W I L L I S L E A S E F I N A N C E C O R P O R AT I O N
2 0 1 4 A N N U A L R E P O R T
Willis Lease Finance Corporation leases large and regional spare commercial
aircraft engines, APUs and aircraft to airlines, aircraft engine manufacturers, and
maintenance, repair and overhaul facilities worldwide. These leasing activities
are integrated with engine and aircraft trading, engine lease pools supported by
cutting-edge technology, as well as various end-of-life solutions for aircraft and
engines provided through its subsidiary, Willis Aeronautical Services, Inc.
Engine and Auxiliary Power Unit (APU) models owned and leased by Willis Lease Finance Corporation
and serving the global aviation markets:
Engines
CF34
CF6-80
CFM56-3C
CFM56-5A
CFM56-5B
CFM56-5C
CFM56-7B
GE90
PW100
PW150
PW2000
PW4000
RB211-535
TRENT 772B
V2500
APUs
GTCP 131-9B
GTCP 331-500B
Aircraft — Various Platforms
CO V ER : B OEIN G 777 POWERE D B Y GE 90 E N G I N ES
ABO VE: B OE I NG 7 37NG P OWE R E D BY C FM56 -7 B E N GI N E S
Strategic Financing & Commitments
1996 Initial Public Offering
1997 Follow-On Equity Offering
2000 SAIR Group Equity Investment
2008 WEST I Expansion
2009 Revolver Renewal
2011 Revolver Renewal
2005 WEST I Asset-Backed Securitization
2012 WEST II Asset-Backed Securitization
2006 Preferred Stock Offering
2014 Revolver Renewal
2007 CFMI Engine Purchase Agreement
(in millions)
$1,500
$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
13
14
Lease Portfolio
JV Owned Assets
Managed Assets
Willis Lease Finance Corporation 2014 Annual Report 1
Dear Fellow Shareholders
Forty years ago, we purchased our first engine
and launched Willis Lease Finance, a company that
has become an international industry leader in provid-
ing aviation services, specializing in leasing large and
regional spare commercial aircraft engines, APUs and
aircraft to airlines, aircraft engine manufacturers and
maintenance, repair and overhaul providers in over
120 countries.
Over this period, the world has changed a great
deal: China became a member of the global commu-
nity and is now one of the leading economies in the
world; the Berlin Wall came down; the Soviet Union
dissolved, and the Cold War ended. The European
Union created the Euro, which has become a major
world currency. Terrorist attacks grew in significance,
and oil prices have bounced around from under
$10 a barrel to over $130 per barrel, with both im-
pacting the global economy through more than one
economic cycle.
Throughout these cycles in the global economy
and the volatility in our marketplace, Willis Lease
has provided a broad range of spare aircraft engines,
with quality service at attractive pricing, to meet the
Lease Rent and Maintenance Reserve Revenue
(in millions)
$160
$140
$120
$100
$80
$60
$40
$20
0
10
11
12
13
14
Lease Rent Revenue
Maintenance Reserve Revenue
2 Willis Lease Finance Corporation 2014 Annual Report
Net Income
(in millions)
$20
$15
$10
$5
0
-$5
10
11
12
13
14
Net Income (Loss) Attributable to Common Shareholders
WEST charge and Preferred Redemption Cost
growing needs of the aviation industry. We will con-
tinue to provide cost-effective, creative, time-sensitive
and value-added products, as we continue to deliver
alternatives to traditional sources of services in the
aviation market.
While the pace of change around the globe con-
tinues to accelerate, many of the factors that impact
the aviation market are constant. It is vital for airlines
to keep high-value assets in the air and productive at
all times. Improving efficiencies across fleets is another
key driver in aviation, and access to capital at afford-
able rates can make the difference between success and
failure in this highly competitive market. Willis Lease
plays an essential role in providing services to airlines
and aviation service providers, and we are proud of our
long history of excellence.
Generating record revenues of $174.3 million
in 2014, we were profitable, posting net income of
$7.2 million, or $0.89 per diluted share. By compari-
son, 2013 profits were boosted by some non-routine
benefits, which included an $8.6 million tax benefit
and a contribution of $3.2 million from one of our
joint ventures following the termination of several long-
term leases. Net income for 2013 was $15.6 million,
or $1.89 per diluted share. Income from operations
increased 35.2% to $10.5 million in 2014, from $7.8
million a year ago. In 2014, earnings from operations
and earnings before taxes were the highest since 2011.
At the end of 2014, Willis Lease held an own-
ership interest in or managed for third parties 248
engines, 5 aircraft and 5 spare parts packages with a
total asset value of $1.4 billion. In 2014, we achieved
a number of accomplishments which position us for
growth in the future and are highlighted below:
• Increased the capacity of our revolving credit
facility to $700 million and extended the maturity
by five years.
• Launched an important joint-venture with China
Aviation Supply Corporation (“CASC”), China’s
leader in aviation supplies trade, distribution and
logistics.
• Substantially grew our joint venture with Mitsui
and related borrowing relationships with Japanese
financial institutions. The engine lease portfolio
of the Willis Mitsui joint venture grew 9% to
$263 million with 28 engines under our man-
agement. This strategic relationship is now in its
fourth year, and continues to be a profitable and
winning combination for both partners.
• Expanded both our technical capabilities and
sales force worldwide, particularly in Shanghai,
Singapore and Dublin.
• Grew our information technology platform
by expanding our customers’ ability to request
engines through a convenient mobile application.
In addition, we upgraded our internal customer
relationship management platform to provide a
more robust and dynamic tool for our sales force.
Average Utilization by Book Value
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
10
11
12
13
14
• Continued to explore opportunities for synergistic
acquisitions of, or partnerships with, companies
that provide complementary services.
• Completed the integration into our company of
Willis Aero, which is now contributing to our
revenues and profits. We foresee this supply chain
side of the business growing in the future.
• We have added GE 90 engines, which power the
Boeing 777 aircraft, to our portfolio and expect to
add GEnx engines, which power the Boeing 787
aircraft, in the near future.
• Our pooling programs are a major competitive
advantage and should continue to be so.
Supply and demand for engines vary greatly at any
given moment and the dynamics of our market can be
challenging. While leasing activity and demand were
solid during the year, the number of engines that came
off lease offset the progress our leasing teams made.
Hence, our average engine utilization remained in the
81-84% range for most of the year. At the end of the
year, we purchased eight engines for $55.5 million,
Willis Lease Finance Corporation 2014 Annual Report 3
four of which were off lease, and we had three engine
leases terminate on December 30, 2014. Excluding
these seven off-lease engines, utilization would have
been 83% at December 31, 2014.
Our strategy for 2015 and beyond is to improve
the productivity and profitability of our engine
portfolio by increasing our portfolio turnover, and
to expand our services to further meet the needs of
our customers. To that end, we brought on new senior
level managers with significant experience in the
aviation marketplace to build our capacity and add
new fields of expertise to our team. The men and
women that compose the Willis Lease team are highly
diverse and reflect the global nature of our business.
More than one-third of our team members are women,
many of them serving in technical and senior positions
within the company. We believe in having a diverse,
multi-cultural workforce, which is also advantageous
when dealing with our global partners and clients.
We will continue to recruit the best in the industry
to our team.
We are also working to further expand our access
to capital, exploring a variety of funding vehicles that
will provide fuel for future growth. As I have said many
times in the past, access to capital is a competitive
advantage that we believe sets us apart from many of
our competitors.
Book Value per Common Share
$30
$25
$20
$15
$10
$5
0
10
11
12
13
14
41% discount to book value at the end of 2014. We
are pleased to have been able to buy our shares at these
attractive prices for the benefit of our shareholders.
Looking forward, we continue to see opportu-
nities to expand our business in aviation services and
leasing. We will continue to invest in new assets, new
talent and new alliances to make Willis Lease stronger,
more nimble and more responsive. Customers want a
choice at a reasonable price. I believe we offer the best
in the business. We look forward to another interesting
and fast-paced year in 2015, and we appreciate your
continued support of our endeavors.
Over the past few years, we have been repurchasing
Sincerely,
our stock, buying back shares at a significant discount
to book value, because we believe that it is capital well
spent. In 2014, we repurchased 249,105 shares total-
ing $5.4 million at a weighted average price of $21.49
per share, which is a 17% discount to book value as
of the end of that year. In the last three years, we have
repurchased 1,572,620 shares for $24.0 million at an
average price of $15.27 per share, which represents a
Charles F. Willis, IV
Chairman and Chief Executive Officer
March 31, 2015
4 Willis Lease Finance Corporation 2014 Annual Report
Selected Financial Data
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
Spare parts sales
Gain on sale of leased equipment
Other revenue
Total revenue
Expenses
Depreciation and amortization
Cost of spare parts sales
Write-down of equipment
General and administrative
Technical expense
Total net finance costs
Total expenses
Net income
Net income (loss) attributable
to common shareholders
Diluted earnings (loss) per common share
Diluted average common shares outstanding
Common shares outstanding at period end
Balance Sheet Data
Equipment held for operating lease
Total assets
Shareholders’ equity
Book value per common share
2014
2013
2012
2011
2010
$ 101,748 $ 101,737
46,694
–
5,675
4,306
53,363
8,917
5,753
4,506
$ 94,591 $ 104,663
39,161
–
11,110
1,719
41,387
–
5,499
6,613
$ 102,133
34,776
–
7,990
3,403
$ 174,287
$ 158,412
$ 148,090
$ 156,653 $ 148,302
$ 65,441
7,474
5,602
35,859
12,336
37,062
$ 58,727
–
6,461
33,868
12,863
38,719
$ 52,591
–
5,874
34,551
7,006
47,131
$ 51,250
–
3,341
35,701
8,394
35,377
$ 48,704
–
2,874
29,302
8,118
40,733
$ 163,774
$ 150,638
$ 147,153
$ 134,063
$ 129,731
$ 7,247
$ 15,626
$ 1,535
$ 14,508
$ 12,050
$ 7,247
$ 15,626
$ 0.89 $ 1.89
8,289
8,400
8,141
8,346
$ (3,793) $ 11,380
$ (0.43) $ 1.28
8,876
9,110
8,791
8,716
$ 8,922
$ 0.96
9,251
9,181
$1,033,022
$1,066,448
$1,261,626
$1,199,229
$ 216,861 $ 212,605
$ 25.31
$ 25.98
$ 961,459
$1,078,715
$ 199,163
$ 22.85
$ 981,505
$1,133,205
$ 236,271
$ 22.43
$ 998,001
$1,125,962
$ 226,580
$ 21.20
Willis Lease Finance Corporation 2014 Annual Report 5
Stock Performance
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, 2009, through
December 31, 2014.
$100 invested on 12/31/09 in stock or in index
including reinvestment of dividends
250
200
150
100
50
0
09
10
11
12
13
14
Willis Lease Finance Corporation
NASDAQ Composite Index
NASDAQ Financial-100 Index
Stock Information
2014
2013
High
Low
High
Low
Q1
Q2
Q3
Q4
$20.59
$16.32
$16.14
$14.55
24.99
24.83
22.81
18.30
20.52
19.88
15.40
15.73
18.23
11.77
13.82
15.71
BOEING 737NG POWERED BY CFM 56-7B ENGINES
6 Willis Lease Finance Corporation 2014 Annual Report
Willis Lease Finance Corporation 2014 Form 10-K
Forward-Looking Statements 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 specific 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 to 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 aircraft, engines and their parts; 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.
I AE V 25 0 0 ENG I NE OPE RATE D O N AN AI R BUS A 319
Can’
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
For the fiscal year ended December 31, 2014
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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, 2014) was approximately $131.9 million (based on a closing sale price of $24.52 per share as reported on the
NASDAQ National Market).
The number of shares of the registrant’s Common Stock outstanding as of March 11, 2015 was 8,331,853.
The Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form 10-K.
3
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WILLIS LEASE FINANCE CORPORATION
2014 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
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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, 2014, we
had a total lease portfolio consisting of 207 engines and related equipment, 5 aircraft and 5 spare parts packages with 77
lessees in 39 countries and an aggregate net book value of $1,066.4 million. As of December 31, 2014, we managed a total
lease portfolio of 41 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. In 2013, we launched Willis Aeronautical Services, Inc. (“Willis Aero”), a wholly-owned
subsidiary, whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment from
third parties of aircraft and 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 separate our business into two reportable segments, Equipment Leasing and Spare Parts Sales. Our business
activities by reportable segment are described below.
Equipment Leasing
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).
Spare Parts Sales
Our wholly owned subsidiary Willis Aero primarily engages in the sale of aircraft engine parts and materials
through the acquisition or consignment from third parties of aircraft and engines. The launch of this business segment in
November 2013 positioned our Company to provide end-of-life solutions for the growing supply of surplus aircraft and
engines. With the establishment of Willis Aero, we are able to manage the full lifecycle of our lease assets, enhance the
returns on our engine portfolio and create incremental value for our shareholders.
3
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 69 commercial jet aircraft engines and leases thereof secures
the obligations of WEST II.
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 no assets outside of the WEST II trust 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 our long term asset lives.
INDUSTRY BACKGROUND - THE DEMAND FOR LEASED AIRCRAFT ENGINES
Historically, commercial aircraft operators owned rather than leased their spare 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 spare 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 21,000 aircraft as of 2014 and projects this will grow to approximately 42,000 aircraft by
2033. 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;
4
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. 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, 2014, all 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 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 is 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.
5
Upon termination of a lease, we will lease, sell or part out the related engines. The demand for aftermarket engines
for either sale or lease may be affected by a number of variables, including:
general market conditions;
regulatory changes (particularly those imposing environmental, maintenance and other requirements on the
operation of engines);
changes in demand for air travel;
fuel costs;
changes in the supply and cost of aircraft equipment; and
technological developments.
The value of particular used engines varies greatly depending upon their condition, the maintenance services
performed during the lease term and, as applicable, the number of hours or cycles remaining until the next major maintenance
is required. If we are unable to lease or sell engines on favorable terms, our financial results and our ability to service debt
may be adversely affected. See “Risk Factors” below.
The value of a particular model of engine is heavily dependent on the status of the types of aircraft on which it is
installed. We believe values of engines tend to be stable so long as the host aircraft for the engines as well as the engines
themselves are still being manufactured. Prices will also tend to remain stable and even rise after a host aircraft is no longer
manufactured so long as there is sufficient demand for the host aircraft. However, the value of an engine begins to decline
rapidly once the host aircraft begins to be retired from service and/or parted out in significant numbers. Values of engines
also may decline because of manufacturing defects that may surface subsequently.
As of December 31, 2014, we had a total lease portfolio of 207 aircraft engines and related equipment, 5 spare parts
packages, 5 aircraft and various parts and other engine-related equipment with a cost of $1,347.5 million in our lease
portfolio. As of December 31, 2013, we had a total lease portfolio of 202 aircraft engines and related equipment, 5 spare
parts packages, 4 aircraft and various parts and other engine-related equipment with a cost of $1,290.8 million in our lease
portfolio.
As of December 31, 2014, minimum future rentals under non-cancelable operating leases of these engines, parts and
aircraft assets were as follows:
Year
2015
2016
2017
2018
2019
Thereafter
(in thousands)
64,899
39,720
25,719
19,292
12,725
24,631
$ 186,986
As of December 31, 2014, we had 77 lessees of commercial aircraft engines, aircraft, and other aircraft-related
equipment in 39 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 $26.7 million as of December 31, 2014.
On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation Limited
(“CASC”) to participate in a joint venture named CASC Willis Engine Lease Company Limited (“CASC Willis”), a new
6
joint venture based in Shanghai, China. Each partner holds a fifty percent interest in the joint venture. In October 2014, each
partner made a $15.0 million initial capital contribution representing the up-front funding for the new joint venture. The new
company will acquire and lease jet engines to Chinese airlines and will concentrate on meeting the fast growing demand for
leased commercial aircraft engines and aviation assets in the People’s Republic of China. Our investment in the joint venture
is $15.0 million as of December 31, 2014.
AIRCRAFT LEASING
As of December 31, 2014, we owned four ATR72-202 and one Boeing 737-600 aircraft with an aggregate net book
value of $36.7 million.
