A N N U A L R E P O R T
Willis Lease Finance Corporation
(in millions)
$1,400
$1,300
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
96
97
98 99
00
01 02 03 04
05
06 07
08
09 10 11 12
Lease Portfolio
JV Owned Assets
Managed Assets
1996: Initial Public Offering
2005: WEST I Asset-Backed Securitization
2008: WEST I Expansion
1997: Follow-On Equity Offering
2006: Preferred Stock Offering
2009 & 11: Revolver Renewal
2000: SAIR Group Equity Investment
2007: CFMI Engine Purchase Agreement
2012: WEST II Asset-Backed Securitization
Willis Lease Finance Corporation is a provider of aviation services, specializing in
leasing spare commercial aircraft engines and other aircraft-related equip ment.
We provide these services to commercial airlines, aircraft engine manufacturers,
and maintenance, repair and overhaul facilities worldwide.
p. 1
2 012 A N N U A L R E POR T
ABOVEA CFM56-5B ON WING.COVERA 747 AIRCRAFT THAT IS POWERED BY EITHER PRATT & WHITNEY 4000 ENGINES OR CF6-80C2 ENGINES. THESE ENGINE MODELS ARE TWO OF THE MANY MODELS OWNED AND LEASED BY WILLIS LEASE FINANCE CORPORATION. p. 2
2 012 A N N U A L R E POR T
Dear Fellow Shareholders
As the premier aircraft engine leasing company in the
The earning power of our franchise in 2012 was over-
global commercial finance section, Willis Lease laid the
shadowed by the costs associated with the refinancing
foundation in 2012 for our next phase of growth, posi-
of our debt and the redemption of our preferred shares.
tioning us well to take advantage of opportunities in
After absorbing $18.3 million in charges related to these
our markets. We remain optimistic about the long-term
activities (which included a write-off of $8.1 million
growth of the engine leasing business for two reasons:
related to issuance costs paid in prior periods), Willis
Airlines continue to out source their capital assets to an
Lease lost $3.8 million, or $0.43 per diluted share, in
ever-increasing degree, and Willis Lease is more attrac-
2012, compared to earnings of $11.4 million, or $1.28
tive than ever as both a financial and strategic partner.
per diluted share, in 2011. The investment we made in
In addition, aircraft engines and their derivatives are an
2012 to refinance our debt and lock in the historically
increasingly attractive asset class for investors, further
low interest rates generates significant long-term
enhancing our access to capital.
benefits for us, which I discuss in detail below.
At the end of 2012, Willis Lease held ownership interests
While we hear reports that credit is tight, our access to
in or managed for third parties 217 engines and 9 aircraft
the capital markets is the best it has ever been. Last
(which are powered by 22 engines). With the finalization
year, in addition to accomplishing our first financing
of the Scandinavian Airlines transaction in March of
with a Chinese bank, we increased our revolving credit
2013, our engines owned or under management now
facility from $345 million to $430 million. We then
total 236 with a total asset value in excess of $1.4 billion.
com pleted our second asset-backed securitization
(ABS) in September with the issuance of Willis Engine
Securitization Trust II (WEST II), a $390 million ABS
which replaced the initial WEST ABS notes.
(in millions)
An important milestone for us, WEST II was also the
winner of three notable awards from the largest avia-
tion industry publications reporting on innovation and
forward-thinking financing trends. The financing took
advantage of historically low interest rates and resulted
in favorable terms.
$160
$140
$120
$100
$80
$60
$40
08 09
10
11
12
Lease Rent Revenue
Maintenance Reserve Revenue
p. 3
2 012 A N N U A L R E POR T
We are already starting to see the benefits of WEST II,
we see the opportunity to grow in connection with other
including:
strategic and financial partners as the years unfold.
Release of approximately $150 million in capital.
Willis Lease has been, and will continue to be, a world-
Locking in low-cost, long-term debt matching our
long-lived assets.
Redemption of all of our preferred stock, saving over
$3 million in dividends annually (which is equivalent
to approximately $5 million pre-tax income).
wide company with a global footprint. We have offices in
Dublin, San Francisco, London, Shanghai and Toulouse,
and representatives in Singapore, Stockholm and Bang-
kok. At last count, we have supplied modern long-lived
aviation assets to airlines in over 100 countries.
Repayment of other maturing, higher cost debt.
Improvement in many aspects of the previous ABS
structure including free cash flow, eligible assets,
loan to value ratios and other operational terms.
Repurchase of 772,134 shares of common stock
at 60% of book value for $11 million in the fourth
quarter, representing a solid investment and further
improving shareholder value.
Deployment of growth capital with the $120 million
transaction with Scandinavian Airlines, the largest
single sale leaseback transaction in our history.
During 2012, the relationship with our partner Mitsui
& Co., Ltd. has flourished. We are proud to see that
the lease portfolio in our joint venture, Willis Mitsui &
Co. Engine Support Ltd. based in Dublin, Ireland, has
grown to more than $190 million of assets as of March
2013. We see this synergistic relationship growing and
becoming an integral part of our future. As the Willis
Mitsui partnership evolves, we plan to source a variety
of different engine types covering the most popular
engines in service today and in the future. In addition,
China is becoming an increasingly important market
for us. Our new Chinese subsidiary, Willis Lease (China)
Limited, based in the Shanghai Free Trade Zone, be-
came operational last year. Its first transaction was an
engine sale and leaseback with a major Chinese airline
which was financed by one of the largest banks in China.
Our China lease pool partnership has almost 90% of
China’s airlines participating in it, and more than
30 aviation professionals from the member airlines
attended our last regional meeting in Xi’an, China.
(in millions)
*
*
*
$30
$25
$20
$15
$10
$5
$0
$(5)
08
09
10
11
12
Net Income
Net Income (Loss) Attributable
to Common Shareholders
*
**
WEST Charge
WEST Charge and Preferred Redemption Cost
p. 4
2 012 A N N U A L R E POR T
$25
$23
$21
$19
$17
$15
$13
08 09
10
11
12
Book Value Per Common Share
We plan to expand our horizons in a number of areas
in the coming years, specializing, of course, in aircraft
engines and their derivatives. In addition, we anticipate
consolidating activities relating to engine management,
regional turboprop growth, consignments, incremental
fee income, engine harvesting, and many of the emerging
business services we currently provide.
Reflecting on our nearly twenty years as a public company,
I am proud of our team’s accomplishments. We have grown
our assets more than ten-fold and have prospered as the
largest independent public engine leasing company. We
have endured when others have not. Access to capital, the
need for critical mass, and deep industry expertise may be
a bridge too far for many new entrants. While the barriers
to entry in this market continue to grow, competition
remains fierce, albeit with fewer players.
Willis Lease has demonstrated its ability to grow and access
100%
90%
80%
70%
60%
50%
(by book value)
capital markets, and I believe that our niche is defendable
and scalable. One of our greatest assets is our people, and
the Willis Lease team is unsurpassed in our industry. From
technical expertise to financial acumen, the members of
our team are some of the most dedicated, knowledgeable
and experienced people in the industry.
We all appreciate the loyalty of our customers and the
support of our shareholders and lenders.
08 09
10
11
12
Sincerely,
Average Utilization
Charles F. Willis, IV
Chairman and Chief Executive Officer
March 31, 2013
p. 5
2 012 A N N U A L R E POR T
ABOVEA GE-90 INSTALLED ON A BOEING 777. p. 6
2 012 A N N U A L R E POR T
The following table summarizes selected consolidated financial data and operating information of the Company.
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” in Form 10-K included with this report.
Years ended December 31,
(In thousands, except earnings per share)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation expense
Write-down of equipment
General and administrative
Technical expense
Total net finance costs
Total expenses
2012
2011
2010
2009
2008
$ 94,591
$ 104,663
$ 102,133
$ 102,390
$ 102,421
41,387
5,499
6,613
39,161
11,110
1,719
34,776
46,049
33,716
7,990
3,403
1,043
958
12,846
3,823
$ 148,090
$ 156,653
$ 148,302
$ 150,440
$ 152,806
$ 52,591
$
51,250
$ 48,704
$
44,091
$
37,438
5,874
3,341
2,874
6,133
34,551
35,701
29,302
26,765
7,006
8,394
8,118
7,149
6,655
27,085
3,673
47,131
35,377
40,733
34,857
36,753
$ 147,153
$ 134,063
$ 129,731
$ 118,995
$ 111,604
Net income
$
1,535
Net income (loss) attributable to common shareholders $
(3,793)
Diluted earnings (loss) per common share
$
(0.43)
Diluted average common shares outstanding
Common shares outstanding at period end
8,791
8,716
$
$
$
$
$
$
14,508
11,380
1.28
8,876
9,110
12,050
$ 22,367
8,922
0.96
$
$
9,251
9,181
19,239
2.14
8,983
9,182
$
$
$
26,601
23,473
2.68
8,760
9,078
BALANCE SHEET DATA
Equipment held for operating lease
$ 961,459
$ 981,505
$ 998,001
$ 976,822
$ 829,739
Total assets
Shareholders’ equity
$ 1,078,715
$ 1,133,205
$ 1,125,962
$ 1,097,702
$ 982,712
$ 199,553
$ 236,661
$ 226,970
$ 220,793
$ 192,207
Book value per common share
$
22.90
$
22.48
$
21.24
$
20.57
$
17.66
Willis Lease Finance Corporation
FORWARD- L OOKI NG S TAT E M E N 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 spe-
cific 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 file 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
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012
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
Name of each exchange on which registered
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 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
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
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 No
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 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, 2012) was approximately $74.9 million (based on a closing sale price of $12.32 per
share as reported on the NASDAQ National Market).
The number of shares of the registrant’s Common Stock outstanding as of March 14, 2013 was 8,692,743.
The Company’s Proxy Statement for the 2013 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form
10-K.
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21
21
21
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36
WILLIS LEASE FINANCE CORPORATION
2012 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 2.
Item 3.
Item 4.
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.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
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
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, 2012, we
had a total lease portfolio consisting of 184 engines and related equipment, 7 aircraft and 4 spare parts packages with 78
lessees in 42 countries and an aggregate net book value of $961.5 million. As of December 31, 2012, we managed a total
lease portfolio of 33 engines and related equipment for other parties. We also seek, from time to time, to act as a leasing
agent of engines for other parties.
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 on 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 14% of the
total number of installed engines. Today it is estimated that there are nearly 42,000 engines installed on commercial aircraft.
Accordingly, we estimate that there are between 4,200 and 5,900 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 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.
THE WEST II SECURITIZATION
Willis Engine Securitization Trust II, or “WEST II”, is a special-purpose, bankruptcy-remote, Delaware statutory
trust that is wholly-owned by us and consolidated in our financial statements. We established WEST II in September 2012,
when WEST II issued and sold $390 million aggregate principal amount of Class 2012-A Term Notes (the “Notes”) and
received $384.9 million in net proceeds. We used these funds, net of transaction expenses and swap termination costs,
together with our revolving credit facility, to pay off the prior Wills Engine Securitization Trust, or “WEST” notes totaling
$435.9 million. At closing, the net book values of 22 engines were pledged as collateral from WEST to the Company’s
revolving credit facility, which provided the remaining funds to pay off the WEST notes. The assets and liabilities of WEST
II will remain on the Company’s balance sheet. A portfolio of 79 commercial jet aircraft engines and leases thereof secures
the obligations of WEST II.
3
WEST II’s obligations under these notes are serviced by revenues from the lease and disposition of its engines, and
are secured by all of its assets, including all of 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 II and none of our assets secure such obligations.
We are the servicer and administrative agent for WEST II. 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 II 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 II is
consolidated in our financial statements these fees eliminate in consolidation. Proceeds from engine sales will be used, at
WEST II’s election, to reduce WEST II’s debt or to acquire other engines.
WEST II 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 is well suited to our engine leasing business
as it provides long term capital in which debt maturity is better matched to long term asset lives.
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 20,000 aircraft as of 2011 and projects this will grow to approximately 40,000 aircraft by
2031. 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;
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 35% to 40% of the spare engine market falls under the category of leased engines.
4
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, 2012, all but one of our leases to air carriers, manufacturers and MROs are operating leases as
opposed to finance leases. 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.
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:
5
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, 2012, we had a total lease portfolio of 184 aircraft engines and related equipment, 4 spare parts
packages, 7 aircraft and various parts and other engine-related equipment with a cost of $1,204.0 million in our lease
portfolio. As of December 31, 2011, we had a total lease portfolio of 194 aircraft engines and related equipment, 3 spare parts
packages, 13 aircraft and various parts and other engine-related equipment with a cost of $1,210.2 million in our lease
portfolio.
As of December 31, 2012, minimum future rentals under non-cancelable operating leases of these engines, parts and
aircraft assets were as follows:
Year
2013
2014
2015
2016
2017
Thereafter
(in thousands)
56,492
38,655
30,436
23,172
14,620
18,133
181,508
$
As of December 31, 2012, we had 78 lessees of commercial aircraft engines, aircraft, and other aircraft-related
equipment in 42 countries. We 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.
On May 25, 2011, we entered into an agreement with Mitsui & Co., Ltd. to participate in a joint venture formed as a
Dublin-based Irish limited company – Willis Mitsui & Company Engine Support Limited (“WMES”) for the purpose of
acquiring and leasing jet engines. Each partner holds a fifty percent interest in the joint venture. Our investment in the joint
venture is $11.8 million as of December 31, 2012.
AIRCRAFT LEASING
As of December 31, 2012, we owned four ATR72-202 aircraft, which are currently off-lease, and three DeHaviland
DHC-8-100 turboprop aircraft, which are on lease to Hawaii Island Air, Inc. (“Island Air”). The aircraft on lease to Island Air
have a net book value of $3.9 million. Charles F. Willis, IV, our CEO and Chairman of our Board of Directors and the owner
of approximately 31% of our common stock, was the sole owner of Island Air, a lessee of the Company since 2004.
6
On February 26, 2013 the stock of Hawaii Island Air was sold to an unrelated third party. While under common ownership,
the independent members of our Board of Directors approved transactions between the Company and Island Air.
The Company and Island Air entered into a series of transactions over the past several years through which the
Company provided equipment to Island Air in return for lease payments. The terms of the agreements have been amended
from time to time with the Company accepting lower lease payments in some circumstances.
As of December 31, 2012, Island Air leased from the Company one DeHaviland DHC-8-100 aircraft under an
operating lease and two DeHaviland DHC-8-100 aircraft and one spare engine under a finance lease. As of December 31,
2012, Island Air owed $4.5 million and $0.65 million under the finance lease and note payable, respectively. The Company
received lease payments and recorded revenue from Island Air totaling $0.6 million, $1.6 million and $0.4 million in the
years ended December 31, 2012, 2011 and 2010.
In connection with the sale of its stock to an unrelated third party, on February 26, 2013, Island Air prepaid the note
payable at a 45% discount of $0.4 million, conditioned on the other large creditors accepting similar reductions in the
amounts due to them. The assets under lease to Island Air have a combined net book value of $4.0 million as of December
31, 2012. Management expects the new ownership should significantly improve the credit quality of the leases. Future lease
rent revenue from Island Air totaling $6.2 million under the finance and operating leases is expected to be recorded through
December 2015.
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 two aircraft are currently on lease to Emirates until
March and May 2013. Our investment in the joint venture at December 31, 2012 is $10.1 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
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.
7
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, 2012, we had a total
lease portfolio consisting of 184 engines and related equipment, 7 aircraft and 4 spare parts packages with 78
lessees in 42 countries and an aggregate net book value of $961.5 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.
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.
8
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, 2012, 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 92% 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 2012, 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.
