What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-14 · 107 added, 146 removed, 192 unchanged (57% of the section changed)

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These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in Item 1A “Risk Factors” of Part I which, along with the other discussion in this report, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations.

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 December 31, 2021, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842.

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 December 31, 2022, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842 and investments in sales-type leases.

As of December 31, 2022, we had 80 lessees in 41 countries.

Our portfolio is continually changing due to acquisitions and sales.

As of December 31, 2021, our $1,991.4 million equipment held for operating lease portfolio and $115.5 million notes receivable represented 304 engines, twelve aircraft, one marine vessel and other leased parts and equipment.

As of December 31, 2022, we had $2,111.9 million of equipment held in our operating lease portfolio, $81.4 million of notes receivable, $17.7 million of maintenance rights, and $6.4 million of investments in sales-type leases, which represented 339 engines, 13 aircraft, one marine vessel and other leased parts and equipment.

As of December 31, 2022, we also managed 324 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.

Willis Aero is a wholly-owned and vertically-integrated subsidiary whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft engines.

Willis Asset Management is a wholly-owned and vertically-integrated subsidiary whose primary focus is the engine management and consulting business.

In 2011 we entered into an agreement with Mitsui & Co., Ltd.

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Each partner holds a 50% interest in the joint venture.

WMES owns a lease portfolio, inclusive of a note receivable, of 37 engines and five aircraft with a net book value of $292.5 million at December 31, 2021.

WMES owns a lease portfolio of 35 engines and five aircraft with a net book value of $255.5 million at December 31, 2022.

Our investment in the joint venture was $41.0 million as of December 31, 2022.

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Each partner holds a 50% interest in the joint venture.

The company acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast-growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China.

CASC Willis acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast-growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China.

CASC Willis owned a lease portfolio of four engines with a net book value of $42.7 million as of December 31, 2022.

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COVID-19 Impact.

Throughout the next 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 2020, 9% of our employees have been 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 have likewise been disrupted.

While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, 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.

In January 2022, the Company lifted travel restrictions and subsequently reopened its corporate headquarters and other offices for employees and contractors to work from.

The Company has experienced and continues to experience various degrees of disruption due to the COVID-19 pandemic.

Lower demand for air travel presents significant risks to the Company, resulting in impacts which have adversely affected the Company's business, results of operations, and financial condition.

The Company is not able to evaluate or foresee the full extent of these impacts at the current time.

During the year ended December 31, 2021, the Company experienced a decrease in lease rent revenue and maintenance reserve revenue as compared to the prior year.

Additionally, as of December 31, 2021, the Company has, in certain situations, agreed to rent concessions which resulted in a total reduction to rent revenues of $0.5 million for the year ended December 31, 2021.

Rent concessions for the year ended December 31, 2020 resulted in a total reduction of rent revenue of $6.5 million.

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.

Due to the impact of recent events, including challenges from declines in market conditions, the Company performed quarterly interim impairment analyses.

The COVID-19 pandemic has materially affected our business and financial results for the year ended December 31, 2021 and may continue to do so indefinitely thereafter.

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.

The scope and nature of the impact of COVID-19 on the airline industry, and in turn the Company's 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 the Company's business and financial position.

The ultimate extent of the effects of the COVID-19 pandemic on the Company will depend on future developments, and such effects could exist for an extended period of time.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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In addition, any deterioration in the financial condition of our customers may adversely affect future lease revenues.

As of December 31, 2021, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842.

Under an operating lease, we retain title to the leased equipment, thereby retaining the potential benefit and assuming the risk of the residual value of the leased equipment.

As of December 31, 2022, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842 and investments in sales-type leases.

Under these leases, we retain title to the leased equipment, thereby retaining the potential benefit and assuming the risk of the residual value of the leased equipment.

We generally depreciate engines on a straight-line basis over 15 years to a 55% residual value.

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We do not accrue for planned major maintenance.

For equipment which is unlikely to be repaired at the end of its current expected life, and is likely to be disassembled upon lease

termination, we depreciate the equipment over its estimated life to a residual value based on an estimate of the wholesale value of the parts after disassembly.