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.
Prior to September 18, 2013, we held 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. Since their purchase, these
two aircraft had been leased to Emirates, with the leases terminating in March and May 2013. The return of both aircraft from
the prior lessee, Emirates, was completed by June 2013, with the airframes being disassembled and parted out and the eight
engines being marketed for lease separately to airline customers.
On September 18, 2013, we completed the acquisition of the fifty percent membership interest held by the other
joint venture partner in WOLF for a purchase price of $1.0 million, with the purchase price representing a $12.7 million
discount from the JV partner’s equity interest. The transaction has been accounted for as an asset acquisition. We recorded
the assets at the cost basis, which represents the allocation of our prior investment basis plus the cash paid to the third party
investor.
The purchase price was allocated to the eight aircraft engines and two airframes. The fair value of the net assets
acquired from this transaction is estimated to be $12.6 million comprising $27.0 million of equipment, $1.6 million of cash
and receivables, offset by $16.0 million of debt and other liabilities. As a result of the transaction, we now own one hundred
percent of WOLF. The WOLF assets and liabilities and the results of operations have been included in the accompanying
consolidated financial statements as of the acquisition date, September 18, 2013.
SPARE PARTS SALES
The sale of spare parts is managed by the Company’s wholly owned subsidiary, Willis Aero. Willis Aero primarily
engages in the sale of aircraft engine parts and materials through the acquisition or consignment from third parties of aircraft
and engines. The launch of this new business segment in November 2013 positioned our Company to provide end-of-life
solutions for the growing supply of surplus aircraft and engines. With the establishment of Willis Aero, we are able to
manage the full lifecycle of our lease assets, enhance the returns on our engine portfolio and create incremental value for our
shareholders. As of December 31, 2014, spare parts inventory had a carrying value of $18.6 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
7
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 senior management, marketing and sales teams all
have extensive experience in leasing aircraft engines and equipment. Our technical group makes up
approximately half of our total company staff levels. As a result, we possess a deep knowledge of the technical
details of commercial aircraft engines and maintenance issues associated with these engines that enables us to
provide our customers with comprehensive and up to date information on the various engine types available for
lease.
We have extensive industry contacts/relationships—worldwide. We have developed long-standing relationships
with aircraft operators, equipment manufacturers and aircraft maintenance organizations around the world. Our
extensive network of relationships enables us to quickly identify new leasing opportunities, procure engines and
equipment and facilitate the repair of equipment owned by us and equipment leased by our customers.
We have a trusted reputation for quality engines and engine records. We have been an independent lessor of
aircraft engines and engine equipment since 1985. Since that time we have focused on providing customers with
high quality engines and engine records. As a result of our commitment to these high standards, a significant
portion of our customer base consists of customers who have leased engines from us previously.
We have a diverse portfolio by customer, geography and engine type. As of December 31, 2014, we had a total
lease portfolio consisting of 207 engines and related equipment, 5 aircraft and 5 spare parts packages with 77
lessees in 39 countries and an aggregate net book value of $1,066.4 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 and aircraft engine 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 MROs 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
8
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. 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 related parts that we purchase,
lease and sell 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, 2014, 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 93% 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 2014, 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, 2014,
2013, and 2012. The countries that accounted for more than 10% of our lease rent revenue included the United States in each
9
of 2014, 2013 and 2012 as well as Switzerland and China in 2012. 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):
2014
Lease Rent
Revenue
Percentage
Years Ended December 31,
2013
Lease Rent
Revenue
(dollars in thousands)
Percentage
2012
Lease Rent
Revenue
Percentage
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Total
$ 11,880
7,771
4,997
37,990
9,907
21,796
3,264
4,143
$ 101,748
12 % $ 14,258
7,387
8
5
2,947
37,788
37
10
8,794
21,407
21
2,609
3
6,547
4
100 % $ 101,737
14 % $ 11,693
6,075
7
5,206
3
35,001
37
9,196
9
18,585
21
2,307
3
6,528
6
100 % $ 94,591
12 %
6
6
37
10
20
2
7
100 %
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 85% 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, 2014, we had 99 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 maintenance, repair and overhaul
companies (“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;
increased competition;
changes in interest rates and the availability and terms of credit available to commercial aircraft operators;
10
concerns about security, terrorism, war, public health and political instability;
inclement weather and natural disasters, including but not limited to volcanic eruptions;
environmental compliance and other regulatory costs;
labor contracts, labor costs and strikes or stoppages at commercial aircraft operators;
aircraft fuel prices and availability;
technological developments;
maintenance costs;
airport access and air traffic control infrastructure constraints;
insurance and other operating costs incurred by commercial aircraft operators and MROs;
industry capacity, utilization and general market conditions; and
market prices for aviation equipment.
To the extent that our customers are negatively affected by these risk factors, we may experience:
a decrease in demand for some engine types in our portfolio;
greater credit risks from our customers, and a higher incidence of lessee defaults and repossessions;
an inability to quickly lease engines and aircraft on commercially acceptable terms when these become
available through our purchase commitments and regular lease terminations; and
shorter lease terms, which may increase our expenses and reduce our utilization rates.
Our engine values and lease rates, which are dependent on the status of the types of aircraft on which engines are
installed, and other factors, could decline.
The value of a particular model of engine depends heavily on the types of aircraft on which it may be installed and
the supply of available engines. We believe values of engines tend to be relatively stable so long as there is sufficient demand
for the host aircraft. However, we believe the value of an engine begins to decline rapidly once the host aircraft begins to be
retired from service and/or used for spare parts in significant numbers. Certain types of engines may be used in significant
numbers by commercial aircraft operators that are currently experiencing financial difficulties. If such operators were to go
into liquidation or similar proceedings, the resulting over-supply of engines from these operators could have an adverse effect
on the demand for the affected engine types and the values of such engines.
Upon termination of a lease, we may be unable to enter into new leases or sell the engine on acceptable terms.
We own the engines that we lease to customers and bear the risk of not recovering our entire investment through
leasing and selling the engines. Upon termination of a lease, we seek to enter a new lease or to sell the engine. We also
selectively sell engines on an opportunistic basis. We cannot give assurance that we will be able to find, in a timely manner, a
lessee for our engines coming off-lease. If we do find a lessee, we may not be able to obtain satisfactory lease rates and terms
(including maintenance and redelivery conditions) or rates and terms comparable to our current leases, and we can give no
assurance that the creditworthiness of any future lessee will be equal to or better than that of the existing lessees of our
engines. Because the terms of engine leases may be less than 12 months, we may frequently need to remarket engines. We
face the risk that we may not be able to keep our engines on lease consistently.
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We are subject to the risks and costs of aircraft maintenance and obsolescence on the aircraft that we own.
We currently own four ATR72-202 turboprop and one Boeing 737-600 aircraft. We may buy other aircraft or
interests in aircraft in the future primarily to seek opportunities to realize value from the engines or related parts. 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, part-out companies and sellers may, among other things,
adversely affect the demand for, lease rates and residual values of our aircraft;
our aircraft lessees are aircraft operators engaged in economically sensitive, highly cyclical and competitive
businesses and our results of operations from aircraft leasing depend, in part, on their financial strength (for
more details, see the risk factor entitled “We are affected by the risks faced by commercial aircraft operators
and MROs because they are our customers” above);
our aircraft lessees may encounter significant financial difficulties, which could result in our agreeing to amend
our leases with the customer to, among other things, defer or forgive rent payments or extend lease terms as an
alternative to repossession;
our aircraft lessees may file for bankruptcy which could result in us incurring greater losses with respect to
aircraft than with respect to engines; and
aircraft technology is constantly improving and, as a result, aircraft of a particular model and type tend to
become obsolete and less in demand over time, when newer, more advanced and efficient aircraft become
available.
We carry the risk of maintenance for our leased assets. Our maintenance reserves may be inadequate or lessees may
default on their obligations to perform maintenance, which could increase our expenses.
Under most of our engine leases, the lessee makes monthly maintenance reserve payments to us based on the
engine’s usage and management’s estimate of maintenance costs. A certain level of maintenance reserve payments on the
WEST 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. Thirty-seven
of our leases comprising approximately 23.5% of the net book value of our on-lease engines at December 31, 2014 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.
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Our ability to determine the condition of the engines and whether the lessees are properly maintaining our engines is
generally limited to the lessees’ reporting of monthly usage and any maintenance performed, confirmed by periodic
inspections performed by us and third-parties. A lessee’s failure to meet its maintenance or recordkeeping obligations under a
lease could result in:
a grounding of the related engine;
a repossession which would likely cause us to incur additional and potentially substantial expenditures in
restoring the engine to an acceptable maintenance condition;
a need to incur additional costs and devote resources to recreate the records prior to the sale or lease of the
engine;
loss of lease revenue while we perform refurbishments or repairs and recreate records; and
a lower lease rate and/or shorter lease term under a new lease entered into by us following repossession of the
engine.
Any of these events may adversely affect the value of the engine, unless and until remedied, and reduce our
revenues and increase our expenses. If an engine is damaged during a lease and we are unable to recover from the lessee or
insurance, we may incur a loss.
Our operating results vary and comparisons to results for preceding periods may not be meaningful.
Due to a number of factors, including the risks described in this ITEM 1A, our operating results may fluctuate.
These fluctuations may also be caused by:
the timing and number of purchases and sales of engines;
the timing and amount of maintenance reserve revenues recorded resulting from the termination of long term
leases, for which significant amounts 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, and proceeds from
engine sales, and result in higher legal, technical, maintenance, storage and insurance costs related to repossession and the
cost 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. After a period of recovery, the airline industry was negatively
impacted again 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 the years since, returning to profitability with carriers
13
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, 2014, we had an aggregate of approximately $1.4 million in lease rent and $1.9 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 in foreign jurisdictions, with some seeking to
restructure their operations and others 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
laws 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 and such default is not cured in a timely manner we typically seek to terminate the lease and
repossess the engine. If a defaulting lessee contests the termination and repossession or is under court protection,
enforcement of our rights under the lease may be difficult, expensive and time-consuming. We may not realize any practical
benefits from our legal rights and we may need to obtain consents to export the engine. As a result, the relevant engine may
be off-lease or not producing revenue for a prolonged period. In addition, we will incur direct costs associated with
repossessing our engine. These costs may include legal and similar costs, the direct costs of transporting, storing and insuring
the engine, and costs associated with necessary maintenance and recordkeeping to make the engine available for lease or sale.
During this time, we will realize no revenue from the leased engine, and we will continue to be obligated to pay our debt
financing for the engine. If an engine is installed on an airframe, the airframe may be owned by an aircraft lessor or other
third party. Our ability to recover engines installed on airframes may depend on the cooperation of the airframe owner.
We and our customers operate in a highly regulated industry and changes in laws or regulations may adversely
affect our ability to lease or sell our engines.
Licenses and consents
We and our customers operate in a highly regulated industry. A number of our leases require specific governmental
or regulatory licenses, consents or approvals. These include consents for certain payments under the leases and for the export,
import or re-export of our engines. Consents needed in connection with future leasing or sale of our engines may not be
received timely or have economically feasible terms. Any of these events could adversely affect our ability to lease or sell
engines.
The U.S. Department of Commerce, or the “Commerce Department,” regulates exports. We are subject to the
Commerce Department’s and the U.S. Department of State’s regulations with respect to the lease and sale of engines and
aircraft to foreign entities and the export of related parts. These Departments may, in some cases, require us to obtain export
licenses for engines exported to foreign countries. The U.S. Department of Homeland Security, through the U.S. Customs
and Border Protection, enforces regulations related to the import of engines and aircraft into the United States for
maintenance or lease and imports of parts for installation on our engines and aircraft.
We are prohibited from doing business with persons designated by the U.S. Department of the Treasury’s Office of
Foreign Assets Control, or “OFAC,” on its “Specially Designated Nationals List,” and must monitor our operations and
existing and potential lessees for compliance with OFAC’s rules. Similarly, sanctions issued by the U.S. government, the
European Union or other governments could prohibit or restrict us from doing business in certain countries or with certain
persons, and we must monitor our operations and existing and potential lessees for compliance with such sanctions.
14
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 influencing any official act or decision or securing any improper advantage. 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 the European Aviation
Safety Agency (“EASA”), who regulate the maintenance of engines and issue airworthiness directives. Airworthiness
directives typically set forth special maintenance actions or modifications to certain engine types or series of specific engines
that must be implemented for the engine to remain in service. Also, airworthiness directives may require the lessee to make
more frequent inspections of an engine or particular engine parts. Each lessee of an engine generally is responsible for
complying with all airworthiness directives. However, if the engine is off lease, we may be forced to bear the cost of
compliance with such airworthiness directives, and if the engine is leased, subject to the terms of the lease, if any, we may be
forced to share the cost of compliance.
Environmental regulation
Governmental regulations of noise and emissions levels may be applicable where the related airframe is registered,
and where the aircraft is operated. For example, jurisdictions throughout the world have adopted noise regulations which
require all aircraft to comply with Stage III noise requirements. In addition to the current Stage III compliance requirements,
the United States and the International Civil Aviation Organization, or “ICAO,” have adopted a new, more stringent set of
“Stage IV” standards for noise levels which will apply to engines manufactured or certified beginning in 2006. At this time,
the United States regulations would not require any phase-out of aircraft that qualify only for Stage III compliance, but the
European Union has established a framework for the imposition of operating limitations on non-Stage IV aircraft. These
regulations could limit the economic life of our engines or reduce their value, could limit our ability to lease or sell the non-
compliant engines or, if engine modifications are permitted, require us to make significant additional investments in the
engines to make them compliant.
The United States and other jurisdictions are beginning to impose more stringent limits on the emission of nitrogen
oxide, carbon monoxide and carbon dioxide emissions from engines, consistent with ICAO standards. These limits generally
apply only to engines manufactured after 1999. In 2005, the European Union launched an Emissions Trading System limiting
greenhouse gas emissions by various industries and persons, including aircraft operators. 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 new 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 842) (“ED”), issued in May 2013, 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 FASB has not completed all of its deliberations and the decisions made to date were sufficiently different from
those published in the 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
15
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. 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
for which there may not be sufficient insurance coverage.
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 relatively 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, 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
16
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 require 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. From time to
time, 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 was approximately 0.17% on
each of December 31, 2013 and December 31, 2014.
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.”
17
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;
the level, direction and volatility of interest rates and expectations of changes in rates;
the 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.
For the year ended December 31, 2014, 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, those 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, 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.
18
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 lessee bankruptcy or lease default while the
aircraft with the engine installed remains in such a jurisdiction. We may suffer a loss if we are not able to repossess engines
leased to lessees in these jurisdictions.
RISKS RELATED TO OUR SMALL SIZE AND CORPORATE STRUCTURE
Intense competition in our industry, particularly with major companies with substantially greater financial,
personnel, marketing and other resources, could cause our revenues and business to suffer.
The engine leasing industry is highly competitive and global. Our primary competitors include GE Engine Leasing,
Shannon Engine Support Ltd., Pratt &Whitney, Rolls-Royce Partners Finance and Engine Lease Finance Corporation.
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, offer
maintenance and repair services 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
19
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 current and 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.
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 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
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
may 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, 2014, 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 2,707,439 shares of our
common stock, representing approximately 32% 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.
20
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 affect the rights of WEST II;
We cease to be engaged in the aircraft engine leasing business;
We become subject to an insolvency or bankruptcy proceeding, either voluntarily or involuntarily; and
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, 2014, 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.
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 Junior Participating 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 under a lease that covers 20,534 square feet of office space.
We sub-lease 7,124 square feet of office and warehouse space for our operations in San Diego, California. We lease 30,000
square feet of office and warehouse space in Boynton Beach, Florida. We also lease facilities for sales and operations in
London, UK; Shanghai, China; Singapore; Blagnac, France; and Dublin, Ireland.
ITEM 3. LEGAL PROCEEDINGS
None.
21
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 2014.
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 2, 2015 there were approximately 3,442 shareholders of our Common Stock.