The following table displays the regional profile of our lease customer base for the years ended December 31, 2012,
2011 and 2010. No single country accounted for more than 10% of our lease rent revenue for any of those periods except for
the United States, Switzerland and China in 2012, the United States and Switzerland in each of 2010-2011 and Brazil and
China in each of 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):
Years Ended December 31,
2012
2011
2010
Percentage
Lease Rent
Revenue
Percentage
Lease Rent
Revenue
Percentage
(dollars in thousands)
12 % $ 20,790
6,806
3,183
38,626
9,818
18,635
2,084
4,721
100 % $ 104,663
6
6
37
10
20
2
7
20 % $ 22,662
6,367
1,662
32,604
14,380
18,413
432
5,613
100 % $ 102,133
6
3
37
9
18
2
5
22 %
6
2
32
14
18
1
5
100 %
Lease Rent
Revenue
$ 11,693
6,075
5,206
35,001
9,196
18,585
2,307
6,528
$ 94,591
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Total
9
FINANCING/SOURCE OF FUNDS
We, directly or through WEST II, 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, 2012, we had 79 full-time employees (excluding consultants), in sales and marketing, technical
service and administration. None of our employees are 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;
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:
10
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.
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 and four ATR72-202 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.
11
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 II 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. 15 of our
leases comprising approximately 11.3% of the net book value of our on-lease engines at December 31, 2012 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.
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
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;
12
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.
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 through 2012, 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, 2012, we had an aggregate of approximately $3.0 million in lease rent and $2.6 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 aircraft 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.
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.
13
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.
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.
14
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 effect 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. The FASB has not completed all
of its deliberations and the decisions made to date were sufficiently different from those published in the Lease ED to warrant
re-exposure of the revised proposal. The FASB's standard-setting process is ongoing and until new standards have been
finalized and issued, we cannot determine the impact on our consolidated financial statements that may result from such
future. 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.
Our aircraft, engines or parts could cause bodily injury or property damage, exposing 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
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.
15
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
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 II, 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, and a portion of 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 decreased from approximately 0.30% on December
31, 2011 to approximately 0.21% on December 31, 2012.
16
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 II securitization facility includes restrictions and limitations on the sale of engines in
that facility including, among others, that (i) the net proceeds from any individual engine sale must be at least 105% of the
debt allocated under the facility to that engine, and (ii) the aggregate appraised value of the facility’s engines sold through
September 2019 cannot exceed 20% of the total appraised value of the facility’s engines at the inception of the facility plus
the value of capitalized modifications to the engines since then, and cannot exceed 30% thereafter. 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
The trading price of our common 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;
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
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.
17
For the year ended December 31, 2012, 88% 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.
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.
18
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 II. Due to WEST II’s bankruptcy remote structure, that equity is
subject to the prior payments of WEST II’s debt and other obligations. Therefore, our rights and the rights of our creditors to
participate in any distribution of the assets of WEST II upon its liquidation, reorganization, dissolution or winding up will be
subject to the prior claims of WEST II’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.
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.
19
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, 2012, 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 2,739,202 shares of our
common stock, representing approximately 31% 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.
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 are the servicer and administrative agent for the WEST II facility and our cash flows would be materially and
adversely affected if we were removed from these positions.
We are the servicer and administrative agent with respect to engines in the WEST II facility. We receive monthly
fees of 11.5% as servicer and 2.0% as administrative agent of the aggregate net rents actually received by WEST II on its
engines. We may be removed as servicer and administrative agent by the affirmative vote of a requisite number of holders of
WEST II facility notes upon the occurrence of certain specified events, including the following events, subject to WEST II
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 covenant set forth in the Servicing Agreement: Maintain a minimum
consolidated earnings before interest, taxes, depreciation and amortization to interest ratio of 2.25-to-1.00
As of December 31, 2012, 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 II facility. If we are removed, our expenses would increase since our consolidated
subsidiary, WEST II, 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.
20
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 in Novato, California. We occupy space in Novato under a lease that covers
approximately 20,534 square feet of office space and expires September 30, 2018. The remaining lease rental commitment is
approximately $3.2 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 $0.1 million. We also lease office and
warehouse space in Shanghai, China. The office lease expires December 31, 2013 and the warehouse lease expires July 31,
2017 and the remaining lease commitments are approximately $64,800 and $28,000, respectively. We also lease office space
in London, United Kingdom. The lease expires December 21, 2015 and the remaining lease commitment is approximately
$219,000. We also lease office space in Blagnac, France. The lease expires December 31, 2013 and the remaining lease
commitment is approximately $17,000. We lease office space in Dublin, Ireland. The lease expires May 15, 2017 and the
remaining lease commitment is approximately $0.2 million.
ITEM 3. LEGAL PROCEEDINGS
None.
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 2012.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following information relates to our Common Stock, which is listed on the NASDAQ National Market under
the symbol WLFC. As of March 14, 2013 there were approximately 3,064 shareholders of our Common Stock.
The high and low closing sales price of the Common Stock for each quarter of 2012 and 2011, as reported by
NASDAQ, are set forth below:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012
2011
High
$ 14.82
13.14
13.33
14.71
Low
$ 12.13
11.75
11.46
12.35
High
$ 14.20
13.69
14.00
12.19
Low
$ 12.15
12.55
11.00
9.91
During the years ended December 31, 2012 and 2011, we did not pay cash dividends to our common shareholders.
We have not made any dividend payments to our common shareholders 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.
21
The following table outlines our Equity Compensation Plan Information.
Number of securities to be
issued upon exercise of
outstanding
options, warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a)
(a)
(b)
(c)
n/a
—
n/a
n/a
n/a
58,380
136,928
—
136,928
$ 8.60
n/a
$ 8.60
—
341,352
399,732
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
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. 1,728,156 shares of restricted stock were
granted under the 2007 Stock Incentive Plan by December 31, 2012. Of this amount, 69,508 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 341,352 shares which were available as of December 31, 2012 for future issuance under the 2007
Incentive Plan.
On September 27, 2012, the Company announced that its Board of Directors has authorized a plan to repurchase up
to $100.0 million of its common stock over the next 5 years. This plan extends the previous plan authorized on December 8,
2009, and increases the number of shares authorized for repurchase to up to $100.0 million. The repurchased shares are to be
subsequently retired. 928,261 shares totaling $12.7 million were repurchased in 2012 under our authorized plan. As of
December 31, 2012, the total number of common shares outstanding was approximately 8.7 million.
Common stock repurchases, under our authorized plan, in the quarter ended December 31, 2012 were as follows:
Period
October
November
December
Total
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
(in thousands, except per share data)
458
68
246
772
$ 13.79
$ 14.27
$ 14.10
$ 13.93
458
68
246
772
$ 93,677
$ 92,711
$ 89,240
$ 89,240
22
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.
Revenue:
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
2012
Ye ars Ende d De ce mbe r 31,
2010
2011
2009
2008
(dollars in thousands, e xce pt pe r share data)
$ 94,591
41,387
5,499
6,613
$ 148,090
$ 104,663
39,161
11,110
1,719
$ 156,653
$ 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
Net income
$ 1,535
$ 14,508
$ 12,050
$ 22,367
$ 26,601
Net income (loss) attributable to common
shareholders
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Balance Sheet Data:
Total assets
Debt (includes capital lease obligation)
Shareholders’ equity
Lease Portfolio:
Engines at end of the period
Spare parts packages at the end of the period
Aircraft at the end of the period
$ (3,793)
$ 11,380
$ 8,922
$ 19,239
$ 23,473
$ (0.45)
$ (0.43)
$ 1.35
$ 1.28
$ 1.03
$ 0.96
$ 2.30
$ 2.14
$ 2.85
$ 2.68
$ 1,078,715
$ 696,988
$ 199,553
$ 1,133,205
$ 718,134
$ 236,661
$ 1,125,962
$ 731,632
$ 226,970
$ 1,097,702
$ 726,235
$ 220,793
$ 982,712
$ 641,125
$ 192,207
184
4
7
194
3
13
179
4
3
169
3
4
160
3
4
23
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.” As of
December 31, 2012, 160 of our leases were operating leases and 1 was a finance lease. As of December 31, 2012, we had 78
lessees in 42 countries. Our portfolio is continually changing due to acquisitions and sales. As of December 31, 2012, our
total lease portfolio consisted of 184 engines and related equipment, 7 aircraft and 4 spare engine parts packages with an
aggregate net book value of $961.5 million. As of December 31, 2012, we also managed 33 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, and WOLF completed the purchase of two Airbus A340-313 aircraft from
Boeing Aircraft Holding Company for a purchase price of $96.0 million. On May 25, 2011, we entered into an agreement
with Mitsui & Co., Ltd. to participate in a joint venture formed as a Dublin-based Irish limited company – Willis Mitsui &
Company Engine Support Limited (“WMES”) for the purpose of acquiring and leasing jet engines. Each partner holds a fifty
percent interest in the joint venture. WMES owns and leases 15 engines with a net book value of $139.8 million at December
31, 2012.
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 on a
straight-line basis 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.
24
In addition, any deterioration in the financial condition of our customers may adversely affect future lease revenues. As of
December 31, 2012, all but one 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
a straight-line basis over 13-20 years to a 15%-17% residual value. Major overhauls paid for by us, which improve
functionality or extend the original useful life, are capitalized and depreciated over the shorter of the estimated period to the
next overhaul (“deferral method”) or the remaining useful life of the equipment. We do not accrue for planned major
maintenance. For equipment which is unlikely to be repaired at the end of its current expected life, and is likely to be
disassembled upon lease termination, we depreciate the equipment over its estimated life to a residual value based on an
estimate of the wholesale value of the parts after disassembly. Currently, 51 engines having a net book value of $118.5
million are depreciated using this policy.
It is our policy to review estimates regularly to accurately expense the cost of equipment over the useful life of the
engines. On July 1, 2011 and again on July 1, 2012, we adjusted the depreciation for certain older engine types within the
portfolio. The 2012 change in depreciation estimate resulted in a $2.0 million increase in depreciation in 2012 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 2012 change in depreciation estimate is a reduction in 2012 net income of $1.0 million or $0.12 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.
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, 2012 COMPARED TO THE YEAR ENDED DECEMBER 31, 2011
Revenue is summarized as follows:
Years Ended December 31,
2012
2011
Amount
%
Amount
%
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
$ 94,591
41,387
5,499
6,613
$ 148,090
(dollars in thousands)
63.9%
27.9%
3.7%
4.5%
100.0%
$ 104,663
39,161
11,110
1,719
$ 156,653
66.8%
25.0%
7.1%
1.1%
100.0%
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2012, decreased by 9.6% over the
comparable period in 2011. This decrease primarily reflects lower portfolio utilization in the current period and a decrease in
the average size of the lease portfolio, which translated into a lower amount of equipment on lease. The aggregate of net book
value of equipment held for lease at December 31, 2012 and 2011, was $961.5 million and $981.5 million, respectively, a
decrease of 2.0%. 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. At December 31, 2012, and 2011, respectively, approximately 86% and 82% of equipment by net book
value was on-lease. The average utilization for the year ended December 31, 2012 was 83% compared to 86% in the prior
year.
25
During the year ended December 31, 2012, one aircraft and 7 engines were added to our lease portfolio at a total cost of
$67.4 million (including capitalized costs). During the year ended December 31, 2011, 10 aircraft and 30 engines were added
to our lease portfolio at a total cost of $135.4 million (including capitalized costs).
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2012 increased
5.7% to $41.4 million from $39.2 million for the comparable period in 2011. This increase was primarily due to higher
maintenance reserve revenues generated for engines on short term leases, for which usage was higher in 2012 than in the year
ago period.
Gain on Sale of Leased Equipment. During the year ended December 31, 2012, we sold 14 engines, 1 aircraft and
various engine-related equipment from the lease portfolio for a net gain of $5.5 million. During the year ended December 31,
2011, we sold 12 engines and various engine-related equipment from the lease portfolio for a net gain of $11.1 million. The
2011 gain on sales included $3.6 million which represents 50% of the total $7.2 million gain related to the sale by the
Company of seven engines to WMES in 2011, as described in footnote 4 to our consolidated financial statements.
Other Revenue. Our other revenue consists primarily of management fee income and lease administration fees, and
increased $4.9 million from the prior year. The increase was primarily due to the recording of a gain of $2.0 million related to
the receipt of an engine in exchange for an engine that was damaged while under lease. Other revenue also increased in the
current period due to an increase in the number of engines managed, an increase in engine purchase arrangement fees, an
increase in termination and other lessee settlements and the recording of a $0.2 million gain related to the settlement of an
insurance claim of a casualty loss on a leased engine.
Depreciation Expense. Depreciation expense increased $1.3 million or 2.6% to $52.6 million for the year ended
December 31, 2012, from the comparable period in 2011 due to changes in estimates of useful lives and residual values on
certain older engine types. On July 1, 2011 and again on July 1, 2012, 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 2012 change in depreciation estimate resulted in a $2.0 million increase in depreciation for 2012. The net
effect of the 2012 change in depreciation estimate is a reduction in 2012 net income of $1.0 million or $0.12 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 $5.9 million for the year
ended December 31, 2012, an increase of $2.5 million from the $3.3 million recorded in the comparable period in 2011. A
write-down of $1.2 million was recorded for the year ended December 31, 2012 to adjust the carrying value of engine parts
held on consignment for which market conditions for the sale of parts has changed. A write-down of $4.7 million was
recorded in the year ended December 31, 2012 due to a management decision to sell 2 engines and consign 5 engines for part
out and sale. A write-down of $2.3 million was recorded for the year ended December 31, 2011 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 $1.0 million for the year ended December 31, 2011, due to the adjustment
of carrying values for certain impaired engines within the portfolio to reflect estimated market values.
General and Administrative Expenses. General and administrative expenses decreased 3.2% to $34.6 million for the
year ended December 31, 2012, from the comparable period in 2011 due to a decrease in employee bonus related to the
Company’s financial results ($1.5 million), decreased legal and consulting expense (0.7 million) and decreased selling
expenses ($0.3 million), which was partially offset by increases in taxes, fees and licenses ($0.5 million), bad debt expense
($0.4 million), employee benefits ($0.2 million) and system conversion expenses ($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 decreased 16.5%
to $7.0 million for the year ended December 31, 2012, from the comparable period in 2011 due mainly to a decrease in
engine maintenance costs due to lower repair activity ($1.3 million), lower 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 ($0.4 million) and decreased
sub-lease rental expense resulting from the termination of a sublease rental program in September 2011 ($0.3 million). The
decreases were partially offset by an increase in storage expenses ($0.7 million).
Net Finance Costs. Net finance costs include interest expense, interest income and net (gain)/loss on debt
extinguishment and derivatives termination. Interest expense decreased 9.8% to $31.7 million for the year ended December
31, 2012, from the comparable period in 2011, due to a decrease in the average debt outstanding and a decrease in the
average notional value of interest rate swaps held throughout the period which were at a higher rate than the prevailing
interest rates on our debt. As of December 31, 2012, $282.0 million of our debt is tied to one-month U.S. dollar LIBOR
which was 0.23% for each of the years ended December 31, 2012 and 2011 (average of month-end rates). At December 31,
2012 and 2011, one-month LIBOR was 0.21% and 0.30%, respectively.
26
To mitigate exposure to interest rate changes, we have entered into interest rate swap agreements. As of December 31, 2012,
such swap agreements had notional outstanding amounts of $100.0 million, with a remaining term of eleven months and a
fixed rate of 2.10%. In 2012 and 2011, $6.4 million and $11.3 million was realized through the income statement as an
increase in interest expense, respectively.
We recorded a loss on extinguishment of debt and derivative instruments of $15.5 million for the year ended
December 31, 2012 as a result of the write-off of $5.3 million of unamortized debt issuance costs and unamortized note
discount associated with the full repayment of WEST notes on September 17, 2012 and the termination of interest rate swaps
totaling $10.2 million. Upon the closing of WEST II on September 17, 2012, at which time the WEST floating rate debt was
fully repaid, six interest rate swaps with a notional value of $215.0 million that were assigned to the WEST debt were
terminated. The effective portion of the loss on these cash flow hedges was $10.1 million and was reclassified out of
accumulated other comprehensive income and recorded in earnings for the year ended December 31, 2012.
