W IL L IS L E A SE F IN A NCE COR P OR AT ION
2 010 A NNUA L R EP OR T
Power to Spare—Worldwide ®
Willis Lease Finance Corporation is a provider of aviation services,
specializing in leasing spare commercial aircraft engines and other
aircraft-related equipment. We provide these services to commercial
airlines, aircraft engine manufacturers, and maintenance, repair and
overhaul facilities worldwide.
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STRA TEGIC FINANCINGS
& C OMMITMENTS
LEASE POR TFOLIO G ROWTH
(IN MILLIONS)
1996: Initial Public Offering
$1,000
1997: Follow-on Equity Offering
2000: SAIR Group Equity Investment
2005: Asset-backed Securitization
for WEST 1
2006: Preferred Stock Offering
2007: CFMI Engine Purchase Agreement
2008: Asset-backed Securitization
for WEST 2
2009: Revolver Renewal
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$900
$800
$700
$600
$500
$400
$300
$200
$100
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96
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09
10
D E A R F E L L O W SH A R EH O L D E R S,
To begin with, I wish to express to our shareholders how much we, the employees of
Willis Lease, appreciate your support. We had a solidly profi table year in 2010. While the
profi ts in 2010 were below the record fi nancial results we achieved in the prior two years,
our strong fourth quarter profi ts, which were the best quarterly results for the year, brought
considerable optimism that our improving performance will carry forward into 2011.
We achieved a number of signifi cant milestones last year.
Highlights for the year include:
• The lease portfolio increased 2% year-over-year to $998.0 million, with 16 engines
purchased and seven engines and one airframe sold during 2010. Of the 2010 pur-
chases, nine engines were purchased late in the fourth quarter and had little impact
on 2010 revenues.
• Year-end utilization improved to 90% from 85% a year ago, showing improvement
from prior periods, which were 83% and 89% at the end of the second and third quarters
of 2010, respectively. Average utilization was 86% in 2010 compared to 89% in 2009.
• Lease rent revenues remained relatively fl at, refl ecting lower average utilization and
pressure on lease rates.
• Maintenance reserve revenues contributed $34.8 million to 2010 revenues, down from
the record $46.0 million achieved in 2009.
• Gains on sale of leased equipment contributed $8.0 million to 2010 revenues compared
to $1.0 million a year ago. Four of the engines sold in 2010 continue to be managed on
behalf of third parties, earning ongoing servicing fees. We manage 16 engines on behalf
of third parties.
• The sale of our joint venture interest in Sichuan Snecma Aero-Engine Maintenance
Co. Ltd. boosted other income by $2.0 million in 2010.
• Total net fi nance costs in 2010 increased 17% year-over-year, refl ecting the 175 basis
“ WE HAVE CONTINUED
point increase in the cost of the revolving debt facility that was renewed in the fourth
TO EXPAND AND DEEPEN
OUR RELATIONSHIPS
WITH BANKS THROUGH-
quarter of 2009, as well as an increase in average debt outstanding and higher average
interest rate swap positions held during the year. Net fi nance costs were reduced in
2009, due to a gain on extinguishment of debt of $0.9 million, generated from debt
repurchase.
• The company repurchased 367,000 common shares during 2010 at an average cost
OUT THE WORLD THAT
of $11.31 per share.
PROVIDE THE FUNDING
FOR OUR GROWTH.”
During 2010, the airline industry recovered from the economic downturn and worldwide
airline profi ts reached new heights. The industry continues to benefi t from increased traffi c
and high load factors. Fleet utilization is up and many parked aircraft have returned to
service. Additionally, previously deferred engine overhauls are beginning to lead to more
shop visits. These conditions support greater demand for leased engines. While these
factors fuel our optimism for 2011, they were not enough to overcome excess supplies in
the spare engine market last year or relieve the pressure on lease rates that built up over
the past few years. Our ability to post profi ts during all cycles in the industry is an indicator
of the expertise of our team and our ability to react quickly to market conditions.
2010 WILLIS LEASE FINANCE CORPORATION ANNUAL REPORT 1
New Alliances
We continue to expand our engine portfolio of fuel-effi cient high-demand engines with
NET INCOME
NET INCOME A TTRIBU TABLE
TO COMMO N SHA REHOLDERS
the net addition of nine engines during the year. We recently announced a new alliance
(IN MILLIONS)
with BAE Systems Asset Management to broaden and enhance our access to jet engines
to further build our portfolio. As aircraft age, their primary value increasingly concentrates
in the engines which have longer useful lives than the aircraft. We believe older aircraft
are an excellent source of engines for us to tap. The expertise in aviation assets and
leasing fundamentals that BAE Systems provides will complement our own skill set nicely.
BAE Systems is a highly regarded, worldwide fi rm, headquartered in London that had
revenues in excess of $35 billion last year. We expect they will help broaden our abilities
to capitalize on opportunities in the pre-owned aircraft and engine space.
Furthermore, we are expanding in the regional jet aircraft market with the signing of
a Memorandum of Understanding with SuperJet International to purchase six Sukhoi
SuperJet (SSJ) 100 aircraft over the next few years. We believe these aircraft, which
seat 98 passengers, offer a signifi cant advancement over older regional aircraft and fi ll
a need for effi cient and affordable transportation in regional centers around the world.
$30
$25
$20
$15
$10
$5
06
07
08
09
10
ABOVE: A CFM56 HIGH-PRESSURE COMPRESSOR IN BUILD AND BALANCE. Image courtesy of Lufthansa Technik.
ON THE COVER: A CFM56-5B AT THE BEGINNING OF AN ENGINE BUILD. Image courtesy of Lufthansa Technik.
2 2010 WILLIS LEASE FINANCE CORPORATION ANNUAL REPORT
AV ER AGE UTILIZATION
(BY BOOK VALUE)
95%
90%
85%
80%
75%
70%
65%
06
07
08
09
10
In addition to the strong potential we see for developing new regional markets throughout
the world, we believe the SuperJet transaction is strategically signifi cant. Willis Lease is
the fi rst U.S.-based company to join the alliances of international companies involved in
the launch of this aircraft, including PowerJet which is comprised of NPO Saturn—the
major Russian engine manufacturer—and Snecma, the French worldwide leader of engines
for the SSJ 100 as well as the CFMI brand. Engines manufactured by CFMI make up a
signifi cant portion of our current portfolio. At the same time, our involvement with the
premier Russian aircraft manufacturer Sukhoi and their partner—major Italian aerospace
leader Alenia Aeronautica, a Finmeccanica Company —will help provide an entry into these
new strategic markets.
Financial Strength
Our ability to access the fi nancial markets is one of our greatest strengths. When we
completed the fi rst WEST securitization in 2005, it was a groundbreaking transaction
with a unique renewable structure. The WEST program is continuing to prove its worth
by providing access to the credit markets at attractive rates. While our cost of funding
has risen in the past year, we have continued to expand and deepen our relationships
with banks throughout the world that provide the funding for our growth.
LEA SE RENT REVENUE
MAINTENA NCE RESERVE REVENUE
In 2010, we renewed and increased our credit facilities with a global consortium of banks.
(IN MILLIONS)
The higher cost of debt will begin to be offset by savings from hedging activities. As our
$160
$140
$120
$100
$80
$60
$40
higher cost interest rate swaps mature, we plan to gradually reduce our hedging position.
Higher cost swaps with a notional value of $98 million matured in the last half of 2010,
and a further $55 million in swaps will mature in the fi rst half of 2011, producing interest
savings going forward.
Looking Forward
Much of my time as CEO is focused on determining where the current and future opportu-
nities lie. We have made solid progress in achieving a number of strategic and operational
goals and are continuing to work on the following objectives:
06
07
08
09
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• Expanding our successful engine pooling arrangements into new geographic markets
• Pursuing strategic and fi nancial joint venture opportunities.
and engine models.
• Enhancing our access to capital.
• Entering new markets and adding market share where we already operate.
• Capitalizing on the opportunities in the regional aircraft market.
• Repurchasing common shares will continue to be a part of our capital management
strategy, and we have already repurchased more than 300,000 common shares this year.
2010 WILLIS LEASE FINANCE CORPORATION ANNUAL REPORT 3
Last year I stated that we were returning to more normal conditions in both the fi nance
BOO K VALUE PER COMMON SHA R E
and aviation markets. While that process has taken longer than expected, I continue to see
reasons for optimism. I believe 2011 will no doubt present its share of challenges. Never-
theless, overall I feel that the company is well positioned to deal with events successfully.
I am proud of the way the company dealt with the challenges it faced, and I feel good
about the momentum we have going into 2011.
Sincerely,
Charles F. Willis, IV
President and Chief Executive Offi cer
March 31, 2011
$21
$19
$17
$15
$13
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10
O U R E N G I N E P O R T F O L I O
R O L L S R O Y C E
RB211-535
AE3007A
P & W
PW4000
PW2000
PW150
PW100
JT8D-200
C F M
CFM56-7B
CFM56-5B
CFM56-5C
CFM56-5A
CFM56-3C
G E
CF6-80
CF34
I A E
V2500
ABOVE: TROUBLESHOOTING A CF6-80C2 ENGINE. Image courtesy of Lufthansa Technik.
4 2010 WILLIS LEASE FINANCE CORPORATION ANNUAL REPORT
Stock Performance Graph
The following performance graph shows the percentage change in cumulative total return to
WILLIS LEASE FINANCE CORPORATION
a holder of our common stock compared with the cumulative total return, assuming dividend
reinvestment, of the NASDAQ Composite Index and the NASDAQ Financial-100 Index, during
NASDAQ COMPOSITE INDEX
NASDAQ FINANCIAL-100 INDEX
the period from December 31, 2005, through December 31, 2010.
$100 invested on 12/31/05 in stock or in index
including reinvestment of dividends.
200
180
160
140
120
100
80
60
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
ABOVE: A CFM56-3 IN A FINAL QUICK ENGINE CHANGE BUILD. Image courtesy of Lufthansa Technik.
2010 WILLIS LEASE FINANCE CORPORATION ANNUAL REPORT 5
SE L E C T E D F IN A N CI A L D ATA
The following table summarizes selected consolidated fi nancial data and operating information of the
Company. The selected consolidated fi nancial and operating data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Form 10-K included with this report.
(In thousands, except earnings per share)
Years ended December 31,
R E V E N U E
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other income
Total revenue
E X P E N S E
Depreciation expense
Write-down of equipment
General and administrative
Technical expense
Total net fi nance costs
Total expenses
2010
2009
2008
2007
2006
$ 102,133
$ 102,390
$ 102,421
$ 86,084
$ 69,230
34,776
7,990
3,403
46,049
33,716
28,169
32,744
1,043
958
12,846
3,823
7,389
768
3,781
300
$ 148,302
$ 150,440
$ 152,806
$ 122,410
$ 106,055
$
48,704
$
44,091
$ 37,438
$ 31,136
$ 26,255
2,874
29,302
8,118
40,733
6,133
26,765
7,149
6,655
4,335
3,389
27,085
20,551
19,995
3,673
2,543
1,544
34,857
36,753
36,812
28,375
$ 129,731
$ 118,995
$ 111,604
$ 95,377
$ 79,558
Net income
Net income attributable to common shareholders
Diluted earnings per common share
Diluted average common shares outstanding
Common shares outstanding at period end
$
$
$
12,050
8,922
0.96
9,251
9,181
$
$
$
22,367
19,239
$ 26,601
$ 17,664
$ 17,886
$ 23,473
$ 14,536
$ 14,941
2.14
$
2.68
$
1.66
$
1.56
8,983
9,182
8,760
9,078
8,742
8,433
9,606
8,010
B A L A N C E S H E E T D A T A
Equipment held for operating lease
$ 998,001
$ 976,822
$ 829,739
$ 744,827
$ 604,101
Total assets
Shareholders’ equity
$ 1,125,962
$ 1,097,702
$ 982,712
$ 868,590
$ 730,019
$ 226,970
$ 220,793
$ 192,207
$ 174,652
$ 164,002
Book value per common share
$
21.24
$
20.57
$
17.66
$
16.93
$
16.49
FORWARD-LO OKIN G STAT EMEN T S Except for historical information, the matters discussed in this Annual Report contain forward-looking statements that involve risks and uncertainties. Do
not unduly rely on forward-looking statements, which give only expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update them. Our actual results may differ materially from the results discussed in forward-looking statements. Factors that might cause such a difference include, but
are not limited to: the state of the global economy; the availability of capital to us and our customers; the state of the airline industry, including growth rates of markets and other economic factors,
as well as the effects of specifi c events, such as terrorist activity, changes in oil prices and other disruptions to world markets; risks associated with owning and leasing jet engines and aircraft; our
ability to successfully negotiate leases, equipment purchases, and sales to collect amounts due to us and control costs; changes in interest rates; our ability to continue to meet changing customer
demands; regulatory changes affecting airline operations, aircraft maintenance, accounting and taxes; the market value of engines and costs of scheduled maintenance events; and other risks
detailed in our Annual Report on Form 10-K and other continuing reports we fi le with the Securities and Exchange Commission.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧⌧⌧⌧ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(cid:2)(cid:2)(cid:2)(cid:2) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2010
Commission File Number: 001-15369
WILLIS LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
68-0070656
(IRS Employer Identification No.)
773 San Marin Drive, Suite 2215, Novato, CA
(Address of principal executive offices)
94998
(Zip Code)
Registrant’s telephone number, including area code (415) 408-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock
Series A Preferred Stock
Series I Preferred Stock
Name of each exchange on which registered
NASDAQ
NASDAQ
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes (cid:2) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:2)
No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:2) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendments to this Form 10-K. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer (cid:2)
Non-accelerated filer (cid:2)
(Do not check if a smaller reporting company)
Accelerated filer ⌧
Smaller reporting company (cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:2) No ⌧
The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most
recently completed second fiscal quarter (June 30, 2010) was approximately $57.6 million (based on a closing sale price of $9.22 per share
as reported on the NASDAQ National Market).
The number of shares of the registrant’s Common Stock outstanding as of March 14, 2011 was 9,126,949.
The Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference into Part III of this
Form 10-K.
WILLIS LEASE FINANCE CORPORATION
2010 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for Registrant’s Common Equity and Related Stockholder Matters
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Controls and Procedures
Item 9A.
Other Information
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
3
10
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2
ITEM 1. BUSINESS
INTRODUCTION
PART I
Willis Lease Finance Corporation with its subsidiaries is a leading lessor of commercial aircraft engines. Our
principal business objective is to build value for our shareholders by acquiring commercial aircraft engines and managing
those engines in order to provide a return on investment, primarily through lease rent and maintenance reserve revenues, as
well as through management fees earned for managing aircraft engines owned by other parties. As of December 31, 2010, we
had a total lease portfolio consisting of 179 engines and related equipment, three aircraft and four spare parts packages with
62 lessees in 35 countries and an aggregate net book value of $998.0 million. As of December 31, 2010, we managed a total
lease portfolio of 16 engines and related equipment for other parties. We also seek, from time to time, to act as leasing agent
of engines for other parties and we also own a relatively small portfolio of aircraft that we lease.
Our strategy is to lease aircraft engines and aircraft and provide related services to a diversified group of commercial
aircraft operators and maintenance, repair and overhaul organizations (“MROs”) worldwide. Commercial aircraft operators
need engines in addition to those installed in the aircraft that they operate. These spare engines are required for various
reasons including requirements that engines be inspected and repaired at regular intervals based on equipment utilization.
Furthermore, unscheduled events such as mechanical failure, FAA airworthiness directives or manufacturer-recommended
actions for maintenance, repair and overhaul of engines result in the need for spare engines. Commercial aircraft operators
and others in the industry generally estimate that the total number of spare engines needed is between 10% and 15% of the
total number of installed engines. Today it is estimated that there are nearly 47,000 engines installed on commercial aircraft.
Accordingly, we estimate that there are between 4,700 and 7,100 spare engines in the market, including both owned and
leased spare engines.
Our engine portfolio consists of noise-compliant Stage III commercial jet engines manufactured by CFMI, General
Electric, Pratt & Whitney, Rolls Royce and International Aero Engines. These engines generally may be used on one or more
aircraft types and are the most widely used engines in the world, powering Airbus, Boeing, McDonnell Douglas, Bombardier
and Embraer aircraft.
The Company acquires engines for its leasing portfolio in a number of ways. It enters into sale and lease back
transactions with operators of aircraft and providers of engine maintenance cost per hour services. We also purchase both
new and used engines, on a speculative basis (i.e. without a lease attached from manufacturers or other parties which own
such engines).
We hold a fifty percent membership interest in a joint venture, WOLF A340, LLC, a Delaware limited liability
company, (“WOLF”). On December 30, 2005, WOLF completed the purchase of two Airbus A340-313 aircraft from Boeing
Aircraft Holding Company for a purchase price of $96.0 million. These aircraft are currently leased to Emirates with
remaining lease terms of 30 and 32 months. Our investment in the joint venture is $9.4 million.
We are a Delaware corporation, incorporated in 1996. Our executive offices are located at 773 San Marin Drive,
Suite 2215, Novato, California 94998. We transact business directly and through our subsidiaries unless otherwise indicated.
We maintain a website at www.willislease.com where our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as
reasonably practicable following the time they are filed with or furnished to the SEC. You may read and copy any materials
we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC also maintains
an electronic Internet site that contains our reports, proxy and information statements, and other information at
http://www.sec.gov.
We do not break our business into multiple segments. Instead, we consider our continuing operations to operate in
one reportable segment.
3
THE WEST SECURITIZATION
Willis Engine Securitization Trust, or “WEST,” is a special-purpose, bankruptcy-remote, Delaware statutory trust
that is wholly-owned by us and consolidated in our financial statements. We established WEST in 2005 to acquire and
finance engines owned by another of our wholly-owned subsidiaries, WEST Engine Funding LLC (formerly Willis Engine
Funding LLC). In August 2005 and again in March 2008, WEST issued and sold notes to finance its acquisition of engines.
WEST’s obligations under these notes are serviced by revenues from the lease and disposition of its engines, and are secured
by all its assets, including all its interests in its engines, its subsidiaries, restricted cash accounts, engine maintenance reserve
accounts, all proceeds from the sale or disposition of engines, and all insurance proceeds. We have not guaranteed any
obligations of WEST and none of our assets secure such obligations.
We are the servicer and administrative agent for WEST. Our annual fees for these services are 11.5% as servicer and
2.0% as administrative agent of the aggregate net rents actually received by WEST on its engines, and such fees are payable
to us monthly. We are also paid a fee of 3.0% of the net proceeds from the sale of any engines. As WEST is consolidated in
our financial statements these fees eliminate on consolidation. Proceeds from engine sales will be used, at WEST’s election,
to reduce WEST’s debt or to acquire other engines.
WEST gives us the flexibility to manage the portfolio to adapt to changes in aircraft fleets and customer demand
over time, benefiting both us and our investors. The asset-backed securitization provides a significant improvement to our
capital structure by better matching debt maturity to asset life. It includes a warehouse facility to provide additional
borrowing capacity, which offers new capital to fund growth and, more importantly, provides a structure for regular
placement of additional term notes in the future as the warehouse matures.
INDUSTRY BACKGROUND - THE DEMAND FOR LEASED AIRCRAFT ENGINES
Historically, commercial aircraft operators owned rather than leased their engines. As engines become more
powerful and technically sophisticated, they also become more expensive to acquire and maintain. In part due to cash
constraints on commercial aircraft operators and the costs associated with engine ownership, commercial aircraft operators
have become more cost-conscious and now utilize operating leases for a portion of their engines and are therefore better able
to manage their finances in this capital-intensive business. Engine leasing is a specialized business that has evolved into a
discrete sector of the commercial aviation market. Participants in this sector need access to capital, as well as specialized
technical knowledge, in order to compete successfully.
Growth in the spare engine leasing industry is dependent on two fundamental drivers:
•
•
the number of commercial aircraft, and therefore engines, in the market; and
the proportion of engines that are leased, rather than owned, by commercial aircraft operators.
We believe both drivers will increase over time.
Increased number of aircraft, and therefore engines, in the market
We believe that the number of commercial and cargo aircraft, and hence spare engines, will increase. Boeing
estimates that there are roughly 19,000 aircraft as of 2009 and projects this will grow to approximately 36,000 aircraft by
2029. Aircraft equipment manufacturers have predicted such an increase in aircraft to address the rapid growth of both
passenger and cargo traffic in the Asian markets, as well as demand for new aircraft in more mature markets.
Increased lease penetration rate
Spare engines provide support for installed engines in the event of routine or other engine maintenance or
unscheduled removal. The number of spare engines needed to service any fleet is determined by many factors. These factors
include:
•
•
•
the number and type of aircraft in an aircraft operator’s fleet;
the geographic scope of such aircraft operator’s destinations;
the time an engine is on-wing between removals;
4
•
•
average shop visit time; and
the number of spare engines an aircraft operator requires in order to ensure coverage for predicted and
unscheduled removals.
We believe that commercial aircraft operators are increasingly considering their spare engines as significant capital
assets, where operating leases may be more attractive than capital leases or ownership of spare engines. Some believe that
currently as many as 25% to 30% of the spare engine market falls under the category of leased engines. Industry analysts
have forecast that the percentage of leased engines is likely to increase over the next 15 years as engine leasing follows the
growth of aircraft leasing. We believe this is due to the increasing cost of newer engines, the anticipated modernization of the
worldwide aircraft fleet and the significant cost associated therewith, and the emergence of new niche-focused airlines which
generally use leasing in order to obtain their capital assets.
ENGINE LEASING
As of December 31, 2010, all of our leases to air carriers, manufacturers and MROs are operating leases as opposed
to finance leases; however, the Company did enter into a finance lease in January 2011. Under operating leases, we retain the
potential benefit and assume the risk of the residual value of the aircraft equipment, in contrast to capital or financing leases
where the lessee has more of the potential benefits and risks of ownership. Operating leases allow commercial aircraft
operators greater fleet and financial flexibility due to the relatively small initial capital outlay necessary to obtain use of the
aircraft equipment, and the availability of short and long term leases to better meet their needs. Operating lease rates are
generally higher than finance lease rates, in part because of the risks associated with the residual value.
We describe all of our current leases as “triple-net” operating leases. A triple-net operating lease requires the lessee
to make the full lease payment and pay any other expenses associated with the use of the engines, such as maintenance,
casualty and liability insurance, sales or use taxes and personal property taxes. The leases contain detailed provisions
specifying the lessees’ responsibility for engine damage, maintenance standards and the required condition of the engine
upon return at the end of the lease. During the term of the lease, we generally require the lessee to maintain the engine in
accordance with an approved maintenance program designed to meet applicable regulatory requirements in the jurisdictions
in which the lessee operates.
We lease our assets under both short and long term leases. Short term leases are generally for periods of less than
one year. Under many of our leases the lessee pays use fees designed to cover expected future maintenance costs (often called
maintenance reserves) which are reimbursable for certain maintenance expenditures. Under long term leases, at the end of the
lease the accumulated use fees are retained by us to fund future maintenance not performed by the lessee as indicated by the
remaining use fees. Under short-term leases and certain medium-term leases, we may undertake a portion of the maintenance
and regulatory compliance risk. For these leases, the lessee has no claim to the maintenance reserves paid to us throughout
the term of the lease. Use fees received are recognized in revenue as maintenance reserve revenue if they are not
reimbursable to the lessee which is typically the case with short term leases. Use fees that are reimbursable under longer term
leases are recorded as a maintenance reserve liability until they are reimbursed to the lessee or the lease terminates, at which
time they are recognized in revenue as maintenance reserve revenue.
We try to mitigate risk where possible. For example, we make an analysis of the credit risk associated with the
lessee before entering into any significant lease transaction. Our credit analysis generally consists of evaluating the
prospective lessee’s financial standing by utilizing financial statements and trade and/or banking references. In certain
circumstances, we may require our lessees to provide additional credit support such as a letter of credit or a guaranty from a
bank or a third party or a security deposit. We also evaluate insurance and expropriation risk and evaluate and monitor the
political and legal climate of the country in which a particular lessee is located in order to determine our ability to repossess
our engines should the need arise. Despite these guidelines, we cannot give assurance that we will not experience collection
problems or significant losses in the future. See “Risk Factors” below.
At the commencement of a lease, we may collect, in advance, a security deposit normally equal to at least one
month’s lease payment. The security deposit is returned to the lessee after all lease return conditions have been met. Under
the terms of some of our leases, during the term of the lease, the lessees pay amounts to us based on usage of the engine,
which are referred to as maintenance reserves or use fees, which are designed to cover the expected future maintenance costs.
For those leases in which the maintenance reserves are reimbursable to the lessee, maintenance reserves are collected and are
reimbursed to the lessee when qualifying maintenance is performed. Under longer-term leases, to the extent that cumulative
use fee billings are inadequate to fund expenditures required prior to return of the engine to us, the lessee is obligated to
cover the shortfall. Recovery is therefore dependent upon the financial condition of the lessee.
5
During the lease period, our leases require that maintenance and inspection of the leased engines be performed at
qualified maintenance facilities certified by the FAA or its foreign equivalent. In addition, when an engine becomes off-lease,
it undergoes inspection to verify compliance with lease return conditions. Our management believes that our attention to our
lessees, and our emphasis on maintenance and inspection helps preserve residual values and generally helps us to recover our
investment in our leased engines.
Upon termination of a lease, we will lease, sell or part out the related engines. The demand for aftermarket engines
for either sale or lease may be affected by a number of variables, including:
•
•
•
•
•
•
general market conditions;
regulatory changes (particularly those imposing environmental, maintenance and other requirements on the
operation of engines);
changes in demand for air travel;
fuel costs;
changes in the supply and cost of aircraft equipment; and
technological developments.
The value of particular used engines varies greatly depending upon their condition, the maintenance services
performed during the lease term and, as applicable, the number of hours or cycles remaining until the next major maintenance
is required. If we are unable to lease or sell engines on favorable terms, our financial results and our ability to service debt
may be adversely affected. See “Risk Factors” below.
The value of a particular model of engine is heavily dependent on the status of the types of aircraft on which it is
installed. We believe values of engines tend to be stable so long as the host aircraft for the engines as well as the engines
themselves are still being manufactured. Prices will also tend to remain stable and even rise after a host aircraft is no longer
manufactured so long as there is sufficient demand for the host aircraft. However, the value of an engine begins to decline
rapidly once the host aircraft begins to be retired from service and/or parted out in significant numbers. Values of engines
also may decline because of manufacturing defects that may surface subsequently.
As of December 31, 2010, we had a total lease portfolio of 179 aircraft engines and related equipment, four spare
parts packages, three aircraft and various parts and other engine-related equipment with a cost of $1,190.4 million in our
lease portfolio. As of December 31, 2009, we had a total lease portfolio of 169 aircraft engines and related equipment, three
spare parts packages, four aircraft and various parts and other engine-related equipment with a cost of $1,137.5 million in our
lease portfolio.
As of December 31, 2010, minimum future rentals under non-cancelable operating leases of these engines, parts and
aircraft assets were as follows:
Year
2011
2012
2013
2014
2015
Thereafter
(in thousands)
$
$
67,936
46,819
35,550
27,883
21,791
34,848
234,827
As of December 31, 2010, we had 62 lessees of commercial aircraft engines, aircraft, and other aircraft-related
equipment in 35 countries. Although our exposure to one large customer has increased during 2010, we continue to believe
the loss of any one customer would not have a significant long-term adverse effect on our business. We operate in a global
market in which our engines are easily transferable among lessees located in many countries, which stabilizes demand and
allows us to recover from the loss of a particular customer. As a result, we do not believe we are dependent on a single
customer or a few customers the loss of which would have a material adverse effect on our revenues.
6
AIRCRAFT LEASING
As of December 31, 2010, we owned three DeHaviland DHC-8-100 turboprop aircraft, all of which we lease to
Hawaii Island Air, Inc. (“Island Air”). These aircraft have a net book value of $3.3 million.
