Willis Lease Finance Corp 10-Q for FY2021 Q3
Willis Lease Finance Corp (WLFC)
10-Q
2021-11-03
For: 2021-09-30
View Original
Added on
April 04, 2026
About this 10-Q
Willis Lease Finance Corp filed this 10-Q on November 3, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $70.79M
- up 0.3% from $70.61M a year earlier
- Net income
- $2.88M
- down 3.4% from net income of $2.98M a year earlier
- Diluted EPS
- $0.32
- down 8.6% from $0.35 a year earlier
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 September 30, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File Number: 001-15369
______________________________________________________________________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code (561 ) 349-9989
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of exchange on which registered | ||||||||||||
______________________________________________________________________
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | ☒ | |||||||||
| Non-Accelerated Filer | ☐ | 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 ☒
The number of shares of the registrant's Common Stock outstanding as of November 1, 2021 was 6,076,051 .
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
INDEX
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business, operations, growth strategy and service development efforts and potential impact of the COVID-19 pandemic on the Company's business, operating results and financial condition. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 15, 2021, this quarterly report on Form 10-Q for the three and nine months ended September 30, 2021, and our other reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our other filings with the SEC.
3
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Equipment held for operating lease, less accumulated depreciation of $ | |||||||||||
| Maintenance rights | |||||||||||
| Equipment held for sale | |||||||||||
Receivables, net of allowances of $ | |||||||||||
| Spare parts inventory | |||||||||||
| Investments | |||||||||||
Property, equipment & furnishings, less accumulated depreciation of $ | |||||||||||
| Intangible assets, net | |||||||||||
| Notes receivable | |||||||||||
| Other assets | |||||||||||
| Total assets (1) | $ | $ | |||||||||
| LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Deferred income taxes | |||||||||||
| Debt obligations | |||||||||||
| Maintenance reserves | |||||||||||
| Security deposits | |||||||||||
| Unearned revenue | |||||||||||
| Total liabilities (2) | |||||||||||
Redeemable preferred stock ($ | |||||||||||
| Shareholders’ equity: | |||||||||||
Common stock ($ | |||||||||||
| Paid-in capital in excess of par | |||||||||||
| Retained earnings | |||||||||||
Accumulated other comprehensive income (loss), net of income tax expense (benefit) of $ | ( | ||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities, redeemable preferred stock and shareholders’ equity | $ | $ | |||||||||
_____________________________
(1)Total assets at September 30, 2021 and December 31, 2020, respectively, include the following assets of variable interest entities (“VIEs”) that can only be used to settle the liabilities of the VIEs: Restricted cash $56,476 and $35,262 ; Equipment $1,224,879 and $1,037,684 ; Maintenance Rights $5,433 and $767 ; Inventory $4,367 and $5,437 ; Notes receivable $131,584 and $26,392 ; and Other assets $4,748 and $558 , respectively.
(2)Total liabilities at September 30, 2021 and December 31, 2020, respectively, include the following liabilities of VIEs for which the VIEs’ creditors do not have recourse to Willis Lease Finance Corporation: Debt obligations $1,208,679 and $907,550 , respectively.
See accompanying notes to the unaudited condensed consolidated financial statements.
4
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| REVENUE | |||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance reserve revenue | |||||||||||||||||||||||
| Spare parts and equipment sales | |||||||||||||||||||||||
| Gain on sale of leased equipment | |||||||||||||||||||||||
| Asset transition fee | |||||||||||||||||||||||
| Other revenue | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| EXPENSES | |||||||||||||||||||||||
| Depreciation and amortization expense | |||||||||||||||||||||||
| Cost of spare parts and equipment sales | |||||||||||||||||||||||
| Write-down of equipment | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Technical expense | |||||||||||||||||||||||
| Net finance costs: | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Loss on debt extinguishment | |||||||||||||||||||||||
| Total net finance costs | |||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| Earnings from operations | |||||||||||||||||||||||
| Earnings (loss) from joint ventures | ( | ||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Preferred stock dividends | |||||||||||||||||||||||
| Accretion of preferred stock issuance costs | |||||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | $ | ( | $ | ||||||||||||||||||
| Basic weighted average earnings (loss) per common share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted weighted average earnings (loss) per common share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
5
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Currency translation adjustment | ( | ||||||||||||||||||||||
| Unrealized gain (loss) on derivative instruments | ( | ||||||||||||||||||||||
| Unrealized gain on derivative instruments at joint venture | |||||||||||||||||||||||
| Net gain (loss) recognized in other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Tax (expense) benefit related to items of other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
6
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
Three months ended September 30, 2021 and 2020
(In thousands)
(Unaudited)
| Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in Capital in | Retained | Comprehensive | Total Shareholders' | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Excess of par | Earnings | (Loss) Income | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2021 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized loss from currency translation adjustment, net of tax benefit of $ | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain from derivative instruments, net of tax expense of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | — | — | ( | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of preferred shares issuance costs | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in Capital in | Retained | Comprehensive | Total Shareholders' | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Excess of par | Earnings | Loss | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2020 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain from currency translation adjustment, net of tax expense of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain from derivative instruments, net of tax expense of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | — | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of preferred shares issuance costs | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2020 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
7
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
Nine months ended September 30, 2021 and 2020
(In thousands)
(Unaudited)
| Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in Capital in | Retained | Comprehensive | Total Shareholders' | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Excess of par | Earnings | (Loss) Income | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain from currency translation adjustment, net of tax expense of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain from derivative instruments, net of tax expense of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | — | — | ( | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock in satisfaction of withholding tax | — | — | ( | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of preferred shares issuance costs | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in Capital in | Retained | Comprehensive | Total Shareholders' | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Excess of par | Earnings | Loss | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2019 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain from currency translation adjustment, net of tax expense of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized loss from derivative instruments, net of tax benefit of $ | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | — | — | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock in satisfaction of withholding tax | — | — | ( | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of preferred shares issuance costs | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends ($ | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2020 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
8
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization expense | |||||||||||
| Write-down of equipment | |||||||||||
| Stock-based compensation expenses | |||||||||||
| Amortization of deferred costs | |||||||||||
| Allowances and provisions | ( | ||||||||||
| Gain on sale of leased equipment | ( | ( | |||||||||
| Income from joint ventures | ( | ||||||||||
| Loss on debt extinguishment | |||||||||||
| Loss on sale of note receivable | |||||||||||
| Loss on disposal of property, equipment and furnishings | |||||||||||
| Deferred income taxes | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables | ( | ( | |||||||||
| Distributions received from joint ventures | |||||||||||
| Inventory | |||||||||||
| Other assets | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Maintenance reserves | ( | ( | |||||||||
| Security deposits | |||||||||||
| Unearned revenue | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sale of equipment (net of selling expenses) | |||||||||||
| Proceeds from sale of note receivable | |||||||||||
| Issuance of notes receivable | ( | ( | |||||||||
| Payments received on notes receivable | |||||||||||
| Purchase of equipment held for operating lease | ( | ( | |||||||||
| Purchase of property, equipment and furnishings | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from debt obligations | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Principal payments on debt obligations | ( | ( | |||||||||
| Debt prepayment costs | ( | ||||||||||
| Proceeds from shares issued under stock compensation plans | |||||||||||
| Cancellation of restricted stock units in satisfaction of withholding tax | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Preferred stock dividends | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| (Decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Net cash paid for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income Taxes | $ | $ | |||||||||
| Supplemental disclosures of non-cash activities: | |||||||||||
| Liabilities assumed in purchase of equipment held for operating lease | $ | ( | $ | ( | |||||||
| Transfers from Equipment held for operating lease to Spare parts inventory | $ | $ | |||||||||
| Transfers from Equipment held for operating lease to Equipment held for sale | $ | $ | |||||||||
| Transfers from Spare parts inventory to Equipment held for operating lease | $ | $ | |||||||||
| Accrued share repurchases | $ | $ | |||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
9
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
Unless the context requires otherwise, references to the “Company”, “WLFC”, “we”, “us” or “our” in this Quarterly Report on Form 10-Q refer to Willis Lease Finance Corporation and its subsidiaries.
1. Summary of Significant Accounting Policies
The significant accounting policies of the Company were described in Note 1 to the audited consolidated financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”). There have been no significant changes in the Company’s significant accounting policies for the nine months ended September 30, 2021.
