Willis Lease Finance Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company acquires, leases, and selectively sells commercial aircraft engines and related equipment. Financial amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $35.2 | $38.7 | $70.9 | $79.5 |
| Earnings from operations | $4.8 | $5.5 | $9.8 | $13.4 |
| Net income | $3.2 | $3.5 | $6.5 | $8.5 |
| Net income attributable to common shareholders | $2.4 | $2.7 | $5.0 | $7.0 |
| Diluted earnings per common share | $0.28 | $0.31 | $0.56 | $0.78 |
| Operating margin, calculated | 13.8% | 14.2% | 13.8% | 16.9% |
- Six-month operating cash flow was $33.9, up from $25.7. Investing cash use was $0.7, versus $64.7; financing cash use was $35.0, versus financing inflow of $45.0. Cash and cash equivalents ended at $4.6, down from $6.4 at year-end 2011.
- At June 30, total assets were $1,116.8 and shareholders’ equity was $243.5. Notes payable were $686.0 net of discount ($687.8 carrying amount before discount); maintenance reserves were $61.8 and derivative liabilities were $11.1.
- Restricted cash was $84.9, but substantial amounts are held for WEST debt service, maintenance reserves, and lease security deposits and are not generally available for corporate use.
- The $345.0 revolving credit facility had $122.0 available. Approximately $64.7 of debt repayments were scheduled within 12 months. Management reported compliance with applicable financial covenants.
Changes versus prior comparable periods
- Q2 revenue declined 9.1% year over year; six-month revenue fell 10.8%. Lower lease rent reflected a smaller lease portfolio and reduced utilization. Six-month average utilization fell to 83% from 86%; equipment on lease by book value was approximately 82% versus 83%.
- Six-month lease rent revenue decreased 9.6% to $47.9. Gain on equipment sales fell to $4.0 from $7.6, while maintenance reserve revenue eased to $18.0 from $18.4.
- Six-month net income declined 23.7% to $6.5. Lower revenue and equipment-sale gains outweighed reduced depreciation, technical costs, and net finance costs. Interest expense decreased to $15.1 from $18.0, primarily due to lower average debt and reduced swap notionals.
- Equipment purchases were $24.9 for the first half, versus $70.7 a year earlier. Net debt repayments were also lower: $52.4 versus $83.4.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management stated that equity, internally generated funds, and existing debt facilities should support operations for the next 12 months; reduced operating cash generation or borrowing availability could constrain operations and growth.
- Most borrowings are variable-rate, while leases are generally fixed-rate. A 1 percentage-point rate move was estimated to change annual interest expense by approximately $3.5, net of derivatives. The company had $315.0 of interest-rate swaps, with a net fair-value liability of $11.1; management expected hedge contracts to increase net finance costs by approximately $6.7 over the 12 months ending June 30, 2013.
- Approximately 85% of first-half lease revenue came from non-U.S.-domiciled lessees, though leases are payable in U.S. dollars. The largest customer represented 10.9% of first-half lease rent revenue, down from 13.1%.
- A $0.3 equipment write-down was recorded in the first half following engine sales below net book value. The company also had commitments for four engines and related equipment with a stated gross purchase price of $37.5; the contractual-obligations table lists purchase obligations of $36.1.
- Related-party credit risk: Island Air, which leases aircraft and engines from the company and is associated with the CEO and chairman, was past due for May, June, and July payments. The company reported $2.9 of overdue rent and late charges, records lease revenue on a cash basis given collectability uncertainty, and had received $0.1 during the first half under a prior settlement arrangement.
- J.T. Power, an entity associated with the CEO’s son, restructured a $1.3 payment obligation under a consignment guarantee into quarterly payments of $45,000 for five years, plus a balloon payment. The initial quarterly payment was received in Q2.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lease portfolio utilization and lease revenue stabilize, and whether upcoming aircraft-engine purchases generate adequate returns.
- Availability of unrestricted liquidity after considering restricted cash, the $64.7 of debt due within 12 months, and covenant or collateral borrowing limits.
- Exposure to variable interest rates, the expected cost and duration of swaps, and the potential effect on lease spreads.
- Collection prospects for Island Air and J.T. Power related-party balances, including the terms and performance of their repayment arrangements.
- Reconciliation of the $37.5 gross engine purchase commitment with the $36.1 purchase-obligation amount in the contractual commitments table.