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WILLIS LEASE FINANCE CORP - Quarter Report: 2016 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-15369


 

WILLIS LEASE FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

68-0070656

(State or other jurisdiction of incorporation or
organization)

 

(IRS Employer Identification No.)

 

 

 

773 San Marin Drive, Suite 2215, Novato, CA

 

94998

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (415) 408-4700

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer

 

Accelerated filer 

 

 

 

Non-accelerated filer

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

 

Title of Each Class

 

Outstanding at May 3, 2016

Common Stock, $0.01 par value per share

 

7,320,306

 

 

 

 

 

 


 

Table of Contents

 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

 

INDEX

 

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Consolidated Financial Statements (Unaudited)

 

 

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2016 and 2015

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015

 

 

 

 

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2016 and 2015

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

20 

 

 

 

Item 4. 

Controls and Procedures

20 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

21 

 

 

 

Item 6. 

Exhibits

22 

 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1.Consolidated Financial Statements (Unaudited)

 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data, unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,743

 

$

9,732

Restricted cash

 

 

29,964

 

 

33,026

Equipment held for operating lease, less accumulated depreciation of $320,609 and $316,532 at March 31, 2016 and December 31, 2015, respectively

 

 

1,101,604

 

 

1,122,859

Equipment held for sale

 

 

25,971

 

 

23,454

Operating lease related receivables, net of allowances of $1,121 and $912 at March 31, 2016 and December 31, 2015, respectively

 

 

15,690

 

 

14,072

Spare parts inventory

 

 

19,293

 

 

20,526

Investments

 

 

43,272

 

 

41,295

Property, equipment & furnishings, less accumulated depreciation of $4,902 and $11,102 at March 31, 2016 and December 31, 2015, respectively

 

 

17,001

 

 

20,247

Intangible assets, net

 

 

874

 

 

932

Other assets

 

 

11,048

 

 

9,839

Total assets

 

$

1,277,460

 

$

1,295,982

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

23,087

 

$

21,665

Deferred income taxes

 

 

99,347

 

 

96,742

Notes payable

 

 

850,031

 

 

866,089

Maintenance reserves

 

 

65,554

 

 

71,054

Security deposits

 

 

25,074

 

 

25,010

Unearned lease revenue

 

 

4,351

 

 

5,090

Total liabilities

 

 

1,067,444

 

 

1,085,650

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock ($0.01 par value, 20,000,000 shares authorized; 7,423,654 and 7,548,395 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively)

 

 

74

 

 

75

Paid-in capital in excess of par

 

 

24,925

 

 

28,720

Retained earnings

 

 

185,826

 

 

182,058

Accumulated other comprehensive loss, net of income tax benefit of $427 and $275 at March 31, 2016 and December 31, 2015, respectively.

 

 

(809)

 

 

(521)

Total shareholders’ equity

 

 

210,016

 

 

210,332

Total liabilities and shareholders’ equity

 

$

1,277,460

 

$

1,295,982

 

 

 

 

 

 

 

(1) Total assets at March 31, 2016 and December 31, 2015 include the

      following assets of a variable interest entity (VIE) that can only be used

      to settle the liabilities of the VIE:  Cash, $32,156 and $33,776; Equipment,

      $330,182 and $335,327; and Other, $12,457 and $11,490, respectively.

 

 

 

 

 

 

(2) Total liabilities at March 31, 2016 and December 31, 2015 include

     the following liabilities of a VIE for which the VIE creditors do not have

     recourse to Willis Lease Finance Corporation: Notes payable, $294,337

     and $300,467, respectively.

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

3


 

Table of Contents

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2016

    

2015

    

REVENUE

 

 

 

 

 

 

 

Lease rent revenue

 

$

28,139

 

$

25,097

 

Maintenance reserve revenue

 

 

15,819

 

 

14,148

 

Spare parts and equipment sales

 

 

2,609

 

 

2,151

 

Gain on sale of leased equipment

 

 

2,989

 

 

662

 

Other revenue

 

 

1,000

 

 

756

 

Total revenue

 

 

50,556

 

 

42,814

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

16,644

 

 

17,705

 

Cost of spare parts and equipment sales

 

 

1,915

 

 

1,480

 

Write-down of equipment

 

 

2,036

 

 

24

 

General and administrative

 

 

11,752

 

 

9,972

 

Technical expense

 

 

1,696

 

 

1,832

 

Net finance costs:

 

 

 

 

 

 

 

  Interest expense

 

 

10,008

 

 

9,567

 

  Gain on debt extinguishment

 

 

 —

 

 

(1,151)

 

Total net finance costs

 

 

10,008

 

 

8,416

 

Total expenses

 

 

44,051

 

 

39,429

 

 

 

 

 

 

 

 

 

Earnings from operations

 

 

6,505

 

 

3,385

 

 

 

 

 

 

 

 

 

Earnings from joint ventures

 

 

187

 

 

354

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

6,692

 

 

3,739

 

Income tax expense

 

 

2,924

 

 

1,441

 

Net income

 

$

3,768

 

$

2,298

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

$

0.53

 

$

0.29

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

$

0.52

 

$

0.29

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

 

7,149

 

 

7,848

 

Diluted average common shares outstanding

 

 

7,272

 

 

8,044

 

 

See accompanying notes to the unaudited consolidated financial statements.

4


 

Table of Contents

 

 

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Net income

 

$

3,768

 

$

2,298

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(441)

 

 

 —

 

Net loss recognized in other comprehensive income

 

 

(441)

 

 

 —

 

Tax benefit related to items of other comprehensive income

 

 

153

 

 

 —

 

Other comprehensive loss

 

 

(288)

 

 

 —

 

Total comprehensive income

 

$

3,480

 

$

2,298

 

 

See accompanying notes to the unaudited consolidated financial statements.