(a) Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), consistent in all material respects with those applied in the 2020 Form 10-K, for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Therefore, they do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the 2020 Form 10-K. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of income, statements of comprehensive income, statements of redeemable preferred stock and shareholders’ equity and statements of cash flows for such interim periods presented. Additionally, operating results for interim periods are not necessarily indicative of the results that can be expected for a full year.
In accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. These estimates and judgments are based on historical experience and other assumptions that management believes are reasonable and the inputs into management's estimates and judgment consider the economic implications of the COVID-19 pandemic on the Company’s critical and significant accounting estimates. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. The significant estimates made in the accompanying Unaudited Condensed Consolidated Financial Statements include certain assumptions related to intangible assets, long-lived assets, equipment held for sale, allowance for doubtful accounts, inventory and estimated income taxes. Actual results may differ materially from these estimates under different assumptions or conditions. Given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 pandemic, the Company will continue to evaluate the nature and extent of the impact to its business, results of operations and financial condition.
(b) Principles of Consolidation
(c) Risks and Uncertainties
As a result of the COVID-19 pandemic, the Company has continued to temporarily close its headquarters and other offices, require its employees and contractors to predominately work remotely, and implement travel restrictions, all of which represent a significant disruption in how the Company operates its business. The Company has also taken various proactive actions in an attempt to mitigate the financial impact of the COVID-19 pandemic. During 2020, 9 % of our employees were either furloughed, or subject to a form of reduced compensation which was subsequently reversed in 2021. The operations of the Company’s partners and customers
10
have likewise been disrupted. The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In particular, the ongoing COVID-19 pandemic has caused significant disruptions to the airline industry and has resulted in a dramatic reduction in demand for air travel domestically and abroad, which is likely to continue for the foreseeable future. Lower demand for air travel in turn presents significant risks to the Company, resulting in impacts which have adversely affected the Company’s business, results of operation, and financial condition. Lower demand for spare parts and engine and airframe leasing has negatively impacted collections of accounts receivable, caused the Company’s lessee customers to not enter into new leases, resulted in reduced spending by new and existing customers for leases or spare parts or equipment, resulted in lower usage fees, caused some of the Company’s customers to go out of business, and limited the ability of the Company’s personnel to travel to customers and potential customers. The Company is not able to evaluate or foresee the full extent of these impacts at the current time. During the nine months ended September 30, 2021, the Company experienced declining average utilization and a corresponding decrease in revenue as compared to the prior year comparable period. Additionally, as of September 30, 2021, the Company has, in certain situations, agreed to rent concessions which resulted in a total reduction to rent revenues of $0.3 million during the three months ended September 30, 2021 and $0.5 million during the nine months ended September 30, 2021. Rent concessions for the three and nine months ended September 30, 2020 resulted in a total reduction of rent revenue of $2.1 million and $5.2 million, respectively. The rent concessions provide lessees with payment deferral options or reduced rent, where the revised cash flows are substantially the same or less (i.e., the rights of the lessor and obligations of the lessee have not substantially increased) as the original lease agreements. There is no impact on the timing of revenue recognition for rent concessions that result in short term payment deferrals. The rent concessions with reduced rent qualify for the COVID-19 practical expedient to account for the rent concessions outside of the modification framework.
Other than what has been reflected in the Unaudited Condensed Consolidated Financial Statements, the Company is not aware of any specific event or circumstance related to the COVID-19 pandemic that would require it to update its estimates or judgments or adjust the carrying value of its assets or liabilities. Actual results could differ from those estimates and any such differences may be material to the Unaudited Condensed Consolidated Financial Statements.
(d) Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted by the Company
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted this guidance effective January 1, 2021 and it did not materially impact our consolidated financial statements and related disclosures.
In March 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848), Scope”, which clarifies certain optional expedients to all derivatives affected by the discounting transition, regardless of whether the derivatives reference the London Interbank Offered Rate (“LIBOR”) or another rate expected to be discounted or whether the modification replaces or has the potential to replace the reference rate expected to be discounted. The amendments in this guidance are effective upon issuance through December 31, 2022. The Company adopted this guidance upon issuance. When the transition occurs, the Company expects to apply this expedient to its existing debt instruments and interest rate swaps that reference LIBOR, and to any other new transactions that reference LIBOR or another reference rate that is discontinued, through December 31, 2022. The adoption of this ASU did not impact the Company’s consolidated financial statements.
Recent Accounting Pronouncements To Be Adopted by the Company
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. ASU 2016-13 affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU clarifies receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies various scoping and other issues arising from ASU 2016-13. In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU improves the Codification and amends the interaction of
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Topic 842 and Topic 326. The amendments in ASU 2016-13 are effective for the Company on January 1, 2023, with early adoption permitted. The Company expects to adopt this accounting standard update effective January 1, 2023. The Company is evaluating the potential effects on the consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, “Lease (Topic 842): Lessors – Certain Leases with Variable Lease Payments” related to accounting for sales-type leases or direct financing leases with variable lease payments. This ASU is effective for interim and annual years beginning after December 15, 2021, with early adoption permitted. The Company plans to adopt this guidance effective January 1, 2022 and is currently evaluating the potential impact adoption will have on the consolidated financial statements and related disclosures.
2. Revenue from Contracts with Customers
The following tables disaggregate revenue by major source for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three months ended September 30, 2021 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ||||||||||||||||||||||||||
| Gain on sale of leased equipment | ||||||||||||||||||||||||||
| Managed services | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Three Months Ended September 30, 2020 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ( | |||||||||||||||||||||||||
| Managed services | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Nine months ended September 30, 2021 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ||||||||||||||||||||||||||
| Gain on sale of leased equipment | ||||||||||||||||||||||||||
| Managed services | ||||||||||||||||||||||||||
| Asset transition fee (1) | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | $ | $ | $ | ( | $ | |||||||||||||||||||||
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| Nine months ended September 30, 2020 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ( | |||||||||||||||||||||||||
| Gain on sale of leased equipment | ||||||||||||||||||||||||||
| Managed services | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | $ | $ | $ | ( | $ | |||||||||||||||||||||
_____________________________
(1)Asset transition fee reflects the settlement received from the close out of an engine transition program.
3. Equipment Held for Operating Lease and Notes Receivable
As of September 30, 2021, the Company had $1,971.3 million equipment held for operating lease portfolio and $196.1 million notes receivable which represented 313 engines, eight aircraft, one marine vessel and other leased parts and equipment. As of December 31, 2020, the Company had $1,886.6 million equipment held for operating lease portfolio and $158.7 million notes receivable which represented 291 engines, eight aircraft, one marine vessel and other leased parts and equipment.
The following table disaggregates equipment held for operating lease by asset class (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Value | Accumulated Depreciation | Net Book Value | Gross Value | Accumulated Depreciation | Net Book Value | ||||||||||||||||||||||||||||||
| Engines and related equipment | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Aircraft and airframes | ( | ( | |||||||||||||||||||||||||||||||||
| Marine vessel | ( | ( | |||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
Notes Receivable
During the three months ended September 30, 2021 and 2020, the Company recorded interest income related to the notes receivable of $3.6 million and $3.1 million, respectively, and $10.1 million and $6.7 million during the nine months ended September 30, 2021 and 2020, respectively, and is presented within Other revenue. The effective interest rates on our notes receivable ranged from 6.3 % to 12.2 % as of September 30, 2021 and 6.3 % to 16.6 % as of September 30, 2020.
4. Investments
In 2011, the Company 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. As of September 30, 2021, WMES owned a lease portfolio, inclusive of a note receivable, of 37 engines and five aircraft with a net book value of $297.3 million.
In 2014, the Company 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 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. CASC Willis acquires and leases jet engines to Chinese airlines and concentrates on the demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. As of September 30, 2021, CASC Willis owned a lease portfolio of four engines with a net book value of $48.9 million.
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| As of September 30, 2021 | WMES | CASC Willis | Total | |||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Investment in joint ventures as of December 31, 2020 | $ | $ | $ | |||||||||||||||||
| (Loss) earnings from joint ventures | ( | ( | ||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||
| Other comprehensive gain from joint ventures | ||||||||||||||||||||
| Investment in joint ventures as of September 30, 2021 | $ | $ | $ | |||||||||||||||||
“Other revenue” on the Condensed Consolidated Statements of Income includes $0.9 million and $0.4 million of management fees earned during the three months ended September 30, 2021 and 2020, respectively, and $1.6 million and $1.2 million during the nine months ended September 30, 2021 and 2020, respectively, related to the servicing of engines for the WMES lease portfolio.