Interest income for the year ended December 31, 2012 and 2011, decreased by 52.1% to $0.08 million compared to
the year ago period due to a decrease in deposit balances.
Income Taxes. Income taxes for the year ended December 31, 2012, decreased to $1.2 million from $9.4 million for
the comparable period in 2011 reflecting decreased pre-tax income. The overall effective tax rate for the year ended
December 31, 2012 was 43.0% compared to 39.1% for the prior year. 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, 2011 COMPARED TO THE YEAR ENDED DECEMBER 31, 2010
Revenue is summarized as follows:
Years Ended December 31,
2011
2010
Amount
%
Amount
%
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
(dollars in thousands)
$ 104,663
39,161
11,110
1,719
$ 156,653
25.0
7.1
1.1
66.8 % $ 102,133
34,776
7,990
3,403
100.0 % $ 148,302
68.9 %
23.4
5.4
2.3
100.0 %
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2011, increased by 2.4% over the comparable
period in 2010. This increase primarily reflects growth in size of the lease asset portfolio which translated into a higher
amount of equipment on lease throughout the year. The sale of lease assets in the last half of 2011 resulted in a drop in the
year end portfolio value compared to the year ago period. The aggregate of net book value of equipment held for lease at
December 31, 2011 and 2010, was $981.5 million and $998.0 million, respectively, a decrease of 1.7%. At December 31,
2011, and 2010, respectively, approximately 82% and 90% of equipment by net book value was on-lease. . The average
utilization for each of the years ended December 31, 2011 and December 31, 2010 was 86%. During the year ended
December 31, 2011, 10 aircraft and 30 engines were added to our lease portfolio at a total cost of $135.4 million (including
capitalized costs). 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).
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2011, increased
12.6% to $39.2 million from $34.8 million for the comparable period in 2010. This increase was primarily due to the larger
average lease portfolio and an increased amount of equipment on-lease during 2011, particularly as a result of higher
maintenance reserve revenues generated for engines on short term leases, for which usage was higher in 2011 than in the year
ago period.
Gain on Sale of Leased Equipment. During the year ended December 31, 2011, we sold 12 engines and various
engine-related equipment from the lease portfolio for a net gain of $11.1 million. The 2011 gain on sales included $3.6
million which represents 50% of the total $7.2 million gain related to the sale by the Company of seven engines to WMES in
the period, as described in footnote 4 to our consolidated financial statements. 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.
Other Revenue. Our other revenue consists primarily of management fee income and lease administration fees, and
decreased $1.7 million from the prior year.
27
The decrease was primarily due to the sale of our interest in the SSAMC joint venture in 2010 for $3.5 million, which
generated a gain of $2.0 million in the prior year. This was partially offset in 2011 by higher fees earned on a larger portfolio
of engines managed on behalf of third parties.
Depreciation Expense. Depreciation expense increased $2.5 million or 5.2% to $51.3 million for the year ended
December 31, 2011, from the comparable period in 2010 due to an increase in the average lease portfolio value. On July 1,
2010 and again on July 1, 2011, 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 net effect of the
change in depreciation estimate had no significant impact to the net income and diluted earnings per share for the year ended
December 31, 2011 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 $3.3 million for the year
ended December 31, 2011, an increase of $0.4 million from the $2.9 million recorded in the comparable period in 2010. A
write-down of $2.3 million was recorded for the year ended December 31, 2011 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 $1.0 million for the year ended December 31, 2011, due to the adjustment of carrying
values for certain impaired engines within the portfolio to reflect estimated market values. 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.
General and Administrative Expenses. General and administrative expenses increased 21.8% to $35.7 million for the
year ended December 31, 2011, from the comparable period in 2010 due mainly to increases in employment related costs
($4.0 million), selling expenses ($1.0 million) and accounting, legal and consulting fees ($1.0 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 3.7%
to $8.4 million for the year ended December 31, 2011, from the comparable period in 2010 due mainly to increases in engine
maintenance costs due to higher repair activity ($0.9 million) and higher engine freight costs ($0.3 million), which was
partially offset by decreases in operating lease costs ($0.5 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 ($0.4 million).
Net Finance Costs. Net finance costs include interest expense, interest income and net (gain)/loss on debt
extinguishment. Interest expense decreased 13.9% to $35.2 million for the year ended December 31, 2011, from the
comparable period in 2010, due to a decrease in average debt outstanding and a decrease 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 0.27% for the year ended December 31, 2010 to an average of 0.23% for the year ended
December 31, 2011 (average of month-end rates). At December 31, 2011 and 2010, one-month LIBOR was 0.30% and
0.26%, respectively. To mitigate exposure to interest rate changes, we have entered into interest rate swap agreements. As of
December 31, 2011, such swap agreements had notional outstanding amounts of $375.0 million, average remaining terms of
between three and forty months and fixed rates of between 2.10% and 5.05%. In 2011 and 2010, $11.3 and $18.6 million
was realized through the income statement as an increase in interest expense, respectively.
Interest income for the year ended December 31, 2011 and 2010, decreased by 21.2% to $167,000 compared to the
year ago period due to the drop in the rate of interest earned on deposit balances.
Income Taxes. Income taxes for the year ended December 31, 2011, increased to $9.4 million from $7.6 million for
the comparable period in 2010 reflecting increased pre-tax income. The overall effective tax rate for the year ended
December 31, 2011was 39.1% compared to 38.8% for the prior year. 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 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of
Comprehensive Income” (“ASU 2011-05”). This ASU intends to enhance comparability and transparency of other
comprehensive income components. The guidance provides an option to present total comprehensive income, the
components of net income and the components of other comprehensive income in a single continuous statement or two
separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as
part of the Statement of Shareholder’s Equity and Comprehensive Income.
28
The guidance provided in ASU 2011-05 is effective for interim and annual period beginning on or after December 15, 2011
and should be applied retrospectively. We do not expect the adoption of this ASU to have a material impact on our
Consolidated Financial Statements.
In November 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet
Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This ASU requires companies to provide information
about trading financial instruments and related derivatives in expanded disclosures. This ASU is the result of a joint project
conducted by the FASB and the IASB to enhance disclosures and provide converged disclosures about financial instruments
and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master
netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. The
guidance provided in ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013 and
should be applied retrospectively. We do not expect the adoption of this ASU to have a material impact on our Consolidated
Financial Statements.
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-12, “Comprehensive Income
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). This ASU defers only those
changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The amendments are being made to
allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications
out of accumulated other comprehensive income on the components of net income and other comprehensive income for all
periods presented. All other requirements in ASU 2011-05 are not affected by this ASU, including the requirement to report
comprehensive income either in a single continuous financial statement or in two separate but consecutive financial
statements. The guidance provided in ASU 2011-12 is effective for interim and annual period beginning on or after
December 15, 2011 and should be applied retrospectively. The adoption of this ASU did not have a material impact on our
Consolidated Financial Statements.
In February 2013, the FASB issued Accounting Standards Update (ASU) 2013-02, “Comprehensive Income (Topic
220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 require an
entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective
line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles
(GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be
reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other
disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the
amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is
permitted. The Company is currently evaluating the impact that these disclosures will have on its financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We finance our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $603.7
million, $132.4 million and $174.8 million, in the years ended December 31, 2012, 2011 and 2010, respectively, was derived
from this activity. In these same time periods $626.9 million, $146.4 million and $170.0 million, respectively, was used to
pay down related debt. Cash flow from operating activities generated $67.3 million, $76.7 million and $56.6 million in the
years ended December 31, 2012, 2011 and 2010, respectively.
At December 31, 2012, $1.2 million in cash and cash equivalents and restricted cash were held in foreign
subsidiaries. We do not intend to repatriate the funds held in foreign subsidiaries to the United States. In the event that we
decide to repatriate these funds to the United States, we would be required to accrue and pay taxes upon the repatriation.
Our primary use of funds is for the purchase of equipment for lease. Purchases of equipment (including capitalized
costs) totaled $61.5 million, $144.3 million and $121.5 million for the years ended December 31, 2012, 2011 and 2010,
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 and general and administrative costs. Cash
received as maintenance reserve payments for some of our engines on lease are partially restricted by our debt arrangements.
The lease revenue stream, in the short-term, is at fixed rates while a portion of our debt is at variable rates. If interest rates
increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our earnings and
operating cash flows. Revenue and maintenance reserves are also affected by the amount of equipment off lease.
Approximately 86%, by book value, of our assets were on-lease at December 31, 2012 compared to approximately 82% at
December 31, 2011.
29
The average utilization rate for the year ended December 31, 2012 was 83% compared to 86% 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.
On February 27, 2013, we entered into a transaction to purchase and lease back a total of 19 aircraft engines with
SAS Group subsidiary Scandinavian Airlines (“SAS”) for $119.5 million. We will purchase 11 of the engines for $65.0
million and our joint venture, Willis Mitsui & Company Engine Support Limited (“WMES”) will purchase the remaining 8
engines for $54.5 million. We will fund this transaction with available funds from our revolving credit facility.
At December 31, 2012, notes payable consists of loans totaling $697.0 million payable over periods of
approximately 1 to 10 years with interest rates varying between approximately 3.0% and 5.5% (excluding the effect of our
interest rate derivative instruments). At December 31, 2012, we had a revolving credit facility totaling approximately $430.0
million compared to $345.0 million at December 31, 2011. At December 31, 2012, and December 31, 2011, respectively,
approximately $148.0 million and $117.0 million were available under these facilities.
Our significant debt instruments are discussed below:
At December 31, 2012, we had a $430.0 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 18, 2011 and the
proceeds of the new facility, net of $3.3 million in debt issuance costs, was used to pay off the balance remaining from our
prior revolving facility. On September 7, 2012, we increased this revolving credit facility to $430.0 million from $345.0
million. As of December 31, 2012, $148.0 million was available under this facility. The revolving credit facility ends in
November 2016. Based on the Company’s debt to equity ratio of 3.20 as calculated under the terms of the revolving credit
facility at September 30, 2012, the interest rate on this facility is one-month LIBOR plus 2.75% as of December 31, 2012.
Under the revolving credit facility, all subsidiaries except WEST II 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.
On September 17, 2012, we closed an asset-backed securitization (“ABS”) through a newly-created, bankruptcy-
remote, Delaware statutory trust, WEST II, of which the Company is the sole beneficiary. WEST II issued and sold $390
million aggregate principal amount of Class 2012-A Term Notes (the “Notes”) and received $384.9 million in net proceeds.
We used these funds, net of transaction expenses and swap termination costs, combination with our revolving credit facility,
to pay off the prior WEST notes totaling $435.9 million. At closing, the net book value of 22 engines were pledged as
collateral from WEST to the Company’s revolving credit facility, which provided the remaining funds to pay off the WEST
notes.
The assets and liabilities of WEST II will remain on the Company’s balance sheet. A portfolio of 79 commercial jet
aircraft engines and leases thereof secures the obligations of WEST II under the ABS. The Notes have no fixed amortization
and are payable solely from revenue received by WEST II from the engines and the engine leases, after payment of certain
expenses of WEST II. The Notes bear interest at a fixed rate of 5.50% per annum. The Notes may be accelerated upon the
occurrence of certain events, including the failure to pay interest for five business days after the due date thereof. The Notes
are expected to be paid in 10 years. The legal final maturity of the Notes is September 15, 2037.
In connection with the transactions described above, effective September 17, 2012, the Servicing Agreement and
Administrative Agency Agreement previously filed by the Company as exhibits to, and described in, its Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2005 relating to WEST were terminated. The Company entered into
a Servicing Agreement and Administrative Agency Agreement with WEST II to provide certain engine, lease management
and reporting functions for WEST II in return for fees based on a percentage of collected lease revenues and asset sales.
Because WEST II is consolidated for financial statement reporting purposes, all fees eliminate upon consolidation.
As a result of this transaction the Company recorded a loss on extinguishment of debt and derivative instruments of
$15.5 million in the year ended December 31, 2012 as a result of the write-off of $5.3 million of unamortized debt issuance
costs and unamortized note discount associated with the full repayment of WEST notes on September 17, 2012 and the
termination of interest rate swaps totaling $10.2 million.
At December 31, 2012, $386.7 million of WEST II term notes were outstanding. The assets of WEST II are not
available to satisfy our obligations or those of any of our affiliates other than the obligations specific to WEST II. WEST II is
consolidated for financial statement presentation purposes. WEST II’s ability to make distributions and pay dividends to the
Company is subject to the prior payments of its debt and other obligations and WEST II’s maintenance of adequate reserves
and capital. Under WEST II, cash is collected in a restricted account, which is used to service the debt and any remaining
amounts, after debt service and defined expenses, are distributed to the Company.
30
Additionally, a portion of maintenance reserve payments and all lease security deposits are accumulated in restricted accounts
and are available to fund future maintenance events and to secure lease payments, respectively. Cash from maintenance
reserve payments are held in the restricted cash account equal to the maintenance obligations projected for the subsequent six
months, and are subject to a minimum balance of $9.0 million. These terms resulted in the release of excess cash which had
been held in our restricted cash accounts generating greater liquidity.
On September 28, 2012, we closed on a loan for a five year term totaling $8.7 million. Interest is payable at a fixed
rate of 5.50% and principal and interest is paid quarterly. The loan is secured by one engine. The funds were used to purchase
the engine secured under the loan. The balance outstanding on this loan is $8.6 million as of December 31, 2012.
On September 30, 2011, we closed on a loan for a three year term totaling $4.0 million. Interest is payable at a fixed
rate of 3.94% and principal and interest is paid monthly. The loan is secured by our corporate aircraft. The funds were used to
refinance the loan for our corporate aircraft. The balance outstanding on this loan is $2.3 million as of December 31, 2012.
On January 11, 2010, we closed on a loan for a four year term totaling $22.0 million, the proceeds of which were
used to pay down our revolving credit facility. Interest is payable at a fixed rate of 4.50% and principal and interest is paid
quarterly. The loan is secured by three engines. The balance outstanding on this loan is $17.3 million as of December 31,
2012.
At December 31, 2012 and 2011, one-month LIBOR was 0.21% and 0.30%, respectively.
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. The facilities are also cross-defaulted against other facilities. If we do not comply with the covenants or
eligibility requirements, we may not be permitted to borrow additional funds and accelerated payments may become
necessary. Additionally, much of the above debt is secured by engines to the extent that engines are sold, repayment of that
portion of the debt could be required.
At December 31, 2012, we are in compliance with the covenants specified in the revolving credit facility Credit
Agreement, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio
requirement to remain below 4.50 to 1.00. At December 31, 2012, the Company’s calculated Minimum Consolidated
Tangible Net Worth exceeded the minimum required amount of $182.1 million. As defined in the revolving credit facility
Credit Agreement, the Interest Coverage Ratio is the ratio of Earnings before Interest, Taxes, Depreciation and Amortization
and other one-time charges (EBITDA) to Consolidated Interest Expense and the Total Leverage Ratio is the ratio of Total
Indebtedness to Tangible Net Worth. At December 31, 2012, we are in compliance with the covenants specified in the WEST
II indenture and servicing agreement.
Approximately $19.2 million of our debt is repayable during 2013. 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, 2012:
Long-term debt obligations
Interest payments under long-term debt
obligations
Operating lease obligations
Purchase obligations
Interest payments under derivative rate instruments
Total
Total
$ 696,988
189,510
3,794
37,132
1,696
$ 929,120
Less than
1 Year
$ 19,237
30,555
898
19,044
1,696
$ 71,430
Payment due by period (in thousands)
1-3 Years
$ 57,094
3-5 Years
$ 333,589
More than
5 Years
$ 287,068
56,489
1,380
18,088
-
$ 133,051
42,111
1,096
-
-
$ 376,796
60,355
420
-
-
$ 347,843
We have estimated the interest payments due under long-term debt by applying the interest rates applicable at
December 31, 2012 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.
We have made purchase commitments to secure the purchase of four engines and related equipment for a gross
purchase price of $38.5 million, for delivery in 2013 to 2015. As at December 31, 2012, non-refundable deposits paid related
to this purchase commitment were $1.4 million.