As of December 31, 2021, 40 engines having a net book value of $37.0 million were depreciated under this policy with estimated useful lives ranging from 1 to 113 months.

For equipment which is unlikely to be repaired at the end of its current expected life, and is likely to be disassembled upon lease termination, we depreciate the equipment over its estimated life to a residual value based on an estimate of the wholesale value of the parts after disassembly.

As of December 31, 2022, 28 engines having a net book value of $24.2 million were depreciated under this policy with estimated remaining useful lives ranging from 1 to 101 months.

Asset Valuation .

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On a quarterly basis, management monitors the lease portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment.

These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset, or supply/demand events which may impact the Company’s ability to lease an asset in the future.

These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset ( e.g.

, impairment of two engines as a result of the Russia and Ukraine conflict), or supply/demand events which may impact the Company’s ability to lease an asset in the future.

On an annual basis, even absent any such ‘triggering event’, we evaluate the carrying value of the assets in our lease portfolio to determine if any impairment exists.

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If the forecasted undiscounted cash flows are less than the book value, the asset is written down to its fair value.

When evaluating for impairment, we test at the individual asset level (e.g., engine or aircraft), as each asset generates its own stream of cash flows, including lease rents, maintenance reserves and repair costs.

When evaluating for impairment, we test at the individual asset level ( e.g.

, engine or aircraft), as each asset generates its own stream of cash flows, including lease rents, maintenance reserves and repair costs.

We must make assumptions which underlie the most significant and subjective estimates in determining whether any impairment exists.

Those estimates, and the underlying assumptions, are as follows:

• Fair value – we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data.

• Fair value – we determine fair value by reference to independent appraisals, quoted market prices ( e.g.

, an offer to purchase) and other factors, including but not limited to current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data.

• Future cash flows – when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand.

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If the forecasted undiscounted cash flows and fair value of our long-lived assets decrease in the future, we may incur impairment charges.

Write-downs of equipment to their estimated fair values totaled $7.7 million for the year ended December 31, 2021 which included write-downs of $3.9 million due to a management decision to monetize three engines and one airframe either by sale to a third party or for part-out and $3.8 million for the adjustment of the carrying value of seven impaired engines.

Write-downs of equipment to their estimated fair values totaled $21.8 million for the year ended December 31, 2022, primarily reflecting an adjustment of the carrying value of four impaired engines.

Of these write-downs, $20.4 million reflects the impairment of two engines located in Russia which were determined, due to the Russia and Ukraine conflict, to be unrecoverable.

The remaining write-downs were in the ordinary course of business.

As of December 31, 2022, included within equipment held for lease and equipment held for sale was $32.4 million in remaining book value of 16 assets which were previously written down.

Write-downs of equipment to their estimated fair values totaled $20.5 million for the year ended December 31, 2020 which included write-downs of $15.2 million due to a management decision to monetize 10 engines and two airframes either by sale to a third party or for part-out and $5.3 million for the adjustment of the carrying value of seven impaired engines.

Management continuously monitors the aviation industry and evaluates any trends, events or uncertainties involving airlines, individual aircraft and engine models, as well as the engine leasing and sale market which would materially affect the methodology or assumptions employed by WLFC.

Management continuously monitors the aviation industry and evaluates any trends, events and uncertainties involving airlines, individual aircraft and engine models, as well as the engine leasing and sale market which would materially affect the methodology or assumptions employed by WLFC.

We do not consider there to be any trends, events or uncertainties that currently exist or that are reasonably likely to occur that would materially affect our methodology or assumptions.

However, should any arise, we will adjust our methodology and our disclosure accordingly.

Spare parts inventory is stated at lower of cost or net realizable value.

Spare parts inventory is stated at the lower of cost or net realizable value.

An impairment charge for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usage patterns, future sales expectations and salvage value.

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Spare parts and equipment sales 27,009 17,417 55.1 %

Interest income 7,579 12,938 (41.4) %

Gain on sale of leased equipment 3,133 5,975 (47.6) %

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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 decreased by $8.1 million, or 5.6%, to $134.8 million for the year ended December 31, 2021 from $142.9 million for the year ended December 31, 2020.