5


 

Table of Contents

 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Three months Ended March 31, 2016 and 2015
(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Issued and

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Outstanding

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Shares of

 

 

 

 

Paid-in

 

Other

 

 

 

 

Total

 

 

Common

 

Common

 

Capital in

 

Comprehensive

 

Retained

 

Shareholders’

 

 

Stock

 

Stock

 

Excess of par

 

Income

 

Earnings

 

Equity

Balances at December 31, 2014

 

8,346

 

$

83

 

$

42,076

 

$

 —

 

$

174,702

 

$

216,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,298

 

 

2,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased

 

(38)

 

 

 —

 

 

(724)

 

 

 —

 

 

 —

 

 

(724)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock compensation plans

 

10

 

 

 —

 

 

85

 

 

 —

 

 

 —

 

 

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of restricted stock in satisfaction of withholding tax

 

(25)

 

 

 —

 

 

(514)

 

 

 —

 

 

 —

 

 

(514)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation, net of forfeitures

 

 —

 

 

 —

 

 

1,074

 

 

 —

 

 

 —

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit on disqualified disposition of shares

 

 —

 

 

 —

 

 

143

 

 

 —

 

 

 —

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2015

 

8,293

 

$

83

 

$

42,140

 

$

 —

 

$

177,000

 

$

219,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

 

7,548

 

$

75

 

$

28,720

 

$

(521)

 

$

182,058

 

$

210,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,768

 

 

3,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss from currency translation adjustment, net of tax benefit of $153

 

 —

 

 

 —

 

 

 —

 

 

(288)

 

 

 —

 

 

(288)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased

 

(200)

 

 

(2)

 

 

(4,451)

 

 

 —

 

 

 —

 

 

(4,453)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock compensation plans

 

98

 

 

1

 

 

81

 

 

 —

 

 

 —

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of restricted stock in satisfaction of withholding tax

 

(22)

 

 

 —

 

 

(424)

 

 

 —

 

 

 —

 

 

(424)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation, net of forfeitures

 

 —

 

 

 —

 

 

944

 

 

 —

 

 

 —

 

 

944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit on disqualified disposition of shares

 

 —

 

 

 —

 

 

55

 

 

 —

 

 

 —

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2016

 

7,424

 

$

74

 

$

24,925

 

$

(809)

 

$

185,826

 

$

210,016

 

See accompanying notes to the unaudited consolidated financial statements.

6


 

Table of Contents

 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

3,768

 

$

2,298

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

16,644

 

 

17,705

Write-down of equipment

 

 

2,036

 

 

24

Stock-based compensation expenses

 

 

944

 

 

1,074

Amortization of deferred costs

 

 

1,071

 

 

1,072

Allowances and provisions

 

 

209

 

 

67

Gain on sale of leased equipment

 

 

(2,989)

 

 

(662)

Gain on extinguishment of debt

 

 

 —

 

 

(1,151)

Income from joint ventures

 

 

(187)

 

 

(354)

Deferred income taxes

 

 

2,757

 

 

1,357

Changes in assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

(1,827)

 

 

(5,751)

Spare parts inventory

 

 

1,232

 

 

305

Other assets

 

 

(165)

 

 

(2,237)

Accounts payable and accrued expenses

 

 

(282)

 

 

(917)

Restricted cash

 

 

3,062

 

 

5,642

Maintenance reserves

 

 

(5,500)

 

 

3,198

Security deposits

 

 

64

 

 

(98)

Unearned lease revenue

 

 

(739)

 

 

(961)

Net cash provided by operating activities

 

 

20,098

 

 

20,611

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from sale of equipment (net of selling expenses)

 

 

52,488

 

 

2,405

Restricted cash for investing activities

 

 

(1,345)

 

 

 —

Capital contribution to joint ventures

 

 

(4,610)

 

 

(630)

Distributions received from joint ventures

 

 

1,167

 

 

 —

Purchase of equipment held for operating lease

 

 

(44,433)

 

 

(17,944)

Purchase of property, equipment and furnishings

 

 

(70)

 

 

(3,667)

Net cash provided by (used in) investing activities

 

 

3,197

 

 

(19,836)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of notes payable

 

 

20,000

 

 

31,000

Restricted cash from financing activities

 

 

1,345

 

 

 —

Proceeds from shares issued under stock compensation plans

 

 

82

 

 

85

Cancellation of restricted stock units in satisfaction of withholding tax

 

 

(424)

 

 

(514)

Excess tax benefit from stock-based compensation

 

 

55

 

 

143

Repurchase of common stock

 

 

(4,453)

 

 

(724)

Principal payments on notes payable

 

 

(36,889)

 

 

(28,623)

Net cash provided by (used in) financing activities

 

 

(20,284)

 

 

1,367

Increase in cash and cash equivalents

 

 

3,011

 

 

2,142

Cash and cash equivalents at beginning of period

 

 

9,732

 

 

13,493

Cash and cash equivalents at end of period

 

$

12,743

 

$

15,635

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Net cash paid for:

 

 

 

 

 

 

Interest

 

$

9,161

 

$

8,753

Income Taxes

 

$

34

 

$

5

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing activities:

 

 

 

 

 

 

During the three months ended March 31, 2016 and 2015, liabilities of $6,778 and $169, respectively, were incurred but not paid in connection with our purchase of aircraft and engines.

 

 

 

 

 

 

During the three months ended March 31, 2016 and 2015, engines and equipment totaling $12,806 and $86, respectively, were transferred from Held for Operating Lease to Held for Sale

 

 

 

 

 

 

During the three months ended March 31, 2016 , an aircraft of $2,925 was transferred from Property, equipment and furnishings to Assets Held for Lease.

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

7


 

Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

 

1.  Summary of Significant Accounting Policies

 

(a)    Basis of Presentation:

 

Our unaudited consolidated financial statements include the accounts of Willis Lease Finance Corporation and its subsidiaries (“we” or the “Company”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly our financial position as of March 31, 2016 and December 31, 2015, and the results of our operations for the three months ended March 31, 2016 and 2015, and our cash flows for the three months ended March 31, 2016 and 2015. The results of operations and cash flows for the period ended March 31, 2016 are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2016.

 

(b)    Principals of Consolidation:

 

We evaluate all entities in which we have an economic interest firstly to determine whether for accounting purposes the entity is a variable interest entity or voting interest entity. If the entity is a variable interest entity we consolidate the financial statements of that entity if we are the primary beneficiary of the entities’ activities. If the entity is a voting interest entity we consolidate the entity when we have a majority of voting interests. All inter-company balances are eliminated upon consolidation.

 

(c)    Fair Value Measurements:

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value which are the following:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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Table of Contents

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

 

We determine fair value of long-lived assets held and used, such as Equipment held for operating lease and Equipment held for sale, by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors. An impairment charge is recorded when the carrying value of the asset exceeds its fair value.

