Willis Lease Finance Corporation
2 0 1 6 A N N U A L R E P O R T
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773 San Marin Drive, Suite 2215
Novato, California 94998 USA
415.408.4700
www.willislease.com
Executive Team
Charles F. Willis, IV
Chairman and
Chief Executive Officer
Brian R. Hole
President
Scott B. Flaherty
Senior Vice President and
Chief Financial Officer
Dean M. Poulakidas
Senior Vice President
and General Counsel
Board of Directors
Charles F. Willis, IV
Chairman and
Chief Executive Officer
Dr. Hans J. Hunziker
Principal and Chief Executive Officer
AllJets Ltd.
Former President and
Chief Executive Officer
FlightLease Ltd.
Corporate Information
Corporate Headquarters
773 San Marin Drive, Suite 2215
Novato, California 94998
415.408.4700
Independent Registered
Public Accountants
KPMG LLP
55 Second Street, Suite 1400
San Francisco, California 94105
415.963.5100
Robert J. Keady
Founder and President
Eastern American Consulting Group, LLP
Former Vice President,
Business Development and Marketing
Pratt & Whitney Commercial Engines
and Global Services
Robert T. Morris
President
Robert Morris & Company
Austin C. Willis
Former Founder, President and CEO
JT Power, LLC
Senior Vice President
Willis Lease Finance Corporation
Transfer Agent & Registrar
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
800.937.5449
Investor Relations
Scott B. Flaherty
Senior Vice President and
Chief Financial Officer
Willis Lease Finance Corporation
415.408.4700
Stock Exchange Listing
Willis Lease Finance Corporation is listed
on the NASDAQ Global Market under the
symbol WLFC.
Form 10-K, 10-Q and Press Releases
This Form 10-K has been filed with the
Securities 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.
Design: BLOCH+ COULTER Design Group, www.blochcoulter.com
All paper used in this annual report has been certified by the Forest Stewardship Council (FSC).
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, various end-of-life solutions for aircraft and engines
provided through its subsidiary, Willis Aeronautical Services, Inc., as well as asset management services provided through its
subsidiary, Willis Asset Management Limited (WAM). With the addition of WAM in 2016, the Company is now the largest independent
owner and manager of aircraft engines in the world, with roughly 800 engines under management.
E N G I N E S A N D A U X I L I A R Y P O W E R U N I T ( A P U ) M O D E L S
O W N E D A N D L E A S E D B Y W I L L I S L E A S E F I N A N C E C O R P O R A T I O N ,
S E R V I N G G L O B A L A V I A T I O N M A R K E T S
E N G I N E S
CF34-3
CF34-8
CF34-10
CF6-80
CFM56-3C
CFM56-5A
CFM56-5B
CFM56-5C
CFM56-7B
GEnx
GE90
PW100
PW150
PW4000
Trent 772B
V2500
A P U s
GTCP131-9A
GTCP131-9B
GTCP331-500B
A I R C R A F T
Various
platforms
Strategic Financings
1996
1998
2000
2005
Initial Public Offering
Follow-On Equity Offering
SAIR Group Equity Investment
WEST I Asset-Backed Securitization
2006
Preferred Stock Offering
2008
2009
2011
2012
2014
2016
WEST I Expansion
Revolver Renewal
Revolver Renewal
West II Asset-Backed Securitization
Revolver Renewal
Revolver Amendment and Extension
West II Amendment
Preferred Stock Offering
W I L L I S L E A S E F I N A N C E C O R P O R A T I O N – T O T A L A S S E T S
$1600
$1400
$1200
$1000
$ 800
$ 600
$ 400
$ 200
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Owned assets
JV owned assets
Owned and managed assets
1
Welcome Fellow Shareholders
Once again, our company had a very good year.
I am very pleased with the progress achieved in our joint
We achieved $207 million in revenue and $24 million
in pre-tax profit, now with nearly 800 engines owned
or managed. Our engines are, or have been, used in
120 countries. We have approximately $1.5 billion
venture with Mitsui, and acknowledge the powerful
proposition put forward by our CASC/Willis joint venture
in China. I believe that both partners have worked hard to
produce positive results and will do more in the future.
in assets owned by WLFC, its subsidiaries, and its joint
The advent of new technology aircraft, engines and
venture partnerships.
We are the largest independent provider of owned
and managed engines to airlines, manufacturers and
maintenance providers worldwide. I believe the outlook
for the future, with the support of all our employees
and stakeholders, is bright.
Our Business
When I started this company, I had a vision of providing
a service to customers that were looking for more than
they had been offered in the past, and which may not
have been available. Fully appreciating that not all airlines
and MROs’ desires and expectations were the same,
we endeavored to supply a different product. As engines
became more complex and expensive, we recognized
that there was a niche in the market for operating leases,
engine management and end-of-life solutions. I believe
we have led the way with innovation, encompassing both
related power systems may propel us into additional
strategic and financial relationships with OEMs, MROs
and airlines. The market should not underestimate
the desire of our customers to have choices when it
comes to after-market service providers. We intend to
be their first choice.
We also see large, future markets in areas such as
industrial gas turbines, peak power generation and other
diverse transportation asset classes. The growth for
transportation companies in various other asset classes
appears to have peaked. We have in the past been
approached to join certain of those companies due to
the upward trajectory of growth in our asset class. We
refused, as the effort would have been dilutive to our
plan, and some of those companies no longer exist or at
least have experienced serious trouble. Thus, I believe that
our future is wide open, and we are up to the challenge.
product and financial solutions, as well as service levels
I sense we are coming into a period of consolidation in
not seen before. I also believe that the future is wide open
many areas of our industry. As we demonstrated last year,
for companies like ours, with access to low-cost capital
by our acquisition of the engine management business of
and imaginative management.
Over the past 20 years, we have purchased approximately
$3 billion of assets. We have generated approximately
$2.2 billion in revenues and created significant value
for our shareholders. Total Shareholder Return (TSR)
TES, we are looking for strategic/synergistic and accretive
opportunities. We want to be a provider of value-added
services and not just an asset-intensive lessor.
Our Business Environment
We employ nearly 150 dedicated women and men.
for the last five years has been 114%, representing a
We believe in providing a safe, productive and learning
Compound Annual Growth Rate (CAGR) of 16.44%.
environment, while challenging individuals to achieve
This has been achieved through solid planning and
their highest and best potential. We look for talented
time-proven execution.
people worldwide and believe that if they enjoy their work
and produce outstanding results, there is always a place
for them at Willis Lease. We have bases in Dublin, the San
Francisco Bay Area, Singapore, Shanghai, Boynton Beach,
2
L E A S I N G A N D O T H E R R E V E N U E
(millions)
$250
$200
$150
$100
$ 50
12
13
14
15
16
Leasing revenue
Other revenue
B O O K V A L U E P E R C O M M O N S H A R E
$35
$25
$15
$ 5
12
13
14
15
16
San Diego, London and now Wales. Our interest is not
only in growing our hard asset base and service offerings
but, more importantly, building our human capital. I have
found over the years as the company has become more
complex from a regulatory and financial standpoint that
I needed to bring in individuals who not only compliment
my vision, but also provide their own view of the future.
The current United States administration has proffered
ideas of less regulation, more freedom to compete
internationally and the opportunity for all segments of
our population to participate in those ideals. Time will tell.
I can say that much of the rhetoric, if proven to be true,
will be a major boost to our ability to provide more
and higher paying jobs in the United States and abroad.
Immigration, tax reform and deregulation are important
issues for many businesses with worldwide operations,
like ours. We will continue to watch the process closely.
In the existing high regulation environment, however,
being a public company has been, and continues to be,
a very expensive proposition, particularly when compared
to the benefits garnered. We have repurchased 4.5 million
shares since our $100 million share repurchase program
began. We shall continue to repurchase shares as long as
we can capture a discount to our per share book value and
such repurchases correspond with our overall objectives.
Our Future
Our path to where we are has neither been easy nor
without bumps along the way. Larger competitors have
not appreciated our expansion and improved services
to a hitherto underserved market. We will continue to
challenge the status quo and offer outstanding service
to customers who appreciate what we do. It has been
very interesting to see how large international companies,
which espouse great ideals, have found themselves
embroiled in serious issues themselves. We do not believe
in the mantra of some large companies that “want it all
and want it now”. Especially because we are smaller, we
must remain above reproach, even as overregulation and
3
restraint of trade issues threaten to engulf us. We believe
the way forward in international trade is to partner with
others, providing more jobs and more innovation.
I have now been in this industry for over 50 years, leading
this company for most of those years. In preparing for the
future, it is time for me to step into a more strategic role.
For the next two years, I will continue my role as Chair-
man and CEO while watching over the development of
our leadership team. I will then most likely move into the
role of Executive Chairman. Succession planning is well
underway. Brian Hole, our President, and Scott Flaherty,
our Chief Financial Officer, are settling in nicely. My son,
Austin, who has been a member of the Board of Directors
for 10 years and is intimately involved with all aspects
of the engine and spare parts business, is just coming off
$20
$15
$10
$ 5
N E T I N C O M E
(millions)
12
13
14
15
16
active duty with the Special Forces of the United States
($5)
Army. He will be joining our team as Senior Vice President.
Under Brian Hole’s leadership, these officers, and other
integral members of the Willis Lease team, will move the
Company into our next exciting period of growth.
Throughout this letter you will see charts showing the
historical growth of the company across several metrics.
We have come a very long way – in fact, much farther
than I had originally envisioned possible. But, as the
mountain climber comes to realize, the first peak they
sometimes see is only a waypoint along the chosen path,
not the destination.
We take the long view. The journey is equally as important
as the destination.
Thank you for your
continued support.
Charles F. Willis, IV
Chairman and
Chief Executive Officer
March 31, 2017
Net Income (Loss) Attributable
to Common Shareholders
Interest Rate SWAP Unwind and
Preferred Stock Redemption Cost
A V E R A G E U T I L I Z A T I O N
(book value weighted)
100%
80%
60%
40%
20%
90.1%
12
13
14
15
16
4
Selected Financial Data
Thousands, except earnings per share
2016
2015
2014
2013
2012
Years ended December 31,
R E V E N U E
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
E X P E N S E S
Depreciation and amortization
expense
Cost of spare parts and
equipment sales
Write-down of equipment
General and administrative
Technical expense
Net finance costs
$ 119,895
$ 108,046
$ 101,431
$ 101,737
$ 94,591
57,091
17,783
3,482
9,023
53,396
25,582
8,320
2,718
53,322
46,694
41,387
8,917
5,882
4,506
–
–
5,675
4,306
5,499
6,613
$ 207,274
$ 198,062
$ 174,058
$ 158,412
$ 148,090
$ 66,280
$ 69,424
$ 65,314
$ 58,727
$ 52,591
13,293
9,514
47,780
6,993
41,281
17,849
9,181
42,744
9,403
37,861
7,474
5,602
35,859
12,336
37,062
–
–
6,461
33,868
12,863
38,719
5,874
34,551
7,006
47,131
Total expenses
$ 185,141
$ 186,462
$ 163,647
$ 150,638
$ 147,153
Net income
$ 14,069
$ 6,460
$ 7,180
$ 15,626
$ 1,535
Net income (loss) attributable
to common shareholders
Diluted earnings (loss)
per common share
Diluted average common
shares outstanding
Common shares outstanding
at period end
B A L A N C E S H E E T D A T A
$ 13,780
$ 6,460
$ 7,180
$ 15,626
$ (3,793)
$ 2.05
$ 0.81
$ 0.88
$ 1.89
$ (0.45)
6,714
7,987
8,141
8,289
8,490
6,402
7,548
8,346
8,400
8,716
Equipment held for operating lease
$ 1,136,603
$1,109,168
$1,057,381
$1,033,022
$ 961,459
Total assets
$1,337,887
$1,294,285
$1,245,841
$ 1,199,229
$1,078,715
Shareholders’ equity
$ 196,260
$ 209,223
$ 216,648
$ 212,459
$ 199,163
Book value per common share
$ 30.66
$ 27.72
$ 25.96
$ 25.29
$ 22.85
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 reinvest-
ment, of the NASDAQ Composite Index and the
NASDAQ Financial 100 Index, during the period from
December 31, 2011, through December 31, 2016.
2016
2015
High
Low
High
Low
Q1
Q2
Q3
Q4
$22.18 $17.55
$25.40 $21.47
$27.41 $22.13
$27.23 $23.54
$21.62 $17.96
$19.27 $18.20
$18.50 $15.21
$20.27 $15.18
$ 10 0 I N V E S T E D O N 1 2 / 31 / 11 I N S T O C K O R I N
I N D E X I N C L U D I N G R E I N V E S T M E N T O F D I V I D E N D S
$250
$200
$150
$100
$ 50
11
12
13
14
15
16
Willis Lease Finance Corporation
NASDAQ Composite – Total Returns
NASDAQ 100 – Financial
6
7 F O R W A R D - L O O K I N G S T A T E M E N T S
Except for historical information, the matters discussed in this
Annual Report contain forward-looking statements that involve
risks and uncertainties. Do not unduly rely on forward-looking
statements, which give only expectations about the future and
are not guarantees. Forward-looking statements speak only as
of the date they are made, and we undertake no obligation to
update them. Our actual results may differ materially from the
results discussed in forward-looking statements. Factors that
might cause such a difference include, but are not limited to:
the state of the global economy; the availability of capital to
us and our customers; the state of the airline industry, including
growth rates of markets and other economic factors, as well as
the effects of specific events, such as terrorist activity, changes
in oil prices and other disruptors to world markets; risks
associated with owning and leasing jet engines and aircraft;
our ability to successfully negotiate leases, as well as 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; changes in laws applicable to
us; 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.
8
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, 2016
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, 2016) was approximately $81.9 million (based on a closing sale price of $22.23 per share as reported on the NASDAQ National Market).
The number of shares of the registrant’s Common Stock outstanding as of March 6, 2017 was 6,399,767.
The Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form 10-K.
WILLIS LEASE FINANCE CORPORATION
2016 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
3
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24
24
24
24
26
26
38
38
38
38
39
39
39
39
40
40
40
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
Selected Financial Data
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
2
ITEM 1. BUSINESS
INTRODUCTION
PART I
Willis Lease Finance Corporation with its subsidiaries is a leading lessor and servicer of commercial aircraft
and engines. Our principal business objective is to build value for our shareholders by acquiring commercial aircraft and
engines and managing those assets 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, 2016, we had a total lease portfolio consisting of 208 engines and related equipment, 11
aircraft and 5 spare parts packages with 80 lessees in 43 countries with an aggregate net book value of $1,136.6 million.
In addition to our owned portfolio, as of December 31, 2016, we managed a total lease portfolio of 542 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.
In 2016, we purchased, through our wholly owned subsidiary Willis Asset Management Limited (“Willis Asset
Management”), the business and assets of Total Engine Support Limited (“TES”). TES has been the engine management
and consulting business of the TES Aviation Group. Willis Asset Management has 502 engines under management as of
December 31, 2016.
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, proxies 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, Federal Aviation Administration
(“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 45,000 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
3
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 that are subject to a lease when purchased and 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 of engines from third parties. 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.
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 Willis 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 58 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.
4
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 23,000 aircraft as of 2015 and projects this will grow to approximately 45,000 aircraft by
2035. Aircraft equipment manufacturers have predicted such an increase in aircraft to address the rapid growth of both
passenger and cargo traffic in the Asian markets, as well as demand for new aircraft in more mature markets.
Increased lease penetration rate
Spare engines provide support for installed engines in the event of routine or other engine maintenance or
unscheduled removal. The number of spare engines needed to service any fleet is determined by many factors. These
factors include:
the number and type of aircraft in an aircraft operator’s fleet;
the geographic scope of such aircraft operator’s destinations;
the time an engine is on-wing between removals;
average shop visit time; and
the number of spare engines an aircraft operator requires in order to ensure coverage for predicted and
unscheduled removals.
We believe that commercial aircraft operators are increasingly considering their spare engines as significant
capital assets, where operating leases may be more attractive than capital leases or ownership of spare engines. Some
believe that currently as many as 35% to 40% of the spare engine market falls under the category of leased engines.
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, 2016, 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
5
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.
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
6
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, 2016, we had a total lease portfolio of 208 aircraft engines and related equipment, 5 spare
parts packages, 11 aircraft and various parts and other engine-related equipment with a net book value of $1,136.6
million in our lease portfolio. As of December 31, 2015, we had a total lease portfolio of 201 aircraft engines and related
equipment, 5 spare parts packages, 10 aircraft and various parts and other engine-related equipment with a net book
value of $1,109.2 million in our lease portfolio.