The decrease is primarily due to lower average utilization when compared to the prior year which includes operations prior to the COVID-19 pandemic.

Lease rent revenue increased by $27.7 million, or 20.6%, to $162.6 million for the year ended December 31, 2022 from $134.8 million for the year ended December 31, 2021.

The increase is primarily due to an increase in the number of engines acquired and placed on lease, including an increase in utilization compared to the prior period.

During the year ended December 31, 2022, we purchased equipment (including capitalized costs) totaling $286.4 million, which consisted of 46 engines, one aircraft and other parts and equipment purchased for our lease portfolio.

During the year ended December 31, 2021, we purchased equipment (including capitalized costs) totaling $205.8 million, which primarily consisted of 34 engines, four airframes, one aircraft and other parts and equipment purchased for our lease portfolio.

During the year ended December 31, 2020, we purchased equipment (including capitalized costs) totaling $409.3 million, which primarily consisted of 38 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 year ended December 31, 2021 and 2020, respectively.

The aggregate net book value of equipment held for lease at December 31, 2021 and 2020 was $1,991.4 million and $115.5 million notes receivable and $1,886.6 million and $158.7 million notes receivable, respectively.

Average utilization (based on net book value) was approximately 81% and 84% for the year ended December 31, 2021 and 2020, respectively.

One customer accounted for more than 10% of total lease rent revenue during the years ended December 31, 2022 and 2021.

As of December 31, 2022, the Company had $2,111.9 million of equipment held in our operating lease portfolio, $81.4 million of notes receivable, $17.7 million of maintenance rights, and $6.4 million of investments in sales-type leases.

As of December 31, 2021, the Company had $1,991.4 million of equipment held in our operating lease portfolio, $115.5 million of notes receivable, and $22.5 million of maintenance rights.

Average utilization (based on net book value) was approximately 82% and 81% for the years ended December 31, 2022 and 2021, respectively.

Maintenance Reserve Revenue .

Maintenance reserve revenue for the year ended December 31, 2021 decreased $31.4 million, or 29.8%, to $74.0 million from $105.4 million for the year ended December 31, 2020.

Maintenance reserve revenue for the year ended December 31, 2022 increased $9.5 million, or 12.8%, to $83.4 million from $74.0 million for the year ended December 31, 2021.

Long-term maintenance revenue was $36.0 million for the year ended December 31, 2022 compared to $56.3 million for the year ended December 31, 2021.

Engines out on lease with “non-reimbursable” usage fees generated $17.7 million of short-term maintenance revenues for the years ended December 31, 2021 and 2020.

Engines out on lease with “non-reimbursable” usage fees generated $47.4 million of short-term maintenance revenues for the year ended December 31, 2022 compared to $17.7 million for the year ended December 31, 2021, as a result of recovery in global flight traffic subsequent to the most significant impacts of the COVID-19 pandemic.

As of December 31, 2022, there was $6.3 million of deferred in-substance fixed payment use fees included in Unearned Revenue.

Spare Parts and Equipment Sales .

Spare parts and equipment sales for the year ended December 31, 2021 decreased by $1.2 million, or 6.5%, to $17.4 million compared to $18.6 million for the year ended December 31, 2020.

Spare parts sales for the year ended December 31, 2021 were $17.4 million compared to $17.7 million in 2020.

There were no equipment sales for the year ended December 31, 2021 compared to $0.9 million for the sale of one engine for the year ended December 31, 2020.

Spare parts and equipment sales for the year ended December 31, 2022 increased by $9.6 million, or 55.1%, to $27.0 million compared to $17.4 million for the year ended December 31, 2021.

Spare parts sales for the year ended December 31, 2022 were $25.9 million compared to $17.4 million for the year ended December 31, 2021.

The increase in spare parts sales 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 equipment sales of $1.1 million for the sales of two engines during the year ended December 31, 2022, compared to no equipment sales during the year ended December 31, 2021.

Interest Income.

Interest income decreased by $5.4 million, to $7.6 million for the year ended December 31, 2022 from $12.9 million in 2021.