 

The following table shows by level, within the fair value hierarchy, the Company’s assets measured at fair value on a nonrecurring basis during the three months ended March 31, 2016 and 2015, and the gains (losses) recorded during the three months ended March 31, 2016 and 2015 on those assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at Fair Value

 

Total Losses

 

 

March 31, 2016

 

March 31, 2015

 

Three Months Ended March 31,

 

   

Total

   

Level 1

   

Level 2

   

Level 3

   

Total

   

Level 1

   

Level 2

   

Level 3

   

2016

   

2015

 

 

(in thousands)

 

(in thousands)

Equipment held for sale

 

$

3,307

 

$

 —

 

$

3,307

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

(2,036)

 

$

(24)

 

At March 31, 2016, the Company used Level 2 inputs to measure equipment held for sale.  Level 2 inputs include quoted prices for similar assets in inactive markets.

 

An impairment charge is recorded when the carrying value of the asset exceeds its fair value. A write-down of equipment totaling $2.0 million was recorded in the three months ended March 31, 2016 due to a management decision to consign one engine for part-out and sale, in which the asset’s net book value exceeded the estimated proceeds.  A write-down of equipment totaling $24,000 was recorded in the three months ended March 31, 2015 to decrease the book value to zero for certain parts arising from part-out of an engine that will not be sold. 

 

(d)    Reclassifications: 

 

Reclassifications have been made to our consolidated financial statements for the prior periods to conform to classifications used during the three months ended March 31, 2016. 

 

(e)    Foreign Currency Translation:

 

The Company’s foreign investments have been converted at rates of exchange at March 31, 2016. The changes in exchange rates in our foreign investments reported under the equity method are included in stockholders’ equity as accumulated other comprehensive income.

 

(f)    Recent Accounting Pronouncements:

 

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")  No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for the Company beginning January 1, 2017, with early application permitted. The Company is currently evaluating the impact the guidance will have on the Consolidated Financial Statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (topic 842).  Under the new standard, the accounting for leases by lessors would basically remain unchanged from the existing concepts in ASC 840, Leases. In addition, FASB has decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct finance lease that does not transfer control of the underlying asset to the lessee. The standard will be effective for public business entities for annual periods (including interim periods),

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beginning after December 15, 2018, and early adoption will be permitted. The Company is currently evaluating the potential impact the adoption of the standard will have on its consolidated financial condition, results of operations or cash flows.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and for interim periods therein. We are evaluating the impact that this new guidance will have on our consolidated financial position.

 

In April 2015, the FASB issued ASU. 2015-03, "Simplifying the Presentation of Debt Issuance Costs".  ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the accounting treatment for debt discounts. We have adopted ASU 2015-03 during the three-month period ended March 31, 2016. Other assets and Long-term debt, net of discount have been restated as of December 31, 2015 to reflect the retroactive reclassification of $12.6 million of debt issuance costs that have been reclassified from Other assets to Notes payable.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

 

 

2.  Management Estimates

 

These financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.

 

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to residual values, estimated asset lives, impairments and bad debts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Management believes that the accounting policies on revenue recognition, maintenance reserves and expenditures, useful life of equipment, asset residual values, asset impairment and allowance for doubtful accounts are critical to the results of operations.

 

If the useful lives or residual values are lower than those estimated by us, upon sale of the asset a loss may be realized. Significant management judgment is required in the forecasting of future operating results, which are

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used in the preparation of projected undiscounted cash-flows and should different conditions prevail, material impairment write-downs may occur.

 

 

 

3.  Investments

 

On May 25, 2011, we entered into an agreement with Mitsui & Co., Ltd. to participate in a joint venture formed as a Dublin-based Irish limited company — Willis Mitsui & Company Engine Support Limited (“WMES”) for the purpose of acquiring and leasing jet engines. Each partner holds a fifty percent interest in the joint venture and the Company uses the equity method in recording investment activity. The Company made $4.6 million of capital contributions to WMES, received $1.2 million in distributions and recorded $1.2 million as deferred gain as a result of the Company selling four engines to WMES during the three months ended March 31, 2016.

 

On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation Limited (“CASC”) to participate in a joint venture named CASC Willis Engine Lease Company Limited (“CASC Willis”), a new joint venture based in Shanghai, China. Each partner holds a fifty percent interest in the joint venture and the Company uses the equity method in recording investment activity. In October 2014, each partner made a $15.0 million initial capital contribution representing the up-front funding for the new joint venture.  The new company will acquire and lease jet engines to Chinese airlines and will concentrate on meeting the fast growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China.   The investment has been reduced to $13.7 million as of March 31, 2016 as a result of a foreign currency translation adjustment of $0.4 million partially offset by the Company’s share of CASC Willis reported income of $0.1 million during the three months ended March 31, 2016.         

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

    

WMES

 

CASC

 

Total

 

 

(in thousands)

Investment in joint ventures as of December 31, 2015

 

$

27,272

 

$

14,023

 

$

41,295

Capital contribution

 

 

4,610

 

 

 —

 

 

4,610

Earnings from joint venture

 

 

60

 

 

127

 

 

187

Deferred gain on engine sale

 

 

(1,212)

 

 

 —

 

 

(1,212)

Distribution

 

 

(1,167)

 

 

 —

 

 

(1,167)

Foreign Currency Translation Adjustment

 

 

 —

 

 

(441)

 

 

(441)

Investment in joint ventures as of March 31, 2016

 

$

29,563

 

$

13,709

 

$

43,272

 

“Other revenue” on the Consolidated Statement of Income includes management fees earned of $0.6 million and $0.4 million during the three months ended March 31, 2016 and 2015, respectively, related to the servicing of engines for the WMES lease portfolio.   “Gain on sale of  equipment” on the Consolidated Statement of Income includes $1.2 million for the three months ended March 31, 2016 related to the sale of four engines to WMES for $46.1 million.  As 50% owners of WMES, we deferred the $1.2 million gain to our investment which will be amortized over a 15-year period to a 55% residual value. 

 

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Summarized financial information for 100% of WMES is presented in the following tables:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2016

    

2015

 

 

(in thousands)

Revenue

 

$

9,246

 

$

6,398

Expenses

 

 

9,180

 

 

5,727

WMES net income

 

$

66

 

$

671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

    

December 31,

 

 

 

2016

 

 

2015

 

 

(in thousands)

Total assets

 

$

299,746

 

$

256,126

Total liabilities

 

 

231,927

 

 

195,258

Total WMES net equity

 

$

67,819

 

$

60,868

 

 

 

 

 

 

 

 

 

 

4.  Notes Payable

 

Notes payable consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

    

2016

 

2015

 

 

 

(in thousands)

 

Credit facility at a floating rate of interest of LIBOR plus 2.75%, secured by engines. The facility has a committed amount of $700.0 million at March 31, 2016, which revolves until the maturity date of June 2019.

