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Willis Lease Finance Corporation (NASDAQ: WLFC), a leading lessor
of commercial jet engines, today reported fourth quarter net income
applicable to common shareholders rose 46% from the same quarter a
year ago, and more than tripled from the preceding quarter, fueled by
a 13% increase in the engine portfolio and strong secondary market
valuations for engines.
Fourth quarter net income was $4.1 million on revenue of $25.9
million, compared to $2.2 million on revenue of $19.9 million in the
fourth quarter of 2005. After dividends on preferred shares, net
income available to common shareholders was $3.1 million, or $0.33 per
diluted share in the fourth quarter of 2006, compared to $2.2 million,
or $0.22 per share in the fourth quarter of 2005, when no preferred
dividends were due.
For 2006, net income grew 74% to $7.3 million on revenue of $85.3
million, compared to $4.2 million on revenue of $70.5 million in 2005.
After preferred stock dividends of $2.9 million, 2006 net income
available to common shareholders was $4.3 million, or $0.45 per
diluted share, compared to $4.2 million or $0.44 per diluted share in
2005.
"Our engine leasing business continues to capitalize on very
favorable market conditions in the aviation sector. Strong demand for
leased engines combined with reduced availability of certain engine
types has provided us with pricing power that we haven't seen for a
long time," said Charles F. Willis, President and CEO. "Revenue from
our short-term leases, in particular, has benefited from this
supply/demand situation. Market strength also contributed to the
speedy sale or re-leasing of the nine engines that had been leased to
Varig, formerly one of our largest customers, following its bankruptcy
in 2006."
"During the fourth quarter we also took advantage of favorable
market conditions to opportunistically sell several off-lease engines
from our portfolio, resulting in some attractive gains on sale,"
Willis continued. The market demand is strong, we have good liquidity
and access to capital, and we have the strongest management team in
place since we went public in 1996. As well, twelve new engines from
CFMI are scheduled for delivery in 2007, increasing our supply of
engines in high demand. The combination of all of these factors, plus
our strong performance in 2006, gives me confidence for 2007." Listed
below are some of the more important highlights of financial
performance in 2006.
2006 in Review
-- The lease portfolio increased to $609.9 million in 2006,
growing 13%, almost double the growth generated in 2005.
-- Average utilization for 2006 was 90%, compared to 91% a year
ago, reflecting the return of the Varig engines and the fast
growth of the portfolio in 2006.
-- Lease revenue increased 10% and total revenue grew 21%.
-- Earnings from operations grew 77% to $9.8 million, and pretax
income rose 85% from a year ago.
-- Net income to common shareholders, after preferred stock
dividends of $2.9 million, increased 3.2% to $4.3 million, or
$0.45 per diluted share.
-- The repurchase of 1.3 million shares of common stock
previously owned by FlightTechnics LLC, at $9.00 per share,
contributed to growth in common equity per share of 8%, to
$14.38 at year end.
Results from Operations
Lease revenue increased 5% to $17.8 million in the fourth quarter
of 2006, and 10% to $69.2 million for the full year, compared to the
respective periods in 2005. Continued strength in the secondary market
for jet engines contributed to solid gains on sale of equipment,
adding $7.8 million to fourth quarter 2006 revenue and $15.7 to annual
revenue, compared to $2.9 million and $7.1 million, respectively last
year.
Total expenses increased 24% in the fourth quarter of 2006
compared to the same period last year. For all of 2006, total expenses
increased 16% to $75.5 million from $65.0 million in 2005.
Depreciation decreased 8% in the fourth quarter to $6.1 million
from $6.7 million in the same period last year, mainly due to an
improvement in estimated residual values for certain older engines in
the portfolio. For the full year, depreciation grew 1% to $25.6
million compared to $25.3 million in 2005.