The decrease is primarily the result of a decrease in notes receivable of $34.0 million, partially offset by an increase in investments in sales-type leases of $6.4 million.

Gain on Sale of Leased Equipment .

During the year ended December 31, 2022, we sold 25 engines from the lease portfolio for a net gain of $3.1 million.

During the year ended December 31, 2021, we sold 12 engines and one airframe from the lease portfolio for a net gain of $6.0 million.

During the year ended December 31, 2020, we sold 11 engines and two airframes from the lease portfolio for a net gain of $3.4 million.

Gain on Sale of Financial Assets.

During the year ended December 31, 2021, we sold two notes receivable for a net gain of $10.9 million.

There were no gain on sale of financial assets during the year ended December 31, 2020.

During the year ended December 31, 2022, we sold four notes receivable for a net gain of $3.1 million.

There were two notes receivable sold for a $10.9 million net gain on sale of financial assets during the year ended December 31, 2021.

Asset Transition Fee.

Asset transition fee was $6.3 million during the year ended December 31, 2021 reflecting the settlement received from the close out of an engine transition program.

There was no asset transition fee during the year ended December 31, 2022.

Asset transition fee was $6.3 million during the year ended December 31, 2021 reflecting the settlement received from the close out of an engine transition program.

Other Revenue.

Other revenue increased by $13.1 million, to $25.1 million for the year ended December 31, 2022 from $12.0 million in 2021.

The increase primarily reflects increases of $2.7 million in service related fees and $3.4 million in interest income from our notes receivable.

The increase primarily reflects an increase of $12.2 million in managed service revenues subsequent to the most significant impacts of the COVID-19 pandemic.

Depreciation and Amortization Expense .

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Cost of Spare Parts and Equipment Sales .

Cost of spare parts and equipment sales decreased by $1.8 million, or 10.9%, to $14.9 million for the year ended December 31, 2021 compared to $16.8 million in the prior year period due to lower spare parts sales.

There were no cost of equipment sales for the year ended December 31, 2021 compared to $0.1 million for the year ended December 31, 2020.

Cost of spare parts and equipment sales increased by $5.9 million, or 39.6%, to $20.8 million for the year ended December 31, 2022 compared to $14.9 million in the prior year period due to higher spare parts sales and aged lot write-downs.

Cost of equipment sales was $0.1 million for the year ended December 31, 2022, compared to no cost of equipment sales for the year ended December 31, 2021.

Write-down of Equipment.

Write-down of equipment was $20.5 million for the year ended December 31, 2020 reflecting the write-down of 10 engines and two airframes due to a management decision to monetize the assets either by sale to a third-party or for part-out and an adjustment of the carrying value of seven impaired engines.

Write-downs of equipment to their estimated fair values totaled $21.8 million for the year ended December 31, 2022, primarily reflecting an adjustment of the carrying value of four impaired engines.

Of these write-downs, $20.4 million reflects the impairment of two engines located in Russia which were determined, due to the Russia and Ukraine conflict, to be unrecoverable.

The remaining write-downs were in the ordinary course of business.

Write-downs of equipment totaled $7.7 million for the year ended December 31, 2021 which included write-downs of $3.9 million due to a management decision to monetize three engines and one airframe either by sale to a third party or for part-out and $3.8 million for the adjustment of the carrying value of seven impaired engines.

General and Administrative Expenses .

General and administrative expenses increased 22.8% to $92.5 million for the year ended December 31, 2022 compared to $75.4 million in 2021.

The increase primarily reflects increased stock-based compensation as compared to the prior year period which was driven by an increased stock price at time of grant.

The increase primarily reflects a $3.8 million increase in personnel costs, inclusive of a $1.0 million bonus to our Executive Chairman for his 25 years of prior service to the Company, as well as a $2.2 million reduction to the prior year period personnel costs resulting from the Coronavirus Aid, Relief, and Economic Security Act employee retention credit.

Additionally, with the lifting of travel bans and the opening of various markets, travel and related costs increased by $3.8 million as our sales force reengaged with customers globally.

Project costs increased by $3.5 million, primarily related to an increase in managed service revenues subsequent to the most significant impacts of the COVID-19 pandemic.