As of December 31, 2016, minimum future rentals under non-cancelable operating leases of these engines, parts
and aircraft assets were as follows:
Year
2017
2018
2019
2020
2021
Thereafter
(in thousands)
$ 89,119
57,192
43,979
33,482
16,930
23,466
$ 264,168
As of December 31, 2016, we had 80 lessees of commercial aircraft engines, aircraft, and other aircraft-related
equipment in 43 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 $32.5 million as of December 31, 2016.
On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation
(“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,
we made a $15.0 million initial capital contribution, representing our fifty percent, up-front funding contribution to the
new joint venture. The company acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast
growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. CASC
Willis owned a lease portfolio of 3 engines with a net book value of $49.1 million as of December 31, 2016. Our
investment in the joint venture is $12.9 million as of December 31, 2016. During 2016, CASC was reorganized, with
portions of its partnership interest in CASC Willis being transferred to three Chinese airlines and another government-
owned entity. The 2016 CASC reorganization resulted in no voting structure change to the joint venture.
AIRCRAFT LEASING
As of December 31, 2016, we owned and leased four Boeing 737 aircraft, four ATR72-202 turboprop, two
Embraer E-190LR, and one Bombardier Challenger aircraft with an aggregate net book value of $105.7 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
7
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.
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, 2016, spare parts inventory had a carrying value of $25.4
million.
WILLIS ASSET MANAGEMENT LIMITED
In 2016, Willis Asset Management Limited (“Willis Asset Management”), a newly formed Welsh subsidiary,
purchased the business and assets of TES, the consulting and asset management business of the TES Aviation Group.
Willis Asset Management is an asset management, technical services and consultancy business. Willis Asset
Management has 502 engines under management as of December 31, 2016.
OUR COMPETITIVE ADVANTAGES
We are uniquely positioned in the market and remain competitive, in part, due to the following advantages:
We have an entrepreneurial culture and our size and independent ownership structure gives us a unique
ability to move faster than our competition. We were founded in 1985 as a startup venture by our Chief
Executive Officer, Charles F. Willis, IV, and we continue to foster an entrepreneurial attitude among our
executives and employees. Unlike most other aircraft engine leasing companies, we are not tied to a
particular manufacturer and are not part of a larger corporate entity. As a result, we can react more nimbly
to customer demands and changes in the industry.
Our independent ownership allows us to meet our customer needs without regard to any potentially
conflicting affiliate demands to use their engines or services. Many of the aircraft engine leasing companies
with which we compete are owned in whole or part by aircraft engine manufacturers. As a result, these
leasing companies are inherently motivated to sell to customers the aircraft equipment that is manufactured
by their owners, regardless of whether that equipment best meets the needs of their customers. As an
independent public company we have the ability to work with customers to correctly identify their needs
and provide them with the engines, equipment and services that are best suited to those needs.
We have significant technical expertise and experience. Our 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
8
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 lease portfolio by customer, geography and engine type. As of December 31, 2016, we
had a total lease portfolio consisting of 208 engines and related equipment, 11 aircraft and 5 spare parts
packages with 80 lessees in 43 countries and an aggregate net book value of $1,136.6 million.
We have a diverse lease 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 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.
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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, 2016, 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 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
At December 31, 2016, approximately 86% 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 2016, 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,
2016, 2015 and 2014. The United States and China each accounted for more than 10% of our lease rent revenue in 2016.
No country accounted for more than 10% of our lease rent revenue in 2015. The United States accounted for more than
10
10% of our lease rent revenue in 2014. 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):
2016
Lease Rent
Revenue
Percentage
Years Ended December 31,
2015
Lease Rent
Revenue
(dollars in thousands)
Percentage
2014
Lease Rent
Revenue
Percentage
Europe
Asia
South America
United States
Mexico
Canada
Middle East
Africa
Total
$ 44,650
34,524
11,504
13,395
6,251
4,049
3,674
1,848
$ 119,895
37 % $ 43,703
31,569
29
9,688
10
9,177
11
6,886
5
2,828
3
2,223
3
1,972
2
100 % $ 108,046
41 % $ 37,850
21,658
29
9,907
9
11,880
8
7,771
6
4,958
3
4,143
2
3,264
2
100 % $ 101,431
37 %
21
10
12
8
5
4
3
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
and market demand with the expectation that we can lease or sell such engines in the future.
EMPLOYEES
As of December 31, 2016, we had 147 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 and
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, that 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;
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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;
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;
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 corresponding
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.
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Upon termination of a lease, we may be unable to enter into new leases or sell the engine or its parts 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 or part-out
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 or a buyer for our engines coming off-lease or for their associated parts. 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.
We are subject to the risks and costs of aircraft maintenance and obsolescence on the aircraft that we own.
We currently own and lease four Boeing 737 aircraft, four ATR72-202 turboprop, two E-190LR aircraft and
one Bombardier Challenger 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 above entitled “We are affected by the risks faced by commercial aircraft
operators and MROs because they are our customers”);
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 and aircraft leases, the lessee makes monthly maintenance reserve payments to us
based on the asset’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. Forty-nine of our leases comprising approximately 25.3% of the net book value of our on-lease assets at
December 31, 2016 do not provide for any monthly maintenance reserve payments to be made by lessees, and we can
give no assurance that future leases of our engines will require maintenance reserves. In some cases, including engine
and aircraft repossessions, we may decide to pay for refurbishments or repairs if the accumulated use fees are inadequate.
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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 aircraft and our ability to lease the engines and aircraft in a timely
manner following termination of the leases.
The value and income producing potential of an engine or aircraft depends 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 or aircraft to be available for service, all records, logs, licenses and
documentation relating to maintenance and operations of the engine or aircraft must be maintained in accordance with
governmental and manufacturer specifications.
Our leases make the lessees primarily responsible for maintaining the engines or aircraft, keeping related
records and complying with governmental directives and manufacturer requirements. Over time, certain lessees have
experienced, and may experience in the future, difficulties in meeting their maintenance and recordkeeping obligations
as specified by the terms of our leases.
Our ability to determine the condition of the engines or aircraft and whether the lessees are properly
maintaining our assets 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 or aircraft;
a repossession that would likely cause us to incur additional and potentially substantial expenditures in
restoring the engine or aircraft 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 or aircraft;
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 or aircraft.
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 though 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 or aircraft;
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;
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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, aircraft or engine or aircraft model;
the length of our operating leases; and
the timing of necessary overhauls of engines and aircraft.
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 and the appraised and resale value of
engines and may 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.
Certain lessees may be significantly delinquent in their rental payments and may default on their lease
obligations. As of December 31, 2016, we had an aggregate of approximately $3.6 million in lease rent and $2.4 million
in maintenance reserve payments more than 30 days past due. Our inability to collect receivables or to repossess engines,
aircraft or other leased equipment in the event of a default by a lessee could have a material adverse effect on us.
Following the September 11, 2001 terrorist attacks and the global recession that began in 2008, the commercial
aviation industry was negatively affected. The airline industry recovered in the years thereafter and has returned to
profitability with some carriers even posting record profits. 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.
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 that 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 allow these airlines to terminate leases early and to return our engines or aircraft without meeting
the contractual return conditions. 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 or aircraft, 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 or
aircraft 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 or aircraft and its records or, alternatively, to negotiate a settlement under which we can immediately
recover the engine or aircraft and its records in exchange for waiving subsequent legal claims.
We may not be able to repossess an engine or aircraft when the lessee defaults, and even if we are able to
repossess the engine or aircraft, we may have to expend significant funds in the repossession, remarketing and
leasing of the asset.
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 or aircraft. 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 or aircraft.
As a result, the relevant asset may be off-lease or not producing revenue for a prolonged period. In addition, we will
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incur direct costs associated with repossessing our engine or aircraft. These costs may include legal and similar costs, the
direct costs of transporting, storing and insuring the engine or aircraft, and costs associated with necessary maintenance
and recordkeeping to make the asset available for lease or sale. During this time, we will realize no revenue from the
leased engine or aircraft, and we will continue to be obligated to pay our debt financing for the asset. 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 or aircraft.
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 or aicraft. Consents needed in connection with future leasing or
sale of our engines or aircraft may not be received timely or have economically feasible terms. Any of these events could
adversely affect our ability to lease or sell engines or aircraft.
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
United Nations, 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.
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 combating corruption. For example, the U.S. Foreign
Corrupt Practices Act (the "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 similarly applicable 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 and aircraft are subject to general civil aviation authorities, including the FAA and the EASA,
who regulate the maintenance of engines and issue airworthiness directives. Airworthiness directives typically set forth
special maintenance actions or modifications to certain engine and aircraft types or series of specific engines that must be
implemented for the engine or aircraft to remain in service. Also, airworthiness directives may require the lessee to make
more frequent inspections of an engine, aircraft or particular engine parts. Each lessee of an engine or aircraft generally
is responsible for complying with all airworthiness directives. However, if the engine or aircraft is off lease, we may be
forced to bear the cost of compliance with such airworthiness directives, and if the engine or aircraft is leased, subject to
the terms of the lease, if any, we may be forced to share the cost of compliance.
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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 more stringent set of “Stage IV” standards for noise levels which apply to engines manufactured or certified from 2006
onward. At this time, the United States regulations do 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 and aircraft or reduce their value, could
limit our ability to lease or sell the non-compliant engines or aircraft or, if modifications are permitted, require us to
make significant additional investments in the engines or aircraft to make them compliant.
The United States and other jurisdictions are imposing 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 and aircraft.
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. 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.
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards
Update No. 2016-02, “Leases” (topic 842). The FASB issued this update to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018,
including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is evaluating
the impact of the adoption of this update on our consolidated financial statements and related disclosures.
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 lessees’ 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.
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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 insureds on liability insurance policies carried by our
lessees and are usually the loss payees for damage to our engines and aircraft. We have not experienced any significant
aviation-related claims or any product liability claims related to our engines, aircraft 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 and aircraft is dependent, in part, on the appraised
value of our engines and aircraft. If the appraised value of our engines and aircraft 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 fund our continued growth.
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
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 tests. Our revolving credit facility prohibits our declaring or
paying dividends on shares of any class or series of our common or preferred stock if an event of default under such
facility 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 waivers and amendments to our financing agreements in the past, but we cannot
provide any assurance that we will receive such waivers or amendments 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
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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 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 0.77% and 0.43% on December 31, 2016 and December 31, 2015, respectively.
An increase in interest rates or in our borrowing margin would increase the cost of servicing our debt and
could reduce our profitability.
A significant portion of our outstanding debt bears interest at floating rates. As a result, to the extent we have
not hedged against rising interest rates, an increase in the applicable benchmark interest rates would increase our cost of
servicing our debt and could materially adversely affect our results of operations, financial condition, liquidity and cash
flows.
In addition, we regularly refinance our indebtedness. If interest rates or our borrowing margins increase
between the time an existing financing arrangement was consummated and the time such financing arrangement is
refinanced, the cost of servicing our debt would increase and our results of operations, financial condition, liquidity and
cash flows could be materially adversely affected.
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
and aircraft 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 and aircraft 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 and aircraft 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
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“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.”
NUMEROUS FACTORS MAY AFFECT THE TRADING PRICE OF OUR COMMON STOCK
The trading price of our common stock may fluctuate due to many factors, including:
risks relating to our business described in this Annual Report;
sales of our securities by a few stockholders or even a single significant stockholder;
general economic conditions;
changes in accounting mandated under GAAP;
quarterly variations in our operating results;
our financial condition, performance and prospects;
changes in financial estimates by us;
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, 2016, 89% 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.
A substantial portion of 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.
A substantial portion 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
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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.
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 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 or aircraft could exceed the value of such assets, which could negatively affect our ability
to repossess, lease or sell a particular engine or aircraft.
Liens that secure the payment of repairers’ charges or other liens may, depending on the jurisdiction, attach to
engines and aircaft. 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 or aircraft 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 or aircraft. Such liens may have priority over
our interest as well as our creditors’ interest in the engines or aircraft, 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 or aircraft. We cannot give
assurance that our lessees will comply with their obligations to discharge third-party liens on our assets. If they do not,
we may, in the future, find it necessary to pay the claims secured by such liens to repossess such assets.
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 and aircraft 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.
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Our primary competitors generally have significantly greater financial, personnel and other resources, as well as
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 or the aircraft we purchase. Typically, we purchase engines
and aircraft 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 and aircraft. The
market for purchasing engine and aircraft portfolios is highly competitive, generally involving an auction bidding
process. We can give no assurance that engines and aircraft will continue to be available to us on acceptable terms and in
the types and quantities we seek consistent with the diversification requirements of our debt facilities and our portfolio
diversification goals.
Substantially all of our assets are pledged to our creditors.
Substantially all of our assets are pledged to secure our obligations to creditors. Our revolving credit banks have
a lien on all of our assets, including our equity in WEST II. Due to WEST II’s bankruptcy remote structure, that equity is
subject to the prior payments of WEST II’s debt and other obligations. Therefore, our rights and the rights of our
creditors to participate in any distribution of the assets of WEST II upon its liquidation, reorganization, dissolution or
winding up will be subject to the prior claims of WEST II’s creditors. Similarly, the rights of our shareholders are subject
to satisfaction of the claims of our lenders and other creditors.
We may be unable to manage the expansion of our operations.
We can give no assurance that we will be able to manage effectively the 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.
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Compliance with the regulatory requirements imposed on us as a public company results in significant costs
that may 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 such 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 have complied with Section 404b of the Sarbanes-Oxley Act
as of December 31, 2009, and our independent registered public accounting firm audits our internal controls over
financial reporting. Such compliance requires us to incur additional costs on audit and consulting fees and requires
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, 2016, 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 2,744,219 shares of our
common stock, representing approximately 43% 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 our board of directors. In addition, future sales by Mr. Willis of substantial
amounts of our common stock, or the potential for such sales, could adversely affect the prevailing market price of our
common stock.
Our business might suffer if we were to lose the services of certain key employees.
Our business operations depend upon our key employees, including our executive officers. Loss of any of these
employees, particularly our Chief Executive Officer, could have a material adverse effect on our business as our key
employees have knowledge of our industry and customers and would be difficult to replace.
We are the servicer and administrative agent for the WEST II facility and our cash flows would be materially
and adversely affected if we were removed from these positions.
We are the servicer and administrative agent with respect to engines in the WEST II facility. We receive
monthly fees of 11.5% as servicer and 2.0% as administrative agent of the aggregate net rents actually received by
WEST II on its engines. We may be removed as servicer and administrative agent by the affirmative vote of a requisite
number of holders of the 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
23
As of December 31, 2016, 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 lease 30,000 square feet of office
and warehouse space in Bridgend, Wales, UK. We also lease facilities for sales and operations in London, UK;
Shanghai, China; Singapore; Blagnac, France; and Dublin, Ireland.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year 2016.
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, 2017 there were approximately 3,004 shareholders of our Common Stock.
24
The high and low closing sales price of the Common Stock for each quarter of 2016 and 2015, as reported by
NASDAQ, are set forth below:
High
2016
Low
High
2015
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
22.18 $
17.55 $ 21.62 $ 17.96
25.40
21.47
19.27
18.20
27.41
22.13
18.50
15.21
27.23
23.54
20.27
15.18
During the years ended December 31, 2016 and 2015, 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.
Plan Category
Plans Not Approved by Shareholders:
None
Plans Approved by Shareholders:
Employee Stock Purchase Plan
2007 Stock Incentive Plan
Total
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)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a)
(c)
n/a
—
—
—
n/a
n/a
n/a
n/a
n/a
8,898
555,388
564,286
The 2007 Stock Incentive Plan was approved by shareholders. The 2007 Stock Incentive Plan authorized
2,000,000 shares of common stock. On May 28, 2015, the Company’s shareholders authorized an increase in the number
of shares of Common Stock available for grant by 800,000 shares bringing the total to 2,800,000 shares authorized.
2,400,357 shares of restricted stock were granted under the 2007 Stock Incentive Plan by December 31, 2016. Of this
amount, 155,745 shares of restricted stock were cancelled and returned to the pool of shares which could be granted
under the 2007 Stock Incentive Plan resulting in a net number of 555,388 shares which were available as of December
31, 2016 for future issuance under the 2007 Stock 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 Board of Directors reaffirmed the repurchase plan
on April 21, 2015. The repurchased shares are to be subsequently retired. During 2016, the Company repurchased
1,212,230 shares totaling $29.0 million under our authorized plan. As of December 31, 2016, the total number of
common shares outstanding was approximately 6.4 million.
25
Common stock repurchases, under our authorized plan, in the quarter ended December 31, 2016 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
82 $
32
40
154 $
25.52
26.47
25.46
25.70
82 $
32
40
154 $
34,735
33,884
32,886
32,886
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.
