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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-10 · 89 added, 98 removed, 201 unchanged (48% of the section changed)

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Actual results could differ materially for a variety of reasons, including, among others:

the effects on the airline industry and the global economy of events such as terrorist activity and the COVID-19 pandemic, changes in oil prices and other disruptions to the world markets;

the effects on the airline industry and the global economy of events such as the current high interest rate and inflationary environment;

changes in oil prices and other disruptions to the world markets;

trends in the airline industry and our ability to capitalize on those trends, including growth rates of markets and other economic factors;

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our ability to successfully negotiate equipment purchases, sales and leases, to collect outstanding amounts due and to control costs and expenses;

managing the risks and impacts of potential and actual security breaches, cyberattacks, privacy breaches or data breaches, including business, service, or operational disruptions, the unauthorized access to or disclosure of data, financial loss, reputational damage, increased response and remediation costs, legal and regulatory proceedings or other unfavorable outcomes;

changes in interest rates and availability of capital, both to us and our customers;

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regulatory changes affecting airline operations, aircraft maintenance, accounting standards and taxes;

and the market value of engines and other assets in our portfolio.

the market value of engines and other assets in our portfolio;

and the impact of pandemics or other public health crises on our business, financial condition, and results of operations.

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.

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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.

As of December 31, 2023, Willis Aero had $40.3 million in spare parts inventory.

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

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

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

WMES owns a lease portfolio of 35 engines and four aircraft with a net book value of $232.2 million at December 31, 2023.

Our investment in the joint venture was $40.0 million as of December 31, 2023.

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These engines are the most widely used engines in the world, powering Airbus, Boeing, Bombardier, and Embraer aircraft.

COVID-19 Impact.

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.

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

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates, including those related to residual values, estimated asset lives, impairments and bad debts.

On an ongoing basis, we evaluate our estimates, including those related to residual values, estimated asset lives, impairments, bad debts, and credit losses.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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

Aircraft and airframes are generally depreciated on a straight-line basis over 13 to 20 years to a 15% to 17% residual value.

Aircraft and airframes are generally depreciated on a straight-line basis over 13 to 20 years to a 17% residual value.

The marine vessel is depreciated on a straight-line basis over an estimated useful life of 18 years to a 15% residual value.

Other leased parts and equipment are generally depreciated on a straight-line basis over 14 to 15 years to a 25% residual value.

Major overhauls paid for by us, which improve functionality or extend the original useful life, are capitalized and depreciated over the shorter of the estimated period to the next overhaul (“deferral method”) or the remaining useful life of the equipment.

When we pay for major overhauls, which improve functionality or extend the original useful life, they are capitalized and depreciated over the shorter of the estimated period to the next overhaul (“deferral method”) or the remaining useful life of the equipment.

We do not accrue for planned major maintenance.

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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 $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 to their estimated fair values totaled $4.4 million for the year ended December 31, 2023, primarily reflecting an adjustment of the carrying value of five engines and two airframes.

As of December 31, 2023, included within equipment held for lease and equipment held for sale was $31.9 million in remaining book value of 15 assets which were previously written down.

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.

Of this write-down, $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.

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.

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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.

Accounting for Maintenance Expenditures and Maintenance Reserves.

Use fees received are recognized in revenue as maintenance reserve revenue if they are not reimbursable to the lessee.

Use fees that are reimbursable are recorded as a maintenance reserve liability until they are reimbursed to the lessee, the lease terminates, or the obligation to reimburse the lessee for such reserves ceases to exist, at which time they are recognized in revenue as maintenance reserve revenue.

Our expenditures for maintenance are expensed as incurred.

Expenditures that meet the criteria for capitalization are recorded as an addition to equipment recorded on the balance sheet.

RECENT ACCOUNTING PRONOUNCEMENTS

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Gain on sale of financial assets — 3,116 (100.0) %

Asset transition fee — 6,256 (100.0) %

Other revenue 32,088 25,095 27.9 %

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Lease rent revenue increased by $50.6 million, or 31.1%, to $213.1 million for the year ended December 31, 2023 from $162.6 million for the year ended December 31, 2022.

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.

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 that of the prior period.

During the year ended December 31, 2023, we purchased equipment (including capitalized costs) totaling $163.6 million, which consisted of 23 engines and other parts and equipment purchased for our lease portfolio.

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.

One customer accounted for more than 10% of total lease rent revenue during the years ended December 31, 2023 and 2022.

