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EX-32 - EX-32 - WILLIS LEASE FINANCE CORPwlfc-20170331xex32.htm
EX-31.2 - EX-31.2 - WILLIS LEASE FINANCE CORPwlfc-20170331ex312b7d0a2.htm
EX-31.1 - EX-31.1 - WILLIS LEASE FINANCE CORPwlfc-20170331ex3117887ec.htm
EX-23.1 - EX-23.1 - WILLIS LEASE FINANCE CORPwlfc-20170331ex231c5e567.htm
EX-11.1 - EX-11.1 - WILLIS LEASE FINANCE CORPwlfc-20170331ex11141b25c.htm

f

 

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, 2017

 

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 website, 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”, “smaller reporting company” and “emerging growth 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)

 

 

 

 

 

Emerging growth 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 1, 2017

Common Stock, $0.01 par value per share

 

6,464,157

 

 

 

 

 

 


 

 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

 

INDEX

 

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

3

 

 

 

 

Consolidated Statements of Income for the three ended March 31, 2017 and 2016

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March, 2017 and 2016

5

 

 

 

 

Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity for the three months ended March 31, 2017 and 2016

6

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

 

Item 2. 

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

18

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4. 

Controls and Procedures

23

 

 

 

PART II. 

OTHER INFORMATION

23

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

Item 6. 

Exhibits

24

 

2


 

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,

 

 

2017

 

2016

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,890

 

$

10,076

Restricted cash

 

 

29,306

 

 

22,298

Equipment held for operating lease, less accumulated depreciation of $349,273 and $351,553 at March 31, 2017 and December 31, 2016, respectively

 

 

1,094,673

 

 

1,136,603

Maintenance rights

 

 

17,160

 

 

17,670

Equipment held for sale

 

 

58,083

 

 

30,710

Operating lease related receivables, net of allowances of $1,350 and $787 at March 31, 2017 and December 31, 2016, respectively

 

 

11,771

 

 

16,484

Spare parts inventory

 

 

24,475

 

 

25,443

Investments

 

 

44,540

 

 

45,406

Property, equipment & furnishings, less accumulated depreciation of $6,222 and $5,858 at March 31, 2017 and December 31, 2016, respectively

 

 

16,638

 

 

16,802

Intangible assets, net

 

 

2,081

 

 

2,182

Other assets

 

 

12,372

 

 

14,213

Total assets

 

$

1,322,989

 

$

1,337,887

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

22,239

 

$

17,792

Deferred income taxes

 

 

110,063

 

 

104,978

Notes payable

 

 

872,201

 

 

900,255

Maintenance reserves

 

 

66,751

 

 

71,602

Security deposits

 

 

21,256

 

 

21,417

Unearned lease revenue

 

 

5,243

 

 

5,823

Total liabilities

 

 

1,097,753

 

 

1,121,867

 

 

 

 

 

 

 

Redeemable preferred stock ($0.01 par value, 1,000,000 shares authorized; 1,000,000 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively)

 

 

19,767

 

 

19,760

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock ($0.01 par value, 20,000,000 shares authorized; 6,525,373 and 6,401,929 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively)

 

 

65

 

 

64

Paid-in capital in excess of par

 

 

2,324

 

 

2,512

Retained earnings

 

 

203,841

 

 

194,729

Accumulated other comprehensive loss, net of income tax benefit of $401 and $275 at March 31, 2017 and December 31, 2016, respectively.

 

 

(761)

 

 

(1,045)

Total shareholders’ equity

 

 

205,469

 

 

196,260

Total liabilities, redeemable preferred stock and shareholders' equity

 

$

1,322,989

 

$

1,337,887

 

 

 

 

 

 

 

(1) Total assets at March 31, 2017 and December 31, 2016 include the following assets of a variable interest entity (VIE) that can only be used to settle the liabilities of the VIE:  Cash, $583 and $257; Restricted Cash $29,306 and $22,298; Equipment, $302,620 and $309,815; and Other, $4,087 and $4,139, respectively.