 

$

539,000

 

$

549,000

 

 

 

 

 

 

 

 

 

WEST II Series 2012-A term notes payable at a fixed rate of interest of 5.50%, maturing in September 2037. Secured by engines.

 

 

294,337

 

 

300,467

 

 

 

 

 

 

 

 

 

Note payable at fixed interest rates ranging from 2.60% to 2.97%, maturing in July 2024. Secured by an aircraft.

 

 

15,719

 

 

16,135

 

 

 

 

 

 

 

 

 

Note payable at a variable interest rate of LIBOR plus 2.25%, maturing in January 2018. Secured by engines.

 

 

12,739

 

 

13,082

 

 

 

 

 

 

 

 

 

Notes payable

 

 

861,795

 

 

878,684

 

 

 

 

 

 

 

 

 

Less: unamortized debt issuance costs

 

 

(11,764)

 

 

(12,595)

 

Total notes payable

 

$

850,031

 

$

866,089

 

 

At March 31, 2016 , we had a revolving credit facility to finance the acquisition of aircraft engines for lease as well as for general working capital purposes.  On April 20, 2016 we entered into a Third Amended and Restated Credit Agreement which increased the revolving credit facility to $890.0 million from $700.0 million and extended the term to April 2021.    This $890 million revolving credit facility has an accordion feature up to $1 billion.  The

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initial interest rate on the facility is LIBOR plus 2.75%.  Quarterly, the interest rate is adjusted based on the Company’s leverage ratio, as calculated under the terms of the revolving credit facility.

 

For further information on our debt instruments, see the "Notes Payable" note in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

The following is a summary of the aggregate maturities of our long-term debt at March 31, 2016:

 

 

 

 

 

 

 

 

 

Year

    

(in thousands)

2016

 

$

17,091

2017

 

 

23,624

2018

 

 

33,294

2019

 

 

562,430

2020

 

 

23,031

Thereafter

 

 

202,325

 

 

$

861,795

 

 

 

5.  Stock-Based Compensation Plans

 

Our 2007 Stock Incentive Plan (the 2007 Plan) was adopted on May 24, 2007. Under this 2007 Plan, a total of 2,000,000 shares are authorized for stock based compensation available in the form of either restricted stock or stock options.  On May 28, 2015, the Company’s shareholders authorized an increase in the number of shares of Common Stock available for grant by 800,000 shares bringing the total to 2,800,000 shares authorized.  2,371,962 shares of restricted stock were granted under the 2007 Stock Incentive Plan by March 31, 2016. Of this amount, 152,534 shares of restricted stock were cancelled and returned to the pool of shares which could be granted under the 2007 Stock Incentive Plan resulting in a net number of 580,572 shares which were available as of March 31, 2016 for future issuance under the 2007 Incentive Plan. The fair value of the restricted stock awards equaled the stock price at the date of grants.  The following table summarizes restricted stock activity during the year ended December 31, 2015 and the three months ended March 31, 2016.

 

 

 

 

 

    

Shares

Restricted stock at December 31, 2014

 

525,356

Granted in 2015 (vesting over 3 years)

 

125,000

Granted in 2015 (vesting over 4 years)

 

5,000

Granted in 2015 (vesting on first anniversary from date of issuance)

 

16,440

Vested in 2015

 

(275,201)

Restricted stock at December 31, 2015

 

396,595

Granted in 2016 (vesting over 2 years)

 

20,000

Granted in 2016 (vesting over 3 years)

 

75,000

Granted in 2016 (vesting over 4 years)

 

13,250

Vested in 2016

 

(61,083)

Cancelled in 2016

 

(17,166)

Restricted stock at March 31, 2016

 

426,596

 

All cancelled shares have reverted to the share reserve and are available for issuance at a later date, in accordance with the 2007 Plan.

 

Our accounting policy is to recognize the associated expense of such awards on a straight-line basis over the vesting period. At March 31, 2016, the stock compensation expense related to the restricted stock awards that will be recognized over the average remaining vesting period of 2.0 years totals $5.9 million. At March 31, 2016, the intrinsic value of unvested restricted stock awards is $9.2 million. The 2007 Plan terminates on May 24, 2017.

 

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6.  Income Taxes

 

Income tax expense for the three months ended March 31, 2016 and March 31, 2015 was $2.9 million and $1.4 million, respectively.  The effective tax rates for the three months ended March 31, 2016 and March 31, 2015 were 43.7% and 38.5%, respectively.  The increase was primarily due to the impact of the IRS code 162(m) calculation for executive compensation for the three months ended March 31, 2016.

 

The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur.  Our tax rate is subject to change based on changes in the mix of assets leased to domestic and foreign lessees, the proportions of revenue generated within and outside of California, the amount of executive compensation exceeding $1.0 million as defined in IRS code 162(m) and numerous other factors, including changes in tax law.

 

7.  Fair Value of Financial Instruments

 

The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, operating lease related receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments.

 

The carrying amount of the Company’s outstanding balance on its Notes Payable as of March 31, 2016 and December 31, 2015 was estimated to have a fair value of approximately $872.9 million and $890.1 million, respectively, based on the fair value of estimated future payments calculated using the prevailing interest rates at each period end.

 

8. Operating Segments

 

The Company operates in two business segments: (i) Leasing and Related Operations which involves acquiring and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft engines and other aircraft equipment and the selective purchase and resale of commercial aircraft engines and other aircraft equipment and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine and airframe parts, whole engines, engine modules and portable aircraft components and leasing of engines destined for disassembly and sale of parts.

 

The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses and inter-company allocation of interest expense. While the Company believes there are synergies between the two business segments, the segments are managed separately because each requires different business strategies.