During the nine months ended September 30, 2021, the Company sold two engines to WMES for $25.0 million. During the nine months ended September 30, 2020, the Company sold one note receivable to WMES for $8.4 million.
There were no
Unaudited summarized financial information for 100% of WMES is presented in the following tables:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| WMES net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Total assets | $ | $ | |||||||||
| Total liabilities | |||||||||||
| Total WMES net equity | $ | $ | |||||||||
The difference between the Company’s investment in WMES and 50 % of total WMES net equity is primarily attributable to the recognition of deferred gains, prior to the adoption of ASU 2017-05, related to engines sold by the Company to WMES.
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5. Debt Obligations
Debt obligations consisted of the following:
| September 30, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
Credit facility at a floating rate of interest of one-month LIBOR plus | $ | $ | |||||||||
WEST VI Series A 2021 term notes payable at a fixed rate of interest of | |||||||||||
WEST VI Series B 2021 term notes payable at a fixed rate of interest of | |||||||||||
WEST VI Series C 2021 term notes payable at a fixed rate of interest of | |||||||||||
WEST V Series A 2020 term notes payable at a fixed rate of interest of | |||||||||||
WEST V Series B 2020 term notes payable at a fixed rate of interest of | |||||||||||
WEST V Series C 2020 term notes payable at a fixed rate of interest of | |||||||||||
WEST IV Series A 2018 term notes payable at a fixed rate of interest of | |||||||||||
WEST IV Series B 2018 term notes payable at a fixed rate of interest of | |||||||||||
WEST III Series A 2017 term notes payable at a fixed rate of interest of | |||||||||||
WEST III Series B 2017 term notes payable at a fixed rate of interest of | |||||||||||
Note payable at three-month LIBOR plus a margin ranging from | |||||||||||
Note payable at a fixed rate of interest of | |||||||||||
| Less: unamortized debt issuance costs | ( | ( | |||||||||
| Total debt obligations | $ | $ | |||||||||
One-month LIBOR was 0.08% and 0.14% as of September 30, 2021 and December 31, 2020, respectively.
Principal outstanding at September 30, 2021, is expected to be repayable as follows:
| Year | (in thousands) | |||||||
| 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
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In May 2021, WLFC and its direct, wholly-owned subsidiary Willis Engine Structured Trust VI (“WEST VI”), closed its offering of $336.7 million aggregate principal amount of fixed rate notes (the “WEST VI Notes”). The WEST VI Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $278.6 million, the Series B Notes issued in an aggregate principal amount of $38.7 million and the Series C Notes issued in an aggregate principal amount of $19.4 million. The WEST VI Notes are secured by, among other things, WEST VI’s direct and indirect ownership interests in a portfolio of 29 aircraft engines and one airframe.
The Series A Notes have a fixed coupon of 3.104 %, an expected maturity of approximately eight years and a final maturity date in May 2046, the Series B Notes have a fixed coupon of 5.438 %, an expected maturity of approximately eight years and a final maturity date in May 2046 and the Series C Notes have a fixed coupon of 7.385 %, an expected maturity of approximately eight years and a final maturity date in May 2046. The Series A Notes were issued at a price of 99.99481 % of par, the Series B Notes were issued at a price of 99.99996 % of par and the Series C Notes were issued at a price of 99.99869 % of par. Principal on the WEST VI Notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.
In May 2021, WLFC repaid an existing note payable that was secured by two engines.
In June 2021, WLFC entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement dated as of June 7, 2019, which updates the provisions relating to the future discontinuance of LIBOR and sets forth the mechanics for establishing the Secured Overnight Financing Rate (“SOFR”) as a benchmark replacement rate.
Virtually all of the above debt requires ongoing compliance with certain financial covenants, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. The Company also has certain negative financial covenants such as liens, advances, change in business, sales of assets, dividends and stock repurchases. These covenants are tested either monthly, quarterly or annually and the Company was in full compliance with all financial covenant requirements at September 30, 2021.
6. Derivative Instruments
The Company periodically holds interest rate derivative instruments to mitigate exposure to changes in interest rates, predominantly one-month LIBOR, with $603.0 million and $783.1 million of variable rate borrowings at September 30, 2021 and December 31, 2020, respectively. As a matter of policy, management does not use derivatives for speculative purposes. As of September 30, 2021, the Company had five interest rate swap agreements. During the first quarter of 2021, the Company entered into four additional fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two with remaining terms of 28 months and two with remaining terms of 52 months as of September 30, 2021. One interest rate swap agreement was entered into during 2019 which has a notional outstanding amount of $100.0 million with a remaining term of 33 months as of September 30, 2021. One interest rate swap agreement which the Company entered into in 2016 expired in April 2021. The derivative instruments were each designated as cash flow hedges at inception and recorded at fair value.
The Company evaluated the effectiveness of the swap agreements to hedge the interest rate risk associated with its variable rate debt and concluded at the swap inception dates that each swap was highly effective in hedging that risk. The Company evaluates the effectiveness of the hedging relationships on an ongoing basis and concluded there was no ineffectiveness in the hedges for the period ended September 30, 2021.
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data when evaluating the Company’s and counterparty’s risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period. The Company applies hedge accounting and accounts for the change in fair value of its cash flow hedges through other comprehensive income for all derivative instruments.
The net fair value of the interest rate swaps as of September 30, 2021 was $2.4 million, representing an asset of $4.2 million and a liability of $1.8 million. The net fair value of the interest rate swaps as of December 31, 2020 was $4.0 million, representing a liability. The Company recorded interest expense of $0.5 million and $0.7 million during the three months ended September 30, 2021 and 2020, respectively, and $1.9 million and $1.3 million during the nine months ended September 30, 2021 and 2020, respectively, from derivative instruments.
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Effect of Derivative Instruments on Earnings in the Statements of Income and on Comprehensive Income
The following tables provide additional information about the financial statement effects related to the cash flow hedges for the three and nine months ended September 30, 2021 and 2020:
| Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) | |||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||
| Interest rate contracts | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | |||||||||||||||||||||
The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur. The ineffective portion of the hedges, if any, is recorded in earnings in the current period.
Counterparty Credit Risk
The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The counterparties for the interest rate swaps are large financial institutions that possessed investment grade credit ratings. Based on these ratings, the Company believes that the counterparties were credit-worthy and that their continuing performance under the hedging agreements was probable and did not require the counterparties to provide collateral or other security to the Company.
7. Income Taxes
Income tax expense for the three and nine months ended September 30, 2021 was $3.2 million and $0.9 million, respectively. The effective tax rate for the three and nine months ended September 30, 2021 was 52.8 % and 37.0 %, respectively. Income tax expense for the three and nine months ended September 30, 2020 was $3.1 million and $11.7 million, respectively. The effective tax rate for the three and nine months ended September 30, 2020 was 50.6 % and 48.0 %, respectively. The increase in the effective tax rate was predominantly due to executive compensation exceeding $1.0 million as defined in IRS code Section 162(m).
The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur. The Company’s tax rate is subject to change based on changes in the mix of assets leased to domestic and foreign lessees, state taxes, the amount of executive compensation exceeding $1.0 million as defined in IRS code Section 162(m) and numerous other factors, including changes in tax law.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S., and includes several provisions related to employment and income taxes, including provisions for the deferral of the employer portion of social security taxes through December 31, 2020. On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021, which enhances and expands certain provisions of the CARES Act. The Company qualified for the Employment Retention Credit (“ERC”) and recognized a credit of $0.8 million and $2.2 million for the three and nine months ended September 30, 2021, respectively, as a reduction to payroll tax.
8. Fair Value Measurements
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties in contrast to a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision.
Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable
17
inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:
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.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
•Cash and cash equivalents, restricted cash, receivables, and accounts payable: The amounts reported in the accompanying Condensed Consolidated Balance Sheets approximate fair value due to their short-term nature.
•Notes receivable: The carrying amount of the Company’s outstanding balance on its Notes receivable as of September 30, 2021 and December 31, 2020 was estimated to have a fair value of approximately $198.5 million and $159.2 million, respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each period end (Level 2 inputs).