The high and low closing sales price of the Common Stock for each quarter of 2014 and 2013, as reported by
NASDAQ, are set forth below:
High
2014
Low
High
2013
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
20.59 $
16.32 $ 16.14 $ 14.55
24.99
18.30
15.40
11.77
24.83
20.52
15.73
13.82
22.81
19.88
18.23
15.71
During the years ended December 31, 2014 and 2013, 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.
The following table outlines our Equity Compensation Plan Information.
Number of securities
Number of securities to be
issued upon exercise of
outstanding
Weighted-average exercise
price of outstanding
options, warrants and rights options, warrants and rights
(a)
(b)
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a)
(c)
n/a
—
49,000
—
49,000 $
n/a
n/a
9.20
n/a
9.20
n/a
30,286
—
18,096
48,382
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. 2,117,272 shares of restricted stock were
granted under the 2007 Stock Incentive Plan by December 31, 2014. Of this amount, 135,368 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 18,096 shares which were available as of December 31, 2014 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. The repurchased shares are to be subsequently retired. 249,105
22
shares totaling $5.4 million were repurchased in 2014 under our authorized plan. As of December 31, 2014, the total number
of common shares outstanding was approximately 8.3 million.
Common stock repurchases, under our authorized plan, in the quarter ended December 31, 2014 were as follows:
Period
October
November
December
Total
Total Number of
Shares Purchased
Total Number of
Shares Purchased
Average Price Paid as Part of Publicly
Announced Plans
per Share
(in thousands, except per share data)
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
8 $
54
—
62 $
21.89
21.79
—
21.80
8 $
54
—
62 $
79,135
77,970
77,970
77,970
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.
2014
Years Ended December 31,
2012
(dollars in thousands, except per share data)
2013
2011
2010
Revenue:
Lease rent revenue
Maintenance reserve revenue
Spare parts sales
Gain on sale of leased equipment
Other revenue
Total revenue
$ 101,748 $ 101,737 $
94,591 $ 104,663 $ 102,133
34,776
39,161
41,387
—
—
—
7,990
11,110
5,499
3,403
1,719
6,613
$ 174,287 $ 158,412 $ 148,090 $ 156,653 $ 148,302
53,363
8,917
5,753
4,506
46,694
—
5,675
4,306
Net income
$
7,247 $
15,626 $
1,535 $
14,508 $
12,050
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
Shareholders’ equity
Lease Portfolio:
Engines at end of the period
Spare parts packages at end of the period
Aircraft at end of the period
$
7,247 $
15,626 $
(3,793) $
11,380 $
8,922
$
$
0.92 $
0.89 $
1.95 $
1.89 $
(0.45) $
(0.43) $
1.35 $
1.28 $
1.03
0.96
1,261,626 $
$
1,125,962
$ 840,956 $ 787,614 $ 696,988 $ 718,134 $ 731,632
$ 216,861 $ 212,605 $ 199,163 $ 236,271 $ 226,580
1,133,205 $
1,078,715 $
1,199,229 $
207
5
5
202
5
4
184
4
7
194
3
13
179
4
3
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
23
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; and 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, 2014, all of our leases were operating leases. As of December 31, 2014, we had 77 lessees in 39 countries. Our
portfolio is continually changing due to acquisitions and sales. As of December 31, 2014, our lease portfolio consisted of 207
engines and related equipment, 5 aircraft and 5 spare engine parts packages with an aggregate net book value of $1,066.4
million. As of December 31, 2014, we also managed 41 engines and related equipment on behalf of other parties. In 2013,
we launched Willis Aeronautical Services, Inc. (“Willis Aero”), a wholly-owned subsidiary, whose primary focus is the sale
of aircraft engine parts and materials through the acquisition or consignment of aircraft and engines from third parties.
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 a lease
portfolio of 28 engines with a net book value of $262.8 million at December 31, 2014.
On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation Limited
(“CASC”) to participate in a joint venture named CASC Willis Engine Lease Company Limited (“CASC Willis”), a new
joint venture based in Shanghai, China. Each partner holds a fifty percent interest in the joint venture. In October 2014, each
partner made a $15.0 million initial capital contribution representing the up-front funding for the new joint venture. The new
company will acquire and lease jet engines to Chinese airlines and will concentrate on meeting the fast growing demand for
leased commercial aircraft engines and aviation assets in the People’s Republic of China.
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. In addition, any deterioration in the financial condition of our customers may adversely affect future
lease revenues. As of December 31, 2014 all of our engine 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.
24
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 14-15 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, 59 engines having a net book value of $140.4
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, 2013 and again on July 1, 2014, we adjusted the depreciation for certain older engine types within the
portfolio. The 2014 change in depreciation estimate resulted in a $2.9 million increase in depreciation in 2014 and on an
annual basis will result in an increase in depreciation expense of $5.8 million per year assuming no change in our portfolio.
The net effect of the 2014 change in depreciation estimate is a reduction in 2014 net income of $1.7 million or $0.21 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, 2014 COMPARED TO THE YEAR ENDED DECEMBER 31, 2013
Revenue is summarized as follows:
Lease rent revenue
Maintenance reserve revenue
Spare parts sales
Gain on sale of leased equipment
Other revenue
Total revenue
Years Ended December 31,
2014
2013
Amount
%
Amount
%
$ 101,748
53,363
8,917
5,753
4,506
$ 174,287
(dollars in thousands)
58.3 % $ 101,737
46,694
30.6 %
—
5.1 %
5,675
3.4 %
4,306
2.6 %
100.0 % $ 158,412
64.2 %
29.5 %
— %
3.6 %
2.7 %
100.0 %
Lease Rent Revenue. Our lease rent revenue for the years ended December 31, 2014 and December 31, 2013 was
flat. An increase in the average size of the lease portfolio in the current period was offset by lower average portfolio
utilization compared to the year ago period. The aggregate of net book value of equipment held for lease at December 31,
2014 and 2013, was $1,066.4 million and $1,033.0 million, respectively, an increase of 3.2%. 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. As of December 31, 2014
and 2013, approximately 79% and 86%, respectively, of equipment by net book value was on-lease. The average utilization
for the year ended December 31, 2014 was 83% compared to 84% in the prior year. During the year ended December 31,
2014, 21 engines and one aircraft were added to our lease portfolio at a total cost of $137.4 million (including capitalized
costs). During the year ended December 31, 2013, 40 engines were added to our lease portfolio at a total cost of $172.2
million (including capitalized costs).
25
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2014 increased
14.3% to $53.4 million from $46.7 million for the comparable period in 2013. This increase was primarily due to higher
maintenance reserve revenues recognized related to the termination of long term leases in 2014 compared to 2013.
Spare Parts Sales. Spare parts sales for the year ended December 31, 2014 was $8.9 million. During the third
quarter of 2014, we began recording spare parts sales and cost of spare parts sales for the inventory sold by our engine part
sales subsidiary, Willis Aero as separate line items in our consolidated income statement. Spare parts sales for the year ended
December 31, 2013 was zero due to the launch of our engine part sales subsidiary, Willis Aero, during the fourth quarter of
2013.
Gain on Sale of Leased Equipment. During the year ended December 31, 2014, we sold 7 engines, exchanged 2
engines and sold various engine-related equipment from the lease portfolio for a net gain of $5.8 million. During the year
ended December 31, 2013, we sold 24 engines, 3 aircraft and various engine-related equipment from the lease portfolio for a
net gain of $5.7 million.
Other Revenue. Our other revenue consists primarily of management fee income, lease administration fees and third
party consignment commissions earned by Willis Aero. Other revenue increased $0.1 million from the prior year. The
increase was primarily due to an increase in commissions earned by Willis Aero on third party spare parts sales and an
increase in fees earned related to engines managed on behalf of third parties. These increases were partially offset by the
recording of a gain of $0.4 million in the year ago period related to an insurance settlement.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $6.7 million or 11.4% to
$65.4 million for the year ended December 31, 2014, from the comparable period in 2013 due to growth in the lease portfolio
and changes in estimates of useful lives and residual values on certain older engine types. On July 1, 2013 and again on
July 1, 2014, we adjusted the depreciation for certain older engine types within the portfolio. It is our policy to review
estimates regularly to accurately expense the cost of equipment over the useful life of the engines. The 2014 change in
depreciation estimate resulted in a $2.9 million increase in depreciation for 2014. The net effect of the 2014 change in
depreciation estimate is a reduction in 2014 net income of $1.7 million or $0.21 in diluted earnings per share over what net
income would have otherwise been had the change in depreciation estimate not been made.
Cost of Spare Parts Sales. Cost of spare parts sales for the year ended December 31, 2014 was $7.5 million. During
the third quarter of 2014, we began recording spare parts sales and cost of spare parts sales for the inventory sold by our
engine part sales subsidiary, Willis Aero, as separate line items in our consolidated income statement. Cost of spare parts
sales for the year ended December 31, 2013 was zero due to the launch of our engine part sales subsidiary, Willis Aero,
during the fourth quarter of 2013.
Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $5.6 million for the year
ended December 31, 2014, a decrease of $0.9 million from the $6.5 million recorded in the comparable period in 2013. A
write-down of equipment totaling $2.6 million was recorded in the year ended December 31, 2014 due to a management
decision to consign six engines for part-out and sale, in which the assets’ net book value exceeded the estimated proceeds
from part-out. Write-downs on held for use equipment to their estimated fair values totaled $2.4 million for the year ended
December 31, 2014, due to the adjustment of carrying values for certain impaired engines within the portfolio to reflect
estimated market values. A further write-down of $0.6 million was recorded in the year ended December 31, 2014 to adjust
the carrying value of engine parts for which market conditions for the sale of parts has changed. A write-down of $3.7
million was recorded in the year ended December 31, 2013 due to a management decision to consign four engines for part out
and sale, in which the assets net book value exceeds the estimated proceeds from part-out. A further write-down of $2.8
million was recorded in the year ended December 31, 2013 to adjust the carrying value of engine parts held on consignment
for which market conditions for the sale of parts has changed.
General and Administrative Expenses. General and administrative expenses increased 5.9% to $35.9 million for the
year ended December 31, 2014, from the comparable period in 2013 due primarily to increases in employment related costs
($1.3 million), corporate aircraft expenses ($0.6 million), travel and entertainment expenses ($0.5 million), and accounting
services ($0.3 million), and, which was partially offset by decreased legal fees ($0.4 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 4.1%
to $4.6 million for the year ended December 31, 2014, from the comparable period in 2013 due primarily to a decrease in
engine maintenance costs due to lower engine repair activity ($0.3 million) and decreased engine storage fees ($0.2 million).
Net Finance Costs. Net finance costs include interest expense, interest income and loss/(gain) on debt
extinguishment and derivatives termination. Interest expense decreased 4.3% to $37.1 million for the year ended December
26
31, 2014, from the comparable period in 2013, due primarily to $1.5 million of interest expense recorded a year ago related to
interest rate swaps in place for much of 2013, which terminated in November 2013. As of December 31, 2014, $468.5
million of our debt is tied to one-month U.S. dollar LIBOR which was 0.16% and 0.19% for the years ended December 31,
2014 and 2013 (average of month-end rates), respectively. At December 31, 2014 and 2013, one-month LIBOR was 0.17%.
To mitigate exposure to interest rate changes, we periodically enter into interest rate swap agreements. The last of our interest
rate swap agreements matured in November 2013. In 2014 and 2013, ($0.5 million) and $1.5 million were realized through
the income statement as an (decrease) increase in interest expense, respectively, as a result of the swap agreements.
Income Taxes. Income tax expense (benefit) for the year ended December 31, 2014, increased to $4.6 million from
($4.3 million) for the comparable period in 2013. During 2014, a valuation allowance of $1.3 million was established for the
net operating losses expiring in California for the periods 2016 to 2024, resulting in a 7.3% increase in our effective tax rate
in the year. The effective rate for the year ended December 31, 2013 differs from the U.S. federal statutory rate primarily due
to an income tax benefit of $8.7 million related to an extraterritorial income (“ETI”) adjustment recorded in the year ago
period for certain of our engines. We recognized this income tax benefit in the year ended December 31, 2013 resulting from
adjustments made to the tax basis of certain of our engines due to a decision in a court case on behalf of another company in
which our circumstances are similar. The overall effective tax rate for the year ended December 31, 2014 was 38.8%
compared to 38.9% (excluding the ETI benefit) 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,
the amount of executive compensation exceeding $1.0 million as defined in IRS code 162(m) and numerous other factors,
including changes in tax law.
YEAR ENDED DECEMBER 31, 2013 COMPARED TO THE YEAR ENDED DECEMBER 31, 2012
Revenue is summarized as follows:
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
Years Ended December 31,
2013
2012
Amount
%
Amount
%
$ 101,737
46,694
5,675
4,306
$ 158,412
(dollars in thousands)
64.2 % $
29.5 %
3.6 %
2.7 %
94,591
41,387
5,499
6,613
100.0 % $ 148,090
63.9 %
27.9 %
3.7 %
4.5 %
100.0 %
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2013, increased by 7.6% over the
comparable period in 2012. This increase primarily reflects an increase in the average size of the lease portfolio and higher
average portfolio utilization in the current period, which translated into a higher amount of equipment on lease. The
aggregate of net book value of equipment held for lease at December 31, 2013 and 2012, was $1,033.0 million and $961.5
million, respectively, an increase of 7.4%. 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 each of December 31, 2013 and 2012, approximately 86% of
equipment by net book value was on-lease. The average utilization for the year ended December 31, 2013 was 84% compared
to 83% in the prior year. During the year ended December 31, 2013, 40 engines were added to our lease portfolio at a total
cost of $172.2 million (including capitalized costs). 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).
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2013 increased
12.8% to $46.7 million from $41.4 million for the comparable period in 2012. This increase was primarily due to higher
maintenance reserve revenues recognized related to the termination of long term leases in 2013 compared to 2012.
Gain on Sale of Leased Equipment. During the year ended December 31, 2013, we sold 24 engines, 3 aircraft and
various engine-related equipment from the lease portfolio for a net gain of $5.7 million. 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.
Other Revenue. Our other revenue consists primarily of management fee income and lease administration fees, and
decreased $2.3 million from the prior year. The decrease was primarily due to the recording of a gain of $2.0 million in 2012
related to the receipt of an engine in exchange for an engine that was damaged while under lease.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $6.1 million or 11.6% to
$58.7 million for the year ended December 31, 2013, from the comparable period in 2012 due to growth in the lease portfolio
27
and changes in estimates of useful lives and residual values on certain older engine types. On July 1, 2012 and again on
July 1, 2013, we adjusted the depreciation for certain older engine types within the portfolio. It is our policy to review
estimates regularly to accurately expense the cost of equipment over the useful life of the engines. The 2013 change in
depreciation estimate resulted in a $3.9 million increase in depreciation for 2013. The net effect of the 2013 change in
depreciation estimate is a reduction in 2013 net income of $2.3 million or $0.28 in diluted earnings per share over what net
income would have otherwise been had the change in depreciation estimate not been made.
Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $6.5 million for the year
ended December 31, 2013, an increase of $0.6 million from the $5.9 million recorded in the comparable period in 2012. A
write-down of $3.7 million was recorded in the year ended December 31, 2013 due to a management decision to consign four
engines for part out and sale, in which the assets net book value exceeds the estimated proceeds from part-out. A further
write-down of $2.8 million was recorded in the year ended December 31, 2013 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 further 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.
General and Administrative Expenses. General and administrative expenses decreased 2.0% to $33.9 million for the
year ended December 31, 2013, from the comparable period in 2012 due primarily to decreases in third party servicer fees
($0.9 million), bad debt expense ($0.8 million), marketing representative fees ($0.3 million) and corporate aircraft expenses
($0.1 million), which was partially offset by increases in accounting and legal fees ($0.7 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 84.3%
to $12.9 million for the year ended December 31, 2013, from the comparable period in 2012 due primarily to increases in
engine maintenance costs due to higher engine repair activity ($5.5 million), as well as increases in third party technical
service fees ($0.3 million) and engine thrust rental fees due to an increase in the number of engines being operated at higher
thrust levels under the CFM thrust rental program ($0.2 million).