2016
Years Ended December 31,
2014
(dollars in thousands, except per share data)
2013
2015
2012
Revenue:
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
$
119,895 $
57,091
17,783
3,482
9,023
207,274 $
$
108,046 $
53,396
25,582
8,320
2,718
198,062 $
101,431 $
53,322
8,917
5,882
4,506
174,058 $
101,737 $
46,694
—
5,675
4,306
158,412 $
94,591
41,387
—
5,499
6,613
148,090
Net income
$
14,069 $
6,460 $
7,180 $
15,626 $
1,535
Net income (loss) attributable to common shareholders $
13,780 $
6,460 $
7,180 $
15,626 $
(3,793)
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
Aircraft at end of the period
Spare parts packages at the end of the period
$
$
2.10 $
2.05 $
0.83 $
0.81 $
0.91 $
0.88 $
1.95 $
1.89 $
(0.45)
(0.45)
$ 1,337,887 $ 1,294,285 $ 1,245,841 $ 1,199,229 $ 1,078,715
696,988
$
199,163
$
787,614 $
212,459 $
900,255 $
196,260 $
825,498 $
216,648 $
866,089 $
209,223 $
208
11
5
201
10
5
207
5
5
202
4
5
184
7
4
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
26
similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current
expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including,
among others: the effects on the airline industry and the global economy of events such as terrorist activity, changes in
oil prices and other disruptions to the world markets; trends in the airline industry, including growth rates of markets and
other economic factors; risks associated with owning and leasing jet engines and aircraft; our ability to successfully
negotiate equipment purchases, sales and leases, to collect outstanding amounts due and to control costs and expenses;
changes in interest rates and availability of capital, our ability to continue to meet the changing customer demands;
regulatory changes affecting airline operations, aircraft maintenance, accounting standards and taxes; 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.
Explanatory Note: Certain 2015 and 2014 amounts include adjustments to prior periods see "Note 1. Summary
of Significant Accounting Policies (c) Correction of Immaterial Errors - Consolidated Financial Statements" for further
disclosure.
General. Our core business is acquiring and leasing commercial aircraft engines and related aircraft equipment
pursuant to operating leases, and the selective sale of such engines, all of which we sometimes refer to as “equipment.”
As of December 31, 2015, all of our leases were operating leases. As of December 31, 2016, we had 80 lessees in 43
countries. Our portfolio is continually changing due to acquisitions and sales. As of December 31, 2016, our lease
portfolio consisted of 208 engines and related equipment, 11 aircraft and 5 spare engine parts packages with an aggregate
net book value of $1,136.6 million. As of December 31, 2016, we also managed 542engines and related equipment on
behalf of other parties.
In 2016, we purchased, through our wholly owned subsidiary Willis Asset Management Limited (“Willis Asset
Management”), the business and assets of Total Engine Support Limited (“TES”). TES has been the engine management
and consulting business of the TES Aviation Group.
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 June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation
(“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,
we made a $15.0 million initial capital contribution, representing our fifty percent, up-front funding contribution to the
new joint venture. The company acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast
growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. CASC
Willis owned a lease portfolio of 3 engines with a net book value of $49.1 million as of December 31, 2016. Our
investment in the joint venture is $12.9 million as of December 31, 2016. During 2016, CASC was reorganized, with
portions of its partnership interest in CASC Willis being transferred to three Chinese airlines and another government-
owned entity. The 2016 CASC reorganization resulted in no voting structure change to the joint venture.
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 30 engines with a net book value of $268.0 million at December 31, 2016.
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,
27
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, 2016 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.
We generally depreciate engines on a straight-line basis over 15 years to a 55% residual value. Aircraft are
generally depreciated on a straight-line basis over 13-20 years to a 15%-17% residual value. Spare parts packages are
generally depreciated on a straight-line basis over 14-15 years to a 25% residual value. Major overhauls paid for by us,
which improve functionality or extend the original useful life, are capitalized and depreciated over the shorter of the
estimated period to the next overhaul (“deferral method”) or the remaining useful life of the equipment. We do not
accrue for planned major maintenance. For equipment which is unlikely to be repaired at the end of its current expected
life, and is likely to be disassembled upon lease termination, we depreciate the equipment over its estimated life to a
residual value based on an estimate of the wholesale value of the parts after disassembly. As of December 31, 2016, 56
engines and 6 aircraft having a net book value of $126.1 million were depreciated under this policy with estimated useful
lives ranging from 1 to 124 months.
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.
On a quarterly basis, management monitors the lease portfolio for events which may indicate that a particular
asset may need to be evaluated for potential impairment. These events may include a decision to part-out or sell an asset,
knowledge of specific damage to an asset, or supply/ demand events which may impact the Company’s ability to lease an
asset in the future. On an annual basis, even absent any such ‘triggering event’, we evaluate the carrying value of all
assets in our lease portfolio to determine if any impairment exists, by performing an undiscounted cash flow test for each
asset.
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. When evaluating for impairment, we group assets at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In our
28
portfolio, this is at the individual asset level (e.g., engine or aircraft), as each asset generates its own stream of cash
flows, including lease rents, maintenance reserves and repair costs.
We must make assumptions which underlie the most significant and subjective estimates in determining
whether any impairment exists. Those estimates, and the underlying assumptions, are as follows:
Fair value – we determine fair value by reference to independent appraisals, quoted market prices (e.g., an
offer to purchase) and other factors. We rely on leading accredited third-party appraisers for independent
appraisals of current fair value. These appraisers are engine/ aircraft experts and rely on current data from
airlines, engine manufacturers and Maintenance, Repair and Overhaul (“MRO”) providers as well as
specific market sales and repair cost data in generating their appraisals.
Future cash flows – when evaluating the future cash flows that an asset will generate, we make assumptions
regarding the lease market for specific engine models, including estimates of market lease rates and future
demand. These assumptions are based upon lease rates that we are obtaining in the current market as well
as our expectation of future demand for the specific engine/ aircraft model.
If the undiscounted forecasted cash flows and fair value of our long-lived assets decrease in the future we may
incur impairment charges.
Management continuously monitors the aviation industry and evaluates any trends, events or uncertainties
involving airlines, individual aircraft and engine models, as well as the engine leasing and sale market which would
materially affect the methodology or assumptions employed by WLFC. We do not consider there to be any trends, events
or uncertainties that currently exist or that are reasonably likely to occur that would materially affect our methodology or
assumptions. However, should any arise, we will adjust our methodology and our disclosure accordingly.
Spare parts inventory is stated at lower of cost or net realizable value. An impairment charge for excess or
inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usage patterns,
future sales expectations and salvage value.
Accounting for Maintenance Expenditures and Maintenance Reserves. Use fees received are recognized in
revenue as maintenance reserve revenue if they are not reimbursable to the lessee. Use fees that are reimbursable are
recorded as a maintenance reserve liability until they are reimbursed to the lessee 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.
Accounting for Maintenance Rights. We identify, measure and account for maintenance right assets and
liabilities associated with acquisitions of equipment with in-place leases. A maintenance right asset represents the fair
value of the contractual right under a lease to receive equipment in an improved maintenance condition as compared to
the maintenance condition on the acquisition date. A maintenance right liability represents the Company's obligation to
pay the lessee for the difference between the lease-end contractual maintenance condition of the equipment and the
actual maintenance condition of the equipment on the acquisition date. The equipment condition at the end of the lease
term may result in either overhaul work being performed by the lessee to meet the required return condition or a financial
settlement.
When a capital event is performed on the equipment by the lessee, which satisfies their maintenance right
obligation, the maintenance rights are added to the equipment basis and depreciated to the next capital event. When
equipment is sold before the end of the pre-existing lease, the maintenance rights are applied against any accumulated
maintenance reserves, if paid by the lessee, and the remaining balance is applied to the disposition gain or loss. When a
lease terminates, an end of lease true-up is performed and the maintenance right is applied against the accumulated
maintenance reserves or, for non-reserve lessees the final settlement payment, and any remaining net maintenance right
is recorded in the income statement.
29
YEAR ENDED DECEMBER 31, 2016 COMPARED TO THE YEAR ENDED DECEMBER 31, 2015
Revenue is summarized as follows:
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
Years Ended December 31,
2016
2015
Amount
%
Amount
%
$ 119,895
57,091
17,783
3,482
9,023
$ 207,274
(dollars in thousands)
57.8 % $ 108,046
53,396
27.5 %
25,582
8.6 %
8,320
1.7 %
2,718
4.4 %
100.0 % $ 198,062
54.6 %
27.0 %
12.9 %
4.2 %
1.4 %
100.0 %
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2016 increased by 11.0% over the
comparable period in 2015. This increase primarily reflects a higher average portfolio utilization in the current period,
which translated into a higher percentage of lease rent revenue earning assets. The aggregate net book value of
equipment held for lease at December 31, 2016 and 2015, was $1,136.6 million and $1,109.2 million, respectively, an
increase of 2.5%. 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, 2016 and 2015, approximately 93% and 90%, respectively, of equipment
by net book value was on-lease. The average utilization for the year ended December 31, 2016 was 90% compared to
87% in the prior year. During the year ended December 31, 2016, 20 engines and 1 aircraft were added to our lease
portfolio at a total cost of $153.1 million (including capitalized costs). During the year ended December 31, 2015, 12
engines and 6 aircraft were added to our lease portfolio at a total cost of $172.7 million (including capitalized costs).
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2016
increased 6.9% to $57.1 million from $53.4 million for the comparable period in 2015. The increase was due to both
higher utilization, driving a $5.7 million increase in short term maintenance revenues partially offset by $2.0 million of
lower maintenance reserve revenues related to a lower termination of long term leases in the year ended December 31,
2016 than in the year ago period.
Spare Parts and Equipment Sales. Spare parts and equipment sales for the year ended December 31, 2016 was
$17.8 million compared to $25.6 million in 2015. Equipment sales of $3.3 million were for the sale of three airframes
during the year ended December 31, 2016. Equipment sales were $10.0 million for the sale of two airframe, one engine
and related equipment for the year ended December 31, 2015. Spare parts sales for the year ended December 31, 2016
were $14.5 million compared to $15.6 million in the comparable period in 2015.
Gain on Sale of Leased Equipment. During the year ended December 31, 2016, we sold 7 engines and various
engine-related equipment from the lease portfolio for a net gain of $3.5 million. During the year ended December 31,
2015, we sold 8 engines and various engine-related equipment from the lease portfolio for a net gain of $8.3 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 $6.3 million from the prior year
primarily due to recognizing revenue of $4.0 million of security payments for aircraft upon default of a lessee and $0.6
million foreign subsidy recognized in the period. The foreign subsidy was received from the People’s Republic of China
resulting from our China subsidiary operating in the Shanghai free trade zone.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $3.1 million or 4.5%
to $66.3 million for the year ended December 31, 2016, from the comparable period in 2015 primarily due to changes in
portfolio mix associated with our ongoing portfolio management efforts.
Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales for the year ended December
31, 2016 was $13.3 million a decrease of 25.5% from the comparable period in 2015. Cost of equipment sales was $2.4
million and $5.7 million in the year ended December 31, 2016 and 2015, respectively. Cost of spare parts sales for the
30
year ended December 31, 2016 were $10.7 million compared to $12.1 million in the comparable period in 2015. Gross
margin on spare parts sales for 2016 was 24.6% compared to 22.4% for 2015 primarily due to a change in the mix of
parts sold in 2016.
Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $9.5 million for the
year ended December 31, 2016, an increase of $0.3 million from the $9.2 million recorded in the comparable period in
2015. A writedown of $5.5 million was recorded due to the adjustment of the carrying value for six impaired engines and
one impaired aircraft within the portfolio to reflect estimated market value. A further write-down of equipment totaling
$2.0 million was recorded in the year ended December 31, 2016 due to a management decision to consign one engine for
part-out and sale, in which the asset’s net book value exceeded the estimated proceeds. An additional writedown of $2.0
million was recorded in year ended December 31, 2016 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 equipment totaling $9.2 million was recorded in the year ended December 31, 2015. This
amount includes a write-down of equipment totaling $5.5 million due to a management decision to consign four 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 $0.6 million for the year ended December 31, 2015 due to an
adjustment of carrying values for certain impaired parts packages within the portfolio to reflect estimated market values.
A further write-down of $2.8 million was recorded in the year ended December 31, 2015 to adjust the carrying value of
engine parts for which market conditions for the sale of parts has changed. An additional write-down of $0.3 million
was recorded in the year ended December 31, 2015 based on a comparison of the inventory values with the revised net
proceeds expected from part sales.
General and Administrative Expenses. General and administrative expenses increased 11.8% to $47.8 million
for the year ended December 31, 2016, from the comparable period in 2015 due primarily to increases in contingency
bonus ($3.1 million) resulting from improved operating results (pre-tax earnings and utilization) as well as increases in
salary expense ($1.4 million) from increased headcount, and higher legal expenses ($1.0 million).
Technical Expense. Technical expenses consist of the cost of engine repairs, engine thrust rental fees,
outsourced technical support services, sublease engine rental expense, engine storage and freight costs. These expenses
decreased 25.6% to $7.0 million for the year ended December 31, 2016, from the comparable period in 2015 due
primarily to a decrease in engine maintenance costs due to reduced engine shop visits ($1.4 million) lower engine thrust
rental fees ($0.7 million), and lower engine technical services expense ($0.3 million) due to decreased engine returns.
Net Finance Costs. Net finance costs include interest expense and gain on debt extinguishment. Net finance
costs increased 9.0% to $41.3 million for 2016, from the comparable period in 2015, due primarily to higher average
debt balances in the current period compared to the year ago period and the recording of a gain on debt extinguishment
of $1.2 million in the prior year period. The average notes payable balances for the years ended December 31, 2016 and
2015 were $892.4 million and $858.2 million, respectively, an increase of 4.0%. As of December 31, 2016, $619.7
million of our debt is tied to one-month U.S. dollar LIBOR which increased from an average of 0.21% for 2015 to an
average of 0.45% for 2016 (average of month-end rates). At December 31, 2016 and 2015, one-month LIBOR was
0.77% and 0.43%, respectively.
To mitigate exposure to interest rate changes, we periodically enter into interest rate swap agreements. As of
December 31, 2016, such swap agreement had a notional outstanding amount of $100.0 million, with a remaining term
of 52 months. No interest rate swap agreements existed during the year ended December 31, 2015.
Income Taxes. Income tax expense for the year ended December 31, 2016, increased to $9.9 million from $6.3
million for the comparable period in 2015. The effective tax rate for the years ended December 31, 2016 and December
31, 2015 were 41.2% and 49.4%, respectively. This decrease was due to lower forecasted permanent non-deductible
expenses for executive compensation (IRS code 162(m) calculation) and changes in the proportions of revenue generated
within and outside of California during the year ended December 31, 2016.
31
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, 2015 COMPARED TO THE YEAR ENDED DECEMBER 31, 2014
Revenue is summarized as follows:
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
Years Ended December 31,
2015
2014
Amount
%
Amount
%
$ 108,046
53,396
25,582
8,320
2,718
$ 198,062
(dollars in thousands)
54.6 % $ 101,431
53,322
27.0 %
8,917
12.9 %
5,882
4.2 %
4,506
1.4 %
100.0 % $ 174,058
58.3 %
30.6 %
5.1 %
3.4 %
2.6 %
100.0 %
Lease Rent Revenue. Our lease rent revenue for the year ended December 31, 2015 increased by 6.5% over the
comparable period in 2014. 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, 2015 and 2014, was $1,109.2 million and
$1,066.4 million, respectively, an increase of 4.0%. Portfolio utilization is defined as the net book value of on-lease
assets as a percentage of the net book value of total lease assets. As of December 31, 2015 and 2014, approximately 90%
and 79%, respectively, of equipment by net book value was on-lease. The average utilization for the year ended
December 31, 2014 was 87% compared to 83% in the prior year. During the year ended December 31, 2015, 12 engines
and 6 aircraft were added to our lease portfolio at a total cost of $172.7 million (including capitalized costs). 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).
Maintenance Reserve Revenue. Our maintenance reserve revenue for the year ended December 31, 2015
increased 0.1% to $53.4 million from $53.3 million for the comparable period in 2014. The increase was due to higher
maintenance reserves billed reflecting increased usage of engines under lease resulting from higher portfolio utilization
in 2015 compared to 2014.
Spare Parts and Equipment Sales. Spare parts and equipment sales for the year ended December 31, 2015 was
$25.6 million compared to $8.9 million in 2014. The increase was due to the sale of two airframes and other related
equipment in the current period related to recent aircraft purchases as well as growth in spare parts sales due to an
increase in inventory acquisitions in late 2014 at Willis Aero.
