WILLIS LEASE FINANCE CORP - FORM 10-Q

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EX-32 - EX-32 - WILLIS LEASE FINANCE CORP	wlfc-20170630xex32.htm
EX-31.2 - EX-31.2 - WILLIS LEASE FINANCE CORP	wlfc-20170630ex312491fc2.htm
EX-31.1 - EX-31.1 - WILLIS LEASE FINANCE CORP	wlfc-20170630ex311e7d63c.htm
EX-11.1 - EX-11.1 - WILLIS LEASE FINANCE CORP	wlfc-20170630ex1113dd3be.htm

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 June 30, 2017

☐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 ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 August 7, 2017
Common Stock, $0.01 par value per share		6,434,074

Table of Contents

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

INDEX


PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	3

	Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income for the six months ended June 30, 2017 and 2016	5

	Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity for the six months ended June 30, 2017 and 2016	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 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	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 6.	Exhibits	27

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)


	June 30,		December 31,
	2017		2016
ASSETS
Cash and cash equivalents	$	11,256	$	10,076
Restricted cash		43,244		22,298
Equipment held for operating lease, less accumulated depreciation of $351,616 and $351,553 at June 30, 2017 and December 31, 2016, respectively		1,160,545		1,136,603
Maintenance rights		17,159		17,670
Equipment held for sale		27,826		30,710
Operating lease related receivables, net of allowances of $1,058 and $787 at June 30, 2017 and December 31, 2016, respectively		12,867		16,484
Spare parts inventory		22,955		25,443
Investments		45,928		45,406
Property, equipment & furnishings, less accumulated depreciation of $6,586 and $5,858 at June 30, 2017 and December 31, 2016, respectively		16,400		16,802
Intangible assets, net		1,980		2,182
Other assets		26,194		14,213
Total assets	$	1,386,354	$	1,337,887

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses	$	24,452	$	17,792
Deferred income taxes		114,127		104,978
Notes payable		921,782		900,255
Maintenance reserves		68,512		71,602
Security deposits		23,074		21,417
Unearned lease revenue		5,195		5,823
Total liabilities		1,157,142		1,121,867

Redeemable preferred stock ($0.01 par value, 1,000,000 shares authorized; 1,000,000 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively)	$	19,777	$	19,760

Shareholders’ equity:
Common stock ($0.01 par value, 20,000,000 shares authorized; 6,440,049 and 6,401,929 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively)		64		64
Paid-in capital in excess of par		708		2,512
Retained Earnings		209,497		194,729
Accumulated other comprehensive loss, net of income tax benefit of $439 and benefit $551 at June 30, 2017 and December 31, 2016, respectively.		(834)		(1,045)
Total shareholders’ equity		209,435		196,260
Total liabilities, redeemable preferred stock and shareholders' equity	$	1,386,354	$	1,337,887

(1) Total assets at June 30, 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, $72 and $257; Restricted Cash $43,244 and $22,298; Equipment, $281,472 and $309,815; and Other, $8,026 and $4,139, respectively.
(2) Total liabilities at June 30, 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, $263,884 and $273,380, respectively.

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data, unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
REVENUE
Lease rent revenue	$	31,337	$	29,181	$	61,572	$	57,457
Maintenance reserve revenue		11,881		15,514		43,843		31,333
Spare parts and equipment sales		19,383		3,673		31,979		6,305
Gain on sale of leased equipment		3,527		258		4,509		3,250
Other revenue		1,716		992		3,888		1,992
Total revenue		67,844		49,618		145,791		100,337

EXPENSES
Depreciation and amortization expense		16,015		16,188		32,644		32,607
Cost of spare parts and equipment sales		13,730		2,787		23,130		4,719
Write-down of equipment		2,277		1,893		15,285		3,929
General and administrative		13,065		10,685		26,265		22,437
Technical expense		2,448		1,803		4,740		3,499
Net finance costs:
Interest expense		11,312		10,397		22,178		20,405
Gain on debt extinguishment		—		137		—		137
Net finance costs		11,312		10,534		22,178		20,542
Total expenses		58,847		43,890		124,242		87,733

Earnings from operations		8,997		5,728		21,549		12,604

Earnings from joint ventures		1,161		56		3,015		243

Income before income taxes		10,158		5,784		24,564		12,847
Income tax expense		4,168		2,418		10,406		5,470
Net income	$	5,990	$	3,366	$	14,158	$	7,377
Preferred stock dividends		324		—		646		—
Accretion of preferred stock issuance costs		9		—		17		—

Net income attributable to common shareholders	$	5,657	$	3,366		13,495		7,377

Basic earnings per common share:	$	0.94	$	0.50	$	2.22	$	1.07

Diluted earnings per common share:	$	0.92	$	0.49	$	2.18	$	1.05

Average common shares outstanding		6,036		6,685		6,075		6,917
Diluted average common shares outstanding		6,142		6,819		6,201		7,047

See accompanying notes to the unaudited consolidated financial statements.

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WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands, unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net income	$	5,990	$	3,366	$	14,158	$	7,377

Other comprehensive income (loss):
Currency translation adjustment		226		967		326		526
Unrealized loss on derivative instruments		(338)		—		(3)		—
Net gain (loss) recognized in other comprehensive income		(112)		967		323		526
Tax benefit (expense) related to items of other comprehensive income		40		(334)		(112)		(182)
Other comprehensive income (loss)		(72)		633		211		344
Total comprehensive income	$	5,918	$	3,999	$	14,369	$	7,721

See accompanying notes to the unaudited consolidated financial statements.

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WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity
Six months Ended June 30, 2017 and 2016
(In thousands, unaudited)


				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		Equity
Balances at December 31, 2015	—	$	—	7,548	$	75	$	28,720	$	(521)	$	180,949	$	209,223

Net income	—		—	—		—		—		—		7,377		7,377

Net unrealized loss from currency translation adjustment, net of tax benefit of $182	—		—	—		—		—		345		—		345

Shares repurchased	—		—	(942)		(9)		(22,390)		—		—		(22,399)

Shares issued under stock compensation plans	—		—	112		1		81		—		—		82

Cancellation of restricted stock in satisfaction of withholding tax	—		—	(29)		—		(581)		—		—		(581)

Stock-based compensation, net of forfeitures	—		—	—		—		1,849		—		—		1,849

Tax benefit on disqualified disposition of shares	—		—	—		—		254		—		—		254

Balances at June 30, 2016	—	$	—	6,689	$	67	$	7,933	$	(176)	$	188,326	$	196,150

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	—		—	—		—		—		—		14,158		14,158

Net unrealized gain from currency translation adjustment, net of tax expense of $112	—		—	—		—		—		214		—		214

Net unrealized gain (loss) from derivative instruments, net of tax expense of $1	—		—	—		—		—		(3)		—		(3)

Shares repurchased	—		—	(155)		(2)		(3,347)		—		—		(3,349)

Shares issued under stock compensation plans	—		—	211		2		91		—		—		93

Cancellation of restricted stock in satisfaction of withholding tax	—		—	(18)		—		(622)		—		—		(622)

Stock-based compensation, net of forfeitures	—		—	—		—		2,074		—		—		2,074

Accretion of preferred shares issuance costs	—		17	—		—		—		—		(17)		(17)

Preferred stock dividend	—		—	—		—		—		—		(646)		(646)

Balances at June 30, 2017	1,000	$	19,777	6,440	$	64	$	708	$	(834)	$	209,497		209,435

See accompanying notes to the unaudited consolidated financial statements.

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WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands, unaudited)


	Six Months Ended June 30,
	2017		2016
Cash flows from operating activities:
Net income	$	14,158	$	7,377
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		32,644		32,607
Write-down of equipment		15,285		3,929
Stock-based compensation expenses		2,074		1,849
Amortization of deferred costs		2,361		2,157
Allowances and provisions		272		(419)
Gain on sale of leased equipment		(4,509)		(3,250)
Gain on extinguishment of debt		—		137
Income from joint ventures		(3,015)		(243)
Excess tax benefit from stock-based compensation		—		254
Deferred income taxes		10,406		4,990
Changes in assets and liabilities:
Receivables		3,345		(225)
Spare parts inventory		645		1,799
Other assets		(3,315)		297
Accounts payable and accrued expenses		8,139		(2,322)
Maintenance reserves		(342)		(1,782)
Security deposits		1,757		(105)
Unearned lease revenue		(628)		(256)
Net cash provided by operating activities		79,277		46,794

Cash flows from investing activities:
Proceeds from sale of equipment (net of selling expenses)		37,754		54,204
Capital contribution to joint ventures		—		(4,610)
Distributions received from joint ventures		1,880		1,167
Purchase of equipment held for operating lease		(112,233)		(61,472)
Purchase of maintenance rights		—		(4,634)
Purchase of property, equipment and furnishings		(326)		(183)
Net cash provided by (used in) investing activities		(72,925)		(15,528)

Cash flows from financing activities:
Proceeds from issuance of notes payable		93,000		55,000
Debt issuance cost		—		(3,755)
Proceeds from shares issued under stock compensation plans		93		82
Cancellation of restricted stock units in satisfaction of withholding tax		(622)		(581)
Repurchase of common stock		(3,348)		(22,399)
Preferred stock dividends, net		(596)		—
Principal payments on notes payable		(72,752)		(42,501)
Net cash provided by (used in) financing activities		15,775		(14,154)
Increase (decrease) in cash, cash equivalents and restricted cash		22,127		17,112
Cash, cash equivalents and restricted cash at beginning of period		32,373		42,758
Cash, cash equivalents and restricted cash at end of period	$	54,500	$	59,870
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest	$	19,426	$	18,653
Income Taxes	$	332	$	72



Supplemental disclosures of non-cash investing activities:
During the six months ended June 30, 2017 and 2016, liabilities of $1,624 and $2,565, respectively, were incurred but not paid in connection with our purchase of aircraft and engines.
During the six months ended June 30, 2017 and 2016, engines and equipment totaling $27,408 and $18,371, respectively, were transferred from Held for Operating Lease to Held for Sale
During the six months ended June 30, 2016 , an aircraft of $2,925 was transferred from Property, equipment and furnishings to Assets Held for Lease.
(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.

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, 2016.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of June 30, 2017 and December 31, 2016, and the results of our operations for the three and six months ended June 30, 2017 and 2016, and our cash flows for the six months ended June 30, 2017 and 2016. The results of operations and cash flows for the period ended June 30, 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.

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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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 six months ended June 30, 2017 and 2016, and the losses recorded during the six months ended June 30, 2017 and 2016 on those assets:

WILLIS LEASE FINANCE CORP - FORM 10-Q - August 9, 2017

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