Net Finance Costs. Net finance costs include interest expense, interest income and loss/(gain) on debt
extinguishment and derivatives termination. Interest expense increased 22.0% to $38.7 million for the year ended
December 31, 2013, from the comparable period in 2012, primarily to an increase in the average debt outstanding and an
increase in the cost of WEST II debt. As of December 31, 2013, $392.0 million of our debt is tied to one-month U.S. dollar
LIBOR which was 0.19% and 0.23% for the years ended December 31, 2013 and 2012 (average of month-end rates),
respectively. At December 31, 2013 and 2012, one-month LIBOR was 0.17% and 0.21%, respectively. To mitigate exposure
to interest rate changes, we periodically enter into interest rate swap agreements. The last of our interest rate swap agreements
matured in November 2013. In 2013 and 2012, $1.5 million and $6.4 million were realized through the income statement as
an increase in interest expense, respectively, as a result of the swap agreements.
Interest income for the year ended December 31, 2013 decreased to $0 from $0.08 million during the year ago
period due to a decrease in deposit balances and a drop in the rate of interest earned on deposit balances.
Income Taxes. Income tax expense (benefit) for the year ended December 31, 2013, decreased to ($4.3 million) from
$1.2 million for the comparable period in 2012. The effective rate for the year ended December 31, 2013 differs from the
U.S. federal statutory rate primarily due to an income tax benefit of $8.7 million related to an extraterritorial income (“ETI”)
adjustment recorded in the period for certain of our engines. We recognized this income tax benefit in the current period
resulting from adjustments made to the tax basis of certain of our engines due to a decision in a recent court case on behalf of
another company in which our circumstances are similar. The overall effective tax rate for the year ended December 31, 2013
was 38.9 % (excluding the ETI benefit) compared to 43.0% 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, the amount of executive compensation exceeding $1.0 million as defined in IRS code 162(m) and numerous
other factors, including changes in tax law.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, which supersedes most of the current revenue recognition
requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers are also required. This guidance is effective for the Company in the first
28
quarter of 2017 and early application is not permitted. Entities must adopt the new guidance using one of two retrospective
application methods. We are currently evaluating the standard to determine the impact of its adoption on the consolidated
financial statements.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which is part of Accounting
Standards Codification (“ASC”) 740: Income Taxes. The new guidance requires an entity to present an unrecognized tax
benefit and an NOL carryforward, a similar tax loss, or a tax credit carryforward on a net basis as part of a deferred tax asset,
unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or would not be utilized for
that purpose, then a liability would be recognized. We adopted this ASU as of January 1, 2014. The adoption of this ASU
did not have a material impact on our Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We finance our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $154.4
million, $130.0 million and $603.7 million, in the years ended December 31, 2014, 2013, and 2012, respectively, was derived
from this activity. In these same time periods $101.1 million, $70.9 million and $626.9 million, respectively, was used to pay
down related debt. Cash flow from operating activities generated $62.7 million, $80.3 million and $67.3 million in the years
ended December 31, 2014, 2013, and 2012, respectively.
At December 31, 2014, $10.5 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 $128.1 million, $136.2 million and $61.5 million for the years ended December 31, 2014, 2013, and 2012,
respectively.
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 purchased 11 of the engines for $63.0 million
and our joint venture, Willis Mitsui & Company Engine Support Limited (“WMES”) purchased the remaining 8 engines for
$54.5 million. We funded our portion of this transaction with available funds from our revolving credit facility. As part of
this transaction, we made a $5.5 million capital contribution to WMES to support its purchase of the 8 SAS engines. During
the remainder of 2013, we made additional capital contributions of $5.7 million to our investment in WMES. During 2014,
we made capital contributions of $2.6 million to our investment in WMES.
Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise
lease revenue, security deposits and maintenance reserves, and are offset by interest expense and general and administrative
costs. Cash received as maintenance reserve payments for some of our engines on lease are partially restricted by our debt
arrangements. The lease revenue stream, in the short-term, is at fixed rates while a portion of our debt is at variable rates. If
interest rates increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our
earnings and operating cash flows. Revenue and maintenance reserves are also affected by the amount of equipment off lease.
Approximately 79% and 86%, by book value, of our assets were on-lease at each of December 31, 2014 and December 31,
2013, respectively. The average utilization rate for the year ended December 31, 2014 was 83% compared to 84% a year ago.
If there is an increase in off-lease rates or deterioration in lease rates that are not offset by reductions in interest rates, there
will be a negative impact on earnings and cash flows from operations.
At December 31, 2014, notes payable consists of loans totaling $841.0 million payable over periods of
approximately 2.4 to 9.6 years with interest rates varying between approximately 2.4% and 5.5%. Substantially all of our
assets are pledged to secure our obligations to creditors. Our significant debt instruments are discussed below:
At December 31, 2014, we had a revolving credit facility to finance the acquisition of aircraft engines for lease as
well as for general working capital purposes, with the amounts drawn under the facility not to exceed that which is allowed
under the borrowing base as defined by the credit agreement. On June 4, 2014, we entered into a Second Amended and
Restated Credit Agreement which increased this revolving credit facility to $700.0 million from $450.0 million and extended
the maturity date by five years to June 2019. Debt issuance costs totaling $4.9 million were incurred related to the new
facility. As of December 31, 2014 and December 31, 2013, $270.0 million and $88.0 million were available under this
facility, respectively. On a quarterly basis, the interest rate is adjusted based on the Company’s leverage ratio, as calculated
under the terms of the revolving credit facility. Based on the Company’s leverage ratio of 4.20 at December 31, 2014, the
interest rate on this facility is one-month LIBOR plus 2.50% as of December 31, 2014. Under the revolving credit facility, all
29
subsidiaries except WEST II and WOLF 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, Willis Engine Securitization Trust II, or “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 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. The current portfolio of 69
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 10 years from the issuance date by September 17, 2022. The legal final maturity of
the Notes is September 15, 2037.
In connection with the transactions described above, effective September 17, 2012, 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 due to 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, 2014 and 2013, $351.9 and $370.6 million, respectively, 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.
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 18, 2013, we completed the acquisition of the fifty percent membership interest held by the other
joint venture partner in WOLF, with the transaction being accounted for as an asset acquisition. With this acquisition, WOLF
is consolidated for financial statement presentation purposes. The WOLF assets and liabilities and the results of operations
have been included in the accompanying consolidated financial statements as of the acquisition date, September 18, 2013.
Two term notes with an original principal amount of $36.0 million, with a current balance outstanding of $24.0 million as of
December 31, 2014, are included in Notes payable. The two term notes are non-recourse, have a maturity date of May 2017
and interest is payable at one-month LIBOR plus 4.0%.
The assets of WOLF are not available to satisfy our obligations or any of our affiliates other than the obligations
specific to WOLF. WOLF’s ability to make distributions to the Company is subject to the prior payments of all of its debt
and other obligations. Under WOLF, cash related to parts sales and leasing of engine assets is collected in a restricted account
and used to pay certain operating expenses, service the debt, and upon full debt repayment are distributed to the Company.
We recorded the WOLF assets at the cost basis, which represents the allocation of our prior investment basis plus
the cash paid to the third party investor. The purchase price was allocated to the eight aircraft engines and two airframes. The
fair value of the net assets acquired from this transaction is estimated to be $12.6 million, which comprised of $27.0 million
of equipment, $1.6 million of cash and receivables, offset by $16.0 million of debt and other liabilities. As a result of the
transaction, we now own one hundred percent of WOLF. The WOLF assets and liabilities and the results of operations
related to the WOLF assets have been included in the accompanying consolidated financial statements as of the acquisition
date, September 18, 2013
30
On July 16, 2014, we closed on a loan for a ten year term totaling $13.4 million. Interest is payable at a fixed rate of
2.83% for the initial five years of the loan and principal and interest is paid monthly. The loan provided 100% of the funding
for the purchase of a corporate aircraft. The balance outstanding on this loan is $12.9 million as of December 31, 2014.
On January 10, 2014, we extended the term of an existing loan that was scheduled to mature on January 11, 2014.
The loan has a term of 4 years with a maturity date of January 11, 2018. Interest is payable at one-month LIBOR plus 2.25%
and principal and interest is paid quarterly. The loan is secured by three engines. The balance outstanding on this loan is
$14.5 million and $15.8 million as of December 31, 2014 and December 31, 2013, respectively.
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 $7.7 million and $8.2 million as of December 31,
2014 and December 31, 2013, respectively.
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. This loan was fully
repaid in 2014 and the balance outstanding on this loan was $1.0 million as of December 31, 2013.
One-month LIBOR was 0.17% at each of December 31, 2014 and December 31, 2013.
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 up to 85% of
an engine’s net book value and 65% of spare part’s net book value. Therefore we must have other available funds for the
balance of the purchase price of any new equipment to be purchased or we will not be permitted to draw on 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, 2014, we are in compliance with the covenants specified in the revolving credit facility, including
the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement to remain below
5.00 to 1.00. 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, 2014, we
are in compliance with the covenants specified in the WEST II indenture and servicing agreement.
Approximately $35.5 million of our debt is repayable during 2015. 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, 2014:
Payment due by period (in thousands)
Long-term debt obligations
Interest payments under long-term debt obligations
Operating lease obligations
Purchase obligations
Total
$
Total
840,956 $
171,646
3,865
9,500
$ 1,025,967 $
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
68,813 $ 490,365 $ 246,283
35,495 $
31,827
46,751
60,531
32,537
—
951
1,670
1,244
—
—
—
9,500
78,776 $ 131,014 $ 538,067 $ 278,110
We have estimated the interest payments due under long-term debt by applying the interest rates applicable at
December 31, 2014 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 a purchase commitment to secure the purchase of an engine and related equipment for a gross
purchase price of $9.5 million, for delivery in 2015.
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 $2.0 million. Equipment leasing, financing, sales and general administrative activities are conducted from the
31
Novato location. We sub-lease office and warehouse space for our operations in San Diego, California. This lease expires
October 31, 2015, and the remaining lease commitment is approximately $0.1 million. We lease office and warehouse space
in Shanghai, China. The office lease expires December 31, 2015 and the warehouse lease expires July 31, 2017 and the
remaining lease commitments are approximately $65,000 and $18,000, respectively. We lease office space in London, United
Kingdom. The lease expires December 21, 2015 and the remaining lease commitment is approximately $73,000. We lease
office space in Blagnac, France. The lease expires December 31, 2015 and the remaining lease commitment is approximately
$18,000. We lease office space in Dublin, Ireland. The lease expires May 15, 2017 and the remaining lease commitment is
approximately $28,000. We lease office space in Singapore. The lease expires October 31, 2015 and the remaining lease
commitment is approximately $103,000. We lease office and warehouse space in Boynton Beach, Florida. The lease expires
October 29, 2019 and the remaining lease commitment is approximately $1.4 million.
We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level
of operations through 2015. A decline in the level of internally generated funds, such as could result if the amount of
equipment off-lease increases or there is a decrease in availability under our existing debt facilities, would impair our ability
to sustain our level of operations. We are discussing additions to our capital base with our commercial and investment banks.
If we are not able to access additional capital, our ability to continue to grow our asset base consistent with historical trends
will be impaired and our future growth limited to that which can be funded from internally generated capital.
Management of Interest Rate Exposure
At December 31, 2014, $468.5 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 periodically enter 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 no interest rate
swap agreements in place.
We record derivative instruments at fair value as either an asset or liability. We have used derivative instruments
(primarily interest rate swaps) to manage the risk of interest rate fluctuation. While substantially all our derivative
transactions are entered into for the purposes described above, hedge accounting is only applied where specific criteria have
been met and it is practicable to do so. 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
(decreased)/ increased interest expense by ($0.5 million) and $1.5 million for the years ended December 31, 2014 and
December 31, 2013, respectively. This incremental cost (benefit) for the swaps effective for hedge accounting was included
in interest expense for the respective periods.
For any interest rate swaps that we enter into, we will be exposed to risk in the event of non-performance of the
interest rate hedge counter-parties. We anticipate that we may hedge additional amounts of our floating rate debt in the future.
Related Party Transactions
Prior to 2014, the Company leased equipment to an airline owned by our CEO and Chairman. The Company
received lease payments from the airline and recorded revenue totaling $2.1 million and $0.6 million in the years ended
December 31, 2013 and 2012, respectively. Our CEO and Chairman no longer owns the airline. In connection with the 2013
sale of its stock to an unrelated third party, the airline prepaid a note to us at a 45% discount of $0.4 million, similar to
reductions received by other large creditors. The Company subsequently sold four engines and three aircraft, which had an
aggregate net book value of $3.4 million, to the third party for $4.9 million. The $4.9 million proceeds were included in 2013
revenue as follows: Gain on Sale $0.8 million (net of the asset’s $3.4 million net book value), Maintenance Reserve Revenue
$0.4 million, Lease Rent Revenue $0.4 million and Other Revenue $0.3 million.
J.T. Power, LLC (“J.T. Power”): In the ordinary course of business, the Company uses a number of consignment
vendors to sell engine parts. Prior to 2014, the Company consigned equipment for part-out to J.T. Power, an entity owned by
Austin Willis, the son of our CEO and Chairman, and directly and indirectly, a shareholder and a Director of the Company.
Sales of consigned parts under the Consignment agreements were $22,200 and $70,700 for the years ended December 31,
2013 and 2012, respectively. The Consignment agreements provided a minimum guarantee of net consignment proceeds
which was converted to a note and had a balance of $1.2 million as of December 31, 2012.
32
On November 6, 2013, the Company purchased certain assets of J.T. Power for $5.6 million. A net cash payment of
$4.5 million was made to fund the transaction, after deducting amounts owed to the Company, including $0.7 million related
to the minimum guarantee remaining under the note and cash received of $0.4 million. Of the $4.5 million cash payment,
$1.2 million was paid to various creditors and $3.3 million was paid to the shareholders of J.T. Power.
As part of the acquisition of certain assets of J.T. Power, we launched Willis Aeronautical Services, Inc. (“Willis
Aero”), a wholly-owned subsidiary, whose primary focus is the sale of aircraft engine parts and materials through the
acquisition or consignment from third parties of aircraft and engines.
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, 2014, $468.5 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, would increase or decrease $4.7
million (in 2013, $3.9 million).
We previously hedged a portion of our borrowings from time to time, effectively fixing the rate of these borrowings.
This hedging activity helps protect us against reduced margins on longer term fixed rate leases. In November 2013, the last of
our swap agreements matured. For any interest rate swaps entered into, we will be exposed to risk in the event of non-
performance of the interest rate hedge counter-parties. We anticipate that we may hedge additional amounts of our floating
rate debt in the future.
We are also exposed to currency devaluation risk. During 2014, 2013, and 2012, respectively, 88%, 86% and 88%
of our total lease rent revenues came from non-United States domiciled lessees. All of our leases require payment in U.S.
dollars. If these lessees’ currency devalues against the U.S. dollar, the lessees could potentially encounter difficulty in
making their lease payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted as a separate section of this report beginning on page 44.
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.
33
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, 2014.
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 (1992). Based on this assessment our management believes
that, as of December 31, 2014, 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 46.
(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, 2014 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
We have adopted a Standards of Ethical Conduct Policy (“Code of Ethics”) that applies to all employees and
directors including our Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. The Code of Ethics is
filed in Exhibit 14.1 and is also available on our website at www.willislease.com.
The remainder of the information required by this item is incorporated by reference to our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement. The information in Item
5 of this report regarding our Equity Compensation Plans is incorporated herein by reference.
On September 10, 2014, the SEC approved the settlement of an administrative proceeding, previously disclosed in
the Company’s Forms 10-K and 10-Q, alleging that in certain instances Company executives had failed to timely file public
reports regarding their stock ownership. According to the SEC, alleged violations of these reporting provisions have no state
of mind requirement, and even an inadvertent failure to timely file the disclosure may constitute a violation. Without
admitting or denying the allegations, the Company agreed to pay a civil penalty of $150,000 and to cease and desist from
future violations of applicable securities law provisions, while certain Company officers agreed to pay an aggregate amount
totaling $125,500.
34
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
Total
$
$
2014
926,654
272,142
72,256
1,271,052
$
$
2013
727,314
152,710
47,970
927,994
The remaining information required by this item is incorporated by reference to our Proxy Statement.
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 44.