Gain on Sale of Leased Equipment. During the year ended December 31, 2015, we sold 8 engines and sold
various engine-related equipment from the lease portfolio for a net gain of $8.3 million. 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 $5.9 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 decreased $1.8 million from the prior year
primarily due to a decrease in fees earned related to engines managed on behalf of third parties and lower commissions
on third party spare parts sales.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $4.1 million or 6.3%
to $69.4 million for the year ended December 31, 2015, from the comparable period in 2014 due to growth in the lease
portfolio and changes in estimates of useful lives and residual values on certain older engine types.
32
Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales for the year ended December
31, 2015 was $17.8 million an increase of 138.8% from the comparable period in 2014. Gross margin on spare parts
sales for 2015 was 22.4% compared to 16.2% for 2014 primarily due to a change in the mix of parts sold in 2015. Cost
of equipment sales increased to $5.7 million in 2015 from Nil in 2014 due to the sale two airframes and other related
equipment in 2015 related to recent aircraft purchases.
Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $9.2 million for the
year ended December 31, 2015, an increase of $3.6 million from the $5.6 million recorded in the comparable period in
2014. A write-down of equipment totaling $5.5 million was recorded in the year ended December 31, 2015 due to a
management decision to consign four 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 $0.6
million for the year ended December 31, 2015 due to an adjustment of carrying values for certain impaired parts
packages within the portfolio to reflect estimated market values. A further write-down of $2.8 million was recorded in
the year ended December 31, 2015 to adjust the carrying value of engine parts for which market conditions for the sale of
parts has changed. An additional write-down of $0.3 million was recorded in the year ended December 31, 2015 based
on a comparison of the inventory values with the revised net proceeds expected from part sales.
A write-down of equipment totaling $5.6 million was recorded in the year ended December 31, 2014. This
amount includes a write-down of equipment totaling $2.6 million 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.
General and Administrative Expenses. General and administrative expenses increased 19.2% to $42.7 million
for the year ended December 31, 2015, from the comparable period in 2014 due primarily to increases in contingency
bonus ($2.5 million) resulting from improved operating results (pre-tax earnings and utilization) as well as increases in
salary expense ($1.6 million), corporate aircraft expense ($1.4 million), bad debt expense ($0.7 million), stock based
compensation ($0.6 million) and other selling expenses ($0.5 million), which was partially offset by lower legal
expenses ($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
decreased 23.8% to $9.4 million for the year ended December 31, 2015, from the comparable period in 2014 due
primarily to a decrease in engine maintenance costs due to lower engine repair activity ($3.6 million) and decreased
engine storage fees ($0.2 million), which was partially offset by higher thrust rental fees due to an increase in the number
of engines operated at higher thrust levels under the CFM thrust rental program ($0.5 million) and increased third party
technical service fees ($0.3 million).
Net Finance Costs. Net finance costs include interest expense and gain on debt extinguishment. Net finance
costs increased 2.2% to $37.9 million for 2015, from the comparable period in 2014, due primarily to higher average
debt balances in the current period compared to the year ago period partially offset by the recording of a gain on debt
extinguishment of $1.2 million in the current period. The average notes payable balances for the years ended December
31, 2015 and 2014 were $878.7 million and $769.2 million, respectively, an increase of 14.2%. As of December 31,
2015, $562.1 million of our debt is tied to one-month U.S. dollar LIBOR which increased from an average of 0.16% for
2014 to an average of 0.21% for 2015 (average of month-end rates). At December 31, 2015 and 2014, one-month
LIBOR was 0.43% and 0.17%, respectively. To mitigate exposure to interest rate changes, we periodically enter into
interest rate swap agreements. Our previous interest rate swap agreements matured in November 2013. For 2014,
interest expense was reduced by $0.5 million resulting from interest rate swaps.
Income Taxes. Income tax expense for the year ended December 31, 2015, increased to $6.3 million from $4.6
million for the comparable period in 2014. The effective tax rate for the years ended December 31, 2015 and December
33
31, 2014 were 49.4% and 38.8%, respectively. This increase was primarily due to the impact of state and foreign taxes
and the IRS code 162(m) calculation for executive compensation during the year ended December 31, 2015. 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 January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which
eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure
goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by
comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual
and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a
prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January
1, 2017. The Company is currently evaluating the impact of adopting this guidance.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires amounts generally
described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling
the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-08 is effective
for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a retrospective
transition method to each period presented. The Company is currently evaluating the impact of adopting this guidance.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of
accounting for share-based compensation arrangements, including the income tax impact, classification on the statement
of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016, and early adoption is permitted. Althrough early adoption is permitted, we will
adopt these provisions prospectively in the first quarter of fiscal 2017. These changes will impact our tax provision, cash
flows from operating activities and cash flows from financing activities. We will continue to estimate forfeitures each
period, so there will be no change associated with forfeitures. Excess tax benefits and deficiencies are heavily impacted
by factors outside of our control such as the number of stock options exercised and the market price of our stock.
In February 2016, the FASB issued ASU 2016-02, Leases (topic 842). The FASB issued this update to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods
beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is
permitted. The Company is evaluating the impact of the adoption of this update on our consolidated financial statements
and related disclosures.
In July 2015, the FASB issued ASU 2015-11 ,Simplifying the Measurement of Inventory, which simplifies the
measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2017 and for interim periods therein.
We are evaluating the impact that this new guidance will have on our consolidated financial position.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes
previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration the company expects to receive in
exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance
currently in effect, including estimating the amount of variable revenue to recognize over each identified performance
obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount
and timing of revenue and cash flows arising from contracts. In July 2016, the FASB deferred the effective date for
annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods).
34
Early adoption is permitted to the original effective date of periods beginning after December 15, 2017 (including
interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period
presented or retrospectively with the cumulative effect recognized as of the date of initial application. While we have not
completed our assessment of the new revenue recognition standard, we currently expect that this new standard will 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
$149.0 million, $192.7 million and $154.4 million, in the years ended December 31, 2016, 2015, and 2014, respectively,
was derived from this borrowing activity. Also in 2016 we generated $19.8 million of cash from the sale of preferred
stock. In these same time periods $114.0 million, $153.8 million and $101.1 million, respectively, was used to pay down
related debt. Cash flow from operating activities generated $100.9 million, $107.4 million and $62.8 million in the years
ended December 31, 2016, 2015, and 2014, respectively.
At December 31, 2016, $4.6 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 $173.7 million, $174.8 million and $119.0 million for the years ended December 31, 2016,
2015, and 2014, respectively.
During 2016, we made $0.6 million of capital contributions to our investment in WMES and received $1.3
million in distributions. During 2015, we made additional capital contributions of $2.6 million to our investment in
WMES.
On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation
(“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,
we made a $15.0 million initial capital contribution, representing our fifty percent, up-front funding contribution to the
new joint venture. The company acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast
growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. CASC
Willis owned a lease portfolio of 3 engines with a net book value of $49.1 million as of December 31, 2016. Our
investment in the joint venture is $12.9 million as of December 31, 2016. During 2016, CASC was reorganized, with
portions of its partnership interest in CASC Willis being transferred to three Chinese airlines and another government-
owned entity. The 2016 CASC reorganization resulted in no voting structure change to the joint venture.
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 93% and 90%, by book value, of our assets were on-lease as of
December 31, 2016 and December 31, 2015, respectively. The average utilization rate for the year ended December 31,
2016 was 90% compared to 87% 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, 2016, notes payable consists of loans totaling $900.3 million payable over periods of
approximately 1.0 years to 7.5 years with interest rates varying between approximately 2.6% and 5.5%. Substantially all
of our assets are pledged to secure our obligations to creditors. For further information on our debt instruments, see the
"Notes Payable" Note 4 in Part II, Item 8 of this Form 10-K.
35
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, 2016, 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 4.25 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, 2016, we are in compliance with the covenants specified in the WEST II indenture and servicing
agreement.
Approximately $23.6 million of our debt is repayable during 2017. 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, 2016:
Payment due by period (in thousands)
Long-term debt obligations
Interest payments under long-term debt obligations
Operating lease obligations
Total
$
Total
913,703 $
130,571
2,939
1-3 Years
Less than
1 Year
56,725 $ 654,298 $ 179,056
23,624 $
7,406
21,876
62,189
39,100
—
1,628
—
1,311
64,352 $ 120,225 $ 676,174 $ 186,462
More than
5 Years
3-5 Years
$ 1,047,213 $
We have estimated the interest payments due under long-term debt by applying the interest rates applicable at
December 31, 2016 to the remaining debt, adjusted for the estimated debt repayments identified in the table above.
Actual interest payments made will vary due to changes in the rates for one-month LIBOR.
The following table lists our properties and their remaining lease commitments:
Location
Novato, California
Boynton Beach, Florida
San Diego, California
Bridgend, Wales, United Kingdom
Singapore
Shanghai, China
Shanghai, China
Dublin, Ireland
London, United Kingdom
Blagnac, France
Total
Property Type
Principal Office
Warehouse and office
Warehouse and office
Warehouse and office
Office
Office
Warehouse
Office
Office
Office
Lease
Expiration
09/30/18
10/29/19
10/31/19
10/31/17
12/31/17
12/31/17
07/31/17
05/15/17
11/18/18
12/31/17
$
$
Remaining Lease
Commitment
(in thousands)
932
822
481
368
102
86
4
12
116
16
2,939
We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our
level of operations through 2017. A decline in the level of internally generated funds could result if the amount of
36
equipment off-lease increases or there is a decrease in availability under our existing debt facilities or there is a
significant step-up in borrowing costs, would impair our ability to sustain our level of operations. We continue to discuss
additions to our capital base with our commercial and investment banks. 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, 2016, $619.7 million of our borrowings were on a variable rate basis at various interest rates
tied to one-month LIBOR. Our equipment leases are generally structured at fixed rental rates for specified terms.
Increases in interest rates could narrow or result in a negative spread, between the rental revenue we realize under our
leases and the interest rate that we pay under our borrowings. We have entered into interest rate derivative instruments to
mitigate our exposure to interest rate risk and not to speculate or trade in these derivative products. During 2016, we
entered into one interest rate swap agreement which has notional outstanding amount of $100.0 million, with remaining
term of 52 months. The fair value of the swap at December 31, 2016 was $68,000 representing a net asset for us.
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 increased (decreased) interest expense by $25,000 , Nil, and ($0.5 million) for the
years ended December 31, 2016, December 31, 2015 and December 31, 2014, 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
Stock Buybacks
On April 1, 2016, in a transaction approved by a Special Committee of the Board of Directors, the Company
purchased 60,000 shares of its common stock directly from the Company’s Chief Executive Officer, Charles F. Willis.
The purchase price was $20.59 per share, the closing price of the Company’s common stock as of March 31, 2016.
On December 8, 2016, in a transaction approved by a Special Committee of the Board of Directors, the
Company purchased 40,000 shares of its common stock directly from the Company’s Chief Executive Officer, Charles
F. Willis. The purchase price was $24.95 per share, a 2% discount to the closing price of the Company’s common stock
as of December 8, 2016 of $25.46.
WMES
“Other revenue” on the Consolidated Statement of Income includes management fees earned of $2.1 million,
$1.7 million and $2.0 million during the years ended December 31, 2016, 2015 and 2014, respectively, related to the
servicing of engines for the WMES lease portfolio.
37
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, 2016, $619.7 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 $5.2 million (in 2015, $5.6 million).
We hedge 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. Based on the implied forward
rates for one-month LIBOR, we expect interest expense will be increased by approximately $0.7 million for the year
ending December 31, 2017 as a result of our hedges. Such hedging activities may limit our ability to participate in the
benefits of any decrease in interest rates, but may also protect us from increases in interest rates. Furthermore, since lease
rates tend to vary with interest rate levels, it is possible that we can adjust lease rates for the effect of change in interest
rates at the termination of leases. Other financial assets and liabilities are at fixed rates.
We are also exposed to currency devaluation risk. During the years ended December 31, 2016, 2015, and 2014,
respectively, 89%, 92% 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 45.
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.
38
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,
2016. 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 (2013). Based on this assessment our
management believes that, as of December 31, 2016, 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 48.
(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, 2016 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We have adopted a Standards of Ethical Conduct Policy (the “Code of Ethics”) that applies to all employees and
directors including our Chief Executive Officer, President, 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.
39
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
Tax fees
Total
$
$
2016
1,417,100
38,051
1,455,151
$
$
2015
1,228,632
43,640
1,272,272
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 46.
(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 81.
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.
40
Exhibit
Number
EXHIBITS
Description
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*
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, (3) Amendment to Bylaws, dated September
28, 2010, (4) Amendment to Bylaws, dated August 5, 2013 (incorporated by reference to Exhibit 3.1
to our report on Form 8-K filed on August 9, 2013), and (5) Amendment to Bylaws, dated October 7,
2016 (incorporated by reference to Exhibit 10.1 to our report on Form 8-K filed on October 18, 2016).
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 our report on 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 our report on 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).
Amended and Restated 2007 Stock Incentive Plan (incorporated by reference to the Registrant’s
Proxy Statement for 2015 Annual Meeting of Stockholders filed on April 28, 2015).
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 our report on 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 Scott B. Flaherty dated May 20, 2016
(incorporated by reference to Exhibit 10.1 to our report on Form 8-K filed on May 25, 2016).
Employment Agreement between the Registrant and Dean M. Poulakidas dated March 31, 2013
(incorporated by reference to Exhibit 10.23 to our report on Form 8-K filed on June 19, 2013).
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,
41
each of the additional grantors referred to therein and from time to time made a party thereto and
Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 10.15 to
our report on Form 10-Q filed on November 9, 2012).
Note Purchase Agreement dated as of September 6, 2012 by and among Willis Engine Securitization
Trust II, the Registrant, Credit Agricole Securities (USA) Inc. and Goldman, Sachs & Co. (incorporated
by reference to Exhibit 10.16 to our report on Form 10-Q filed on November 9, 2012).
Servicing Agreement dated as of September 17, 2012 between Willis Engine Securitization Trust II,
the Registrant and the entities listed on Appendix A thereto (incorporated by reference to
Exhibit 10.17 to our report on Form 10-Q filed on November 9, 2012).
Administrative Agency Agreement dated as of September 17, 2012 among Willis Engine
Securitization Trust II, the Registrant, Deutsche Bank Trust Company Americas, as trustee, and the
entities listed on Appendix A thereto (incorporated by reference to Exhibit 10.18 to our report on
Form 10-Q filed on November 9, 2012).
Third Amended and Restated Credit Agreement, dated as of April 20, 2016, among the Company,
MUFG Union Bank, N.A. as administrative agent and security agent, and certain other lenders and
financial institutions named therein (incorporated by reference to Exhibit 10.15 to our report on Form
10-Q filed on August 16, 2016).
Employment Agreement between the Company and Brian R. Hole dated January 14, 2016
(incorporated by reference to Exhibit 10.1 to our report on Form 8-K filed on February 16, 2016).
Employment Agreement between the Company and Austin C. Willis dated February 9, 2016
(incorporated by reference to Exhibit 10.2 to our report on Form 8-K filed on February 16, 2016).
Trust Amendment No. 2 dated as of September 9, 2016 to Amended and Restated Trust Agreement
of Willis Engine Securitization Trust II dated as of September 14, 2012 (incorporated by reference to
Exhibit 10.1 to our report on Form 8-K filed September 20, 2016).
General Supplement 2016-1 dated as of September 9, 2016 to Trust Indenture dated as of
September 14, 2012 (incorporated by reference to Exhibit 10.2 to our report on Form 8-K filed
September 20, 2016).
Series A Preferred Stock Purchase Agreement dated as of October 11, 2016 (incorporated by
reference to Exhibit 10.1 to our report on Form 8-K filed October 18, 2016).
Amended and Restated Certificate of Designations, Preferences, and Relative Rights and Limitations
of Series A Cumulative Redeemable Preferred Stock dated as of October 13, 2016 (incorporated by
reference to Exhibit 10.2 to our report on Form 8-K filed October 18, 2016).
Certificate Eliminating Series I Junior Participating Preferred Stock of Willis Lease Finance
Corporation dated as of October 7, 2016 (incorporated by reference to Exhibit 10.3 to our report on
Form 8-K filed October 18, 2016).
Statement re Computation of Per Share Earnings.
Statement re Computation of Ratios.
Code of Ethics (incorporated by reference to Exhibit 14.1 to our report on Form 10-K filed on
March 11, 2016).
Subsidiaries of the Registrant.
Consent of KPMG LLP.
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 Scott B. Flaherty, 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.
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
10.11*
10.12*
10.13*
10.14*
10.15
10.16
10.17
10.18
10.19
10.20
10.21
11.1
12.1
14.1
21.1
23.1
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.DEF
42
101.LAB
101.PRE
XBRL Taxonomy Extension Labels Linkbase
XBRL Taxonomy Extension Presentation Linkbase
* Confidential treatment has been requested for certain portions of this exhibit. These portions have been omitted and
filed separately with the SEC.