•Debt obligations: The carrying amount of the Company’s outstanding balance on its Debt obligations as of September 30, 2021 and December 31, 2020 was estimated to have a fair value of approximately $1,862.2 million and $1,691.0 million respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each period end (Level 2 inputs).
Assets Measured and Recorded at Fair Value on a Recurring Basis
As of September 30, 2021 and December 31, 2020, the Company measured the fair value of its interest rate swap agreements based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The net fair value of the interest rate swaps as of September 30, 2021 was $2.4 million, representing a net asset of $4.2 million and a net liability of $1.8 million. The net fair value of the interest rate swaps as of December 31, 2020 was $4.0 million, representing a net liability. The Company recorded interest expense of $0.5 million and $0.7 million during the three months ended September 30, 2021 and 2020, respectively, and $1.9 million and $1.3 million during the nine months ended September 30, 2021 and 2020, respectively, from derivative instruments.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines 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 Company uses Level 2 inputs to measure write-downs of equipment held for lease and equipment held for sale.
| Total Losses | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Equipment held for lease | $ | $ | $ | $ | |||||||||||||||||||
| Equipment held for sale | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
There were no write-downs for the three months ended September 30, 2021. Write-downs of equipment to their estimated fair values totaled $4.1 million for the nine months ended September 30, 2021, reflecting an adjustment of the carrying value of four impaired engines and one airframe. As of September 30, 2021, included within equipment held for lease and equipment held for sale was $30.7 million in remaining book values of 16 assets which were previously written down.
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9. Earnings Per Share
Basic earnings per common share is computed by dividing net income, less preferred stock dividends and accretion of preferred stock issuance costs, by the weighted average number of common shares outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the vesting of restricted stock using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. Additionally, redeemable preferred stock is not convertible and does not affect dilutive shares.
There were no anti-dilutive shares for the three months ended September 30, 2021. There were 0.2 million anti-dilutive shares excluded from the computation of diluted weighted average earnings per common share for the nine months ended September 30, 2021. There were 0.2 million anti-dilutive shares excluded from the computation of diluted weighted average earnings per common share for the three months ended September 30, 2020. There were no anti-dilutive shares for the nine months ended September 30, 2020.
The following table presents the calculation of basic and diluted EPS (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | $ | ( | $ | ||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Potentially dilutive common shares | |||||||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
| Basic weighted average earnings (loss) per common share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted weighted average earnings (loss) per common share | $ | $ | $ | ( | $ | ||||||||||||||||||
10. Equity
Common Stock Repurchase
Effective December 31, 2018, the Board of Directors approved the renewal of the existing common stock repurchase plan extending the plan through December 31, 2020 and amending the plan to allow for repurchases of up to $60.0 million of the Company's common stock until such date. Effective December 31, 2020, the Board of Directors approved the renewal of the existing common stock repurchase plan extending the plan through December 31, 2022. Repurchased shares are immediately retired. During the nine months ended September 30, 2021, the Company repurchased a total of 135,118 shares of common stock for approximately $5.1 million at a weighted average price of $38.03 per share. During the nine months ended September 30, 2020, the Company repurchased a total of 55,426 shares of common stock for approximately $1.5 million at a weighted average price of $27.24 per share. At September 30, 2021, approximately $49.8 million is available to purchase shares under the plan.
Redeemable Preferred Stock
Dividends: The Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5 % per share. During the nine months ended September 30, 2021 and 2020, the Company paid total dividends of $2.4
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11. Stock-Based Compensation Plans
The components of stock-based compensation expense were as follows:
| Three months ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| 2007 Stock Incentive Plan | $ | $ | $ | $ | |||||||||||||||||||
| 2018 Stock Incentive Plan | |||||||||||||||||||||||
| Employee Stock Purchase Plan | |||||||||||||||||||||||
| Total Stock Compensation Expense | $ | $ | $ | $ | |||||||||||||||||||
The significant stock compensation plans are described below.
The 2007 Stock Incentive Plan (the “2007 Plan”) was adopted in May 2007. Under the 2007 Plan, a total of 2,800,000 shares were authorized for stock-based compensation available in the form of either restricted stock awards (“RSAs”) or stock options. The RSAs are subject to service-based vesting, typically between and four years , where a specific period of continued employment must pass before an award vests. The expense associated with these awards is recognized on a straight-line basis over the respective vesting period, with forfeitures accounted for as they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date fair value of the award tranche that is actually vested at that date. As of September 30, 2021, there were no stock options outstanding under the 2007 Plan.
The 2018 Stock Incentive Plan (the “2018 Plan”) was adopted in May 2018. Under the 2018 Plan, a total of 800,000 shares are authorized for stock-based compensation, plus the number of shares remaining under the 2007 Plan and any future forfeited awards under the 2007 Plan, in the form of RSAs. The RSAs are subject to service and performance-based vesting, typically between and four years , where a specific period of continued employment or service must pass before an award vests. The expense associated with these awards is recognized on a straight-line basis over the respective vesting period, with forfeitures accounted for as they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date fair value of the award tranche that is actually vested at that date.
As of September 30, 2021, the Company had granted 885,300 RSAs under the 2018 Plan and had 9,296 shares available for future issuance. The fair value of the restricted stock awards equaled the stock price at the grant date.
The following table summarizes restricted stock activity under the 2007 and 2018 Plans during the nine months ended September 30, 2021:
| Shares | |||||
| Balance of unvested shares as of December 31, 2020 | |||||
| Shares granted | |||||
| Shares forfeited | |||||
| Shares vested | ( | ||||
| Balance of unvested shares as of September 30, 2021 | |||||
Under the Employee Stock Purchase Plan (“ESPP”), as amended and restated effective April 1, 2018, 325,000 shares of common stock have been reserved for issuance. Eligible employees may designate not more than 10 % of their cash compensation to be deducted each pay period for the purchase of common stock under the ESPP. Participants may purchase not more than 1,000 shares or $25,000 of common stock in any one calendar year. Each January 31 and July 31 shares of common stock are purchased with the employees’ payroll deductions from the immediately preceding six months at a price per share of 85 % of the lesser of the market price of the common stock on the purchase date or the market price of the common stock on the date of entry into an offering period. In the nine months ended September 30, 2021 and 2020, 18,211 and 11,418 shares of common stock, respectively, were issued under the ESPP. The Company issues new shares through its transfer agent upon an employee stock purchase.
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12. Reportable Segments
The Company has two reportable 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 other related businesses and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine parts, whole engines, engine modules and portable aircraft components.
The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses. While the Company believes there are synergies between the two business segments, the segments are managed separately because each requires different business strategies.
The following tables present a summary of the reportable segments (in thousands):
| Three Months Ended September 30, 2021 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ||||||||||||||||||||||||||
| Gain on sale of leased equipment | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | ( | |||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Cost of spare parts and equipment sales | ||||||||||||||||||||||||||
| General and administrative | ( | |||||||||||||||||||||||||
| Technical expense | ||||||||||||||||||||||||||
| Net finance costs: | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Total finance costs | ||||||||||||||||||||||||||
| Total expenses | ( | |||||||||||||||||||||||||
| Earnings from operations | $ | $ | $ | $ | ||||||||||||||||||||||
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| Three Months Ended September 30, 2020 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ( | |||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | ( | |||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Cost of spare parts and equipment sales | ||||||||||||||||||||||||||
| Write-down of equipment | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Technical expense | ||||||||||||||||||||||||||
| Net finance costs: | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Total finance costs | ||||||||||||||||||||||||||
| Total expenses | ||||||||||||||||||||||||||
| Earnings (loss) from operations | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Nine Months Ended September 30, 2021 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ||||||||||||||||||||||||||
| Gain on sale of leased equipment | ||||||||||||||||||||||||||
| Asset transition fee (1) | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | ( | |||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Cost of spare parts and equipment sales | ( | |||||||||||||||||||||||||
| Write-down of equipment | ||||||||||||||||||||||||||
| General and administrative | ( | |||||||||||||||||||||||||
| Technical expense | ||||||||||||||||||||||||||
| Net finance costs: | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Total finance costs | ||||||||||||||||||||||||||
| Total expenses | ( | |||||||||||||||||||||||||
| Earnings (loss) from operations | $ | $ | $ | ( | $ | |||||||||||||||||||||
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| Nine Months Ended September 30, 2020 | Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Lease rent revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance reserve revenue | ||||||||||||||||||||||||||
| Spare parts and equipment sales | ( | |||||||||||||||||||||||||
| Gain on sale of leased equipment | ||||||||||||||||||||||||||
| Other revenue | ( | |||||||||||||||||||||||||
| Total revenue | ( | |||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Cost of spare parts and equipment sales | ||||||||||||||||||||||||||
| Write-down of equipment | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Technical expense | ||||||||||||||||||||||||||
| Net finance costs: | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Loss on debt extinguishment | ||||||||||||||||||||||||||
| Total finance costs | ||||||||||||||||||||||||||
| Total expenses | ||||||||||||||||||||||||||
| Earnings (loss) from operations | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
_____________________________
(1)Asset transition fee reflects the settlement received from the close out of an engine transition program.
| Leasing and Related Operations | Spare Parts Sales | Eliminations | Total | |||||||||||||||||||||||
| Total assets as of September 30, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets as of December 31, 2020 | $ | $ | $ | $ | ||||||||||||||||||||||
13. Related Party Transactions
Joint Ventures
“Other revenue” on the Condensed Consolidated Statements of Income includes management fees earned of $0.9 million and $0.4 million during the three months ended September 30, 2021 and 2020, respectively, and $1.6 million and $1.2 million during the nine months ended September 30, 2021 and 2020, respectively, related to the servicing of engines for the WMES lease portfolio.