(a) (2) Financial Statement Schedule
Schedule I, Parent Company Financial Statements, and Schedule II, Valuation Accounts, is submitted as a separate
section of this report starting on page 76.
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.
35
EXHIBITS
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11*
10.12*
10.13*
10.14*
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).
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 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).
Employment Agreement between the Registrant and Dean M. Poulakidas dated March 31, 2013 (incorporated
by reference to Exhibit 10.23 to Form 8-K filed on June 19, 2013).
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).
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).
36
10.15*
10.16*
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).
Second Amended and Restated Credit Agreement, dated as of June 4, 2014, among the Company, Union Bank,
N.A., as administrative agent and security agent, and certain lenders and financial institutions named therein
(incorporated by reference to Exhibit 10.16 to our report on Form 10-Q filed on August 11, 2014).
11.1 Statement re Computation of Per Share Earnings.
12.1 Statement re Computation of Ratios.
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 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
31.1
31.2
32
101
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,
2014, 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.
*
Portions of these exhibits have been omitted pursuant to a request for confidential treatment and the redacted material
has been filed separately with the Commission.
(d)
Financial Statements
Financial Statements are submitted as a separate section of this report beginning on page 44.
37
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.
SIGNATURES
Dated: March 16, 2015
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 16, 2015
Chief Executive Officer and Director
/s/ CHARLES F. WILLIS, IV
(Principal Executive Officer)
Charles F. Willis, IV
Date: March 16, 2015
Chief Financial Officer and Senior Vice President
/s/ BRADLEY S. FORSYTH
(Principal Finance and Accounting Officer)
Bradley S. Forsyth
Date: March 16, 2015
Director
Date: March 16, 2015
Director
Date: March 16, 2015
Director
Date: March 16, 2015
Director
/s/ ROBERT T. MORRIS
Robert T. Morris
/s/ HANS JOERG HUNZIKER
Hans Joerg Hunziker
/s/ ROBERT J. KEADY
Robert J. Keady
/s/ AUSTIN C. WILLIS
Austin C. Willis
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013
Consolidated Statements of Income (Loss) for the years ended December 31, 2014, December 31, 2013 and
December 31, 2012
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, December 31,
2013 and December 31, 2012
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, December 31, 2013 and
December 31, 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, December 31, 2013 and
December 31, 2012
Notes to Consolidated Financial Statements
400-
441
42
43
44
45
46
47
39
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, 2014 and 2013, 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, 2014.
In connection with our audits of the financial statements, we also have audited financial statement schedules I and II. These
consolidated financial statements and financial statement schedules are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules 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, 2014 and 2013, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Willis Lease Finance Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 16, 2015 expressed an unqualified opinion
on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Francisco, California
March 16, 2015
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Willis Lease Finance Corporation:
We have audited Willis Lease Finance Corporation and subsidiaries’ (the Company’s) internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Willis Lease Finance Corporation and
subsidiaries’ 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. 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 and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated
Framework (1992) 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, 2014 and 2013, 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, 2014, and our report dated March 16, 2015, expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
San Francisco, California
March 16, 2015
41
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
December 31, December 31,
2014
2013
$
ASSETS
Cash and cash equivalents
Restricted cash
Equipment held for operating lease, less accumulated depreciation of $281,087 and $257,806
at December 31, 2014 and 2013, respectively
Equipment held for sale
Operating lease related receivable, net of allowances of $215 and $296 at December 31, 2014
and 2013, respectively
Spare parts inventory
Investments
Property, equipment & furnishings, less accumulated depreciation of $9,420 and $8,666 at
December 31, 2014 and 2013, respectively
Intangible assets, net
Equipment purchase deposits
Other assets
13,493 $
51,258
12,801
50,794
1,066,448
18,114
1,033,022
32,491
8,912
18,593
41,590
17,955
1,164
—
24,099
13,286
3,280
23,485
4,950
1,396
1,369
22,355
Total assets
$
1,261,626 $
1,199,229
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses
Deferred income taxes
Notes payable
Maintenance reserves
Security deposits
Unearned lease revenue
$
21,614 $
90,510
840,956
66,474
20,869
4,342
16,283
86,685
787,614
77,335
15,158
3,549
Total liabilities
1,044,765
986,624
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; 0 shares issued and
outstanding at December 31, 2014 and 2013)
Common stock ($0.01 par value, 20,000,000 shares authorized; 8,346,304 and 8,399,739
shares issued and outstanding at December 31, 2014 and 2013, respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive income, net of income tax expense of $174 at
December 31, 2013
Total shareholders’ equity
—
—
83
42,076
174,702
84
44,741
167,455
—
216,861
325
212,605
Total liabilities and shareholders’ equity
$
1,261,626 $
1,199,229
See accompanying notes to the consolidated financial statements.
42
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
(In thousands, except per share data)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Spare parts sales
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation and amortization expense
Cost of spare parts sales
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) benefit
Net income
Preferred stock dividends
Preferred stock redemption costs
Years Ended December 31,
2013
2014
2012
$
101,748 $
53,363
8,917
5,753
4,506
174,287
101,737 $
46,694
—
5,675
4,306
158,412
94,591
41,387
—
5,499
6,613
148,090
65,441
7,474
5,602
35,859
12,336
37,062
—
—
37,062
163,774
58,727
—
6,461
33,868
12,863
38,719
—
—
38,719
150,638
52,591
—
5,874
34,551
7,006
31,749
(80)
15,462
47,131
147,153
10,513
7,774
937
1,329
3,526
1,759
11,842
(4,595)
7,247 $
11,300
4,326
15,626 $
2,696
(1,161)
1,535
$
—
—
—
—
2,493
2,835
Net income (loss) attributable to common shareholders
$
7,247 $
15,626 $
(3,793)
Basic earnings (loss) per common share:
$
0.92 $
1.95 $
(0.45)
Diluted earnings (loss) per common share:
$
0.89 $
1.89 $
(0.43)
Average common shares outstanding
Diluted average common shares outstanding
7,917
8,141
8,029
8,289
8,490
8,791
See accompanying notes to the consolidated financial statements
43
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income
$
Years Ended December 31,
2013
2014
7,247 $ 15,626 $
2012
1,535
Other comprehensive (loss) income:
Derivative instruments
Unrealized losses on derivative instruments
Reclassification adjustment for losses included in termination
of derivative instruments
Reclassification adjustment for losses (gains) included in net
income
Net gain (loss) recognized in other comprehensive income
Tax benefit (expense) related to items of other comprehensive
income
—
—
(187)
(4,311)
—
10,143
(499)
(499)
1,485
1,298
6,037
11,869
174
(435)
(4,208)
(325)
6,922 $ 16,489 $
863
7,661
9,196
Other comprehensive income (loss)
Total comprehensive income
$
See accompanying notes to the consolidated financial statements.
44
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2014, 2013, and 2012
(In thousands)
Issued and
Outstanding
Shares of
Common
Preferred
Stock
Common Paid-in Capital in
Stock
Stock
Excess of par
Comprehensive
Income/(Loss)
Retained
Earnings
Total Shareholders’
Equity
Accumulated Other
Balances at December 31, 2011
$
31,915
9,110 $
91 $
56,842 $
(8,199) $
155,622 $
236,271
Net income
Net unrealized gain from derivative instruments,
net of tax expense of $4,208
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
Balances at December 31, 2012
$
Net income
Net unrealized gain from derivative instruments,
net of tax expense of $435
Shares repurchased
Shares issued under stock compensation plans
Cancellation of restricted stock units in
satisfaction of withholding tax
Stock-based compensation, net of forfeitures
Balances at December 31, 2013
$
Net income
Net unrealized loss from derivative instruments,
net of tax benefit of $174
Shares repurchased
Shares issued under stock compensation plans
Cancellation of restricted stock units in
satisfaction of withholding tax
Stock-based compensation, net of forfeitures
Tax benefit on disqualified disposition of shares
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(928)
627
(93)
—
—
—
—
(9)
6
(1)
—
—
—
—
—
(12,727)
1,719
(1,193)
3,144
—
1,535
1,535
7,661
—
—
(2,493)
—
(2,835)
—
—
—
—
—
—
—
—
7,661
(2,493)
(34,750)
(12,736)
1,725
(1,194)
3,144
8,716 $
87 $
47,785 $
(538) $
151,829 $
199,163
—
—
—
(395)
160
(81)
—
—
(4)
2
(1)
—
—
—
(5,914)
678
(1,247)
3,439
—
15,626
15,626
863
—
—
—
—
—
—
—
—
—
863
(5,918)
680
(1,248)
3,439
8,400 $
84 $
44,741 $
325 $
167,455 $
212,605
—
—
—
(249)
272
(77)
—
—
—
(2)
2
(1)
—
—
—
—
(5,350)
408
(1,543)
3,509
311
—
7,247
7,247
(325)
—
—
—
—
—
—
—
—
—
—
—
(325)
(5,352)
410
(1,544)
3,509
311
Balances at December 31, 2014
$
—
8,346 $
83 $
42,076 $
— $
174,702 $
216,861
See accompanying notes to the consolidated financial statements.
45
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 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
Income from joint ventures
Non-cash portion of loss on debt extinguishment and derivatives termination
Deferred income taxes
Changes in assets and liabilities:
Receivables
Spare parts inventory
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 (net of selling expenses)
Restricted cash for investing activities
Capital contribution to joint ventures
Distributions received from joint ventures
Acquisition of J.T. Power, net of cash acquired
Investment in WOLF, net of cash acquired
Purchase of equipment held for operating lease and for sale
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
Interest bearing security deposits
Proceeds from shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of withholding tax
Redemption of preferred stock
Repurchase of common stock
Excess tax benefit from stock-based compensation
Principal payments on notes payable
Decrease in restricted cash
Net cash provided by (used in) financing activities
Increase/(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest
Income Taxes
Supplemental disclosures of non-cash investing activities:
During the years ended December 31, 2014, 2013, 2012, a liability of $8,188, $63, and $2,255, respectively, was incurred but not paid in
connection with our purchase of aircraft and engines.
During the years ended December 31, 2014, 2013, 2012, engines and equipment totaling $3,071, $15,166, and $22,935, respectively,
were transferred from Held for Operating Lease to Held for Sale but not settled.
During the year ended December 31, 2014, engines and equipment totaling $9,649 were transferred from Held for Sale to Spare Parts
Inventory.
See accompanying notes to the consolidated financial statements.
46
Years Ended December 31,
2013
2012
2014
$
7,247
$
15,626
$
1,535
65,441
5,602
3,509
4,319
—
(499)
(81)
(5,753)
—
—
(1,329)
—
3,996
4,454
(5,964)
—
(590)
(1,881)
(6,831)
(10,861)
1,159
793
62,731
43,632
6,366
(17,623)
847
—
—
(128,075)
(13,831)
(108,684)
154,395
(5,074)
—
4,553
410
(1,544)
—
(5,352)
311
(101,054)
—
46,645
692
12,801
58,727
6,461
3,439
4,113
—
(404)
(684)
(5,675)
—
(351)
(3,526)
—
(4,389)
2,269
—
—
(3,158)
(23)
(5,701)
14,022
614
(1,064)
80,296
38,706
(20,502)
(11,219)
—
(4,171)
2,020
(136,231)
(453)
(131,850)
130,000
(1,252)
—
7,588
680
(1,248)
—
(5,918)
—
(70,874)
—
58,976
7,422
5,379
52,591
5,874
3,144
3,982
341
(236)
503
(5,499)
(1,961)
(173)
(957)
7,164
949
(4,985)
—
542
(1,256)
(5,724)
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
$
13,493
$
12,801
$
5,379
$
$
33,132
210
$
$
33,931
111
$
$
21,528
105
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.
Prior to September 18, 2013, we held a fifty percent membership interest in a joint venture, WOLF A340, LLC,
a Delaware limited liability company, (“WOLF”). On September 18, 2013, we completed the acquisition of the fifty
percent membership interest held by the other joint venture partner in WOLF. As a result of the transaction, we now own
one hundred percent of WOLF. The WOLF assets and liabilities and the results of operations have been included in the
accompanying consolidated financial statements as of the acquisition date, September 18, 2013.
In 2013, the Company launched Willis Aeronautical Services, Inc. (“Willis Aero”), a wholly-owned subsidiary,
whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment from third
parties of aircraft and engines.
(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 Funding (Ireland) Limited, Willis Aviation Finance Limited, Willis
Lease France, Willis Lease (China) Limited, WEST Engine Securitization Trust II, Willis Engine Securitization
(Ireland) Limited, WOLF A340 LLC, WOLF 149 LLC, WOLF 139 LLC, Willis Aero, Willis Lease Singapore Pte. Ltd.
(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.
The Company evaluates sales arrangements under Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition: Multiple Element Arrangements (“FASB
47
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 two
deliverables, the sale of the engines and the management services, are separate units of accounting. Therefore, revenue is
recognized in accordance with FASB ASC 605-10-S99, Revenue Recognition: Overall: SEC Materials, formerly SAB
104, for each unit.
One requirement of FASB ASC 605-25 for the two deliverables to be accounted for as separate units of
accounting is that management can determine the fair value of the undelivered item (the management services), when the
first item (the sale of engines) is delivered. Assessing fair value evidence requires judgment. In determining fair value,
the Company has reviewed information from management agreements entered into by other parties on a standalone
basis, compared it to the management agreements entered into with the investor group and determined that the fees
charged on a standalone basis were comparable to the fees charged when the Company entered into the management
agreement concurrent with the sale of the 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.
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, 2014, we had an aggregate of approximately $1.4 million in lease rent and $1.9 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 6.4% of total lease rent revenue during 2014. This customer
had no past due rents as of December 31, 2014. No customer accounted for greater than 10% of total lease rent revenue
in 2013 and 2012.
(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.
48
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
14-15 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. 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. Such
review resulted in an impairment charge for engines and aircraft of $2.4 million in 2014 (disclosed separately as “Write-
down of equipment” in the Consolidated Statements of Income). No impairment charges were recorded in 2013 and
2012 as a result of our review.
(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 enter into various derivative instruments periodically to mitigate the exposure on our variable rate
borrowings. The derivative instruments are fixed-rate interest swaps that are recorded at fair value as either an asset or
liability. The last of our hedge instruments matured in November 2013.
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.
During the year ended December 31, 2013 the Company determined that it incorrectly applied the guidance in
ASC 815, Derivatives and Hedging from 2006 to 2010. The effects of correcting the prior period errors were an increase
49
to Accumulated Other Comprehensive Income of $0.7 million, a decrease to Retained Earnings of $1.1 million and an
increase to Deferred Tax Liabilities of $0.4 million from the amounts previously reported at December 31, 2012.
(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 2011-2013 and 2010-2013, 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.
(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) Spare Parts Inventory
Inventory consists of spare aircraft and engine parts and is stated at lower of cost or net realizable value. An
impairment charge for excess or inactive inventory is recorded based upon an analysis that considers current inventory
levels, historical usage patterns, future sales expectations and salvage value.
(m) Intangible Assets
Intangible assets include customer relationships and goodwill arising from the Company’s acquisition of J.T.
Power (see Footnote 6. Acquisition). Intangible assets are accounted for in accordance with FASB ASC 350,
“Intangibles — Goodwill and Other.”
50
Goodwill is assessed for impairment annually. Customer relationships are amortized on a straight line basis over
their estimated useful life of five years. The Company has no intangible assets with indefinite useful lives.
(n) 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.
(o) 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:
2014
Years Ended December 31,
2013
(in thousands)
2012
Shares:
Weighted-average number of common shares outstanding
Dilutive and potentially dilutive common shares
Total shares
7,917
224
8,141
8,029
260
8,289
8,490
301
8,791
(p) Investments
Our investment in the WMES and CASC Willis joint ventures, where we own 50% of the equity of the
ventures, are accounted for using the equity method of accounting. The 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 entities.
Prior to September 18, 2013, we held a fifty percent membership interest in a joint venture, WOLF A340, LLC,
a Delaware limited liability company, (“WOLF”). On September 18, 2013, we completed the acquisition of the fifty
percent membership interest held by the other joint venture partner in WOLF. Prior to that date, the investment in the
WOLF joint venture was accounted for using the equity method of accounting. As a result of the transaction, we now
own one hundred percent of WOLF. The WOLF assets and liabilities and the results of operations have been included in
the accompanying consolidated financial statements as of the acquisition date, September 18, 2013.