(d)
Financial Statements
Financial Statements are submitted as a separate section of this report beginning on page 45.
43
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, duly authorized officers and directors.
SIGNATURES
Dated: March 15, 2017
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 15, 2017
Chief Executive Officer and Director
/s/ CHARLES F. WILLIS, IV
(Principal Executive Officer)
Charles F. Willis, IV
Date: March 15, 2017
Chief Financial Officer
/s/ Scott B. Flaherty
(Principal Finance and Accounting Officer)
Scott B. Flaherty
Date: March 15, 2017
Director
Date: March 15, 2017
Director
Date: March 15, 2017
Director
Date: March 15, 2017
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
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015
Consolidated Statements of Income for the years ended December 31, 2016, December 31, 2015 and
December 31, 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, December 31,
2015 and December 31, 2014
Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity for the years ended
December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015 and
December 31, 2014
Notes to Consolidated Financial Statements
477
48
50
51
51
52
53
45
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, 2016 and 2015, and the related consolidated statements of income, comprehensive
income, redeemable preferred stock and shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2016. In connection with our audits of the consolidated 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, 2016 and 2015, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2016, 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,
2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2017 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Francisco, California
March 15, 2017
46
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, 2016, based on criteria established in Internal Control — Integrated Framework (2013)
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 in Item 9A. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Willis Lease Finance Corporation and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated
Framework (2013) 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, 2016
and 2015, and the related consolidated statements of income, comprehensive income, redeemable preferred stock and
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our
report dated March 15, 2017, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
San Francisco, California
March 15, 2017
47
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
December 31, December 31,
2016
2015 (1)
ASSETS
Cash and cash equivalents
Restricted cash
Equipment held for operating lease, less accumulated depreciation of $351,553 and $316,366 at December 31, 2016 and
2015, respectively
Maintenance rights
Equipment held for sale
Operating lease related receivables, net of allowances of $787 and $912 at December 31, 2016 and 2015, respectively
Spare parts inventory
Investments
Property, equipment & furnishings, less accumulated depreciation of $5,858 and $11,102 at December 31, 2016 and
2015, respectively
Intangible assets, net
Other assets
Total assets (2)
LIABILITIES, REDEEMBABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses
Deferred income taxes
Notes payable
Maintenance reserves
Security deposits
Unearned revenue
Total liabilities (3)
$
10,076
22,298
$
9,732
33,026
1,136,603
17,670
30,710
16,484
25,443
45,406
16,802
2,182
14,213
1,337,887
17,792
104,978
900,255
71,602
21,417
5,823
1,121,867
$
$
1,109,168
12,140
23,454
13,626
20,826
41,295
20,247
932
9,839
1,294,285
21,665
96,154
866,089
71,054
25,010
5,090
1,085,062
$
$
Redeemable preferred stock ($0.01 par value, 1,000,000 shares authorized; 1,000,000 and nil shares issued and
outstanding at December 31, 2016 and 2015, respectively)
19,760
—
Shareholders’ equity:
Common stock ($0.01 par value, 20,000,000 shares authorized; 6,401,929 and 7,548,395 shares issued and outstanding
at December 31, 2016 and 2015, respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive loss, net of income tax benefit of $551 and $275 at December 31, 2016 and
December 31, 2015, respectively.
Total shareholders’ equity
Total liabilities, redeemable preferred stock and shareholders' equity
64
2,512
194,729
75
28,720
180,949
(1,045)
196,260
1,337,887
$
(521)
209,223
1,294,285
$
(1) Certain amounts include adjustments to prior periods see "Note 1. Summary
of Significant Accounting Policies (c) Correction of Immaterial Errors -
Consolidated Financial Statements" for further disclosure.
(2) Total assets at December 31, 2016 and December 31, 2015 include the
following assets of a variable interest entity (VIE) that can only be used
to settle the liabilities of the VIE: Cash, $257 and $750 ; Restricted
Cash $22,298 and $33,026, Equipment, $309,815 and $328,118; and Other,
$4,139 and $6,329 respectively."
(3) Total liabilities at December 31, 2016 and December 31, 2015 include
the following liabilities of a VIE for which the VIE creditors do not have
recourse to Willis Lease Finance Corporation: Notes payable, $273,380
and $293,331, respectively.
See accompanying notes to the consolidated financial statements.
48
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
Years Ended December 31,
2016
2015 (1)
2014 (1)
REVENUE
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation and amortization expense
Cost of spare parts and equipment sales
Write-down of equipment
General and administrative
Technical expense
Net finance costs:
Interest expense
Loss (gain) on debt extinguishment
Total net finance costs
Total expenses
Earnings from operations
Earnings from joint ventures
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Accretion of preferred stock issuance costs
$ 119,895 $ 108,046 $ 101,431
53,322
8,917
5,882
4,506
174,058
53,396
25,582
8,320
2,718
198,062
57,091
17,783
3,482
9,023
207,274
66,280
13,293
9,514
47,780
6,993
69,424
17,849
9,181
42,744
9,403
65,314
7,474
5,602
35,859
12,336
41,144
137
41,281
185,141
39,012
(1,151)
37,861
186,462
37,062
—
37,062
163,647
22,133
11,600
10,411
1,813
1,175
1,329
23,946
9,877
$ 14,069 $
281
8
12,775
6,315
6,460 $
—
—
11,740
4,560
7,180
—
—
Net income attributable to common shareholders
$ 13,780 $
6,460 $
7,180
Basic earnings per common share:
$
2.10 $
0.83 $
0.91
Diluted earnings per common share:
$
2.05 $
0.81 $
0.88
Average common shares outstanding
Diluted average common shares outstanding
6,570
6,714
7,817
7,987
7,917
8,141
(1) Certain amounts include adjustments to prior periods see "Note 1.
Summary of Significant Accounting Policies (c) Correction of
Immaterial Errors - Consolidated Financial Statements" for further
disclosure.
See accompanying notes to the consolidated financial statements.
49
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Years Ended December 31,
2016
$ 14,069 $
2015 (1)
2014 (1)
6,460 $
7,180
(796)
—
—
(796)
—
—
(499)
(499)
275
(521)
5,939 $
174
(325)
6,855
(868)
69
—
(799)
275
(524)
$ 13,545 $
Net income
Other comprehensive income (loss):
Currency translation adjustment
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
Other comprehensive income (loss)
Total comprehensive income
(1) Certain amounts include adjustments to prior periods see
"Note 1. Summary of Significant Accounting Policies (c)
Correction of Immaterial Errors - Consolidated Financial
Statements" for further disclosure.
See accompanying notes to the consolidated financial statements.
50
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Shareholders’ Equity
Years Ended December 31, 2016, 2015, and 2014
(In thousands)
(2)
2
(1)
—
—
(9)
2
(1)
—
—
—
—
(5,350)
408
(1,543)
3,509
311
—
—
—
Redeemable
Preferred Stock
Shares Amount
—
— $
Common Stock Paid-in Capital in
Shares Amount Excess of par
84 $
8,400 $
44,741 $
Accumulated Other
Stockholders' Equity
Comprehensive
Income/(Loss)
Retained
Earnings (1)
Total Shareholders’
Equity
Balances at December 31, 2013
Net income
—
—
—
—
Net unrealized gain from derivative instruments, net of tax benefit of
$174
Shares repurchased
Shares issued under stock compensation plans
—
—
—
—
—
—
—
(249)
—
272
Cancellation of restricted stock units in satisfaction of withholding tax
—
—
(77)
Stock-based compensation, net of forfeitures
Tax benefit on disqualified disposition of shares
—
—
—
—
—
—
325 $
167,309 $
212,459
—
7,180
7,180
(325)
—
—
—
—
—
—
—
—
—
—
—
(325)
(5,352)
410
(1,544)
3,509
311
Balances at December 31, 2014
— $
—
8,346 $
83 $
42,076 $
— $
174,489 $
216,648
Net income
—
—
—
—
Net unrealized loss from derivative instruments, net of tax benefit of
$275
Shares repurchased
Shares issued under stock compensation plans
—
—
—
—
—
—
—
(912)
—
205
Cancellation of restricted stock units in satisfaction of withholding tax
—
—
(91)
Stock-based compensation, net of forfeitures
Tax benefit on disqualified disposition of shares
—
—
—
—
—
—
—
—
(16,491)
516
(1,557)
4,150
26
—
6,460
6,460
(521)
—
—
—
—
—
—
—
—
—
—
—
(521)
(16,500)
518
(1,558)
4,150
26
Balances at December 31, 2015
— $
—
7,548 $
75 $
28,720 $
(521) $
180,949 $
209,223
Net income
—
—
—
—
Net unrealized loss from currency translation adjustment, net of tax
benefit of $300
—
—
—
—
Net unrealized gain from derivative instruments, net of tax expense of
$25
Shares repurchased
Shares issued under stock compensation plans
—
—
—
—
—
—
—
(1,212)
(12)
(28,946)
—
127
Cancellation of restricted stock units in satisfaction of withholding tax
—
—
(61)
Stock-based compensation, net of forfeitures
Issuance of preferred stock
Accretion of preferred shares issuance costs
Preferred stock dividend
Tax benefit on disqualified disposition of shares
—
—
1,000
19,752
—
—
—
8
—
—
—
—
—
—
—
1
—
—
—
—
—
—
154
(1,369)
3,717
—
—
—
236
—
14,069
14,069
(568)
44
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8)
.
(281)
—
(568)
44
(28,958)
155
(1,369)
3,717
—
(8)
(281)
236
Balances at December 31, 2016
1,000 $ 19,760
6,402 $
64 $
2,512 $
(1,045) $
194,729 $
196,260
(1) Certain amounts include adjustments to prior periods see "Note 1.
Summary of Significant Accounting Policies (c) Correction of
Immaterial Errors - Consolidated Financial Statements" for further
disclosure.
See accompanying notes to the consolidated financial statements.
51
Years Ended December 31,
2015 (1)
2014 (1)
2016
$
14,069
$
6,460
$
7,180
66,280
9,514
3,717
4,271
—
(571)
(3,482)
(1,813)
137
9,100
(2,287)
(5,093)
(1,511)
(1,707)
2,329
10,728
548
(4,048)
732
100,913
62,525
(1,345)
(5,545)
1,167
—
(173,662)
(5,530)
(1,006)
(123,396)
149,000
(3,808)
455
155
(1,369)
(28,958)
236
19,752
(113,981)
1,345
22,827
344
9,732
69,424
9,181
4,150
4,307
—
697
(8,320)
(1,175)
(1,151)
6,027
(5,769)
3,828
—
(2,635)
1,677
9,636
4,580
5,747
748
107,412
41,608
(16,763)
(630)
1,304
5,802
(174,772)
(8,844)
(3,988)
(156,283)
192,700
(13)
(1,606)
518
(1,558)
(16,500)
26
—
(153,816)
25,359
45,110
(3,761)
13,493
65,314
5,602
3,509
4,319
(499)
(81)
(5,882)
(1,329)
—
4,110
4,812
(5,964)
—
(590)
(1,998)
(6,831)
(10,861)
1,158
793
62,762
43,632
6,366
(17,623)
847
—
(119,008)
(9,098)
(13,831)
(108,715)
154,395
(5,074)
4,553
410
(1,544)
(5,352)
311
—
(101,054)
—
46,645
692
12,801
$
10,076
$
9,732
$
13,493
$
$
37,319
459
$
$
35,568
353
$
$
33,132
210
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 interest rate derivative cost
Allowances and provisions
Gain on sale of leased equipment
Income from joint ventures
Loss (gain) on debt extinguishment
Deferred income taxes
Changes in assets and liabilities:
Receivables
Spare parts inventory
Intangibles
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
Maintenance rights payments received
Purchase of equipment held for operating lease and for sale
Purchase of maintenance rights
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
Interest bearing security deposits
Proceeds from shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of withholding tax
Repurchase of common stock
Excess tax benefit from stock-based compensation
Proceeds from issuance of preferred stock
Principal payments on notes payable
Restricted cash for financing activities
Net cash provided by financing activities
Increase/(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest
Income Taxes
Supplemental disclosures of non-cash investing activities:
During the years ended December 31, 2016, 2015, 2014, a liability of $5,337, $4,662 and $8,188, respectively, was incurred but not paid
in connection with our purchase of aircraft and engines.
During the years ended December 31, 2016, 2015, 2014, engines and equipment totaling $28,560, $22,079, and $3,071, respectively, were
transferred from Held for Operating Lease to Held for Sale.
During the years ended December 31, 2016, 2015, 2014, engines and equipment totaling nil, $6,061 and $9,649 were transferred from
Held for Sale to Spare Parts Inventory, respectively.
During the years ended December 31, 2016, an aircraft of $2,925 was transferred from Property, equipment and furnishings to Assets
Held for Lease.
As of December 31, 2016, accrued preferred stock dividends were $281.
During the year ended December 31, 2016, the accretion of preferred stock issuance costs was $8.
(1) Certain amounts include adjustments to prior periods see "Note 1.
Summary of Significant Accounting Policies (c) Correction of
Immaterial Errors - Consolidated Financial Statements" for further
disclosure.
See accompanying notes to the consolidated financial statements.
52
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. WEST II is a
variable interest entity which the Company owns 100% of the equity and consolidates in our financial statements.
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.
In 2016, we purchased, through our wholly owned subsidiary Willis Asset Management Limited (“Willis Asset
Management”), the business and assets of Total Engine Support Limited (“TES”). TES has been the engine management
and consulting business of the TES Aviation Group. Willis Asset Management has 502 engines under management as of
December 31, 2016.
(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, Willis Aero, Willis Lease Singapore Pte. Ltd., and Willis Asset Management Limited (together, the
“Company”).
We evaluate all entities in which we have an economic interest firstly to determine whether for accounting
purposes the entity is a variable interest entity or voting interest entity. If the entity is a variable interest entity we
consolidate the financial statements of that entity if we are the primary beneficiary of the entities’ activities. If the entity
is a voting interest entity we consolidate the entity when we have a majority of voting interests. All inter-company
balances are eliminated upon consolidation.
53
(c) Correction of Immaterial Errors – Consolidated Financial Statements
During 2016 the Company determined that its financial statements for the years ended December 31, 2015,
2014, and for prior years contained errors resulting from the incorrect accounting for equipment purchased with in-place
leases. The Company previously did not identify measure and account for maintenance rights acquired. The Company’s
accounting policy for maintenance rights is described below as note 1(d). Management evaluated the materiality of the
errors described above from a qualitative and quantitative perspective in accordance with the requirements of the
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99, Materiality (SAB 99). Based on such
evaluation, we have concluded that these corrections would not be material to any individual prior period and have
corrected such balances herein.
The associated correcting entries were recorded in the respective period starting with the opening consolidated
balance sheet of December 31, 2014. The Consolidated Balance Sheet as of December 31, 2015 presented herein has
been revised as follows: decrease in Equipment Held for Operating Lease by $13.7 million, increase in Maintenance
Rights by $12.1 million, decrease in Deferred Income Taxes by $0.6 million and decrease in retained earnings by $1.1
million as of December 31, 2015.
The adjustments to the previously reported Consolidated Statement of Income for the years ending December
31, 2015 and 2014 were as follows: a decrease in Maintenance Reserve Revenue of $1.7 million and $41,000,
respectively; an increase (decrease) in Gain on Sale of Leased Equipment of ($34,000) and $0.1 million, respectively; an
decrease in Depreciation and Amortization expense of $0.2 million and $0.1 million, respectively; and a decrease in
Income Tax Expense of $0.5 million and $35,000, a decrease in net income of $0.9 million and $0.1 million,
respectively; and a decrease in basic and diluted earnings per share of $0.11 and $0.01, respectively.
The adjustments to the previously reported Consolidated Statement of cash flows for the years ending
December 31, 2015 and 2014 were as follows: a decrease in cash provided by operating income of $1.7 million; and a
decrease in the cash used by investing activities of $1.7 million.
There were other immaterial out of period adjustments recorded that affected lease rent revenue, spare part sales
revenue and expense and general and administrative expenses for the years ended December 31, 2015 and 2014.
(d) 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
ASC 605-25”), which addresses accounting for multiple element arrangements. The Company has determined that two
deliverables, the sale of equipment 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.
For multiple deliverable revenue arrangements, the Company allocates revenue to equipment sales and
management services using the relative selling price method to recognize revenue when the revenue recognition criteria
for each deliverable are met. The selling price of a deliverable is based on a hierarchy and if the Company is unable to
establish vendor-specific objective evidence of selling price (“VSOE”) it uses third-party evidence of selling price
54
(“TPE”), and if no such data is available, it uses a best estimated selling price (“BSP”). When VSOE cannot be
established, the Company attempts to establish the selling price of each element based on TPE. When the Company is
unable to establish selling price using VSOE or TPE, the Company uses BSP. The objective of BSP is to determine the
price at which the Company would transact a sale if the equipment or service were sold on a stand-alone basis. The
selling price of the service elementis based on TPE and is determined by reviewing 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.