 

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The following tables present a summary of the operating segments (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Leasing and 

    

 

 

    

 

 

 

 

For the three months ended March 31, 2016

 

Related Operations

 

Spare Parts Sales

 

Eliminations (1)

 

Total

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Lease rent revenue

 

$

28,139

 

$

 —

 

$

 —

 

$

28,139

Maintenance reserve revenue

 

 

15,819

 

 

 —

 

 

 —

 

 

15,819

Spare parts sales

 

 

 —

 

 

2,609

 

 

 —

 

 

2,609

Gain on sale of leased equipment

 

 

2,989

 

 

 —

 

 

 —

 

 

2,989

Other revenue

 

 

933

 

 

358

 

 

(291)

 

 

1,000

Total revenue

 

 

47,880

 

 

2,967

 

 

(291)

 

 

50,556

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

16,562

 

 

82

 

 

 —

 

 

16,644

Cost of spare parts sales

 

 

 —

 

 

1,915

 

 

 —

 

 

1,915

General and administrative

 

 

10,980

 

 

772

 

 

 —

 

 

11,752

Net finance costs

 

 

9,913

 

 

95

 

 

 —

 

 

10,008

Other expense

 

 

3,732

 

 

 —

 

 

 —

 

 

3,732

Total expenses

 

 

41,187

 

 

2,864

 

 

 —

 

 

44,051

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

$

6,693

 

$

103

 

$

(291)

 

$

6,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Leasing and 

    

 

 

    

 

 

 

 

For the three months ended March 31, 2015

 

Related Operations

 

Spare Parts Sales

 

Eliminations (1)

 

Total

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Lease rent revenue

 

$

25,097

 

$

 —

 

$

 —

 

$

25,097

Maintenance reserve revenue

 

 

14,148

 

 

 —

 

 

 —

 

 

14,148

Spare parts sales

 

 

 —

 

 

2,151

 

 

 —

 

 

2,151

Gain on sale of leased equipment

 

 

662

 

 

 —

 

 

 —

 

 

662

Other revenue

 

 

617

 

 

295

 

 

(156)

 

 

756

Total revenue

 

 

40,524

 

 

2,446

 

 

(156)

 

 

42,814

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

17,633

 

 

72

 

 

 —

 

 

17,705

Cost of spare parts sales

 

 

 —

 

 

1,480

 

 

 —

 

 

1,480

General and administrative

 

 

9,337

 

 

635

 

 

 —

 

 

9,972

Net finance costs

 

 

8,326

 

 

90

 

 

 —

 

 

8,416

Other expense

 

 

1,856

 

 

 —

 

 

 —

 

 

1,856

Total expenses

 

 

37,152

 

 

2,277

 

 

 —

 

 

39,429

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

$

3,372

 

$

169

 

$

(156)

 

$

3,385

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents revenue generated between our

       operating segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets as of March 31, 2016

 

$

1,252,992

 

$

24,468

 

$

 —

 

$

1,277,460

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets as of December 31, 2015

 

$

1,269,396

 

$

26,586

 

$

 —

 

$

1,295,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9. Subsequent Events

 

On April 20, 2016 we entered into a Third Amended and Restated Credit Agreement which increased the revolving credit facility to $890.0 million from $700.0 million and extended the term to April 2021.    This $890 million revolving credit facility has an accordion feature up to $1 billion.  The initial interest rate on the facility is LIBOR plus 2.75%.  Quarterly, the interest rate is adjusted based on the Company’s leverage ratio, as calculated under the terms of the revolving credit facility.

 

 

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Our core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft engines and related aircraft equipment; and the selective purchase and sale of commercial aircraft engines (collectively “equipment”).  In 2013, we launched Willis Aeronautical Services, Inc. (“Willis Aero”), a wholly-owned subsidiary, whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft and engines from third parties.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates included in our 2015 Form 10-K.

 

Results of Operations

 

Three months ended March 31, 2016, compared to the three months ended March 31, 2015:

 

Lease Rent Revenue. Lease rent revenue for the three months ended March 31, 2016 increased 12.1% to $28.1 million from the comparable period in 2015. This increase primarily reflects a higher average portfolio utilization in the current period, which translated into a higher amount of equipment on lease. The aggregate net book value of lease equipment at March 31, 2016 and 2015 was $1,101.6 million and $1,050.9 million, respectively, an increase of 4.8%. The average utilization for the three months ended March 31, 2016 and 2015 was 87% and 81%, respectively. At March 31, 2016 and 2015, approximately 90% and 83%, respectively, of equipment held for lease by book value was on lease.

 

During the three months ended March 31, 2016, we added $42.1 million of equipment and capitalized costs to the lease portfolio. During the three months ended March 31, 2015, we added $2.7 million of equipment and capitalized costs to the lease portfolio.

 

Maintenance Reserve Revenue. Our maintenance reserve revenue for the three months ended March 31, 2016 increased 11.8% to $15.8 million from $14.1 million for the comparable period in 2015. The increase was due to higher maintenance reserve revenues related to the termination of long term leases and higher maintenance reserves billed reflecting increased usage of engines under lease resulting from higher portfolio utilization in the three months ended March 31, 2016 than in the year ago period. 

 

Spare Parts and Equipment Sales. Spare parts and equipment sales for the three months ended March 31, 2016 were $2.6 million compared to $2.2 million in the comparable period in 2015.  The increase was due to the growth in spare parts sales due to an increase in inventory acquisitions.

 

Gain on Sale of Leased Equipment. During the three months ended March 31, 2016, we sold one airframe, six engines and other related equipment generating a net gain of $3.0 million. During the three months ended March 31, 2015, we sold one engine and sold other related equipment generating a net gain of $0.7 million.

 

Other Revenue. Our other revenue consists primarily of management fee income, lease administration fees and third party consignment commissions earned by Willis Aero.  Other revenue increased to $1.0 million from $0.8 million for the comparable period in 2015 primarily due to an increase in fees earned related to engines managed on behalf of third parties.

 

Depreciation and Amortization Expense. Depreciation and amortization expense decreased 6.0% to $16.6 million for the three months ended March 31, 2016 from $17.7 million in the comparable period in 2015, due to

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certain engines becoming fully depreciated during the quarter.  As of July 1, 2015, we adjusted the depreciation for certain older engine types. It is our policy to review estimates regularly to reflect the cost of equipment over the useful life of these engines. The 2015 change in depreciation estimate did not have a material impact on depreciation in the current period.

 

Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales was $1.9 million for the three months ended March 31, 2016 compared to $1.5 million for the comparable period in 2015. Gross margin on parts sales for the three months ended March 31, 2016 quarter was 26.6% compared to 31.2% for the comparable period in 2015 primarily due to a change in the mix of parts sold in 2016.

 

Write-down of Equipment.   Write-down of equipment was $2.0 million and $0.0 million in the three months ended March 31, 2016 and 2015, respectively.  A write-down of equipment totaling $2.0 million was recorded in the three months ended March 31, 2016 due to a management decision to consign one engine for part-out and sale, in which the asset’s net book value exceeded the estimated proceeds. A write-down of equipment totaling $24,000 was recorded in the three months ended March 31, 2015 due to a management decision to consign an engine for part-out and sale, in which the asset’s net book value exceeds the estimated proceeds from part-out.