(q) 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
51
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.
(r) 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
$1.5 million, $1.5 million and $1.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(s) 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 Measured and Recorded at Fair Value on a Nonrecurring Basis
We determine fair value of long-lived assets held and used, such as Equipment held for operating lease and
Equipment held for sale, by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and
other factors. An impairment charge is recorded when the carrying value of the asset exceeds its fair value.
The 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, 2014 and 2013, and the gains (losses) recorded during the years ended
December 31, 2014 and 2013 on those assets:
Total
December 31, 2014
Level 1 Level 2
Assets at Fair Value
Level 3
Total
(in thousands)
December 31, 2013
Level 2
Level 1
Total Losses
December 31,
Level 3
2014
2013
(in thousands)
Equipment
held for sale $
$
Total
18,114
18,114 $
— $
— $
14,801 $
14,801 $
3,313 $ 32,491
3,313 $ 32,491 $
— $
— $
30,824 $
30,824 $
1,667 $
1,667 $
(5,602) $
— $
(6,461)
(6,461)
At December 31, 2014, the Company used Level 2 inputs to measure the fair value of certain engines and
equipment held for sale. Due to the absence of quoted market prices of certain engines that were held for sale and not
consigned to third parties, the fair values of these assets are categorized as Level 3. The fair value of these assets were
based on management’s estimate considering projected future sales proceeds at December 31, 2014 and December 31,
2013. An impairment charge is recorded when the carrying value of the asset exceeds its fair value.
An impairment charge is recorded when the carrying value of the asset exceeds its fair value. A write-down of
equipment totaling $2.6 million was recorded in the year ended December 31, 2014 due to a management decision to
consign six engines for part-out and sale, in which the assets’ net book value exceeded the estimated proceeds from part-
out. Write-downs on held for use equipment to their estimated fair values totaled $2.4 million for the year ended
December 31, 2014, due to the adjustment of carrying values for certain impaired engines within the portfolio to reflect
estimated market values. A further write-down of $0.6 million was recorded in the year ended December 31, 2014 to
adjust the carrying value of engine parts for which market conditions for the sale of parts has changed. An asset write-
52
down of $3.7 million was recorded in the year ended December 31, 2013 based on a comparison of the asset net book
values with the proceeds expected from the sale of engines. A further asset write-down of $2.8 million was recorded in
the year ended December 31, 2013, 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.
(t) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes most of the current revenue
recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective
for the Company in the first quarter of 2017 and early application is not permitted. Entities must adopt the new guidance
using one of two retrospective application methods. We are currently evaluating the standard to determine the impact of
its adoption on the consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes - Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which is part of
Accounting Standards Codification (“ASC”) 740: Income Taxes. The new guidance requires an entity to present an
unrecognized tax benefit and an NOL carryforward, a similar tax loss, or a tax credit carryforward on a net basis as part
of a deferred tax asset, unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or
would not be utilized for that purpose, then a liability would be recognized. We adopted this ASU as of January 1, 2014.
The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
(2) Equipment Held for Operating Lease
At December 31, 2014, we had 207 aircraft engines and related equipment with a cost of $1,303.3 million, 5
spare parts packages with a cost of $6.1 million and 5 aircraft with a cost of $38.1 million, in our lease portfolio. At
December 31, 2013, we had 202 aircraft engines and related equipment with a cost of $1,261.2 million, 5 spare parts
packages with a cost of $6.1 million and 4 aircraft with a cost of $23.5 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):
Lease rent revenue
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Totals
2014
Years Ended December 31,
2013
(in thousands)
2012
$
11,880 $
14,258 $
7,771
4,997
37,990
9,907
21,796
3,264
4,143
7,387
2,947
37,788
8,794
21,407
2,609
6,547
$ 101,748 $ 101,737 $
11,693
6,075
5,206
35,001
9,196
18,585
2,307
6,528
94,591
53
Lease rent revenue less applicable depreciation and interest
2014
Years Ended December 31,
2013
(in thousands)
2012
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Off-lease and other
Totals
$
2,577 $
2,157
(100)
6,988
3,503
5,891
1,041
1,277
(19,525)
6,055 $
1,641
747
5,061
2,995
5,652
837
1,664
(13,973)
5,875
2,472
3,015
11,162
4,482
6,212
746
3,011
(15,130)
21,845
$
3,809 $
10,679 $
Net book value of equipment held for operating lease
Region
United States
Mexico
Canada
Europe
South America
Asia
Africa
Middle East
Off-lease and other
Totals
2014
Years Ended December 31,
2013
(in thousands)
2012
$
$
61,521
64,770
11,026
344,833
107,080
232,448
12,063
17,125
215,582
1,066,448
$
$
103,515
75,628
12,500
368,381
78,486
219,123
3,734
58,509
113,146
1,033,022
$
$
68,845
59,694
17,658
299,505
87,660
229,946
5,280
74,644
118,227
961,459
As of December 31, 2014 and 2013, 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 2015
Leases expiring 2016
Leases expiring 2017
Leases expiring 2018
Leases expiring 2019
Leases expiring thereafter
Lease Term
Off-lease and other
Month-to-month leases
Leases expiring 2014
Leases expiring 2015
Leases expiring 2016
Leases expiring 2017
Leases expiring 2018
Leases expiring thereafter
54
December 31, 2014
Net Book Value
(in thousands)
$
$
215,582
97,951
331,757
151,444
73,387
62,972
24,001
109,354
1,066,448
December 31, 2013
Net Book Value
(in thousands)
$
$
113,146
102,721
370,370
124,130
100,622
63,969
47,604
110,460
1,033,022
As of December 31, 2014, minimum future payments under non-cancelable leases were as follows:
Year
2015
2016
2017
2018
2019
Thereafter
$
(in thousands)
64,899
39,720
25,719
19,292
12,725
24,631
186,986
$
(3) Equipment Held for Sale
Equipment held for sale includes engines being marketed for sale as well as engines removed from our lease portfolio
that are being parted out, with our investment in the long lived asset being recovered through the sale of spare parts. The
assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell.
(4) Spare Parts Inventory
Inventory consists of spare aircraft and engine parts and is stated at lower of cost or net realizable value. An
impairment charge for excess or inactive inventory is recorded based upon an analysis that considers current inventory
levels, historical usage patterns, future sales expectations and salvage value.
Sales of spare parts were $0.4 million during the 1st quarter of 2014, $1.7 million during the 2nd quarter of 2014, $4.6
million during the 3rd quarter of 2014 and $2.2 million during the 4th quarter of 2014. Cost of spare parts sales were $0.3
million during the 1st quarter of 2014, $1.6 million during the 2nd quarter of 2014, $4.1 million during the 3rd quarter of
2014 and $1.5 million during the 4th quarter of 2014.
(5) 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 $20.4 million
capital contributions to WMES in from 2011 through 2014 for the purchase of 21 engines from third parties, increasing
the number of engines in the lease portfolio to 28. The Company made $2.6 million of capital contributions to WMES
and received $0.8 million in return of capital distributions from WMES in the year ended December 31, 2014. The $28.4
million of capital contributions has been partially offset by $3.6 million, resulting in a net investment of $24.8 million,
which has been reduced by $0.8 million in distributions and increased further to $26.7 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.
Our investment in the joint venture is $26.7 million and $23.5 million as of December 31, 2014 and December
31, 2013, respectively.
Prior to September 18, 2013, we held a fifty percent membership interest in a joint venture, WOLF A340, LLC,
a Delaware limited liability company, (“WOLF”), which was accounted for as an investment under the equity method of
accounting. 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. Since their purchase, these two aircraft had been leased
to Emirates, with the leases terminating in March and May 2013. The return of both aircraft from the prior lessee,
Emirates, was completed by June 2013, with the airframes being disassembled and parted out and the eight engines being
marketed for lease separately to airline customers.
On September 18, 2013, we completed the acquisition of the fifty percent membership interest held by the other
joint venture partner in WOLF for a purchase price of $1.0 million, with the purchase price representing a $12.7 million
discount from the JV partner’s equity interest. The transaction has been being accounted for as an asset acquisition. We
55
recorded the assets at the cost basis, which represents the allocation of our prior investment basis plus the cash paid to
the third party investor. The purchase price was allocated to the eight aircraft engines and two airframes. The fair value
of the net assets acquired from this transaction is estimated to be $12.6 million, which comprised of $27.0 million of
equipment, $1.6 million of cash and receivables, offset by $16.0 million of debt and other liabilities. As a result of the
transaction, we now own one hundred percent of WOLF. The WOLF assets and liabilities and the results of operations
have been included in the accompanying consolidated financial statements as of the acquisition date, September 18,
2013.
On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation
Limited (“CASC”) to participate in a joint venture named CASC Willis Engine Lease Company Limited (“CASC
Willis”), a new joint venture based in Shanghai, China. Each partner holds a fifty percent interest in the joint venture. In
October 2014, each partner made a $15.0 million initial capital contribution representing the up-front funding for the
new joint venture. The new company will acquire and lease jet engines to Chinese airlines and will concentrate on
meeting the fast growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of
China.
Years Ending December 31, 2014 and 2013 (in thousands)
Investment in joint ventures as of December 31, 2012
Investment
Earnings from joint ventures
Transfer to consolidated subsidiary
Investment in joint ventures as of December 31, 2013
Investment
Earnings (losses) from joint ventures
Distribution
Investment in joint ventures as of December 31, 2014
(6) Acquisition
WOLF
WMES
CASC
$
10,065 $
—
3,026
(13,091)
$
$
— $
—
—
—
— $
11,766 $
11,219
500
—
23,485 $
2,623
1,411
(847)
26,672 $
— $
—
—
—
— $
15,000
(82)
—
14,918 $
Total
21,831
11,219
3,526
(13,091)
23,485
17,623
1,329
(847)
41,590
On November 6, 2013, the Company purchased certain assets of J.T. Power, an ‘end-of-life’ solution provider
for aircraft engines and parts, for $5.6 million. A cash payment of $4.5 million was made to fund the transaction, after
deducting amounts owed to the Company, $0.7 million related to the minimum guarantee of an existing consignment
program and cash received of $0.4 million. The major classes of assets to which we allocated the purchase price were
spare parts inventory of $3.4 million, accounts receivable of $1.7 million, identifiable intangible assets of $1.2 million
and goodwill of $0.3 million.
56
(7) Notes Payable
Notes payable consisted of the following:
As of December 31,
2013
2014
(in thousands)
Credit facility at a floating rate of interest of LIBOR plus 2.50%, secured by engines. The
facility has a committed amount of $700.0 million and $450.0 million at December 31, 2014
and 2013, respectively, which revolves until the maturity date of June 2019.
$
430,000 $
362,000
WEST II Series 2012-A term notes payable at a fixed rate of interest of 5.50%, maturing in
September 2037. Secured by engines.
351,899
370,614
Note payable at a variable interest rate of LIBOR plus 4.00%, maturing in May 2017.
Secured by engines.
24,000
30,000
Note payable at a variable interest rate of LIBOR plus 2.25%, maturing in January 2018.
Secured by engines.
14,455
15,827
Note payable at a fixed interest rate of 5.50%, maturing in September 2017. Secured by one
engine.
7,693
8,173
Note payable at a fixed interest rate of 2.83%, maturing in July 2024. Secured by an aircraft.
12,909
—
Note payable at a fixed interest rate of 3.94%, matured in September 2014. Secured by an
aircraft.
—
1,000
Total notes payable
$
840,956 $
787,614
One-month LIBOR was 0.17% at each of December 31, 2014 and December 31, 2013.
Principal outstanding at December 31, 2014, is repayable as follows:
Year
2015
2016
2017
2018
2019 (includes $430.0 million outstanding on revolving credit facility)
Thereafter
(in thousands)
35,495
28,809
40,004
35,099
455,266
246,283
$ 840,956
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. 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, 2014.
At December 31, 2014, we are in compliance with the covenants specified in the revolving credit facility,
including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement to
remain below 5.00 to 1.00. 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, 2014, we are in compliance with the covenants specified in the WEST II indenture and servicing
agreement.
57
At December 31, 2014, notes payable consists of loans totaling $841.0 million payable over periods of
approximately 2.4 years to 9.6 years with interest rates varying between approximately 2.4% and 5.5%. Substantially all
of our assets are pledged to secure our obligations to creditors. The significant facilities are described below.
At December 31, 2014, we had a revolving credit facility to finance the acquisition of aircraft engines for lease
as well as for general working capital purposes, with the amounts drawn under the facility not to exceed that which is
allowed under the borrowing base as defined by the credit agreement. On June 4, 2014, we entered into a Second
Amended and Restated Credit Agreement which increased this revolving credit facility to $700.0 million from $450.0
million and extended the maturity date by five years to June 2019. Debt issuance costs totaling $4.9 million were
incurred related to the new facility. As of December 31, 2014 and December 31, 2013, $270.0 million and $88.0 million
were available under this facility, respectively. On a quarterly basis, the interest rate is adjusted based on the Company’s
leverage ratio, as calculated under the terms of the revolving credit facility. Based on the Company’s leverage ratio of
4.20 at December 31, 2014, the interest rate on this facility is one-month LIBOR plus 2.50% as of December 31, 2014.
Under the revolving credit facility, all subsidiaries except WEST II and WOLF 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, 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. The current portfolio of 69
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 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.
At December 31, 2014 and 2013, $351.9 million and $370.6 million of WEST II term notes were outstanding,
respectively. 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.
On September 18, 2013, we completed the acquisition of the fifty percent membership interest held by the other
joint venture partner in WOLF, with the transaction being accounted for as an asset acquisition. As a result of the
transaction, we now own one hundred percent of WOLF. The WOLF assets and liabilities and the results of operations
have been included in the accompanying consolidated financial statements as of the acquisition date, September 18,
2013. Two term notes with an original principal amount of $36.0 million, with a current balance outstanding of $24.0
million as of December 31, 2014, are included in Notes payable. The two term notes are non-recourse to the Company,
have a maturity date of May 2017 and interest is payable at one-month LIBOR plus 4.0%.
The assets of WOLF are not available to satisfy our obligations or any of our affiliates other than the obligations
specific to WOLF. WOLF’s ability to make distributions to the Company is subject to the prior payments of all of its
58
debt and other obligations. Under WOLF, cash related to parts sale and leasing of engine assets is collected in a restricted
account and used to pay certain operating expenses, service the debt, and upon full debt repayment are distributed to the
Company.
On July 16, 2014, we closed on a loan for a ten year term totaling $13.4 million. Interest is payable at a fixed
rate of 2.83% for the initial five years of the loan and principal and interest is paid monthly. The loan provided 100% of
the funding for the purchase of a corporate aircraft. The balance outstanding on this loan is $12.9 million as of
December 31, 2014.
On January 10, 2014, we extended the term of an existing loan that was scheduled to mature on January 11,
2014. The loan has a term of 4 years with a maturity date of January 11, 2018. Interest is payable at one-month LIBOR
plus 2.25% and principal and interest is paid quarterly. The loan is secured by three engines. The balance outstanding on
this loan is $14.5 million and $15.8 million as of December 31, 2014 and December 31, 2013, respectively.
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 $7.7 million and $8.6 million as of
December 31, 2014 and 2013, respectively.
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. This loan
was fully repaid in 2014 and the balance outstanding on this loan was $1.0 million as of December 31, 2013.
(8) Derivative Instruments
We periodically hold interest rate derivative instruments to mitigate exposure to changes in interest rates, in
particular one-month LIBOR, with $468.5 million and $392.0 million of our borrowings at December 31, 2014 and
2013, respectively, at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. We
currently have no interest rate swap agreements in place. During 2013 we were a party to one interest rate swap
agreement with a notional outstanding amount of $100.0 million with a fixed rate of 2.10%. The swap agreement expired
in November 2013. The remaining effective portion of these hedges at the swap expiration date is being amortized into
earnings over the term of the underlying borrowings. We recorded a ($0.5 million) benefit and $1.5 million expense to
net finance costs during the years ended December 31, 2014 and December 31, 2013 respectively.