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, 2016, we had an aggregate of approximately $3.6 million in lease rent and $2.4 million
in maintenance reserve receivables 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.
We recognize sales of spare parts upon shipping and the amount reported as cost of sales is recorded at specific
cost.
We recognize service revenue from fees earned under engine maintenance service agreements as earned on a
monthly basis.
No customer accounted for greater than 10% of total lease rent revenue in 2016, 2015 and 2014.
(e) Other Revenue
Other revenue consists primarily of management fee income, lease administration fees and third party
consignment commissions earned by Willis Aero. During the year ended December 31, 2016, other revenue included
$4.0 million of security payments for aircraft upon default of a lessee.
(f) 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.
55
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. Our typical 15 year holding period is the estimated useful life of our engines
based on our business model and plans, and represents how long we anticipate holding a newly acquired engine. The
technical useful life of a new engine can be in excess of 25 years. We review the useful life and residual values of all
engines periodically as demand changes to accurately depreciate the cost of equipment over the useful life of the engines.
The useful life of older generation engines and aircraft may be significantly less than 15 years, based upon the
technical status of the engine, as well as supply and demand factors. For these older generation engines and aircraft, the
remaining useful life and our remaining expected holding period are typically the same. For older generation 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. As of December 31, 2016, 56 engines and 6 aircraft having a net book value of $126.1 million were
depreciated under this policy with estimated useful lives ranging from 1 to 124 months. We adjust our estimates
annually for these older generation assets, including updating our estimates of an engine’s or aircraft’s remaining
operating life as well as future residual value expected from part-out based on the current technical status of the engine
or aircraft.
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 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 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 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 of $1.8 million, $0.6 million and $2.4 million in 2016, 2015, and 2014,
respectively (Included in “Write-down of equipment” in the Consolidated Statements of Income).
(g) 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
(h) 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, included in
Notes Payable on the Consolidate Balance Sheet, and amortized over the life of the related loan using the effective
interest method.
56
(i) 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 remaining
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.
(j)
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.
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.
k)
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 6).
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 2013-2016 and 2012-2016, 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.
(l) 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 fifteen 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.
57
(m) 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.
(n) 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.
(o) 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.
(p) Intangible Assets
Intangible assets include customer relationships and goodwill arising from the Company’s acquisition of J.T.
Power and Total Engine Support Limited (“TES”). Intangible assets are accounted for in accordance with FASB ASC
350, “Intangibles — Goodwill and Other.”
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.
(q) 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.
58
(r) Per share information
Basic earnings per common share is computed by dividing net income by the weighted-average number of
common shares outstanding during the period. The computation of fully diluted earnings per share is similar to the
computation of basic earnings per share, except for the inclusion of all potentially dilutive common shares. Redeemable
preferred stock is not convertible and does not affect dilutive shares. The reconciliation between basic common shares
and fully diluted common shares is presented below:
2016
Years Ended December 31,
2015
(in thousands)
2014
Shares:
Weighted-average number of common shares outstanding
Dilutive and potentially dilutive common shares
Total shares
(s)
Investments
6,570
144
6,714
7,817
170
7,987
7,917
224
8,141
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.
(t) Stock Based Compensation
We recognize compensation expense in the financial statements for share-based awards based on the grant-date
fair value of those awards. Additionally, stock-based compensation expense includes an estimate for pre-vesting
forfeitures and is recognized over the requisite service periods of the awards on a straight-line basis, which is generally
commensurate with the vesting term.
(u) Initial Direct Costs associated with Leases
We account for the initial direct costs, including sales commission and legal fees, incurred in obtaining a new
lease by deferring and amortizing those costs over the term of the lease. The amortization of these costs is recorded
under General and Administrative expenses in the Consolidated Statements of Income. The amounts amortized were
$1.6 million, $1.6 million and $1.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(v) Maintenance Rights
59
We identify, measure and account for maintenance right assets and liabilities associated with acquisitions of
equipment with in-place leases. A maintenance right asset represents the fair value of the contractual right under a lease
to receive equipment in an improved maintenance condition as compared to the maintenance condition on the acquisition
date. A maintenance right liability represents the Company's obligation to pay the lessee for the difference between the
lease-end contractual maintenance condition of the equipment and the actual maintenance condition of the equipment on
the acquisition date. The equipment condition at the end of the lease term may result in either overhaul work being
performed by the lessee to meet the required return condition or a financial settlement.
When a capital event is performed on the equipment by the lessee, which satisfies their maintenance right
obligation, the maintenance rights are added to the equipment basis and depreciated to the next capital event. When
equipment is sold before the end of the pre-existing lease, the maintenance rights are applied against any accumulated
maintenance reserves, if paid by the lessee, and the remaining balance is applied to the disposition gain or loss. When a
lease terminates, an end of lease true-up is performed and the maintenance right is applied against the accumulated
maintenance reserves or, for non-reserve lessees the final settlement payment, and any remaining net maintenance right
is recorded in the income statement.
Maintenance right assets were $17.7 million and $12.1 million as of December 31, 2016 and December 31,
2015, respectively.
(w) 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 Recurring Basis
As of December 31, 2016, we measured the fair value of our interest rate swaps of $100.0 million (notional
amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The
Company estimates the fair value of derivative instruments using a discounted cash flow technique and, at December 31,
2016, has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and
counterparties’ risk of non-performance. We had an interest rate swap agreement which had a net fair value of $69,000
as of December 31, 2016. In 2016, $25,000, was realized through the income statement as an increase in interest
expense.
The following table shows by level, within the fair value hierarchy, the Company’s assets and liabilities at fair
value as of December 31, 2016:
60
Derivatives
Total
Assets and (Liabilities) at Fair Value
December 31, 2016
Level 1
Level 2
Level 3
Total
$
$
—
—
$
$
(in thousands)
69
69
$
$
—
—
$
$
69
69
No derivatives existed during the year ended December 31, 2015.
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 during the years ended December 31, 2016 and 2015, and the losses recorded during the years
ended December 31, 2016 and 2015 on those assets:
Level 1
December 31, 2016
Level 3
Level 2
Assets at Fair Value
Total
Level 1
(in thousands)
December 31, 2015
Level 3
Level 2
Total Losses
December 31,
Total
2016
2015
(in thousands)
Equipment
held for lease $
Equipment
held for sale
Spare parts
inventory
Total
$
— $
1,196 $
— $
1,196 $
— $
2,154 $
— $
2,154 $
(3,674) $
(2,536)
—
8,976
—
8,976
—
4,931
—
4,931
(5,365)
(6,645)
—
— $
1,538
11,710 $
—
— $
1,538
11,710 $
—
— $
—
7,085 $
—
— $
—
7,085 $
(475)
(9,514) $
—
(9,181)
At December 31, 2016, the Company used Level 2 inputs to measure write down of equipment held for lease,
equipment held for sale, and spare parts inventory. Level 2 inputs include quoted prices for similar assets in inactive
markets.
An impairment charge is recorded when the carrying value of the asset exceeds its fair value. Write-downs of
equipment to their estimated fair values totaled $9.5 million for the year ended December 31, 2016 compared to $9.2
million recorded in the year ago period. A writedown of $5.5 million was recorded due to the adjustment of the carrying
value for six impaired engines and one impaired aircraft within the portfolio to reflect estimated market value. A further
write-down of equipment totaling $2.0 million was recorded in the year ended December 31, 2016 due to a management
decision to consign one engine for part-out and sale, in which the asset’s net book value exceeded the estimated
proceeds. An additional writedown of $2.0 million was recorded in year ended December 31, 2016 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 equipment totaling $9.2 million was recorded in the year ended December 31, 2015. A write-
down of equipment totaling $5.5 million was recorded in the year ended December 31, 2015 due to a management
decision to consign four 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 $0.6 million for the
year ended December 31, 2015 due to an adjustment of carrying values for certain impaired parts packages within the
portfolio to reflect estimated market values. A further write-down of $2.8 million was recorded in the year ended
December 31, 2015 to adjust the carrying value of engine parts for which market conditions for the sale of parts has
changed. An additional write-down of $0.3 million was recorded in the year ended December 31, 2015 based on a
comparison of the inventory values with the revised net proceeds expected from part sales.
61
(x) Foreign Currency Translation
The Company’s foreign investments have been converted at rates of exchange at December 31, 2016. The
changes in exchange rates in our foreign investments reported under the equity method are included in stockholders’
equity as accumulated other comprehensive income.
(y) Redeemable Preferred Stock
The Company’s Series A preferred shares are redeemable at $20 per share upon the occurrence of certain
events. The Company classifies this equity as mezzanine as it is a conditionally redeemable security.
The Company incurred approximately $0.2 million of issuance costs during 2016, in connection with the
issuance of its preferred shares. The Company is accreting the issuance costs to redemption value over the period from
the date of issuance to October 2023, such that the carrying amounts of the securities will equal the redemption amounts
at the earliest redemption date.
(2) Equipment Held for Operating Lease
As of December 31, 2016, we had a total lease portfolio of 208 aircraft engines and related equipment, 5 spare
parts packages, 11 aircraft and various parts and other engine-related equipment with a net book value of $1,136.6
million in our lease portfolio. As of December 31, 2015, we had a total lease portfolio of 201 aircraft engines and related
equipment, 5 spare parts packages, 10 aircraft and various parts and other engine-related equipment with a net book
value of $1,109.2 million in our lease portfolio.
A majority of our equipment is leased and operated internationally. All leases relating to this equipment are
denominated and payable in U.S. dollars.
We lease our equipment to lessees domiciled in eight geographic regions. The tables below set forth geographic
information about our leased equipment grouped by domicile of the lessee (which is not necessarily indicative of the
asset’s actual location):
2016
Years Ended December 31,
2015
(in thousands)
2014
$
44,650 $
34,524
11,504
13,395
6,251
4,049
3,674
1,848
37,850
21,658
9,907
11,880
7,771
4,958
4,143
3,264
$ 119,895 $ 108,046 $ 101,431
43,703 $
31,569
9,688
9,177
6,886
2,828
2,223
1,972
Lease rent revenue
Region
Europe
Asia
South America
United States
Mexico
Canada
Middle East
Africa
Totals
62
Lease rent revenue less applicable depreciation and interest
2016
Years Ended December 31,
2015
(in thousands)
2014
Region
Europe
Asia
South America
United States
Mexico
Canada
Middle East
Africa
Off-lease and other
Totals
$
13,137
10,318
3,464
1,053
2,430
74
743
460
(13,303)
11,074
8,867
1,929
634
2,310
(123)
474
206
(19,713)
$
18,376 $
5,658 $
6,988
5,891
3,503
2,577
2,157
(100)
1,277
1,041
(19,525)
3,809
Net book value of equipment held for operating lease
Region
Europe
Asia
South America
United States
Mexico
Canada
Middle East
Africa
Off-lease and other
Totals
2016
Years Ended December 31,
2015
(in thousands)
2014
$
$
384,661
265,736
112,268
148,208
55,114
35,199
8,971
42,949
83,497
1,136,603
387,652
309,158
112,718
99,876
35,374
18,893
9,612
18,937
116,948
1,109,168
$
$
343,102
232,511
107,080
61,521
57,371
11,026
12,063
17,125
215,582
1,057,381
$
$
As of December 31, 2016 and 2015, 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 2017
Leases expiring 2018
Leases expiring 2019
Leases expiring 2020
Leases expiring 2021
Leases expiring thereafter
December 31, 2016
Net Book Value
(in thousands)
$
$
83,497
88,546
396,155
144,977
70,511
180,732
57,196
114,989
1,136,603
63
Lease Term
Off-lease and other
Month-to-month leases
Leases expiring 2016
Leases expiring 2017
Leases expiring 2018
Leases expiring 2019
Leases expiring 2020
Leases expiring thereafter
December 31, 2015
Net Book Value
(in thousands)
$
$
116,948
90,173
429,635
106,923
87,916
60,022
86,922
130,629
1,109,168
As of December 31, 2016, minimum future payments under non-cancelable leases were as follows:
Year
2017
2018
2019
2020
2021
Thereafter
(3) Investments
$
(in thousands)
89,119
57,192
43,979
33,482
16,930
23,466
264,168
$
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 and the
Company uses the equity method in recording investment activity. The investment has increased to $32.5 million as of
December 31, 2016 as a result of the Company making $5.5 million in capital contributions to WMES, receiving $1.2
million in distributions, recording $1.2 million as deferred gain as a result of the Company selling four engines to
WMES and the Company’s share of WMES reported income of $2.0 million during the year ended December 31, 2016.
On June 3, 2014 we entered into an agreement with China Aviation Supplies Import & Export Corporation
(“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,
we made a $15.0 million initial capital contribution, representing our fifty percent, up-front funding contribution to the
new joint venture. The company acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast
growing demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. CASC
Willis owned a lease portfolio of 3 engines with a net book value of $49.1 million as of December 31, 2016. Our
investment in the joint venture is $12.9 million as of December 31, 2016. During 2016, CASC was reorganized, with
portions of its partnership interest in CASC Willis being transferred to three Chinese airlines and another government-
owned entity. The 2016 CASC reorganization resulted in no voting structure change to the joint venture.
64
Years Ending December 31, 2016 and 2015 (in thousands)
Investment in joint ventures as of December 31, 2014
Investment
Earnings (losses) from joint ventures
Distribution
Foreign Currency Translation Adjustment
Investment in joint ventures as of December 31, 2015
Investment
Earnings (losses) from joint ventures
Deferred gain on engine sale
Distribution
Foreign Currency Translation Adjustment
Investment in joint ventures as of December 31, 2016
WMES
26,672 $
630
1,274
(1,304)
—
27,272 $
5,545
2,032
(1,212)
(1,167)
—
32,470 $
$
$
$
CASC
Willis
14,918 $
—
(99)
—
(796)
14,023 $
—
(219)
—
—
(868)
12,936 $
Total
41,590
630
1,175
(1,304)
(796)
41,295
5,545
1,813
(1,212)
(1,167)
(868)
45,406
“Other revenue” on the Consolidated Statement of Income includes management fees earned of $2.1 million,
$1.7 million and $2.0 million during the years ended December 31, 2016, 2015 and 2014, respectively, related to the
servicing of engines for the WMES lease portfolio. During 2015, WMES consigned an engine for part out and sale to
our Willis Aero subsidiary. The value of the engine is $0.1 million as of December 31, 2016.
Summarized financial information for 100% of WMES is presented in the following table:
Revenue
Expenses
WMES net income
Total assets
Total liabilities
Total WMES net equity
2016
Years Ended December 31,
2015
(in thousands)
2014
$
35,463 $
31,669
26,909 $
24,574
$
3,794 $
2,335 $
25,757
23,150
2,607
December 31, December 31,
2016
2015
(in thousands)
$ 293,299 $
219,881
$
73,418 $
256,126
195,258
60,868
65
(4) Notes Payable
Notes payable consisted of the following:
As of December 31,
2015
2016
(in thousands)
Credit facility at a floating rate of interest of LIBOR plus 2.75%, secured by engines. The
facility has a committed amount of $890.0 million at December 31, 2016, which revolves
until the maturity date of April 2021.
$ 608,000 $ 549,000
WEST II Series 2012-A term notes payable at a fixed rate of interest of 5.50%, maturing in
September 2037. Secured by engines.
279,541
300,467
Note payable at fixed interest rates ranging from 2.60% to 2.97%, maturing in July 2024.
Secured by an aircraft.
14,453
16,135
Note payable at a variable interest rate of LIBOR plus 2.25%, maturing in January 2018.
Secured by engines.
Notes payable
Less: unamortized debt issuance costs
Total notes payable
11,709
13,082
913,703
878,684
(13,448)
(12,595)
$ 900,255 $ 866,089
One-month LIBOR was 0.77% and 0.43% as of December 31, 2016 and December 31, 2015, respectively.
Principal outstanding at December 31, 2016, is repayable as follows:
Year
2017
2018
2019
2020
2021 (includes $608.0 million outstanding on revolving credit facility)
Thereafter
(in thousands)
$ 23,624
33,294
23,430
23,031
631,268
179,056
$ 913,703
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 repurchases. These covenants
are tested quarterly and the Company was in full compliance with all covenant requirements at December 31, 2016.
At December 31, 2016, 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 4.25 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, 2016, we are in compliance with the covenants specified in the WEST II indenture and servicing
agreement.