Gavarnie Holding, LLC, a Delaware limited liability company (“Gavarnie”) owned by Charles F. Willis, IV,
purchased the stock of Aloha Island Air, Inc., a Delaware Corporation, (“Island Air”) from Aloha AirGroup, Inc. (“Aloha”)
on May 11, 2004. Charles F. Willis, IV is the President, CEO and Chairman of our Board of Directors and owns
approximately 30% of our common stock. As of December 31, 2010, Island Air leases three DeHaviland DHC-8-100 aircraft
and four spare engines from us. The aircraft and engines on lease to Island Air have a net book value of $3.8 million at
December 31, 2010. Beginning in 2006 Island Air experienced cash flow difficulties, which affected their payments to us due
to a fare war commenced by a competitor, their dependence on tourism which has suffered from the current economic
environment as well as volatile fuel prices. The Board of Directors approved lease rent deferrals which were accounted for as
a reduction in lease revenue in the applicable periods. Because of the question regarding collectability of amounts due under
these leases, lease rent revenue for these leases have been recorded on a cash basis until such time as collectability becomes
reasonably assured. After taking into account the deferred amounts, Island Air owes us $2.8 million in overdue rent. We hold
letters of credit for $0.2 million which may be used to partially offset our claims against Island Air.
In October 2010, Island Air purchased one airframe from us, generating a net gain of $0.4 million. Effective
January 2, 2011 we converted the operating leases with Island Air to a finance lease, with a principal amount of $7.0 million,
under which they have resumed monthly payments. This transaction will increase operating income by $3.2 million which
will be recognized over the five year term of the finance lease. We are also discussing a program for them to commence
payments of the deferred amounts under the previous operating leases on a reduced basis. This program is dependent on their
obtaining substantially similar concessions from their other major creditors.
Our aircraft leases are “triple-net” leases and the lessee is responsible for making the full lease payment and paying
any other expenses associated with the use of the aircraft, such as maintenance, casualty and liability insurance, sales or use
taxes and personal property taxes. In addition, the lessee is responsible for normal maintenance and repairs, engine and
airframe overhauls, and compliance with return conditions of flight equipment on lease. Under the provisions of many leases,
for certain engine and airframe overhauls, we reimburse the lessee for costs incurred up to but not exceeding maintenance
reserves the lessee has paid to us. Maintenance reserves are designed to cover the expected maintenance costs. The lessee is
also responsible for compliance with all applicable laws and regulations with respect to the aircraft. We require our lessees to
comply with FAA requirements. We periodically inspect our leased aircraft. Generally, we require a deposit as security for
the lessee’s performance of obligations under the lease and the condition of the aircraft upon return. In addition, the leases
contain extensive provisions regarding our remedies and rights in the event of a default by the lessee and specific provisions
regarding the condition of the aircraft upon return. The lessee is required to continue to make lease payments under all
circumstances, including periods during which the aircraft is not in operation due to maintenance or grounding.
We hold a fifty percent membership interest in a joint venture, WOLF A340, LLC, a Delaware limited liability
company, (“WOLF”). On December 30, 2005, WOLF completed the purchase of two Airbus A340-313 aircraft from Boeing
Aircraft Holding Company for a purchase price of $96.0 million. These aircraft are currently on lease to Emirates until 2013.
Our investment in the joint venture at December 31, 2010 is $9.4 million.
OUR COMPETITIVE ADVANTAGES
We are uniquely positioned in the market and remain competitive, in part, due to the following advantages:
• We have an entrepreneurial culture and our size and independent ownership structure gives us a unique ability
to move faster than our competition. We were founded in 1985 as a startup venture by our Chief Executive
Officer, Charles F. Willis, IV, and we continue to foster an entrepreneurial attitude among our executives and
employees. Unlike most other aircraft engine leasing companies, we are not tied to a particular manufacturer
and are not part of a larger corporate entity. As a result, we can react more nimbly to customer demands and
changes in the industry.
• Our independent ownership allows us to meet our customer needs without regard to any potentially conflicting
affiliate demands to use their engines or services. Many of the aircraft engine leasing companies with which we
compete are owned in whole or part by aircraft engine manufacturers. As a result, these leasing companies are
inherently motivated to sell to customers the aircraft equipment that is manufactured by their owners, regardless
of whether that equipment best meets the needs of their customers. As an independent public company we have
7
the ability to work with customers to correctly identify their needs and provide them with the engines,
equipment and services that are best suited to those needs.
• We have significant technical expertise and experience. Our management as well as our marketing and sales
teams all have extensive experience in leasing aircraft engines and equipment. Our technical group makes up
approximately half of our total company staff levels. As a result, we possess a deep knowledge of the technical
details of commercial aircraft engines and maintenance issues associated with these engines that enables us to
provide our customers with comprehensive and up to date information on the various engine types available for
lease.
• We have extensive industry contacts/relationships—worldwide. We have developed long-standing relationships
with aircraft operators, equipment manufacturers and aircraft maintenance organizations around the world. Our
extensive network of relationships enables us to quickly identify new leasing opportunities, procure engines and
equipment and facilitate the repair of equipment owned by us and equipment leased by our customers.
• We have a trusted reputation for quality engines and engine records. We have been an independent lessor of
aircraft engines and engine equipment since 1985. Since that time we have focused on providing customers with
high quality engines and engine records. As a result of our commitment to these high standards, a significant
portion of our customer base consists of customers who have leased engines from us previously.
• We have a diverse portfolio by customer, geography and engine type. As of December 31, 2010, we had a total
lease portfolio consisting of 179 engines and related equipment, three aircraft and four spare parts packages
with 62 lessees in 35 countries and an aggregate net book value of $998.0 million.
• We have a diverse product offering (by engine type and types of leases). We lease a variety of noise-compliant,
Stage III commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce and
International Aero Engines. These engines generally may be used on one or more aircraft types and are the most
widely used engines in the world, powering Airbus, Boeing, McDonnell Douglas, Bombardier and Embraer
aircraft. We offer short and long-term leases, sale/leaseback transactions and engine pooling arrangements
where members of the pool have quick access to available spare engines from us or other pool members, which
are typically structured as short-term leases.
COMPETITION
The markets for our products and services are very competitive, and we face competition from a number of sources.
These competitors include aircraft engine and aircraft parts manufacturers, aircraft and aircraft engine lessors, airline and
aircraft service and repair companies and aircraft spare parts distributors. Many of our competitors have substantially greater
resources than us. Those resources may include greater name recognition, larger product lines, complementary lines of
business, greater financial, marketing, information systems and other resources. In addition, equipment manufacturers,
aircraft maintenance providers, FAA certified repair facilities and other aviation aftermarket suppliers may vertically
integrate into the markets that we serve, thereby significantly increasing industry competition. We can give no assurance that
competitive pressures will not materially and adversely affect our business, financial condition or results of operations.
We compete primarily with aircraft engine manufacturers as well as with other aircraft engine lessors. It is common
for commercial aircraft operators and MRO’s to utilize several leasing companies to meet their aircraft engine needs and to
minimize reliance on a single leasing company.
Our competitors compete with us in many ways, including pricing, technical expertise, lease flexibility, engine
availability, supply reliability, customer service and the quality and condition of engines. Some of our competitors have
greater financial resources than we do, or are affiliates of larger companies. We emphasize the quality of our portfolio of
aircraft engines, supply reliability and high level of customer service to our aircraft equipment lessees. We focus on ensuring
adequate aircraft engine availability in high-demand locations, dedicate large portions of our organization to building
relationships with lessees, maintain close day-to-day coordination with lessees and have developed an engine pooling
arrangement that allows pool members quick access to available spare aircraft engines.
8
INSURANCE
In addition to requiring full indemnification under the terms of our leases, we require our lessees to carry the types
of insurance customary in the air transportation industry, including comprehensive third party liability insurance and physical
damage and casualty insurance. We require that we be named as an additional insured on liability insurance with ourselves
and our lenders normally identified as the loss payee for damage to the equipment on policies carried by lessees. We monitor
compliance with the insurance provisions of the leases. We also carry contingent physical damage and third party liability
insurance as well as product liability insurance.
GOVERNMENT REGULATION
Our customers are subject to a high degree of regulation in the jurisdictions in which they operate. For example, the
FAA regulates the manufacture, repair and operation of all aircraft operated in the United States and equivalent regulatory
agencies in other countries, such as the European Aviation Safety Agency (“EASA”) in Europe, regulate aircraft operated in
those countries. Such regulations also indirectly affect our business operations. All aircraft operated in the United States must
be maintained under a continuous condition-monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for commercial aircraft are prescribed by regulatory
authorities and can be performed only by certified repair facilities utilizing certified technicians. The FAA can suspend or
revoke the authority of air carriers or their licensed personnel for failure to comply with regulations and ground aircraft if
their airworthiness is in question.
While our leasing and reselling business is not regulated, the aircraft, engines and engine parts that we lease and sell
to our customers must be accompanied by documentation that enables the customer to comply with applicable regulatory
requirements. Furthermore, before parts may be installed in an aircraft, they must meet certain standards of condition
established by the FAA and/or the equivalent regulatory agencies in other countries. Specific regulations vary from country
to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements.
With respect to a particular engine or engine component, we utilize FAA and/or EASA certified repair stations to repair and
certify engines and components to ensure marketability.
Effective January 1, 2000, federal regulations stipulate that all aircraft engines hold, or be capable of holding, a
noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention, or have been shown to
comply with Stage III noise levels set out in Section 36.5 of Appendix C of Part 36 of the FAA Regulations of the United
States if the engines are to be used in the continental United States. Additionally, much of Europe has adopted similar
regulations. As of December 31, 2010, all of the engines in our lease portfolio are Stage III engines and are generally suitable
for use on one or more commonly used aircraft.
We believe that the aviation industry will be subject to continued regulatory activity. Additionally, increased
oversight has and will continue to originate from the quality assurance departments of airline operators. We have been able to
meet all such requirements to date, and believe that we will be able to meet any additional requirements that may be imposed.
We cannot give assurance, however, that new, more stringent government regulations will not be adopted in the future or that
any such new regulations, if enacted, would not have a material adverse impact on us.
GEOGRAPHIC AREAS IN WHICH WE OPERATE
Approximately 81% of our on-lease engines, related aircraft parts, and equipment (all of which we sometimes refer
to as “equipment”) by net book value are leased and operated internationally. All leases relating to this equipment are
denominated and payable in U.S. dollars, which is customary in the industry. Future leases may provide for payments to be
made in euros or other foreign currencies. In 2010, we leased our equipment to lessees domiciled in eight geographic regions.
We are subject to a number of risks related to our foreign operations. See “Risk Factors” below.
9
The following table displays the regional profile of our lease customer base for the years ended December 31, 2010,
2009 and 2008. No single country accounted for more than 10% of our lease rent revenue for any of those periods except for
the United States and China in each of 2008-2010 and Brazil and Switzerland in each of 2009-2010. The tables include
geographic information about our leased equipment grouped by the lessee’s domicile (which does not necessarily indicate the
asset’s actual location):
2010
Years Ended December 31,
2009
2008
Lease Rent
Revenue
Percentage
Lease Rent
Revenue
Percentage
Lease Rent
Revenue
Percentage
(dollars in thousands)
$
$
22,662
6,367
1,662
32,604
14,380
18,413
432
5,613
102,133
22% $
6
2
32
14
18
1
5
100% $
21,944
5,548
1,264
31,057
16,575
19,164
480
6,358
102,390
21% $
6
1
30
16
19
1
6
100% $
20,933
6,876
825
31,692
14,701
22,860
574
3,960
102,421
20%
7
1
31
14
22
1
4
100%
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Total
FINANCING/SOURCE OF FUNDS
We, directly or through WEST, typically acquire engines with a combination of equity capital and funds borrowed
from financial institutions. In order to facilitate financing and leasing of engines, each engine is generally owned through a
statutory or common law trust that is wholly-owned by us or our subsidiaries. We usually borrow 70% to 83% of an engine
purchase price. Substantially all of our assets secure our related indebtedness. We typically acquire engines from airlines in a
sale-lease back transaction, from engine manufacturers or from other lessors. From time to time, we selectively acquire
engines prior to a firm commitment to lease or sell the engine, depending on the price of the engine, market demand with the
expectation that we can lease or sell such engines.
EMPLOYEES
As of December 31, 2010, we had 64 full-time employees (excluding consultants), in sales and marketing, technical
service and administration. None of our employees is covered by a collective bargaining agreement and we believe our
employee relations are satisfactory.
ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Annual Report should be carefully considered. The
risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our
business, financial condition, operating results, and cash flows could be materially adversely affected.
RISKS RELATING TO OUR BUSINESS
We are affected by the risks faced by commercial aircraft operators and MROs because they are our customers.
Commercial aircraft operators are engaged in economically sensitive, highly cyclical and competitive businesses.
We are a supplier to commercial aircraft operators and MROs. As a result, we are indirectly affected by all the risks facing
commercial aircraft operators and MROs, which are beyond our control. Our results of operations depend, in part, on the
financial strength of our customers and our customers’ ability to compete effectively in the marketplace and manage their
risks. These risks include, among others:
•
•
•
general economic conditions in the countries in which our customers operate, including changes in gross
domestic product;
demand for air travel and air cargo shipments;
changes in interest rates and the availability and terms of credit available to commercial aircraft operators;
10
•
•
•
•
•
concerns about security, terrorism, war, public health and political instability;
environmental compliance and other regulatory costs;
labor contracts, labor costs and stoppages at commercial aircraft operators;
aircraft fuel prices and availability;
technological developments;
• maintenance costs;
•
•
•
airport access and air traffic control infrastructure constraints;
insurance and other operating costs incurred by commercial aircraft operators and MROs;
industry capacity, utilization and general market conditions; and
• market prices for aviation equipment.
To the extent that our customers are negatively affected by these risk factors, we may experience:
•
•
•
•
a decrease in demand for some engine types in our portfolio;
greater credit risks from our customers, and a higher incidence of lessee defaults and repossessions;
an inability to quickly lease engines and aircraft on commercially acceptable terms when these become
available through our purchase commitments and regular lease terminations; and
shorter lease terms, which may increase our expenses and reduce our utilization rates.
Our engine values and lease rates, which are dependent on the status of the types of aircraft on which engines are
installed, and other factors, could decline.
The value of a particular model of engine depends heavily on the types of aircraft on which it may be installed and
the supply of available engines. We believe values of engines tend to be relatively stable so long as there is sufficient demand
for the host aircraft. However, we believe the value of an engine begins to decline rapidly once the host aircraft begins to be
retired from service and/or used for spare parts in significant numbers. Certain types of engines may be used in significant
numbers by commercial aircraft operators that are currently experiencing financial difficulties. If such operators were to go
into liquidation or similar proceedings, the resulting over-supply of engines from these operators could have an adverse effect
on the demand for the affected engine types and the values of such engines.
Upon termination of a lease, we may be unable to enter into new leases or sell the engine on acceptable terms.
We own the engines that we lease to customers and bear the risk of not recovering our entire investment through
leasing and selling the engines. Upon termination of a lease, we seek to enter a new lease or to sell the engine. We also
selectively sell engines on an opportunistic basis. We cannot give assurance that we will be able to find, in a timely manner, a
lessee for our engines coming off-lease. If we do find a lessee, we may not be able to obtain satisfactory lease rates and terms
(including maintenance and redelivery conditions) or rates and terms comparable to our current leases, and we can give no
assurance that the creditworthiness of any future lessee will be equal to or better than that of the existing lessees of our
engines. Because the terms of engine leases may be less than 12 months, we may frequently need to remarket engines. We
face the risk that we may not be able to keep the engines on lease consistently.
11
We are subject to the risks and costs of aircraft maintenance and obsolescence on the aircraft that we own.
We currently own three DeHaviland DHC-8-100 turboprop aircraft and interests through WOLF in two Airbus
A340-313 aircraft. We may buy other aircraft or interests in aircraft in the future primarily to seek opportunities to realize
value from the engines. Among other risks described in this Annual Report, the following risks apply when we lease or sell
aircraft:
• we will be subject to the greater maintenance risks and risks of declines in value that apply to aircraft as
opposed to engines, as well as the potentially greater risks of leasing or selling aircraft;
•
•
•
•
•
intense competition among manufacturers, lessors, and sellers may, among other things, adversely affect the
demand for, lease rates and residual values of our aircraft;
our aircraft lessees are aircraft operators engaged in economically sensitive, highly cyclical and competitive
businesses and our results of operations from aircraft leasing depend, in part, on their financial strength (for
more details, see the risk factor entitled “We are affected by the risks faced by commercial aircraft operators
and MROs because they are our customers” above);
our aircraft lessees may encounter significant financial difficulties, which could result in our agreeing to amend
our leases with the customer to, among other things, defer or forgive rent payments or extend lease terms as an
alternative to repossession;
our aircraft lessees may file for bankruptcy which could result in us incurring greater losses with respect to
aircraft than with respect to engines; and
aircraft technology is constantly improving and, as a result, aircraft of a particular model and type tend to
become obsolete and less in demand over time, when newer, more advanced and efficient aircraft become
available.
We carry the risk of maintenance for our leased assets. Our maintenance reserves may be inadequate or lessees may
default on their obligations to perform maintenance, which could increase our expenses.
Under most of our engine leases, the lessee makes monthly maintenance reserve payments to us based on the
engine’s usage and management’s estimate of maintenance costs. A certain level of maintenance reserve payments on the
WEST engines are held in related engine reserve restricted cash accounts. Generally the lessee under long term leases is
responsible for all scheduled maintenance costs, even if they exceed the amounts of maintenance reserves paid. 37 of our
leases comprising approximately 22.4% of the net book value of our on-lease engines at December 31, 2010 do not provide
for any monthly maintenance reserve payments to be made by lessees, and we can give no assurance that future leases of the
engines will require maintenance reserves. In some cases, including engine repossessions, we may decide to pay for
refurbishments or repairs if the accumulated use fees are inadequate.
We can give no assurance that our operating cash flows and available liquidity reserves, including the amounts held
in the engine reserve restricted cash accounts, will be sufficient to fund necessary engine maintenance. Actual maintenance
reserve payments by lessees and other cash that we receive may be significantly less than projected as a result of numerous
factors, including defaults by lessees. Furthermore, we can provide no assurance that lessees will meet their obligations to
make maintenance reserve payments or perform required scheduled maintenance or, to the extent that maintenance reserve
payments are insufficient to cover the cost of refurbishments or repairs.
Continuing failures by lessees to meet their maintenance and recordkeeping obligations under our leases could
adversely affect the value of our leased engines and our ability to lease the engines in a timely manner following
termination of the lease.
The value and income producing potential of an engine depend heavily on it being maintained in accordance with an
approved maintenance system and complying with all applicable governmental directives and manufacturer requirements. In
addition, for an engine to be available for service, all records, logs, licenses and documentation relating to maintenance and
operations of the engine must be maintained in accordance with governmental and manufacturer specifications.
Our leases make the lessees primarily responsible for maintaining the engines, keeping related records and
complying with governmental directives and manufacturer requirements. Over time, certain lessees have experienced and
12
may experience in the future, difficulties in meeting their maintenance and recordkeeping obligations as specified by the
terms of our leases.
Our ability to determine the condition of the engines and whether the lessees are properly maintaining our engines is
generally limited to the lessees’ reporting of monthly usage and any maintenance performed, confirmed by periodic
inspections performed by us and third-parties. A lessee’s failure to meet its maintenance or recordkeeping obligations under a
lease could result in:
•
•
•
•
•
a grounding of the related engine;
a repossession which would likely cause us to incur additional and potentially substantial expenditures in
restoring the engine to an acceptable maintenance condition;
a need to incur additional costs and devote resources to recreate the records prior to the sale or lease of the
engine;
loss of lease revenue while we perform refurbishments or repairs and recreate records; and
a lower lease rate and/or shorter lease term under a new lease entered into by us following repossession of the
engine.
Any of these events may adversely affect the value of the engine, unless and until remedied, and reduce our
revenues and increase our expenses. If an engine is damaged during a lease and we are unable to recover from the lessee or
insurance, we may incur a loss.
Our operating results vary and comparisons to results for preceding periods may not be meaningful.
Due to a number of factors, including the risks described in this ITEM 1A, our operating results may fluctuate.
These fluctuations may also be caused by:
•
•
•
•
•
•
•
the timing and number of purchases and sales of engines;
the timing and amount of maintenance reserve revenues recorded resulting from the termination of long term
leases, for which significant amount of maintenance reserves may have accumulated;
the termination or announced termination of production of particular aircraft and engine types;
the retirement or announced retirement of particular aircraft models by aircraft operators;
the operating history of any particular engine or engine model;
the length of our operating leases; and
the timing of necessary overhauls of engines.
These risks may reduce our engine utilization rates, lease margins, maintenance reserve revenues, proceeds from
engine sales, and result in higher legal, technical, maintenance, storage and insurance costs related to repossession and costs
of engines being off-lease. As a result of the foregoing and other factors, the availability of engines for lease or sale
periodically experiences cycles of oversupply and undersupply of given engine models. The incidence of an oversupply of
engines may produce substantial decreases in engine lease rates, the appraised and resale value of engines and increase the
time and costs incurred to lease or sell engines.
We anticipate that fluctuations from period to period will continue in the future. As a result, we believe that
comparisons to results for preceding periods may not be meaningful and that results of prior periods should not be relied
upon as an indication of our future performance.
13
Our customers face intense competition and some carriers are in troubled financial condition.
The commercial aviation industry deteriorated sharply in 2001 and 2002 after the September 11, 2001 terrorist
attacks and the related slowdown in economic activity. However, after a period of recovery, the airline industry was
negatively impacted in 2008 and 2009 by the spike in fuel prices and the deepening worldwide recession, caused by the
turmoil in the credit and financial markets. The airline industry has recovered in 2010, returning to profitability with carriers
in emerging markets and the U.S. faring better than European carriers. However, we cannot give assurance that delinquencies
and defaults on our leases will not increase during future cyclical downturns in the economy and commercial aviation
industry.
Certain lessees may be significantly delinquent in their rental payments and may default on their lease obligations.
As of December 31, 2010, we had an aggregate of approximately $1.5 million in lease rent and $1.2 million in maintenance
reserve payments more than 30 days past due. Our inability to collect receivables or to repossess engines or other leased
equipment in the event of a default by a lessee could have a material adverse effect on us.
Various airlines have filed for bankruptcy in the United States and other foreign jurisdictions, some of which are
seeking to restructure their operations and others which are ceasing operations entirely. In the case of airlines which are
restructuring, such airlines often reduce their flights or eliminate the use of certain types of aircrafts and the related engine
types. Applicable bankruptcy law often allows these airlines to terminate leases early and to return our engines without
meeting the contractual return conditions, and in that case, we may not be paid the full amount, or any part of, our claims for
these lease terminations. Alternatively, we might negotiate agreements with those airlines under which the airline continues
to lease the engine, but under modified lease terms. In the case of an airline which has ceased operations entirely, in addition
to the risk of nonpayment, we face the enhanced risk of deterioration or total loss of an engine while it is under uncertain
custody and control. In that case, we may be required to take legal action to secure the return of the engine and its records, or
alternatively to negotiate a settlement under which we can immediately recover the engine and its records in exchange for
waiving subsequent legal claims.
On January 5, 2010, Mesa Airlines filed for protection under Chapter 11 of the Bankruptcy Code. At the time of its
filing, Mesa had leased six engines from us with a total net book value of $10.5 million as of December 31, 2009. Two of
those engines were under leases which required ongoing maintenance reserve payments, and as of the filing Mesa was current
on those payments. The other four engines were under leases which only required payment of maintenance reserves on a
current basis if Mesa reported net losses for three consecutive quarters, and as of the filing, Mesa had not reported three
consecutive loss quarters. Following the filing, Mesa terminated two of the leases and returned those engines to us. We also
negotiated an agreement with Mesa under which Mesa extended the two engine leases under the original lease terms and
continued the remaining two engine leases under modified lease terms. Under the modified leases, Mesa is required to make
maintenance reserve payments for post-bankruptcy engine usage on a current basis, and we have filed proofs of claim in
Mesa’s bankruptcy proceedings for the balance of maintenance reserve payments related to Mesa’s pre-bankruptcy engine
usage.
In August 2010, Mexicana Airlines’ primary operating entity initiated commercial insolvency proceedings in
Mexico. In September 2010, Mexicana Inter, the low-cost-carrier affiliate of Mexicana Airlines, also initiated its own
commercial insolvency proceeding in Mexico. Mexicana and all of its affiliates also suspended all commercial passenger
service on August 28, 2010, and have not resumed operations since then. At the time of their respective filings, Mexicana and
Mexicana Inter had leased five engines from us with a total net book value of $19.9 million as of December 31, 2009. All
five engines were under leases which did not require current payments of maintenance reserves. Due to the uncertainty of
Mexicana’s ability to fully secure our engines after it ceased operations and the unlikelihood that it would resume operations
in the immediate future, we focused our efforts on the immediate recovery of our assets from Mexico. In a negotiated
settlement of claims against Mexicana, we were able to achieve the consensual return of all five of our engines and the
related records between August and December 2010. As a result of the insolvency proceedings and subsequent settlement,
the Company wrote-off to bad debt an outstanding notes receivable balance of $44,000 and $9,000 in recognized overdue
rent.
Gavarnie Holding, LLC, a Delaware limited liability company (“Gavarnie”) owned by Charles F. Willis, IV,
purchased the stock of Aloha Island Air, Inc., a Delaware Corporation, (“Island Air”) from Aloha AirGroup, Inc. (“Aloha”)
on May 11, 2004. Charles F. Willis, IV is the President, CEO and Chairman of our Board of Directors and owns
approximately 30% of our common stock. As of December 31, 2010, Island Air leases three DeHaviland DHC-8-100 aircraft
and four spare engines from us. The aircraft and engines on lease to Island Air have a net book value of $3.8 million at
December 31, 2010. Beginning in 2006 Island Air experienced cash flow difficulties, which affected their payments to us due
to a fare war commenced by a competitor, their dependence on tourism which has suffered from the current economic
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environment as well as volatile fuel prices. The Board of Directors approved lease rent deferrals which were accounted for as
a reduction in lease revenue in the applicable periods. Because of the question regarding collectability of amounts due under
these leases, lease rent revenue for these leases have been recorded on a cash basis until such time as collectability becomes
reasonably assured. After taking into account the deferred amounts, Island Air owes us $2.8 million in overdue rent. We hold
letters of credit for $0.2 million which may be used to partially offset our claims against Island Air.
In October 2010, Island Air purchased one airframe from us, generating a net gain of $0.4 million. Effective January
2, 2011 we converted the operating leases with Island Air to a finance lease, with a principal amount of $7.0 million, under
which they have resumed monthly payments. This transaction will increase operating income by $3.2 million which will be
recognized over the five year term of the finance lease. We are also discussing a program for them to commence payments of
the deferred amounts under the previous operating leases on a reduced basis. This program is dependent on their obtaining
substantially similar concessions from their other major creditors.
We may not be able to repossess an engine when the lessee defaults, and even if we are able to repossess the engine,
we may have to expend significant funds in the repossession and leasing of the engine.
When a lessee defaults we typically seek to terminate the lease and repossess the engine. If a defaulting lessee
contests the termination and repossession or is under court protection, enforcement of our rights under the lease may be
difficult, expensive and time-consuming. We may not realize any practical benefits from our legal rights and we may need to
obtain consents to export the engine. As a result, the relevant engine may be off-lease or not producing revenue for a
prolonged period. In addition, we will incur direct costs associated with repossessing our engine. These costs may include
legal and similar costs, the direct costs of transporting, storing and insuring the engine, and costs associated with necessary
maintenance and recordkeeping to make the engine available for lease or sale. During this time, we will realize no revenue
from the leased engine, and we will continue to be obligated to pay our debt financing for the engine. If an engine is installed
on an airframe, the airframe may be owned by an aircraft lessor or other third party. Our ability to recover engines installed
on airframes may depend on the cooperation of the airframe owner.
We and our customers operate in a highly regulated industry and changes in laws or regulations may adversely
affect our ability to lease or sell our engines.
Licenses and consents
We and our customers operate in a highly regulated industry. A number of our leases require specific governmental
or regulatory licenses, consents or approvals. These include consents for certain payments under the leases and for the export,
import or re-export of our engines. Consents needed in connection with future leasing or sale of our engines may not be
received timely or have economically feasible terms. Any of these events could adversely affect our ability to lease or sell
engines.