Technical Expense .

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These expenses increased 53.7% to $14.4 million for the year ended December 31, 2022, compared to $9.4 million in 2021.

The increase primarily reflects the increase in engine repairs.

The increase is primarily due to an increase in engine maintenance due to an industry-wide increase in engine and aircraft utilization and engine hub repairs resulting from a FAA airworthiness directive, as compared to the prior year period.

Net Finance Costs .

Net finance costs increased to $68.0 million in the year ended December 31, 2021, from $67.7 million for the year ended December 31, 2020.

The slight increase was primarily due to the increase in interest expense related to the WEST VI transaction partly offset by a loss on debt extinguishment of $4.7 million recognized in the prior year period.

Net finance costs decreased to $64.2 million in the year ended December 31, 2022, from $68.0 million for the year ended December 31, 2021.

The decrease was primarily due to a $2.6 million gain on debt extinguishment associated with the repurchase of six tranches of ABS notes as well as a reduction in interest expense primarily related to assets that transitioned in our WEST VI financing, which allowed for restricted cash to pay down credit facility indebtedness.

Income Taxes .

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The effective tax rate for the years ended December 31, 2022 and December 31, 2021 was 44.5% and 63.3%, respectively.

The increase in the effective tax rate was predominantly due to change in tax laws in the United Kingdom.

The decrease in the effective tax rate was predominantly due to a state tax benefit recognized in 2022.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

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At December 31, 2022, $10.7 million in cash and cash equivalents and restricted cash were held in foreign subsidiaries.

We do not intend to repatriate the funds held in foreign subsidiaries to the United States.

In the event that we decide to repatriate these funds to the United States, we would be required to accrue and pay taxes upon the repatriation.

Other than $6.2 million held at a subsidiary in China, for which the tax impact of the planned repatriation has been accrued, we do not intend to repatriate the funds held in other foreign subsidiaries to the U.S.

In the event that we decide to repatriate these funds held at the other foreign subsidiaries to the U.S., we would be required to accrue and pay taxes upon the repatriation.

We generate significant cash flow from our core business as evidenced by our net cash provided by operating activities which was $144.4 million in 2022.

The Company’s largest recurring expense is its non-cash depreciation.

Beyond cash provided through operations, we generally fund the growth of our business through a combination of equity and corporate borrowings.

Beyond cash provided through operations, we generally fund the growth of our business through a combination of equity and corporate borrowings secured by our equipment lease portfolio.

Cash of approximately $284.0 million and $513.7 million in the years ended December 31, 2022 and 2021, respectively, was derived from this borrowing activity.

In these same time periods $228.8 million and $417.0 million, respectively, was used to pay down related debt.

Our credit facility is our primary source of capital to grow our business.

We also access the Asset Backed Security (“ABS”) market to establish term fixed rate debt financing to better match our long-lived assets.

We also access the ABS and other markets to establish term fixed rate debt financing to better match our long-lived assets.

The Company’s credit facility matures in 2024 and we have historically rolled that facility prior to its expiration.

The ABS market continues to be open and active for issuers like the Company.

The ABS market continues to be open for issuers like the Company.

Refer to Note 6 of the consolidated financial statements for a detailed discussion of the Company’s debt obligations.

We finance our growth through borrowings secured by our equipment lease portfolio.

The Company’s largest recurring expense is its non-cash depreciation.

Beyond cash provided through operations, we generally fund the growth of our business through borrowings provided by our credit facility as well the issuance of ABS debt securities which allow us to establish term fixed rate debt against our long-lived assets.

The Company’s credit facility matures in 2024 and has historically rolled that facility prior to its expiration.

The ABS market continues to be open and active for issuers like the Company.

Cash of approximately $513.7 million and $973.2 million in the years ended December 31, 2021 and 2020, respectively, was derived from this borrowing activity.

In these same time periods $417.0 million and $530.8 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, or future rental concessions which could reduce rent or defer customer payments, negatively impacting our financial results.

Preferred Stock Dividends

In October 2016, the Company sold and issued to Development Bank of Japan Inc.