66
At December 31, 2016, notes payable consists of loans totaling $900.3 million payable over periods of
approximately 1.0 years to 7.5 years with interest rates varying between approximately 2.6% 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, 2016, we had a revolving credit facility to finance the acquisition of equipment 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 April 20, 2016 we entered into a Third
Amended and Restated Credit Agreement which increased the revolving credit facility to $890.0 million from $700.0
million and extended the term to April 2021. This $890 million revolving credit facility has an accordion feature which
would expand the entire credit facility up to $1 billion. The initial interest rate on the facility is LIBOR plus 2.75%. The
interest rate is adjusted quarterly, based on the Company’s leverage ratio, as calculated under the terms of the revolving
credit facility. As of December 31, 2016 and December 31, 2015, $282.0 million and $151.0 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 3.15 at
December 31, 2016, the interest rate on this facility is one-month LIBOR plus 2.75% as of December 31, 2016. Under
the revolving credit facility, all subsidiaries except WEST II jointly and severally guarantee payment and performance of
the terms of the loan agreement. The guarantee would be triggered by a default under the agreement.
On September 17, 2012, we closed an asset-backed securitization (“ABS”) through a newly-created,
bankruptcy-remote, Delaware statutory trust, WEST II, of which the Company is the sole beneficiary. WEST II issued
and sold $390 million aggregate principal amount of Class 2012-A Term Notes (the “Notes”) and received $384.9
million in net proceeds. The Notes’ creditors do not have recourse to the Company. 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 58
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, 2016 and 2015, $279.5 million and $300.5 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 13, 2016, the Company entered into an amendment (the “Amendment No. 2”) to the Amended
and Restated Trust Agreement of WEST II, as amended by Trust Amendment No. 1, dated as of September 14, 2012.
The Amendment No. 2 allows the Company to make additional equity contributions to fund engine maintenance
expenses, to make up shortfalls in required net sale proceeds from engine dispositions and to provide additional funds in
67
the acquisition of replacement engines for WEST II. These potential future equity contributions by the Company are
voluntary. The Amendment No. 2 also increases the percentage of WEST II engines subject to disposition and modifies
certain concentration limits.
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
related to the WOLF assets 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 balance
outstanding of $24.0 million as of December 31, 2015, are included in Notes payable. On March 25, 2015, we paid off
the $23.1 million balance of the two term notes associated with the WOLF assets at a 5% discount. This transaction
resulted in the recording of a $1.2 million gain on debt extinguishment which has been included in our statement of
income for the year ended December 31, 2015.
On July 16, 2014, we closed on a loan with a ten year term totaling $13.4 million. During the second quarter of
2016, we closed on two additional loans totaling $4.7 million, repayable over the same ten year term. The interest is
payable at fixed rates ranging from 2.60% to 2.97% for the initial five years of the loan term and principal and interest is
paid monthly. The loans provided 100% of the funding for the purchase of a corporate aircraft and subsequent
modifications and upgrades. The balance outstanding on these loans is $14.5 million and $16.1 million as December 31,
2016 and December 31, 2015, respectively.
On January 10, 2014, we extended the term of an existing loan that was scheduled to mature on January 11,
2015. 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 $11.7 million and $13.1 million as of December 31, 2016 and December 31, 2015, respectively.
(5) Derivative Instruments
We periodically hold interest rate derivative instruments to mitigate exposure to changes in interest rates, in
particular one-month LIBOR, with $619.7 million and $562.1 million of our borrowings at December 31, 2016 and
2015, respectively, at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. During
2016, we entered into one interest rate swap agreement which has notional outstanding amount of $100.0 million, with
remaining terms of 52 months. The fair value of the swap at December 31, 2016 was $68,000, representing a net asset
for us. We recorded a $25,000, nil and ($0.5 million) expense (benefit) to net finance costs during the years ended
December 31, 2016, 2015 and 2014 respectively from derivative investments.
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.
68
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, 2016, 2015, and 2014:
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,
2015
(in thousands)
2016
2014
Interest rate contracts
Total
Interest expense
$
$
25 $
25 $
— $
— $
(499)
(499)
Our derivatives were 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, 2016, 2015, and 2014:
Derivatives in
Cash Flow Hedging
Relationships
Amount of Gain (Loss) Recognized
Location of Loss (Gain)
in OCI on Derivatives
(Effective Portion)
Years Ended December 31,
2015
(in thousands)
2014
2016
Reclassified from
Accumulated OCI into
Income
(Effective Portion)
Amount of Loss (Gain) Reclassified
from Accumulated OCI into Income
(Effective Portion)
Years Ended December 31,
2015
(in thousands)
2016
2014
Interest rate contracts
Total
$
$
69
69
$
$
—
—
$
$
— Interest expense
— Total
$
$
25
25
$
$
—
—
$
$
(499)
(499)
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 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 2016 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 did not require the
counterparty to provide collateral or other security to the Company.
69
(6) Income Taxes
The components of income before income taxes are as follows
U.S.
Non U.S.
Income from before income taxes
2016
Years ended December 31,
2015
(in thousands)
2014
$
21,634 $
11,319 $
2,312
23,946
$
1,456
12,775
$
$
10,433
1,307
11,740
The components of income tax expense for the years ended December 31, 2016, 2015, and 2014, included in the
accompanying consolidated statements of income were as follows:
December 31, 2016
Current
Deferred
Total 2016
December 31, 2015
Current
Deferred
Total 2015
December 31, 2014
Current
Deferred
Total 2014
Federal
State
Foreign
Total
(in thousands)
$
$
324 $
8,807
9,131 $
14 $
292
306 $
440 $
—
440 $
778
9,099
9,877
$
$
(208) $
4,871
4,663 $
13 $
1,163
1,176 $
476 $
—
476 $
281
6,034
6,315
$
$
109 $
3,797
3,906 $
179 $
164
343 $
311 $
—
311 $
599
3,961
4,560
The following is a reconciliation of the federal income tax expense at the statutory rate of 34% to the effective
income tax expense:
2016
$
Years Ended December 31,
2015
(in thousands and % of pre-tax income)
$
%
%
$
2014
%
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-nondeductible executive
compensation
Permanent differences and other
Effective income tax expense
8,142 34.0 4,343 34.0 3,992 34.0
1.0
0.9
(0.3)
(0.9)
118
101
(36)
(101)
776
476
(306)
(195)
202
440
—
(40)
6.1
3.7
(2.4)
(1.5)
0.8
1.8
—
(0.1)
1,201
(68)
9,877
5.0
(0.3)
41.2
1,117
104
6,315
8.7
0.8
49.4
768
(282)
4,560
6.5
(2.4)
38.8
The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which
they occur.
70
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
Balance as of December 31, 2014
Increases related to current year tax positions
Decreases due to tax positions released
Balance as of December 31, 2015
Increases related to current year tax positions
Decreases due to tax positions expired
Balance as of December 31, 2016
(in thousands)
$
$
464
5
(195)
274
4
(72)
206
No reserve was established as of December 31, 2016 and December 31, 2015 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 assets (liabilities)
Net deferred tax liabilities
Other comprehensive loss deferred tax asset
$
As of December 31,
2016
2015
(in thousands)
1,839 $
1,035
1,659
2,501
377
35,693
52
43,156
(1,280)
41,876
1,511
944
898
1,767
377
35,827
42
41,366
(1,280)
40,086
(147,827)
422
(147,405)
(137,496)
981
(136,515)
551
275
Net deferred tax liabilities
$
(104,978) $
(96,154)
As of December 31, 2016, we had net operating loss carry forwards of approximately $105.0 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 2023 to 2034 and the state net operating loss carry forwards will expire at various times from 2023 to 2034.
During 2014, a valuation allowance of $1.3 million was established for the net operating losses expiring in California for
the periods 2017 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, 2016, we also had alternative minimum tax credit
of approximately $0.4 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.
71
Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect
exercises in 2016. 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 $3.0 million as of December 31, 2016, 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 2016 are $1.0 million
and will be recorded to paid-in capital when recognized.
(7) Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, restricted cash,
operating lease related receivables, and accounts payable approximates fair value because of the immediate or short-term
maturity of these financial instruments.
The carrying amount of the Company’s outstanding balance on its Notes Payable as of December 31, 2016 and
2015 was estimated to have a fair value of approximately $864.0 million and $890.1 million, respectively, based on the
fair value of estimated future payments calculated using the prevailing interest rates at each year end.
(8) 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. As of
December 31, 2016, one swap agreement had a notional outstanding amount of $100.0 million, a remaining term of 52
months. In 2016, 2015 and 2014, $25,000, nil, and ($0.5 million) was realized through the income statement as an
increase (decrease) in interest expense, respectively.
72
(9) Commitments, Contingencies, Guarantees and Indemnities
The following table lists our properties and their remaining lease commitments:
Location
Novato, California
Boynton Beach, Florida
San Diego, California
Bridgend, Wales, United Kingdom
Singapore
Shanghai, China
Shanghai, China
Dublin, Ireland
London, United Kingdom
Blagnac, France
Total
(10) Equity
Common Stock Repurchase
Property Type
Principal Office
Warehouse and office
Warehouse and office
Warehouse and office
Office
Office
Warehouse
Office
Office
Office
Lease
Expiration
09/30/18
10/29/19
10/31/19
10/31/17
12/31/17
12/31/17
07/31/17
05/15/17
11/18/18
12/31/17
$
$
Remaining Lease
Commitment
(in thousands)
932
822
481
368
102
86
4
12
116
16
2,939
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 Board of Directors reaffirmed the repurchase plan
on April 21, 2016. This plan extends the previous plan authorized on December 8, 2009, and increases the value of the
total number of shares authorized for repurchase up to $100.0 million. During 2016, the Company repurchased 1,212,230
shares of common stock for approximately $29.0 million under this program, at a weighted average price of $23.71 per
share. The repurchased shares were subsequently retired.
Redeemable Preferred Stock
On October 11, 2016, the Company entered into a Stock Purchase Agreement with Development Bank of Japan
Inc., relating to the sale and issuance of an aggregate of 1,000,000 shares of the Company’s 6.5% Series A Preferred
Stock, $0.01 par value per share (the “Preferred Stock”) at a purchase price of $20.00 per share. The purchase and sale of
the Preferred Stock closed on October 14, 2016. The net proceeds to the Company after deducting investor fees were
$19.8 million.
The Preferred Stock carries a quarterly dividend at the rate per annum of 6.5% per share, with a $20.00
liquidation preference per share.
The rights and privileges of the Preferred Stock are described below:
Voting Rights
Holders of the Preferred Stock do not have general voting rights.
Dividends
The Preferred Stock carries a quarterly dividend at the rate per annum of 6.5% per share. As of December 31,
2016, no dividends have been declared or paid.
Liquidation Preference
73
The holders of the Preferred Stock have preference in the event of any voluntary or involuntary liquidation,
dissolution, or winding-up of the corporation, including a merger or consolidation. Upon such liquidation event, the
preferred stockholders are entitled to be paid out of the assets of the Company available for distribution to its
stockholders after payment of all the Company’s indebtedness and other obligations and before any payment shall be
made to the holders of common stock or any other class or series of stock ranking on liquidation junior to the Preferred
Stock an amount equal to the greater of $20.00 per share, plus any declared but unpaid dividends.
Redemption
The preferred stock has no stated maturity date, however the holders of the Preferred Stock have the option to
require the Company to redeem all or any portion of the Preferred Stock for cash upon occurrence of any significant
changes in operating results, ownership structure, or liqudity events as defined in the Preferred Stock purchase
agreements. The redemption price is $20 per share plus dividends accrued but not paid. The Company is accreting the
Preferred Stock to redemption value over the period from the date of issuance to October 2023, such that the carrying
amounts of the securities will equal the redemption amounts at the earliest redemption date.
(11) Stock-Based Compensation Plans
The components of stock compensation expense for the years ended December 31, 2016, 2015, and 2014,
included in the accompanying consolidated statements of income were as follows:
2007 Stock Incentive Plan
Employee Stock Purchase Plan
Total Stock Compensation Expense
2016
2015
(in thousands)
2014
$
$
3,681 $
36
3,717 $
4,102 $
48
4,150 $
3,459
50
3,509
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 available in the form of either restricted stock or stock
options. On May 28, 2015, the Company’s shareholders authorized an increase in the number of shares of Common
Stock available for grant by 800,000 shares bringing the total to 2,800,000 shares authorized. 2,400,357 shares of
restricted stock were granted under the 2007 Stock Incentive Plan by December 31, 2016. Of this amount, 155,745
shares of restricted stock were cancelled and returned to the pool of shares which could be granted under the 2007 Stock
Incentive Plan resulting in a net number of 555,388 shares which were available as of December 31, 2016 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.
74
The following table summarizes restricted stock activity during the years ended December 31:
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
Granted in 2015 (vesting over 3 years)
Granted in 2015 (vesting over 4 years)
Granted in 2015 (vesting on first anniversary from date of issuance)
Cancelled in 2015
Vested in 2015
Restricted stock at December 31, 2015
Granted in 2016 (vesting over 2 years)
Granted in 2016 (vesting over 3 years)
Granted in 2016 (vesting over 4 years)
Granted in 2016 (vesting on first anniversary from date of issuance)
Cancelled in 2016
Vested in 2016
Restricted stock at December 31, 2016
Shares
515,130
174,500
13,000
50,208
(5,750)
(221,732)
525,356
125,000
5,000
16,440
—
(275,201)
396,595
20,000
85,000
13,250
18,395
(20,377)
(213,528)
299,335
Our accounting policy is to recognize the associated expense of such awards on a straight-line basis over the
vesting period. At December 31, 2016 the stock compensation expense related to the restricted stock awards that will be
recognized over the average remaining vesting period of 1.5 years totals $3.8 million. At December 31, 2016, the
intrinsic value of unvested restricted stock awards is $7.7 million. The Plan terminates on May 24, 2017.
A summary of activity under the 2007 Plan for the years ended December 31, 2016, 2015, and 2014 is as
follows:
Balance as of December 31, 2013
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2014
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2015
Shares granted
Shares cancelled
Shares vested
Balance as of December 31, 2016
Number Outstanding
Grant Date Fair Value
Weighted Average
Aggregate Grant
Date Fair Value
515,130 $
237,708
(5,750)
(221,732)
525,356 $
146,440
—
(275,201)
396,595 $
136,645
(20,377)
(213,528)
299,335 $
13.71 $
19.84
14.02
13.24
13.71 $
18.53
—
15.87
17.98 $
21.55
17.79
17.12
20.24 $
7,060,474
4,710,362
(80,630)
(2,903,595)
8,786,611
2,713,159
—
(4,368,570)
7,131,200
2,944,941
(362,536)
(3,655,269)
6,058,336
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
75
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 2016 and 2015, 11,014 and 10,374 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 $6.35, $6.17 and $3.19 for 2016, 2015 and 2014, 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, 2014, 26,437 options were exercised with a total intrinsic value at exercise date of approximately $0.2
million. In the year ended December 31, 2015, 49,000 options were exercised with a total intrinsic value at exercise date
of approximately $0.3 million. As of December 31, 2016, there are no options remaining under the 1996 Plan.
(12) 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 2016, 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 $18,000
(or $24,000 for employees at least 50 years of age). We match 50% of employee contributions up to 8% of the
employee’s salary which totaled $0.4 million, $0.4 million and $0.3 million for the years ended December, 31, 2016,
2015, and 2014, respectively.
(13) Quarterly Consolidated Financial Information (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31,
2016, 2015, and 2014 (in thousands, except per share data).
Fiscal 2016 (1)
Total revenue
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
$ 50,719 $ 49,618 $ 51,461 $ 55,476 $ 207,274
Net income attributable to common shareholders
4,011
3,366
3,985
2,418
13,780
Basic earnings per common share
0.57
0.50
0.63
0.40
2.10
Diluted earnings per common share
0.55
0.49
0.62
0.39
2.05
Average common shares outstanding
Diluted average common shares outstanding
7,149
7,272
6,685
6,819
6,307
6,448
6,149
6,275
6,570
6,714
76
Fiscal 2015 (1)
Total revenue
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
$ 41,336 $ 43,810 $ 57,730 $ 55,186 $ 198,062
Net income (loss) attributable to common shareholders
1,358
(486)
2,551
3,037
6,460
Basic earnings (loss) per common share
0.17
(0.06)
0.33
0.39
0.83
Diluted earnings (loss) per common share
0.17
(0.06)
0.32
0.38
0.81
Average common shares outstanding
Diluted average common shares outstanding
7,848
8,044
7,841
7,841
7,839
7,963
7,739
7,872
7,817
7,987
Fiscal 2014 (1)
Total revenue
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
$ 43,340 $ 43,994 $ 45,519 $ 41,205 $ 174,058
Net income (loss) attributable to common shareholders
4,352
2,319
1,000
(491)
7,180
Basic earnings (loss) per common share
0.55
0.29
0.13
(0.06)
0.91
Diluted earnings (loss) per common share
0.54
0.28
0.12
(0.06)
0.88
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
(1) Certain amounts include adjustments to prior periods see "Note 1.