The U.S. Department of Commerce, or the “Commerce Department,” regulates exports. We are subject to the
Commerce Department’s and the U.S. Department of State’s regulations with respect to the lease and sale of engines and
aircraft to foreign entities and the export of related parts. These Departments may, in some cases, require us to obtain export
licenses for engines exported to foreign countries. The U.S. Department of Homeland Security, through the U.S. Customs
and Border Protection, enforces regulations related to the import of engines and aircraft into the United States for
maintenance or lease and imports of parts for installation on our engines and aircraft.
We are prohibited from doing business with persons designated by the U.S. Department of the Treasury’s Office of
Foreign Assets Control, or “OFAC,” on its “Specially Designated Nationals List,” and must monitor our operations and
existing and potential lessees for compliance with OFAC’s rules.
Anti-corruption Laws
As a U.S. corporation with significant international operations, we are required to comply with a number of U.S.
and international laws and regulations, including those involving anti-corruption. For example, the U.S. Foreign Corrupt
Practices Act (FCPA) and similar world-wide anti-bribery laws generally prohibit improper payments to foreign officials for
the purpose of obtaining or keeping business. The scope and enforcement of anti-corruption laws and regulations may vary.
Although our policies expressly mandate compliance with the FCPA and similar laws, there can be no assurance that none of
our employees or agents will take any action in violation of our policies. Violations of such laws or regulations could result in
substantial civil or criminal fines or sanctions. Actual or alleged violations could also damage our reputation, be expensive to
defend, and impair our ability to do business.
15
Civil aviation regulation
Users of engines are subject to general civil aviation authorities, including the FAA and Joint Aviation Authorities
in Europe, who regulate the maintenance of engines and issue airworthiness directives. Airworthiness directives typically set
forth special maintenance actions or modifications to certain engine types or series of specific engines that must be
implemented for the engine to remain in service. Also, airworthiness directives may require the lessee to make more frequent
inspections of an engine or particular engine parts. Each lessee of an engine generally is responsible for complying with all
airworthiness directives. However, if the engine is off lease, we may be forced to bear the cost of compliance with such
airworthiness directives, and if the engine is leased, subject to the terms of the lease, if any, we may be forced to share the
cost of compliance.
Environmental regulation
Governmental regulations of noise and emissions levels may be applicable where the related airframe is registered,
and where the aircraft is operated. For example, jurisdictions throughout the world have adopted noise regulations which
require all aircraft to comply with Stage III noise requirements. In addition to the current Stage III compliance requirements,
the United States and the International Civil Aviation Organization, or “ICAO,” have adopted a new, more stringent set of
“Stage IV” standards for noise levels which will apply to engines manufactured or certified beginning in 2006. At this time,
the United States regulations would not require any phase-out of aircraft that qualify only for Stage III compliance, but the
European Union has established a framework for the imposition of operating limitations on non-Stage IV aircraft. These
regulations could limit the economic life of our engines or reduce their value, could limit our ability to lease or sell the non-
compliant engines or, if engine modifications are permitted, require us to make significant additional investments in the
engines to make them compliant.
The United States and other jurisdictions are beginning to impose more stringent limits on the emission of nitrogen
oxide, carbon monoxide and carbon dioxide emissions from engines, consistent with ICAO standards. These limits generally
apply only to engines manufactured after 1999. Concerns over global warming could result in more stringent limitations on
the operation of older, non-compliant engines.
Any change to current tax laws or accounting principles making operating lease financing less attractive could
adversely affect our business, financial condition and results of operations.
Our lessees enjoy favorable accounting and tax treatment by using operating leases. Changes in tax laws or
accounting principles that make operating leases less attractive to our lessees could have a material adverse affect on demand
for our leases and on our business.
Our consolidated financial statements are prepared in accordance with GAAP. The Financial Accounting Standards
Board (“FASB”) and International Accounting Standards Board (“IASB”) have recently issued a jointly developed proposal
on lease accounting that could significantly change the accounting and reporting for lease arrangements. The main objective
of the proposed standard is to create a new accounting model for both lessees and lessors, replacing the existing concepts of
operating and capital leases with models. The new models would result in the elimination of most off-balance sheet lease
financing for lessees. Lessors would apply one of two models depending upon whether the lessor retains exposure to
significant risks or benefits of the underlying assets. The FASB’s document is in the form of an exposure draft of a proposed
Accounting Standards Update, Leases (Topic 840) (“ED”), issued in August 2010, and would apply to the accounting for all
leases, with some exceptions. The ED also includes expanded disclosures including quantitative and qualitative information
to enable users to understand the amount and timing of expected cash flows for both lessors and lessees.
The proposals set out in the ED were open for comment until December 15, 2010. A final standard is targeted to
occur by June 30, 2011. If there are future changes in GAAP with regard to how we and our customers must account for
leases, it could change the way we and our customers conduct our businesses and, therefore, could have the potential to have
an adverse effect on our business. We do not anticipate that the accounting pronouncement, when issued, will change the
fundamental economic reasons that airlines lease aircraft and aircraft engines.
Allegations that our aircraft, engines or parts caused bodily injury or property damage expose us to liability claims.
We are exposed to potential liability claims if the use of our aircraft, engines or parts is alleged to have caused
bodily injury or property damage. Our leases require our lessees to indemnify us against these claims and to carry insurance
customary in the air transportation industry, including liability, property damage and hull all risks insurance on our engines
and on our aircraft at agreed upon levels. We can give no assurance that one or more catastrophic events will not exceed
16
insurance coverage limits or that lessees’ insurance will cover all claims that may be asserted against us. Any insurance
coverage deficiency or default by lessees under their indemnification or insurance obligations may reduce our recovery of
losses upon an event of loss.
We may not be adequately covered by insurance.
While we maintain contingent insurance covering losses not covered by our lessees’ insurance, such coverage may
not be available in circumstances where the lessee’s insurance coverage is insufficient. In addition, if a lessee is not obligated
to maintain sufficient insurance, we may incur the costs of additional insurance coverage during the related lease. We are
required under certain of our debt facilities to obtain political risk insurance for leases to lessees in specified jurisdictions. We
can give no assurance that such insurance will be available at commercially reasonable rates, if at all.
Currently, the U.S. government is still offering war risk insurance to U.S.-certificated airlines; however, most
foreign governments have ceased this practice, forcing non-U.S. airlines back into the commercial insurance market for this
coverage. It is unknown how long the U.S. government will continue to offer war risk insurance and whether U.S.-
certificated airlines could obtain war risk insurance in the commercial markets on acceptable terms and conditions.
We and our lenders generally are named as an additional insured on liability insurance policies carried by our
lessees and are usually the loss payees for damage to the engines. We have not experienced any significant aviation-related
claims or any product liability claims related to our engines or spare parts that were not insured. However, an uninsured or
partially insured claim, or a claim for which third-party indemnification is not available, could have a material adverse effect
upon us. A loss of an aircraft where we lease the airframe, an engine or spare parts could result in significant monetary
claims.
RISKS RELATING TO OUR CAPITAL STRUCTURE
Our inability to obtain sufficient capital would constrain our ability to grow our portfolio and to increase our
revenues.
Our business is capital intensive and highly leveraged. Accordingly, our ability to successfully execute our business
strategy and maintain our operations depends on the availability and cost of debt and equity capital. Additionally, our ability
to borrow against our portfolio of engines is dependent, in part, on the appraised value of our engines. If the appraised value
of our engines declines, we may be required to reduce the principal outstanding under certain of our debt facilities.
Availability under such debt facilities may also be reduced, at least temporarily, as a result of such reduced appraisals.
The recent, well publicized, worldwide disruptions in the credit and financial markets increase the risk of adverse
effects on our customers and our capital providers (lenders and derivative counter-parties) and therefore on us. The
disruptions may also adversely affect our ability to raise additional capital to continue our recent growth trend. Although we
have adequate debt commitments from our lenders, assuming they are willing and able to meet their contractual obligation to
lend to us, the market disruptions may adversely affect our ability to raise additional equity capital to fund future growth,
requiring us to rely on internally generated funds. This would lower our rate of capital investment.
We can give no assurance that the capital we need will be available to us on favorable terms, or at all. Our inability
to obtain sufficient capital, or to renew or expand our credit facilities could result in increased funding costs and would limit
our ability to:
• meet the terms and maturities of our existing and future debt facilities;
•
•
•
add new equipment to our portfolio;
fund our working capital needs and maintain adequate liquidity; and
finance other growth initiatives.
Our financing facilities impose restrictions on our operations.
We have, and expect to continue to have, various credit and financing arrangements with third parties. These
financing arrangements are secured by all or substantially all of our assets. Our existing credit and financing arrangements
require us to meet certain financial condition and performance tests. Our revolving credit facility prohibits our declaring or
17
paying dividends on shares of any class or series of our capital stock if an event of default under such facilities has or will
occur and remains uncured. The agreements governing our debt, including the issuance of notes by WEST, also include
restrictive financial covenants. A breach of those and other covenants could, unless waived or amended by our creditors,
result in a cross-default to other indebtedness and an acceleration of all or substantially all of our debt. We have obtained
such amendments and waivers to our financing agreements in the past, but we cannot provide any assurance that we will
receive such amendments or waivers in the future if we request them. If our outstanding debt is accelerated at any time, we
likely would have little or no cash or other assets available after payment of our debts, which could cause the value or market
price of our outstanding equity securities to decline significantly and we would have few, if any, assets available for
distributions to our equity holders in liquidation.
We are exposed to interest rate risk on our engine leases, which could have a negative impact on our margins.
We are affected by fluctuations in interest rates. Our lease rates are generally fixed, but nearly all our debt bears
variable rate interest based on one-month LIBOR, so changes in interest rates directly affect our lease margins. We seek to
reduce our interest rate volatility and uncertainty through hedging with interest rate derivative contracts with respect to a
portion of our debt. Our lease margins, as well as our earnings and cash flows may be adversely affected by increases in
interest rates, to the extent we do not have hedges or other derivatives in place or if our hedges or other derivatives do not
mitigate our interest rate exposure from an economic standpoint. We would be adversely affected by increasing interest rates.
As reported by British Bankers’ Association, the one-month LIBOR has increased from approximately 0.23% on December
31, 2009 to approximately 0.26% on December 31, 2010.
We have risks in managing our portfolio of engines to meet customer needs.
The relatively long life cycles of aircraft and jet engines can be shortened by world events, government regulation or
customer preferences. We seek to manage these risks by trying to anticipate demand for particular engine types, maintaining
a portfolio mix of engines that we believe is diversified and that will have long-term value and will be sought by lessees in
the global market for jet engines, and by selling engines that we expect will experience obsolescence or declining usefulness
in the foreseeable future. The WEST securitization facility limits our sale of certain engines in that facility during any
12 month period to 10% of the “average aggregate adjusted borrowing value” of the engines during any 12 month period,
which may inhibit engine sales that we otherwise believe should be pursued. We can give no assurance that we can
successfully manage our engine portfolio to reduce these risks.
Our inability to maintain sufficient liquidity could limit our operational flexibility and also impact our ability to
make payments on our obligations as they come due.
In addition to being capital intensive and highly leveraged, our business also requires that we maintain sufficient
liquidity to enable us to contribute the non-financed portion of engine purchases as well as to service our payment obligations
to our creditors as they become due despite the fact that the timing and amounts of payments under our leases do not match
the timing under our debt service obligations. Our restricted cash is unavailable for general corporate purposes. Accordingly,
our ability to successfully execute our business strategy and maintain our operations depends on our ability to continue to
maintain sufficient liquidity, cash and available credit under our credit facilities. Our liquidity could be adversely impacted if
we are subjected to one or more of the following: a significant decline in lease revenues, a material increase in interest
expense that is not matched by a corresponding increase in lease rates, a significant increase in operating expenses, or a
reduction in our available credit under our credit facilities. If we do not maintain sufficient liquidity, our ability to meet our
payment obligations to creditors or to borrow additional funds could become impaired as could our ability to make dividend
payments or other distributions to our equity holders. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources.”
NUMEROUS FACTORS MAY AFFECT THE TRADING PRICE OF OUR COMMON STOCK AND OUR PREFERRED
STOCK
The trading price of our common stock and our Series A Preferred Stock may fluctuate due to many factors,
including:
•
•
•
risks relating to our business described in this Annual Report;
sales of our securities by a few stockholders or even a single significant stockholder;
general economic conditions;
18
•
•
•
•
•
changes in accounting mandated under GAAP;
quarterly variations in our operating results;
our financial condition, performance and prospects;
changes in financial estimates by us;
level, direction and volatility of interest rates and expectations of changes in rates;
• market for securities similar to our common stock and our Series A Preferred Stock; and
•
changes in our capital structure, including additional issuances by us of debt or equity securities.
In addition, the U.S. stock markets have experienced price and volume volatility that has affected many companies’
stock prices, often for reasons unrelated to the operating performance of those companies.
RISKS RELATING TO OUR FOREIGN OPERATIONS
A substantial portion of our lease revenue comes from foreign customers, subjecting us to divergent regulatory
requirements.
For the year ended December 31, 2010, 78% of our lease revenue was generated by leases to foreign customers.
Such international leases present risks to us because certain foreign laws, regulations and judicial procedures may not be as
protective of lessor rights as those which apply in the United States. We are also subject to risks of foreign laws that affect
the timing and access to courts and may limit our remedies when collecting lease payments and recovering assets. None of
our leased engines have been expropriated; however, we can give no assurance that political instability abroad and changes in
the policies of foreign nations will not present expropriation risks in the future that are not covered by insurance.
Our leases require payments in U.S. dollars but many of our customers operate in other currencies; if foreign
currencies devalue against the U.S. dollar, our lessees may be unable to make their payments to us.
All of our current leases require that payments be made in U.S. dollars. If the currency that our lessees typically use
in operating their businesses devalues against the U.S. dollar, the lessees could encounter difficulties in making payments in
U.S. dollars. Furthermore, many foreign countries have currency and exchange laws regulating international payments that
may impede or prevent payments from being paid to us in U.S. dollars. Future leases may provide for payments to be made in
euros or other foreign currencies. Any change in the currency exchange rate that reduces the amount of U.S. dollars obtained
by us upon conversion of future lease payments denominated in euros or other foreign currencies, may, if not appropriately
hedged by us, have a material adverse effect on us and increase the volatility of our earnings. If payments on our leases are
made in foreign currency, our risks and hedging costs will increase.
We operate globally and are affected by our customers’ local and regional economic and other risks.
We believe that our customers’ growth and financial condition are driven by economic growth in their service areas.
The largest portion of our lease revenues come from Europe. European airline operations are among the most heavily
regulated in the world. At the same time, new low-cost carriers have exerted substantial competitive and financial pressure on
major European airlines. Low-cost carriers are having similar effects in North America and elsewhere.
Our operations may also be affected by political or economic instability in the areas where we have customers.
We may not be able to enforce our rights as a creditor if a lessee files for bankruptcy outside of the United States.
When a debtor seeks protection under the United States Bankruptcy Code, creditors are automatically stayed from
enforcing their rights. In the case of United States-certificated airlines, Section 1110 of the Bankruptcy Code provides certain
relief to lessors of aircraft equipment. Section 1110 has been the subject of significant litigation and we can give no assurance
that Section 1110 will protect our investment in an aircraft or engines in the event of a lessee’s bankruptcy. In addition,
Section 1110 does not apply to lessees located outside of the United States and applicable foreign laws may not provide
comparable protection.
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Liens on our engines could exceed the value of the engines, which could negatively affect our ability to repossess,
lease or sell a particular engine.
Liens that secure the payment of repairers’ charges or other liens may, depending on the jurisdiction, attach to the
engines. Engines also may be installed on airframes to which liens unrelated to the engines have attached. These liens may
secure substantial sums that may, in certain jurisdictions or for limited types of liens, exceed the value of the particular
engine to which the liens have attached. In some jurisdictions, a lien may give the holder the right to detain or, in limited
cases, sell or cause the forfeiture of the engine. Such liens may have priority over our interest as well as our creditors’ interest
in the engines, either because they have such priority under applicable local law or because our creditors’ security interests
are not filed in jurisdictions outside the United States. These liens and lien holders could impair our ability to repossess and
lease or sell the engines. We cannot give assurance that our lessees will comply with their obligations to discharge third party
liens on our engines. If they do not, we may, in the future, find it necessary to pay the claims secured by such liens to
repossess the engines.
In certain countries, an engine affixed to an aircraft may become an accession to the aircraft and we may not be
able to exercise our ownership rights over the engine.
In some jurisdictions, an engine affixed to an aircraft may become an accession to the aircraft, so that the ownership
rights of the owner of the aircraft supersede the ownership rights of the owner of the engine. If an aircraft is security for the
owner’s obligations to a third-party, the security interest in the aircraft may supersede our rights as owner of the engine. This
legal principle could limit our ability to repossess an engine in the event of a lease default while the aircraft with the engine
installed remains in such a jurisdiction. We may suffer a loss if we are not able to repossess engines leased to lessees in these
jurisdictions.
RISKS RELATED TO OUR SMALL SIZE AND CORPORATE STRUCTURE
Intense competition in our industry, particularly with major companies with substantially greater financial,
personnel, marketing and other resources, could cause our revenues and business to suffer.
The engine leasing industry is highly competitive and global. Our primary competitors include GE Engine Leasing,
Shannon Engine Support, Pratt &Whitney, Rolls-Royce Partners Finance and Engine Lease Finance.
Our primary competitors generally have significantly greater financial, personnel and other resources, and a physical
presence in more locations, than we do. In addition, competing engine lessors may have lower costs of capital and may
provide financial or technical services or other inducements to customers, including the ability to sell or lease aircraft or
provide other forms of financing that we do not provide. We cannot give assurance that we will be able to compete
effectively or that competitive pressures will not adversely affect us.
There is no organized market for the spare engines we purchase. Typically, we purchase engines from commercial
aircraft operators, engine manufacturers, MROs and other suppliers. We rely on our representatives, advertisements and
reputation to generate opportunities to purchase and sell engines. The market for purchasing engine portfolios is highly
competitive, generally involving an auction bidding process. We can give no assurance that engines will continue to be
available to us on acceptable terms and in the types and quantities we seek consistent with the diversification requirements of
our debt facilities and our portfolio diversification goals.
Substantially all of our assets are pledged to our creditors.
Substantially all of our assets are pledged to secure our obligations to creditors. Our revolving credit banks have a
lien on all of our assets, including our equity in WEST. Due to WEST’s bankruptcy remote structure, that equity is subject to
the prior payments of WEST’s debt and other obligations. Therefore, our rights and the rights of our creditors to participate in
any distribution of the assets of WEST upon its liquidation, reorganization, dissolution or winding up will be subject to the
prior claims of WEST’s creditors. Similarly, the rights of our shareholders are subject to satisfaction of the claims of our
lenders and other creditors.
We may be unable to manage the expansion of our operations.
We can give no assurance that we will be able to manage effectively the potential expansion of our operations, or
that if we are successful expanding our operations that our systems, procedures or controls will be adequate to support our
operations, in which event our business, financial condition, results and cash flows could be adversely affected.
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Any acquisition or expansion involves various risks, which may include some or all of the following:
•
•
•
•
•
•
•
•
•
incurring or assuming additional debt;
diversion of management’s time and attention from ongoing business operations;
future charges to earnings related to the possible impairment of goodwill and the write down of other intangible
assets;
risks of unknown or contingent liabilities;
difficulties in the assimilation of operations, services, products and personnel;
unanticipated costs and delays;
risk that the acquired business does not perform consistently with our growth and profitability expectations;
risk that growth will strain our infrastructure, staff, internal controls and management, which may require
additional personnel, time and expenditures; and
potential loss of key employees and customers.
Any of the above factors could have a material adverse effect on us.
Compliance with the regulatory requirements imposed on us as a public company results in significant costs that
will likely have an adverse effect on our results.
As a public company, we are subject to various regulatory requirements including, but not limited to, compliance
with the Sarbanes-Oxley Act of 2002. Compliance with these regulations results in significant additional costs to us both
directly, through increased audit and consulting fees, and indirectly, through the time required by our limited resources to
address the regulations. We have complied with Section 404a of the Sarbanes-Oxley Act as of December 31, 2007,
completing our annual assessment of internal controls over financial reporting. We complied with Section 404b of the
Sarbanes-Oxley Act as of December 31, 2009 and our independent registered public accounting firm has audited internal
controls over financial reporting. Such compliance requires us to incur additional costs on audit and consulting fees and
require additional management time that will adversely affect our results of operations and cash flows.
We are effectively controlled by one principal stockholder, who has the power to contest the outcome of most
matters submitted to the stockholders for approval and to affect our stock prices adversely if he were to sell
substantial amounts of his common stock.
As of December 31, 2010, our principal stockholder, Chairman of the Board of Directors and Chief Executive
Officer, Mr. Charles F. Willis, IV, beneficially owned or had the ability to direct the voting of 2,779,307 shares of our
common stock, representing approximately 30% of the outstanding shares of our common stock. As a result, Mr. Willis
effectively controls us and has the power to contest the outcome of substantially all matters submitted to our stockholders for
approval, including the election of the board of directors. In addition, future sales by Mr. Willis of substantial amounts of our
common stock, or the potential for such sales, could adversely affect the prevailing market price of our common stock and
possibly other classes or series of our stock such as our Series A Preferred Stock.
Our business might suffer if we were to lose the services of certain key employees.
Our business operations depend upon our key employees, including our executive officers. Loss of any of these
employees, particularly our Chief Executive Officer, could have a material adverse effect on our business as our key
employees have knowledge of our industry and customers and would be difficult to replace. We maintain key man life
insurance of $5.0 million on Mr. Willis, but such amount is unlikely to adequately compensate us for the loss of his services.
We are the servicer and administrative agent for the WEST facility and our cash flows would be materially and
adversely affected if we were removed from these positions.
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We are the servicer and administrative agent with respect to engines in the WEST facility. We receive annual fees of
11.5% as servicer and 2.0% as administrative agent of the aggregate net rents actually received by WEST on its engines. We
may be removed as servicer and administrative agent by the affirmative vote of a requisite number of holders of WEST
facility notes upon the occurrence of certain specified events, including the following events, subject to WEST following
certain specified procedures and providing us certain cure rights as set forth in the servicing agreement:
• We fail to perform the requisite services set forth in the servicing agreement or administrative agent agreement;
• We fail to provide adequate insurance or otherwise materially and adversely affects the rights of WEST;
• We cease to be engaged in the aircraft engine leasing business;
• We become subject to an insolvency or bankruptcy proceeding, either voluntarily or involuntarily;
• We fail to maintain the following financial covenants set forth in the servicing agreement:
• Maintain a ratio of total indebtedness to tangible net worth ratio of less than 5.0-to-1.0; and
• Maintain a ratio of earnings before interest, taxes to interest (excluding any extraordinary gains or
losses and pre-WEST engine financing costs) of at least 1.2-to-1.0 on a rolling-four -quarter-basis;
• We undergo one of certain change of control transactions set forth in the servicing agreement; and
• We default in the payment of other indebtedness of $10.0 million or more or indebtedness in such amount shall
have been accelerated as a result of an event of default under the applicable agreements.
As of December 31, 2010, we were in compliance with the financial covenants set forth above. There can be no
assurance that we will be in compliance with these covenants in the future or will not otherwise be terminated as service or
administrative agent for the WEST facility. If we are removed, our expenses would increase since our consolidated
subsidiary, WEST, would have to hire an outside provider to replace the servicer and administrative agent functions, and we
would be materially and adversely affected. Consequently, our business, financial condition, results of operations and cash
flows would be adversely affected.
Provisions in Delaware law and our charter and bylaws might prevent or delay a change of control.
Certain provisions of law, our amended certificate of incorporation, bylaws and amended rights agreement could
make the following more difficult: (1) an acquisition of us by means of a tender offer, a proxy contest or otherwise, and
(2) the removal of incumbent officers and directors.
Our board of directors has authorized the issuance of shares of Series I Preferred Stock pursuant to our amended
rights agreement, by and between us and American Stock Transfer and Trust Company, as rights agent. The rights agreement
could make it more difficult to proceed with and tend to discourage a merger, tender offer or proxy contest. Our amended
certificate of incorporation also provides that stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent and, in certain circumstances relating to acquisitions or other changes
in control, requires an 80% supermajority vote of all outstanding shares of our common stock. Our bylaws also limit the
ability of stockholders to raise matters at a meeting of stockholders without giving advance notice.
ITEM 2. PROPERTIES
Our principal offices are located at 773 San Marin Drive, Suite 2215, Novato, California, 94998. We occupy space
in Novato under a lease that covers approximately 18,375 square feet of office space and expires February 28, 2015. The
remaining lease rental commitment is approximately $2.2 million, with $0.5 million owing for 2011. Equipment leasing,
financing, sales and general administrative activities are conducted from the Novato location. We also sub-lease
approximately 7,150 square feet of office and warehouse space for our operations at San Diego, California. This lease expires
October 31, 2013, and the remaining lease commitment is approximately $0.5 million. We also lease office space in
Shanghai, China. The lease expires December 31, 2011 and the remaining lease commitment is approximately $65,000. We
also lease office and living space in London, United Kingdom. The office space lease continues month-to-month and the
living space lease expires January 3, 2011. At December 31, 2010, there was no remaining lease commitment. We also lease
22
office space in Blagnac, France. The lease expires December 31, 2011 and the remaining lease commitment is approximately
$20,000.
ITEM 3. LEGAL PROCEEDINGS
Two of our Irish subsidiaries, WLFC Funding (Ireland) Limited and WLFC (Ireland) Limited, were sued in
connection with the Italian liquidation proceedings of Volare Airlines. The actions allege that our subsidiaries received
preferential payments in the aggregate amount of 7.0 million euro on account of our engine leases to Volare in 2003 and
within one year prior to Volare’s ceasing operations. We believe any loss, as a result of the proceedings, is neither probable
nor estimable at December 31, 2010, and we are defending this claim vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year 2010.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following information relates to our Common Stock, which is listed on the NASDAQ National Market under
the symbol WLFC. As of March 15, 2011 there were approximately 1,690 stockholders of our Common Stock.
The high and low closing sales price of the Common Stock for each quarter of 2010 and 2009, as reported by
NASDAQ, are set forth below:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
2009
High
Low
High
Low
$
$
17.61
15.75
11.22
13.54
$
13.80
9.22
8.12
9.87
$
10.58
15.39
14.98
15.20
7.25
9.92
10.50
11.03
During the years ended December 31, 2010 and 2009 we did not pay cash dividends to our common stockholders.
We have not made any dividend payments to our common stockholders since our inception as all available cash has been
utilized for the business. We have no intention of paying dividends on our common stock in the foreseeable future. In
addition, certain of our debt facilities contain negative covenants which prohibit us from paying any dividends or making
distributions of any kind with respect to our common stock.
The following table outlines our Equity Compensation Plan Information:
Plan Category
Plans Not Approved by
Stockholders:
None
Plans Approved by Stockholders:
Employee Stock Purchase Plan
1996 Stock Option/Stock Issuance
Plan*
2007 Stock Incentive Plan
Total
* Plan expired
Number of securities to be
issued upon exercise of
outstanding
options, warrants and rights
(a)
Weighted-average exercise
price of outstanding
options, warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
n/a
n/a
6.80
n/a
6.80
n/a
96,845
—
962,951
1,059,796
n/a
—
812,891
—
812,891
$
$
23
The 1996 Stock Option/Stock Issuance Plan and the 2007 Stock Incentive Plan were approved by security holders.
The 2007 Stock Incentive Plan authorized 2,000,000 shares of common stock. 1,070,092 shares of restricted stock were
granted under the 2007 Stock Incentive Plan by December 31, 2010. Of this amount, 33,043 shares of restricted stock were
withheld or forfeited and returned to the pool of shares which could be granted under the 2007 Stock Incentive Plan resulting
in a net number of 962,951 shares which were available as of December 31, 2010 for future issuance under the 2007
Incentive Plan.