Other
During 2020, the Board’s Independent Directors approved the Company’s agreement to a lease with our Chief Executive Officer (“CEO”) in support of the Company’s marine vessel leasing business. That lease provides for a payment to our CEO of $750 per day for the use of his tender in support of our vessel lease to a third-party lessee. The Company has paid a total of $18,750 and $41,250 during the three and nine months ended September 30, 2021, respectively, for usage of the tender.
During 2021, the Company paid approximately $27,000 of expenses to Mikchalk Lake, LLC, an entity in which our CEO retains an ownership interest. These expenses were for lodging and other business-related services. These transactions were approved by the Board’s Independent Directors.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, including potential impacts of the COVID-19 pandemic on our business, results of operations and financial condition. Our actual results may differ materially from those contained in or implied by any forward-looking statements. The financial information included in this discussion and in our consolidated financial statements may not be indicative of our consolidated financial position, operating results, changes in equity and cash flows in the future. See “Special Note Regarding Forward-Looking Statements” included earlier in this report.
Overview
Our core business is acquiring and leasing commercial aircraft and aircraft engines and related aircraft equipment pursuant to operating leases, all of which we sometimes collectively refer to as “equipment.” As of September 30, 2021, all of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by Accounting Standards Codification (“ASC”) 842. As of September 30, 2021, we had 71 lessees in 40 countries. Our portfolio is continually changing due to equipment acquisitions and sales. As of September 30, 2021, $1,971.3 million of equipment held in our operating lease portfolio and $196.1 million of notes receivable represented 313 engines, eight aircraft, one marine vessel and other leased parts and equipment. As of September 30, 2021, we also managed 488 engines, aircraft and related equipment on behalf of other parties.
Our wholly owned subsidiary Willis Asset Management Limited (“Willis Asset Management”) is focused on the engine management and consulting business. Willis Aeronautical Services, Inc. (“Willis Aero”) is 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.
We actively manage our portfolio and structure our leases to maximize the residual values of our leased assets. Our leasing business focuses on popular Stage IV commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce and International Aero Engines. These engines are the most widely used engines in the world, powering Airbus, Boeing, Bombardier and Embraer aircraft.
As previously disclosed, on March 16, 2021, we received a non-binding indication of interest (the “Indication of Interest”) to acquire all of the outstanding shares of the Company’s common stock not already owned by Charles F. Willis IV, the Company’s Chief Executive Officer and largest stockholder (individually and together with an entity controlled by him), and Austin C. Willis, the Company’s Senior Vice President, Corporate Development (together, the “Group”), in exchange for cash consideration of $42.00 per share. The Indication of Interest was filed as an exhibit to a Schedule 13D/A filed by the Group on March 17, 2021. The Indication of Interest did not provide details on how the Group proposed to finance its acquisition. On June 25, 2021, the Company’s Chief Executive Officer delivered a letter (the “Letter”) to the Special Committee of the Board of Directors reaffirming interest in acquiring all of the Company’s common stock not already owned by the Group in exchange for cash consideration of $42.00 per share (the “Offer Price”) and clarifying that he does not intend to increase the Offer Price.
On March 19, 2021, the Board of Directors of the Company formed a committee (the “Independent Committee”) comprised solely of independent directors to review, evaluate and negotiate any proposal from the Group. See “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and our other filings with the SEC.
On August 10, 2021, the Group delivered a notice of withdrawal to the Board of Directors of the Company, notifying the Company that it was withdrawing its proposal for the acquisition of all the outstanding shares of common stock of the Company not already owned by the Group and that it had mutually agreed with the Independent Committee to immediately terminate and abandon any further discussions regarding a potential acquisition.
COVID-19 Impact
Throughout the remainder of the year, we plan to continue to stay focused on cost control and remain prudent with our capital expenditures. We have continued to temporarily close our headquarters and other offices, require our employees and contractors to predominately work remotely, and implement travel restrictions, all of which represent a significant disruption in how we operate our business. We have taken various proactive actions in an attempt to mitigate the financial impact of the COVID-19 pandemic. During
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2020, 9% of our employees were either furloughed, or subject to a form of reduced compensation which was subsequently reversed in 2021. The operations of our partners and customers have likewise been disrupted. The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In particular, the ongoing COVID-19 pandemic has caused significant disruptions to the airline industry that has resulted in a dramatic reduction in demand for air travel domestically and abroad, which is likely to continue for the foreseeable future. Lower demand for air travel in turn presents significant risks to our Company, resulting in impacts that have adversely affected our business, results of operations, and financial condition. Lower demand for spare parts and engine and airframe leasing has negatively impacted collections of accounts receivable, caused our lessee customers to not enter into new leases, resulted in reduced spending by new and existing customers for leases or spare parts or equipment, resulted in lower usage fees, caused some of our customers to go out of business, and limited the ability of our personnel to travel to customers and potential customers. During the nine months ended September 30, 2021, we experienced declining average utilization and a corresponding decrease in revenue as compared to the prior year comparable period. Additionally, as of September 30, 2021, the Company has, in certain situations, agreed to rent concessions which resulted in a total reduction to rent revenues of $0.3 million during the third quarter of 2021 and $0.5 million year-to-date. Rent concessions for the three and nine months ended September 30, 2020 resulted in a total reduction of rent revenue of $2.1 million and $5.2 million, respectively. The rent concessions provide lessees with payment deferral options or reduced rent, where the revised cash flows are substantially the same or less (i.e., the rights of the lessor and obligations of the lessee have not substantially increased) as the original lease agreements. There is no impact on the timing of revenue recognition for rent concessions that result in short term payment deferrals. The rent concessions with reduced rent qualify for the COVID-19 practical expedient to account for the rent concessions outside of the modification framework.
The scope and nature of the impact of COVID-19 on the airline industry, and in turn our business, continue to evolve and the outcomes are uncertain. Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to our business and financial position. The ultimate extent of the effects of the COVID-19 pandemic on our Company will depend on future developments, and such effects could exist for an extended period of time.
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 included in our 2020 Form 10-K.
Results of Operations
Three months ended September 30, 2021 compared to the three months ended September 30, 2020
Revenue is summarized as follows:
| Three Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Lease rent revenue | $ | 32,908 | $ | 30,025 | 9.6 | % | |||||||||||
| Maintenance reserve revenue | 23,659 | 32,302 | (26.8) | % | |||||||||||||
| Spare parts and equipment sales | 5,091 | 2,888 | 76.3 | % | |||||||||||||
| Gain on sale of leased equipment | 2,440 | — | 100.0 | % | |||||||||||||
| Other revenue | 6,693 | 5,398 | 24.0 | % | |||||||||||||
| Total revenue | $ | 70,791 | $ | 70,613 | 0.3 | % | |||||||||||
Lease Rent Revenue. Lease rent revenue consists of rental income from long-term and short-term engine leases, aircraft leases, and other leased parts and equipment. Lease rent revenue increased by $2.9 million, or 9.6%, to $32.9 million in the three months ended September 30, 2021 from $30.0 million for the three months ended September 30, 2020. The increase is due to lower COVID-19 related rent concessions and an increase in the number of engines acquired and placed on lease. These increases were partially offset by a decline in portfolio utilization and a lower lease rent factor due to leases on newer technology engines which tend to have longer term leases and lower rent rates. During the three months ended September 30, 2021, we purchased equipment (including capitalized costs) totaling $106.5 million, which consisted of 25 engines and other parts and equipment purchased for our lease portfolio. During the three months ended September 30, 2020, we purchased equipment (including capitalized costs) totaling $5.0 million, which consisted of other parts and equipment purchased for our lease portfolio.
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One customer accounted for more than 10% of total lease rent revenue during the three months ended September 30, 2021 and 2020, respectively.
The aggregate net book value of equipment held for lease at September 30, 2021 and 2020 consisted of $1,971.3 million and $196.1 million notes receivable and $1,616.5 million and $159.6 million notes receivable, respectively. Average utilization (based on net book value) was approximately 82% and 86% for the three months ended September 30, 2021 and 2020, respectively.
Maintenance Reserve Revenue. Maintenance reserve revenue decreased $8.6 million, or 26.8%, to $23.7 million for the three months ended September 30, 2021 from $32.3 million for the three months ended September 30, 2020. Long-term maintenance revenue is influenced by end of lease compensation and the realization of long-term maintenance reserves associated with engines coming off lease. Long-term maintenance revenue was $18.6 million for the three months ended September 30, 2021 compared to $30.6 million in the comparable prior period. “Non-reimbursable” maintenance reserve revenue is directly influenced by on lease engine flight hours and cycles. Engines out on lease with “non-reimbursable” usage fees generated $5.0 million of short-term maintenance revenues compared to $1.7 million in the comparable prior period.
Spare Parts and Equipment Sales. Spare parts sales increased by $2.2 million, or 76.3%, to $5.1 million for the three months ended September 30, 2021 compared to $2.9 million for the three months ended September 30, 2020. The increase in spare parts sales for the third quarter of 2021 was driven by an industry-wide increase in engine and aircraft utilization and the demand for parts associated with such increase compared to the prior year period. There were no equipment sales for the three months ended September 30, 2021 or 2020.
Gain on Sale of Leased Equipment. During the three months ended September 30, 2021, we sold six engines, one airframe and other parts and equipment from the lease portfolio for a net gain of $2.4 million. There was no gain on sale of leased equipment during the three months ended September 30, 2020.
Other Revenue. Other revenue increased by $1.3 million, to $6.7 million in the three months ended September 30, 2021 from $5.4 million in the three months ended September 30, 2020. The increase primarily reflects increases of $0.4 million in service related fees and $0.5 million in interest income from our notes receivable.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $2.7 million, or 11.4%, to $21.3 million for the three months ended September 30, 2021 compared to $24.0 million for the three months ended September 30, 2020. The decrease reflects certain assets reaching the end of their depreciable lives as compared to the prior year period.
Cost of Spare Parts and Equipment Sales. Cost of spare parts sales decreased by $0.2 million, or 4.9%, to $3.9 million for the three months ended September 30, 2021 compared to $4.1 million for the three months ended September 30, 2020. There was no equipment or cost of equipment sales for the three months ended September 30, 2021 and 2020.
Write-down of Equipment. There was no write-down of equipment for the three months ended September 30, 2021. Write-down of equipment was $5.2 million for the three months ended September 30, 2020, reflecting the write-down of six engines.
General and Administrative Expenses. General and administrative expenses increased by $2.2 million, or 13.4%, to $18.7 million for the three months ended September 30, 2021 compared to $16.5 million for the three months ended September 30, 2020. The increase primarily reflects increased stock-based compensation as compared to the prior year period which was driven by an increase in stock price.
Technical Expense. Technical expense consists of the non-capitalized cost of engine repairs, engine thrust rental fees, outsourced technical support services, sublease engine rental expense, engine storage and freight costs. Technical expense increased by $1.7 million to $2.5 million for the three months ended September 30, 2021 compared to $0.8 million for the three months ended September 30, 2020. The increase is primarily due to an increase in engine repairs as compared to the prior year period as well as the industry-wide increase in engine and aircraft utilization.
Net Finance Costs. Net finance costs increased $3.0 million, or 19.4%, to $18.3 million for the three months ended September 30, 2021 compared to $15.4 million for the three months ended September 30, 2020. The increase is due to higher leverage levels as compared to the prior year period. Net finance costs are also influenced by the execution of the WEST VI transaction, which temporarily increases total leverage and interest expense at the Company. Debt obligations outstanding, net of unamortized debt issuance costs, as of September 30, 2021 and 2020, were $1,814.2 million and $1,462.7 million, respectively. After adjustment for interest rate derivative instruments, $103.0 million and $318.0 million as of September 30, 2021 and 2020, respectively, were tied to one-month LIBOR. As of September 30, 2021 and 2020, we held $500 million and $200 million of interest rate derivative instruments on this debt and one-month LIBOR was 0.08% and 0.15% respectively.
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Income Tax Expense. Income tax expense was $3.2 million for the three months ended September 30, 2021 compared to $3.1 million for the three months ended September 30, 2020. The effective tax rate for the third quarter of 2021 was 52.8% compared to 50.6% in the prior year period. The increase in the effective tax rate was predominantly due to executive compensation exceeding $1.0 million as defined in IRS code Section 162(m).
Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020
Revenue is summarized as follows:
| Nine Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | % Change | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Lease rent revenue | $ | 96,859 | $ | 114,874 | (15.7) | % | |||||||||||
| Maintenance reserve revenue | 60,749 | 82,816 | (26.6) | % | |||||||||||||
| Spare parts and equipment sales | 13,226 | 14,848 | (10.9) | % | |||||||||||||
| Gain on sale of leased equipment | 2,440 | 1,367 | 78.5 | % | |||||||||||||
| Asset transition fee | 6,256 | — | 100.0 | % | |||||||||||||
| Other revenue | 18,858 | 13,300 | 41.8 | % | |||||||||||||
| Total revenue | $ | 198,388 | $ | 227,205 | (12.7) | % | |||||||||||
Lease Rent Revenue. Lease rent revenue decreased by $18.0 million, or 15.7%, to $96.9 million for the nine months ended September 30, 2021, compared to $114.9 million for the nine months ended September 30, 2020. The decrease is primarily due to lower utilization when compared to the prior year period which includes operations prior to the COVID-19 pandemic. This decrease is partially offset by an increase in the number of engines acquired and placed on lease during 2021. During the nine months ended September 30, 2021, we purchased equipment (including capitalized costs) totaling $170.3 million, which primarily consisted of 32 engines, one aircraft and other parts and equipment purchased for our lease portfolio. During the nine months ended September 30, 2020, we purchased equipment (including capitalized costs) totaling $82.0 million, which primarily consisted of four engines and other parts and equipment purchased for our lease portfolio.
One customer accounted for more than 10% of total lease rent revenue during the nine months ended September 30, 2021 and 2020, respectively.
The aggregate net book value of equipment held for lease at September 30, 2021 and 2020, was $1,971.3 million and $196.1 million notes receivable and $1,616.5 million and $159.6 million notes receivable, respectively. Average utilization (based on net book value) was approximately 81% and 86% for the nine months ended September 30, 2021 and 2020, respectively.
Maintenance Reserve Revenue. Maintenance reserve revenue decreased $22.1 million, or 26.6%, to $60.7 million for the nine months ended September 30, 2021 from $82.8 million for the nine months ended September 30, 2020. Long-term maintenance revenue was $50.6 million for the nine months ended September 30, 2021 compared to $66.4 million in the prior year period. Engines out on lease with “non-reimbursable” usage fees generated $10.2 million of short-term maintenance revenues compared to $16.5 million in the comparable prior period, resulting from the decline in global flight traffic related to the COVID-19 pandemic.
Spare Parts and Equipment Sales. Spare parts and equipment sales decreased by $1.6 million, or 10.9%, to $13.2 million for the nine months ended September 30, 2021 compared to $14.8 million in the prior year period. Spare parts sales for the nine months ended September 30, 2021 were $13.2 million, compared to $14.0 million in the comparable period of 2020. There were no equipment sales during the nine months ended September 30, 2021, compared to $0.9 million for the sale of one engine in the comparable period of 2020.
Gain on Sale of Leased Equipment. During the nine months ended September 30, 2021, we sold six engines, one airframe and other parts and equipment from the lease portfolio for a net gain of $2.4 million. During the nine months ended September 30, 2020 we sold 10 engines and two airframes from the lease portfolio for a net gain of $1.4 million.