Summary of Significant Accounting Policies (c) Correction of
Immaterial Errors - Consolidated Financial Statements" for further
disclosure.
(14) Related Party Transactions
Stock Buybacks
On April 1, 2016, in a transaction approved by a Special Committee of the Board of Directors, the Company
purchased 60,000 shares of its common stock directly from the Company’s Chief Executive Officer, Charles F. Willis.
The purchase price was $21.59 per share, the closing price of the Company’s common stock as of March 31, 2016.
On December 8, 2016, in a transaction approved by a Special Committee of the Board of Directors, the
Company purchased 40,000 shares of its common stock directly from the Company’s Chief Executive Officer, Charles
F. Willis. The purchase price was $24.95 per share, a 2% discount to the closing price of the Company’s common stock
as of December 8, 2016 of $25.46.
WMES
“Other revenue” on the Consolidated Statement of Income includes management fees earned of $2.1 million,
$1.7 million and $2.0 million during the years ended December 31, 2016, 2015 and 2014, respectively, related to the
servicing of engines for the WMES lease portfolio. During 2016, the Company sold four engines to WMES. See “Note
3. Investments” for further disclosure.
77
(15) 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.
The following tables present a summary of the operating segments (amounts in thousands):
For the year ended December 31, 2016
Revenue:
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
Expenses:
Depreciation and amortization expense
Cost of spare parts and equipment sales
General and administrative
Net finance costs
Other expense
Total expenses
Earnings from operations
For the year ended December 31, 2015
Revenue:
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
Expenses:
Depreciation and amortization expense
Cost of spare parts and equipment 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
$
$
119,895 $
57,091
3,335
3,482
8,711
192,514
65,939
2,394
44,703
40,813
16,507
170,356
22,158 $
— $
—
14,448
—
1,947
16,395
341
10,899
3,077
468
—
14,785
1,610 $
— $
—
—
—
(1,635)
(1,635)
119,895
57,091
17,783
3,482
9,023
207,274
—
—
—
—
—
—
(1,635) $
66,280
13,293
47,780
41,281
16,507
185,141
22,133
Leasing and
Related Operations Spare Parts Sales Eliminations (1)
Total
108,046 $
53,396
9,975
8,320
2,517
182,254
69,135
5,734
39,974
37,474
18,584
170,901
11,353 $
— $
—
15,607
—
659
16,266
289
12,115
2,770
387
—
15,561
705 $
— $
—
—
—
(458)
(458)
108,046
53,396
25,582
8,320
2,718
198,062
—
—
—
—
—
—
(458) $
69,424
17,849
42,744
37,861
18,584
186,462
11,600
$
$
78
For the year ended December 31, 2014
Revenue:
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
Expenses:
Depreciation and amortization expense
Cost of spare parts and equipment sales
General and administrative
Interest expense
Other expense
Total expenses
Leasing and
Related Operations Spare Parts Sales Eliminations (1)
Total
$
101,431 $
53,322
—
5,882
3,581
164,216
— $
—
8,917
—
1,661
10,578
— $
—
—
—
(736)
(736)
101,431
53,322
8,917
5,882
4,506
174,058
65,025
—
33,211
36,779
17,830
152,845
289
7,474
2,648
283
108
10,802
—
—
—
—
—
—
65,314
7,474
35,859
37,062
17,938
163,647
Earnings from operations
$
11,371 $
(224) $
(736) $
10,411
(1) Represents revenue generated between our operating segments
Total assets as of December 31, 2016
Total assets as of December 31, 2015
Total assets as of December 31, 2014
$
$
$
1,307,460 $
1,267,414 $
1,226,701 $
30,427 $
26,871 $
19,140 $
— $ 1,337,887
— $ 1,294,285
— $ 1,245,841
79
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I — CONDENSED BALANCE SHEETS
Parent Company Information
(In thousands, except share data)
December 31, December 31,
2016
2015
ASSETS
Cash and cash equivalents
Equipment held for operating lease, less accumulated depreciation
Equipment held for sale
Maintenance Rights
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
Other assets, net
Total assets
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’
EQUITY
Liabilities:
Accounts payable and accrued expenses
Deferred income taxes
Notes payable
Maintenance reserves
Security deposits
Unearned lease revenue
Total liabilities
$
4,574 $
811,091
22,446
16,468
7,853
17,554
24,723
45,406
(2,879)
16,096
1,021
12,289
2,894
753,024
10,938
22,680
4,170
16,420
20,286
41,295
(1,280)
19,964
271
8,118
898,780
$
976,642 $
$
13,428 $
43,265
626,876
54,655
18,555
3,843
760,622
17,659
37,358
572,759
38,072
20,612
3,090
689,550
Redeemable preferred stock ($0.01 par value, 1,000,000 shares authorized; 1,000,000
and nil shares issued and outstanding at December 31, 2016 and 2015, respectively)
19,760
—
Shareholders’ equity:
Common stock ($0.01 par value, 20,000,000 shares authorized; 6,401,929 and
7,548,395 shares issued and outstanding at December 31, 2016 and 2015, respectively)
Paid-in capital in excess of par
Retained earnings
Accumulated other comprehensive loss, net of income tax benefit
Total shareholders’ equity
Total liabilities, redeemable preferred stock and equity
64
2,512
194,729
(1,045)
196,260
75
28,727
180,949
(521)
209,230
898,780
$
976,642 $
80
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF INCOME
Parent Company Information
(In thousands)
Years Ended December 31,
2015
2014
2016
REVENUE
Lease rent revenue
Maintenance reserve revenue
Spare parts and equipment sales
Gain on sale of leased equipment
Other revenue
Total revenue
EXPENSES
Depreciation expense
Cost of spare parts and equipment sales
Write-down of equipment
General and administrative
Technical expense
Interest expense
Total expenses
Earnings from operations
Earnings from joint ventures
Income before income taxes
Income tax expense
$
76,283 $
30,742
8,404
3,322
10,660
129,411
63,443 $
29,937
20,210
2,420
7,017
123,027
43,451
6,591
5,989
39,201
4,637
23,358
123,227
40,623
13,559
6,764
35,898
6,805
18,448
122,097
50,492
22,229
7,588
2,276
5,227
87,812
29,276
6,354
4,681
29,479
4,455
13,500
87,745
6,184
930
67
1,813
1,175
1,329
7,997
4,710
2,105
2,277
1,396
1,346
Equity in income of subsidiaries, net of tax of $5,168, $4,037, and $3,214 at
December 31, 2016, 2015 and 2014, respectively
10,782
6,632
7,130
Net income
Preferred stock dividends
Accretion of preferred stock issuance costs
Net income attributable to common shareholders
$
14,069 $
6,460 $
7,180
281
8
13,780 $
—
—
6,460 $
—
—
7,180
$
81
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Parent Company Information
(In thousands)
2016
14,069
Years Ended December 31,
2015
2014
$
6,460
$
7,180
(868)
69
—
(799)
275
(524)
13,545
$
(796)
—
—
(796)
275
(521)
5,939
$
—
—
(499)
(499)
174
(325)
6,855
Net income
Other comprehensive income:
Currency translation adjustment
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
Total comprehensive income
$
$
82
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE I — CONDENSED STATEMENTS OF CASH FLOWS
Parent Company Information
(In thousands)
2016
Years Ended December 31,
2015
2014
$
14,069
$
6,460
$
7,180
(10,782)
43,451
5,989
3,717
2,704
—
(1)
(3,322)
(1,813)
137
4,710
(4,884)
(1,608)
(750)
(2,648)
3,723
(4,437)
16,583
(2,283)
878
63,433
(2,329)
15,500
60,893
(5,545)
1,167
—
(167,874)
(5,530)
(443)
(104,161)
149,000
(3,808)
155
(1,369)
455
(28,958)
236
19,752
(93,055)
42,408
1,680
2,894
4,574
20,619
20
$
$
$
(6,632)
40,623
6,764
4,150
2,646
—
(17)
(2,420)
(1,175)
—
1,806
(865)
4,547
—
(2,420)
4,471
(1,242)
5,227
5,354
817
68,094
(23,923)
3,791
18,792
(630)
1,304
5,802
(161,888)
(8,844)
(3,736)
(169,332)
192,700
(13)
518
(1,558)
(1,606)
(16,500)
26
—
(71,846)
101,721
483
2,411
2,894
16,462
75
$
$
$
(7,130)
29,276
4,681
3,509
2,391
(499)
34
(2,276)
(1,329)
—
1,478
(1,204)
(5,533)
—
(942)
2,425
(17,651)
17,563
2,303
1,048
35,324
(9,666)
17,582
21,360
(17,623)
847
—
(101,710)
(3,296)
(13,767)
(106,273)
154,395
(5,074)
410
(1,544)
4,553
(5,352)
311
—
(75,859)
71,840
891
1,520
2,411
11,110
76
$
$
$
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
Income from joint ventures
Loss on extinguishment of debt
Deferred income taxes
Changes in assets and liabilities:
Receivables
Spare parts inventory
Intangibles
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
Maintenance rights payments received
Purchase of equipment held for operating lease
Purchase of maintenance rights
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
Proceeds from shares issued under stock compensation plans
Cancellation of restricted stock units in satisfaction of withholding tax
Security deposit
Repurchase of common stock
Excess tax benefit from stock-based compensation
Proceeds from issuance of preferred stock
Principal payments on notes payable
Net cash provided by financing activities
Increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest
Income Taxes
Supplemental disclosures of non-cash investing and financing activities:
During the years ended December 31, 2016, 2015, 2014, engines and equipment totaling $229, $41,410 and
$120,880, respectively, were transferred to the parent from its subsidiaries.
During the years ended December 31, 2016, 2015, 2014, engines and equipment totaling $18,194, $21,786 and
$3,071, respectively, were transferred from Held for Operating Lease to Held for Sale.
During the years ended December 31, 2016, 2015 and 2014, engines and equipment totaling nil, $6,061 and
$9,649, respectively, were transferred from Held for Sale to Spare Parts Inventory.
During the years ended December 31, 2016, an aircraft of $2,925 was transferred from Property, equipment and
furnishings to Assets Held for Lease.
As of December 31, 2016, accrued preferred stock dividends were $281.
During the year ended December 31, 2016, the accretion of preferred stock issuance costs was $8.
83
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
SCHEDULE II — VALUATION ACCOUNTS
(In thousands)
Additions
Balance at Charged
Beginning (Credited) (Deductions) Balance at
End of Period
of Period
to Expense Recoveries
Net
December 31, 2014
Accounts receivable, allowance for doubtful accounts
December 31, 2015
Accounts receivable, allowance for doubtful accounts
December 31, 2016
Accounts receivable, allowance for doubtful accounts
296
(26)
(55)
215
697
912
(125)
—
—
215
912
787
Deductions in allowance for doubtful accounts represent uncollectible accounts written off, net of recoveries.
84
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands, except per share amounts)
Exhibit 11.1
Basic
Earnings:
Net income attributable to common shareholders
$13,780
$6,460
$7,180
2016
Years Ended December 31,
2015
2014
Shares:
Average common shares outstanding
Basic earnings per common share
Assuming full dilution
Earnings:
6,570
$2.10
7,817
$0.83
7,917
$0.91
Net income attributable to common shareholders
$13,780
$6,460
$7,180
Shares:
Average common shares outstanding
Potentially dilutive common shares outstanding
Diluted average common shares outstanding
Diluted earnings per common share
Supplemental information:
6,570
144
6,714
$2.05
7,817
170
7,987
$0.81
7,917
224
8,141
$0.88
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.
85
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Statement of Computation of Ratios of
Earnings to Fixed Charges and Preferred Dividends
(In thousands, except ratios)
2016
Years Ended December 31,
2014
2013
2015
Exhibit 12.1
2012
Earnings:
Earnings from continuing operations before income
taxes
Fixed charges
Cash distributions from equity method investments
Total earnings
Fixed charges:
$22,133
41,587
1,167
$64,887
$11,600
39,395
1,304
$52,299
$10,411
37,416
847
$48,704
$7,774
38,990
—
$46,764
$937
32,008
802
$33,747
Interest expense
Estimated interest expense within rental expense (1)
Total fixed charges
Preferred stock dividend (2)
Total fixed charges and preferred stock dividends
$41,144
443
$41,587
281
$41,868
$39,012
383
$39,395
—
$39,395
$37,062
354
$37,416
—
$37,416
$38,719
271
$38,990
—
$38,990
$31,749
259
$32,008
4,374
$36,382
Ratio of earnings to fixed charges
1.56
1.33
1.30
1.20
1.05
Ratio of earnings to fixed charges and preferred stock
dividends
1.55
1.33
1.30
1.20
0.93
(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.
86
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.
Delaware
Singapore
Willis Asset Management Limited
United Kingdom
87
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 15, 2016, with respect to the consolidated balance sheets of Willis Lease Finance Corporation and
subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive
income, redeemable preferred stock and shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2016, and related financial statement schedules I and II, and the effectiveness of internal
control over financial reporting as of December 31, 2016, which reports appears in the December 31, 2016 annual report
on Form 10-K of Willis Lease Finance Corporation.
/s/ KPMG LLP
San Francisco, California
March 15, 2017
88
Exhibit 31.1
CERTIFICATIONS
I, Charles F. Willis IV, 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 15, 2017
/s/ Charles F. Willis, IV
Charles F. Willis, IV
Chief Executive Officer
Chairman of the Board
89
Exhibit 31.2
CERTIFICATIONS
I, Scott B. Flaherty, 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 15, 2017
/s/ Scott B. Flaherty
Scott B. Flaherty
Chief Financial Officer
90
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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, 2016 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 15, 2017
/s/ Charles F. Willis, IV
Charles F. Willis, IV
Chairman of the Board and Chief Executive Officer
/s/ Scott B. Flaherty
Scott B. Flaherty
Chief Financial Officer
91
Executive Team
Charles F. Willis, IV
Chairman and
Chief Executive Officer
Brian R. Hole
President
Scott B. Flaherty
Senior Vice President and
Chief Financial Officer
Dean M. Poulakidas
Senior Vice President
and General Counsel
Board of Directors
Charles F. Willis, IV
Chairman and
Chief Executive Officer
Dr. Hans J. Hunziker
Principal and Chief Executive Officer
AllJets Ltd.
Former President and
Chief Executive Officer
FlightLease Ltd.
Corporate Information
Corporate Headquarters
773 San Marin Drive, Suite 2215
Novato, California 94998
415.408.4700
Independent Registered
Public Accountants
KPMG LLP
55 Second Street, Suite 1400
San Francisco, California 94105
415.963.5100
Robert J. Keady
Founder and President
Eastern American Consulting Group, LLP
Former Vice President,
Business Development and Marketing
Pratt & Whitney Commercial Engines
and Global Services
Robert T. Morris
President
Robert Morris & Company
Austin C. Willis
Former Founder, President and CEO
JT Power, LLC
Senior Vice President
Willis Lease Finance Corporation
Transfer Agent & Registrar
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
800.937.5449
Investor Relations
Scott B. Flaherty
Senior Vice President and
Chief Financial Officer
Willis Lease Finance Corporation
415.408.4700
Stock Exchange Listing
Willis Lease Finance Corporation is listed
on the NASDAQ Global Market under the
symbol WLFC.
Form 10-K, 10-Q and Press Releases
This Form 10-K has been filed with the
Securities 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.
Design: BLOCH+ COULTER Design Group, www.blochcoulter.com
All paper used in this annual report has been certified by the Forest Stewardship Council (FSC).
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, various end-of-life solutions for aircraft and engines
provided through its subsidiary, Willis Aeronautical Services, Inc., as well as asset management services provided through its
subsidiary, Willis Asset Management Limited (WAM). With the addition of WAM in 2016, the Company is now the largest independent
owner and manager of aircraft engines in the world, with roughly 800 engines under management.
E N G I N E S A N D A U X I L I A R Y P O W E R U N I T ( A P U ) M O D E L S
O W N E D A N D L E A S E D B Y W I L L I S L E A S E F I N A N C E C O R P O R A T I O N ,
S E R V I N G G L O B A L A V I A T I O N M A R K E T S .
E N G I N E S
CF34-3
CF34-8
CF34-10
CF6-80
CFM56-3C
CFM56-5A
CFM56-5B
CFM56-5C
CFM56-7B
GEnx
GE90
PW100
PW150
PW4000
Trent 772B
V2500
A P U s
GTCP131-9A
GTCP131-9B
GTCP331-500B
A I R C R A F T
Various
platforms
Willis Lease Finance Corporation
2 0 1 6 A N N U A L R E P O R T
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773 San Marin Drive, Suite 2215
Novato, California 94998 USA
415.408.4700
www.willislease.com