 

General and Administrative Expenses. General and administrative expenses increased 17.8% to $11.8 million for the three months ended March 31, 2016, from $10.0 million in the comparable period in 2015, due primarily to increased legal expense ($0.6 million), higher salary expense ($0.5 million) due to increased head count, higher  contingency bonus resulting from improved operating profits ($0.4 million),  and higher corporate aircraft expense ($0.4 million).

 

Technical Expense. Technical expenses consist of the cost of engine repairs, engine thrust rental fees, outsourced technical support services, engine storage and freight costs. These expenses decreased 7.4% to $1.7 million for the three months ended March 31, 2016 compared to the year ago period due to lower engine technical services expense ($0.2 million) due to lower engine returns.  This decrease was partially offset by higher maintenance costs ($0.1 million) due to increased repair activity.

 

Net Finance Costs. Net finance costs increased 18.9% to $10.0 million for the three months ended March 31, 2016, from $8.4 million in the comparable period in 2015, due primarily to a gain on the extinguishment of debt of $1.2 million recorded during the three months ended March 31, 2015 partially offset by higher average debt balances in the current quarter compared to the year ago period. The average notes payable balances at March 31, 2016 and 2015, were $880.1 million and $841.9 million, respectively, an increase of 4.5%. As of March 31, 2016, $551.7 million of our debt is tied to one-month U.S. dollar LIBOR which increased from an average of 0.17% for the three months ended March 31, 2015 to an average of 0.43% for the three months ended March 31, 2016 (average of month-end rates). As of March 31, 2016 and 2015, one-month LIBOR was 0.43% and 0.18%, respectively.

 

Income Tax Expense. Income tax expense for the three months ended March 31, 2016 and 2015 was $2.9 million and $1.4 million, respectively. The effective tax rates for the three months ended March 31, 2016 and 2015 were 43.7% and 38.5%, respectively.  This increase was due to the impact of the IRS code 162(m) calculation for executive compensation during the three months ended March 31, 2016.

 

The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur. Our tax rate is subject to change based on changes in the mix of assets leased to domestic and foreign lessees, the proportions of revenue generated within and outside of California, the amount of executive compensation exceeding $1.0 million as defined in IRS code 162(m) and numerous other factors, including changes in tax law.

 

Liquidity and Capital Resources

 

We finance our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $20.0 million and $31.0 million in the three-month periods ended March 31, 2016 and 2015, respectively, was

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derived from this activity. In these same time periods, $36.9 million and $28.6 million, respectively, was used to pay down related debt. Cash flow from operating activities was $20.1 million and $20.6 million in the three-month periods ended March 31, 2016 and 2015, respectively.

 

At March 31, 2016, $4.7 million in cash and cash equivalents and restricted cash were held in foreign subsidiaries. We do not intend to repatriate the funds held in foreign subsidiaries to the United States. In the event that we decide to repatriate these funds to the United States, we would be required to accrue and pay taxes upon the repatriation.

 

Our primary use of funds is for the purchase of equipment for lease. Purchases of equipment (including capitalized costs) totaled $44.4 million and $17.9 million for the three-month periods ended March 31, 2016 and 2015, respectively.

 

Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise lease rent revenue, security deposits and maintenance reserves, and are offset by net finance costs and general and administrative costs. Note that cash received from maintenance reserve arrangements for some of our engines on lease are restricted per our WEST II debt agreement. Cash from WEST II engine maintenance reserve payments, that can be used to fund future maintenance events, are held in the restricted cash account equal to the maintenance obligations projected for the subsequent six months, and are subject to a minimum balance of $9.0 million. The lease revenue stream, in the short-term, is at fixed rates while a portion of our debt is at variable rates. If interest rates increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our earnings and operating cash flows. Lease rent revenue and maintenance reserves are also affected by the amount of equipment off-lease. Approximately 90%, by book value, of our assets were on lease at March 31, 2016 and December 31, 2015. The average utilization rate was 87% and 81% for the three-month periods ended March 31, 2016 and March 31, 2015, respectively.  If there is any increase in off-lease rates or deterioration in lease rates that are not offset by reductions in interest rates, there will be a negative impact on earnings and cash flows from operations.

 

Notes payable consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

    

2016

 

2015

 

 

 

(in thousands)

 

Credit facility at a floating rate of interest of LIBOR plus 2.75%, secured by engines. The facility has a committed amount of $700.0 million at March 31, 2016, which revolves until the maturity date of June 2019.

 

$

539,000

 

$

549,000

 

 

 

 

 

 

 

 

 

WEST II Series 2012-A term notes payable at a fixed rate of interest of 5.50%, maturing in September 2037. Secured by engines.

 

 

294,337

 

 

300,467

 

 

 

 

 

 

 

 

 

Note payable at fixed interest rates ranging from 2.60% to 2.97%, maturing in July 2024. Secured by an aircraft.

 

 

15,719

 

 

16,135

 

 

 

 

 

 

 

 

 

Note payable at a variable interest rate of LIBOR plus 2.25%, maturing in January 2018. Secured by engines.

 

 

12,739

 

 

13,082

 

 

 

 

 

 

 

 

 

Notes payable

 

 

861,795

 

 

878,684

 

 

 

 

 

 

 

 

 

Less: unamortized debt issuance costs

 

 

(11,764)

 

 

(12,595)

 

Total notes payable

 

$

850,031

 

$

866,089

 

 

At March 31, 2016 , we had a revolving credit facility to finance the acquisition of aircraft engines for lease as well as for general working capital purposes.  On April 20, 2016 we entered into a Third Amended and Restated

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Credit Agreement which increased the revolving credit facility to $890.0 million from $700.0 million and extended the term to April 2021.    This $890 million revolving credit facility has an accordion feature up to $1 billion.  The initial interest rate on the facility is LIBOR plus 2.75%.  Quarterly, the interest rate is adjusted based on the Company’s leverage ratio, as calculated under the terms of the revolving credit facility.

 

Virtually all of the above debt is subject to our ongoing compliance with the covenants of each financing, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. In addition, under these facilities, we can typically borrow up to 85% of an engine’s net book value and 65% of spare part’s net book value. Therefore we must have other available funds for the balance of the purchase price of any new equipment to be purchased or we will not be permitted to draw on these facilities. The facilities are also cross-defaulted against other facilities. If we do not comply with the covenants or eligibility requirements, we may not be permitted to borrow additional funds and accelerated payments may become necessary. Additionally, much of the above debt is secured by engines to the extent that engines are sold, repayment of that portion of the debt could be required.