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has
used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk
of non-performance. 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.
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, 2014, 2013, and 2012:
Derivatives in Cash Flow Hedging
Relationships
Location of Loss (Gain) Recognized on
Derivatives in the Statements of Income
Amount of Loss (Gain) Recognized on
Derivatives in the Statements of Income
Years Ended December 31,
2013
(in thousands)
2012
2014
Interest rate contracts
Reclassification adjustment for losses
included in termination of derivative
instruments
Total
Interest expense
$
(499) $ 1,485 $
6,427
Loss on debt extinguishment and
derivatives termination
—
10,143
—
(499) $ 1,485 $ 16,570
$
59
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, 2014, 2013, and 2012:
Derivatives in
Cash Flow Hedging
Relationships
Amount of Gain (Loss) Recognized Location of Loss (Gain) Amount of Loss (Gain) Reclassified
from Accumulated OCI into Income
Reclassified from
(Effective Portion)
Accumulated OCI into
Years Ended December 31,
Income
2013
(Effective Portion)
(in thousands)
in OCI on Derivatives
(Effective Portion)
Years Ended December 31,
2012
2013
(in thousands)
2014
2012
2014
Interest rate contracts*
Total
$
$
— $
— $
1,690 $
1,690 $
508 Interest expense
508 Total
$
$
(499)
(499)
$
$
1,485
1,485
$
$
6,427
6,427
* These amounts are shown net of $1.9 million and $6.7 million of interest payments reclassified to the income
statement during the years ended December 31, 2013 and 2012, respectively. No interest payments were reclassified to
the income statement in 2014.
The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is
reported as a component of other comprehensive income and is reclassified into earnings in the period during which the
transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur. The ineffective
portion of the hedges 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.
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 during the first eleven months of 2013 was a large financial institution in
the United States that possessed an investment grade credit rating. Based on this rating, the Company believes that the
counterparty was creditworthy and that their continuing performance under the hedging agreement was probable, and
had not required the counterparty to provide collateral or other security to the Company.
(9) Income Taxes
The components of income (loss) from continuing operations before income taxes are as follows
U.S.
Non U.S.
Income from continuing operations before income taxes
2014
Years ended December 31,
2013
(in thousands)
2012
$
10,535 $
1,307
11,842
10,408 $
892
11,300
2,335
361
2,696
60
The components of income tax expense for the years ended December 31, 2014, 2013, and 2012, included in the
accompanying consolidated statements of income were as follows:
December 31, 2014
Current
Deferred
Total 2014
December 31, 2013
Current
Deferred
Total 2013
December 31, 2012
Current
Deferred
Total 2012
Federal
State
Foreign
Total
(in thousands)
$
$
109 $
3,832
3,941 $
179 $
164
343 $
311 $
—
311 $
599
3,996
4,595
$
$
(155) $
(3,755)
(3,910) $
123 $
(634)
(511) $
95 $
—
95 $
63
(4,389)
(4,326)
$
$
175 $
707
882 $
37 $
242
279 $
— $
—
— $
212
949
1,161
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
Foreign tax paid
Tax consequences of the sale of engines to WMES
Uncertain tax positions
Permanent differences-162(m)
4,027 34.0 3,842 34.0
2014
$
117
101
(36)
(101)
768
$
%
2012
Years Ended December 31,
2013
(in thousands and % of pre-tax income)
$
%
916 34.0
6.9
185
—
—
(1.7)
(46)
3.6
97
14.3
385
(338)
95
(36)
160
732
(3.0)
0.8
(0.3)
1.4
6.5
1.0
0.9
(0.3)
(0.9)
6.5
%
ETI basis restoration
Permanent differences and other
—
(281)
—
(2.4)
(8,728)
(53)
(77.2)
(0.5)
—
(376)
—
(14.1)
Effective income tax expense (benefit)
4,595
38.8
(4,326)
(38.3)
1,161
43.0
In 2013, we recorded an income tax benefit of $8.7 million related to an extraterritorial income (“ETI”)
adjustment for certain of our engines. We recognized this income tax benefit in 2013 resulting from adjustments made to
the tax basis of certain of our engines due to a decision in a recent court case on behalf of another company in which our
circumstances are similar. The Company records tax expense or benefit for unusual or infrequent items discretely in the
period in which they occur.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
Balance as of December 31, 2012
Increases related to current year tax positions
Balance as of December 31, 2013
Increases related to current year tax positions
Decreases due to tax positions released
Balance as of December 31, 2014
(in thousands)
$
$
406
160
566
109
(211)
464
As of December 31, 2013 we reserved $0.2 million for the benefit resulting from the Extraterritorial Income
Exclusion. As of December 31, 2012, we reserved $0.1 million for tax exposure in Europe. No reserve was established as
61
of December 31, 2014 for the 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.
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
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Depreciation and impairment on aircraft engines and equipment
Other deferred tax liabilities
Net deferred tax liabilities
Other comprehensive income, deferred tax asset
$
As of December 31,
2014
2013
(in thousands)
1,368 $
564
938
582
377
37,173
28
41,030
(1,310)
39,720
1,134
532
853
1,048
377
36,778
17
40,739
—
40,739
(129,332)
(898)
(130,230)
(125,675)
(1,575)
(127,250)
—
(174)
Net deferred tax liabilities
$
(90,510) $
(86,685)
As of December 31, 2014, we had net operating loss carry forwards of approximately $104.4 million for federal
tax purposes and $4.7 million for state tax purposes. The federal net operating loss carry forwards will expire at various
times from 2022 to 2033 and the state net operating loss carry forwards will expire at various times from 2016 to 2024.
During 2014, a valuation allowance of $1.3 million was established for the net operating losses expiring in California for
the periods 2016 to 2024. 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, 2014, we also had alternative minimum tax credit
of approximately $0.3 million for federal income tax purposes which has no expiration date and which should be
available to offset future regular tax liabilities. Management believes that no valuation allowance is required on deferred
tax assets related to federal net operating loss carry forwards, 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 2014. 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 ASC 718, in the amount of $2.2 million as of December 31, 2014, 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 2014 are $0.8 million
and will be recorded to paid-in capital when recognized.
(10) 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.
62
The carrying amount of the Company’s outstanding balance on its Notes Payable as of December 31, 2014 and
2013 was estimated to have a fair value of approximately $847.0 million and $798.8 million, respectively, based on the
fair value of estimated future payments calculated using the prevailing interest rates at each year end.
(11) 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.
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, our 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 periodically enter into interest rate swap agreements. We
currently have no interest rate swap agreements in place. In 2014, 2013 and 2012, ($0.5 million), $1.5 million and $6.4
million was realized through the income statement as an increase (decrease) in interest expense, respectively.
(12) 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 $2.0 million. Equipment leasing, financing, sales and general administrative activities are
conducted from the Novato location. We sub-lease office and warehouse space for our operations in San Diego,
California. This lease expires October 31, 2015, and the remaining lease commitment is approximately $0.1 million. We
lease office and warehouse space in Shanghai, China. The office lease expires December 31, 2015 and the warehouse
lease expires July 31, 2017 and the remaining lease commitments are approximately $65,000 and $18,000, respectively.
We lease office space in London, United Kingdom. The lease expires December 21, 2015 and the remaining lease
commitment is approximately $73,000. We lease office space in Blagnac, France. The lease expires December 31, 2015
and the remaining lease commitment is approximately $18,000. We lease office space in Dublin, Ireland. The lease
expires May 15, 2017 and the remaining lease commitment is approximately $28,000. We lease office space in
Singapore. The lease expires October 31, 2015 and the remaining lease commitment is approximately $103,000. We
lease office and warehouse space in Boynton Beach, Florida. The lease expires October 29, 2019 and the remaining lease
commitment is approximately $1.4 million.
We have made a purchase commitment to secure the purchase of an engine and related equipment for a gross
purchase price of $9.5 million, for delivery in 2015.
(13) Shareholders’ Equity
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 2014,
the Company repurchased 249,105 shares of common stock for approximately $5.4 million under this program, at a
weighted average price of $21.49 per share. The repurchased shares were subsequently retired.
63
(14) Stock-Based Compensation Plans
The components of stock compensation expense for the years ended December 31, 2014, 2013, and 2012,
included in the accompanying consolidated statements of income were as follows:
2007 Stock Incentive Plan
Employee Stock Purchase Plan
Total Stock Compensation Expense
2014
2013
(in thousands)
2012
$
$
3,459 $
50
3,509 $
3,393 $
46
3,439 $
3,092
52
3,144
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.
2,117,272 shares of restricted stock were granted under the 2007 Stock Incentive Plan by December 31, 2014. Of this
amount, 135,368 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 18,096 shares which were available as of
December 31, 2014 for future issuance under the 2007 Incentive Plan. 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, 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
Granted in 2013 (vesting over 4 years)
Granted in 2013 (vesting on first anniversary from date of issuance)
Cancelled in 2013
Vested in 2013
Restricted stock at December 31, 2013
Granted in 2014 (vesting over 3 years)
Granted in 2014 (vesting over 4 years)
Granted in 2014 (vesting on first anniversary from date of issuance)
Cancelled in 2014
Vested in 2014
Restricted stock at December 31, 2014
Shares
651,294
283,000
28,040
(8,988)
(270,692)
682,654
130,000
21,408
(60,110)
(258,822)
515,130
174,500
13,000
50,208
(5,750)
(221,732)
525,356
Our accounting policy is to recognize the associated expense of such awards on a straight-line basis over the
vesting period. At December 31, 2014 the stock compensation expense related to the restricted stock awards that will be
recognized over the average remaining vesting period of 1.8 years totals $6.1 million. At December 31, 2014, the
intrinsic value of unvested restricted stock awards is $11.5 million. The Plan terminates on May 24, 2017.
64
A summary of activity under the 2007 Plan for the years ended December 31, 2014, 2013, and 2012 is as
follows:
Balance as of December 31, 2011
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2012
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2013
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2014
Number Outstanding
Grant Date Fair Value
Aggregate Value
Weighted Average
651,294 $
311,040
(8,988)
(270,692)
682,654 $
151,408
(60,110)
(258,822)
515,130 $
237,708
(5,750)
(221,732)
525,356 $
11.79 $
13.68
12.52
11.33
12.83 $
14.25
12.41
12.01
13.71 $
19.84
14.02
13.24
16.72 $
7,680,578
4,256,290
(112,521)
(3,067,357)
8,756,990
2,158,011
(745,876)
(3,108,651)
7,060,474
4,710,362
(80,630)
(2,903,595)
8,786,611
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 2014 and 2013, 14,068 and 14,026 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 $6.17, $3.19 and $3.19 for 2014, 2013 and 2012, 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, 2012, 306,653 options were exercised with a total intrinsic value at exercise date of
approximately $2.4 million and no options were cancelled. In the year ended December 31, 2013, 54,991 options were
exercised with a total intrinsic value at exercise date of approximately $0.4 million and 6,500 options were cancelled. In
the year ended December 31, 2014, 26,437 options were exercised with a total intrinsic value at exercise date of
approximately $0.2 million. There are 49,000 stock options vested and expected to vest under the 1996 Stock
Option/Stock Issuance Plan which have an intrinsic value of $0.6 million.
65
A summary of the activity under the 1996 Plan for the years ended December 31, 2014, 2013, and 2012
is as follows:
Options
Available
for Grant Options
Weighted
Average
Remaining
Weighted
Contractual
Average
Term (in
Aggregate
Exercise Price
6.35
years)
Intrinsic Value
2,484,009
1.82 $
5.34
—
8.60
7.96
5.01
9.38
9.71
—
9.20
2.23 $
781,692
1.49 $
601,991
0.59 $
622,300
—
—
—
—
—
—
(54,991)
(6,500)
75,437 $
(26,437)
—
49,000 $
49,000 $
9.20
0.59 $
622,300
136,928 $
75,437 $
49,000 $
8.60
9.38
9.20
2.23 $
781,692
1.49 $
601,991
0.59 $
622,300
Outstanding as of December 31, 2011
—
443,581 $
Options exercised
Options cancelled
—
(306,653)
—
—
Outstanding as of December 31, 2012
—
136,928 $
Options exercised
Options cancelled
Outstanding as of December 31, 2013
Options exercised
Options cancelled
Outstanding as of December 31, 2014
Vested and expected to vest at:
December 31, 2014
Options exercisable at:
December 31, 2012
December 31, 2013
December 31, 2014
The following table summarizes information concerning outstanding and exercisable options at December 31,
2014:
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Number
Outstanding Life (in years) Exercise Price
Weighted Average Number
Exercisable Exercise Price
Weighted Average
49,000
0.59
9.20
49,000
9.20
Exercise Prices
From $9.20 to $9.20
(15) 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 2014, 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 $17,500
(or $23,000 for employees at least 50 years of age). We match 50% of employee contributions up to 8% of the
employee’s salary which totaled $0.3 million for each of the years ended December, 31, 2014, 2013, and 2012.
66
(16) Quarterly Consolidated Financial Information (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31,
2014, 2013, and 2012 (in thousands, except per share data).
Fiscal 2014
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
Total revenue
Net income (loss)
$
43,000 $ 42,251 $ 42,745 $ 46,291 $
4,331
2,214
(277)
979
174,287
7,247
Net income (loss) attributable to common shareholders
4,331
2,214
979
(277)
7,247
Basic earnings (loss) per common share
0.55
0.28
0.12
(0.03)
0.92
Diluted earnings (loss) per common share
0.53
0.27
0.12
(0.03)
0.89
Average common shares outstanding
Diluted average common shares outstanding
7,914
8,129
7,976
8,179
7,938
8,123
7,839
8,037
7,917
8,141
Fiscal 2013
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
Total revenue
Net income (loss)
$
35,304 $ 37,953 $ 37,952 $ 47,203 $
1,610
9,692
(2,229)
6,553
158,412
15,626
Net income (loss) attributable to common shareholders
1,610
9,692
(2,229)
6,553
15,626
Basic earnings (loss) per common share
0.20
1.20
(0.29)
0.84
1.95
Diluted earnings (loss) per common share
0.19
1.17
(0.28)
0.81
1.89
Average common shares outstanding
Diluted average common shares outstanding
8,033
8,273
8,106
8,303
8,126
8,329
7,846
8,084
8,029
8,289
Fiscal 2012
Total revenue
Net income (loss)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
$ 35,739 $ 35,153 $ 37,506 $ 39,692 $ 148,090
1,535
3,229
(7,194)
3,289
2,211
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)
(0.45)
Diluted earnings (loss) per common share
0.29
0.28
(0.91)
(0.09)
(0.43)
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
8,490
8,791
(17) Related Party Transactions
Prior to 2014, the Company leased equipment to an airline owned by our CEO and Chairman. The Company
received lease payments from the airline and recorded revenue totaling $2.1 million and $0.6 million in the years ended
December 31, 2013 and 2012, respectively. Our CEO and Chairman no longer owns the airline. In connection with the
2013 sale of its stock to an unrelated third party, the airline prepaid a note to us at a 45% discount of $0.4 million, similar
to reductions received by other large creditors. The Company subsequently sold four engines and three aircraft, which
had an aggregate net book value of $3.4 million, to the third party for $4.9 million. The $4.9 million proceeds were
67
included in 2013 revenue as follows: Gain on Sale $0.8 million (net of the asset’s $3.4 million net book value),
Maintenance Reserve Revenue $0.4 million, Lease Rent Revenue $0.4 million and Other Revenue $0.3 million.
J.T. Power, LLC (“J.T. Power”): In the ordinary course of business, the Company uses a number of
consignment vendors to sell engine parts. Prior to 2014, the Company consigned equipment for part-out to J.T. Power, an
entity owned by Austin Willis, the son of our CEO and Chairman, and directly and indirectly, a shareholder and a
Director of the Company. Sales of consigned parts under the Consignment agreements were $22,200 and $70,700 for the
years ended December 31, 2013 and 2012, respectively. The Consignment agreements provided a minimum guarantee of
net consignment proceeds which was converted to a note and had a balance of $1.2 million as of December 31, 2012.
On November 6, 2013, the Company purchased certain assets of J.T. Power for $5.6 million. A net cash
payment of $4.5 million was made to fund the transaction, after deducting amounts owed to the Company, including
$0.7 million related to the minimum guarantee remaining under the note and cash received of $0.4 million. Of the $4.5
million cash payment, $1.2 million was paid to various creditors and $3.3 million was paid to the shareholders of J.T.
Power.
As part of the acquisition of certain assets of J.T. Power, we launched Willis Aeronautical Services, Inc.
(“Willis Aero”), a wholly-owned subsidiary, whose primary focus is the sale of aircraft engine parts and materials
through the acquisition or consignment from third parties of aircraft and engines.
(18) Operating Segments
The Company operates in two business segments: (i) Leasing and Related Operations which involves acquiring
and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft engines and other aircraft equipment and
the selective purchase and resale of commercial aircraft engines and other aircraft equipment and (ii) Spare Parts Sales
which involves the purchase and resale of after-market engine and airframe parts, whole engines, engine modules and
portable aircraft components and leasing of engines destined for disassembly and sale of parts.
The Company evaluates the performance of each of the segments based on profit or loss after general and
administrative expenses and inter-company allocation of interest expense. While the Company believes there are
synergies between the two business segments, the segments are managed separately because each requires different
business strategies.
68
The following tables present a summary of the operating segments (amounts in thousands):
For the year ended December 31, 2014
Revenue:
Lease rent revenue
Maintenance reserve revenue
Spare parts sales
Gain on sale of leased equipment
Other revenue
Total revenue
Expenses:
Depreciation and amortization expense
Cost of spare parts sales
General and administrative
Net finance costs
Other expense
Total expenses
Earnings (loss) from operations
Leasing and
Related Operations Spare Parts Sales Eliminations (1)
Total
$
101,748 $
53,363
—
5,753
3,581
164,445
— $
—
8,917
—
1,661
10,578
— $ 101,748
53,363
—
8,917
—
5,753
—
4,506
(736)
174,287
(736)
65,152
—
33,211
36,779
17,830
152,972
289
7,474
2,648
283
108
10,802
$
11,473 $
(224) $
—
—
—
—
—
—
(736) $
65,441
7,474
35,859
37,062
17,938
163,774
10,513
(1) Represents revenue generated between our operating segments
For the year ended December 31, 2013
Revenue:
Lease rent revenue
Maintenance reserve revenue
Gain on sale of leased equipment
Other revenue
Total revenue
Expenses:
Depreciation and amortization expense
General and administrative
Net finance costs
Other expense
Total expenses
Earnings from operations
Leasing and
Related Operations Spare Parts Sales Eliminations
Total
$
101,737 $
46,694
5,675
3,365
157,471
58,684
33,490
38,719
19,312
150,205
$
7,266 $
— $
—
—
941
941
43
378
—
12
433
508 $
— $ 101,737
46,694
—
5,675
—
4,306
—
158,412
—
—
—
—
—
—
— $
58,727
33,868
38,719
19,324
150,638
7,774
Total assets as of December 31, 2014
$
1,241,837 $
19,789 $
— $
1,261,626
Total assets as of December 31, 2013
$
1,194,800 $
4,429 $
— $
1,199,229
(19) Subsequent Events
Management has reviewed and evaluated subsequent events through the date that the financial statements were
issued.
69
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED BALANCE SHEETS
Parent Company Information
December 31, 2014 and 2013
(In thousands, except share data)
December 31, December 31,
2014
2013
ASSETS
Cash and cash equivalents
Equipment held for operating lease, less accumulated depreciation
Equipment held for sale
Operating lease related receivable, net of allowances
Spare parts inventory
Due from affiliate
Investments
Investment in subsidiaries
Property, equipment & furnishings, less accumulated depreciation
Intangible assets, net
Equipment purchase deposits
Other assets, net
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses
Deferred income taxes
Notes payable
Maintenance reserves
Security deposits
Unearned lease revenue
Total liabilities
$
2,411 $
628,341
15,768
3,379
14,906
19,044
41,590
6,054
17,867
271
—
13,528
1,520
464,912
26,382
1,911
—
1,393
23,485
97,869
4,868
271
1,369
9,774
633,754
$
763,159 $
$
10,820 $
26,132
457,364
32,845
16,864
2,273
546,298
8,813
6,993
378,828
15,282
10,008
1,225
421,149
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; 0 shares issued and
outstanding at December 31, 2014 and 2013)
Common stock ($0.01 par value, 20,000,000 shares authorized; 8,346,304 and
8,399,739 shares issued and outstanding at December 31, 2014 and 2013, respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive income, net of income tax expense
Total shareholders’ equity
Total liabilities and shareholders’ equity
—
—
83
42,076
174,702
—
216,861
84
44,741
167,455
325
212,605
633,754
$
763,159 $
70
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF INCOME (LOSS)
Parent Company Information
Years Ended December 31, 2014, 2013, and 2012
(In thousands)
Years Ended December 31,
2013
2014
2012
REVENUE
Lease rent revenue
Maintenance reserve revenue
Spare parts sales
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation expense
Cost of spare parts sales
Write-down of equipment
General and administrative
Technical expense
Net finance costs:
Interest expense
Loss on debt extinguishment
Total net finance costs
Total expenses
Loss from operations
Earnings from joint ventures
Income (loss) before income taxes
Income tax benefit/(expense)
$
50,749 $
36,593 $
22,270
7,588
2,147
5,227
87,981
14,046
—
3,472
8,022
62,133
30,564
13,139
—
3,605
10,809
58,117
29,555
6,354
4,681
29,546
4,455
13,500
—
13,500
88,091
19,699
—
4,204
29,907
5,478
15,030
—
15,030
74,318
18,764
—
2,621
30,565
3,336
11,471
94
11,565
66,851
(110)
(12,185)
(8,734)
1,329
3,526
1,759
1,219
(1,708)
(8,659)
4,525
(6,975)
2,196
Equity in income of subsidiaries, net of tax of $3,553, $199, and $3,357 at
December 31, 2014, 2013 and 2012, respectively
7,736
19,760
6,314
Net income
$
7,247 $
15,626 $
1,535
Preferred stock dividends
Preferred stock redemption costs
—
—
—
—
2,493
2,835
Net income (loss) attributable to common shareholders
$
7,247 $
15,626 $
(3,793)
71
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Parent Company Information
Years Ended December 31, 2014, 2013, and 2012
(In thousands)
Net income
Other comprehensive income (loss):
Derivative instruments
Years Ended December 31,
2013
15,626 $
2014
7,247 $
2012
1,535
$
Unrealized losses on derivative instruments
Reclassification adjustment for losses (gains) included in net income
Net gain (loss) recognized in other comprehensive income
Tax benefit (expense) related to items of other comprehensive income
(loss)
Other comprehensive income from parent
Other comprehensive income from subsidiaries
Total other comprehensive income (loss)
—
(499)
(499)
(187)
1,485
1,298
174
(435)
(325)
—
(325)
863
—
863
(1,039)
1,511
472
(16)
456
7,205
7,661
Total comprehensive income
$
6,922 $
16,489 $
9,196
72
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF CASH FLOWS
Parent Company Information
Years Ended December 31, 2014, 2013, and 2012
(In thousands)
2014
Years Ended December 31,
2013
2012
$
7,247
$
15,626
$
1,535
(7,736)
29,555
4,681
3,509
2,391
(499)
34
(2,147)
—
(1,329)
—
1,383
(1,502)
(5,533)
—
(942)
322
(2,208)
8,693
(1,616)
919
35,222
(9,666)
17,582
21,360
(17,623)
847
—
—
(104,904)
(13,767)
(106,171)
154,395
(5,074)
—
410
(1,544)
—
4,553
(5,352)
—
311
(75,859)
71,840
891
1,520
2,411
11,110
76
$
$
$
(19,760)
19,699
4,204
3,439
2,286
(404)
(94)
(3,472)
(351)
(3,526)
—
(4,072)
1,871
—
—
(2,165)
(943)
(4,041)
3,495
426
(575)
11,643
(34,098)
69,548
21,644
(11,219)
—
(4,171)
(1,000)
(132,140)
(450)
(91,886)
130,000
(637)
—
680
(1,248)
—
7,588
(5,918)
—
—
(52,844)
77,621
(2,622)
4,142
1,520
11,903
111
$
$
$
(6,314)
18,764
2,621
3,144
2,215
(236)
34
(3,605)
(173)
(957)
94
(2,408)
(292)
—
5
(1,329)
(2,209)
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
4,142
8,105
101
$
$
$
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
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
Income from joint ventures
Non-cash portion of loss on debt extinguishment
Deferred income taxes
Changes in assets and liabilities:
Receivables
Spare parts inventory
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)
Capital contribution to joint venture
Distributions received from joint venture
Acquisition of J.T. Power, net of cash acquired
Acquisition of WOLF, net of cash acquired
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
Redemption of preferred stock
Security deposit
Repurchase of common stock
Cash settlement of stock options
Excess tax benefit from stock-based compensation
Principal payments on notes payable
Net cash provided by (used in) financing activities
Increase/(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest
Income Taxes
Supplemental disclosures of non-cash investing activities:
During the years ended December 31, 2014, 2013, 2012, engines and equipment totaling $3,071, $422
and $14,156, respectively, were transferred from Held for Operating Lease to Held for Sale but not settled.
During the years ended December 31, 2014, 2013, 2012, engines and equipment totaling $120,880,
$116,020 and $(56,562), respectively, were transferred to (from) the parent to its subsidiaries.
During the year ended December 31, 2014, engines and equipment totaling $9,649 were transferred
from Held for Sale to Spare Parts Inventory.
73
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE II — VALUATION ACCOUNTS
December 31, 2014, 2013, and 2012
(In thousands)
Additions
Balance at Charged
Beginning (Credited) (Deductions) Balance at
End of Period
of Period
to Expense Recoveries
Net
December 31, 2012
Accounts receivable, allowance for doubtful accounts
December 31, 2013
Accounts receivable, allowance for doubtful accounts
December 31, 2014
Accounts receivable, allowance for doubtful accounts
477
503
—
980
980
(30)
(654)
296
296
(26)
(55)
215
Deductions in allowance for doubtful accounts represent uncollectible accounts written off, net of recoveries.
74
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Computation of Earnings (Loss) Per Share
(In thousands, except per share amounts)
Exhibit 11.1
Basic
Earnings:
Net income (loss) attributable to common shareholders
$7,247
$15,626
$(3,793)
2014
Years Ended December 31,
2013
2012
Shares:
Average common shares outstanding
Basic earnings (loss) per common share
Assuming full dilution
Earnings:
7,917
$0.92
8,029
$1.95
8,490
$(0.45)
Net income (loss) attributable to common shareholders
$7,247
$15,626
$(3,793)
Shares:
Average common shares outstanding
Potentially dilutive common shares outstanding
Diluted average common shares outstanding
Diluted earnings (loss) per common share
Supplemental information:
7,917
224
8,141
$0.89
8,029
260
8,289
$1.89
8,490
301
8,791
$(0.43)
The difference between average common shares outstanding to calculate basic and assuming full dilution is due
to options outstanding under the 1996 Stock Option/Stock Issuance Plan and restricted stock issued under the 2007 Stock
Incentive Plan.
The calculation of diluted earnings per share for 2014 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 (loss) per share for 2013 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 (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.
75
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Statement of Computation of Ratios of
Earnings to Fixed Charges and Preferred Dividends
(In thousands, except ratios)
2014
Years Ended December 31,
2012
2011
2013
Exhibit 12.1
2010
Earnings:
Earnings from continuing operations before income
taxes
Fixed charges
Cash distributions from equity method investments
Total earnings
Fixed charges:
$10,513
37,416
847
$48,776
$7,774
38,990
—
$46,764
$937
32,008
802
$33,747
$22,590
35,469
810
$58,869
$18,571
41,186
949
$60,706
Interest expense
Estimated interest expense within rental expense (1)
Total fixed charges
Preferred stock dividend (2)
Total fixed charges and preferred stock dividends
$37,062
354
$37,416
—
$37,416
$38,719
271
$38,990
—
$38,990
$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
Ratio of earnings to fixed charges
1.30
1.20
1.05
1.66
1.47
Ratio of earnings to fixed charges and preferred stock
dividends
1.30
1.20
0.93
1.45
1.31
(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.
76
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
Rep. of Ireland
Rep. of Ireland
WLFC Funding (Ireland) Limited
Rep. of Ireland
Willis Aviation Finance Limited
Rep. of Ireland
Willis Lease France
France
Willis Lease (China) Limited
People’s Republic of China
Willis Engine Securitization Trust II
WEST Engine Acquisition LLC
Facility Engine Acquisition LLC
Delaware
Delaware
Delaware
Willis Engine Securitization (Ireland) Limited
Rep. of Ireland
Willis Aeronautical Services, Inc.
Willis Lease Singapore Pte. Ltd.
WOLF A340 LLC
WOLF 149 LLC
WOLF 139 LLC
Delaware
Singapore
Delaware
Delaware
Delaware
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Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Willis Lease Finance Corporation:
We consent to the incorporation by reference in the Registration Statements (No. 333-15343, 333-48258, 333-
63830, 333-109140, 333-118127, 333-142914, 333-170049) on Form S-8 of Willis Lease Finance Corporation of our
reports dated March 16, 2015, with respect to the consolidated balance sheets of Willis Lease Finance Corporation as of
December 31, 2014 and 2013, and the related consolidated statements of income (loss), shareholders’ equity, cash flows,
and comprehensive income for each of the years in the three-year period ended December 31, 2014, and related financial
statement schedules I and II, and the effectiveness of internal control over financial reporting which reports appears in
the December 31, 2014 annual report on Form 10-K of Willis Lease Finance Corporation.
/s/ KPMG LLP
San Francisco, California
March 16, 2015
78
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 16, 2015
/s/ Charles F. Willis, IV
Charles F. Willis, IV
Chief Executive Officer
Chairman of the Board
79
Exhibit 31.2
CERTIFICATIONS
I, Bradley S. Forsyth, certify that:
1. I have reviewed this report on Form 10-K of Willis Lease Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 16, 2015
/s/ Bradley S. Forsyth
Bradley S. Forsyth
Chief Financial Officer
Senior Vice President
80
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, 2014 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.
0
Date: March 16, 2015
/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
81
BOEING 777 POWERED BY GE90 ENGINES
Corporate Information
Executive Team
Charles F. Willis, IV
Donald A. Nunemaker
Bradley S. Forsyth
Dean M. Poulakidas
Anthony R. Spaulding
Chairman & Chief
Executive Officer
President
Senior Vice President &
Chief Financial Officer
Senior Vice President &
General Counsel
Senior Vice President,
Technical Services
Board of Directors
Charles F. Willis, IV
Hans Jörg Hunziker, Dr.
Robert J. Keady
Robert T. Morris
Austin Willis
Chairman and Chief Executive
Officer, Willis Lease Finance
Corporation
Principal, HLF Aviation LLC;
Former President and Chief
Executive Officer, FlightLease Ltd.
Founder & President of
Eastern Aviation Consulting
Group, LLC; Former Vice
President, Business Development
& Marketing, Pratt & Whitney
Commercial Engines &
Global Services
President, Robert Morris &
Company
Member of the United States
Armed Forces
Corporate Executive Offices
Transfer Agent & Registrar
Stock Exchange Listing
773 San Marin Drive, Suite 2215
Novato, CA 94998
(415) 408-4700
(415) 408-4701 (fax)
www.willislease.com
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
Independent Registered
Public Accountants
KPMG LLP
55 Second Street, Suite 1400
San Francisco, CA 94105
(415) 963-5100
Investor Relations Counsel
The Cereghino Group
Seattle, WA
(206) 388-5785
www.stockvalues.com
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 website,
www.willislease.com, or by contacting our corporate offices.
Press releases are also available at The Cereghino Group website,
www.stockvalues.com.
773 San Marin Drive, Suite 2215, Novato, California 94998 USA (415) 408-4700 (415) 408-4701 (fax) www.willislease.com
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