As of December 31, 2023, the Company had $2,112.8 million of equipment held in our operating lease portfolio, $92.6 million of notes receivable, $9.2 million of maintenance rights, and $8.8 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.

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.

Average utilization (based on net book value) was approximately 84% and 82% for the years ended December 31, 2023 and 2022, respectively.

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Long-term maintenance revenue was $15.4 million for the year ended December 31, 2023 compared to $36.0 million for the year ended December 31, 2022.

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.

Engines out on lease with “non-reimbursable” usage fees generated $118.3 million of short-term maintenance revenues for the year ended December 31, 2023 compared to $47.4 million for the year ended December 31, 2022.

This increase is primarily due to an increase in the percentage of engines on short-term leases as well as the increase in utilization on those engines relative to prior period.

Additionally, as of December 31, 2023 and 2022, there were $28.4 million and $6.3 million, respectively, of deferred in-substance fixed payment use fees included in Unearned Revenue associated with engines on short-term leases.

Spare Parts and Equipment Sales .

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 and equipment sales for the year ended December 31, 2023 decreased by $6.7 million, or 24.6%, to $20.4 million compared to $27.0 million for the year ended December 31, 2022.

Spare parts sales for the year ended December 31, 2023 were $20.4 million compared to $25.9 million for the year ended December 31, 2022.

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.

The decrease in spare parts sales reflects variations in the timing of sales.

There were no equipment sales during the year ended December 31, 2023, compared to $1.1 million for the sales of two engines during the year ended December 31, 2022.

Gain on Sale of Leased Equipment .

During the year ended December 31, 2023, we sold 28 engines, one airframe, and other parts and equipment from the lease portfolio for a net gain of $10.6 million.

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.

Gain on Sale of Financial Assets.

During the year ended December 31, 2023, there was no gain on sale of financial assets as we did not sell any notes receivable.

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.

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 $7.0 million, to $32.1 million for the year ended December 31, 2023 from $25.1 million in 2022.

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.

Other revenue consists primarily of management fee income, lease administration fees, third-party consignment commissions earned, service fee revenue, and other discrete revenue items.

The increase primarily reflects an increase of $5.6 million in managed service revenues.

Depreciation and Amortization Expense .

Depreciation and amortization expense decreased $2.2 million, or 2.5%, to $88.3 million for the year ended December 31, 2022 compared to $90.5 million for the year ended December 31, 2021.

The decrease reflects certain assets reaching the end of their depreciable lives as compared to the prior year period.

Depreciation and amortization expense increased $2.7 million, or 3.0%, to $90.9 million for the year ended December 31, 2023 compared to $88.3 million for the year ended December 31, 2022.

The increase primarily reflects the growth in our portfolio subject to depreciation as compared to the prior period.

Cost of Spare Parts and Equipment Sales .

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.

Cost of spare parts and equipment sales decreased by $5.6 million, or 27.0%, to $15.2 million for the year ended December 31, 2023 compared to $20.8 million in the prior year period, reflecting the decline in spare part sales.

There were no equipment sales or cost of equipment sales for the year ended December 31, 2023, compared to $0.1 million of cost of equipment sales for the year ended December 31, 2022.

Write-down of Equipment.

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.

Write-down of equipment to their estimated fair values totaled $4.4 million for the year ended December 31, 2023, primarily reflecting the write-down of five engines and two airframes.

Write-down of equipment totaled $21.8 million for the year ended December 31, 2022, primarily reflecting write-downs of $20.4 million for 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 56.5% to $144.8 million for the year ended December 31, 2023 compared to $92.5 million in 2022.

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.

The increase primarily reflects a $29.5 million increase in personnel costs, which includes an increase of $18.4 million in bonus compensation.

Additionally, a $4.9 million increase in outside service fees, a $7.4 million increase in asset management project costs, a $4.4 million increase in aviation hull war insurance as a result of the Russia and Ukraine conflict, a $1.8 million increase in other taxes due to an increase in business conducted in India, and a $1.5 million increase in equipment costs further contributed to the increased general and administrative expenses.

Technical Expense .

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These expenses increased 40.3% to $20.2 million for the year ended December 31, 2023, compared to $14.4 million in 2022.

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.

The increase is primarily due to a higher level of engine repair activity and thrust rental fees, which is driven by increased activity in the industry.

Net Finance Costs .