(2) Total liabilities at March 31, 2017 and December 31, 2016 include the following liabilities of a VIE for which the VIE creditors do not have recourse to Willis Lease Finance Corporation: Notes payable, $268,695 and $273,380, respectively.

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


 

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016 (1)

    

REVENUE

 

 

 

 

 

 

 

Lease rent revenue

 

$

30,233

 

$

28,276

 

Maintenance reserve revenue

 

 

31,961

 

 

15,819

 

Spare parts and equipment sales

 

 

12,596

 

 

2,632

 

Gain on sale of leased equipment

 

 

983

 

 

2,992

 

Other revenue

 

 

2,173

 

 

1,000

 

Total revenue

 

 

77,946

 

 

50,719

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

16,628

 

 

16,419

 

Cost of spare parts and equipment sales

 

 

9,400

 

 

1,932

 

Write-down of equipment

 

 

13,009

 

 

2,036

 

General and administrative

 

 

13,201

 

 

11,752

 

Technical expense

 

 

2,292

 

 

1,696

 

Net finance costs

 

 

10,865

 

 

10,008

 

Total expenses

 

 

65,395

 

 

43,843

 

 

 

 

 

 

 

 

 

Earnings from operations

 

 

12,551

 

 

6,876

 

 

 

 

 

 

 

 

 

Earnings from joint ventures

 

 

1,854

 

 

187

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

14,405

 

 

7,063

 

Income tax expense

 

 

6,238

 

 

3,052

 

Net income

 

$

8,167

 

$

4,011

 

Preferred stock dividends

 

 

321

 

 

 —

 

Accretion of preferred stock issuance costs

 

 

 7

 

 

 —

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

7,839

 

$

4,011

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

$

1.28

 

$

0.56

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

$

1.26

 

$

0.55

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

 

6,114

 

 

7,149

 

Diluted average common shares outstanding

 

 

6,240

 

 

7,272

 

 

 

 

 

 

 

 

 

(1) Certain amounts include adjustments to prior periods see "Note 1. Summary of Significant Accounting Policies (c) Correction of Immaterial Errors - Consolidated Financial Statements" for further disclosure.

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

4


 

 

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016 (1)

    

Net income

 

$

8,167

 

$

4,011

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Currency translation adjustment

 

 

99

 

 

(441)

 

Unrealized gain on derivative instruments

 

 

335

 

 

 —

 

Net gain (loss) recognized in other comprehensive income

 

 

434

 

 

(441)

 

Tax benefit (expense) related to items of other comprehensive income

 

 

(150)

 

 

153

 

Other comprehensive income (loss)

 

 

284

 

 

(288)

 

Total comprehensive income

 

$

8,451

 

$

3,723

 

 

 

 

 

 

 

 

 

(1) Certain amounts include adjustments to prior periods see "Note 1. Summary of Significant Accounting Policies (c) Correction of Immaterial Errors - Consolidated Financial Statements" for further disclosure.

 

 

See accompanying notes to the unaudited consolidated financial statements.

5


 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity
Three months Ended March 31, 2017 and 2016
(In thousands, unaudited)

 

 

l

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

Paid-in

 

Other

 

 

 

 

Total

 

 

Preferred Stock

 

Common Stock

 

Capital in

 

Comprehensive

 

Retained

 

Shareholders’

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Excess of par

 

Income

 

Earnings (1)

 

Equity

Balances at December 31, 2015

 

 —

 

$

 —

 

7,548

 

$

75

 

$

28,720

 

$

(521)

 

$

180,949

 

$

209,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,011

 

 

4,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

$

184,960

 

$

209,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2017

 

1,000

 

$

19,760

 

6,402

 

$

64

 

$

2,512

 

$

(1,045)

 

$

194,729

 

$

196,260

Cumulative-effect adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,273

 

 

1,273

Balances at January 1, 2017, adjusted

 

1,000

 

 

19,760

 

6,402

 

 

64

 

 

2,512

 

 

(1,045)

 

 

196,002

 

 

197,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,167

 

 

8,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain from currency translation adjustment, net of tax expense of $34