On December 8, 2009, the Company’s Board of Directors authorized a plan to repurchase up to $30.0 million of the
Company’s common stock, depending upon market conditions and other factors, over the next three years. The repurchased
shares are to be subsequently retired. 367,483 shares totaling $4.2 million were repurchased in 2010 under our authorized
plan. As of December 31, 2010, the total number of common shares outstanding was approximately 9.2 million.
Common stock repurchases, under our authorized plan, in the fiscal year 2010 were as follows:
Period
January 1, 2010-March 31, 2010
April 1, 2010-June 30, 2010
July 1, 2010-September 30, 2010
October 1, 2010-December 31, 2010
Total
Total Number of
Shares Purchased
Average Price Paid
per Share
(in thousands, except per share data)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
3
21
154
189
367
$
$
$
$
$
14.71
11.55
9.68
12.55
11.31
3
21
154
189
367
$
$
$
$
$
29,924
29,677
28,183
25,803
25,803
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes our selected consolidated financial data and operating information. The selected
consolidated financial and operating data should be read in conjunction with the Consolidated Financial Statements and notes
thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere
in this Form 10-K.
2010
Years Ended December 31,
2008
(dollars in thousands, except per share data)
2007
2009
2006
Revenue:
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other income
Total revenue
$ 102,133 $ 102,390 $ 102,421 $
69,230
32,744
3,781
300
$ 148,302 $ 150,440 $ 152,806 $ 122,410 $ 106,055
86,084 $
28,169
7,389
768
46,049
1,043
958
34,776
7,990
3,403
33,716
12,846
3,823
Net income
$
12,050 $
22,367 $
26,601 $
17,664 $
17,886
Net income attributable to common shareholders
$
8,922 $
19,239 $
23,473 $
14,536 $
14,941
Basic earnings per common share
Diluted earnings per common share
Balance Sheet Data:
$
$
1.03 $
0.96 $
2.30 $
2.14 $
2.85 $
2.68 $
1.79 $
1.66 $
1.63
1.56
Total assets
Debt (includes capital lease obligation)
Shareholders’ equity
$ 1,125,962 $ 1,097,702 $ 982,712 $ 868,590 $ 730,019
$ 731,632 $ 726,235 $ 641,125 $ 567,108 $ 465,249
$ 226,970 $ 220,793 $ 192,207 $ 174,652 $ 164,002
Lease Portfolio:
Engines at the end of the period
Spare parts packages at the end of the period
Aircraft and Helicopters at the end of the period
179
4
3
169
3
4
160
3
4
144
3
6
131
3
4
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Forward-Looking Statements. This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact,
including statements regarding prospects or future results of operations or financial position, made in this Annual Report on
Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions
to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are
inherently uncertain. 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, changes in oil prices and other disruptions to the
world markets; trends in the airline industry, including growth rates of markets and other economic factors; risks associated
with owning and leasing jet engines and aircraft; our ability to successfully negotiate equipment purchases, sales and leases,
to collect outstanding amounts due and to control costs and expenses; changes in interest rates and availability of capital, our
ability to continue to meet the changing customer demands; regulatory changes affecting airline operations, aircraft
maintenance, accounting standards and taxes; the market value of engines and other assets in our portfolio. 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 of Part I, “Risk Factors,” which, along with the
previous discussion, describes some, but not all, of the factors that could cause actual results to differ significantly from
management’s expectations.
General. Our core business is acquiring and leasing pursuant to operating leases, commercial aircraft engines and
related aircraft equipment, and the selective sale of such engines, all of which we sometimes refer to as “equipment.” While
at December 31, 2010, all of our leases were operating leases, the Company entered into a finance lease in January 2011. As
of December 31, 2010, we had 62 lessees in 35 countries. Our portfolio is continually changing due to acquisitions and sales.
As of December 31, 2010, our total lease portfolio consisted of 179 engines and related equipment, three aircraft and four
spare engine parts packages with an aggregate net book value of $998.0 million. As of December 31, 2010, we also managed
16 engines and related equipment on behalf of other parties. On December 30, 2005, we entered into a joint venture called
WOLF with Oasis International Leasing (USA), Inc., which is now known as Waha Capital PJSC. WOLF completed the
purchase of two Airbus A340-313 aircraft from Boeing Aircraft Holding Company for a purchase price of $96.0 million. We
actively manage our portfolio and structure our leases to maximize the residual values of our leased assets. Our leasing
business focuses on popular Stage III commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney,
Rolls Royce and International Aero Engines. These engines are the most widely used engines in the world, powering Airbus,
Boeing, McDonnell Douglas, Bombardier and Embraer aircraft.
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. 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. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies, grouped by our activities, affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements:
Leasing Related Activities. Revenue from leasing of aircraft equipment is recognized as operating lease revenue over
the terms of the applicable lease agreements. Where collection cannot be reasonably assured, for example, upon a lessee
bankruptcy, we do not recognize revenue until cash is received. We also estimate and charge to income a provision for bad
debts based on our experience in the business and with each specific customer and the level of past due accounts. The
financial condition of our customers may deteriorate and result in actual losses exceeding the estimated allowances. In
addition, any deterioration in the financial condition of our customers may adversely affect future lease revenues. As of
December 31, 2010, all of our leases are accounted for as operating leases. 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.
We generally depreciate engines on a straight-line basis over 15 years to a 55% residual value. Spare parts packages
are generally depreciated on a straight-line basis over 15 years to a 25% residual value. Aircraft are generally depreciated on
25
a straight-line basis over 13-20 years to a 15%-17% residual value. 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. Currently, 47
engines having a net book value of $102.0 million are depreciated using this policy. It is our policy to review estimates
regularly to more accurately expense the cost of equipment over the useful life of the engines. On July 1, 2009 and again on
July 1, 2010, we adjusted the depreciation for certain older engine types within the portfolio. The 2010 change in
depreciation estimate resulted in a $2.0 million increase in depreciation in 2010 and on an annual basis will result in an
increase in depreciation expense of $4.0 million per year assuming no change in our portfolio. The net effect of the 2010
change in depreciation estimate is a reduction in 2010 net income of $1.2 million or $0.13 in diluted earnings per share over
what net income would have otherwise been had the change in depreciation estimate not been made. If useful lives or residual
values are lower than those estimated by us, future write-downs may be recorded or a loss may be realized upon sale of the
equipment.
Sales Related Activities. For equipment sold out of our lease portfolio, we recognize the gain or loss associated with
the sale as revenue. Gains or losses consist of sales proceeds less the net book value of the equipment sold and any costs
directly associated with the sale.
Asset Valuation. Long-lived assets and certain identifiable intangibles to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable, and long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell. Impairment is identified by comparison of undiscounted forecasted cash flows,
including estimated sales proceeds, over the life of the asset with the asset’s book value. If the forecasted undiscounted cash
flows are less than the book value, we write the asset down to its fair value. We determine fair value by reference to
independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors. If the undiscounted forecasted
cash flows and fair value of our long-lived assets decrease in the future we may incur impairment charges.
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 or the lease terminates, 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.
YEAR ENDED DECEMBER 31, 2010 COMPARED TO THE YEAR ENDED DECEMBER 31, 2009
Revenue is summarized as follows:
Years Ended December 31,
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other income
Total revenue
2010
Amount
$
$
102,133
34,776
7,990
3,403
148,302
%
(dollars in thousands)
68.9 % $
23.4
5.4
2.3
100.0 % $
102,390
46,049
1,043
958
150,440
Amount
2009
%
68.1%
30.6
0.7
0.6
100.0%
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2010, was flat with the comparable
period in 2009. This primarily reflects lower average portfolio utilization in the current period, lower lease rates for certain
engine types and the deferral of revenue related to certain customers for which revenue is recorded on a cash, rather than
accrual, basis, offset by portfolio growth. Portfolio utilization is defined as the net book value of on-lease assets as a
percentage of the net book value of total lease assets. The aggregate of net book value of equipment held for lease at
December 31, 2010 and 2009, was $998.0 million and $976.8 million, respectively, an increase of 2.2%. At December 31,
2010, and 2009, respectively, approximately 90% and 85% of equipment by net book value was on-lease. The average
utilization for the year ended December 31, 2010 was 86% compared to 89% in the prior year. During the year ended
December 31, 2010, 16 engines were added to our lease portfolio at a total cost of $120.0 million (including capitalized
costs). During the year ended December 31, 2009, 21 engines were added to our lease portfolio at a total cost
of $214.1million (including capitalized costs).
26
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2010, decreased
24.5% to $34.8 million from $46.0 million for the comparable period in 2009. Eight long term leases terminated in 2010
compared with the termination of thirteen long term leases in the year ago period. Higher balances of maintenance reserves
had accumulated for the long term leases that terminated in 2009 compared to those that terminated in the current period,
resulting in the decrease in maintenance reserve revenue in the current year.
Gain on Sale of Leased Equipment. During the year ended December 31, 2010, we sold 7 engines and various
engine-related equipment from the lease portfolio and one airframe for a net gain of $8.0 million. During the year ended
December 31, 2009, we sold 5 engines and various engine-related equipment from the lease portfolio for a net gain of $1.0
million.
Other Income. Our other income consists primarily of management fee income and lease administration fees, and
increased $2.4 million from the prior year. The increase was primarily due to the sale of our interest in the SSAMC joint
venture in November 2010 for $3.5 million, which generated a gain of $2.0 million in the current period.
Depreciation Expense. Depreciation expense increased $4.6 million or 10.5% to $48.7 million for the year ended
December 31, 2010, from the comparable period in 2009 due to increased lease portfolio value and changes in estimates of
residual values on certain older engine types. On July 1, 2009 and again on July 1, 2010, we adjusted the depreciation for
certain older engine types within the portfolio. It is our policy to review estimates regularly to reflect the cost of equipment
over the useful life of these engines. The 2010 change in depreciation estimate resulted in a $2.0 million increase in
depreciation in 2010. The net effect of the 2010 change in depreciation estimate is a reduction in 2010 net income of $1.2
million or $0.13 in diluted earnings per share over what net income would have otherwise been had the change in
depreciation estimate not been made.
Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $2.9 million for the year
ended December 31, 2010, a decrease of $3.2 million from the $6.1 million recorded in the comparable period in 2009. A
write-down of $2.7 million was recorded for the year ended December 31, 2010 to adjust the carrying values of engine parts
held on consignment for which market conditions for the sale of parts has changed. Write-downs on held for use equipment
to their estimated fair values totaled $0.2 million for the year ended December 31, 2010, due to the adjustment of carrying
values for certain impaired engines within the portfolio to reflect estimated market values. A write-down of $3.0 million was
recorded for the year ended December 31, 2009 due to a management decision to sell two engines and consign seven engines
for part out and sale. Further write-downs of $3.1 million were recorded in the year ended December 31, 2009 to adjust the
carrying values of engine parts held on consignment for which market conditions for the sale of parts has changed.
General and Administrative Expenses. General and administrative expenses increased 9.5% to $29.3 million for the
year ended December 31, 2010, from the comparable period in 2009 due mainly to increases in selling expenses ($0.7
million), accounting, legal and consulting fees ($0.7 million), employment related costs ($0.6 million), system conversion
expenses ($0.5 million) and employee relocation costs ($0.3 million), which was offset partially by decreases in bad debt
expense ($0.5 million) and insurance expense ($0.1 million).
Technical Expense. Technical expenses consist of the cost of engine repairs, engine thrust rental fees, outsourced
technical support services, sublease engine rental expense, engine storage and freight costs. These expenses increased 13.6%
to $8.1 million for the year ended December 31, 2010, from the comparable period in 2009 due mainly to increases in engine
maintenance costs due to higher repair activity ($1.3 million) and engine operating lease costs ($0.3 million), which was
partially offset by decreases in outsourced technical support services expenses ($0.4 million) and engine thrust rental fees due
to a decrease in the number of engines being operated at higher thrust levels under the CFM thrust rental program ($0.1
million).
Net Finance Costs. Net finance costs include interest expense, interest income and net (gain)/loss on debt
extinguishment. Interest expense increased 13.6% to $40.9 million for the year ended December 31, 2010, from the
comparable period in 2009, due to an increase in average debt outstanding and an increase in the average notional value of
interest rate swaps held throughout the period. Virtually all of our debt is tied to one-month U.S. dollar LIBOR which
decreased from an average of 0.33% for the year ended December 31, 2009 to an average of 0.27% for the year ended
December 31, 2010 (average of month-end rates). At December 31, 2010 and 2009, one-month LIBOR was 0.26% and
0.23%, respectively. To mitigate exposure to interest rate changes, we have entered into interest rate swap agreements. As of
December 31, 2010, such swap agreements had notional outstanding amounts of $430.0 million, average remaining terms of
between two and 51 months and fixed rates of between 2.10% and 5.05%. In 2010 and 2009, $18.6 and $16.2 million was
realized through the income statement as an increase in interest expense, respectively.
27
Interest income for the year ended December 31, 2010, decreased to $0.2 million from $0.3 million for the year
ended December 31, 2009, due to a decrease in cash deposit balances from the prior period.
We recorded $0.9 million as a gain upon extinguishment of debt in the year ended December 31, 2009 when we
purchased $3.0 million original principal amount, representing $2.1 million principal outstanding as of May 15, 2009, of
WEST’s Series 2005-A1 notes for a purchase price of $1.2 million. After write-off of unamortized debt issuance costs and
purchase discount of $0.06 million related to the notes, a gain on extinguishment of debt of $0.9 million was recorded in the
period.
Income Taxes. Income taxes for the year ended December 31, 2010, decreased to $7.6 million from $10.0 million for
the comparable period in 2009 reflecting decreased pre-tax income and the impact of discrete items booked in 2009. The
overall effective tax rate for the year ended December 31, 2010 was 38.8% compared to 30.9% for the prior year. For the
year ended December 31, 2009, the Company’s effective tax rate was reduced by $2.3 million related to a change in
California state tax law during 2009 regarding state apportionment of income, which is effective 2011, and due to a change in
the method used by the Company to allocate revenue to U.S. states. These changes resulted in a reduction in the long term
deferred tax liability. For the year ended December 31, 2009, the Company also recognized an adjustment of $1.2 million
increasing the tax provision in the period related to the tax treatment of individual employee non-performance based
compensation costs in excess of $1.0 million annually. The adjustment was based on compensation earned in 2007, 2008 and
2009 that had not previously been recognized as non-deductible in the financial statements, by period as follows: 2007 $0.2
million, 2008 $0.5 million, 2009 $0.5 million. Our tax rate is subject to change based on changes in the mix of assets leased
to domestic and foreign lessees, the proportions of revenue generated within and outside of California and numerous other
factors, including changes in tax law.
YEAR ENDED DECEMBER 31, 2009 COMPARED TO THE YEAR ENDED DECEMBER 31, 2008
Revenue is summarized as follows:
Years Ended December 31,
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other income
Total revenue
2009
Amount
$
$
102,390
46,049
1,043
958
150,440
%
(dollars in thousands)
68.1 % $
30.6
0.7
0.6
100.0 % $
102,421
33,716
12,846
3,823
152,806
Amount
2008
%
67.0%
22.1
8.4
2.5
100.0%
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2009, decreased 0.03% to $102.39
million from $102.42 million for the comparable period in 2008. This decrease primarily reflects lower average portfolio
utilization in the current period, lower lease rates for certain engine types and the deferral of revenue related to certain
customers for which revenue is recorded on a cash, rather than accrual, basis, partially offset by portfolio growth. Portfolio
utilization is defined as the net book value of on-lease assets as a percentage of the net book value of total lease assets. The
aggregate of net book value of equipment held for lease at December 31, 2009 and 2008, was $976.8 million and $829.7
million, respectively, an increase of 17.7%. The ten engine sale to an investor group in September 2008 resulted in a
reduction in portfolio net book value of $51.9 million, with the Company also recognizing nine months of lease rent revenue
in 2008. At December 31, 2009, and 2008, respectively, approximately 85% and 91% of equipment by net book value was
on-lease. The average utilization for the year ended December 31, 2009 was 89% compared to 93% in the prior year. During
the year ended December 31, 2009, 21 engines were added to our lease portfolio at a total cost of $214.1 million (including
capitalized costs). During the year ended December 31, 2008, 43 engines were added to our lease portfolio at a total cost
of $232.4 million (including capitalized costs).
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2009, increased
36.6% to $46.0 million from $33.7 million for the comparable period in 2008. Thirteen long term leases terminated in 2009
compared with the termination of fourteen long term leases in the year ago period. Higher balances of maintenance reserves
had accumulated for the long term leases that terminated in 2009 compared to those that terminated in the year ago period,
resulting in the increase in maintenance reserve revenue in the current year.
Gain on Sale of Leased Equipment. During the year ended December 31, 2009, we sold 5 engines and various
engine-related equipment from the lease portfolio for a net gain of $1.0 million. During the year ended December 31, 2008,
we sold 13 engines, 2 helicopters and various engine-related equipment from the lease portfolio for a net gain of $12.8
28
million. The gain on sale in 2008 included the sale in the quarter ended September 30, 2008 of a portfolio of ten engines
having a net book value of $51.9 million to an investor group for $63.0 million, contributing $11.1 million to gain on sale.
Other Income. Our other income consists primarily of management fee income and lease administration fees, and
decreased $2.9 million from the prior year. The decrease was due to the inclusion in 2008 of the settlement of a claim for
$1.0 million to resolve a litigation arising from a lessee default in the first quarter as well as the recording of a gain of $2.2
million related to an insurance casualty loss in the fourth quarter.
Depreciation Expense. Depreciation expense increased $6.7 million or 17.8% to $44.1 million for the year ended
December 31, 2009, from the comparable period in 2008 due to increased lease portfolio value and changes in estimates of
residual values on certain older engine types. On April 1 and July 1, 2008 and again on July 1, 2009, we adjusted the
depreciation for certain older engine types within the portfolio. It is our policy to review estimates regularly to reflect the cost
of equipment over the useful life of these engines. The 2009 change in depreciation estimate resulted in a $4.5 million
increase in depreciation in 2009. The net effect of the 2009 change in depreciation estimate is a reduction in 2009 net income
of $2.9 million or $0.32 in diluted earnings per share over what net income would have otherwise been had the change in
depreciation estimate not been made.
Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $6.1 million for the year
ended December 31, 2009, a decrease of $0.6 million from the $6.7 million recorded in the comparable period in 2008. A
write-down of $3.0 million was recorded for the year ended December 31, 2009 due to a management decision to sell two
engines and consign seven engines for part out and sale. Further write-downs of $3.1 million were recorded in the year ended
December 31, 2009 to adjust the carrying values of engine parts held on consignment for which market conditions for the
sale of parts has changed. Write-downs on held for use equipment to their estimated fair values totaled $2.5 million for the
year ended December 31, 2008, due to the adjustment of carrying values for certain impaired engines within the portfolio to
reflect estimated market values. There was an additional write-down of $3.6 million for the year ended December 31, 2008
due to a management decision to consign six engines for part out and sale. Further write-downs of $0.6 million were recorded
in the year ended December 31, 2008 to adjust the carrying values of engine parts held on consignment for which market
conditions for the sale of parts has changed.
General and Administrative Expenses. General and administrative expenses decreased 1.2% to $26.8 million for the
year ended December 31, 2009, from the comparable period in 2008 due mainly to decreases in employee severance costs
($0.7 million), employment related costs ($0.3 million) and accounting and legal services ($0.2 million), which was offset
partially by increases in stock-based compensation ($0.7 million), bad debt expense ($0.2 million) and servicing fees for
regional engine portfolio ($0.2 million).
Technical Expense. Technical expenses consist of the cost of engine repairs, engine thrust rental fees, outsourced
technical support services, sublease engine rental expense, engine storage and freight costs. These expenses increased 94.6%
to $7.1 million for the year ended December 31, 2009, from the comparable period in 2008 due mainly to increases in engine
thrust rental fees due to an increase in the number of engines being operated at higher thrust levels under the CFM thrust
rental program ($1.4 million), engine maintenance costs due to higher repair activity ($1.0 million), engine operating lease
costs ($0.5 million) and outsourced technical support services expenses due to higher lease transaction activity ($0.3 million).
Net Finance Costs. Net finance costs include interest expense, interest income and net (gain)/loss on debt
extinguishment. Interest expense decreased 6.8% to $36.0 million for the year ended December 31, 2009, from the
comparable period in 2008, due to decreased interest rates, which was partially offset by an increase in average debt
outstanding. Virtually all of our debt is tied to one-month U.S. dollar LIBOR which decreased from an average of 2.54% for
the year ended December 31, 2008 to an average of 0.33% for the year ended December 31, 2009 (average of month-end
rates). At December 31, 2009 and 2008, one-month LIBOR was 0.23% and 0.44%, respectively. To mitigate exposure to
interest rate changes, we have entered into interest rate swap agreements. As of December 31, 2009, such swap agreements
had notional outstanding amounts of $528.0 million, average remaining terms of between seven and 63 months and fixed
rates of between 2.10% and 5.05%. In 2009 and 2008, $16.2 and $5.2 million was realized through the income statement as
an increase in interest expense, respectively.
Interest income for the year ended December 31, 2009, decreased to $0.3 million from $1.9 million for the year
ended December 31, 2008, due to a decrease in interest rates and a shift in deposit funds to U.S. treasury securities. In late
2008, we moved substantial deposits to U.S. treasury securities to avoid risk of loss.
We recorded $0.9 million as a gain upon extinguishment of debt in the year ended December 31, 2009 when we
purchased $3.0 million original principal amount, representing $2.1 million principal outstanding as of May 15, 2009, of
29
WEST’s Series 2005-A1 notes for a purchase price of $1.2 million. After write-off of unamortized debt issuance costs and
purchase discount of $0.06 million related to the notes, a gain on extinguishment of debt of $0.9 million was recorded in the
period.
Income Taxes. Income taxes for the year ended December 31, 2009, decreased to $10.0 million from $15.4 million
for the comparable period in 2008 reflecting decreased pre-tax income and the impact of discrete items booked in 2009. The
overall effective tax rate for the year ended December 31, 2009 was 30.9% compared to 36.7% for the prior year. For the
year ended December 31, 2009, the Company’s effective tax rate was reduced by $2.3 million related to a change in
California state tax law during 2009 regarding state apportionment of income, which is effective 2011, and due to a change in
the method used by the Company to allocate revenue to U.S. states. These changes resulted in a reduction in the long term
deferred tax liability. For the year ended December 31, 2009, the Company also recognized an adjustment of $1.2 million
increasing the tax provision in the period related to the tax treatment of individual employee non-performance based
compensation costs in excess of $1.0 million annually. The adjustment was based on compensation earned in 2007, 2008 and
2009 that had not previously been recognized as non-deductible in the financial statements, by period as follows: 2007 $0.2
million, 2008 $0.5 million, 2009 $0.5 million. Our tax rate is subject to change based on changes in the mix of assets leased
to domestic and foreign lessees, the proportions of revenue generated within and outside of California and numerous other
factors, including changes in tax law.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued an amendment to FASB ASC 810, Consolidation, formerly SFAS No. 167,
Amendments to FASB Interpretation No. 46(R). FASB ASC 810 is intended to (1) address the effects on certain provisions of
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the
elimination of the qualifying special-purpose entity concept in FASB ASC 860, and (2) constituent concerns about the
application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under
the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable
interest entity. This statement was applied as of January 1, 2010, and did not have an impact on our Consolidated Financial
Statements.
In September 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which
addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. ASU 2009-13 will require the companies to allocate the overall
consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in
the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. The adoption of ASU 2009-13 did not have a material impact on our Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which
requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including
significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective
for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are
effective for annual periods beginning after December 15, 2010. Other than requiring additional disclosures, the adoption of
ASU 2010-6 did not have a material impact on our Consolidated Financial Statements.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses. The new disclosure guidance will significantly expand the existing requirements and will
lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new
disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting
periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU,
such as the allowance roll-forward and modification disclosures, will be required for periods beginning after December 15,
2010. The adoption of ASU 2010-20 did not have a material impact on our Consolidated Financial Statements.
During 2010, the FASB issued several ASU’s — ASU No. 2010-01 through ASU No. 2010-29. Except for those
ASU’s discussed above, the ASU’s entail technical corrections to existing guidance or affect guidance related to specialized
industries or entities and therefore do not have a material impact on the Company’s financial position and results of
operations.
30
LIQUIDITY AND CAPITAL RESOURCES
We finance our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $174.8
million, $397.6 million and $394.7 million, in the years ended December 31, 2010, 2009 and 2008, respectively, was derived
from this activity. In these same time periods $170.0 million, $312.3 million and $321.3 million, respectively, was used to
pay down related debt. Cash flow from operating activities generated $56.6 million, $88.2 million and $52.1 million in the
years ended December 31, 2010, 2009 and 2008, respectively
Our primary use of funds is for the purchase of equipment for lease. Purchases of equipment (including capitalized
costs) totaled $121.5 million, $205.1 million and $233.7 million for the years ended December 31, 2010, 2009 and 2008,
respectively.
Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise
lease revenue and maintenance reserves, and are offset by interest expense. Cash received as maintenance reserve payments
for some of our engines on lease are restricted per our debt arrangements. The lease revenue stream, in the short-term, is at
fixed rates while virtually all of our debt is at variable rates. If interest rates increase, it is unlikely we could increase lease
rates in the short term and this would cause a reduction in our earnings and operating cash flows. Revenue and maintenance
reserves are also affected by the amount of equipment off lease. Approximately 90%, by book value, of our assets were on-
lease at December 31, 2010 compared to approximately 85% at December 31, 2009. The average utilization rate for the year
ended December 31, 2010 was 86% compared to 89% a year ago. 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.
At December 31, 2010, notes payable consists of loans totaling $731.6 million (net of discounts of $2.6 million)
payable over periods of 10 months to approximately 15 years with interest rates varying between approximately 1.5% and
8.0% (excluding the effect of our interest rate derivative instruments). At December 31, 2010 and at December 31, 2009, we
had warehouse and revolving credit facilities totaling approximately $440.0 million. At December 31, 2010, and December
31, 2009, respectively, approximately $54.2 million and $72.1 million were available under these combined facilities. The
decrease in availability in 2010 was due to the drawdown of funds from the facilities to support engine purchases.
The significant facilities are described below.
At December 31, 2010, we had a $240.0 million revolving credit facility to finance the acquisition of aircraft
engines for lease as well as for general working capital purposes. We closed on this facility on November 20, 2009 and the
proceeds of the new facility, net of $3.5 million in debt issuance costs, was used to pay off the balance remaining from our
prior revolving facility. As of December 31, 2010, $54.0 million was available under this facility. The revolving facility ends
in November 2012. The interest rate on this facility at December 31, 2010 was one-month LIBOR plus 3.50%. Under the
revolver facility, all subsidiaries except Willis Engine Securitization Trust (“WEST”) and WEST Engine Funding LLC
jointly and severally guarantee payment and performance of the terms of the loan agreement. The guarantee would be
triggered by a default under the agreement. Effective January 21, 2011, we exercised our option under the facility to increase
the size of this facility to $285.0 million.
On January 11, 2010, we closed on a new term loan for a four year term totaling $22.0 million, the proceeds of
which were used to pay down the balance under our revolving credit facility. At December 31, 2010, $20.9 million was
outstanding under this loan. Interest is payable at a fixed rate of 4.50% and principal and interest is paid quarterly. This loan
is secured by three engines.
On August 9, 2005, we closed an asset-backed securitization through WEST, a bankruptcy remote Delaware
Statutory Trust, which is the issuer of various series of term notes and warehouse notes secured by a portfolio of engines. At
December 31, 2010, $300.4 million of WEST term notes and $199.8 million of WEST warehouse notes were outstanding.
The WEST term notes are divided into $114.9 million Series 2005-A1 notes, $167.5 million Series 2008-A1 notes and $18.1
million Series 2005-B1 notes. The WEST warehouse notes are divided into $174.8 million Series 2007-A2 notes and $25.0
million Series 2007-B2 notes.
The Series 2005-A1 and Series 2005-B1 notes were issued on August 9, 2005 in the original principal amounts of
$200.0 million and $28.3 million, respectively. The interest rate on the Series 2005-A1 and Series 2005-B1 notes equals one-
month LIBOR plus a margin of 1.25% and 6.00%, respectively. The Series 2005-A1 term notes’ expected maturity is
July 2018 and the Series 2005-B1 term notes’ expected maturity is July 2020.