Asset Transition Fee. Asset transition fee was $6.3 million during the nine months ended September 30, 2021 reflecting the settlement received from the close out of an engine transition program. There was no asset transition fee during the nine months ended September 30, 2020.
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Other Revenue. Other revenue increased by $5.6 million, or 41.8%, to $18.9 million for the nine months ended September 30, 2021 from $13.3 million for the nine months ended September 30, 2020. The increase primarily reflects increases of $1.8 million in service related fees and $3.4 million in interest income from our notes receivable.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $2.4 million, to $68.8 million for the nine months ended September 30, 2021 compared to $71.2 million for the nine months ended September 30, 2020. The decrease reflects certain assets reaching the end of their depreciable lives as compared to the prior year period.
Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales decreased by $2.5 million, or 18.2%, to $11.0 million for the nine months ended September 30, 2021 compared to $13.5 million for the nine months ended September 30, 2020. Cost of spare parts for the nine months ended September 30, 2021 were $11.0 million compared to $13.3 million in the prior year period due to lower spare parts sales. There was no cost of equipment sales for the nine months ended September 30, 2021, compared to $0.1 million in the prior year period.
Write-down of Equipment. Write-down of equipment was $4.1 million for the nine months ended September 30, 2021, primarily reflecting the write-down of four engines and one airframe. Write-down of equipment was $14.4 million for the nine months ended September 30, 2020, primarily reflecting the write-down of twelve engines, two of which resulted from the Company’s interim impairment analysis, which indicated the carrying values of two engines were in excess of their respective fair value by $0.5 million.
General and Administrative Expenses. General and administrative expenses increased by $3.1 million, or 6.0%, to $54.3 million for the nine months ended September 30, 2021 compared to $51.3 million for the nine months ended September 30, 2020. The increase primarily reflects increased stock-based compensation as compared to the prior year period which was driven by an increase in stock price.
Technical Expense. Technical expense increased by $2.7 million, or 79.1%, to $6.1 million for the nine months ended September 30, 2021 compared to $3.4 million for the nine months ended September 30, 2020. The increase primarily reflects the increase in engine repairs.
Net Finance Costs. Net finance costs decreased by $1.5 million, or 2.9%, to $50.3 million for the nine months ended September 30, 2021 compared to $51.8 million for the nine months ended September 30, 2020. The decrease was primarily due to a loss on debt extinguishment of $4.7 million recognized in the prior year period partly offset by the increase in interest expense related to the WEST VI transaction as compared to the prior year period.
Income Tax Expense. Income tax expense was $0.9 million for the nine months ended September 30, 2021 compared to $11.7 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was 37.0% compared to 48.0% in the prior year period. The decrease in the effective tax rate was predominantly due to Section 162(m) limitation.
Financial Position, Liquidity and Capital Resources
Liquidity
At September 30, 2021, the Company had $71.6 million of cash, cash equivalents and restricted cash, of which $15.1 million was unrestricted. We fund our operations primarily from cash provided by our leasing activities. We finance our growth through borrowings secured primarily by our equipment lease portfolio. Cash of approximately $477.7 million and $690.2 million for the nine months ended September 30, 2021 and 2020, respectively, was derived from our borrowing activities. In these same time periods, $355.9 million and $477.8 million, respectively, was used to pay down related debt.
The impact of the COVID-19 pandemic on the global business environment has caused and could result in additional customer bankruptcies, early lease returns, payment defaults, and rental concessions which could reduce rent or result in deferred customer payments, negatively impacting our financial results.
For any interest rate swaps that we enter into, we will be exposed to risk in the event of non-performance of the interest rate hedge counter-parties. We anticipate that we may hedge additional amounts of our floating rate debt in the future.
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Cash Flows Discussion
Cash flows provided by operating activities was $68.6 million and $83.5 million for the nine months ended September 30, 2021 and 2020, respectively.
Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise lease revenue, security deposits and maintenance reserves, and are offset by interest expense and general and administrative costs. Cash received as maintenance reserve payments for some of our engines on lease are partially restricted by our debt arrangements. 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. Revenue and maintenance reserves are also affected by the amount of equipment off lease. Approximately 79% and 78%, by book value, of our assets were on-lease as of September 30, 2021 and December 31, 2020, respectively. The average utilization rate (based on net book value) for the nine months ended September 30, 2021 and 2020 was approximately 81% and 86%, respectively. If there is an 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.
Cash flows used in investing activities was $180.9 million for the nine months ended September 30, 2021 and primarily reflected $44.4 million related to leases entered into during 2021 which were classified as notes receivable under ASC 842 and $170.3 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made in the period). Cash flows used in investing activities was $188.5 million in the nine months ended September 30, 2020, and primarily reflected $136.0 million related to eight leases entered into during 2020 which were classified as notes receivable under ASC 842 and $82.0 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made in the period), partly offset by $17.7 million in proceeds from sales of equipment (net of selling expenses).
Cash flows provided by financing activities was $104.9 million for the nine months ended September 30, 2021 and primarily reflected $477.7 million in proceeds from debt obligations, partially offset by $355.9 million in principal payments and $5.1 million of share repurchases. Cash flows provided by financing activities was $199.2 million for the nine months ended September 30, 2020 and primarily reflected $690.2 million in proceeds from debt obligations, partially offset by $477.8 million in principal payments and $8.4 million in debt issuance and prepayment costs.
Preferred Stock Dividends
The Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share. During the nine months ended September 30, 2021 and 2020, the Company paid total dividends of $2.4 million, respectively, on the Series A-1 and Series A-2 Preferred Stock.
Debt Obligations and Covenant Compliance
In June 2021, WLFC entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement dated as of June 7, 2019, which updates the provisions relating to the future discontinuance of the London Interbank Offered Rate (“LIBOR”) and sets forth the mechanics for establishing the Secured Overnight Financing Rate as a benchmark replacement rate.
In May 2021, WLFC and its direct, wholly-owned subsidiary Willis Engine Structured Trust VI (“WEST VI”), closed its offering of $336.7 million aggregate principal amount of fixed rate notes (“WEST VI Notes”). The WEST VI Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $278.6 million, the Series B Notes issued in an aggregate principal amount of $38.7 million and the Series C Notes issued in an aggregate principal amount of $19.4 million. The WEST VI Notes are secured by, among other things, WEST VI’s direct and indirect ownership interests in a portfolio of 29 aircraft engines and one airframe.
The Series A Notes have a fixed coupon of 3.104%, an expected maturity of approximately eight years and a final maturity date in May 2046, the Series B Notes have a fixed coupon of 5.438%, an expected maturity of approximately eight years and a final maturity date in May 2046 and the Series C Notes have a fixed coupon of 7.385%, an expected maturity of approximately eight years and a final maturity date in May 2046. The Series A Notes were issued at a price of 99.99481% of par, the Series B Notes were issued at a price of 99.99996% of par and the Series C Notes were issued at a price of 99.99869% of par. Principal on the WEST VI Notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.
The assets of WEST VI are not available to satisfy the Company’s obligations other than the obligations specific to WEST VI. WEST VI is consolidated for financial statement presentation purposes. WEST VI’s ability to make distributions and pay dividends to the Company is subject to the prior payments of its debt and other obligations and WEST VI’s maintenance of adequate reserves and capital. Under WEST VI’s indenture, cash is collected in a restricted account, which is used to service the debt and any remaining
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amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance reserve payments and lease security deposits are formulaically accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively. The WEST VI indenture requires that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts.
In May 2021, WLFC repaid an existing note payable that was secured by two engines.
In March 2020, WLFC and its direct, wholly-owned subsidiary Willis Engine Structured Trust V (“WEST V”) (formerly known as Willis Engine Securitization Trust II (“WEST II”)), closed its offering of $366.2 million aggregate principal amount of fixed rate notes (the “WEST V Notes”). The WEST V Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $303.0 million, the Series B Notes issued in an aggregate principal amount of $42.1 million and the Series C Notes issued in an aggregate principal amount of $21.1 million. The WEST V Notes are secured by, among other things, WEST V’s direct and indirect ownership interests in a portfolio of 54 aircraft engines and three airframes, including 25 aircraft engines and three airframes which WEST V acquired from WLFC pursuant to an asset purchase agreement.