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

65

 

 

 —

 

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain from derivative instruments, net of tax expense of $116

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

219

 

 

 —

 

 

219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased

 

 —

 

 

 —

 

(40)

 

 

(1)

 

 

(883)

 

 

 —

 

 

 —

 

 

(884)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock compensation plans

 

 —

 

 

 —

 

175

 

 

 2

 

 

91

 

 

 —

 

 

 —

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of restricted stock in satisfaction of withholding tax

 

 —

 

 

 —

 

(11)

 

 

 —

 

 

(270)

 

 

 —

 

 

 —

 

 

(270)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation, net of forfeitures

 

 —

 

 

 —

 

 —

 

 

 —

 

 

874

 

 

 —

 

 

 —

 

 

874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of preferred shares issuance costs

 

 —

 

 

 7

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7)

 

 

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(321)

 

 

(321)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2017

 

1,000

 

$

19,767

 

6,526

 

$

65

 

$

2,324

 

$

(761)

 

$

203,841

 

 

205,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Certain amounts include adjustments to prior periods see "Note 1. Summary of significant Accounting Policies (c) Correction of Immaterial Errors - Consolidated Financial Statements" for further disclosure.

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

6


 

 

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2017

    

2016 (1)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

8,167

 

$

4,011

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

 

 

 

 

 

 

Depreciation and amortization expense

 

 

16,628

 

 

16,419

Write-down of equipment

 

 

13,009

 

 

2,036

Stock-based compensation expenses

 

 

874

 

 

944

Amortization of deferred costs

 

 

1,198

 

 

1,071

Allowances and provisions

 

 

563

 

 

209

Gain on sale of leased equipment

 

 

(983)

 

 

(2,992)

Income from joint ventures

 

 

(1,854)

 

 

(187)

Excess tax benefit from stock-based compensation

 

 

 —

 

 

55

Deferred income taxes

 

 

6,181

 

 

2,888

Changes in assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

4,150

 

 

(2,273)

Spare parts inventory

 

 

50

 

 

1,532

Other assets

 

 

(791)

 

 

(165)

Accounts payable and accrued expenses

 

 

3,834

 

 

(282)

Maintenance reserves

 

 

(4,340)

 

 

(5,500)

Security deposits

 

 

(160)

 

 

64

Unearned lease revenue

 

 

(580)

 

 

(739)

Net cash provided by operating activities

 

 

45,946

 

 

17,091

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from sale of equipment (net of selling expenses)

 

 

26,711

 

 

52,488

Capital contribution to joint ventures

 

 

 —

 

 

(4,610)

Distributions received from joint ventures

 

 

1,880

 

 

1,167

Maintenance rights payments received

 

 

 —

 

 

4,634

Purchase of equipment held for operating lease

 

 

(35,304)

 

 

(44,433)

Purchase of maintenance rights

 

 

 —

 

 

(4,634)

Purchase of property, equipment and furnishings

 

 

(199)

 

 

(70)

Net cash provided by (used in) investing activities

 

 

(6,912)

 

 

4,542

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of notes payable

 

 

18,000

 

 

20,000

Proceeds from shares issued under stock compensation plans

 

 

94

 

 

82

Cancellation of restricted stock units in satisfaction of withholding tax

 

 

(270)

 

 

(424)

Repurchase of common stock

 

 

(884)

 

 

(4,453)

Preferred stock dividends, net

 

 

(305)

 

 

 —

Principal payments on notes payable

 

 

(46,847)

 

 

(36,889)

Net cash used in financing activities

 

 

(30,212)

 

 

(21,684)

Increase (decrease) in cash, cash equivalents and resticted cash

 

 

8,822

 

 

(51)

Cash, cash equivalents and restricted cash at beginning of period

 

 

32,374

 

 

42,758

Cash, cash equivalents and restricted cash at end of period

 

$

41,196

 

$

42,707

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Net cash paid for:

 

 

 

 

 

 

Interest

 

$

9,485

 

$

8,753

Income Taxes

 

$

75

 

$

 5

 

 

 

 

 

 

 

(1) Certain amounts include adjustments to prior periods see "Note 1. Summary of Significant Accounting Policies (c) Correction of Immaterial Errors - Consolidated Financial Statements" for further disclosure.