31
The Series 2008-A1 and Series 2008-B1 notes were issued on March 28, 2008 in the original principal amounts of
$212.4 million and $20.3 million, respectively. The interest rate on the Series 2008-A1 and Series 2008-B1 notes equals one-
month LIBOR plus a margin of 1.50% and 3.50%, respectively. The Series 2008-A1 term notes’ expected maturity is
March 2021 and the Series 2008-B1 term notes’ expected maturity is March 2023.
The Series 2007-A2 and Series 2007-B2 notes were issued on December 13, 2007 in the original principal amounts
of $175.0 million and $25.0 million, respectively. The interest rate on the Series 2007-A2 notes and the Series 2007-B2 notes
at December 31, 2010 is equal to one-month LIBOR plus a margin of 1.25% and 2.75%, respectively. Effective as of
February 14, 2011, those interest rates will increase to one-month LIBOR plus a margin of 1.75% and 3.75%, respectively.
The Series 2007-A2 and Series 2007-B2 notes originally allowed for borrowings of up to $200.0 million in the aggregate
through December 15, 2010. Effective as of February 14, 2011, the outstanding principal balances of $174.8 million and
$25.0 million borrowed under these notes were converted to term loans which amortize on a monthly basis until their
maturity. The Series 2007-A2 notes’ expected maturity is January 2024 and the Series 2007-B2 notes’ expected maturity is
January 2026.
WEST also entered into a Senior Liquidity Facility on December 13, 2007 which expires on the final maturity date
of the Series 2008-A1 term notes in March 2021. The maximum facility size is 4% of the outstanding Series 2007-A2 notes
and Series 2008-A1 notes. This facility replaced the requirement to maintain 4% cash reserves for the 2007-A2 notes and the
Series 2008-A1 notes. The facility may be drawn on any payment date should the cash flow at WEST be insufficient to pay
interest on the Series 2007-A2 notes, Series 2008-A1 notes and any required hedge payments. A commitment fee is payable
on the facility. The establishment of this facility resulted in the release of $7.1 million of cash held previously in the Senior
Restricted Cash Account in December 2007.
The assets of WEST and WEST Engine Funding LLC are not available to satisfy our obligations or any of our
affiliates. WEST is consolidated for financial statement presentation purposes. WEST’s ability to make distributions and pay
dividends to us is subject to the prior payments of its debt and other obligations and WEST’s maintenance of adequate
reserves and capital. Under WEST, 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 us. Additionally, maintenance reserve
payments and lease security deposits are accumulated in restricted accounts and are not available for general use. Cash from
maintenance reserve payments is held in the restricted cash account and is subject to a minimum balance established annually
based on an engine portfolio maintenance reserve study provided by a third party. Any excess maintenance reserve amounts
remain within the restricted cash accounts and may be utilized for the purchase of new engines.
On June 30, 2008, we purchased the WEST Series 2008-B1 notes for $19.8 million (the then-unpaid principal
amount of the 2008-B1 notes) with the proceeds of a $20.0 million term loan made by an affiliate of the prior note holder.
This term loan is secured by a pledge of the WEST Series 2008-B1 notes to the lender. The term loan was originally for a
term of two years with maturity on July 1, 2010 with no amortization with all amounts due at maturity. On May 3, 2010, the
Company extended the maturity date from July 1, 2010 to December 31, 2010 and amended the covenants for this term loan
to conform to that of the $240.0 million revolving credit facility. On December 29, 2010, the Company further extended the
maturity date from December 31, 2010 to December 31, 2011 and increased the interest rate for the term loan from one-
month LIBOR plus 3.50% to one-month LIBOR plus 4.00%. Additionally, this term loan will now amortize on a monthly
basis, with a $15.2 million bullet payment required at the December 31, 2011 maturity date.
On January 18, 2011, we purchased the WEST Series 2005-B1 notes for $17.9 million (the then-unpaid principal
amount of the 2005-B1 notes) with the proceeds of a term loan made by the bank which was the prior note holder. This term
loan is secured by a pledge of the WEST Series 2005-B1 notes to the lender. Interest on this term loan is one-month LIBOR
plus a margin of 3.00%. The term of this loan is five years and the loan amortization is consistent with the amortization on
the underlying WEST Series 2005-B1 notes, with a bullet payment required at the end of the five year term.
At December 31, 2010 and 2009, one-month LIBOR was 0.26% and 0.23%, respectively.
32
Approximately $74.2 million of our debt is repayable during 2011 which includes the $20.0 million term loan
secured by the WEST Series 2008-B1 Note. Such repayments primarily consist of scheduled installments due under term
loans. Repayments are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The
table below summarizes our contractual commitments at December 31, 2010:
Long-term debt obligations
Interest payments under long-term debt
obligations
Operating lease obligations
Purchase obligations
Total
Payment due by period (in thousands)
Total
734,249
$
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
$
74,185
$
287,223
$
113,795
$
259,046
74,948
2,777
45,039
857,013
$
18,851
747
45,039
138,822
$
24,936
1,389
—
313,548
$
12,949
641
—
127,385
$
18,212
—
—
277,258
$
We have estimated the interest payments due under long-term debt by applying the interest rates applicable at
December 31, 2010 to the remaining debt, adjusted for the estimated debt repayments identified in the table above. Actual
interest payments made will vary due to changes in the rates for one-month LIBOR. The interest estimate excludes the effect
of any derivative instruments in place at the balance sheet date.
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. In addition, under these facilities, we can typically borrow 70% to 83%
of an engine’s net book value and approximately 70% 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
these facilities. Many of our 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 to the extent that engines are sold, repayment of
that portion of the debt could be required. We were in compliance with all covenants at December 31, 2010.
We have made purchase commitments to secure the purchase of five engines for a gross purchase price of $45.0
million, for delivery in 2011. As at December 31, 2010, non-refundable deposits paid related to this purchase commitment
were $1.4 million. In October 2006, we entered into an agreement with CFM International (“CFM”) to purchase new spare
aircraft engines. The agreement specifies that, subject to availability, we may purchase up to a total of 45 CFM56-7B and
CFM56-5B spare engines over a five year period, with options to acquire up to an additional 30 engines. Our 2009 purchase
orders with CFM for three engines were deferred and are included in our 2011 commitments to purchase.
We entered into a new lease effective November 1, 2007 for our offices in Novato, California that covers
approximately 18,375 square feet of office space. The total remaining rent commitment is approximately $2.2 million and
expires February 28, 2015. The sub-lease of our premises in San Diego, California expires in October 2013. Our Shanghai,
China office lease expires in December 2011. Our Blagnac, France office lease expires in December 2011.
We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level
of operations through 2011. A decline in the level of internally generated funds, such as could result if the amount of
equipment off-lease increases or there is a decrease in availability under our existing debt facilities, would impair our ability
to sustain our level of operations. We are discussing 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.
Management of Interest Rate Exposure
At December 31, 2010, all but $22.4 million of our borrowings were on a variable rate basis at various interest rates
tied to one-month LIBOR. Our equipment leases are generally structured at fixed rental rates for specified terms. 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. 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. We currently have interest rate swap
agreements which have notional outstanding amounts of $430.0 million, with remaining terms of between two and 51 months
and fixed rates of between 2.10% and 5.05%. The fair value of the swaps at December 31, 2010 and 2009 was negative $14.3
million and negative $7.9 million, respectively, representing a net liability for us.
33
We record derivative instruments at fair value as either an asset or liability. We use 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. 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. All of the transactions that we have designated as
hedges are accounted for as cash flow hedges. The effective portion of the gain or loss on a derivative instrument designated
as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period
during which the transaction being hedged affects earnings. 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 $18.6
million and $16.2 million in 2010 and 2009, respectively. This incremental cost for the swaps effective for hedge accounting
was included in interest expense for the respective periods.
We will be exposed to risk in the event of non-performance of the interest rate hedge counter-parties. We anticipate
that we may hedge additional amounts of our floating rate debt during the next year.
Related Party and Similar Transactions
Gavarnie Holding, LLC, a Delaware limited liability company (“Gavarnie”) owned by Charles F. Willis, IV,
purchased the stock of Aloha Island Air, Inc., a Delaware Corporation, (“Island Air”) from Aloha AirGroup, Inc. (“Aloha”)
on May 11, 2004. Charles F. Willis, IV is the President, CEO and Chairman of our Board of Directors and owns
approximately 30% of our common stock. As of December 31, 2010, Island Air leases three DeHaviland DHC-8-100 aircraft
and four spare engines from us. The aircraft and engines on lease to Island Air have a net book value of $3.8 million at
December 31, 2010. Beginning in 2006 Island Air experienced cash flow difficulties, which affected their payments to us due
to a fare war commenced by a competitor, their dependence on tourism which has suffered from the current economic
environment as well as volatile fuel prices. The Board of Directors approved lease rent deferrals which were accounted for as
a reduction in lease revenue in the applicable periods. Because of the question regarding collectability of amounts due under
these leases, lease rent revenue for these leases have been recorded on a cash basis until such time as collectability becomes
reasonably assured. After taking into account the deferred amounts, Island Air owes us $2.8 million in overdue rent. We hold
letters of credit for $0.2 million which may be used to partially offset our claims against Island Air.
In October 2010, Island Air purchased one airframe from us, generating a net gain of $0.4 million. Effective January
2, 2011 we converted the operating leases with Island Air to a finance lease, with a principal amount of $7.0 million, under
which they have resumed monthly payments. This transaction will increase operating income by $3.2 million which will be
recognized over the five year term of the finance lease. We are also discussing a program for them to commence payments of
the deferred amounts under the previous operating leases on a reduced basis. This program is dependent on their obtaining
substantially similar concessions from their other major creditors.
We entered into a Consignment Agreement dated January 22, 2008, with J.T. Power, LLC (“J.T. Power”), an entity
whose majority shareholder, Austin Willis, is the son of our President and Chief Executive Officer, and directly and
indirectly, a shareholder of ours as well as a Director of the Company. According to the terms of the Consignment
Agreement, J.T. Power is responsible to market and sell parts from the teardown of three engines with a book value of $4.2
million. During the year ended December 31, 2010, sales of consigned parts were $45,100. Under this agreement, J.T. Power
provides a minimum guarantee of net consignment proceeds of $3.3 million by January 22, 2012. Based on current estimated
consignment proceeds, J.T. Power would be obligated to pay $0.8 million under the guarantee in January 2012. On
November 17, 2008, we entered into a Consignment Agreement with J.T. Power in which they are responsible to market and
sell parts from the teardown of one engine with a book value of $1.0 million. During the year ended December 31, 2010,
sales of consigned parts were $24,900. On February 25, 2009, we entered into a Consignment Agreement with J.T. Power in
which they are responsible to market and sell parts from the teardown of one engine with a book value of $133,400. During
the year ended December 31, 2010, sales of consigned parts were $4,100. On July 31, 2009, we entered into a Consignment
Agreement with J.T. Power in which they are responsible to market and sell parts from the teardown of one engine with a
book value of $0.5 million. During the year ended December 31, 2010, sales of consigned parts were $0.2 million. On
July 27, 2006, we entered into an Aircraft Engine Agency Agreement with J.T. Power, in which we will, on a non-exclusive
basis, provide engine lease opportunities with respect to available spare engines at J.T. Power. J.T. Power will pay us a fee
based on a percentage of the rent collected by J.T. Power for the duration of the lease including renewals thereof. We earned
no revenue during the year ended December 31, 2010 under this program.
The Company entered into an Independent Contractor Agreement dated September 9, 2009 with Hans Jorg
Hunziker, a member of our Board of Directors. Under this Agreement, Mr. Hunziker will provide services in connection
34
with the identification and qualification of potential investors in our equity securities. The board has determined that,
notwithstanding this limited assignment, Mr. Hunziker remains an independent director. During 2010, the Company incurred
$39,400 in consulting fees related to this Agreement. This Agreement expired, by its terms, on October 31, 2010.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is that of interest rate risk. A change in LIBOR rates would affect our cost of
borrowing. Increases in interest rates, which may cause us to raise the implicit rates charged to our customers, could result in
a reduction in demand for our leases. Alternatively, we may price our leases based on market rates so as to keep the fleet on-
lease and suffer a decrease in our operating margin due to interest costs that we are unable to pass on to our customers. All
but $22.4 million of our outstanding debt is variable rate debt. We estimate that for every one percent increase or decrease in
our variable rate debt (net of derivative instruments), annual interest expense would increase or decrease $2.8 million (in
2009, $2.0 million).
We hedge a portion of our borrowings, effectively fixing the rate of these borrowings. This hedging activity helps
protect us against reduced margins on longer term fixed rate leases. Based on the implied forward rates for one-month
LIBOR, we expect interest expense will be increased by approximately $9.3 million for the year ending December 31, 2011,
as a result of our hedges. Such hedging activities may limit our ability to participate in the benefits of any decrease in interest
rates, but may also protect us from increases in interest rates. Furthermore, since lease rates tend to vary with interest rate
levels, it is possible that we can adjust lease rates for the effect of change in interest rates at the termination of leases. Other
financial assets and liabilities are at fixed rates.
We are also exposed to currency devaluation risk. During 2010, 2009, and 2008, respectively, 78%, 79%, and 80%
of our total lease rent revenues came from non-United States domiciled lessees. All of our leases require payment in U.S.
dollars. If these lessees’ currency devalues against the U.S. dollar, the lessees could potentially encounter difficulty in
making their lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted as a separate section of this report beginning on page 41.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on management’s evaluation (with the participation of
our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our
CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable
assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated
and communicated to management, including our principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Inherent Limitations on Controls
Management, including the CEO and CFO, does not expect that our disclosure controls and procedures will prevent
or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation
of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and
instances of fraud, if any, within the Company have been detected. The design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-
15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting includes policies and
35
procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our
transactions and dispositions of assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and
(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our financial statements. Our internal control over financial reporting is a
process designed with the participation of our principal executive officer and principal financial officer or persons performing
similar functions to provide reasonable assurance to our management and board of directors regarding the reliability of
financial reporting and preparation of financial statements for external purposes in accordance with generally accepted
accounted principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010.
In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment our management believes that, as
of December 31, 2010, our internal control over financial reporting is effective under those criteria.
KPMG LLP, the independent registered public accounting firm that audited the Company’s financial statements
included in this Annual Report, issued an audit report on the Company’s internal control over financial reporting. KPMG’s
audit report appears on page 42.
(b) Changes in internal control over financial reporting. There has been no change in our internal control over
financial reporting during our fourth fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
We have adopted a Standards of Ethical Conduct Policy (“Code of Ethics”) that applies to all employees and
directors including our Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. The Code of Ethics is
filed in Exhibit 14.1 and is also available on our website at www.willislease.com.
The remainder of the information required by this item is incorporated by reference to our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement. The information in Item
5 of this report regarding our Equity Compensation Plans is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to our Proxy Statement.
36
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We were billed the following amounts by our principal accountant:
Audit fees
Audit-related fees
Tax fees
All other fees
Total
2010
2009
$
$
664,455
—
—
89,768
754,223
$
$
646,721
—
—
—
646,721
Amounts billed under All other fees for 2010 are primarily for professional services rendered in providing
international tax consulting services.
The remaining information required by this item is incorporated by reference to our Proxy Statement.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
PART IV
The response to this portion of Item 15 is submitted as a separate section of this report beginning on page 41.
(a) (2) Financial Statement Schedules
Schedule I, Parent Company Financial Statements, and Schedule II, Valuation Accounts, are submitted as a separate
section of this report starting on page 70.
All other financial statement schedules have been omitted as the required information is not pertinent to the Registrant or
is not material or because the required information is included in the Financial Statements and Notes thereto.
(a) (3), (b) and (c): Exhibits: The response to this portion of Item 15 is submitted below.
EXHIBITS
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Description
Certificate of Incorporation, dated March 12, 1998, as amended by the Certificate of Amendment of Certificate of
Incorporation, dated May 6, 1998 (incorporated by reference to Exhibit 3.1 to our report on Form 10-K filed on
March 31, 2009).
Bylaws, dated April 18, 2001 as amended by (1) Amendment to Bylaws, dated November 13, 2001,
(2) Amendment to Bylaws, dated December 16, 2008, and (3) Amendment to Bylaws, dated September 28, 2010
(incorporated by reference to Exhibit 3.1 to our report on Form 10-Q filed on November 8, 2010).
Specimen of Series A Cumulative Redeemable Preferred Stock Certificate (incorporated by reference to
Exhibit 4.1 to Form S-1 Registration Statement Amendment No. 2 filed on January 27, 2006).
Form of Certificate of Designations of the Registrant with respect to the Series A Cumulative Redeemable
Preferred Stock (incorporated by reference to Exhibit 4.2 to Form S-1 Registration Statement Amendment No. 2
filed on January 27, 2006).
Form of Amendment No. 1 to Certificate of Designations of the Registrant with respect to the Series A Cumulative
Redeemable Preferred Stock (incorporated by reference to Exhibit 4.3 to our report on Form 10-K filed on
March 31, 2009).
Rights Agreement dated as of September 24, 1999, by and between Willis Lease Finance Corporation and
American Stock Transfer and Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to
Form 8-K filed on October 4, 1999).
Second Amendment to Rights Agreement dated as of December 15, 2005, by and between Willis Lease Finance
Corporation and American Stock Transfer and Trust Company, as Rights Agent (incorporated by reference to
Exhibit 4.5 to our report on Form 10-K filed on March 31, 2009).
4.6 Third Amendment to Rights Agreement dated as of September 30, 2008, by and between Willis Lease Finance
37
4.7
4.8
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19*
10.20
Corporation and American Stock Transfer and Trust Company, as Rights Agent (incorporated by reference to
Exhibit 4.6 to our report on Form 10-K filed on March 31, 2009).
Form of Certificate of Designations of the Registrant with respect to the Series I Junior Participating Preferred
Stock (formerly known as “Series A Junior Participating Preferred Stock”) (incorporated by reference to
Exhibit 4.7 to our report on Form 10-K filed on March 31, 2009).
Form of Amendment No. 1 to Certificate of Designations of the Registrant with respect to Series I Junior
Participating Preferred Stock (incorporated by reference to Exhibit 4.8 to our report on Form 10-K filed on
March 31, 2009).
Form of Indemnification Agreement entered into between the Registrant and its directors and officers
(incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 1, 2010).
1996 Stock Option/Stock Issuance Plan, as amended and restated as of March 1, 2003 (incorporated by reference
to Exhibit 99.1 to Form S-8 filed on September 26, 2003).
2007 Stock Incentive Plan (incorporated by reference to the Registrant’s Proxy Statement for 2007 Annual
Meeting of Stockholders filed on April 30, 2007).
Amended and Restated Employment Agreement between the Registrant and Charles F. Willis IV dated as of
December 1, 2008 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 22, 2008).
Employment Agreement between the Registrant and Donald A. Nunemaker dated November 21, 2000
(incorporated by reference to Exhibit 10.3 to our report on Form 10-K filed on April 2, 2001).
Employment Agreement between the Registrant and Thomas C. Nord dated September 19, 2005 (incorporated by
reference to Exhibit 10.1 to Form 8-K filed on September 23, 2005).
Employment Agreement between the Registrant and Bradley S. Forsyth dated February 20, 2007 (incorporated by
reference to Exhibit 10.2 to Form 8-K filed on February 21, 2007).
Employment Offer Letter to Jesse V. Crews dated July 15, 2009 (incorporated by reference to Exhibit 10.33 to our
report on Form 10-Q filed on November 12, 2009).
Loan and Aircraft Security Agreement dated October 29, 2004 between Fleet Capital Corporation and Willis Lease
Finance Corporation (incorporated by reference to Exhibit 10.42 to our report on Form 10-K filed on March 31,
2005).
Amendment No. 1 to Loan and Aircraft Security Agreement dated as of December 9, 2004 between Fleet Capital
Corporation and Willis Lease Finance Corporation (incorporated by reference to Exhibit 10.44 to our report on
Form 10-K filed on March 31, 2005).
Amendment No. 2 to Loan and Aircraft Security Agreement dated as of February 14, 2007 between Fleet Capital
Corporation and Willis Lease Finance Corporation (incorporated by reference to Exhibit 10.10 to our report on
Form 10-K filed on March 31, 2009).
Amendment No. 3 to Loan and Aircraft Security Agreement dated as of August 28, 2008 between Fleet Capital
Corporation and Willis Lease Finance Corporation (incorporated by reference to Exhibit 10.11 to our report on
Form 10-K filed on March 31, 2009).
Series 2005-A1 Note Purchase Agreement, dated as of July 28, 2005, among the Registrant, Willis Engine
Securitization Trust, UBS Securities LLC and UBS Limited (incorporated by reference to Exhibit 10.35 to our
report on Form 10-Q filed on November 29, 2005).
Series 2005-B1 Note Purchase Agreement, dated as of August 9, 2005, among the Registrant, Willis Engine
Securitization Trust, Fortis Capital and HSH Nordbank AG (incorporated by reference to Exhibit 10.36 to our
report on Form 10-Q filed on November 29, 2005).
Series 2007-A2 Note Purchase and Loan Agreement dated as of December 13, 2007, among Willis Engine
Securitization Trust, Willis Lease Finance Corporation and the initial Series 2007-A2 Holders (incorporated by
reference to Exhibit 10.59 to our report on Form 10-K filed on March 31, 2008).
Series 2007-B2 Note Purchase and Loan Agreement dated as of December 13, 2007 among Willis Engine
Securitization Trust, Willis Lease Finance Corporation and the initial Series 2007-B2 Holders (incorporated by
reference to Exhibit 10.60 to our report on Form 10-K filed on March 31, 2008).
Series 2008-A1 Note Purchase and Loan Agreement dated as of March 25, 2008, among Willis Engine
Securitization Trust, Willis Lease Finance Corporation and the initial Series 2008-A1 Holders (incorporated by
reference to Exhibit 10.16 to our report on Form 10-K filed on March 31, 2009).
Series 2008-B1 Note Purchase and Loan Agreement dated as of March 25, 2008, among Willis Engine
Securitization Trust, Willis Lease Finance Corporation and the initial Series 2008-B1 Holders (incorporated by
reference to Exhibit 10.17 to our report on Form 10-K filed on March 31, 2009).
Amended and Restated Indenture, dated December 13, 2007, by and between Willis Engine Securitization Trust
and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.18 to our report on
Form 10-K filed on March 31, 2009).
Series A1 Indenture Supplement, dated August 9, 2005, by and between Willis Engine Securitization Trust and
Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.40 to our report on Form 10-Q
38
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31*
10.32
filed on November 29, 2005).
Series B1 Indenture Supplement, dated August 9, 2005, by and between Willis Engine Securitization Trust and
Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.41 to our report on Form 10-Q
filed on November 29, 2005).
Series 2007-A2 Supplement, dated as of December 13, 2007, by and between Willis Engine Securitization Trust
and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.21 to our report on
Form 10-K filed on March 31, 2009).
Series 2007-B2 Supplement, dated as of December 13, 2007, by and between Willis Engine Securitization Trust
and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.22 to our report on
Form 10-K filed on March 31, 2009).
Series 2008-A1 Supplement, dated as of March 28, 2008, by and between Willis Engine Securitization Trust and
Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.23 to our report on Form 10-K
filed on March 31, 2009).
Series 2008-B1 Supplement, dated as of March 28, 2008, by and between Willis Engine Securitization Trust and
Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.24 to our report on Form 10-K
filed on March 31, 2009).
General Supplement 2008-1 dated as of March 28, 2008 (incorporated by reference to Exhibit 10.25 to our report
on Form 10-K filed on March 31, 2009).
General Supplement 2009-1 dated as of March 20, 2009 (incorporated by reference to Exhibit 10.26 to our report
on Form 10-K filed on March 31, 2009).
Servicing Agreement, dated as of August 9, 2005, among the Registrant, Willis Engine Securitization Trust,
WEST Engine Funding and 59 engine owning trusts named therein (incorporated by reference to Exhibit 10.44 to
our report on Form 10-Q filed on November 29, 2005).
Administrative Agency Agreement, dated as of August 9, 2005, among the Registrant, Willis Engine
Securitization Trust, WEST Engine Funding and 59 engine owning trusts named therein (incorporated by reference
to Exhibit 10.45 to our report on Form 10-Q filed on November 29, 2005).
Limited Liability Company Agreement of WOLF A340 LLC, dated as of December 8, 2005, between Oasis
International Leasing (USA), Inc. and the Registrant (incorporated by reference to Exhibit 10.49 to Form S-1
Registration Statement Amendment No. 1 filed on January 9, 2006).
Credit Agreement, dated as of November 18, 2009, among Willis Lease Finance Corporation, Union Bank, N.A.,
as security agent and administrative agent, and certain lenders named therein (incorporated by reference to
Exhibit 10.31 to our report on Form 10-K filed on March 16, 2010).
Independent Contractor Agreement, dated September 9, 2009, by and between Willis Lease Finance Corporation
and Hans Jorg Hunziker (incorporated by reference to Exhibit 10.32 to our report on Form 10-Q filed on May 10,
2010).
11.1 Statement re Computation of Per Share Earnings
12.1 Statements re Computation of Ratios
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 of our report on Form 10-K filed on March 16, 2010).
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
31.1
Certification of Charles F. Willis, IV, pursuant to Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Bradley S. Forsyth, pursuant to Section 1350 as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
31.2
32
* Portions of these exhibits have been omitted pursuant to a request for confidential treatment and the redacted material has
been filed separately with the Commission.
(d) Financial Statements
Financial Statements are submitted as a separate section of this report beginning on page 41.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 15, 2011
Willis Lease Finance Corporation
By:
/s/ CHARLES F. WILLIS, IV
Charles F. Willis, IV
Chairman of the Board, President, and
Chief Executive Officer
Dated:
Title
Signature
Date: March 15, 2011
Date: March 15, 2011
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ CHARLES F. WILLIS, IV
Charles F. Willis, IV
Chief Financial Officer and Senior Vice President
(Principal Finance and Accounting Officer)
/s/ BRADLEY S. FORSYTH
Bradley S. Forsyth
Date: March 15, 2011
Director
Date: March 15, 2011
Director
Date: March 15, 2011
Director
Date: March 15, 2011
Director
Date: March 15, 2011
Director
/s/ ROBERT T. MORRIS
Robert T. Morris
/s/ HANS JORG HUNZIKER
Hans Jorg Hunziker
/s/ W. WILLIAM COON, JR.
W. William Coon, Jr.
/s/ AUSTIN C. WILLIS
Austin C. Willis
/s/ GERARD LAVIEC
Gerard Laviec
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009
42
43
Consolidated Statements of Income for the years ended December 31, 2010, December 31, 2009 and December 31, 2008
44
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2010,
December 31, 2009 and December 31, 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, December 31, 2009 and December 31,
2008
Notes to Consolidated Financial Statements
45
46
47
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Willis Lease Finance Corporation:
We have audited the accompanying consolidated balance sheets of Willis Lease Finance Corporation and
subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income,
shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended
December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited financial
statement schedules I and II. We have also audited the Company’s internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements and financial statement schedules, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Willis Lease Finance Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of
their operations and cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
San Francisco, California
March 15, 2011
42
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS
Cash and cash equivalents
Restricted cash
Equipment held for operating lease, less accumulated depreciation of $192,377 and
$160,702 at December 31, 2010 and 2009, respectively
Equipment held for sale
Operating lease related receivable, net of allowances of $423 and $467 at December 31,
2010 and 2009, respectively
Notes receivable
Investments
Assets under derivative instruments
Property, equipment & furnishings, less accumulated depreciation of $3,984 and $3,305
at December 31, 2010 and 2009, respectively
Equipment purchase deposits
Other assets, net
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses
Liabilities under derivative instruments
Deferred income taxes
Notes payable, net of discount of $2,617 and $3,211 at December 31, 2010 and 2009,
respectively
Maintenance reserves
Security deposits
Unearned lease revenue
Total liabilities
December 31,
December 31,
2010
2009
$
2,225
77,013
$
2,056
59,630
998,001
7,418
8,872
747
9,381
—
6,971
2,769
12,565
1,125,962
18,099
14,274
75,645
731,632
50,442
5,726
3,174
898,992
$
$
976,822
14,263
5,783
943
10,701
3,689
7,296
2,082
14,437
1,097,702
14,352
11,584
69,118
726,235
46,752
5,481
3,387
876,909
$
$
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; 3,475,000 shares issued
and outstanding at December 31, 2010 and 2009, respectively)
Common stock ($0.01 par value, 20,000,000 shares authorized; 9,181,365 and
9,181,620 shares issued and outstanding at December 31, 2010 and 2009,
respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive loss, net of income tax benefit of $6,085 and $4,845
at December 31, 2010 and 2009, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
31,915
31,915
92
60,108
145,324
92
60,671
136,402
(10,469)
226,970
1,125,962
$
(8,287)
220,793
1,097,702
$
See accompanying notes to the consolidated financial statements.
