |
- Lease rent revenue declined 6.7% to $25.1 million. Management attributed the decrease primarily to lower average utilization: 81% versus 87% in Q1 2014. At quarter-end, approximately 83% of equipment held for lease by book value was on lease, versus 84% a year earlier.
- Maintenance reserve revenue was broadly stable at $14.1 million. Spare-parts sales increased to $2.2 million from $0.4 million as Willis Aero continued to ramp up; parts gross margin improved to 31.2% from 18.7%.
- Depreciation and amortization rose 12.7% to $17.7 million, including a $1.5 million increase from changed depreciation estimates for certain engine types. General and administrative expense rose 3.0% to $10.0 million.
- Net finance costs fell to $8.4 million from $9.4 million, including a $1.2 million gain from paying off WOLF-related term notes at a discount. Interest expense itself increased to $9.6 million from $9.4 million.
Cash flow, balance sheet and liquidity
- Operating cash flow was $20.6 million, up from $18.8 million. Investing activities used $19.8 million, mainly reflecting $17.9 million of equipment purchases. Financing activities provided $1.4 million; the company issued $31.0 million of notes and made $28.6 million of principal payments. Cash and cash equivalents increased to $15.6 million.
- Total assets were $1.260 billion and shareholders’ equity was $219.2 million at March 31, 2015. Notes payable totaled $842.2 million, compared with $841.0 million at December 31, 2014. The filing reports debt of $767.1 million at March 31, 2014.
- Cash and cash equivalents were $15.6 million; restricted cash was $45.6 million. The company reported $239.0 million available under its $700 million revolving credit facility, which matures in June 2019.
- Debt rates ranged from approximately 2.4% to 5.5%. About $475.1 million of borrowings were variable-rate, tied to one-month LIBOR; management estimated a 1 percentage-point rate change would alter annual interest expense by approximately $4.8 million. No interest-rate swaps were in place.
- Management said equity, internally generated funds and existing facilities should fund operations for the next 12 months, while noting that reduced cash generation or borrowing availability could constrain operations and growth. The company reported compliance with revolving-credit and WEST II covenants at quarter-end.
Outlook, risks and notable items
- No numerical earnings or revenue guidance was provided. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Management identified off-lease equipment, utilization and lease rates as key operating sensitivities. Fixed-rate lease income alongside variable-rate debt may compress margins if interest rates rise; higher off-lease levels or weaker lease rates could also reduce earnings and operating cash flow.
- Approximately 94% of Q1 lease rent revenue came from lessees domiciled outside the United States. Leases are payable in U.S. dollars, so currency weakness in lessee markets could make payments more difficult. No customer exceeded 10% of lease rent revenue.
- Contractual commitments included $23.1 million for an engine and related equipment due for delivery in 2015; a $6.8 million non-refundable deposit had been paid. Scheduled debt repayments over the next 12 months were approximately $23.8 million.
- The CFO was on short-term medical leave; the company retained E. Payson Smith as interim CFO. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- The company was evaluating the new revenue-recognition standard; following a proposed one-year deferral, it expected the standard to become effective in Q1 2018 if approved.
Most important facts for investors to verify
- Whether utilization and the proportion of equipment on lease recover, and how that affects lease rent revenue.
- Whether depreciation assumptions for older engine types, residual values and asset impairment estimates remain appropriate.
- Debt availability, covenant headroom, scheduled repayments and exposure to higher LIBOR rates; assess the effect of restricted cash on usable liquidity.
- Execution and funding of the $23.1 million equipment purchase commitment and the performance of the joint ventures and spare-parts business.
- The expected duration of the CFO’s leave and any subsequent update on financial leadership.