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing activities:

 

 

 

 

 

 

During the three months ended March 31, 2017 and 2016, liabilities of $623 and $6,778, respectively, were incurred but not paid in connection with our purchase of aircraft and engines.

During the three months ended March 31, 2017 and 2016, engines and equipment totaling $37,883 and $12,806, 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


 

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, 2016.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2017 and December 31, 2016, and the results of our operations for the three months ended March 31, 2017 and 2016, and our cash flows for the three months ended March 31, 2017 and 2016. The results of operations and cash flows for the period ended March 31, 2017 are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2017.

 

(b)    Principles 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)   Correction of Immaterial Errors – Consolidated Financial Statements:  

 

During the second quarter of 2016 the Company determined that its financial statements for the years ended December 31, 2015, 2014 and 2013 and for prior years and for the quarter ended March 31, 2016 contained errors resulting from the incorrect accounting for equipment purchased with in-place leases. The Company previously did not identify, measure and account for maintenance rights acquired.   The Company’s accounting policy for maintenance rights is described in the notes to the consolidated financial statements in our Form 10-K for the fiscal year ended December 31, 2016.  Management evaluated the materiality of the errors described above from a qualitative and quantitative perspective in accordance with the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99, Materiality (SAB 99).  Based on such evaluation, we have concluded that these corrections would not be material to any individual prior period and have corrected such balances herein.

 

The adjustments to the previously reported Consolidated Statement of Income for the three month period ending March 31, 2016 were as follows: a decrease in Depreciation and Amortization Expense of $0.2 million; an increase in Income Tax Expense of $0.1 million, an increase in net income of $0.2 million; and an increase in basic and diluted earnings per share of $0.03.

 

8


 

There were other immaterial out of period adjustments recorded that affected lease rent revenue, spare part sales revenue and expense and general and administrative expenses for the three month month ended March 31, 2016. 

  

(d)    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.

 

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, 2017 and 2016, and the losses recorded during the three months ended March 31, 2017 and 2016 on those assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at Fair Value

 

Total Losses

 

 

March 31, 2017

 

March 31, 2016

 

Three Months Ended March 31,

 

   

Level 1

   

Level 2

   

Level 3

   

Total

   

Level 1

   

Level 2

   

Level 3

   

Total

   

2017

   

2016

 

 

(in thousands)

 

(in thousands)

Equipment held for lease

 

$

 —

 

$

11,454

 

$

 —

 

$

11,454

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

(9,019)

 

$

 —

Equipment held for sale

 

 

 —

 

 

26,306

 

 

 —

 

 

26,306

 

 

 —

 

 

3,307

 

 

 —

 

 

3,307

 

 

(3,071)

 

 

(2,036)

Spare parts inventory

 

 

 —

 

 

2,228

 

 

 —

 

 

2,228

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(919)

 

 

 —

Total

 

$

 —

 

$

39,988

 

$

 —

 

$

39,988

 

$

 —

 

$

3,307

 

$

 —

 

$

3,307

 

$

(13,009)

 

$

(2,036)

 

At March 31, 2017, 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 writedown of $12.1 million was recorded during the three months ended March 31, 2017 for four engines and two aircraft for which their leases ended or were modified in the period. We evaluated the equipment return condition, end of lease compensation, accumulated maintenance reserves and expected future proceeds from part out and sale to record our initial best estimate of impairment.   An additional asset write-down of $0.9 million was recorded in the

9


 

three months ended March 31, 2017 based upon a comparison of the spare parts net book values with the revised net proceeds expected from part sales.  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.

 

(e)    Reclassifications: 

 

Reclassifications have been made to our consolidated financial statements for the prior periods to conform to classifications used during the three ended March 31, 2017. 

 

(f)    Foreign Currency Translation:

 

The Company’s foreign investments have been converted at rates of exchange at March 31, 2017. The changes in exchange rates in our foreign investments reported under the equity method are included in stockholders’ equity as accumulated other comprehensive income.