43
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other income
Total revenue
EXPENSES
Depreciation expense
Write-down of equipment
General and administrative
Technical expense
Net finance costs:
Interest expense
Interest income
Net gain on debt extinguishment
Total net finance costs
Total expenses
Earnings from operations
Earnings from joint venture
Income before income taxes
Income tax expense
Net income
Preferred stock dividends paid and declared-Series A
Net income attributable to common shareholders
Basic earnings per common share:
Diluted earnings per common share:
Average common shares outstanding
Diluted average common shares outstanding
See accompanying notes to the consolidated financial statements.
2010
Years Ended December 31,
2009
2008
$
$
102,133
34,776
7,990
3,403
148,302
$
102,390
46,049
1,043
958
150,440
102,421
33,716
12,846
3,823
152,806
48,704
2,874
29,302
8,118
40,945
(212 )
—
40,733
129,731
44,091
6,133
26,765
7,149
36,013
(280)
(876)
34,857
118,995
37,438
6,655
27,085
3,673
38,640
(1,887)
—
36,753
111,604
18,571
31,445
41,202
1,109
942
797
19,680
(7,630 )
12,050
$
32,387
(10,020)
22,367
$
41,999
(15,398)
26,601
3,128
3,128
3,128
8,922
$
19,239
$
23,473
1.03
$
2.30
$
0.96
$
2.14
$
8,681
9,251
8,364
8,983
2.85
2.68
8,242
8,760
$
$
$
$
44
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Issued and
Outstanding
Shares of
Common
Stock
Preferred
Stock
Common
Stock
Paid-in
Capital in
Excess of par
Accumulated
Other
Comprehensive
Income/(Loss)
Retained
Earnings
Total
Shareholders’
Equity
Balances at December 31, 2007
$
31,915
8,433 $
84 $
55,712 $
(6,749) $
93,690 $
Net income
Unrealized loss from derivative instruments,
net of tax benefit of $4,685
Total comprehensive income
Preferred stock dividends paid
Shares issued under stock compensation plans
Stock-based compensation expense
Excess tax benefit from stock-based compensation
—
—
—
—
—
—
—
—
—
645
—
—
—
—
—
7
—
—
—
—
—
405
1,693
129
—
26,601
(8,152 )
—
—
—
—
—
(3,128 )
—
—
—
Balances at December 31, 2008
$
31,915
9,078 $
91 $
57,939 $
(14,901) $ 117,163 $
Net income
Unrealized gain from derivative instruments,
net of tax expense of $3,726
Total comprehensive income
Preferred stock dividends paid
Shares repurchased
Shares issued under stock compensation plans
Stock-based compensation expense
Excess tax benefit from stock-based compensation
—
—
—
—
—
—
—
—
—
—
(3 )
107
—
—
—
—
—
—
1
—
—
—
—
—
(40)
73
2,435
264
—
22,367
6,614
—
—
—
—
—
—
—
—
—
—
Balances at December 31, 2009
$
31,915
9,182 $
92 $
60,671 $
(8,287) $ 136,402 $
Net income
Unrealized loss from derivative instruments,
net of tax benefit of $1,242
Total comprehensive income
Preferred stock dividends paid
Shares repurchased
Shares issued under stock compensation plans
Stock-based compensation expense
Excess tax benefit from stock-based compensation
—
—
—
—
—
—
—
—
—
—
(367 )
366
—
—
—
—
—
(4)
4
—
—
—
—
—
(4,152)
489
2,678
422
—
12,050
(2,182 )
—
—
—
—
—
—
(3,128 )
—
—
—
—
174,652
26,601
(8,152)
18,449
(3,128)
412
1,693
129
192,207
22,367
6,614
28,981
(40)
74
2,435
264
220,793
12,050
(2,182)
9,868
(3,128)
(4,156)
493
2,678
422
(3,128 )
(3,128)
Balances at December 31, 2010
$
31,915
9,181 $
92 $
60,108 $
(10,469) $ 145,324 $
226,970
See accompanying notes to the consolidated financial statements.
45
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Write-down of equipment
Stock-based compensation expenses
Amortization of deferred costs
Amortization of loan discount
Amortization of interest rate derivative cost
Allowances and provisions
Gain on sale of leased equipment
Gain on sale of leased equipment deposits
Gain on sale of interest in joint venture
Gain on insurance settlement
Settlement of interest rate derivative
Income from joint venture, net of distributions
Net gain on debt extinguishment
Deferred income taxes
Changes in assets and liabilities:
Receivables
Notes receivable
Other assets
Accounts payable and accrued expenses
Restricted cash
Maintenance reserves
Security deposits
Unearned lease revenue
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of equipment held for operating lease (net of selling expenses)
Proceeds from sale of equipment deposits (net of selling expenses)
Proceeds from sale of interest in joint venture
Restricted cash for investing activities
Proceeds from insurance settlement
Excess distributions from joint venture
Purchase of equipment held for operating lease
Purchase of property, equipment and furnishings
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of notes payable
Debt issuance cost
Distribution to preferred stockholders
Proceeds from shares issued under stock compensation plans
Excess tax benefit from stock-based compensation
Repurchase of common stock
Principal payments on notes payable
Net cash provided by (used in) financing activities
Increase/(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest
Income Taxes
Supplemental disclosures of non-cash investing activities:
During the years ended December 31, 2010, 2009, 2008, a liability of $6,099, $0 and $587,
respectively, was incurred but not paid in connection with our purchase of aircraft and
engines.
See accompanying notes to the consolidated financial statements.
46
Years Ended December 31,
2009
2010
2008
$
12,050
$
22,367
$
26,601
48,704
2,874
2,678
5,246
594
2,956
(44)
(7,990)
—
(2,020)
—
—
(160)
—
7,767
(3,045)
196
(3,108)
3,596
(17,383)
3,690
245
(213)
56,633
63,777
—
3,500
—
—
—
(121,509)
(399)
(54,631)
174,841
(268)
(3,128)
493
422
(4,156)
(170,037)
(1,833)
169
2,056
44,091
6,133
2,435
4,521
676
258
570
(1,043)
(400)
—
—
(2,557)
(267)
(876)
9,273
1,657
(943)
(430)
(2,511)
9,395
(2,406)
302
(1,996)
88,249
25,493
6,580
—
169
—
—
(205,132)
(199)
(173,089)
397,630
(4,201)
(3,128)
74
264
(40)
(312,321)
78,278
(6,562)
8,618
37,438
6,655
1,693
4,831
595
—
278
(12,846)
—
—
(2,211)
—
(231)
—
14,172
(2,738)
—
(3,421)
611
(18,349)
(323)
(711)
90
52,134
99,493
—
—
14,116
3,500
124
(233,748)
(1,593)
(118,108)
394,682
(3,477)
(3,128)
412
129
—
(321,260)
67,358
1,384
7,234
$
$
$
2,225
$
2,056
$
8,618
17,629
549
$
$
16,496
544
$
$
30,994
2,269
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Willis Lease Finance Corporation (“Willis” or the “Company”) is a provider of aviation services whose primary
focus is providing operating leases of commercial aircraft engines and other aircraft-related equipment to air carriers,
manufacturers and overhaul/repair facilities worldwide. Willis also engages in the selective purchase and resale of
commercial aircraft engines. WLFC (Ireland) Limited, WLFC Funding (Ireland) Limited and WLFC Lease (Ireland) Limited
are wholly-owned Irish subsidiaries of Willis formed to facilitate certain of Willis’ international leasing activities. Willis
Lease France is a wholly-owned French subsidiary of Willis formed to facilitate the conduct of sales and marketing activities
in Europe.
Willis Engine Securitization Trust (“WEST”) is a bankruptcy remote special purpose vehicle which was established
for the purpose of financing aircraft engines through an asset-backed securitization. WEST Engine Funding LLC (“WEF”) is
a wholly-owned subsidiary of WEST and owns the engines which secure the notes issued by WEST. WEST Engine Funding
(Ireland) Limited is another wholly-owned subsidiary of WEST and was established to facilitate certain international leasing
activities by WEF.
Management considers the continuing operations of our company to operate in one reportable segment.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Willis, WEST, WEF, WEST Engine Funding (Ireland)
Limited, WLFC (Ireland) Limited, WLFC Funding (Ireland) Limited, WLFC Lease (Ireland) Limited and Willis Lease
France (together, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
(c) Revenue Recognition
Revenue from leasing of aircraft equipment is recognized as operating lease revenue straight-line over the terms of
the applicable lease agreements. Revenue is not recognized when cash collection is not reasonably assured. When
collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash
payments are received.
We regularly sell equipment from our lease portfolio. This equipment may or may not be subject to a lease at the
time of sale. The gain or loss on such sales is recognized as revenue and consists of proceeds associated with the sale less the
net book value of the asset sold and any direct costs associated with the sale. To the extent that deposits associated with the
engine are not included in the sale we include any such amount in our calculation of gain or loss.
In the year ended December 31, 2008, the Company sold a portfolio of ten engines to an investor group for $63.0
million. In the year ended December 31, 2010, the Company sold four engines to an investor group for $32.9 million. After
the date of each sale, the Company retains responsibility to manage the engines that were sold to the investor group. Because
the arrangements have multiple deliverables, the Company evaluated the arrangements under Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition: Multiple Element Arrangements
(“FASB ASC 605-25”), formerly Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, which addresses accounting for multiple element arrangements. The Company has determined that the two
deliverables under the arrangements, the sale of the engines and the management services, are separate units of accounting.
Therefore, revenue is recognized in accordance with FASB ASC 605-10-S99, Revenue Recognition: Overall: SEC Materials,
formerly SAB 104, for each unit.
One requirement of FASB ASC 605-25 for the two deliverables to be accounted for as separate units of accounting
is that management can determine the fair value of the undelivered item (the management services), when the first item (the
sale of engines) is delivered. Assessing fair value evidence requires judgment. In determining fair value, the Company has
reviewed information from management agreements entered into by other parties on a standalone basis, compared it to the
management agreements entered into with the investor group and determined that the fees charged on a standalone basis were
comparable to the fees charged when the Company entered into the management agreement concurrent with the sale of the
47
portfolio of engines. Accordingly, the Company determined that the fees charged for its management services were
comparable to those charged by other asset managers for the same service. As such, the Company has concluded that
evidence exists to support its assessment of the fair value of the management services.
Based on the conclusion that the sale of engines and the management services can be accounted for separately, the
Company recognized a $11.1 million gain on sale of the ten engine portfolio in the year ended December 31, 2008 and
recognized a $7.2 million gain on sale of the four engines in the year ended December 31, 2010. The gain recorded was the
difference between the sales price and the net book value of the engines sold.
The Company recognizes revenue from management fees under equipment management agreements as earned on a
monthly basis. Management fees are based upon a percentage of net lease rents of the investor group’s engine portfolio
calculated on an accrual basis and recorded in Other income.
Under the terms of some of our leases, the lessees pay use fees (also known as maintenance reserves) to us based on
usage of the leased asset, which are designed to cover expected future maintenance costs. Some of these amounts are
reimbursable to the lessee if they make specifically defined maintenance expenditures. 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 or the lease terminates, at which time they are
recognized in revenue as maintenance reserve revenue.
Certain lessees may be significantly delinquent in their rental payments and may default on their lease obligations.
As of December 31, 2010, we had an aggregate of approximately $1.5 million in lease rent and $1.2 million in maintenance
reserve payments more than 30 days past due. Our inability to collect receivables or to repossess engines or other leased
equipment in the event of a default by a lessee could have a material adverse effect on us.
Our largest customer accounted for approximately 14.1% of total revenue during 2010. This customer had $70,000
in past due rents as of December 31, 2010. No other customer accounted for greater than 10% of total revenue in 2010, 2009
and 2008.
(d) Equipment Held for Operating Lease
Aircraft assets held for operating lease are stated at cost, less accumulated depreciation. Certain costs incurred in
connection with the acquisition of aircraft assets are capitalized as part of the cost of such assets. Major overhauls paid for by
us, which improve functionality or extend original useful life, are capitalized and depreciated over the estimated remaining
useful life of the equipment. The cost of overhauls of aircraft assets under long term leases, for which the lessee is
responsible for maintenance during the period of the lease, are paid for by the lessee or from reimbursable maintenance
reserves paid to the Company in accordance with the lease, and are not capitalized.
Based on specific aspects of the equipment, we generally depreciate engines on a straight-line basis over a 15-year
period from the acquisition date to a 55% residual value. We believe that this methodology accurately reflects our typical
holding period for the assets and, that the residual value assumption reasonably approximates the selling price of the assets 15
years from date of acquisition.
For engines or aircraft that are unlikely to be repaired at the end of the current expected useful lives, we depreciate
the engines or aircraft over their estimated lives to a residual value based on an estimate of the wholesale value of the parts
after disassembly.
The spare parts packages owned by us are depreciated on a straight-line basis over an estimated useful life of 15
years to a 25% residual value. The aircraft owned by us are depreciated on a straight-line basis over an estimated useful life
of 13 to 20 years to a 15% to 17% residual value.
The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and certain
identifiable intangibles to be disposed are reported at the lower of carrying amount or fair value less cost to sell. Impairment
is identified by comparison of undiscounted forecast cash flows, including estimated sales proceeds, over the life of the asset
with the assets’ book value. If the forecast undiscounted cash flows are less than the book value the asset is written down to
its fair value. Fair value is determined per individual asset by reference to independent appraisals, quoted market prices (e.g.
an offer to purchase) and other factors considered relevant by Management. We conduct a formal annual review of the
carrying value of long-lived assets and also evaluate assets during the year if we note a triggering event indicating an
48
impairment is possible. Such reviews resulted in impairment charges for engines and aircraft of $0.2 million, $3.0 million and
$6.1 million (disclosed separately as “Write-down of equipment” in the Consolidated Statements of Income) in 2010, 2009
and 2008, respectively.
(e) Debt Issuance Costs and Related Fees
To the extent that we are required to pay fees in order to secure debt, such fees are capitalized and amortized over
the life of the related loan using the effective interest method.
(f) Maintenance and Repair Costs
Maintenance and repair costs under our leases are generally the responsibility of the lessees. Under many of our
leases, lessees pay periodic use fees (often called maintenance reserves) to us based on the usage of the asset. Under the terms
of some of our leases, the lessees pay amounts to us based on usage, which are designed to cover the expected maintenance
cost. Some of these amounts are reimbursable to the lessee if they make specifically defined maintenance expenditures.
Use fees billed are recognized in maintenance reserve revenue if they are not reimbursable to the lessee. Use fees
that are reimbursable are included in maintenance reserve liability until they are reimbursed to the lessee or the lease
terminates, at which time they are recognized in 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. Major overhauls paid for by us, which improve functionality or extend original useful life, are
capitalized and depreciated over the estimated remaining useful life of the equipment.
(g)
Interest Rate Hedging
We have entered into various derivative instruments to mitigate our exposure on our variable rate borrowings. The
derivative instruments are fixed-rate interest swaps and are recorded at fair value as either an asset or liability.
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. In order to apply hedge
accounting, the transaction must be designated as a hedge and it 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. All of the transactions that we have designated as hedges are cash flow hedges. The effective portion of the change in
fair value on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive
income and is reclassified into earnings in the period during which the transaction being hedged affects earnings. The
ineffective portion of the hedges are recorded in earnings in the current period.
(h) Income Taxes
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates
applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in the tax rates is recognized in income in the period that includes the
enactment date.
The Company recognizes in the financial statements the impact of a tax position, if that position is more likely than
not of being sustained on audit, based on the technical merits of the position. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. We did not carry any specified tax reserves as of December 31, 2007.
Since adoption, we evaluated income tax uncertainty risk areas and exposures and reserved $176,000 as of December 31,
2008. We did not carry any specified tax reserves as of December 31, 2009. As of December 31, 2010, we reserved $113,000
for tax exposure in the UK. If the Company is able to eventually recognize these uncertain tax positions, all of the
unrecognized benefit would reduce the Company’s effective tax rate.
The Company files income tax returns in various states and countries which may have different statutes of
limitations. The open tax years for federal and state tax purposes are from 2007-2009 and 2006-2009, respectively. The
Company records penalties and accrued interest related to uncertain tax positions in income tax expense. Such adjustments
have historically been minimal and immaterial to our financial results.
49
(i) Property, Equipment and Furnishings
Property, equipment and furnishings are recorded at cost and depreciated using the straight-line method over the
estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are recorded at
cost and depreciated by the straight-line method over the shorter of the lease term or useful life of the leasehold.
(j) Cash and Cash Equivalents
We consider highly liquid investments readily convertible into known amounts of cash, with original maturities of
90 days or less, as cash equivalents.
(k) Restricted Cash
We have certain bank accounts that are subject to restrictions in connection with our WEST borrowings. Under
WEST, 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 us. Additionally, maintenance reserve payments and lease security deposits
are accumulated in restricted accounts and are not available for general use.
Cash from maintenance reserve payments are held in the restricted cash account and are subject to a minimum
balance established annually based on an engine portfolio maintenance reserve study provided by a third party. This structure
was incorporated into the Indenture in December 2007, which resulted in the redeployment of cash that is now available to
fund future engine purchases. Any excess maintenance reserve amounts remain within the restricted cash accounts and are
utilized for the purchase of new engines. Engines purchased with these funds are not included as part of the borrowing
capacity for WEST. Maintenance reserve accounts are only available to meet the costs of specified engine maintenance or
repair provisions and can be reimbursed to the lessee. In the event an engine is sold, accumulated maintenance reserves
remaining after the sale may be used for new engine purchases.
Security deposits are held until the end of the lease, at which time provided return conditions have been met, the
deposit will be returned to the lessee. To the extent return conditions are not met, these deposits may be retained by us.
Further, WEST deposits cash in the Senior Restricted Cash Account in an amount equal to 4% of the sum of the outstanding
principal balance of the Series 2005-A1 notes and in the Junior Restricted Cash Account in an amount equal to 3% of the sum
of the outstanding principal balances of all Series of Series B notes. A Senior Liquidity Facility was established in
December 2007 which replaced the need to maintain cash reserves for the Series 2007-A2 notes and the Series 2008-A1
notes.
(l) Notes Receivable
Notes receivable are recorded net of any unamortized fees and incremental direct costs. Amortization of any fees is
recorded over the term of the related loan. As applicable, interest income on the notes receivable is accrued as earned. We
evaluate the collectability of both interest and principal for each note receivable to determine whether it is impaired, based on
current information and events. Once collectability is not reasonably assured, interest income is recognized on a cash basis,
unless we determine the note should be on the cost recovery method, and any cash payments received would then be reflected
as a reduction of principal.
(m) Management Estimates
These financial statements have been prepared on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States.
The preparation of 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. We base our estimates on historical experience and on various other assumptions that are believed 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. Actual results may differ from these estimates under different assumptions or conditions.
Management believes that the accounting policies on revenue recognition, maintenance reserves and expenditures,
useful life of equipment, asset residual values, asset impairment and allowance for doubtful accounts are critical to the results
of operations.
50
If the useful lives or residual values are lower than those estimated by us, upon sale of the asset a loss may be
realized. Significant management judgment is required in the forecasting of future operating results, which are used in the
preparation of projected undiscounted cash-flows and should different conditions prevail, material impairment write-downs
may occur.
(n) Per share information
Basic earnings per common share is computed by dividing net income by the weighted-average number of common
shares outstanding during the period. The computation of fully diluted earnings per share is similar to the computation of
basic earnings per share, except for the inclusion of all potentially dilutive common shares. The reconciliation between basic
common shares and fully diluted common shares is presented below:
Shares:
Weighted-average number of common shares outstanding
Potentially dilutive common shares
Total shares
Potential common stock excluded as anti-dilutive in period
(o) Investments
2010
Years Ended December 31,
2009
(in thousands)
2008
8,681
570
9,251
4
8,364
619
8,983
39
8,242
518
8,760
111
We have one investment in a joint venture where we own 50% of the equity of the venture and we have significant
influence. We account for this investment using the equity method of accounting. The investment is recorded at the amount
invested plus or minus our 50% share of net income or loss less any distributions or return of capital received from the entity.
We also had an investment in a non-marketable security where management did not have significant influence and it
was recorded at cost. The investment was sold in November 2010. Management evaluated the investment for impairment
quarterly. No adjustment to the carrying value was required during the periods presented.
(p) Stock Based Compensation
We recognize compensation expense in the financial statements for share-based awards based on the grant-date fair
value of those awards. Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is
recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the
vesting term.
(q) Initial Direct Costs associated with Leases
We account for the initial direct costs, including sales commission and legal fees, incurred in obtaining a new lease
by deferring and amortizing those costs over the term of the lease. The amortization of these costs is recorded under General
and Administrative expenses in the Consolidated Statements of Income. The amounts amortized were $1.6 million,
$1.6 million and $2.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(r) Fair Value Measurements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which expanded the required
disclosures about fair value measurements. In particular, this guidance requires (i) separate disclosure of the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers,
(ii) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3
fair value measurements, (iii) fair value measurement disclosures for each class of assets and liabilities and (iv) disclosures
about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value
measurements for fair value measurements that fall in either Level 2 or Level 3. The adoption of this guidance did not have a
material effect on our financial condition or results of operations.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable
51
inputs and minimize the use of unobservable inputs, to the extent possible. The standard describes a fair value hierarchy
based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used
to measure fair value which are the following:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
As of December 31, 2010, we measure the fair value of our interest rate swaps of $430.0 million (notional amount)
based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company
estimates the fair value of derivative instruments using a discounted cash flow technique and, at December 31, 2010, has used
creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-
performance. We have interest rate swap agreements which have a net liability fair value of $14.3 million and $7.9 million as
of December 31, 2010 and December 31, 2009, respectively. In 2010 and 2009, $18.6 million and $16.2 million,
respectively, were realized through the income statement as an increase in interest expense.
The following table shows by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value
as of December 31, 2010 and 2009:
December 31, 2010
December 31, 2009
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets and (Liabilities) at Fair Value
Derivatives
Total
$ (14,274) $
$ (14,274) $
— $ (14,274) $
— $ (14,274) $
(in thousands)
— $
— $
(7,985) $
(7,985) $
— $
— $
(7,985) $
(7,985) $
—
—
The following table shows the fair value activity, measured by Level 3 inputs, as of December 31, 2010 and 2009:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning balance, January 1, 2009
Total gains or losses (realized/unrealized)
Included in earnings
Included in other comprehensive income
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Ending balance, December 31, 2009
Total gains or losses (realized/unrealized)
Included in earnings
Included in other comprehensive income
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Ending balance, December 31, 2010
(in thousands)
$
(20,534)
—
—
—
20,534
—
—
—
—
—
—
$
$
In 2010 and 2009, all hedges were effective and no change in fair value was recorded in earnings.
52
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
We determine fair value of long-lived assets held and used, such as Equipment held for sale, by reference to
independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors. An impairment charge is recorded
when the carrying value of the asset exceeds its fair value.
The following table shows by level, within the fair value hierarchy, the Company’s assets measured at fair value on
a nonrecurring basis as of December 31, 2010 and 2009, and the gains (losses) recorded as of December 31, 2010 and 2009
on those assets:
Total
December 31, 2010
Level 2
Level 1
Assets at Fair Value
Level 3
Total
(in thousands)
December 31, 2009
Level 2
Level 1
Total Losses
December 31,
Level 3
2010
2009
(in thousands)
Equipment held for operating
lease
$
275 $ — $
Equipment held for sale
Total
4,734
—
3,970
$ 5,009 $ — $ 4,245 $
275 $ — $ — $ — $ — $ — $
(215) $ (3,021)
(3,112)
764
764 $ 5,305 $ — $ 5,305 $ — $ (2,874) $ (6,133)
(2,659)
5,305
5,305
—
—
We determine fair value of long-lived assets held and used by reference to independent appraisals, quoted market
prices (e.g., an offer to purchase) and other factors. At December 31, 2010, the Company used Level 2 inputs to measure the
fair value of long-lived assets held and used. These assets, with a carrying amount of $0.5 million, were written down to their
fair value of $0.3 million, resulting in an impairment charge of $0.2 million, which was included in earnings in 2010. In
2009, long-lived assets held and used with a carrying amount of $19.2 million were written down to their fair value of $16.2
million, resulting in an impairment charge of $3.0 million. As of December 31, 2009, all the long-lived assets held and used
that had been written down in the year had been transferred to Equipment held for sale. At December 31, 2010, the Company
used Level 2 inputs and, due to a portion of the valuations requiring management judgment due to the absence of quoted
market prices, Level 3 inputs to measure the fair value of engines that were held as consignment inventory with third parties.
An asset write-down of $2.7 million and $3.1 million was recorded in 2010 and 2009, respectively, based upon a comparison
of the asset net book values with the revised net proceeds expected from part sales arising from consignment of the engines.
(s) Recent Accounting Pronouncements
In June 2009, the FASB issued an amendment to FASB ASC 810, Consolidation, formerly SFAS No. 167,
Amendments to FASB Interpretation No. 46(R). FASB ASC 810 is intended to (1) address the effects on certain provisions of
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the
elimination of the qualifying special-purpose entity concept in FASB ASC 860, and (2) constituent concerns about the
application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under
the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable
interest entity. This statement was applied as of January 1, 2010, and did not have an impact on our Consolidated Financial
Statements.
In September 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which
addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. ASU 2009-13 will require the companies to allocate the overall
consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in
the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. The adoption of ASU 2009-13 did not have a material impact on our Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which
requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including
significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective
for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are
effective for annual periods beginning after December 15, 2010. Other than requiring additional disclosures, the adoption of
ASU 2010-6 did not have a material impact on our Consolidated Financial Statements.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses. The new disclosure guidance will significantly expand the existing requirements and will
53
lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new
disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting
periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU,
such as the allowance roll-forward and modification disclosures, will be required for periods beginning after December 15,
2010. The adoption of ASU 2010-20 did not have a material impact on our Consolidated Financial Statements.
During 2010, the FASB issued several ASU’s — ASU No. 2010-01 through ASU No. 2010-29. Except for those
ASU’s discussed above, the ASU’s entail technical corrections to existing guidance or affect guidance related to specialized
industries or entities and therefore do not have a material impact on the Company’s financial position and results of
operations.
(t) Subsequent Events
We have evaluated subsequent events through the date that the financial statements were issued. On January 18,
2011, we purchased the WEST Series 2005-B1 notes for $17.9 million (the then-unpaid principal amount of the 2005-B1
notes) with the proceeds of a term loan made by the bank which was the prior note holder. This term loan is secured by a
pledge of the WEST Series 2005-B1 notes to the lender. Interest on this term loan is one-month LIBOR plus a margin of
3.00%. The term of this loan is five years and the loan amortization is consistent with the amortization on the underlying
WEST Series 2005-B1 notes, with a bullet payment required at the end of the five year term. Effective January 21, 2011, we
exercised our option under the revolving credit facility to increase the size of this facility to $285.0 million.
(2) Equipment Held for Lease
At December 31, 2010, we had 179 aircraft engines and related equipment with a cost of $1,170.8 million, four
spare parts packages with a cost of $5.7 million and three aircraft with a cost of $13.9 million, in our operating lease
portfolio. At December 31, 2009, we had 169 aircraft engines and related equipment with a cost of $1,113.6 million, three
spare parts packages with a cost of $5.1 million and four aircraft with a cost of $18.8 million, in our operating lease portfolio.
A majority of our aircraft equipment is leased and operated internationally. All leases relating to this equipment are
denominated and payable in U.S. dollars.
54
We lease our aircraft equipment to lessees domiciled in eight geographic regions. The tables below set forth
geographic information about our leased aircraft equipment grouped by domicile of the lessee (which is not necessarily
indicative of the asset’s actual location):
Lease rent revenue
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Totals
Lease rent revenue less applicable depreciation and interest
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Off-lease and other
Totals
Net book value of equipment held for operating lease
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Off-lease and other
Totals
2010
Years Ended December 31,
2009
(in thousands)
2008
22,662
6,367
1,662
32,604
14,380
18,413
432
5,613
102,133
$
$
21,944
5,548
1,264
31,057
16,575
19,164
480
6,358
102,390
$
$
20,933
6,876
825
31,692
14,701
22,860
574
3,960
102,421
2010
Years Ended December 31,
2009
(in thousands)
2008
11,371
3,686
957
13,313
6,812
7,014
246
2,859
(9,923 )
36,335
$
$
12,059
3,203
831
15,916
6,806
8,778
316
3,824
(8,198)
43,535
$
$
9,271
2,195
420
12,555
4,750
10,085
302
1,571
(4,363)
36,786
2010
Years Ended December 31,
2009
(in thousands)
2008
170,742
59,869
14,786
345,256
84,238
180,936
12,268
46,791
83,115
998,001
$
$
187,598
46,557
9,416
245,683
143,608
143,979
4,118
63,043
132,820
976,822
$
$
144,696
38,920
9,713
225,055
134,430
161,605
—
46,023
69,297
829,739
$
$
$
$
$
$
55
As of December 31, 2010 and 2009, the lease status of the equipment held for operating lease was as follows:
Lease Term
Off-lease and other
Month-to-month leases
Leases expiring 2011
Leases expiring 2012
Leases expiring 2013
Leases expiring 2014
Leases expiring 2015
Leases expiring thereafter
Lease Term
Off-lease and other
Month-to-month leases
Leases expiring 2010
Leases expiring 2011
Leases expiring 2012
Leases expiring 2013
Leases expiring 2014
Leases expiring thereafter
December 31, 2010
Net Book Value
(in thousands)
83,115
142,544
324,992
101,612
83,171
43,899
54,430
164,238
998,001
December 31, 2009
Net Book Value
(in thousands)
132,820
95,956
312,558
124,515
65,999
69,447
38,721
136,806
976,822
$
$
$
$
As of December 31, 2010, minimum future payments under non-cancelable leases were as follows:
Year
2011
2012
2013
2014
2015
Thereafter
(3) Notes Receivable
(in thousands)
67,936
46,819
35,550
27,883
21,791
34,848
234,827
$
$
At December 31, 2010 and 2009, we had Notes receivable of $0.7 million and $0.9 million, respectively. As of
December 31, 2010, the Company had four notes relating to lease rents and maintenance reserves owing from two lessees for
four leased engines. Three of the notes are payable over the remaining twelve month period with interest payable at 8.5% per
annum, with a final payment due in December 2011. The fourth note is due in full in May 2012.
56
(4) Investments
In July 1999, we entered into an agreement to participate in a joint venture formed as a limited company - Sichuan
Snecma Aero-engine Maintenance Co. Ltd. (“Sichuan Snecma”) for the purpose of providing airlines in the Asia Pacific area
with modern maintenance, leased engines and spare parts. Sichuan Snecma focuses on providing maintenance services for
CFM56 series engines and is located in Chengdu, China. Our investment of $1.48 million (2009, $1.48 million) represents a
4.6% interest in the joint venture. On November 8, 2010, the sale of the Company’s interest in Sichuan Snecma was
completed. The sales proceeds totaled $3.5 million, resulting in a gain of $2.0 million on the sale which was recorded as
Other income in the current period.
We hold a fifty percent membership interest in a joint venture, WOLF A340, LLC, a Delaware limited liability
company, (“WOLF”). On December 30, 2005, WOLF completed the purchase of two Airbus A340-313 aircraft from Boeing
Aircraft Holding Company for a purchase price of $96.0 million. The purchase was funded by four term notes with one
financial institution totaling $76.8 million, with interest payable at LIBOR plus 1.0% to 2.5% and maturing in 2013. These
aircraft are currently on lease to Emirates until 2013. Our investment in the joint venture is $9.4 million and $9.2 million as
of December 31, 2010 and December 31, 2009, respectively.
Year Ending December 31, 2010 and 2009
Investment in WOLF A340, LLC as of December 31, 2008
Investment
Earnings from joint venture
Distribution
Investment in WOLF A340, LLC as of December 31, 2009
Investment
Earnings from joint venture
Distribution
Investment in WOLF A340, LLC as of December 31, 2010
(in thousands)
8,954
—
942
(675)
9,221
—
1,109
(949)
9,381
$
$
$
57
(5) Notes Payable
Notes payable consisted of the following:
As of December 31,
2010
2009
(in thousands)
Credit facility at a floating rate of interest of LIBOR plus 3.50%, secured by engines.
The facility has a committed amount of $240.0 million, which revolves until the
maturity date of November 2012.
$
186,000
$
222,500
WEST Series 2005-A1 term notes payable of $114.9 million (2009, $130.1 million)
payable at a floating rate of interest based on LIBOR plus 1.25%, maturing in
July 2018; and $18.1 million (2009, $20.0 million) Series 2005-B1 term notes
payable at LIBOR plus 6.00%, maturing in July 2020. Secured by engines.
132,983
150,022
WEST Series 2008-A1 term notes payable, a floating rate of interest based on LIBOR
plus 1.50%, maturing in March 2021. Secured by engines.
167,457
183,795
WEST Series 2007-A2 warehouse notes payable of $174.8 million (2009, $127.0
million) payable at a floating rate of interest based on LIBOR plus 1.25%, maturing
in January 2024; and $25.0 million (2009, $18.4 million) Series 2007-B2 warehouse
notes payable at LIBOR plus 2.75%, maturing in January 2026. Secured by engines.
Note payable at a floating rate of LIBOR plus 4.00%, maturing in December 2011.
Secured by Series 2008-B1 notes ($16.6 million).
Note payable at a fixed interest rate of 4.50%, maturing in January 2014.
Secured by engines.
Note payable at a fixed interest rate of 8.00%, unsecured, maturing in December 2013.
Note payable at a floating rate of LIBOR plus 1.20%, maturing in October 2011.
Secured by an aircraft.
Note payable at a floating rate of LIBOR plus 1.50%, maturing in October 2011.
Secured by an aircraft.
199,790
145,415
20,000
20,000
20,936
1,500
—
1,500
5,299
5,601
284
613
Total notes payable before discount
$
734,249
$
729,446
WEST Series 2005-A1 term notes discount, $3,000 at issuance, and
WEST Series 2008-A1 term notes discount, $2,888 at issuance, net of amortization
(2,617)
(3,211)
Total notes payable
$
731,632
$
726,235
At December 31, 2010, one-month LIBOR was 0.26%. At December 31, 2009, the one-month LIBOR rate was
0.23%.
Principal outstanding at December 31, 2010, is repayable as follows:
Year
2011 (includes $20.0 million outstanding on senior term loan)
2012 (includes $186.0 million outstanding on revolving credit facility)
2013
2014
2015
Thereafter
58
(in thousands)
$
$
74,185
235,861
51,362
65,306
48,489
259,046
734,249
Certain of the debt instruments above have covenant requirements such as minimum tangible net worth, maximum
balance sheet leverage and various interest coverage ratios. The Company also has certain negative financial covenants such
as liens, advances, change in business, sales of assets, dividends and stock repurchase. These covenants are tested quarterly
and the Company was in full compliance with all covenant requirements at December 31, 2010.
At December 31, 2010, notes payable consists of loans totaling $731.6 million (net of discounts of $2.6 million)
payable over periods of 10 months to approximately 15 years with interest rates varying between approximately 1.5% and
8.0% (excluding the effect of our interest rate derivative instruments). At December 31, 2010 and at December 31, 2009, we
had warehouse and revolving credit facilities totaling approximately $440.0 million. At December 31, 2010, and
December 31, 2009, respectively, approximately $54.2 million and $72.1 million were available under these combined
facilities. The decrease in availability in 2010 was due to the drawdown of funds from the facilities to support engine
purchases. The significant facilities are described below.
At December 31, 2010, we had a $240.0 million revolving credit facility to finance the acquisition of aircraft
engines for lease as well as for general working capital purposes. We closed on this facility on November 20, 2009 and the
proceeds of the new facility, net of $3.5 million in debt issuance costs, was used to pay off the balance remaining from our
prior revolving facility. As of December 31, 2010, $54.0 million was available under this facility. The revolving facility ends
in November 2012. The interest rate on this facility at December 31, 2010 was one-month LIBOR plus 3.50%. Under the
revolver facility, all subsidiaries except Willis Engine Securitization Trust (“WEST”) and WEST Engine Funding LLC
jointly and severally guarantee payment and performance of the terms of the loan agreement. The guarantee would be
triggered by a default under the agreement. Effective January 21, 2011, we exercised our option under the facility to increase
the size of this facility to $285.0 million.
On January 11, 2010, we closed on a new term loan for a four year term totaling $22.0 million, the proceeds of
which were used to pay down the balance under our revolving credit facility. At December 31, 2010, $20.9 million was
outstanding under this loan. Interest is payable at a fixed rate of 4.50% and principal and interest is paid quarterly. This loan
is secured by three engines.
On August 9, 2005, we closed an asset-backed securitization through WEST, a bankruptcy remote Delaware
Statutory Trust, which is the issuer of various series of term notes and warehouse notes secured by a portfolio of engines. At
December 31, 2010, $300.4 million of WEST term notes and $199.8 million of WEST warehouse notes were outstanding.
The WEST term notes are divided into $114.9 million Series 2005-A1 notes, $167.5 million Series 2008-A1 notes and $18.1
million Series 2005-B1 notes. The WEST warehouse notes are divided into $174.8 million Series 2007-A2 notes and $25.0
million Series 2007-B2 notes.
The Series 2005-A1 and Series 2005-B1 notes were issued on August 9, 2005 in the original principal amounts of
$200.0 million and $28.3 million, respectively. The interest rate on the Series 2005-A1 and Series 2005-B1 notes equals one-
month LIBOR plus a margin of 1.25% and 6.00%, respectively. The Series 2005-A1 term notes’ expected maturity is
July 2018 and the Series 2005-B1 term notes’ expected maturity is July 2020.
The Series 2008-A1 and Series 2008-B1 notes were issued on March 28, 2008 in the original principal amounts of
$212.4 million and $20.3 million, respectively. The interest rate on the Series 2008-A1 and Series 2008-B1 notes equals one-
month LIBOR plus a margin of 1.50% and 3.50%, respectively. The Series 2008-A1 term notes’ expected maturity is
March 2021 and the Series 2008-B1 term notes’ expected maturity is March 2023.
The Series 2007-A2 and Series 2007-B2 notes were issued on December 13, 2007 in the original principal amounts
of $175.0 million and $25.0 million, respectively. The interest rate on the Series 2007-A2 notes and the Series 2007-B2
notes at December 31, 2010 is equal to one-month LIBOR plus a margin of 1.25% and 2.75%, respectively. Effective as of
February 14, 2011, those interest rates will increase to one-month LIBOR plus a margin of 1.75% and 3.75%, respectively.
The Series 2007-A2 and Series 2007-B2 notes originally allowed for borrowings of up to $200.0 million in the aggregate
through December 15, 2010. Effective as of February 14, 2011, the outstanding principal balances of $174.8 million and
$25.0 million borrowed under these notes were converted to term loans which amortize on a monthly basis until their
maturity. The Series 2007-A2 notes’ expected maturity is January 2024 and the Series 2007-B2 notes’ expected maturity is
January 2026.
WEST also entered into a Senior Liquidity Facility on December 13, 2007 which expires on the final maturity date
of the Series 2008-A1 term notes in March 2021. The maximum facility size is 4% of the outstanding Series 2007-A2 notes
and Series 2008-A1 notes. This facility replaced the requirement to maintain 4% cash reserves for the 2007-A2 notes and the
Series 2008-A1 notes. The facility may be drawn on any payment date should the cash flow at WEST be insufficient to pay
59
interest on the Series 2007-A2 notes, Series 2008-A1 notes and any required hedge payments. A commitment fee is payable
on the facility. The establishment of this facility resulted in the release of $7.1 million of cash held previously in the Senior
Restricted Cash Account in December 2007.
The assets of WEST and WEST Engine Funding LLC are not available to satisfy our obligations or any of our
affiliates. WEST is consolidated for financial statement presentation purposes. WEST’s ability to make distributions and pay
dividends to us is subject to the prior payments of its debt and other obligations and WEST’s maintenance of adequate
reserves and capital. Under WEST, 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 us. Additionally, maintenance reserve
payments and lease security deposits are accumulated in restricted accounts and are not available for general use. Cash from
maintenance reserve payments is held in the restricted cash account and is subject to a minimum balance established annually
based on an engine portfolio maintenance reserve study provided by a third party. Any excess maintenance reserve amounts
remain within the restricted cash accounts and may be utilized for the purchase of new engines.
On June 30, 2008, we purchased the WEST Series 2008-B1 notes for $19.8 million (the then-unpaid principal
amount of the 2008-B1 notes) with the proceeds of a $20.0 million term loan made by an affiliate of the prior note holder.
This term loan is secured by a pledge of the WEST Series 2008-B1 notes to the lender. The term loan was originally for a
term of two years with maturity on July 1, 2010 with no amortization with all amounts due at maturity. On May 3, 2010, the
Company extended the maturity date from July 1, 2010 to December 31, 2010 and amended the covenants for this term loan
to conform to that of the $240.0 million revolving credit facility. On December 29, 2010, the Company further extended the
maturity date from December 31, 2010 to December 31, 2011 and increased the interest rate for the term loan from one-
month LIBOR plus 3.50% to one-month LIBOR plus 4.00%. Additionally, this term loan will now amortize on a monthly
basis, with a $15.2 million bullet payment required at the December 31, 2011 maturity date.
On January 18, 2011, we purchased the WEST Series 2005-B1 notes for $17.9 million (the then-unpaid principal
amount of the 2005-B1 notes) with the proceeds of a term loan made by the bank which was the prior note holder. This term
loan is secured by a pledge of the WEST Series 2005-B1 notes to the lender. Interest on this term loan is one-month LIBOR
plus a margin of 3.00%. The term of this loan is five years and the loan amortization is consistent with the amortization on
the underlying WEST Series 2005-B1 notes, with a bullet payment required at the end of the five year term.
At December 31, 2010 and 2009, one-month LIBOR was 0.26% and 0.23%, respectively.
(6) Derivative Instruments
We hold a number of interest rate derivative instruments to mitigate exposure to changes in interest rates, in
particular one-month LIBOR, as all but $22.4 million of our borrowings at December 31, 2010 are at variable rates. As a
matter of policy, we do not use derivatives for speculative purposes. In addition, WEST is required under its credit agreement
to hedge a portion of its borrowings. At December 31, 2010, we were a party to interest rate swap agreements with notional
outstanding amounts of $430.0 million, remaining terms of between two and 51 months and fixed rates of between 2.10%
and 5.05%. At December 31, 2009, we were a party to interest rate swap agreements with notional outstanding amounts of
$528.0 million, remaining terms of between seven and 63 months and fixed rates of between 2.10% and 5.05%. The net fair
value of the swaps at December 31, 2010 and 2009 was negative $14.3 million and negative $7.9 million, respectively,
representing a net liability for us. These amounts represent the estimated amount we would be required to pay if we
terminated the swaps.
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and, as of
December 31, 2010, has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and
counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying
variables and the use of different assumptions would result in a different valuation. Management believes it has applied
assumptions consistently during the period. We apply hedge accounting and account for the change in fair value of our cash
flow hedges through other comprehensive income for all derivative instruments.
Based on the implied forward rate for LIBOR at December 31, 2010, we anticipate that net finance costs will be
increased by approximately $9.3 million for the year ending December 31, 2011 due to the interest rate derivative contracts
currently in place.
We terminated three swaps with a notional value of $105.0 million on November 18, 2009. The originally specified
hedged forecasted transactions remain probable to occur as the debt remains in place. The effective portion of the loss on
60
these hedges at the termination date was $2.6 million and will be reclassified into earnings over the original term of the
swaps.
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
The following table provides information about the fair value of our derivative instruments, by contract type:
Derivatives Designated as Hedging Instruments
Balance Sheet Location
Derivatives
Fair Value
Years Ended December 31,
2009
2010
(in thousands)
Interest rate contracts
Interest rate contracts
Assets under derivative instruments
Liabilities under derivative
instruments
$
$
—
14,274
$
$
3,689
11,584
Earnings Effects of Derivative Instruments on the Statements of Income
The following table provides information about the income effects of our cash flow hedging relationships for the
years ended December 31, 2010, 2009 and 2008:
Derivatives in Cash Flow Hedging
Relationships
Location of Loss (Gain) Recognized on
Derivatives in the Statements of Income
Amount of Loss (Gain) Recognized on
Derivatives in the Statements of Income
Years Ended December 31,
2009
(in thousands)
2010
2008
Interest rate contracts
Total
Interest expense
$
$
18,633
18,633
$
$
16,227
16,227
$
$
5,197
5,197
Our derivatives are designated in a cash flow hedging relationship with the effective portion of the change in fair
value of the derivative reported in the cash flow hedges subaccount of accumulated other comprehensive income.
Effect of Derivative Instruments on Cash Flow Hedging
The following tables provide additional information about the financial statement effects related to our cash flow
hedges for the years ended December 31, 2010, 2009 and 2008:
Derivatives in
Cash Flow Hedging
Relationships
Interest rate
contracts*
Total
Amount of Gain (Loss) Recognized
in OCI on Derivatives
(Effective Portion)
Years Ended December 31,
2009
(in thousands)
2010
2008
Location of Loss (Gain)
Reclassified from
Accumulated OCI into
Income
(Effective Portion)
Amount of Loss (Gain) Reclassified
from Accumulated OCI into Income
(Effective Portion)
Years Ended December 31,
2009
(in thousands)
2008
2010
$
$
(6,380) $
(6,380) $
12,639 $
12,639 $
(12,837 ) Interest expense
(12,837 ) Total
$
$
18,633 $
18,633 $
16,227 $
16,227 $
5,197
5,197
* These amounts are shown net of $15.7 million, $18.5 million and $5.2 million of interest payments reclassified to the
income statement during the year ended December 31, 2010, 2009 and 2008, respectively.
The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is
reported as a component of other comprehensive income and is reclassified into earnings in the period during which the
transaction being hedged affects earnings. The ineffective portion of the hedges is recorded in earnings in the current period.
However, these are highly effective hedges and no significant ineffectiveness occurred in either period presented.
61
Counterparty Credit Risk
The Company evaluates the creditworthiness of the counterparties under its hedging agreements, all of which are
large financial institutions in the United States, Switzerland and Germany with investment grade credit ratings. Based on
those ratings, the Company believes that the counterparties are currently creditworthy and that their continuing performance
under the hedging agreements is probable, and has not required those counterparties to provide collateral or other security to
the Company.
(7) Income Taxes
The components of income tax expense for the years ended December 31, 2010, 2009 and 2008, included in the
accompanying consolidated statements of income were as follows:
December 31, 2010
Current
Deferred
Total 2010
December 31, 2009
Current
Deferred
Total 2009
December 31, 2008
Current
Deferred
Total 2008
Federal
State
(in thousands)
Total
(458) $
7,609
7,151
$
321
158
479
$
$
(137)
7,767
7,630
108
13,047
13,155
382
13,347
13,729
$
$
$
$
$
639
(3,774)
(3,135) $
844
825
1,669
$
$
747
9,273
10,020
1,226
14,172
15,398
$
$
$
$
$
$
The following is a reconciliation of the federal income tax expense at the statutory rate of 34% to the effective
income tax expense:
Statutory federal income tax
expense
State taxes, net of federal benefit
State income tax apportionment
adjustment
Extraterritorial income exclusion
Prior year adjustments
FIN 48 liability
Permanent differences-162(m)
Permanent differences and other
Effective income tax expense
2010
Years Ended December 31,
2009
(in thousands and % of pre-tax income)
2008
$
%
$
%
$
%
6,690
713
(396)
(101)
—
113
406
205
7,630
34.0
3.7
(2.0)
(0.5)
—
0.6
2.1
0.9
38.8
11,012
250
(2,319)
(92)
—
—
516
653
10,020
34.0
0.8
(7.2)
(0.3)
—
—
1.6
2.0
30.9
14,280
1,004
—
(169)
27
—
—
256
15,398
34.0
2.4
—
(0.4)
0.1
—
—
0.6
36.7
In 2010, 2009, and 2008, we determined that a number of assets and their associated leases qualify for exclusion
from federal taxable income under the Extraterritorial Income Exclusion rules, resulting in a reduction in the federal effective
tax rate.
For the year ended December 31, 2010 and 2009, the Company’s effective tax rate was reduced by $0.4 million and
$2.3 million, respectively, related to a change in California state tax law during 2009 regarding state apportionment of
income which is effective 2011. For the year ended December 31, 2009, the Company also recognized an adjustment of $1.2
million increasing the tax provision in the period related to the tax treatment of individual employee non-performance based
compensation costs in excess of $1.0 million annually. The adjustment was based on compensation earned in 2007, 2008 and
62
2009 that had not previously been recognized as non-deductible for tax purposes, by period as follows: 2007 $0.2 million,
2008 $0.5 million, 2009 $0.5 million.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities
are presented below:
Deferred tax assets:
Unearned lease revenue
State taxes
Reserves and allowances
Other accruals
Alternative minimum tax credit
Net operating loss carry forward
Total deferred tax assets
Deferred tax liabilities:
Depreciation and impairment on aircraft engines and equipment
Section 481 adjustment-Maintenance reserve
Other deferred tax liabilities
Net deferred tax liabilities
Other comprehensive income, deferred tax asset
As of December 31,
2010
2009
(in thousands)
$
$
1,175
2,518
1,811
4,014
377
23,807
33,702
1,240
2,496
1,209
2,678
1,064
30,082
38,769
(106,834)
(4,929)
(3,669)
(115,432)
(95,753)
(12,576)
(4,403)
(112,732)
6,085
4,845
Net deferred tax liabilities
$
(75,645) $
(69,118)
As of December 31, 2010, we had net operating loss carry forwards of approximately $67.0 million for federal tax
purposes and $12.7 million for state tax purposes. The federal net operating loss carry forwards will expire at various times
from 2021 to 2029 and the state net operating loss carry forwards will expire at various times from 2013 to 2016. The
Company’s ability to utilize the net operating loss and tax credit carry forwards in the future may be subject to restriction in
the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax
law. As of December 31, 2010, we also had alternative minimum tax credit of approximately $0.3 million for federal income
tax purposes which has no expiration date and which should be available to offset future regular tax liabilities. Management
believes that no valuation allowance is required on deferred tax assets, as it is more likely than not that all amounts are
recoverable through future taxable income.
(8) Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, restricted cash,
operating lease related receivable, notes receivable and accounts payable approximates fair value because of the immediate or
short-term maturity of these financial instruments.
The carrying amount of the Company’s outstanding balance on its Notes Payable as of December 31, 2010 was
estimated to have a fair value of approximately $670.7 million based on the fair value of estimated future payments
calculated using the prevailing interest rates.
63
(9) Risk Management — Risk Concentrations and Interest Rate Risk
Risk Concentrations
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash
deposits, lease receivables and interest rate swaps.
We place our cash deposits with financial institutions and other creditworthy institutions such as money market
funds and limit the amount of credit exposure to any one party. We opt for security of principal as opposed to yield. In late
2008, we moved substantial deposits to U.S. treasury securities to avoid risk of loss. Concentrations of credit risk with
respect to lease receivables are limited due to the large number of customers comprising our customer base, and their
dispersion across different geographic areas. Some lessees are required to make payments for maintenance reserves at the end
of the lease however, risk is considered limited due to the relatively few lessees which have this provision in the lease. We
enter into interest rate swap agreements with five counterparties that are investment grade financial institutions.
Interest Rate Risk Management
To mitigate exposure to interest rate changes, we have entered into interest rate swap agreements. As of
December 31, 2010, such swap agreements had notional outstanding amounts of $430.0 million, average remaining terms of
between two and 51 months and fixed rates of between 2.10% and 5.05%. In 2010, 2009 and 2008, $18.6, $16.2 and $5.2
million was realized through the income statement as an increase in interest expense, respectively.
(10) Commitments, Contingencies, Guarantees and Indemnities
Our principal offices are located in Novato, California. We occupy space in Novato under a lease that expires
February 28, 2015. The remaining lease rental commitment is approximately $2.2 million. Equipment leasing, financing,
sales and general administrative activities are conducted from the Novato location. We also sub-lease office and warehouse
space for our operations at San Diego, California. This lease expires October 31, 2013, and the remaining lease commitment
is approximately $0.5 million. We also lease office space in Shanghai, China. The lease expires December 31, 2011 and the
remaining lease commitment is approximately $65,000. We also lease office and living space in London, United Kingdom.
The office space lease continues month-to-month and the living space lease expires January 3, 2011. At December 31, 2010,
there was no remaining lease commitment. We also lease office space in Blagnac, France. The lease expires December 31,
2011 and the remaining lease commitment is approximately $20,000.
We have made purchase commitments to secure the purchase during 2011 of five engines for a gross purchase price
of $45.0 million, for delivery in 2011. As at December 31, 2010, non-refundable deposits paid related to this purchase
commitment were $1.4 million. In October 2006, we entered into an agreement with CFM International (“CFM”) to purchase
new spare aircraft engines. The agreement specifies that, subject to availability, we may purchase up to a total of 45 CFM56-
7B and CFM56-5B spare engines over a five year period, with options to acquire up to an additional 30 engines. Our 2009
purchase orders with CFM for three engines represent deferral of engine deliveries originally scheduled for 2009 and are
included in our 2011 commitments to purchase.
(11) Shareholders’ Equity
(a) Preferred Stock
On February 7, 2006 we completed a public offering of 3,475,000 shares of our 9.0% Series A Cumulative
Redeemable Preferred Stock with a liquidation preference of $10 per share, or approximately $34.8 million in total. After
underwriting commissions and expenses of issuance, we received net proceeds of approximately $31.9 million. The preferred
stock accrues cash dividends from the date of issuance at a rate of 9.0% per annum, or approximately $260,625 per month.
The first dividend payment was paid March 15, 2006. The payment of dividends is at the discretion of our board of directors.
The Series A Preferred Stock is traded on the NASDAQ National Market under the symbol WLFCP.
Holders of the Series A Preferred Stock generally have no voting rights, but may elect two directors if we fail to pay
dividends for an aggregate of 18 or more months (consecutive or nonconsecutive) and also may vote in certain other limited
circumstances. The Series A Preferred Stock has no stated maturity date and is not convertible into any of our property or
other securities. On or after February 11, 2011 we may, at our option, redeem the shares. Accordingly, the Series A
Preferred Stock will remain outstanding indefinitely, unless we decide to redeem them, or they are otherwise cancelled or
exchanged.
64
(b) Common Stock Repurchase
On December 8, 2009, the Company’s Board of Directors authorized a plan to repurchase up to $30.0 million of the
Company’s common stock, depending upon market conditions and other factors, over the next three years. During 2010, the
Company repurchased 367,483 shares of common stock for approximately $4.2 million under this program, at a weighted
average price of $11.31 per share. The repurchased shares were subsequently retired. As of December 31, 2010, the total
number of common shares outstanding was 9.2 million.
(12) Stock-Based Compensation Plans
The components of stock compensation expense for the years ended December 31, 2010, 2009 and 2008, included in
the accompanying consolidated statements of income were as follows:
2007 Stock Incentive Plan
1996 Stock Option/Stock Issuance Plan
Employee Stock Purchase Plan
Total Stock Compensation Expense
2010
2009
(in thousands)
2008
$
$
2,603
14
61
2,678
$
$
2,246
146
43
2,435
$
$
1,570
74
49
1,693
The significant stock compensation plans are described below.