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.

Net finance costs increased to $78.8 million for the year ended December 31, 2023, from $64.2 million for the year ended December 31, 2022, primarily due to an increase in short-term interest rates, which drive borrowing costs in our revolving credit facility.

This increase was partially offset by derivative-related receipts of $23.4 million for the year ended December 31, 2023 as compared to $7.8 million for the year ended December 31, 2022.

Income Taxes .

Income tax expense for the year ended December 31, 2022 decreased to $4.4 million from $5.8 million for the comparable period in 2021.

Income tax expense for the year ended December 31, 2023 increased to $23.3 million from $4.4 million for the comparable period in 2022.

The effective tax rate for the years ended December 31, 2023 and December 31, 2022 was 34.8% and 44.5%, respectively.

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

The decrease in the effective tax rate was predominantly due to an increase in pre-book tax income.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

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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 for issuers like the Company.

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

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

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The net proceeds to the Company after deducting issuance costs were $29.7 million.

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 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.

The Company’s Series A-1 Preferred Stock accrued quarterly dividends at the rate per annum of 6.5% per share through October 15, 2023 and accrue quarterly dividends at the rate per annum of 8.5% per share thereafter.

The Company’s Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share.

During the years ended December 31, 2023 and 2022, the Company paid total dividends of $3.2 million and $3.3 million on the Series A-1 and Series A-2 Preferred Stock, respectively.

Cash Flows Discussion

Cash flows provided by operating activities were $229.7 million and $144.4 million in the years ended December 31, 2023 and 2022, respectively.

The $85.3 million, or 59.1%, increase in operating cash flows was primarily driven by a 31.1% increase in lease rent revenue and a 60.2% increase in maintenance reserve revenue, reflecting growth in the size and utilization of the lease portfolio along with increased levels of usage fees resulting from high levels of travel and supply chain constraints.

Changes in maintenance reserves contributed to a $29.8 million increase in year-over-year operating cash flows as market conditions limited asset returns, thereby reducing the return or forfeiture of maintenance reserves.

Additionally, changes in unearned revenue contributed to $18.2 million of incremental operating cash flows, reflecting deferrals of in-substance fixed payment use fees.

Changes in accounts receivables and accounts payables year-over-year largely offset as increased business activities impacted both balances.

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.

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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 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 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 expense).

Cash flows used in investing activities were $92.8 million for the year ended December 31, 2023 and primarily reflected $163.6 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), and $15.4 million related to a lease entered into during 2023 which was classified as a note receivable under ASC 842, partly offset by $85.1 million in proceeds from sales of equipment (net of selling expenses).

Cash flows used in investing activities were $194.4 million for the year ended December 31, 2022 and primarily reflected $286.4 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), and $15.3 million related to leases entered into during 2022 which were classified as notes receivable under ASC 842, 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 expense).

Cash flows used in financing activities for the year ended December 31, 2023 were $57.9 million and primarily reflected $665.5 million in principal payments and $9.4 million in new debt issuance costs, partly offset by $625.7 million in proceeds from the issuance of debt obligations.

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, 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%.

At December 31, 2023, debt obligations totaled $1,802.9 million, net of unamortized debt issuance costs and note discounts, payable with interest rates varying between approximately 3.1% and 8.0%.

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, 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.

The WEST VI Notes are secured by, among other things, WEST VI’s direct and indirect ownership interests in a portfolio of aircraft engines and an 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 with a balance of $5.8 million that was secured by two engines.

In October 2023, the Company entered into Amendment No.

4 to the Fourth Amended and Restated Credit Agreement (“Amendment No.

4”), which extended the maturity date for $500.0 million of its credit facility to June 2025.

In December 2023, under the terms of Amendment No.

4, the Company terminated $292.0 million of its credit facility.

This termination resulted in the credit facility having a reduced total committed amount of $708.0 million as of December 31, 2023.

$49.8 million revolves until the earlier of the final WEST VII novated asset or the maturity date of March 31, 2024, and $158.2 million revolves until the maturity date of June 2024.

In October 2023, the Company and its direct, wholly-owned subsidiary WEST VII, closed its offering of $410.0 million aggregate principal amount of fixed rate notes.

The notes are secured by, among other things, WEST VII’s direct and indirect interests in a portfolio of aircraft engines and airframes.

The notes have a fixed coupon of 8.00%, an expected maturity in October 2029, and a final maturity date in October 2048.