Fourth quarter net finance costs increased 32% to $7.7 million
from $5.8 million in the same quarter a year ago. Net finance costs
rose 25% to $28.4 million in 2006 from $22.8 million in 2005. On an
operating level, the growth in interest expense for the year was
directly linked to higher interest rates and, to a lesser extent,
greater debt levels. Partially offsetting higher interest expense was
an increase in interest income due to larger balances of restricted
cash for maintenance reserves, as well as higher earning rates on
these balances.
General and administrative (G&A) expense grew to $6.6 million
compared to $4.4 million in the fourth quarter a year ago. G&A expense
for 2006 grew 24% to $21.0 million from $16.9 million in 2005. Higher
staffing costs, including higher compensation and benefit expenses and
additional temporary help were the primary contributors to the
overhead growth in 2006. "With the accounting treatment requiring
expensing for stock options beginning January 1, 2006, compensation
expense included $205,000 in the fourth quarter and $685,000 for the
full year in 2006, that was not included in year ago results," said
Brad Forsyth, Chief Financial Officer.
The income tax provision was higher than in the past in both the
fourth quarter and full year in 2006 due to a change in the estimate
of the 2006 California effective tax rate. In 2005, losses generated
primarily from the extinguishment of debt also reduced the effective
tax rate for the year.
Balance Sheet
At December 31, 2006, the company had 131 commercial jet engines,
3 aircraft parts packages, and 4 aircraft and other engine-related
equipment in its lease portfolio, with a net book value of $609.9
million, compared to 124 commercial jet engines, 3 aircraft parts
packages, 5 aircraft and other engine-related equipment in its lease
portfolio with a net book value of $540.7 million at year-end 2005.
Total assets increased 13% to $737.9 million at December 31, 2006,
compared to $655.7 million a year ago. Total shareholders' equity
increased 21% to $147.1 million from $121.5 million a year ago due
primarily to the addition of $31.9 million in preferred equity and
offset partially by a decrease of $11.7 million in common equity
related to the repurchase of 1.3 million shares in December 2006. Book
value per common share increased to $14.38 compared to $13.27 at
December 31, 2005.
At December 31, 2006, the company had $76 million of availability
under its revolving credit and warehouse facilities, compared to
$106 million a year earlier. The company's funded debt to equity ratio
was 3.16 to 1 at December 31, 2006, compared to 3.36 to 1 at December
31, 2005.
Changes in Accounting
"Effective January 1, 2007, we will adopt the FASB Staff Position
(FSP), Accounting for Planned Major Maintenance Events which is
effective for the first fiscal period beginning after December 15,
2006 and is explained more thoroughly in our filings with the SEC. The
FSP prohibits accrual for maintenance costs. Upon adoption of the FSP
in our 2007 financial statements, we will retroactively change our
2005 and 2006 financial statements to apply the new policy
consistently for all periods presented. This accounting policy change
will have a significant effect on our currently reported income
statements and balance sheets for 2006 and 2005," said Forsyth.
Under the terms of some of the Company's leases, the lessees pay
amounts to the Company based on usage which are designed to cover the
expected maintenance cost. Some of these amounts are reimbursable to
the lessee if they make specifically defined maintenance expenditures.
Through 2006, all such fees received are recorded in maintenance
reserves until such time as maintenance costs are reimbursed to the
lessee or incurred by the Company after the end of the lease. If the
expenditures by the Company are in excess of the reserve and, under
the Company's capitalization policy, the expenditure extends the
original life or improves functionality of the asset, the incremental
expenditure is capitalized. The maintenance reserves were considered
in the Company's impairment analysis. In the analysis, carrying value
was determined by deducting maintenance reserves from the asset's book
value.
Commencing in 2007, use fees received will be recognized in
revenue if they are not reimbursable to the lessee. Use fees that are
reimbursable will be included in maintenance reserves until they are
reimbursed to the lessee or the lease terminates, at which time they
will be recognized in revenue. Expenditures for maintenance by the
Company will be expensed as incurred. Expenditures that meet the
criteria for capitalization will be recorded as an addition to
Equipment recorded on the balance sheet. The change in policy will
result in a revised impairment analysis being performed without
maintenance reserves included as part of the calculation of lease
assets carrying value. The Company will recognize additional
impairment charges in prior periods based on this analysis.
Forsyth added "With the adoption of the FSP we anticipate our
income statement for 2006 would differ as follows from the income
statement reported today using our current accounting policies:"
-0-
*T
---------------------------------------
(In thousands, except per Anticipated 2006
share data, audited) Impact of Under New
Accounting Accounting
As Filed Change Policy
---------------------------------------
REVENUE
Lease revenue $ 69,230 $ 32,744 $ 101,974
Gain (Loss) on sale of
leased equipment 15,744 (13,491) 2,253
Other income 300 - 300
---------------------------------------
Total revenue 85,274 19,253 104,527
---------------------------------------
EXPENSES
Depreciation expense 25,562 693 26,255
Write-down of equipment 601 2,177 2,778
Other operating expenses 20,960 694 21,654
---------------------------------------
Total expenses 75,498 3,564 79,062
---------------------------------------
Earnings from operations 9,776 15,689 25,465
Income before income taxes 10,242 15,689 25,931
Income tax expense (2,988) (4,577) (7,565)
---------------------------------------
Net income 7,254 11,112 18,366
---------------------------------------
---------------------------------------
Net income applicable to
common shareholders $ 4,309 $ 11,112 $ 15,421
=======================================
Basic earnings per common
share $ 0.47 $ 1.21 $ 1.68
---------------------------------------
Diluted earnings per common
share $ 0.45 $ 1.16 $ 1.61
---------------------------------------
Average common shares
outstanding 9,169 9,169 9,169
Diluted average common
shares outstanding 9,606 9,606 9,606
*T
Based on preliminary analysis, the impact of the FSP changes would
be an increase in net income in 2006 of $11.1 million and a decrease
in net income in 2005 of $2.6 million. Included in the impact of the
accounting change above is the termination of nine leases to Varig in
2006 which contributed $14.1 million to revenues and $10 million to
net income, or $1.04 per diluted share. The result of the anticipated
changes for all prior periods would be a net increase in shareholders
equity of $15.9 million to $163.0 million at the end of 2006, which
would translate to a $1.99 increase in book value per common share to
$16.37.
About Willis Lease Finance
Willis Lease Finance Corporation leases spare commercial aircraft
engines, rotable parts and aircraft to commercial airlines, aircraft
engine manufacturers and overhaul/repair facilities worldwide. These
leasing activities are integrated with the purchase and resale of used
and refurbished commercial aircraft engines.
-0-
*T
Consolidated Statements of Income
Three Months Twelve Months
Ended Ended
(In thousands, December 31, % December 31, %
except per share
data, audited) 2006 2005 Change 2006 2005 Change
-------- -------- -------- -------- -------- -------
REVENUE
Lease revenue $17,845 $16,926 5.4% $69,230 $63,119 9.7%
Gain on sale of
equipment 7,822 2,898 169.9% 15,744 7,061 123.0%
Other income 252 81 211.1% 300 366 (18.0)%
-------- -------- -------- --------
Total revenue 25,919 19,905 30.2% 85,274 70,546 20.9%
-------- -------- -------- --------
EXPENSES
Depreciation
expense 6,149 6,708 (8.3)% 25,562 25,291 1.1%
Write-down of
equipment 601 81 642.0% 601 81 642.0%
General and
administrative 6,584 4,373 50.6% 20,960 16,880 24.2%
Net finance costs
Interest
expense 8,566 7,241 18.3% 31,610 24,514 28.9%
Interest income (886) (553) 60.2% (3,082) (1,541) 100.0%
Realized and
unrealized
(gains) and
losses
on derivative
instruments - (868) (100.0)% (153) (1,589) (90.4)%
Loss upon
extinguishment
of debt - - - 1,375
-------- -------- -------- --------
Total net finance
costs 7,680 5,820 32.0% 28,375 22,759 24.7%
-------- -------- -------- --------
Total expenses 21,014 16,982 23.7% 75,498 65,011 16.1%
-------- -------- -------- --------
-------- -------- -------- --------
Income from
operations 4,905 2,923 67.8% 9,776 5,535 76.6%
-------- -------- -------- --------