 

(g)    Recent Accounting Pronouncements:

 

In July 2015, the Financial Accounting Standards Board ("FASB")  issued Accounting Standards Update ("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, 2017 and for interim periods therein.  The Company adopted ASU 2015-11 during the quarter ended March 31, 2017 and it did not have a material impact on our consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-08 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a retrospective transition method to each period presented. The Company adopted this standard as of March 31, 2017 and included $29.3 million and $30.0 million of restricted cash in the total of cash, cash equivalents and restricted cash in its statements of consolidated cash flows for the three months ended March 31, 2017 and 2016, respectively.   The adoption of this standard also resulted in an increase (decrease) in cash flows from operating, investing and financing activities of ($3.1 million), $1.3 million and ($1.3 million), respectively, for the three months ended March 31, 2016.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new guidance became effective for the Company in the first quarter of fiscal 2017.

 

The Company adopted ASU 2016-09 on January 1, 2017 on a modified retrospective method through a cumulative adjustment to  retained earnings of $1.3 million.  Starting this quarter, excess tax benefit from stock-based compensation of $25,000 were reflected in the Consolidated Statements of Income as income tax expense, whereas they previously were recognized in equity. Additionally, our Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity, with the prior periods adjusted accordingly. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result of the adoption of ASU 2016-09, the Consolidated Statement of Cash Flows for the three months ended March 31, 2016 was adjusted as follows: a $0.1 million increase to net cash provided by operating activities and a $0.1 million decrease to net cash used in financing activities.

 

 

10


 

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

 

 

3. Commitments

 

We have made a purchase commitment to secure the purchase of three engines and related equipment for a gross purchase price of $13.5 million, for delivery in 2017. 

 

 

4.  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 investment has decreased to $31.8 million as of March 31, 2017 as a result of the Company receiving $1.9 million in distributions, recording $0.4 million as deferred gain as a result of the Company selling an engine to WMES and the Company’s share of WMES reported income of $1.6 million during the three months ended March 31, 2017.

 

On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation (“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. In October 2014, we made a $15.0 million initial capital contribution, representing our fifty percent, up-front funding contribution to the new joint venture. The company acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. During the three months ended March 31, 2017 the Company recording $0.5 million as deferred gain as a result of the Company selling an engine to CASC Willis, recorded $0.1 million foreign

11


 

currency translation adjustment and the Company’s share of CASC Willis reported income of $0.2 million. Our investment in the joint venture is $12.8 million as of March 31, 2017.      

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

    

WMES

 

CASC

 

Total

 

 

(in thousands)

Investment in joint ventures as of December 31, 2016

 

$

32,470

 

$

12,936

 

$

45,406

Earnings from joint venture

 

 

1,635

 

 

219

 

 

1,854

Deferred gain on engine sale

 

 

(443)

 

 

(496)

 

 

(939)

Distribution

 

 

(1,880)

 

 

 —

 

 

(1,880)

Foreign Currency Translation Adjustment

 

 

 —

 

 

99

 

 

99

Investment in joint ventures as of March 31, 2017

 

$

31,782

 

$

12,758

 

$

44,540

 

“Other revenue” on the Consolidated Statement of Income includes management fees earned of $0.8 million and $0.6 million during the three months ended March 31, 2017 and 2016, respectively, related to the servicing of engines for the WMES lease portfolio. “Gain on sale of leased equipment” on the Consolidated Statement of Income includes $0.9 million for the three months ended March 31, 2017 related to the sale of an engine to WMES ($0.4 million gain) and the sale of an engine to CASC Willis ($0.5 million gain).  “Gain on sale of  leased 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 and CASC Willis, we deferred these gains to our investment which is being amortized over a 15-year period to a 55% residual value. 

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2017

    

2016

 

 

(in thousands)

Revenue

 

$

11,661

 

$

9,246

Expenses

 

 

8,430

 

 

9,180

WMES net income

 

$

3,231

 

$

66