The notes were issued at a price of 98.84814% of par.

Principal on the notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.

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

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

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

Under WEST III, WEST IV, WEST V, WEST VI, and WEST VII, cash is collected in restricted accounts, 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 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.

The WEST III, WEST IV, WEST V, WEST VI, and WEST VII 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.

These covenants are tested either monthly, quarterly, or annually as required, and the Company was in full compliance with all financial covenant requirements at December 31, 2023.

At December 31, 2023, 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 of not greater than 4.50 to 1.00, on or prior to December 31, 2024, and not greater than 4.25 to 1.00 for the quarter ending March 31, 2025 and thereafter.

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 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.

At December 31, 2023, we were in compliance with the covenants specified in the WEST III, WEST IV, WEST V, WEST VI, and WEST VII indentures, servicing and other debt related agreements.

Contractual Obligations and Commitments

6 unchanged sentences

Interest payments under debt obligations 371,719 100,539 149,157 91,852 30,171

Operating lease obligations 11,350 3,268 5,909 1,319 854

Purchase obligations 459,665 138,813 320,852 — —

Operating lease obligations 8,621 3,363 3,619 1,013 626

Total $ 2,667,064 $ 315,921 $ 1,169,761 $ 526,404 $ 654,978

From time to time we enter into contractual commitments to purchase engines directly from original equipment manufacturers.

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.

We are currently committed to purchasing nine additional new LEAP-1B engines and 18 additional new LEAP-1A engines for $459.7 million by 2027.

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 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 December 2020, we entered into definitive agreements for the purchase of 21 modern technology aircraft engines.

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$38.4 million of variable interest payments due under debt obligations, scheduled above, are estimated by applying the interest rates applicable at December 31, 2023 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.

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

We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level of operations through 2024.

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MANAGEMENT OF INTEREST RATE EXPOSURE

At December 31, 2022, $727.0 million of our borrowings were on a variable rate basis at various interest rates tied to one-month LIBOR.

At December 31, 2023, $353.0 million of our borrowings were on a variable rate basis at various interest rates tied to one-month term SOFR.

Our equipment leases are generally structured at fixed rental rates for specified terms.

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

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

During the first quarter of 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two with remaining terms of 13 months and two with remaining terms of 37 months as of December 31, 2022.

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 18 months as of December 31, 2022.

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, 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.

As of December 31, 2023, we have five interest rate swap agreements with a total notional value of $500.0 million.

During 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two with remaining terms of one month and two with remaining terms of 25 months as of December 31, 2023.

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 six months as of December 31, 2023.

The net fair value of the interest rate swaps as of December 31, 2023 and December 31, 2022 was $16.5 million and $34.8 million, respectively, each representing an asset and reflected within other assets on the Consolidated Balance Sheets.

As it relates to the two fixed-rate interest swap agreements with remaining terms of one month as of December 31, 2023, the Company evaluated the probability of the forecasted transactions occurring.

The Company determined that it is not probable that the forecasted transactions will occur upon the maturities of these two fixed-rate interest rate swap agreements and as such, reclassified into earnings the associated amount in accumulated other comprehensive income.

The impact was an addition to interest income, or reduction to interest expense, in the Company’s Consolidated Statements of Income of approximately $0.2 million for the year ended December 31, 2023.

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

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“Other revenue” on the Consolidated Statements of Income includes management fees earned of $2.4 million and $2.0 million during the years ended December 31, 2023 and 2022, respectively, related to the servicing of engines for the WMES lease portfolio.

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

During 2023, WMES sold an engine to the Company for $22.3 million, and the Company sold two engines to WMES for $28.8 million.

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

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

During 2022, the Company subleased a WMES engine to a third party, with WMES as the head lessor.

Under ASC 842, the Company recognized a right-of-use (“ROU”) asset of $4.9 million and a lease liability of $4.9 million for this lease during the year ended December 31, 2022.

Between January 2023 and July 2023, Willis Asset Management Limited, one of the Company’s wholly-owned and vertically-integrated subsidiaries, leased one of its hangars to Fur Feather and Fin Limited, an entity in which the Company’s Executive Chairman retains an ownership interest, for quarterly rent payments of approximately $7,700.

The lease was approved by the Board’s Independent Directors.

During 2023, the Company paid approximately $44,000 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.

These expenses were for lodging and other business-related services and were approved by the Board’s Independent Directors.

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