 

At March 31, 2016, we are in compliance with the covenants specified in the revolving credit facility, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement to remain below 5.00 to 1.00. As defined in the revolving credit facility Credit Agreement, the Interest Coverage Ratio is the ratio of Earnings before Interest, Taxes, Depreciation and Amortization and other one-time charges (EBITDA) to Consolidated Interest Expense and the Total Leverage Ratio is the ratio of Total Indebtedness to Tangible Net Worth. At March 31, 2016, we are in compliance with the covenants specified in the WEST II indenture and servicing agreement.

 

For further information on our debt instruments, see the "Notes Payable" note in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Approximately $22.9 million of our debt is repayable during the next 12 months. Such repayments consist of scheduled installments due under term loans. Repayments are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The table below summarizes our contractual commitments at March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment due by period (in thousands)

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More than

 

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

5 Years

Long-term debt obligations

 

$

861,795

 

$

22,939

 

$

56,964

 

$

585,343

 

$

196,549

Interest payments under long-term debt

    obligations

 

 

145,062

 

 

35,287

 

 

66,663

 

 

28,428

 

 

14,684

Operating lease obligations

 

 

2,715

 

 

1,119

 

 

1,427

 

 

169

 

 

 -

Total

 

$

1,009,572

 

$

59,345

 

$

125,054

 

$

613,940

 

$

211,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We have estimated the interest payments due under long-term debt by applying the interest rates applicable at March 31, 2016 to the remaining debt, adjusted for the estimated debt repayments identified in the table above. Actual interest payments made will vary due to changes in the rates for one-month LIBOR.

 

We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level of operations for the next twelve months. A decline in the level of internally generated funds, resulting from an increase in the amount of equipment off-lease or a decrease in availability under our existing debt facilities, would impair our ability to sustain our level of operations. We continually discuss additions to our capital base with our commercial and investment banks. If we are not able to access additional capital, our ability to grow

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our asset base consistent with historical trends will be impaired and our future growth limited to that which can be funded from internally generated capital.

 

Recent Accounting Pronouncements

 

A discussion of recent accounting pronouncements is included in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q in “Note 1. Summary of Significant Accounting Policies” under the heading "Recent Accounting Pronouncements" and is incorporated herein by reference.

 

Management of Interest Rate Exposure

 

At March 31, 2016, $551.7 million of our borrowings were on a variable rate basis at various interest rates tied to one-month LIBOR. Our equipment leases are generally structured at fixed rental rates for specified terms. Increases in interest rates could narrow or result in a negative spread, between the rental revenue we realize under our leases and the interest rate that we pay under our borrowings. We periodically enter into interest rate derivative instruments to mitigate our exposure to interest rate risk and not to speculate or trade in these derivative products. We currently have no interest rate swap agreements in place.

 

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Our primary market risk exposure is that of interest rate risk. A change in LIBOR rates would affect our cost of borrowing. Increases in interest rates, which may cause us to raise the implicit rates charged to our customers, could result in a reduction in demand for our leases. Alternatively, we may price our leases based on market rates so as to keep the fleet on-lease and suffer a decrease in our operating margin due to interest costs that we are unable to pass on to our customers. As of March 31, 2016, $551.7 million of our outstanding debt is variable rate debt. We estimate that for every one percent increase or decrease in interest rates on our variable rate debt (net of derivative instruments), our annual interest expense would increase or decrease $5.5 million.

 

We are also exposed to currency devaluation risk. All of our leases require payment in U.S. dollars. During the three months ended March 31, 2016, 91% of our lease rent revenues came from non-United States domiciled lessees.  If these lessees’ currency devalues against the U.S. dollar, the lessees could potentially encounter difficulty in making their lease payments.

 

No customer accounted for more than 10% of total lease rent revenue during the three months ended March 31, 2016 and 2015.

 

 

 

Item 4.Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures. Based on management’s evaluation (with the participation of our Chief Executive Officer (CEO) and Interim Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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Inherent Limitations on Controls

 

Management, including the CEO and CFO, does not expect that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

 

(b) Changes in internal control over financial reporting. There has been no change in our internal control over financial reporting during our fiscal quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) None.

 

(b) None.

 

(c) Issuer Purchases of Equity Securities. On September 27, 2012, the Company announced that its Board of Directors has authorized a plan to repurchase up to $100.0 million of its common stock over the next 5 years. The Board of Directors reaffirmed the repurchase plan on April 21, 2015.  This plan extends the previous plan authorized on December 8, 2009, and increases the number of shares authorized for repurchase to up to $100.0 million.

 

Common stock repurchases, under our authorized plan, in the three months ended March 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate

 

 

 

 

 

 

 

 

Total Number of

 

Dollar Value of

 

 

 

 

 

 

Average

 

Shares Purchased

 

Shares that May

 

 

Total Number of

 

 

Price

 

as Part of Publicly

 

Yet be Purchased

Period

 

Shares Purchased

 

 

per Share

 

Announced Plans

 

Under the Plans

 

 

(in thousands, except per share data)

January 1, 2016 - January 31, 2016

 

 

 —

 

$

 —

 

 

 —

 

$

61,779

February 1, 2016 - February 29, 2016

 

 

 —

 

$

 —

 

 

 —

 

$

61,779

March 1, 2016 - March 31, 2016

 

 

200

 

$

21.95

 

 

200

 

$

57,389

Total

 

 

200

 

$

21.95

 

 

200

 

$

57,389

 

 

 

 

 

ITEM 5.OTHER INFORMATION

 

As previously disclosed in a Form 8-K filed on November 13, 2015, Donald A. Nunemaker, announced his decision to retire as President of the Company, effective March 31, 2016 or shortly thereafter.  Following a professionally conducted search and as previously disclosed in a Form 8-K filed on January 20, 2016, the Company promoted its Chief Investment Officer, Brian R. Hole, to the office of President, effective as of April 1, 2016.

 

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As previously disclosed in a Form 8-K filed on January 25, 2016, our Chief Financial Officer, Bradley S. Forsyth, announced his resignation from the Company effective as of February 18, 2016.  While searching for a permanent replacement and as previously disclosed in a Form 8-K filed on February 5, 2016, the Company has retained the temporary services of Ernest J. Furtado, who is serving as our Interim Chief Financial Officer.  Mr. Furtado recently retired from Textainer Group Holdings Limited, where he had served as Senior Vice President, Chief Financial Officer, Chief Accounting Officer and Secretary.  Mr. Furtado is signing this Form 10-Q as he is currently performing the function of the Company's principal financial officer.