Income from joint
venture 118 - 100.0% 466 - 100.0%
-------- -------- -------- --------
Income before
income taxes 5,023 2,923 71.8% 10,242 5,535 85.0%
Income tax
expense (971) (770) 26.1% (2,988) (1,358) 120.0%
-------- -------- -------- --------
Net income $4,052 $2,153 88.2% $7,254 $4,177 73.7%
======== ======== ======== ========
Preferred
dividends paid
and accrued-
Series A 913 - 100.0% 2,945 - 100.0%
-------- -------- -------- --------
Net income
available to
common
stockholders $3,139 $2,153 45.8% $4,309 $4,177 3.2%
======== ======== ======== ========
Basic earnings
per common share $0.34 $0.24 $0.47 $0.46
======== ======== ======== ========
Diluted earnings
per common share $0.33 $0.22 $0.45 $0.44
======== ======== ======== ========
Average common
shares
outstanding 9,019 9,147 9,169 9,075
Diluted average
common shares
outstanding 9,499 9,601 9,606 9,515
*T
-0-
*T
Consolidated Balance Sheets
December 31, December 31,
(In thousands, except per share data,
audited) 2006 2005
------------- -------------
ASSETS
Cash and cash equivalents $ 387 $ 6,346
Restricted cash 72,759 61,257
Equipment held for operating lease, less
accumulated depreciation 609,892 540,657
Equipment held for sale 10,033 6,223
Operating lease related receivable, net of
allowances 5,002 4,512
Notes receivable 12 161
Investments 10,602 10,347
Assets under derivative instruments 1,508 2,515
Property, equipment & furnishings, less
accumulated depreciation 7,272 7,662
Other assets 20,397 15,997
------------- -------------
Total assets $ 737,864 $ 655,677
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 14,755 $ 26,152
Liabilities under derivative instruments 96 -
Deferred income taxes 30,813 28,588
Notes payable 465,249 407,551
Maintenance reserves 71,061 63,156
Security deposits 4,848 3,964
Unearned lease revenue 3,961 4,793
------------- -------------
Total liabilities 590,783 534,204
------------- -------------
Shareholders' equity:
Preferred stock $ 31,915 $ -
Common stock ($0.01 par value) 80 92
Paid-in capital in excess of par 53,820 63,618
Accumulated other comprehensive
gain/(loss), net of tax (967) (161)
Retained earnings 62,233 57,924
------------- -------------
Total shareholders' equity 147,081 121,473
------------- -------------
Total liabilities and shareholders' equity $ 737,864 $ 655,677
============= =============
*T
Except for historical information, the matters discussed in this
press release contain forward-looking statements that involve risks
and uncertainties. Do not unduly rely on forward-looking statements,
which give only expectations about the future and are not guarantees.
Forward-looking statements speak only as of the date they are made;
and we undertake no obligation to update them. Our actual results may
differ materially from the results discussed in forward-looking
statements. Factors that might cause such a difference include, but
are not limited to, the effects on the airline industry and the global
economy of events such as terrorist activity, changes in oil prices
and other disruptions to the world markets; trends in the airline
industry and our ability to capitalize on those trends, including
growth rates of markets and other economic factors; risks associated
with owning and leasing jet engines and aircraft; our ability to
successfully negotiate equipment purchases, sales and leases, to
collect outstanding amounts due and to control costs and expenses;
changes in interest rates and availability of capital, both to us and
our customers; our ability to continue to meet the changing customer
demands; regulatory changes affecting airline operations, aircraft
maintenance, accounting standards and taxes; the market value of
engines and other assets in our portfolio; and risks detailed in the
Company's Annual Report on Form 10-K and other continuing reports
filed with the Securities and Exchange Commission.
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