Our 2007 Stock Incentive Plan (the 2007 Plan) was adopted on May 24, 2007. Under this 2007 Plan, a total of
2,000,000 shares are authorized for stock based compensation in the form of either restricted stock or stock options. There
have been 1,070,092 shares of restricted stock awarded to date. Two types of restricted stock were granted in 2007: 239,952
shares vesting over 4 years and 15,452 shares vesting on the first anniversary date from date of issuance. Three types of
restricted stock were granted in 2008: 248,964 shares vesting over 4 years, 308,018 shares vesting over 5 years and 17,476
shares vesting on the first anniversary date from date of issuance. Two types of restricted stock have been granted in 2009:
10,000 shares vesting over 4 years and 18,220 shares vesting on the first anniversary date from date of issuance. Two types of
restricted stock have been granted in 2010: 190,375 shares vesting over 4 years and 21,635 shares vesting on the first
anniversary date from date of issuance. The fair value of the restricted stock awards equaled the stock price at the date of
grants. There were 33,043 shares of restricted stock awards granted in 2007 and 2008 that were cancelled during 2008. The
shares have reverted to the share reserve and are available for issuance at a later date, in accordance with the Plan.
Our accounting policy is to recognize the associated expense of such awards on a straight-line basis over the vesting
period. The stock compensation expense related to the 2007-2010 restricted stock awards that will be recognized over the
average remaining vesting period of 2.4 years totals $5.0 million. At December 31, 2010, the intrinsic value of unvested
restricted stock awards is $7.5 million. The Plan terminates on May 24, 2017.
A summary of activity under the 2007 Plan for the years ended December 31, 2010, 2009 and 2008 is as follows:
Balance as of December 31, 2007
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2008
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2009
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2010
Number Outstanding
255,404
574,458
(33,043)
(75,443)
721,376
28,220
—
(191,292)
558,304
212,010
—
(194,523)
575,791
65
$
Weighted Average
Grant Date Fair Value
15.07
$
10.00
13.29
14.51
11.18
13.44
—
11.63
11.14
11.19
—
11.89
10.90
$
$
Aggregate Value
3,849,555
5,745,935
(439,195)
(1,094,434)
8,061,861
379,408
—
(2,224,055)
6,217,214
2,371,619
—
(2,312,649)
6,276,184
$
$
$
$
Employee Stock Purchase Plan: Under our Employee Stock Purchase Plan (the Purchase Plan), as amended and
restated effective May 20, 2010, 250,000 shares of common stock have been reserved for issuance. The Purchase Plan was
effective in September 1996. Eligible employees may designate not more than 10% of their cash compensation to be
deducted each pay period for the purchase of common stock under the Purchase Plan. Participants may purchase not more
than 1,000 shares or $25,000 of common stock in any one calendar year. Each January 31 and July 31 shares of common
stock are purchased with the employees’ payroll deductions from the immediately preceding six months at a price per share
of 85% of the lesser of the market price of the common stock on the purchase date or the market price of the common stock
on the date of entry into an offering period. In 2010 and 2009, 20,523 and 16,203 shares of common stock, respectively, were
issued under the Purchase Plan. We issue new shares through our transfer agent upon employee stock purchase. The weighted
average per share fair value of the employee’s purchase rights under the Purchase Plan for the rights granted was $3.40, $2.77
and $2.77 for 2010, 2009 and 2008, respectively.
1996 Stock Option/Stock Issuance Plan: We granted stock options under our 1996 Stock Option/Stock Issuance Plan
(the 1996 Plan), as amended and restated as of March 1, 2003, until the plan terminated in June 2006. Under this Plan, a total
of 3,025,000 shares were authorized for grant. These options have a contractual term of ten years and vest at a rate of 25%
annually commencing on the first anniversary of the date of grant. For shares outstanding with graded vesting, our accounting
policy is to value the options as one award and recognize the associated expense on a straight-line basis over the vesting
period. In the year ended December 31, 2009, 122,299 options were exercised with a total intrinsic value at exercise date of
approximately $0.8 million and 62,320 options were cancelled. We issue new shares through our transfer agent upon stock
option exercise. In the year ended December 31, 2010, 206,146 options were exercised with a total intrinsic value at exercise
date of approximately $1.4 million and 751 options were cancelled. There are 812,891 stock options vested and expected to
vest under the 1996 Stock Option/Stock Issuance Plan which have an intrinsic value of $5.1 million.
A summary of the activity under the 1996 Plan for the years ended December 31, 2010, 2009 and 2008 is as follows:
Outstanding at January 1, 2008
Options exercised
Options cancelled
Outstanding at December 31, 2008
Options exercised
Options cancelled
Outstanding at December 31, 2009
Options exercised
Options cancelled
Outstanding at December 31, 2010
Vested and expected to vest at:
December 31, 2010
Options exercisable at:
December 31, 2008
December 31, 2009
December 31, 2010
Weighted
Average
Exercise Price
$
$
$
$
7.12
4.90
14.00
7.01
5.65
15.19
6.68
6.20
6.50
6.80
Options
1,363,311
(106,876)
(52,028)
1,204,407
(122,299)
(62,320)
1,019,788
(206,146)
(751)
812,891
Weighted
Average
Remaining
Contractual
Term (in years)
—
—
—
—
—
—
—
—
—
1.81
Options Available
for Grant
—
—
—
—
—
—
—
—
—
—
Aggregate
Intrinsic Value
$
7,653,940
—
—
3,270,437
—
—
8,486,579
—
—
5,064,940
$
$
$
812,891
$
6.80
1.81
$
5,064,940
1,162,907
1,014,538
812,891
$
$
$
6.92
6.66
6.80
3.17
2.53
1.81
$
$
$
3,266,842
8,463,664
5,064,940
66
The following table summarizes information concerning outstanding and exercisable options at December 31, 2010:
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in years)
Number
Outstanding
Weighted Average
Exercise Price
Number
Exercisable
Weighted Average
Exercise Price
2,214
114,839
7,775
208,954
174,350
7,811
9,281
112,750
158,917
16,000
812,891
1.39
1.35
2.41
2.17
0.78
3.89
5.40
4.59
0.16
5.25
1.81
$
$
4.50
4.68
4.92
5.01
5.40
8.44
8.70
9.20
10.00
11.24
6.80
2,214
114,839
7,775
208,954
174,350
7,811
9,281
112,750
158,917
16,000
812,891
$
$
4.50
4.68
4.92
5.01
5.40
8.44
8.70
9.20
10.00
11.24
6.80
Exercise Prices
From $4.50 to $4.50
From $4.68 to $4.68
From $4.92 to $4.92
From $5.01 to $5.01
From $5.40 to $5.40
From $8.40 to $8.49
From $8.70 to $8.70
From $9.20 to $9.20
From $10.00 to $10.00
From $11.24 to $11.24
From $4.50 to $11.24
(13) Employee 401(k) Plan
We adopted The Willis 401(k) Plan (the 401(k) Plan) effective as of January 1997. The 401(k) Plan provides for
deferred compensation as described in Section 401(k) of the Internal Revenue Code. The 401(k) Plan is a contributory plan
available to all our full-time and part-time employees in the United States. In 2010, employees who participated in the
401(k) Plan could elect to defer and contribute to the 401(k) Plan up to 20% of pretax salary or wages up to $16,500 (or
$22,000 for employees at least 50 years of age). We match employee contributions up to 50% of 8% of the employee’s salary
which totaled $303,000 in 2010, $271,000 in 2009 and $238,000 in 2008.
(14) Legal Proceedings
Two of our Irish subsidiaries, WLFC Funding (Ireland) Limited and WLFC (Ireland) Limited, were sued in
connection with the Italian liquidation proceedings of Volare Airlines. The actions allege that our subsidiaries received
preferential payments in the aggregate amount of 7.0 million euro on account of our engine leases to Volare in 2003 and
within one year prior to Volare’s ceasing operations. We believe any loss, as a result of the proceedings, is neither probable
nor estimable at December 31, 2010 and we are defending this claim vigorously.
(15) Quarterly Consolidated Financial Information (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2010,
2009 and 2008 (in thousands, except per share data).
Fiscal 2010
Total revenue
Net income
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Full Year
$
35,699
3,050
$
32,778
1,907
$
40,191
3,083
$
39,634
4,010
$
148,302
12,050
Net income attributable to common
shareholders
Basic earnings per common share
Diluted earnings per common share
Average common shares outstanding
Diluted average common shares outstanding
2,268
1,125
2,301
3,228
8,922
0.26
0.24
8,660
9,303
0.13
0.12
8,729
9,255
0.27
0.25
8,683
9,080
0.37
0.35
8,654
9,199
1.03
0.96
8,681
9,251
67
Fiscal 2009
Total revenue
Net income
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Full Year
$
34,579
7,022
$
33,390
5,019
$
43,642
9,299
$
38,829
1,027
$
150,440
22,367
Net income attributable to common
shareholders
Basic earnings per common share
Diluted earnings per common share
Average common shares outstanding
Diluted average common shares outstanding
6,240
4,237
8,517
0.75
0.71
8,306
8,675
0.51
0.47
8,342
8,926
1.01
0.93
8,391
9,051
245
0.03
0.03
8,414
9,072
19,239
2.30
2.14
8,364
8,983
Fiscal 2008
Total revenue
Net income
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Full Year
$
32,243
5,105
$
37,240
6,422
$
45,894
10,725
$
37,429
4,349
$
152,806
26,601
Net income attributable to common
shareholders
Basic earnings per common share
Diluted earnings per common share
Average common shares outstanding
Diluted average common shares outstanding
(16) Related Party and Similar Transactions
4,323
5,640
9,943
3,567
23,473
0.53
0.49
8,190
8,785
0.69
0.64
8,225
8,735
1.20
1.14
8,253
8,757
0.43
0.41
8,300
8,787
2.85
2.68
8,242
8,760
Gavarnie Holding, LLC, a Delaware limited liability company (“Gavarnie”) owned by Charles F. Willis, IV,
purchased the stock of Aloha Island Air, Inc., a Delaware Corporation, (“Island Air”) from Aloha AirGroup, Inc. (“Aloha”)
on May 11, 2004. Charles F. Willis, IV is the President, CEO and Chairman of our Board of Directors and owns
approximately 30% of our common stock. As of December 31, 2010, Island Air leases three DeHaviland DHC-8-100 aircraft
and four spare engines from us. The aircraft and engines on lease to Island Air have a net book value of $3.8 million at
December 31, 2010. Beginning in 2006 Island Air experienced cash flow difficulties, which affected their payments to us due
to a fare war commenced by a competitor, their dependence on tourism which has suffered from the current economic
environment as well as volatile fuel prices. The Board of Directors approved lease rent deferrals which were accounted for as
a reduction in lease revenue in the applicable periods. Because of the question regarding collectability of amounts due under
these leases, lease rent revenue for these leases have been recorded on a cash basis until such time as collectability becomes
reasonably assured. After taking into account the deferred amounts, Island Air owes us $2.8 million in overdue rent. We hold
letters of credit for $0.2 million which may be used to partially offset our claims against Island Air.
In October 2010, Island Air purchased one airframe from us, generating a net gain of $0.4 million. Effective
January 2, 2011 we converted the operating leases with Island Air to a finance lease, with a principal amount of $7.0 million,
under which they have resumed monthly payments. This transaction will increase operating income by $3.2 million which
will be recognized over the five year term of the finance lease. We are also discussing a program for them to commence
payments of the deferred amounts under the previous operating leases on a reduced basis. This program is dependent on their
obtaining substantially similar concessions from their other major creditors.
68
We entered into a Consignment Agreement dated January 22, 2008, with J.T. Power, LLC (“J.T. Power”), an entity
whose majority shareholder, Austin Willis, is the son of our President and Chief Executive Officer, and directly and
indirectly, a shareholder of ours as well as a Director of the Company. According to the terms of the Consignment
Agreement, J.T. Power is responsible to market and sell parts from the teardown of three engines with a book value of $4.2
million. During the year ended December 31, 2010, sales of consigned parts were $45,100. Under this agreement, J.T. Power
provides a minimum guarantee of net consignment proceeds of $3.3 million by January 22, 2012. Based on current estimated
consignment proceeds, J.T. Power would be obligated to pay $0.8 million under the guarantee in January 2012. On
November 17, 2008, we entered into a Consignment Agreement with J.T. Power in which they are responsible to market and
sell parts from the teardown of one engine with a book value of $1.0 million. During the year ended December 31, 2010,
sales of consigned parts were $24,900. On February 25, 2009, we entered into a Consignment Agreement with J.T. Power in
which they are responsible to market and sell parts from the teardown of one engine with a book value of $133,400. During
the year ended December 31, 2010, sales of consigned parts were $4,100. On July 31, 2009, we entered into a Consignment
Agreement with J.T. Power in which they are responsible to market and sell parts from the teardown of one engine with a
book value of $0.5 million. During the year ended December 31, 2010, sales of consigned parts were $0.2 million. On
July 27, 2006, we entered into an Aircraft Engine Agency Agreement with J.T. Power, in which we will, on a non-exclusive
basis, provide engine lease opportunities with respect to available spare engines at J.T. Power. J.T. Power will pay us a fee
based on a percentage of the rent collected by J.T. Power for the duration of the lease including renewals thereof. We earned
no revenue during the year ended December 31, 2010 under this program.
The Company entered into an Independent Contractor Agreement dated September 9, 2009 with Hans Jorg
Hunziker, a member of our Board of Directors. Under this Agreement, Mr. Hunziker will provide services in connection
with the identification and qualification of potential investors in our equity securities. The board has determined that,
notwithstanding this limited assignment, Mr. Hunziker remains an independent director. During 2010, the Company incurred
$39,400 in consulting fees related to this Agreement. This Agreement expired, by its terms, on October 31, 2010.
69
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED BALANCE SHEETS
Parent Company Information
December 31, 2010 and 2009
(In thousands, except share data)
ASSETS
Cash and cash equivalents
Equipment held for operating lease, less accumulated depreciation
Equipment held for sale
Operating lease related receivable, net of allowances
Notes receivable
Investments
Investment in subsidiaries
Due from affiliate, net
Assets under derivative instruments
Property, equipment & furnishings, less accumulated depreciation
Equipment purchase deposits
Other assets, net
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses
Liabilities under derivative instruments
Deferred income taxes
Notes payable, net of discount
Maintenance reserves
Security deposits
Unearned lease revenue
Total liabilities
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; 3,475,000 shares issued
and outstanding at December 31, 2010 and 2009, respectively)
Common stock ($0.01 par value, 20,000,000 shares authorized; 9,181,365 and
9,181,620 shares issued and outstanding at December 31, 2010 and 2009,
respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive loss, net of income tax benefit
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2010
December 31,
2009
$
$
$
$
$
$
$
2,202
299,175
7,379
2,200
83
9,381
140,264
2,851
—
6,971
2,769
6,950
480,225
15,576
3,516
4,923
217,455
8,812
1,917
1,056
253,255
2,012
304,480
14,245
1,271
342
10,701
130,191
2,305
1,405
7,296
2,082
7,257
483,587
8,014
1,493
7,136
232,299
11,402
1,538
912
262,794
31,915
31,915
92
60,108
145,324
(10,469)
226,970
480,225
$
92
60,671
136,402
(8,287)
220,793
483,587
70
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF INCOME
Parent Company Information
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other income
Total revenue
EXPENSES
Depreciation expense
Write-down of equipment
General and administrative
Technical expense
Net finance costs:
Interest expense
Interest income
Net loss on debt extinguishment
Total net finance costs
Total expenses
Earnings from operations
Earnings from joint venture
Income/(Loss) before income taxes
Income tax benefit/(expense)
2010
Years Ended December 31,
2009
2008
$
$
28,486
11,187
3,782
14,586
58,041
$
34,301
15,445
611
10,722
61,079
14,800
2,874
27,917
3,720
15,039
(25 )
—
15,014
64,325
(6,284 )
1,109
(5,175 )
1,602
17,385
4,992
24,857
2,378
10,835
(14)
19
10,840
60,452
627
942
1,569
(1,052)
34,221
8,716
6,100
11,649
60,686
15,533
3,207
25,597
1,536
11,944
(117)
—
11,827
57,700
2,986
797
3,783
(1,555)
Earnings from investment in affiliate
15,623
21,850
24,373
Net income
$
12,050
$
22,367
$
26,601
Preferred stock dividends paid and declared-Series A
3,128
3,128
3,128
Net income attributable to common shareholders
$
8,922
$
19,239
$
23,473
71
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF CASH FLOWS
Parent Company Information
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income of subsidiary
Depreciation expense
Write-down of equipment
Stock-based compensation expenses
Amortization of deferred costs
Amortization of interest rate derivative
Allowances and provisions
Gain on sale of leased equipment
Gain on sale of leased equipment deposits
Gain on sale of interest in joint venture
Settlement of interest rate derivative
Income from joint venture, net of distributions
Net loss on debt extinguishment
Deferred income taxes
Changes in assets and liabilities:
Receivables
Notes receivable
Other assets
Accounts payable and accrued expenses
Due to/from subsidiary
Maintenance reserves
Security deposits
Unearned lease revenue
Net cash provided by operating activities
Cash flows from investing activities:
Increase in investment in subsidiary, net
Distributions received from subsidiary, net
Proceeds from sale of equipment held for operating lease (net of selling
expenses)
Proceeds from sale of equipment deposits (net of selling expenses)
Proceeds from sale of interest in joint venture
Excess distributions from joint venture
Purchase of equipment held for operating lease
Purchase of property, equipment and furnishings
Net cash provided by/(used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of notes payable
Debt issuance cost
Distribution to preferred stockholders
Proceeds from shares issued under stock compensation plans
Excess tax benefit from stock-based compensation
Repurchase of common stock
Principal payments on notes payable
Net cash (used in)/provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest
Income Taxes
72
2010
Years Ended December 31,
2009
2008
$
12,050
$
22,367
$
26,601
(15,623)
14,800
2,874
2,678
2,719
2,956
(21)
(3,782)
—
(2,020)
—
(160)
—
(2,041)
(908)
259
(2,146)
4,473
(546)
(2,590)
379
144
13,495
(21,814)
39,314
13,520
—
3,500
—
(25,946)
(399)
8,175
120,466
(268)
(3,128)
493
422
(4,156)
(135,309)
(21,480)
190
2,012
(21,850)
17,385
4,992
2,435
1,764
258
532
(611)
(400)
—
(2,557)
(267)
19
4,840
1,155
(342)
92
(7,496)
(680)
(5,433)
(40)
(1,045)
15,118
(28,868)
50,979
10,091
6,580
—
—
(88,913)
(199)
(50,330)
311,832
(3,993)
(3,128)
74
264
(40)
(276,276)
28,733
(6,479)
8,491
(24,373)
15,533
3,207
1,693
2,260
—
23
(6,100)
—
—
—
(231)
—
3,564
(335)
—
(1,858)
(500)
(905)
(5,318)
(536)
(494)
12,231
(24,356)
45,006
53,947
—
—
124
(58,353)
(1,593)
14,775
104,178
(548)
(3,128)
412
129
—
(126,661)
(25,618)
1,388
7,103
$
$
$
2,202
$
2,012
$
8,491
7,462
541
$
$
6,002
511
$
$
10,309
2,256
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE II — VALUATION ACCOUNTS
December 31, 2010, 2009 and 2008
(In thousands)
Balance at
Beginning
of Period
Additions
Charged
(Credited)
to Expense
Net
(Deductions)
Recoveries
Balance at
End of Period
December 31, 2008
Accounts receivable, allowance for doubtful accounts
December 31, 2009
Accounts receivable, allowance for doubtful accounts
December 31, 2010
Accounts receivable, allowance for doubtful accounts
$
62 $
277 $
— $
339
467
513
(35)
(385)
(9)
339
467
423
Deductions in allowance for doubtful accounts represent uncollectible accounts written off, net of recoveries.
73
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands, except per share amounts)
Exhibit 11.1
2010
Years Ended December 31,
2009
2008
Basic
Earnings:
Net income attributable to common shareholders
$
8,922
$
19,239
$
23,473
Shares:
Average common shares outstanding
8,681
8,364
8,242
Basic earnings per common share
Assuming full dilution
Earnings:
Net income attributable to common shareholders
Shares:
Average common shares outstanding
Potentially dilutive common shares outstanding
Diluted average common shares outstanding
$
$
1.03
$
2.30
$
2.85
8,922
$
19,239
$
23,473
8,681
570
9,251
8,364
619
8,983
8,242
518
8,760
Diluted earnings per common share
$
0.96
$
2.14
$
2.68
Supplemental information:
The difference between average common shares outstanding to calculate basic and assuming full dilution is due to
options outstanding under the 1996 Stock Option/Stock Issuance Plan and restricted stock issued under the 2007 Stock
Incentive Plan.
The calculation of diluted earnings per share for 2010 excluded from the denominator zero options and 4,000
restricted stock awards granted to employees and directors because their effect would have been anti-dilutive. The calculation
of diluted earnings per share for 2009 excluded from the denominator 35,000 options and 4,000 restricted stock awards
granted to employees and directors because their effect would have been anti-dilutive. The calculation of diluted earnings per
share for 2008 excluded from the denominator 111,000 options and zero restricted stock awards granted to employees and
directors because their effect would have been anti-dilutive.
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Statement of Computation of Ratios of
Earnings to Fixed Charges and Preferred Dividends
(In thousands, except ratios)
2010
Years Ended December 31,
2008
2009
2007
Exhibit 12.1
2006
Earnings:
Earnings from continuing operations before
income taxes
Fixed charges
Cash distributions from equity method investments
Total earnings
Fixed charges:
Interest expense
Estimated interest expense within rental expense (1)
Total fixed charges
Preferred stock dividend (2)
Total fixed charges and preferred stock dividends
$ 18,571 $ 31,445 $ 41,202 $ 27,033 $ 26,497
31,817
423
$ 60,706 $ 68,356 $ 80,752 $ 66,165 $ 58,737
41,186
949
36,236
675
38,860
690
38,157
975
241
$ 40,945 $ 36,013 $ 38,640 $ 37,940 $ 31,610
207
$ 41,186 $ 36,236 $ 38,860 $ 38,157 $ 31,817
4,442
$ 46,297 $ 40,763 $ 43,802 $ 43,068 $ 36,259
5,111
4,942
4,911
4,527
220
217
223
Ratio of earnings to fixed charges
1.47
1.89
2.08
1.73
1.85
Ratio of earnings to fixed charges and preferred stock
dividends
1.31
1.68
1.84
1.54
1.62
(1) Represents an estimate of the interest within rental expense. There is no expressed interest expense within rental
expense. Rather, the imputed interest expense within rental expense is calculated by multiplying by 30% the office rent
expense for each of the years ended, as indicated above.
(2) Represents pre-tax earnings required to pay preferred stock dividends.
Exhibit 21.1
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
List of Subsidiaries
Subsidiary
Willis Engine Securitization Trust
WEST Engine Funding LLC
State or Jurisdiction
of Incorporation
Delaware
Delaware
WEST Engine Funding (Ireland) Limited
Rep. of Ireland
WLFC (Ireland) Limited
WLFC Funding (Ireland) Limited
WLFC Lease (Ireland) Limited
Willis Lease France
Rep. of Ireland
Rep. of Ireland
Rep. of Ireland
France
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Willis Lease Finance Corporation:
We consent to the incorporation by reference in the registration statement (No. 333-15343, 333-48258, 333-63830,
333-109140) on Form S-8 of Willis Lease Finance Corporation of our report dated March 15, 2011, with respect to the
consolidated balance sheets of Willis Lease Finance Corporation and subsidiaries as of December 31, 2010 and 2009, and the
related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2010, and related financial statement schedules I and II, and the
effectiveness of internal control over financial reporting as of December 31, 2010, which report appears in the December 31,
2010 annual report on Form 10-K of Willis Lease Finance Corporation.
/s/ KPMG LLP
San Francisco, California
March 15, 2011
Exhibit 31.1
I, Charles F. Willis IV, certify that:
1. I have reviewed this report on Form 10-K of Willis Lease Finance Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 15, 2011
/s/ Charles F. Willis, IV
Charles F. Willis, IV
Chief Executive Officer
President
Exhibit 31.2
I, Bradley S. Forsyth, certify that:
1. I have reviewed this report on Form 10-K of Willis Lease Finance Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 15, 2011
/s/ Bradley S. Forsyth
Bradley S. Forsyth
Chief Financial Officer
Senior Vice President
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
Each of the undersigned hereby certifies, in his or her capacity as an officer of Willis Lease Finance Corporation (the
“Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to his or her knowledge:
the Annual Report of the Company on Form 10-K for the year ended December 31, 2010 fully complies
•
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in such report fairly presents, in all material respects, the financial condition and
•
results of operation of the Company.
Date: March 15, 2011
/s/ Charles F. Willis, IV
Charles F. Willis, IV
President and Chief Executive Officer
/s/ Bradley S. Forsyth
Bradley S. Forsyth
Senior Vice President and Chief Financial Officer
C O R P O R AT E INF O R M AT I O N
E X E C U T I V E T E A M
Charles F. Willis, IV
President and Chief
Jesse V. Crews
Executive Vice President
Bradley S. Forsyth
Senior Vice President
Thomas C. Nord
Senior Vice President
Donald A. Nunemaker
Executive Vice President
Judith M. Webber
Senior Vice President,
Executive Offi cer
and Chief Operating
and Chief Financial
and General Counsel
and General Manager,
Technical Services
Offi cer
Offi cer
Leasing
B O A R D O F D I R E C T O R S
C O R P O R AT E E X E C U T I V E O F F I C E S
F O R M 10 - K , 10 - Q & P R E S S R E L E A S E S
Charles F. Willis, IV
President and Chief Executive Offi cer,
Willis Lease Finance Corporation
W. William Coon, Jr.
Former Chairman, Avioserv; Former
Director, FlightTechnics LLC and
T Group America
Hans Jörg Hunziker, Dr.
Principal, HLF Aviation GmbH;
Former President and Chief Executive
Offi cer, Flightlease, Ltd.
Gérard Laviec
Former President and Chief Executive
Officer, CFM International; Former
Chairman, Shannon Engine Support
Robert T. Morris
Principal, Robert Morris & Company;
Former President, Union Bank of
California Leasing, Inc.
Austin Willis
President, JT-Power LLC
773 San Marin Drive, Suite 2215
The Form 10-K has been fi led with the Securities
Novato, CA 94998
415 408 -4700
415 408 -4701 (fax)
www.willislease.com
I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N TA N T S
KPMG LLP
55 2nd Street, Suite 1400
San Francisco, CA 94105
415 963 -5100
and Exchange Commission. Copies of the 10-K,
10-Q and press releases may be obtained from
the investor relations area of our web site,
www.willislease.com, or by contacting our corporate
offi ces. Press releases are also available at The
Cereghino Group web site, www.stockvalues.com.
S T O C K E X C H A N G E L I S T I N G
Willis Lease Finance Corporation is listed on
the NASDAQ Global Market under the symbols:
WLFC (common) and WLFCP (preferred).
T R A N S F E R A G E N T A N D R E G I S T R A R
A N N U A L M E E T I N G
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
800 937 -5449
I N V E S T O R R E L AT I O N S C O U N S E L
The Cereghino Group
1809 7th Avenue, Suite 1414
Seattle, WA 98101
206 388 -5785
www.stockvalues.com
The Annual Meeting of shareholders will
be held on Thursday, May 19, 2011, at
2:00 p.m. at the Company’s headquarters
at 773 San Marin Drive, Suite 2215, Novato,
CA 94998. All shareholders are cordially
invited to attend.
S T O C K I N F O R M AT I O N
20 10
2009
High
Low
High
Low
Q1
Q2
Q3
Q4
$ 17.61 $ 13.80
$ 10.58
$ 7.25
15.75
9.22
15.39
9.92
11.22
8.12
14.98
10.50
13.54
9.87
15.20
11.03
Willis Lease Finance Corporation
415 408-4700
773 San Marin Drive, Suite 2215
415 408-4701 (fax)
Novato, California 94998
USA
www.willislease.com
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