The Series A Notes have a fixed coupon of 3.228%, an expected maturity of approximately eight years and a final maturity date in March 2045, the Series B Notes have a fixed coupon of 4.212%, an expected maturity of approximately eight years and a final maturity date in March 2045 and the Series C Notes have a fixed coupon of 6.657%, an expected maturity of approximately eight years and a final maturity date in March 2045. The Series A Notes were issued at a price of 99.99859% of par, the Series B Notes were issued at a price of 99.99493% of par and the Series C Notes were issued at a price of 99.99918% of par. Principal on the WEST V Notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture for the WEST V Notes.
The assets of WEST V are not available to satisfy the Company’s obligations other than the obligations specific to WEST V. WEST V is consolidated for financial statement presentation purposes. WEST V’s ability to make distributions and pay dividends to the Company is subject to the prior payments of its debt and other obligations and WEST V’s maintenance of adequate reserves and capital. Under WEST V’s indenture, cash is collected in a restricted account, which is used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance reserve payments and lease security deposits are formulaically accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively. The WEST V indenture requires that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts.
We recognized a $4.7 million loss on debt extinguishment upon the repayment of the WEST II Series A 2012 term notes in March 2020.
At September 30, 2021, debt obligations consisted of loans totaling $1,814.2 million, net of unamortized issuance costs, payable with interest rates varying between approximately 1.8% and 7.4%. Substantially all of our assets are pledged to secure our obligations to creditors. For further information on our debt instruments, see Note 5 “Debt Obligations” in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Virtually all of our debt requires our ongoing compliance with certain financial covenants including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. Under our revolving credit facility, we can borrow no more than 85% of an engine’s net book value and 65% of an airframe’s, spare parts inventory’s or other assets net book value. Therefore, we must have other available funds for the balance of the purchase price of any new equipment to be purchased. Our revolving credit facility, certain indentures and other debt related agreements also contain cross-default provisions. 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 debt is secured by engines and aircraft, and to the extent that engines or aircraft are sold, repayment of that portion of the debt could be required.
At September 30, 2021, we were in compliance with the covenants specified in our 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 4.50 to 1.00. The Interest Coverage Ratio, as defined in the credit facility, is the ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) and other one-time charges to consolidated interest expense. The Total Leverage Ratio, as defined in the credit facility, is the ratio of total indebtedness to tangible net worth. At September 30, 2021, we were in compliance with the covenants specified in the WEST III, WEST IV, WEST V and WEST VI indentures and servicing and other debt related agreements.
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Off-Balance Sheet Arrangements
As of September 30, 2021, we had no material off-balance sheet arrangements or obligations that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Contractual Obligations and Commitments
Repayments of our gross debt obligations primarily consist of scheduled installments due under term loans and are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The table below summarizes our contractual commitments at September 30, 2021:
| Payment due by period (in thousands) | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||||||||||||
| Debt obligations | $ | 1,834,695 | $ | 75,077 | $ | 728,887 | $ | 122,076 | $ | 908,655 | |||||||||||||||||||
| Interest payments under debt obligations | 295,012 | 60,899 | 110,551 | 80,053 | 43,509 | ||||||||||||||||||||||||
| Operating lease obligations | 2,956 | 864 | 1,065 | 747 | 280 | ||||||||||||||||||||||||
| Purchase obligations | 447,917 | 22,174 | 425,743 | — | — | ||||||||||||||||||||||||
| Total | $ | 2,580,580 | $ | 159,014 | $ | 1,266,246 | $ | 202,876 | $ | 952,444 | |||||||||||||||||||
From time to time we enter into contractual commitments to purchase engines directly from original equipment manufacturers. As of the date of this report we have purchased three new LEAP-1B engines and are currently committed to purchasing 12 additional new LEAP-1B engines. Our purchase agreements generally contain terms that allow the Company to defer or cancel purchase commitments in certain situations. These deferrals or conversions would not result in penalties or increased costs other than any potential increase due to the normal year-over-year change in engine list prices, which is akin to ordinary inflation. The Company continues to expect demand for LEAP-1B engines to increase as the 737 Max is re-certified and aircraft (and their installed engines) that have been parked and in storage for more than one year begin the technical process of returning to service.
In May 2021, we entered into a commitment for future maintenance services which are anticipated to cost $24.0 million by 2024.
In December 2020, we entered into definitive agreements for the purchase of 25 modern technology aircraft engines. As part of the purchase, we have committed to certain future overhaul and maintenance services which are anticipated to range between $70.2 million and $112.0 million by 2030.
We have estimated the interest payments due under debt obligations by applying the interest rates applicable at September 30, 2021 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.
Recent Accounting Pronouncements
The most recent adopted accounting pronouncements and accounting pronouncements to be adopted by the Company are described in Note 1 to our Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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 September 30, 2021, $603.0 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 our interest rate swaps, our annual interest expense would increase or decrease by $1.0 million.
We hedge a portion of our borrowings from time to time, effectively fixing the rate of these borrowings. This hedging activity helps protect us against reduced margins on longer term fixed rate leases. Such hedging activities may limit our ability to participate in the benefits of any decrease in interest rates but may also protect us from increases in interest rates. Furthermore, since lease rates tend to vary with interest rate levels, it is possible that we can adjust lease rates for the effect of changes in interest rates at the termination of leases. Other financial assets and liabilities are at fixed rates.
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We are also exposed to currency devaluation risk. Substantially all of our leases require payment in U.S. dollars. During the nine months ended September 30, 2021 and 2020, 54% and 78%, respectively, 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness and design of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that as of September 30, 2021 our disclosure controls and procedures were 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 our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) 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.
(c) Changes in internal controls over financial reporting. There has been no change in our internal control over financial reporting during our fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1A. Risk Factors
Investors should carefully consider the risks in the “Risk Factors” in Part 1: Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 15, 2021, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and our other filings with the SEC. These risks are not the only ones facing the Company. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations. Any of these risks could adversely affect our business, cash flows, financial condition and results of operations. The trading price of our common stock could fluctuate due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q. There have been no material changes in our risk factors from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 and Form 10-Q for the period ended March 31, 2021.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities. Effective December 31, 2018, the Board of Directors approved the renewal of the existing common stock repurchase plan extending the plan through December 31, 2020 and amending the plan to allow for repurchases of up to $60.0 million of the Company’s common stock until such date. Effective December 31, 2020, the Board of Directors approved the renewal of the existing common stock repurchase plan extending the plan through December 31, 2022.
Common stock repurchases, under our authorized plan, in the three months ended September 30, 2021 were as follows:
| Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans | ||||||||||
| July 2021 | — | $ | — | — | $ | 54,925 | ||||||||
| August 2021 | — | $ | — | — | $ | 54,925 | ||||||||
| September 2021 | 135,118 | $ | 38.03 | 135,118 | $ | 49,787 | ||||||||
| Total | 135,118 | $ | 38.03 | 135,118 | $ | 49,787 | ||||||||
Item 5. Other Information
None.
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Item 6.
EXHIBITS
| Exhibit Number | Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101 | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
34
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: November 3, 2021
| Willis Lease Finance Corporation | ||||||||
| By: | /s/ Scott B. Flaherty | |||||||
| Scott B. Flaherty | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
35
Exhibit 31.1
CERTIFICATIONS
I, Charles F. Willis IV, certify that:
1. I have reviewed this report on Form 10-Q of Willis Lease Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 3, 2021 | /s/ Charles F. Willis, IV | |||||||||
| Charles F. Willis, IV | |||||||||||
| Chief Executive Officer | |||||||||||
| Chairman of the Board | |||||||||||
Exhibit 31.2
CERTIFICATIONS
I, Scott B. Flaherty, certify that:
1. I have reviewed this report on Form 10-Q of Willis Lease Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 3, 2021 | /s/ Scott B. Flaherty | |||||||||
| Scott B. Flaherty | |||||||||||
| Chief Financial Officer | |||||||||||
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in his or her capacity as an officer of Willis Lease Finance Corporation (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his or her knowledge:
•the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2021 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
•the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| Dated: November 3, 2021 | |||||
| /s/ Charles F. Willis, IV | |||||
| Charles F. Willis, IV | |||||
| Chief Executive Officer | |||||
| Chairman of the Board | |||||
| /s/ Scott B. Flaherty | |||||
| Scott B. Flaherty | |||||
| Chief Financial Officer | |||||