(“DBJ”) an aggregate of 1,000,000 shares of the Company’s 6.5% Series A Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”) at a purchase price of $20.00 per share.

In October 2016, the Company sold and issued to DBJ an aggregate of 1,000,000 shares of the Company’s 6.5% Series A Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”) at a purchase price of $20.00 per share.

The net proceeds to the Company after deducting investor fees were $19.8 million.

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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 years ended December 31, 2021 and 2020, the Company paid total dividends of $3.3 million on the Series A-1 and Series A-2 Preferred Stock, respectively.

During each of the years ended December 31, 2022 and 2021, the Company paid total dividends of $3.3 million on the Series A-1 and Series A-2 Preferred Stock, respectively.

Cash Flows Discussion

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Approximately 80% and 82%, by book value, of our assets were on-lease as of December 31, 2022 and 2021, respectively.

The average utilization rate for the year ended December 31, 2021 and 2020 was approximately 81% and 84%, respectively.

The average utilization rate for the years ended December 31, 2022 and 2021 was approximately 82% and 81%, 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.

There were no distributions received from our investment in WMES in the year ended December 31, 2021.

Distributions received from WMES were $7.2 million in the year ended December 31, 2020.

Cash flows used in investing activities were $148.0 million for the year ended December 31, 2021 and primarily reflected $44.4 million related to leases entered into during 2021 which were classified as notes receivable under ASC 842 and $205.8 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), partly offset by $37.6 million in proceeds from sales of equipment (net of selling expenses) and $58.4 million in proceeds from the sale of notes receivable (net of selling expenses).

Cash flows used in investing activities were $506.7 million for the year ended December 31, 2020 and primarily reflected $136.6 million related to leases entered into during 2020 which were classified as notes receivable under ASC 842 and $409.3 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), partly offset by $26.1 million in proceeds from sales of equipment (net of selling expenses) and $8.4 million in proceeds from the sale of a note receivable (net of selling expense).

Cash flows provided by financing activities for the year ended December 31, 2021 were $74.1 million and primarily reflected $513.7 million in proceeds from the issuance of debt obligations, partly offset by $417.0 million in principal payments, $4.6 million in debt issuance costs and $10.1 million in share repurchases.

Cash flows provided by financing activities for the year ended December 31, 2020 were $428.5 million and primarily reflected $973.2 million in proceeds from the issuance of debt obligations, partly offset by $530.8 million in principal payments, $6.1 million in debt issuance costs, $2.4 million in debt prepayment costs and $1.5 million in share repurchases.

Cash flows used in investing activities were $194.4 million for the year ended December 31, 2022 and primarily reflected $15.3 million related to a lease entered into during 2022 which was classified as a note receivable under ASC 842 and $286.4 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), partly offset by $69.2 million in proceeds from sales of equipment (net of selling expenses) and $40.7 million in proceeds from the sale of notes receivable (net of selling expenses).

Cash flows provided by financing activities for the year ended December 31, 2022 were $43.3 million and primarily reflected $284.0 million in proceeds from the issuance of debt obligations, partly offset by $228.8 million in principal payments and $5.2 million in share repurchases.

Cash flows provided by financing activities for the year ended December 31, 2021 were $74.1 million and primarily reflected $513.7 million in proceeds from the issuance of debt obligations, partly offset by $417.0 million in principal payments, $10.1 million in share repurchases, and $4.6 million in debt issuance costs.

Debt Obligations and Covenant Compliance

At December 31, 2021, debt obligations consists of loans totaling $1,790.3 million, net of unamortized issuance costs, payable with interest rates varying between approximately 1.8% and 7.4%.

At December 31, 2022, debt obligations consists of loans totaling $1,847.3 million, net of unamortized debt issuance costs, payable with interest rates varying between approximately 3.1% 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 6 “Debt Obligations” in Part II, Item 8 of this Form 10-K.

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”).

In June 2021, the Company entered into Amendment No.

2 to the Amended Credit Agreement, 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.

In May 2021, WLFC and its direct, wholly-owned subsidiary WEST VI, closed its offering of $336.7 million aggregate principal amount of fixed rate 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.

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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 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 aircraft engines and airframes.

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.