 

Item 6.Exhibits

 

(a) Exhibits.

 

EXHIBITS

 

 

 

 

Exhibit 
Number

 

Description

3.1 

 

Certificate of Incorporation, dated March 12, 1998, as amended by the Certificate of Amendment of Certificate of Incorporation, dated May 6, 1998 (incorporated by reference to Exhibit 3.1 to our report on Form 10-K filed on March 31, 2009).

3.2 

 

Bylaws, dated April 18, 2001 as amended by (1) Amendment to Bylaws, dated November 13, 2001, (2) Amendment to Bylaws, dated December 16, 2008, (3) Amendment to Bylaws, dated September 28, 2010, and (4) Amendment to Bylaws, dated August 5, 2013 (incorporated by reference to Exhibit 3.1 to our report on Form 8-K filed on August 9, 2013).

4.1 

 

Rights Agreement dated as of September 24, 1999, by and between Willis Lease Finance Corporation and American Stock Transfer and Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed on October 4, 1999).

4.2 

 

Second Amendment to Rights Agreement dated as of December 15, 2005, by and between Willis Lease Finance Corporation and American Stock Transfer and Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.5 to our report on Form 10-K filed on March 31, 2009).

4.3 

 

Third Amendment to Rights Agreement dated as of September 30, 2008, by and between Willis Lease Finance Corporation and American Stock Transfer and Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.6 to our report on Form 10-K filed on March 31, 2009).

4.4 

 

Form of Certificate of Designations of the Registrant with respect to the Series I Junior Participating Preferred Stock (formerly known as “Series A Junior Participating Preferred Stock”) (incorporated by reference to Exhibit 4.7 to our report on Form 10-K filed on March 31, 2009).

4.5 

 

Form of Amendment No. 1 to Certificate of Designations of the Registrant with respect to Series I Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.8 to our report on Form 10-K filed on March 31, 2009).

10.1 

 

Form of Indemnification Agreement entered into between the Registrant and its directors and officers (incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 1, 2010).

10.2 

 

1996 Stock Option/Stock Issuance Plan, as amended and restated as of March 1, 2003 (incorporated by reference to Exhibit 99.1 to Form S-8 filed on September 26, 2003).

10.3 

 

Amended and Restated 2007 Stock Incentive Plan (incorporated by reference to the Registrant’s Proxy Statement for 2015 Annual Meeting of Stockholders filed on April 28, 2015).

10.4 

 

Amended and Restated Employment Agreement between the Registrant and Charles F. Willis IV dated as of December 1, 2008 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 22, 2008).

10.5 

 

Employment Agreement between the Registrant and Donald A. Nunemaker dated November 21, 2000 (incorporated by reference to Exhibit 10.3 to our report on Form 10-K filed on April 2, 2001).

10.6 

 

Amendment to Employment Agreement between Registrant and Donald A. Nunemaker dated December 31, 2008 (incorporated by reference to Exhibit 10.6 to our report on Form 10-Q filed on May 9, 2011).

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10.7 

 

Employment Agreement between the Registrant and Bradley S. Forsyth dated February 20, 2007 (incorporated by reference to Exhibit 10.2 to Form 8-K filed on February 21, 2007).

10.8 

 

Amendment to Employment Agreement between Registrant and Bradley S. Forsyth dated December 31, 2008 (incorporated by reference to Exhibit 10.10 to our report on Form 10-Q filed on May 9, 2011).

10.9 

 

Employment Agreement between the Registrant and Dean M. Poulakidas dated March 31, 2013 (incorporated by reference to Exhibit 10.23 to Form 8-K filed on June 19, 2013).

10.10*

 

Indenture dated as of September 14, 2012 among Willis Engine Securitization Trust II, Deutsche Bank Trust Company Americas, as trustee, the Registrant and Crédit Agricole Corporate and Investment Bank (incorporated by reference to Exhibit 10.14 to our report on Form 10-Q filed on November 9, 2012).

10.11*

 

Security Trust Agreement dated as of September 14, 2012 by and among Willis Engine Securitization Trust II, Willis Engine Securitization (Ireland) Limited, the Engine Trusts listed on Schedule V thereto, each of the additional grantors referred to therein and from time to time made a party thereto and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 10.15 to our report on Form 10-Q filed on November 9, 2012).

10.12*

 

Note Purchase Agreement dated as of September 6, 2012 by and among Willis Engine Securitization Trust II, the Registrant, Credit Agricole Securities (USA) Inc. and Goldman, Sachs & Co. (incorporated by reference to Exhibit 10.16 to our report on Form 10-Q filed on November 9, 2012).

10.13*

 

Servicing Agreement dated as of September 17, 2012 between Willis Engine Securitization Trust II, the Registrant and the entities listed on Appendix A thereto (incorporated by reference to Exhibit 10.17 to our report on Form 10-Q filed on November 9, 2012).

10.14*

 

Administrative Agency Agreement dated as of September 17, 2012 among Willis Engine Securitization Trust II, the Registrant, Deutsche Bank Trust Company Americas, as trustee, and the entities listed on Appendix A thereto (incorporated by reference to Exhibit 10.18 to our report on Form 10-Q filed on November 9, 2012).

10.15*

 

Second Amended and Restated Credit Agreement, dated as of June 4, 2014, among the Company, Union Bank, N.A., as administrative agent and security agent, and certain lenders and financial institutions named therein (incorporated by reference to Exhibit 10.16 to our report on Form 10-Q filed on August 11, 2014).

10.16 

 

Employment Agreement between the Company and Brian R. Hole dated January 14, 2016 (incorporated by reference to Exhibit 10.1 filed on February 16, 2016).

10.17 

 

Employment Agreement between the Company and Austin C. Willis dated February 9, 2016 (incorporated by reference to Exhibit 10.1 filed on February 16, 2016).

11.1 

 

Statement re Computation of Per Share Earnings.

14.1 

 

Code of Ethics (incorporated by reference to Exhibit 14.1 to our report on Form 10-K filed on March 11, 2016).

31.1 

 

Certification of Charles F. Willis, IV, pursuant to Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 

 

Certification of Ernest J. Furtado, pursuant to Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 


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*Confidential treatment has been granted for certain portions of this exhibit. These portions have been omitted and filed separately with the SEC.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 10, 2016

 

 

 

 

 

 

Willis Lease Finance Corporation

 

 

 

 

By:

/s/ Ernest J. Furtado

 

 

Ernest J. Furtado

Interim Chief Financial Officer

(Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

24