31
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 outstanding purchase orders with
CFM for three engines represent deferral of engine deliveries originally scheduled for 2009 and are included in our
commitments to purchase in 2013 to 2015.
We entered into a lease effective November 1, 2007 for our offices in Novato, California that covers approximately
18,375 square feet of office space. This lease was amended on January 6, 2012 to cover an additional 2,159 square feet of
office space. The total remaining rent commitment is approximately $3.2 million and expires September 30, 2018. The sub-
lease of our premises in San Diego, California expires in October 2013. Our Shanghai, China office lease expires in
December 2013. Our London, United Kingdom office lease expires in December 2015. Our Blagnac, France office lease
expires in December 2013. Our Dublin, Ireland office lease expires in May 2017.
We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level
of operations through 2013. 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
We terminated six interest rate swaps with a notional value of $215.0 million on September 17, 2012. The originally
specified hedged forecasted transactions were terminated upon the closing of WEST II on September 17, 2012. The effective
portion of the loss on these cash flow hedges was $10.2 million and was reclassified out of accumulated other comprehensive
income and recorded in earnings for the year ended December 31, 2012.
At December 31, 2012, $282.0 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 one interest rate
swap agreement which has a notional outstanding amount of $100.0 million, with a remaining term of eleven months at a
fixed rate of 2.10%. The fair value of the swaps at December 31, 2012 and 2011 was negative $1.7 million and negative
$12.3 million, respectively, representing a net liability for us.
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 $6.4
million and $11.3 million in 2012 and 2011, 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
Island Air: Charles F. Willis, IV, our CEO and Chairman of our Board of Directors and the owner of approximately
31% of our common stock, was the sole owner of Island Air, a lessee of the Company since 2004. On February 26, 2013 the
stock of Hawaii Island Air was sold to an unrelated third party. While under common ownership, the independent members
of our Board of Directors approved transactions between the Company and Island Air.
32
The Company and Island Air entered into a series of transactions over the past several years through which the
Company provided equipment to Island Air in return for lease payments. The terms of the agreements have been amended
from time to time with the Company accepting lower lease payments in some circumstances.
As of December 31, 2012, Island Air leased from the Company one DeHaviland DHC-8-100 aircraft under an
operating lease and two DeHaviland DHC-8-100 aircraft and one spare engine under a finance lease. As of December 31,
2012, Island Air owed $4.5 million and $0.65 million under the finance lease and note payable, respectively. The Company
received lease payments and recorded revenue from Island Air totaling $0.6 million, $1.6 million and $0.9 million in the
years ended December 31, 2012, 2011 and 2010.
In connection with the sale of its stock to an unrelated third party, on February 26, 2013, Island Air prepaid the note
payable at a 45% discount of $0.4 million, conditioned on the other large creditors accepting similar reductions in the
amounts due to them. The assets under lease to Island Air have a combined net book value of $4.0 million as of December
31, 2012. Management expects the new ownership should significantly improve the credit quality of the leases. Future lease
rent revenue from Island Air totaling $6.2 million under the finance and operating leases is expected to be recorded through
December 2015.
J.T. Power: The Company entered into two Consignment Agreements dated January 22, 2008 and November 17,
2008, with J.T. Power, LLC (“J.T. Power”), an entity whose sole shareholder, Austin Willis, is the son of our Chief
Executive Officer, and directly and indirectly, a shareholder and a Director of the Company. According to the terms of the
Consignment Agreement, J.T. Power was responsible to market and sell parts from the teardown of four engines with a book
value of $5.2 million. During the twelve months ended December 31, 2012, sales of consigned parts were $18,100. Under
these agreements, J.T. Power provided a minimum guarantee of net consignment proceeds of $4.0 million as of February 22,
2012. Based on current consignment proceeds, J.T. Power was obligated to pay $1.3 million under the guarantee in February
2012. On March 7, 2012, this guarantee was restructured as follows - quarterly payments of $45,000 over five years at an
interest rate of 6% with a balloon payment at the end of this five year term. The Agreement provides an option to skip one
quarterly payment and apply it to the balloon payment at an interest rate of 12%. As a December 31, 2012, J.T. Power is
current and the principal amount owing under the note is $1.2 million.
On July 31, 2009, the Company entered into Consignment Agreements with J.T. Power, without guaranties of
consignment proceeds, in which they are responsible to market and sell parts from the teardown of one engine with a book
value of $23,000. During the twelve months ended December 31, 2012, sales of consigned parts were $52,600.
On July 27, 2006, the Company entered into an Aircraft Engine Agency Agreement with J.T. Power, in which the
Company will, on a non-exclusive basis, provides engine lease opportunities with respect to available spare engines at J.T.
Power. J.T. Power will pay the Company a fee based on a percentage of the rent collected by J.T. Power for the duration of
the lease including renewals thereof. The Company earned no revenue during the twelve months ended December 31, 2012
under this program.
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. As of
December 31, 2012, $282.0 million of our outstanding debt is variable rate debt. We estimate that for every one percent
increase or decrease in interest rate, the annual interest expense for our variable rate debt (net of derivative instruments),
would increase or decrease $1.8 million (in 2011, $3.2 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 $1.7 million for the year ending December 31, 2013
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 2012, 2011, and 2010, respectively, 88%, 80% and 78%
of our total lease rent revenues came from non-United States domiciled lessees.
33
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 43.
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
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, 2012.
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, 2012, 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 41.
(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, 2012 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
34
ITEM 9B. OTHER INFORMATION
Thomas C. Nord, Senior Vice President and General Counsel of the Company, will retire effective as of March 31,
2013. Dean M. Poulakidas will assume Mr. Nord’s duties as the Company’s Senior Vice President and General Counsel on
April 1, 2013.
In order to facilitate this transition, the Company and Mr. Nord entered into a Transition Agreement dated as of
December 21, 2012 (the “Transition Agreement”) which outlines the terms of his compensation during the Company’s
transition to a new General Counsel through May 31, 2013 (the “Transition Period”). The Transition Agreement provides for
a graduated reduction of Mr. Nord’s work schedule and related compensation during the Transition Period, from full-time at
his normal salary in January 2013 to 60% in February and March 2013. From April 1, 2013 through the remainder of the
Transition Period Mr. Nord will be on retainer, compensated at a rate of $10,000 per month plus an hourly rate of $300/hour.
Mr. Nord’s unvested restricted stock scheduled to vest through March 31, 2013 will vest as scheduled. Additionally, subject
to the satisfaction of the Company’s CEO with the transition of Mr. Nord’s duties to his successor, Mr. Nord’s other
restricted stock awards scheduled to vest in May, August and December 2013 would be accelerated to vest on April 1, 2013,
and Mr. Nord would be paid a cash payment in lieu of a restricted stock award in recognition of his work on the Company’s
WEST II transaction.
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.
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
2012
$ 657,984
167,660
24,509
-
$ 850,153
2011
$ 653,631
77,386
114,788
25,000
$ 870,805
The remaining information required by this item is incorporated by reference to our Proxy Statement.
35
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) (1) Financial Statements
The response to this portion of Item 15 is submitted as a separate section of this report beginning on page 39.
(a) (2) Financial Statement Schedule
Schedule II, Valuation Accounts, is submitted as a separate section of this report starting on page 69.
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
4.6
4.7
4.8
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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 3.2 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).
Third Amendment to Rights Agreement dated as of September 30, 2008, by and between Willis Lease Finance
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).
Amendment to Employment Agreement between Registrant and Donald A. Nunemaker dated December 31,
2008 (incorporated by reference to Exhibit 10.6 to our report on Form 10-Q filed on May 9, 2011).
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).
36
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*
Amendment to Employment Agreement between Registrant and Thomas C. Nord dated December 31, 2008
(incorporated by reference to Exhibit 10.8 to our report on Form 10-Q filed on May 9, 2011).
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).
Amendment to Employment Agreement between Registrant and Bradley S. Forsyth dated December 31, 2008
(incorporated by reference to Exhibit 10.10 to our report on Form 10-Q filed on May 9, 2011).
Loan and Aircraft Security Agreement dated September 30, 2012 between Banc of America Leasing & Capital,
LLC and Willis Lease Finance Corporation (incorporated by reference to Exhibit 10.12 to our report on Form
10-Q filed on November 9, 2011).
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).
Amended and Restated Credit Agreement, dated as of November 18, 2011, among Willis Lease Finance
Corporation, Union Bank, N.A., as administrative agent and security agent, and certain lenders and financial
institutions named therein (incorporated by reference to Exhibit 10.31 to our report on Form 10-K filed on
March 13, 2011).
Indenture dated as of September 14, 2012 among Willis Engine Securitization Trust II, Deutsche Bank Trust
Company Americas, as trustee, the Registrant and Crédit Agricole Corporate and Investment Bank (incorporated
by reference to Exhibit 10.14 to our report on Form 10-Q filed on November 9, 2012).
Security Trust Agreement dated as of September 14, 2012 by and among Willis Engine Securitization Trust II,
Willis Engine Securitization (Ireland) Limited, the Engine Trusts listed on Schedule V thereto, each of the
additional grantors referred to therein and from time to time made a party thereto and Deutsche Bank Trust
Company Americas, as trustee (incorporated by reference to Exhibit 10.15 to our report on Form 10-Q filed on
November 9, 2012).
Note Purchase Agreement dated as of September 6, 2012 by and among Willis Engine Securitization Trust II,
the Registrant, Credit Agricole Securities (USA) Inc. and Goldman, Sachs & Co. (incorporated by reference to
Exhibit 10.16 to our report on Form 10-Q filed on November 9, 2012).
Servicing Agreement dated as of September 17, 2012 between Willis Engine Securitization Trust II, the
Registrant and the entities listed on Appendix A thereto (incorporated by reference to Exhibit 10.17 to our report
on Form 10-Q filed on November 9, 2012).
Administrative Agency Agreement dated as of September 17, 2012 among Willis Engine Securitization Trust II,
the Registrant, Deutsche Bank Trust Company Americas, as trustee, and the entities listed on Appendix A
thereto (incorporated by reference to Exhibit 10.18 to our report on Form 10-Q filed on November 9, 2012).
Asset Transfer and Liquidation Agreement dated as of September 14, 2012 between the Registrant and Willis
Engine Securitization Trust (incorporated by reference to Exhibit 10.19 to our report on Form 10-Q filed on
November 9, 2012).
Acquisition Transfer Agreement dated as of September 14, 2012 among the Registrant, Willis Engine
Securitization Trust II, Facility Engine Acquisition LLC, WEST Engine Acquisition LLC, and WEST Engine
Funding LLC (incorporated by reference to Exhibit 10.20 to our report on Form 10-Q filed on November 9,
2012).
10.21 Transition Agreement dated as of December 21, 2012 between Registrant and Thomas C. Nord.
Statement re Computation of Per Share Earnings.
Statement re Computation of Ratios.
11.1
12.1
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to our report on Form 10-K filed on March 16, 2010).
21.1
23.1 Consent of KPMG LLP.
31.1
Subsidiaries of the Registrant.
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.
The following materials from the Company’s report on Form 10-K for the fiscal year ended December 31, 2012,
formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Income, (iii) the Consolidated Statements of Shareholder’s Equity and
Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited
Consolidated Financial Statements.
31.2
32
101+
*
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.
37
+ Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration
statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed
for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to
liability under those sections.
(d)
Financial Statements
Financial Statements are submitted as a separate section of this report beginning on page 40.
38
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 18, 2013
Willis Lease Finance Corporation
By: /s/ CHARLES F. WILLIS, IV
Charles F. Willis, IV
Chairman of the Board and
Chief Executive Officer
Dated:
Title
Signature
Date: March 18, 2013
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ CHARLES F. WILLIS, IV
Charles F. Willis, IV
Date: March 18, 2013
Chief Financial Officer
and Senior Vice President
(Principal Finance and Accounting Officer)
Date: March 18, 2013
Director
Date: March 18, 2013
Director
Date: March 18, 2013
Director
Date:
Director
Date: March 18, 2013
Director
/s/ BRADLEY S. FORSYTH
Bradley S. Forsyth
/s/ ROBERT T. MORRIS
Robert T. Morris
/s/ HANS JOERG HUNZIKER
Hans Joerg Hunziker
/s/ W. WILLIAM COON, JR.
W. William Coon, Jr.
Austin C. Willis
/s/ GERARD LAVIEC
Gerard Laviec
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
41-42
Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011
Consolidated Statements of Income (Loss) for the years ended December 31, 2012, December 31, 2011 and December
31, 2010
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, December 31, 2011
and December 31, 2010
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012, December 31, 2011 and
December 31, 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, December 31, 2011 and December 31,
2010
Notes to Consolidated Financial Statements
43
44
45
46
47
48
40
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, 2012 and 2011, and the related consolidated statements of income (loss), comprehensive
income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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, 2012 and 2011, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Willis Lease Finance Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 18, 2013 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Francisco, California
March 18, 2013
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Willis Lease Finance Corporation:
We have audited Willis Lease Finance Corporation’s internal control over financial reporting as of December 31, 2012, based
on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Willis Lease Finance Corporation’s management is responsible 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 the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit 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 audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
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, Willis Lease Finance Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Willis Lease Finance Corporation and subsidiaries as of December 31, 2012 and 2011, and
the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2012, and our report dated March 15, 2013 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
San Francisco, California
March 18, 2013
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 $242,529 and
$228,708 at December 31, 2012 and 2011, respectively
Equipment held for sale
Operating lease related receivable, net of allowances of $980 and $477 at
December 31, 2012 and 2011, respectively
Notes receivable, net of allowances of $654 and $840 at
December 31, 2012 and 2011, respectively
Investments
Property, equipment & furnishings, less accumulated depreciation of $7,087 and
$4,957 at December 31, 2012 and 2011, respectively
Equipment purchase deposits
Other assets
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 $0 and $2,085 at December 31, 2012 and 2011,
respectively
Maintenance reserves
Security deposits
Unearned lease revenue
Total liabilities
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; 0 and 3,475,000
shares issued and outstanding at December 31, 2012 and 2011, respectively )
Common stock ($0.01 par value, 20,000,000 shares authorized; 8,715,580 and
9,109,663 shares issued and outstanding at December 31, 2012 and 2011,
respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive loss, net of income tax benefit of $651 and
$5,249 at December 31, 2012 and 2011, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated financial statements.
December 31,
December 31,
2012
2011
$ 5,379
24,591
$ 6,440
76,252
961,459
23,607
12,916
-
21,831
981,505
20,648
8,434
542
15,239
5,989
1,369
21,574
$ 1,078,715
6,901
1,369
15,875
$ 1,133,205
$ 15,374
1,690
90,248
$ 16,833
12,341
84,706
696,988
63,313
6,956
4,593
879,162
718,134
54,509
6,278
3,743
896,544
-
31,915
87
47,785
152,911
91
56,842
156,704
(1,230)
199,553
$ 1,078,715
(8,891)
236,661
$ 1,133,205
43
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
(In thousands, except per share data)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation expense
Write-down of equipment
General and administrative
Technical expense
Net finance costs:
Interest expense
Interest income
Loss on debt extinguishment and derivatives termination
Total net finance costs
Total expenses
Earnings from operations
Earnings from joint ventures
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Preferred stock redemption costs
2012
Years Ended December 31,
2011
2010
$ 94,591
41,387
5,499
6,613
148,090
$ 104,663
39,161
11,110
1,719
156,653
$ 102,133
34,776
7,990
3,403
148,302
52,591
5,874
34,551
7,006
51,250
3,341
35,701
8,394
48,704
2,874
29,302
8,118
31,749
(80)
15,462
47,131
147,153
35,201
(167)
343
35,377
134,063
40,945
(212)
—
40,733
129,731
937
1,759
22,590
1,295
18,571
1,109
2,696
(1,161)
$ 1,535
23,885
(9,377)
$ 14,508
19,680
(7,630)
$ 12,050
2,493
2,835
3,128
3,128
-
-
Net income (loss) attributable to common shareholders
$ (3,793)
$ 11,380
$ 8,922
Basic earnings (loss) per common share:
$ (0.45)
$ 1.35
$ 1.03
Diluted earnings (loss) per common share:
$ (0.43)
$ 1.28
$ 0.96
Average common shares outstanding
Diluted average common shares outstanding
8,490
8,791
8,423
8,876
8,681
9,251
See accompanying notes to the consolidated financial statements.
44
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income
Other comprehensive income (loss):
Derivative instruments
Twelve Months Ended
December 31
2012
$ 1,535
2011
$ 14,508
2010
$ 12,050
Unrealized losses on derivative instruments
Reclassification adjustment for losses included in termination of
derivative instruments
Reclassification adjustment for losses included in net income
Net gain (loss) recognized in other comprehensive income
Tax benefit (expense) related to items of other
comprehensive income (loss)
(4,311)
(8,933)
(22,057)
10,143
-
-
6,427
12,259
11,349
2,416
18,633
(3,424)
(4,598)
(838)
1,242
Other comprehensive income (loss)
Total comprehensive income
7,661
$ 9,196
1,578
$ 16,086
(2,182)
$ 9,868
See accompanying notes to the consolidated financial statements.
45
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
Balances at December 31, 2009
Net income
Unrealized loss from derivative instruments,
net of tax benefit of $1,242
Preferred stock dividends paid
Shares repurchased
Shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of
withholding tax
Stock-based compensation, net of forfeitures
Excess tax benefit from stock-based
compensation
Issued and
Outstanding
Shares of
Common
Stock
9,182
Preferred
Stock
$ 31,915
Common
Stock
$ 92
Paid-in
Capital in
Excess of par
$ 60,671
Accumulated Other
Comprehensive
Income/(Loss)
$ (8,287)
Retained
Earnings
$ 136,402
Total
Shareholders’
Equity
$ 220,793
—
—
—
—
—
—
—
—
—
—
—
(367)
429
(63)
—
—
—
—
—
(4)
—
—
—
(4,152)
5
1,264
(1)
—
—
(775)
2,678
422
—
12,050
12,050
(2,182)
—
—
—
—
—
—
—
(3,128)
—
—
—
—
—
(2,182)
(3,128)
(4,156)
1,269
(776)
2,678
422
Balances at December 31, 2010
$ 31,915
9,181
$ 92
$ 60,108
$ (10,469)
$ 145,324
$ 226,970
Net income
Unrealized gain from derivative instruments,
net of tax expense of $838
Preferred stock dividends paid
Shares repurchased
Cash settlement of stock options
Shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of
withholding tax
Stock-based compensation, net of forfeitures
Excess tax benefit from stock-based
compensation
—
—
—
—
—
—
—
—
—
—
—
(435)
(172)
614
(78)
—
—
—
—
(4)
(2)
—
—
—
(5,657)
(1,260)
6
666
(1)
—
(967)
3,173
—
14,508
14,508
1,578
—
1,578
—
—
—
—
—
—
(3,128)
—
—
—
—
—
(3,128)
(5,661)
(1,262)
672
(968)
3,173
—
—
—
779
—
—
779
Balances at December 31, 2011
$ 31,915
9,110
$ 91
$ 56,842
$ (8,891)
$ 156,704
$ 236,661
Net income
Net unrealized loss from derivative instruments,
net of tax expense of $4,598
Preferred stock dividends paid
—
—
—
Preferred stock redemption
(31,915)
Shares repurchased
Shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of
withholding tax
Stock-based compensation, net of forfeitures
—
—
—
—
—
—
—
—
(928)
627
(93)
—
—
—
—
—
(9)
—
—
—
—
(12,727)
6
1,719
(1)
(1,193)
—
3,144
—
1,535
1,535
7,661
—
7,661
—
—
—
—
—
—
(2,493)
(2,835)
—
—
—
(2,493)
(34,750)
(12,736)
1,725
(1,194)
—
3,144
Balances at December 31, 2012
$ -
8,716
$ 87
$ 47,785
$ (1,230)
$ 152,911
$ 199,553
See accompanying notes to the consolidated financial statements.
46
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 non-monetary exchange
Gain on insurance settlement
Gain on sale of interest in joint venture
Other non-cash items
Income from joint ventures, net of distributions
Non-cash portion of loss on debt extinguishment and derivatives termination
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 (net of selling expenses)
Proceeds from sale of interest in joint venture
Restricted cash for investing activities
Investment in joint ventures
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
Preferred stock dividends
Proceeds from shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of withholding tax
Excess tax benefit from stock-based compensation
Redemption of preferred stock
Repurchase of common stock
Cash settlement of stock options
Principal payments on notes payable
Decrease in restricted cash
Net cash 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
2012
Years Ended December 31,
2011
2010
$ 1,535
$ 14,508
$ 12,050
52,591
5,874
3,144
3,982
341
(236)
503
(5,499)
(1,961)
(173)
—
—
(957)
7,164
1,161
(4,985)
542
(1,256)
(5,936)
1,694
8,804
678
301
67,311
34,607
—
1,754
(5,636)
(61,464)
(1,219)
(31,958)
603,693
(11,949)
(2,493)
1,725
(1,194)
—
(34,750)
(12,736)
—
(626,923)
48,213
(36,414)
(1,061)
6,440
51,250
3,341
3,173
4,544
532
483
54
(11,110)
—
—
—
(1,113)
(485)
343
9,377
385
205
(4,507)
(2,021)
2,515
4,067
552
569
76,662
110,777
—
(1,754)
(8,943)
(144,334)
(904)
(45,158)
132,409
(3,691)
(3,128)
672
(968)
779
—
(5,661)
(1,262)
(146,439)
—
(27,289)
4,215
2,225
48,704
2,874
2,678
5,246
594
2,956
(44)
(7,990)
—
—
(2,020)
—
(160)
—
7,630
(3,045)
196
(3,108)
3,733
(17,383)
3,690
245
(213)
56,633
63,777
3,500
—
—
(121,509)
(399)
(54,631)
174,841
(268)
(3,128)
1,269
(776)
422
—
(4,156)
—
(170,037)
—
(1,833)
169
2,056
$ 5,379
$ 6,440
$ 2,225
$ 21,528
$ 20,063
$ 17,629
$ 105
$ 155
$ 549
Supplemental disclosures of non-cash investing activities:
During the years ended December 31, 2012, 2011, 2010, a liability of $2,402, $0 and $6,099, respectively, was incurred
but not paid in connection with our purchase of aircraft and engines.
During the years ended December 31, 2012, 2011, 2010, engines and equipment totaling $22,935, $17,067 and $70,000,
respectively, were transferred from Held for Operating Lease to Held for Sale but not settled.
See accompanying notes to the consolidated financial statements.
47
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
Aviation Finance Limited in Ireland is a wholly-owned subsidiary formed to facilitate the leasing and technical support of
worldwide activities. Willis Lease France is a wholly-owned French subsidiary of Willis formed to facilitate sales and
marketing activities in Europe. Willis Lease (China) Limited is a wholly-owned subsidiary of Willis formed to facilitate the
acquisition and leasing of assets in China.
Willis Engine Securitization Trust II (“WEST II”) is a bankruptcy remote special purpose vehicle which was
established for the purpose of financing aircraft engines through an asset-backed securitization. WEST Engine Acquisition
LLC and Facility Engine Acquisition LLC are wholly-owned subsidiaries of WEST II and own the engines which secure the
notes issued by WEST II. Willis Engine Securitization (Ireland) Limited is another wholly-owned subsidiary of WEST II and
was established to facilitate certain international leasing activities by WEST II.
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 Engine Funding LLC, WEST Engine
Funding (Ireland) Limited, WEST Engine Acquisition LLC, Facility Engine Acquisition LLC, WLFC (Ireland) Limited,
Willis Lease (Ireland) Limited, WLFC (Ireland) Limited, WLFC Funding (Ireland) Limited, Willis Aviation Finance
Limited, Willis Lease France, Willis Lease (China) Limited, WEST Engine Securitization Trust II, Willis Engine
Securitization (Ireland) Limited (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 on a straight-line basis 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 years ended December 31, 2011 and 2010, the Company sold three and four engines to an investor group for
$29.0 million and $32.9 million, respectively. 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. There were no such sales recorded
in the year ended December 31, 2012.
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.
48
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 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 $5.0 million gain on sale of the three engines in the year ended December 31, 2011 and recognized a
$7.2 million gain on sale of the four engines in the year ended December 31, 2010. The gains recorded were 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 revenue.
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, 2012, we had an aggregate of approximately $2.9 million in lease rent and $2.7 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. The Company estimates an
allowance for doubtful accounts for lease receivables it does not consider fully collectible. The allowance for doubtful
accounts includes the following: (1) specific reserves for receivables which are impaired for which management believes full
collection is doubtful; and (2) a general reserve for estimated losses based on historical experience.
Our largest customer accounted for approximately 7.4% of total revenue during 2012. This customer had $106,000
in past due rents as of December 31, 2012. No other customer accounted for greater than 10% of total revenue in 2012, 2011
and 2010.
(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 the original useful life, are capitalized and depreciated over the shorter of the
estimated period to the next overhaul (“deferral method”) or the remaining useful life of the equipment. We do not accrue for
planned major maintenance. 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 for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets to be disposed are reported at the lower of
carrying amount or fair value less cost to sell.
49
Impairment is identified by comparison of undiscounted forecasted cash flows, including estimated sales proceeds, over the
life of the asset with the assets’ book value. If the forecasted 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 impairment is possible. No impairment charges were recorded in 2012 as a result of our review. Such reviews
resulted in impairment charges for engines and aircraft of $1.0 million and $0.2 million in 2011 and 2010, respectively
(disclosed separately as “Write-down of equipment” in the Consolidated Statements of Income).
(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 the original useful life, are
capitalized and depreciated over the shorter of the estimated period to the next overhaul (“deferral method”) or the remaining
useful life of the equipment. We do not accrue for planned major maintenance.
(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 is 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 (See Note 7).
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 2009-2011 and 2008-2011, 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.
50
(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 II borrowings. Under
WEST II, cash is collected in a restricted account, which is used to service the debt and any remaining amounts, after debt
service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance reserve payments and
all lease security deposits are accumulated in restricted accounts and are available to fund future maintenance events and to
secure lease payments, respectively. Under WEST II, cash from maintenance reserve payments are held in the restricted cash
account equal to the maintenance obligations projected for the subsequent six months, and are subject to a minimum balance
of $9.0 million. 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.
(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.
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 (loss) per common share is computed by dividing net income (loss) by the weighted-average number
of common shares outstanding during the period. The computation of fully diluted earnings (loss) per share is similar to the
computation of basic earnings (loss) 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:
51
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
2012
Years Ended December 31,
2011
(in thousands)
2010
8,490
301
8,791
—
8,423
453
8,876
—
8,681
570
9,251
4
We have two investments in joint ventures where we own 50% of the equity of the venture and account for these
investments using the equity method of accounting. These investments are 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, which was recorded at cost. The investment was sold in
November 2010 for $3.5 million resulting in a gain of $2.0 million that was recorded as Other revenue in 2010.
(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,
$1.4 million and $1.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(r) Fair Value Measurements
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
inputs and minimize the use of unobservable inputs, to the extent possible. We use a fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the last unobservable, 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, 2012, we measure the fair value of our interest rate swaps of $100.0 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, 2012, 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 $1.7 million and $12.3 million as
of December 31, 2012 and December 31, 2011, respectively. In 2012 and 2011, $6.4 million and $11.3 million, respectively,
were realized through the income statement as an increase in interest expense, and in 2012, $10.2 million was realized
through the income statement as a net loss on debt extinguishment and derivatives termination.
52
The following table shows by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value
as of December 31, 2012 and 2011:
December 31, 2012
December 31, 2011
Assets and (Liabilities) at Fair Value
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Derivatives
Total
$ (1,690)
$ (1,690)
$ — $ (1,690)
$ — $ (1,690)
(in thousands)
$ — $ (12,341)
$ — $ (12,341)
$ — $ (12,341)
$ — $ (12,341)
$ —
$ —
In 2012 and 2011, all hedges were effective and no change in fair value was recorded in earnings.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
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. 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, 2012 and 2011, and the gains (losses) recorded as of December 31, 2012 and 2011
on those assets:
December 31, 2012
December 31, 2011
Assets at Fair Value
Total Losses
December 31,
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
2012
2011
(in thousands)
(in thousands)
Equipment held for
operating lease
Equipment held for
sale
Total
$ — $ —
$ — $ — $ 8,302
$ — $ 8,302
$ — $ - $ (1,035)
6,281
$ 6,281
— 6,281
$ — $ 6,281
$ —
$ -
2,501
$ 10,803
— 1,862
$ — $ 10,164
639
$ 639
(5,874)
$(5,874)
(2,306)
$ (3,341)
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. During 2011, the Company used Level 2 inputs to measure impairment of
long-lived assets held and used that had been identified as impaired. These assets, with a carrying amount of $9.3 million,
were written down to their fair value of $8.3 million, resulting in an impairment charge of $1.0 million, which was included
in earnings in 2011. At each of December 31, 2012 and December 31, 2011, 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 $5.9
million and $2.3 million was recorded in 2012 and 2011, 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 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of
Comprehensive Income” (“ASU 2011-05”). This ASU intends to enhance comparability and transparency of other
comprehensive income components. The guidance provides an option to present total comprehensive income, the
components of net income and the components of other comprehensive income in a single continuous statement or two
separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as
part of the Statement of Shareholder’s Equity and Comprehensive Income. The guidance provided in ASU 2011-05 is
effective for interim and annual period beginning on or after December 15, 2011 and should be applied retrospectively. We
do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.
In November 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet
Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This ASU requires companies to provide information
about trading financial instruments and related derivatives in expanded disclosures. This ASU is the result of a joint project
conducted by the FASB and the IASB to enhance disclosures and provide converged disclosures about financial instruments
and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master
netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. The
guidance provided in ASU 2011-11 is effective for interim and annual period beginning on or after January 1, 2013 and
should be applied retrospectively. We do not expect the adoption of this ASU to have a material impact on our Consolidated
Financial Statements.
53
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-12, “Comprehensive Income
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). This ASU defers only those
changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The amendments are being made to
allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications
out of accumulated other comprehensive income on the components of net income and other comprehensive income for all
periods presented. All other requirements in ASU 2011-05 are not affected by this ASU, including the requirement to report
comprehensive income either in a single continuous financial statement or in two separate but consecutive financial
statements. The guidance provided in ASU 2011-12 is effective for interim and annual period beginning on or after
December 15, 2011 and should be applied retrospectively. The adoption of this ASU did not have a material impact on our
Consolidated Financial Statements.
In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income
(Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 require
an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective
line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles
(GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be
reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other
disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the
amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is
permitted. The Company is currently evaluating the impact that these disclosures will have on its financial statements.
(t) Subsequent Events
On February 26, 2013, the stock of Hawaii Island Air, a lessee and related party of the Company as of December 31,
2012, was sold to an unrelated third party.
On February 27, 2013, we entered into a transaction to purchase and lease back a total of 19 aircraft engines with
SAS Group subsidiary Scandinavian Airlines (“SAS”) for $119.5 million. We will purchase 11 of the engines for $65.0
million and our joint venture, Willis Mitsui & Company Engine Support Limited (“WMES”) will purchase the remaining 8
engines for $54.5 million. We will fund this transaction through our revolving credit facility and WMES will fund its
purchase through its own borrowing facility.
(2) Equipment Held for Lease
At December 31, 2012, we had 184 aircraft engines and related equipment with a cost of $1,156.7 million, 4 spare
parts packages with a cost of $5.9 million and 7 aircraft with a cost of $37.2 million, in our lease portfolio. At December 31,
2011, we had 194 aircraft engines and related equipment with a cost of $1,171.4 million, 3 spare parts packages with a cost of
$5.1 million and 13 aircraft with a cost of $30.7 million, in our 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.
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):
54
Lease rent revenue
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Totals
2012
Years Ended December 31,
2011
(in thousands)
2010
$ 11,693
6,075
5,206
35,001
9,196
18,585
2,307
6,528
$ 94,591
$ 20,790
6,806
3,183
38,626
9,818
18,635
2,084
4,721
$ 104,663
$ 22,662
6,367
1,662
32,604
14,380
18,413
432
5,613
$ 102,133
Lease rent revenue less applicable depreciation and interest
2012
Years Ended December 31,
2011
(in thousands)
2010
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Off-lease and other
Totals
$ 5,875
2,472
3,015
11,162
4,482
6,212
746
3,011
(15,130)
$ 21,845
$ 9,663
3,609
1,731
13,844
5,266
7,162
1,180
1,727
(10,539)
$ 33,643
$ 11,371
3,686
957
13,313
6,812
7,014
246
2,859
(9,923)
$ 36,335
Net book value of equipment held for operating lease
2012
Years Ended December 31,
2011
(in thousands)
2010
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Off-lease and other
Totals
$ 68,845
59,694
17,658
299,505
87,660
229,946
5,280
74,644
118,227
$ 961,459
$ 128,989
66,317
30,987
305,154
86,301
159,022
11,844
49,208
143,683
$ 981,505
$ 170,742
59,869
14,786
345,256
84,238
180,936
12,268
46,791
83,115
$ 998,001
As of December 31, 2012 and 2011, 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 2013
Leases expiring 2014
Leases expiring 2015
Leases expiring 2016
Leases expiring 2017
Leases expiring thereafter
December 31, 2012
Net Book Value
(in thousands)
$ 118,227
149,585
339,598
76,485
43,243
79,600
58,583
96,138
$ 961,459
55
Lease Term
Off-lease and other
Month-to-month leases
Leases expiring 2012
Leases expiring 2013
Leases expiring 2014
Leases expiring 2015
Leases expiring 2016
Leases expiring thereafter
December 31, 2011
Net Book Value
(in thousands)
$ 143,683
151,828
301,385
84,393
49,149
36,571
75,510
138,986
$ 981,505
As of December 31, 2012, minimum future payments under non-cancelable leases were as follows:
Year
2013
2014
2015
2016
2017
Thereafter
(3) Notes Receivable
(in thousands)
$ 56,492
38,655
30,436
23,172
14,620
18,133
$ 181,508
At December 31, 2012, we had one Note Receivable of $0.7 million relating to settlement agreements for the
payment of outstanding balances from one lessee for two aircraft and one engine. This note had an original principal balance
of $1.0 million and is payable monthly over five years with interest of 5.0% per annum, with a final payment due in April
2016. Due to concerns regarding collectability, we have fully reserved for the amount owing under this unsecured note.
(4) Investments
On May 25, 2011, we entered into an agreement with Mitsui & Co., Ltd. to participate in a joint venture formed as a
Dublin-based Irish limited company – Willis Mitsui & Company Engine Support Limited (“WMES”) for the purpose of
acquiring and leasing jet engines. Each partner holds a fifty percent interest in the joint venture. The initial capital
contribution by the Company for its investment in WMES was $8.0 million. The Company provided the initial lease portfolio
by transferring 7 engines to the joint venture in June 2011. In addition, the Company made $1.0 million and $5.6 million
capital contributions to WMES in the years ended December 31, 2011 and December 31, 2012, respectively, for the purchase
of 8 engines from third parties, increasing the number of engines in the lease portfolio to 15. The $14.6 million of capital
contributions has been partially offset by $3.6 million, resulting in a net investment of $11.0 million, which has increased to
$11.8 million as a result of the Company’s share of WMES reported earnings to date. The $3.6 million reduction in
investment represents 50% of the $7.2 million gain related to the sale by the Company of the 7 engines to WMES.
WMES has a loan agreement with JA Mitsui Leasing, Ltd. which provides a credit facility of up to $180.0 million to
support the funding of future engine acquisitions. Funds are available under the loan agreement through March 31, 2013.
WMES also established a separate credit facility for $8.0 million to fund the purchase of an engine, which is repayable over
the 7 year term of the facility. Our investment in the joint venture is $11.8 million and $5.4 million as of December 31, 2012
and December 31, 2011, respectively.
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 March and May 2013. Our investment in the joint venture is $10.1 million and
$9.9 million as of December 31, 2012 and December 31, 2011, respectively.
56
Year Ending December 31, 2012 and 2011 (in thousands)
Investment in joint ventures as of December 31, 2010
Investment
Earnings from joint ventures
Distribution
Investment in joint ventures as of December 31, 2011
Investment
Earnings from joint ventures
Distribution
Investment in joint ventures as of December 31, 2012
WOLF
$ 9,381
-
1,292
(810)
$ 9,863
-
1,004
(802)
$ 10,065
WMES
$ -
5,373
3
-
$ 5,376
5,635
755
-
$ 11,766
Total
$ 9,381
5,373
1,295
(810)
$ 15,239
5,635
1,759
(802)
$ 21,831
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. The investment of $1.48 million represented 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 revenue in 2010.
57
(5) Notes Payable
Notes payable consisted of the following:
As of December 31,
2012
2011
(in thousands)
Credit facility at a floating rate of interest of LIBOR plus 2.75%, secured by engines.
The facility has a committed amount of $430.0 million and $345.0 million at
December 31, 2012 and 2011, respectively, which revolves until the maturity
date of November 2016.
$ 282,000
$ 228,000
WEST II Series 2012-A term notes payable at a fixed rate of interest of 5.50%, maturing
in September 2037. Secured by engines.
386,724
-
WEST Series 2005-A1 term notes payable at a floating rate of interest based on LIBOR
plus 1.25%, maturing in July 2018. Secured by engines. Repaid in September 2012.
WEST Series 2008-A1 term notes payable at a floating rate of interest based on LIBOR
plus 1.50%, maturing in March 2021. Secured by engines. Repaid in September 2012.
-
99,763
-
151,120
WEST Series 2007-A2 warehouse notes payable of $0 million (2011, $162.5 million)
payable at a floating rate of interest based on LIBOR plus 2.25%, maturing in January
2024; and $0 million (2011, $23.5 million) Series 2007-B2 warehouse notes payable at
LIBOR plus 4.75%, maturing in January 2026. Secured by engines. Repaid in September
2012.
-
185,937
Note payable at a floating rate of LIBOR plus 3.00%. Secured by Series 2005-B1 notes.
Repaid in September 2012.
-
16,180
Note payable at a floating rate of LIBOR plus 4.00%. Secured by Series 2008-B1 notes.
Repaid in September 2012.
-
Note payable at a fixed interest rate of 8.00%, unsecured. Repaid in September 2012.
-
15,212
1,500
Note payable at a fixed interest rate of 4.50%, maturing in January 2014.
Secured by engines.
17,338
18,840
Note payable at a fixed rate of 5.50%, maturing in September 2017. Secured by one
engine.
8,593
-
Note payable at a fixed interest rate of 3.94%, maturing in September 2014. Secured by
an aircraft.
Total notes payable before discount
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.
Total notes payable
2,333
3,667
$ 696,988
$ 720,219
-
(2,085)
$ 696,988
$ 718,134
At December 31, 2012, one-month LIBOR was 0.21%. At December 31, 2011, the one-month LIBOR rate was
0.30%.
58
Principal outstanding at December 31, 2012, is repayable as follows:
Year
2013
2014
2015
2016 (includes $282.0 million outstanding on revolving credit facility)
2017
Thereafter
(in thousands)
$ 19,237
36,160
20,934
304,215
29,373
287,069
$ 696,988
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, 2012.
At December 31, 2012, we are in compliance with the covenants specified in the revolving credit facility Credit
Agreement, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio
requirement to remain below 4.50 to 1.00. At December 31, 2012, the Company’s calculated Minimum Consolidated
Tangible Net Worth exceeded the minimum required amount of $182.1 million. As defined in the revolving credit facility
Credit Agreement, the Interest Coverage Ratio is the ratio of Earnings before Interest, Taxes, Depreciation and Amortization
and other one-time charges (EBITDA) to Consolidated Interest Expense and the Total Leverage Ratio is the ratio of Total
Indebtedness to Tangible Net Worth. At December 31, 2012, we are in compliance with the covenants specified in the WEST
II indenture and servicing agreement.
At December 31, 2012, notes payable consists of loans totaling $697.0 million payable over periods of
approximately 1 to 10 years with interest rates varying between approximately 3.0% and 5.5% (excluding the effect of our
interest rate derivative instruments). At December 31, 2012, we had a revolving credit facility totaling approximately $430.0
million compared to $345.0 million at December 31, 2011. At December 31, 2012, and December 31, 2011, respectively,
approximately $148.0 million and $117.0 million were available under these facilities. The significant facilities are described
below.
At December 31, 2012, we had a $430.0 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 18, 2011 and the
proceeds of the new facility, net of $3.3 million in debt issuance costs, was used to pay off the balance remaining from our
prior revolving facility. On September 7, 2012, we increased this revolving credit facility to $430.0 million from $345.0
million. As of December 31, 2012, $148.0 million was available under this facility. The revolving credit facility ends in
November 2016. Based on the Company’s debt to equity ratio of 3.20 as calculated under the terms of the revolving credit
facility at September 30, 2012, the interest rate on this facility is LIBOR plus 2.75% as of December 31, 2012. Under the
revolving credit facility, all subsidiaries except WEST II 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.
On September 17, 2012, we closed an asset-backed securitization (“ABS”) through a newly-created, bankruptcy-
remote, Delaware statutory trust, WEST II, of which the Company is the sole beneficiary. WEST II issued and sold $390
million aggregate principal amount of Class 2012-A Term Notes (the “Notes”) and received $384.9 million in net proceeds.
We used these funds, net of transaction expenses and swap termination costs in combination with our revolving credit
facility, to pay off the prior WEST notes totaling $435.9 million. At closing, the net book values of 22 engines were pledged
as collateral from WEST to the Company’s revolving credit facility.
The assets and liabilities of WEST II will remain on the Company’s balance sheet. A portfolio of 79 commercial jet
aircraft engines and leases thereof secures the obligations of WEST II under the ABS. The Notes have no fixed amortization
and are payable solely from revenue received by WEST II from the engines and the engine leases, after payment of certain
expenses of WEST II. The Notes bear interest at a fixed rate of 5.50% per annum. The Notes may be accelerated upon the
occurrence of certain events, including the failure to pay interest for five business days after the due date thereof. The Notes
are expected to be paid in 10 years. The legal final maturity of the Notes is September 15, 2037.
In connection with the transactions described above, effective September 17, 2012, the Servicing Agreement and
Administrative Agency Agreement previously filed by the Company as exhibits to, and described in, its Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2005 relating to WEST were terminated.
59
The Company entered into a Servicing Agreement and Administrative Agency Agreement with WEST II to provide certain
engine, lease management and reporting functions for WEST II in return for fees based on a percentage of collected lease
revenues and asset sales. Because WEST II is consolidated for financial statement reporting purposes, all fees eliminate upon
consolidation.
As a result of this transaction the Company recorded a loss on extinguishment of debt and derivative instruments of
$15.5 million in the year ended December 31, 2012 as a result of the write-off of $5.3 million of unamortized debt issuance
costs and unamortized note discount associated with the full repayment of WEST notes on September 17, 2012 and the
termination of interest rate swaps totaling $10.2 million.
At December 31, 2012, $386.7 million of WEST II term notes were outstanding. The assets of WEST II are not
available to satisfy our obligations or any of our affiliates other than the obligations specific to WEST II. WEST II is
consolidated for financial statement presentation purposes. WEST II’s ability to make distributions and pay dividends to the
Company is subject to the prior payments of its debt and other obligations and WEST II’s maintenance of adequate reserves
and capital. Under WEST II, cash is collected in a restricted account, which is used to service the debt and any remaining
amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance
reserve payments and all lease security deposits are accumulated in restricted accounts and are available to fund future
maintenance events and to secure lease payments, respectively. Cash from maintenance reserve payments are held in the
restricted cash account equal to the maintenance obligations projected for the subsequent six months, and are subject to a
minimum balance of $9.0 million. These terms resulted in the release of excess cash which had been held in our restricted
cash accounts generating greater liquidity.
On September 28, 2012, we closed on a loan for a five year term totaling $8.7 million. Interest is payable at a fixed
rate of 5.50% and principal and interest is paid quarterly. The loan is secured by one engine. The funds were used to purchase
the engine secured under the loan. The balance outstanding on this loan is $8.6 million as of December 31, 2012.
On September 30, 2011, we closed on a loan for a three year term totaling $4.0 million. Interest is payable at a fixed
rate of 3.94% and principal and interest is paid monthly. The loan is secured by our corporate aircraft. The funds were used to
refinance the loan for our corporate aircraft. The balance outstanding on this loan is $2.3 million as of December 31, 2012.
On January 11, 2010, we closed on a loan for a four year term totaling $22.0 million, the proceeds of which were
used to pay down our revolving credit facility. Interest is payable at a fixed rate of 4.50% and principal and interest is paid
quarterly. The loan is secured by three engines. The balance outstanding on this loan is $17.3 million as of December 31,
2012.
(6) Derivative Instruments
As discussed in Note 5, we terminated six interest rate swaps with a notional value of $215.0 million on September
17, 2012. The originally specified hedged forecasted transactions were terminated upon the closing of WEST II on
September 17, 2012. The effective portion of the loss on these cash flow hedges was $10.2 million and was reclassified out of
accumulated other comprehensive income and recorded in 2012 earnings. As of December 31, 2012, we have one interest
rate swap related to our revolving credit facility.
We hold interest rate derivative instruments to mitigate exposure to changes in interest rates, in particular one-month
LIBOR, with $282.0 million of our borrowings at December 31, 2012 at variable rates. As a matter of policy, we do not use
derivatives for speculative purposes. At December 31, 2012, we were a party to one interest rate swap agreement with a
notional outstanding amount of $100.0 million, with a remaining term of eleven months and a fixed rate of 2.10%. At
December 31, 2011, we were a party to interest rate swap agreements with notional outstanding amounts of $375.0 million,
remaining terms of between three and forty months and fixed rates of between 2.10% and 5.05%. The net fair value of the
swaps at December 31, 2012 and 2011 was negative $1.7 million and negative $12.3 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, 2012, 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.
60
Based on the implied forward rate for LIBOR at December 31, 2012, we anticipate that net finance costs will be
increased by approximately $1.7 million for the year ending December 31, 2013 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
these hedges at the termination date was $2.6 million and is being 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
Derivatives Designated as Hedging Instruments
Balance Sheet Location
Fair Value
Years Ended December 31,
2012
2011
(in thousands)
Interest rate contracts
Liabilities under derivative instruments
$ 1,690
$ 12,341
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, 2012, 2011 and 2010:
Derivatives in Cash Flow Hedging
Relationships
Location of Loss (Gain) Recognized on
Derivatives in the Statements of Income
Interest rate contracts
Reclassification adjustment for losses
included in termination of derivative
instruments
Total
Interest expense
Loss on debt extinguishment and
derivative termination
Amount of Loss (Gain) Recognized on
Derivatives in the Statements of Income
Years Ended December 31,
2011
2012
2010
$ 6,427
(in thousands)
$ 11,349
$ 18,633
$ 10,143
$ 16,570
$ -
$ 11,349
$ -
$ 18,633
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, 2012, 2011 and 2010:
Derivatives in
Cash Flow Hedging
Relationships
Amount of Gain (Loss) Recognized
in OCI on Derivatives
(Effective Portion)
Years Ended December 31,
2011
2012
2010
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,
2011
2010
2012
Interest rate contracts*
Total
$ 508
$ 508
(in thousands)
$ 1,933
$ 1,933
$ (6,380)
$ (6,380)
Interest expense
Total
$ 6,427
$ 6,427
(in thousands)
$ 11,349
$ 11,349
$ 18,633
$ 18,633
* These amounts are shown net of $6.7 million, $10.9 million and $15.7 million of interest payments reclassified to the
income statement during the years ended December 31, 2012, 2011 and 2010, 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 of the periods presented.
61
Counterparty Credit Risk
The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The swap
counterparty for the interest rate swap in place at December 31, 2012 is a large financial institution in the United States that
possesses an investment grade credit rating. Based on this rating, the Company believes that the counterparty is currently
creditworthy and that their continuing performance under the hedging agreement is probable, and has not required the
counterparty to provide collateral or other security to the Company.
(7) Income Taxes
The components of income tax expense for the years ended December 31, 2012, 2011 and 2010, included in the
accompanying consolidated statements of income were as follows:
December 31, 2012
Current
Deferred
Total 2012
December 31, 2011
Current
Deferred
Total 2011
December 31, 2010
Current
Deferred
Total 2010
Federal
State
(in thousands)
Total
$ 175
707
$ 882
$ 37
242
$ 279
$ 212
949
$ 1,161
$ 1,373
9,783
$ 11,156
$ (331)
(1,448)
$ (1,779)
$ 1,042
8,335
$ 9,377
$ (458)
7,609
$ 7,151
$ 321
158
$ 479
$ (137)
7,767
$ 7,630
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
Tax consequesnces of the sale of
engines to WMES
Uncertain tax positions
Permanent differences-162(m)
Permanent differences and other
Effective income tax expense
Years Ended December 31,
2012
2011
2010
(in thousands and % of pre-tax income)
$
%
$
%
$
%
916
185
—
—
(46)
97
385
(376)
1,161
34.0
6.9
—
—
(1.7)
3.6
14.3
(14.1)
43.0
8,147
(38)
(1,137)
(7)
1,214
195
737
266
9,377
34.0
(0.2)
(4.7)
—
5.1
0.8
3.1
1.0
39.1
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
In 2011 and 2010, 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 in those years. In 2012, these assets and their associated leases no longer qualify for exclusion from federal taxable
income under the Extraterritorial Income Exclusion rules.
For the years ended December 31, 2011 and 2010, the Company’s effective tax rate was reduced by $1.1 million and
$0.4 million, respectively, related to a change in California state tax law enacted during 2009 regarding state apportionment
of income which became effective in 2011.
62
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
Balance as of December 31, 2010
Increases related to current year tax positions
Balance as of December 31, 2011
Increases related to current year tax positions
Balance as of December 31, 2012
(in thousands)
$ 113
195
308
98
$ 406
As of December 31, 2012 and 2011, we reserved $0.1 million and $0.2 million, respectively, for tax exposure in
Europe. 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. We carried $0.1 million in specified tax reserves as of December 31, 2010.
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
Charitable contributions
Total deferred tax assets
As of December 31,
2012
2011
(in thousands)
$ 1,550
706
1,596
962
542
32,470
18
37,844
$ 1,274
603
1,595
1,795
527
21,805
16
27,615
Deferred tax liabilities:
Depreciation and impairment on aircraft engines and equipment
Other deferred tax liabilities
Net deferred tax liabilities
(124,292)
(4,451)
(128,743)
(113,956)
(3,612)
(117,568)
Other comprehensive income, deferred tax asset
651
5,247
Net deferred tax liabilities
$ (90,248)
$ (84,706)
As of December 31, 2012, we had net operating loss carry forwards of approximately $91.1 million for federal tax
purposes and $18.3 million for state tax purposes. The federal net operating loss carry forwards will expire at various times
from 2022 to 2032 and the state net operating loss carry forwards will expire at various times from 2016 to 2022. 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, 2012, we also had alternative minimum tax credit of approximately $0.5 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.
Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in
2012. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the
time of grant ("windfall"). Although these additional tax benefits are reflected in net operating tax loss carryforwards,
pursuant to SFAS 123R, in the amount of $2.2 million as of December 31, 2012, the additional tax benefit associated with the
windfall is not recognized until the deduction reduces taxes payable. The tax effect of windfalls included in net operating loss
carryforwards but not reflected in deferred tax assets for 2012 are $0.8 million and will be recorded to paid in capital when
recognized.
63
(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, 2012 and 2011
was estimated to have a fair value of approximately $697.3 million and $634.5 million, respectively, based on the fair value
of estimated future payments calculated using the prevailing interest rates at each year end.
(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 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, 2012, one swap agreement had a notional outstanding amount of $100.0 million, a remaining term of eleven months at a
fixed rate of 2.10%. In 2012, 2011 and 2010, $6.4 million, $11.3 million and $18.6 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 covers
approximately 20,534 square feet of office space and expires September 30, 2018. The remaining lease rental commitment is
approximately $3.2 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 $0.1 million. We also lease office and
warehouse space in Shanghai, China. The office lease expires December 31, 2013 and the warehouse lease expires July 31,
2017 and the remaining lease commitments are approximately $64,800 and $28,000, respectively. We also lease office space
in London, United Kingdom. The lease expires December 21, 2015 and the remaining lease commitment is approximately
$219,000. We also lease office space in Blagnac, France. The lease expires December 31, 2013 and the remaining lease
commitment is approximately $17,000. We lease office space in Dublin, Ireland. The lease expires May 15, 2017 and the
remaining lease commitment is approximately $0.2 million.
We have made purchase commitments to secure the purchase of four engines and related equipment for a gross
purchase price of $38.5 million, for delivery in 2013 to 2015. As at December 31, 2012, 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 outstanding purchase orders with CFM for three engines represent deferral of engine deliveries originally
scheduled for 2009 and are included in our commitments to purchase in 2013 to 2015.
(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 (Nasdaq: WLFCP) with a liquidation preference of $10.00 per share, or approximately $34.8
million in total.
64
After underwriting commissions and expenses of issuance, we received net proceeds of approximately $31.9 million. The
preferred stock accrued cash dividends from the date of issuance at a rate of 9.0% per annum, or approximately $260,625 per
month.
On November 2, 2012, the Company redeemed all outstanding shares of its 9.0% Series A Cumulative Redeemable
Preferred Stock for approximately $34.8 million in cash. The shares were redeemed at a redemption price of $10.00 per
share. Accrued dividends of $147,687 were also paid on the redemption date. In conjunction with the redemption, we
recognized a $2.8 million charge representing the original issuance costs that were paid in 2006, which reduced net income
available to common shareholders for the year ended December 31, 2012.
(b) Common Stock Repurchase
On September 27, 2012, the Company announced that its Board of Directors has authorized a plan to repurchase up
to $100.0 million of its common stock over the next 5 years. This plan extends the previous plan authorized on December 8,
2009, and increases the number of shares authorized for repurchase to up to $100.0 million. During 2012, the Company
repurchased 928,261 shares of common stock for approximately $12.7 million under this program, at a weighted average
price of $13.72 per share. Of the total shares repurchased, 150,000 shares were repurchased from an executive officer for
approximately $2.1 million at a five-day trailing average price of $14.06 per share. The repurchased shares were
subsequently retired. As of December 31, 2012, the total number of common shares outstanding was 8.7 million.
(12) Stock-Based Compensation Plans
The components of stock compensation expense for the years ended December 31, 2012, 2011 and 2010, 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
2012
2011
2010
$ 3,092
-
52
$ 3,144
(in thousands)
$ 3,108
-
65
$ 3,173
$ 2,603
14
61
$ 2,678
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 1,728,156 shares of restricted stock awarded to date. The fair value of the restricted stock awards equaled the stock
price at the date of grants. The following table summarizes restricted stock activity during the years ended December 31:
Restricted stock at December 31, 2009
Granted in 2010 (vesting over 4 years)
Granted in 2010 (vesting on first anniversary from date of issuance)
Cancelled in 2010
Vested in 2010
Restricted stock at December 31, 2010
Granted in 2011 (vesting over 4 years)
Granted in 2011 (vesting on first anniversary from date of issuance)
Cancelled in 2011
Vested in 2011
Restricted stock at December 31, 2011
Granted in 2012 (vesting over 4 years)
Granted in 2012 (vesting on first anniversary from date of issuance)
Cancelled in 2012
Vested in 2012
Restricted Stock at December 31, 2012
Shares
558,304
190,375
21,635
-
(194,523)
575,791
324,924
22,100
(27,477)
(244,044)
651,294
283,000
28,040
(8,988)
(270,692)
682,654
All cancelled shares have reverted to the share reserve and are available for issuance at a later date, in accordance
with the Plan.
65
Our accounting policy is to recognize the associated expense of such awards on a straight-line basis over the vesting
period. At December 31, 2012 the stock compensation expense related to the restricted stock awards that will be recognized
over the average remaining vesting period of 2.5 years totals $6.6 million. At December 31, 2012, the intrinsic value of
unvested restricted stock awards is $9.8 million. The Plan terminates on May 24, 2017.
A summary of activity under the 2007 Plan for the years ended December 31, 2012, 2011 and 2010 is as follows:
Balance as of January 1, 2010
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2010
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2011
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2012
Number Outstanding
558,304
212,010
—
(194,523)
575,791
347,024
(27,477)
(244,044)
651,294
311,040
(8,988)
(270,692)
682,654
Weighted Average
Grant Date Fair Value
$ 11.14
11.19
—
11.89
$ 10.90
12.45
11.34
11.14
$ 11.61
8.55
12.52
11.33
$ 11.61
Aggregate Value
$ 6,217,214
2,371,619
—
(2,312,649)
$ 6,276,184
4,318,920
(311,596)
(2,719,232)
$ 7,564,276
2,659,170
(112,521)
(3,067,357)
$ 7,043,568
Employee Stock Purchase Plan: Under our Employee Stock Purchase Plan (ESPP), 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 2012 and 2011, 18,482 and 19,983 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 $3.19, $3.40 and $3.40
for 2012, 2011 and 2010, 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. We issue new shares through our transfer agent upon stock option exercise. In the year ended December 31, 2011,
369,310 options were exercised with a total intrinsic value at exercise date of approximately $2.1 million and no options were
cancelled. In the year ended December 31, 2012, 306,653 options were exercised with a total intrinsic value at exercise date
of approximately $2.4 million and no options were cancelled. There are 136,928 stock options vested and expected to vest
under the 1996 Stock Option/Stock Issuance Plan which have an intrinsic value of $0.7 million.
66
A summary of the activity under the 1996 Plan for the years ended December 31, 2012, 2011 and 2010 is as follows:
O ptions
Available
for Grant
—
—
—
—
—
—
—
—
—
—
O ptions
1,019,788
(206,146)
(751)
812,891
(369,310)
—
443,581
(306,653)
-
136,928
We ighte d
Ave rage
Exe rcise Price
$ 6.68
6.20
6.50
$ 6.80
7.34
—
$ 6.35
5.34
-
$ 8.60
We ighte d
Ave rage
Re maining
Contractual
Te rm (in
ye ars)
Aggre gate
Intrinsic
Value
2.53
$ 8,486,579
1.81
$ 5,064,940
1.82
$ 2,484,009
2.23
$ 781,692
136,928
$ 8.60
2.23
$ 781,692
812,891
443,581
136,928
$ 6.80
$ 6.35
$ 8.60
1.81
1.82
2.23
$ 5,064,940
$ 2,484,009
$ 781,692
Outstanding as of January 1, 2010
Options exercised
Options cancelled
Outstanding as of December 31, 2010
Options exercised
Options cancelled
Outstanding as of December 31, 2011
Options exercised
Options cancelled
Outstanding as of December 31, 2012
Vested and expected to vest at:
December 31, 2012
Options exercisable at:
December 31, 2010
December 31, 2011
December 31, 2012
The following table summarizes information concerning outstanding and exercisable options at December 31, 2012:
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in years)
0.41
0.17
2.38
1.40
3.40
2.59
3.25
2.23
Number
Outstanding
3,850
18,875
3,921
3,890
4,281
91,516
10,595
136,928
Weighted Average
Exercise Price
4.92
5.01
8.40
8.49
8.70
9.20
11.24
$ 8.60
Number
Exercisable
3,850
18,875
3,921
3,890
4,281
91,516
10,595
136,928
Weighted Average
Exercise Price
4.92
5.01
8.40
8.49
8.70
9.20
11.24
$ 8.60
Exercise Prices
From $4.92 to $4.92
From $5.01 to $5.01
From $8.40 to $8.40
From $8.49 to $8.49
From $8.70 to $8.70
From $9.20 to $9.20
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 2012, 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 $17,000 (or
$22,500 for employees at least 50 years of age). We match 50% of employee contributions up 8% of the employee’s salary
which totaled $334,122 in 2012, $306,837 in 2011 and $303,000 in 2010.
67
(14) Quarterly Consolidated Financial Information (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2012,
2011 and 2010 (in thousands, except per share data).
Fiscal 2012
Total revenue
Net income (loss)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Full Year
$ 35,739
3,289
$ 35,153
3,229
$ 37,506
(7,194)
$ 39,692
2,211
$ 148,090
1,535
Net income (loss) attributable to common shareholders
2,507
2,447
(7,976)
(771)
(3,793)
Basic earnings (loss) per common share
0.30
0.29
(0.94)
(0.09)
Diluted earnings (loss) per common share
0.29
0.28
(0.91)
(0.09)
Average common shares outstanding
Diluted average common shares outstanding
8,404
8,756
8,585
8,848
8,667
8,889
8,277
8,525
(0.45)
(0.43)
8,490
8,791
Fiscal 2011
Total revenue
Net income
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Full Year
$ 40,812
5,063
$ 38,692
3,481
$ 39,480
2,316
$ 37,669
3,648
$ 156,653
14,508
Net income attributable to common shareholders
4,281
2,699
1,534
2,866
11,380
Basic earnings per common share
Diluted earnings per common share
Average common shares outstanding
Diluted average common shares outstanding
0.50
0.47
8,552
9,048
0.33
0.31
8,322
8,796
0.18
0.17
8,397
8,811
0.34
0.33
8,425
8,758
1.35
1.28
8,423
8,876
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
2,268
1,125
2,301
3,228
8,922
Basic earnings per common share
Diluted earnings per common share
Average common shares outstanding
Diluted average common shares outstanding
(15) Related Party and Similar Transactions
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
Island Air: Charles F. Willis, IV, our CEO and Chairman of our Board of Directors and the owner of approximately
31% of our common stock, was the sole owner of Island Air, a lessee of the Company since 2004. On February 26, 2013 the
stock of Hawaii Island Air was sold to an unrelated third party. While under common ownership, the independent members
of our Board of Directors approved transactions between the Company and Island Air.
The Company and Island Air entered into a series of transactions over the past several years through which the
Company provided equipment to Island Air in return for lease payments. The terms of the agreements have been amended
from time to time with the Company accepting lower lease payments in some circumstances.
68
As of December 31, 2012, Island Air leased from the Company one DeHaviland DHC-8-100 aircraft under an
operating lease and two DeHaviland DHC-8-100 aircraft and one spare engine under a finance lease. As of December 31,
2012, Island Air owed $4.5 million and $0.65 million under the finance lease and note payable, respectively. The Company
received lease payments and recorded revenue from Island Air totaling $0.6 million, $1.6 million and $0.4 million in the
years ended December 31, 2012, 2011 and 2010.
In connection with the sale of its stock to an unrelated third party, on February 26, 2013, Island Air prepaid the note
payable at a 45% discount of $0.4 million, conditioned on the other large creditors accepting similar reductions in the
amounts due to them. The assets under lease to Island Air have a combined net book value of $4.0 million as of December
31, 2012. Future lease rent revenue from Island Air totaling $6.2 million under the finance and operating leases is expected to
be recorded through December 2015.
J.T. Power: The Company entered into two Consignment Agreements dated January 22, 2008 and November 17,
2008, with J.T. Power, LLC (“J.T. Power”), an entity whose sole shareholder, Austin Willis, is the son of our Chief
Executive Officer, and directly and indirectly, a shareholder and a Director of the Company. According to the terms of the
Consignment Agreement, J.T. Power was responsible to market and sell parts from the teardown of four engines with a book
value of $5.2 million. During the twelve months ended December 31, 2012, sales of consigned parts were $18,100. Under
these agreements, J.T. Power provided a minimum guarantee of net consignment proceeds of $4.0 million as of February 22,
2012. Based on current consignment proceeds, J.T. Power was obligated to pay $1.3 million under the guarantee in February
2012. On March 7, 2012, this guarantee was restructured as follows - quarterly payments of $45,000 over five years at an
interest rate of 6% with a balloon payment at the end of this five year term. The Agreement provides an option to skip one
quarterly payment and apply it to the balloon payment at an interest rate of 12%. As a December 31, 2012, J.T. Power is
current and the principal amount owing under the note is $1.2 million.
On July 31, 2009, the Company entered into Consignment Agreements with J.T. Power, without guaranties of
consignment proceeds, in which they are responsible to market and sell parts from the teardown of one engine with a book
value of $23,000. During the twelve months ended December 31, 2012, sales of consigned parts were $52,600.
On July 27, 2006, the Company entered into an Aircraft Engine Agency Agreement with J.T. Power, in which the
Company will, on a non-exclusive basis, provides engine lease opportunities with respect to available spare engines at J.T.
Power. J.T. Power will pay the Company a fee based on a percentage of the rent collected by J.T. Power for the duration of
the lease including renewals thereof. The Company earned no revenue during the twelve months ended December 31, 2012
under this program.
69
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED BALANCE SHEETS
Parent Company Information
December 31, 2012 and 2011
(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, net of allowances
Investments
Investment in subsidiaries
Due from subsidiaries, net
Deferred income taxes
Property, equipment & furnishings, less accumulated depreciation
Equipment purchase deposits
Other assets, net
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses
Due to subsidiaries, net
Liabilities under derivative instruments
Deferred income taxes
Notes payable
Maintenance reserves
Security deposits
Unearned lease revenue
Total liabilities
December 31,
2012
December 31,
2011
$ 4,142
266,302
18,271
3,688
—
21,831
198,443
—
3,164
5,989
1,369
9,257
$ 532,456
$ 6,429
320,240
14,164
3,395
5
15,239
148,104
2,298
—
6,901
1,369
9,722
$ 527,866
$ 11,313
2,648
1,690
—
301,671
11,787
1,994
1,800
332,903
$ 11,375
—
2,789
9,555
252,006
11,820
2,676
984
291,205
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; 0 and 3,475,000
shares issued and outstanding at December 31, 2012 and 2011,
respectively)
Common stock ($0.01 par value, 20,000,000 shares authorized; 8,715,580 and
9,109,663 shares issued and outstanding at December 31, 2012 and 2011,
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
—
31,915
87
47,785
152,911
(1,230)
199,553
$ 532,456
91
56,842
156,704
(8,891)
236,661
$ 527,866
70
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF INCOME (LOSS)
Parent Company Information
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation expense
Write-down of equipment
General and administrative
Technical expense
Net finance costs:
Interest expense
Interest income
Loss on debt extinguishment
Total net finance costs
Total expenses
2012
Years Ended December 31,
2011
2010
$ 30,564
13,139
3,605
10,809
58,117
$ 36,181
11,344
7,895
12,487
67,907
$ 28,486
11,187
3,782
14,586
58,041
18,764
2,621
30,565
3,336
11,471
—
94
11,565
66,851
17,783
2,306
34,151
3,711
14,328
(40)
343
14,631
72,582
14,800
2,874
27,917
3,720
15,039
(25)
—
15,014
64,325
Loss from operations
(8,734)
(4,675)
(6,284)
Earnings from joint ventures
Loss before income taxes
Income tax benefit/(expense)
1,759
1,295
1,109
(6,975)
2,196
(3,380)
(628)
(5,175)
1,602
Equity in income of subsidiaries, net of tax of $3,357,
$8,902, and $9,232 at December 31, 2012, 2011 and 2010,
respectively
6,314
18,516
15,623
Net income
$ 1,535
$ 14,508
$ 12,050
Preferred stock dividends
Preferred stock redemption costs
2,493
2,835
3,128
—
3,128
—
Net income (loss) attributable to common shareholders
$ (3,793)
$ 11,380
$ 8,922
71
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I – CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Parent Company Information
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
Net income
Other comprehensive income (loss):
Derivative instruments
Twelve Months Ended
December 31
2012
$ 1,535
2011
$ 14,508
2010
$ 12,050
Unrealized losses on derivative instruments
Reclassification adjustment for losses included in net income
Net gain (loss) recognized in other comprehensive income
Tax benefit (expense) related to items of other
comprehensive income (loss)
(1,039)
1,901
862
(2,145)
3,356
1,211
(6,254)
5,781
(473)
(406)
(420)
171
Other comprehensive income (loss) from parent
456
791
(302)
Other comprehensive income (loss) from subsidiaries
Total other comprehensive income (loss)
7,205
7,661
787
1,578
(1,880)
(2,182)
Total comprehensive income
$ 9,196
$ 16,086
$ 9,868
72
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF CASH FLOWS
Parent Company Information
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Years Ended December 31,
2011
2012
2010
$ 1,535
$ 14,508
$ 12,050
Equity in income of subsidiaries
Depreciation expense
Write-down of equipment
Stock-based compensation expenses
Amortization of deferred costs
Amortization of interest rate derivative cost
Allowances and provisions
Gain on sale of leased equipment
Gain on insurance settlement
Gain on sale of interest in joint venture
Other non-cash items
Income from joint ventures, net of distributions
Non-cash portion of 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 subsidiaries
Maintenance reserves
Security deposits
Unearned lease revenue
Net cash provided by operating activities
Cash flows from investing activities:
Increase in investment in subsidiaries
Distributions received from subsidiaries
Proceeds from sale of equipment held for operating lease (net of selling expenses)
Proceeds from sale of interest in joint venture
Investment in joint ventures
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
Preferred stock dividends
Proceeds from shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of withholding tax
Excess tax benefit from stock-based compensation
Redemption of preferred stock
Repurchase of common stock
Cash settlement of stock options
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
(6,314)
18,764
2,621
3,144
2,215
(236)
34
(3,605)
(173)
—
—
(957)
94
(2,196)
(292)
5
(1,329)
(2,421)
4,946
2,898
(641)
335
18,427
(100,649)
106,183
21,371
—
(5,636)
(40,465)
(1,219)
(20,415)
236,392
(516)
(2,493)
1,725
(1,194)
—
(34,750)
(12,736)
—
(186,727)
(299)
(2,287)
6,429
(18,516)
17,783
(15,623)
14,800
2,306
3,173
1,360
483
(157)
(7,895)
—
—
(1,113)
(485)
343
4,325
(1,037)
78
(910)
(9,066)
553
3,008
759
(72)
9,428
(1,800)
22,851
61,309
—
(8,943)
(99,132)
(904)
(26,619)
132,409
(3,565)
(3,128)
672
(968)
779
—
(5,661)
(1,262)
(97,858)
21,418
4,227
2,202
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)
1,268
(775)
422
—
(4,156)
—
(135,309)
(21,480)
190
2,012
$ 4,142
$ 6,429
$ 2,202
$ 8,105
$ 9,307
$ 7,462
$ 101
$ 155
$ 541
Supplemental disclosures of non-cash investing activities:
During the years ended December 31, 2012, 2011, 2010, engines and equipment totaling $14,156, $17,067 and $70,
respectively, were transferred from Held for Operating Lease to Held for Sale but not settled.
During the years ended December 31, 2012, 2011, 2010, engines and equipment totaling $56,562, $2,448 and $14,417,
respectively, were transferred from the parent to its subsidiaries.
73
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE II — VALUATION ACCOUNTS
December 31, 2012, 2011 and 2010
(In thousands)
December 31, 2010
Accounts receivable, allowance for doubtful accounts
December 31, 2011
Accounts receivable, allowance for doubtful accounts
December 31, 2012
Accounts receivable, allowance for doubtful accounts
Balance at
Beginning
of Period
Additions
Charged
(Credited)
to Expense
Net
(Deductions)
Recoveries
Balance at
End of Period
467
423
477
(35)
350
(9)
(296)
503
-
423
477
980
Deductions in allowance for doubtful accounts represent uncollectible accounts written off, net of recoveries.
December 31, 2010
Notes receivable, allowance for doubtful accounts
December 31, 2011
Notes receivable, allowance for doubtful accounts
December 31, 2012
Notes receivable, allowance for doubtful accounts
Balance at
Beginning
of Period
Additions
Net
(Deductions)
Recoveries
Balance at
End of Period
-
-
-
-
-
940
(100)
840
840
-
(186)
654
74
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Computation of Earnings (Loss) Per Share
(In thousands, except per share amounts)
Exhibit 11.1
Ye ars Ende d De ce mbe r 31,
2012
2011
2010
Basic
Earnings:
Net income (loss) attributable to common shareholders
$ (3,793)
$ 11,380
$ 8,922
Shares:
Average common shares outstanding
8,490
8,423
8,681
Basic earnings (loss) per common share
$ (0.45)
$ 1.35
$ 1.03
Assuming full dilution
Earnings:
Net income (loss) attributable to common shareholders
$ (3,793)
$ 11,380
$ 8,922
Shares:
Average common shares outstanding
Potentially dilutive common shares outstanding
Diluted average common shares outstanding
8,490
301
8,791
8,423
453
8,876
8,681
570
9,251
Diluted earnings (loss) per common share
$ (0.43)
$ 1.28
$ 0.96
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 (loss) per share for 2012 excluded from the denominator zero options and 10,500
restricted stock awards granted to employees and directors because their effect would have been anti-dilutive. The calculation
of diluted earnings per share for 2011 excluded from the denominator zero options and zero restricted stock awards granted to
employees and directors because their effect would have been anti-dilutive. 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.
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Statement of Computation of Ratios of
Earnings to Fixed Charges and Preferred Dividends
(In thousands, except ratios)
Exhibit 12.1
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
2012
Years Ended December 31,
2010
2011
2009
2008
$ 937
32,008
$ 22,590
35,469
$ 18,571
41,186
$ 31,445
36,236
$ 41,202
38,860
802
$ 33,747
810
$ 58,869
949
$ 60,706
675
$ 68,356
690
$ 80,752
$ 31,749
259
$ 32,008
4,374
$ 36,382
$ 35,201
268
$ 35,469
5,136
$ 40,605
$ 40,945
241
$ 41,186
5,111
$ 46,297
$ 36,013
223
$ 36,236
4,527
$ 40,763
$ 38,640
220
$ 38,860
4,942
$ 43,802
Ratio of earnings to fixed charges
1.05
1.66
1.47
1.89
2.08
Ratio of earnings to fixed charges and
preferred stock dividends
0.93
1.45
1.31
1.68
1.84
(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.
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
List of Subsidiaries
Exhibit 21.1
Subsidiary
State or Jurisdiction of Incorporation
WEST Engine Funding LLC
Delaware
WEST Engine Funding (Ireland) Limited
Rep. of Ireland
Willis Lease (Ireland) Limited
WLFC (Ireland) Limited
WLFC Funding (Ireland) Limited
Willis Aviation Finance Limited
Willis Lease France
Rep. of Ireland
Rep. of Ireland
Rep. of Ireland
Rep. of Ireland
France
Willis Lease (China) Limited
People’s Republic of China
Willis Engine Securitization Trust*
Willis Engine Securitization Trust II
WEST Engine Acquisition LLC
Facility Engine Acquisition LLC
Delaware
Delaware
Delaware
Delaware
Willis Engine Securitization (Ireland) Limited
Rep. of Ireland
*This entity was liquidated and cancelled effective as of September 26, 2012.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Willis Lease Finance Corporation:
The audits referred to in our report dated March 18, 2013 included the related financial statement schedule as of
December 31, 2012, and for each of the years in the three-year period ended December 31, 2012, included in the amount
report on Form 10-K of Willis Lease Finance Corporation. This financial statement schedule is the responsibility of the
Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our
audits. In our opinion, such financial statement schedule, 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.
We consent to the incorporation by reference in the registration statements (No. 333-15343, 333-48258, 333-63830,
333-109140) on Form S-8 of Willis Lease Finance Corporation and subsidiaries of our reports dated March 18, 2013, with
respect to the consolidated balance sheets of Willis Lease Finance Corporation and subsidiaries as of December 31, 2012 and
2011, and the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash
flows for each of the years in the three-year period ended December 31, 2012, and related financial statement schedule II, and
the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December
31, 2012 annual report on Form 10-K of Willis Lease Finance Corporation.
/s/ KPMG LLP
San Francisco, California
March 18, 2013
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 18, 2013
/s/ Charles F. Willis, IV
Charles F. Willis, IV
Chief Executive Officer
Chairman of the Board
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 18, 2013
/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, 2012 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 18, 2013
/s/ Charles F. Willis, IV
Charles F. Willis, IV
Chairman of the Board and Chief Executive Officer
/s/ Bradley S. Forsyth
Bradley S. Forsyth
Senior Vice President and Chief Financial Officer
2 012 A N N U A L R E POR T
The following stock performance graph shows the percentage change in cumulative total return to 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 the period from December 31, 2007, through
December 31, 2012.
140
120
100
80
60
40
2007
2008
2009
2010
2011
2012
Willis Lease Finance Corporation
NASDAQ Composite Index
NASDAQ Financial-100 Index
$100 invested on 12/31/07 in stock or in index including reinvestment of dividends.
BELOW CF6-80C2 BEING INSPECTED WITH THRUST REVERSERS OPEN.
p.1
2 012 A N N U A L R E POR T
Corporate Information
EXECUTIVE TEAM
Charles F. Willis, IV
Donald A. Nunemaker
Bradley S. Forsyth
P. David Johnson
Dean M. Poulakidas
Judith M. Webber
Chairman & Chief
Executive Officer
President
Senior Vice President
& Chief Financial Officer
Senior Vice President,
Marketing and Sales
Senior Vice President
& General Counsel
Senior Vice President,
Technical Services
BOARD OF DIRECTORS
CORPORATE EXECUTIVE OFFICES
STOCK EXCHANGE LISTING
Charles F. Willis, IV
Chairman and Chief Executive Officer,
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
Officer, 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;
Director, Aviation Management LLC
773 San Marin Drive, Suite 2215
Novato, CA 94998
415 408-4700
415 408-4701 (fax)
www.willislease.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
KPMG LLP
55 2nd Street, Suite 1400
San Francisco, CA 94105
415 963-5100
Willis Lease Finance Corporation is listed
on the NASDAQ Global Market under the
symbol: WLFC.
FORM 10-K, 10-Q & PRESS RELEASES
The Form 10-K has been filed with the Secur-
ities 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 offices. Press
releases are also available at The Cereghino
Group web site, www.stockvalues.com.
TRANSFER AGENT & REGISTRAR
STOCK INFORMATION
2012
2011
High
Low
High
Low
Q1 $ 14.82 $ 12.13 $ 14.20 $ 12.15
12.55
11.75
Q2
11.00
11.46
Q3
9.91
12.35
Q4
13.14
13.33
14.71
13.69
14.00
12.19
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
800 937-5449
INVESTOR RELATIONS COUNSEL
The Cereghino Group
2502 2nd Avenue, Suite 700
Seattle, WA 98121
206 388-5785
www.stockvalues.com
ENGINE MODELS OWNED AND LEASED BY WILLIS LEASE FINANCE CORPORATION
AE3007A • CF34 • CF6-80 • CFM56-3C • CFM56-5A • CFM56-5B • CFM56-5C • CFM56-7B • JT8D-200 • PW100 • PW150
PW2000 • PW4000 • RB211-535 • TRENT 772B • V2500
773 SAN M AR IN DRI VE , S UIT E 2 2 1 5 , N O VATO , C AL IFO R N IA 9 4998 U SA
WWW.WILLI SL E A S E. C OM 4 1 5 4 0 8 - 4 7 0 0 4 15 4 08 -47 01 (FAX )
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