In May 2021, WLFC repaid an existing note payable with a balance of $5.8 million that was secured by two engines.

In December 2022, the Company recognized a $2.6 million gain on debt extinguishment associated with the repurchase of six tranches of ABS notes with a balance of $12.2 million.

The assets of WEST III, WEST IV, WEST V and WEST VI are not available to satisfy the Company’s obligations other than the obligations specific to the applicable WEST entity.

WEST III, WEST IV, WEST V and WEST VI are consolidated for financial statement presentation purposes.

WEST III, WEST IV, WEST V and WEST VI’s ability to make distributions and pay dividends to the Company is subject to the prior payment of their debt and other obligations and their maintenance of adequate reserves and capital.

Under WEST III, WEST IV, WEST V and WEST VI, cash is collected in restricted accounts, which are used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company.

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.

In October 2020, the Company entered into a Limited Waiver (the “Waiver”) to its Fourth Amended and Restated Credit Agreement.

The Waiver provides for the partial exclusion for specified periods of certain asset book values in the calculation of customer concentration limits, as such limits are defined in the Amended Credit Agreement.

Virtually all of the above debt requires our ongoing compliance with the covenants of each financing, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions.

Under our revolving credit facility, we can typically borrow up to 85% of an engine’s net book value and 65% of spare part’s net book value.

Therefore we must have other available funds for the balance of the purchase price of any new equipment to be purchased or we will not be permitted to draw on our revolver.

The facilities are also cross-defaulted against other facilities.

If we do not comply with the covenants or eligibility requirements, we may not be permitted to borrow additional funds and accelerated payments may become necessary.

Additionally, much of the above debt is secured by engines and aircraft to the extent that engines or aircraft are sold, repayment of that portion of the debt could be required.

The WEST III, WEST IV, WEST V and WEST VI indentures require that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts.

Virtually all of our debt requires ongoing compliance with the covenants of each financing, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions.

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 or quarterly, and the Company was in full compliance with all financial covenant requirements at December 31, 2022.

At December 31, 2022, we were in compliance with the covenants specified in the revolving credit facility, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement to remain below 4.00 to 1.00.

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At December 31, 2022, we were in compliance with the covenants specified in the WEST III, WEST IV, WEST V and WEST VI indentures, servicing and other debt related agreements.

Contractual Obligation and Commitments

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.

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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 for $170.6 million and 19 additional new LEAP-1A engines for $269.3 million by 2025.

We are currently committed to purchasing nine additional new LEAP-1B engines for $145.3 million and 18 additional new LEAP-1A engines for $282.8 million by 2026.

Our purchase agreements generally contain terms that allow the Company to defer or cancel purchase commitments in certain situations.

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The Company continues to expect demand for LEAP-1B engines to increase as the 737 Max continues to be 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 $77.7 million and $112.0 million by 2030.

$27.3 million of interest payments due under debt obligations, scheduled above, are estimated based upon by applying the interest rates applicable at December 31, 2021 to the remaining debt, adjusted for the estimated debt repayments identified in the table above.

$62.9 million of variable interest payments due under debt obligations, scheduled above, are estimated by applying the interest rates applicable at December 31, 2022 to the remaining debt, adjusted for the estimated debt repayments identified in the table above.

Actual interest payments made will vary due to actual changes in the rates for one-month LIBOR.

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Such decline would impair our ability to sustain our level of operations.

We continue to discuss additions to our capital base with our commercial and

investment banks.

We continue to discuss additions to our capital base with our commercial and investment banks.

If we are not able to access additional capital, our ability to continue to grow our asset base consistent with historical trends will be impaired and our future growth limited to that which can be funded from internally generated capital.

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Increases in interest rates could narrow or result in a negative spread between the rental revenue we realize under our leases and the interest rate that we pay under our borrowings.

Historically, we have entered into interest rate derivative instruments to mitigate our exposure to interest rate risk and not to speculate or trade in these derivative products.

Historically, we have entered into interest rate derivative instruments to mitigate our exposure to interest rate risk;

such investments are not intended to speculate or trade in derivative products.

As of December 31, 2022, we have five interest rate swap agreements.

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One interest rate swap agreement which the Company entered into in 2016 expired in April 2021.

The net fair value of the swaps as of December 31, 2021 was $7.3 million, representing an asset of $8.0 million and a liability of $0.7 million.

The net fair value of the interest rate swaps as of December 31, 2020 was $4.0 million, representing a liability.

The net fair value of the swaps as of December 31, 2022 was $34.8 million, representing an asset.

The net fair value of the interest rate swaps as of December 31, 2021 was $7.3 million, representing an asset of $8.0 million and a liability of $0.7 million.

We record derivative instruments at fair value as either an asset or liability.

We have used derivative instruments (primarily interest rate swaps) to manage the risk of interest rate fluctuation.

While substantially all our derivative transactions are entered into for the purposes described above, hedge accounting is only applied where specific criteria have been met and it is practicable to do so.

While substantially all of our derivative transactions are entered into for the purposes described above, hedge accounting is only applied when specific criteria have been met and it is practicable to do so.

In order to apply hedge accounting, the transaction must be designated as a hedge and the hedge relationship must be highly effective.

The hedging instrument’s effectiveness is assessed utilizing regression analysis at the inception of the hedge and on at least a quarterly basis throughout its life.

The hedging instrument’s effectiveness is assessed utilizing regression at the inception of the hedge and either regression or qualitative analysis on at least a quarterly basis throughout its life.

All of the transactions that we have designated as hedges are accounted for as cash flow hedges.

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The ineffective portion of these hedges flows through earnings in the current period.

The hedge accounting for these derivative instrument arrangements increased interest expense by $2.4 million and $2.0 million for the years ended December 31, 2021 and 2020, respectively.

This incremental adjustment for the swaps effective for hedge accounting was included in interest expense for the respective periods.

The Company recorded an adjustment to interest expense of $(7.8) million and $2.4 million during the years ended December 31, 2022 and 2021, respectively, from derivative investments.

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.

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During 2022, the Company sold two engines to WMES for $12.6 million.

During 2020, the Company sold one note receivable to WMES for $8.4 million.

During 2021, the Company sold two engines to WMES for $25.0 million.

There were no engine or aircraft sales to CASC Willis during 2022 or 2021.

On December 2, 2021, in a transaction approved by an independent committee, as well as the Audit Committee, of the Board of Directors, the Company purchased 60,000 shares of its common stock directly from the Company’s Chief Executive Officer (“CEO”), Charles F.

The agreed and paid price per share was $35.43, the discounted volume weighted average price on December 2, 2021.

On October 1, 2021, the Board’s Independent Directors approved the payment of $0.2 million to the Company’s CEO, Charles F.

Willis, for reimbursement of a club membership fee, as well as future payments of reasonable annual club dues.

During 2021, the Company paid approximately $27,000 of expenses payable to Mikchalk Lake, LLC, an entity in which our CEO retains an ownership interest.

During 2022, the Company paid approximately $35,000 of expenses payable to Mikchalk Lake, LLC, an entity in which our Executive Chairman retains an ownership interest.

These expenses were for lodging and other business-related services.

Additionally, during the year ended December 31, 2022, the Company paid a third-party vendor approximately $0.1 million under an exclusive use agreement for an aircraft used for business-related purposes.

The third-party vendor leased the aircraft from a company which our Executive Chairman owns.

These transactions were approved by the Board’s Independent Directors.

During 2020, the Board’s Independent Directors approved the Company’s agreement to a lease with our 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.

In addition, the Company purchased a hull insurance policy, for our CEO’s tender, at

a rate of $6,800 per annum, plus a one-time subscriber fee of $695 to insure his tender while in the service of the Company’s vessel leasing business.

The Company has paid a total of $41,250 and $9,750 during the years ended December 31, 2021 and 2020, respectively, for usage of the tender.

On November 11, 2021, in a transaction approved by the Independent Compensation Committee, the Company purchased the tender for $0.5 million.

Additionally, during 2020, our CEO was charged $4,000 for personal expenses while onboard the Company’s marine vessel.

During 2020, the Company’s CEO was charged $9,100 for the purchase of artwork from the Company.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis