WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2025

Financial Performance Overview

Willis Lease Finance Corporation, a leading provider of aircraft engines and other aviation equipment, has reported its financial results for the three months ended March 31, 2025. The company saw strong growth across multiple revenue streams, with total revenue increasing by 32.5% compared to the same period in the prior year.

The key highlights of the company’s financial performance include:

• Lease rent revenue increased by 28.1% to $67.7 million, driven by growth in the company’s leasing portfolio and higher average lease rates.
• Maintenance reserve revenue grew by 25.0% to $54.9 million, reflecting increased long-term maintenance revenue and higher short-term maintenance fees.
• Spare parts and equipment sales surged by 454.7% to $18.2 million, as the company capitalized on strong demand for surplus aviation parts.
• Interest revenue rose by 73.4% to $3.9 million, primarily due to an increase in notes receivable.

However, the company also faced higher expenses during the quarter. Depreciation and amortization expense increased by 11.3% to $25.0 million, reflecting the larger size of the lease portfolio. General and administrative expenses jumped by 61.3% to $47.7 million, driven by increased consultant fees and personnel costs. Net finance costs also rose by 39.5% to $32.1 million, due to higher debt levels and borrowing costs.

Despite the rise in expenses, the company remained profitable, generating net income of $16.9 million for the quarter, compared to $20.9 million in the same period last year. The effective tax rate increased to 33.2% from 30.2% in the prior year, primarily due to higher executive compensation.

Revenue and Profit Trends

The company’s revenue growth was broad-based, with increases across most of its business segments. Lease rent revenue, the largest component of total revenue, grew by 28.1% year-over-year, reflecting the expansion of the company’s leasing portfolio and higher average lease rates. This was partially offset by a slight decrease in average utilization of the equipment in the portfolio.

Maintenance reserve revenue, which includes both short-term and long-term maintenance fees, also saw strong growth of 25.0%. The increase in long-term maintenance revenue was driven by end-of-lease compensation and the realization of maintenance reserves, while the short-term maintenance revenue rose due to more engines on lease with “non-reimbursable” usage fees.

The standout performer was the company’s spare parts and equipment sales, which surged by 454.7%. This was driven by strong demand for surplus aviation parts, as well as a discrete $7.0 million sale of equipment. Interest revenue also grew significantly, up 73.4%, due to an increase in notes receivable related to failed sale-leaseback transactions.

On the expense side, the company faced higher costs, particularly in general and administrative expenses, which rose by 61.3%. This was primarily due to a significant increase in consultant-related fees, as well as higher personnel costs, including share-based compensation. Depreciation and amortization expense also increased by 11.3%, reflecting the growth in the lease portfolio.

Despite the rise in expenses, the company remained profitable, generating net income of $16.9 million for the quarter. However, the effective tax rate increased to 33.2%, compared to 30.2% in the prior year, due to higher executive compensation exceeding the $1.0 million limit under Section 162(m) of the Internal Revenue Code.

Strengths and Weaknesses

One of the company’s key strengths is its diversified revenue streams, which include lease rent, maintenance reserve, spare parts and equipment sales, and other sources of income. This diversification helps to mitigate the risk of reliance on any single revenue source and provides the company with multiple avenues for growth.

The company’s leasing business, which accounts for the majority of its revenue, has also demonstrated strong performance, with a 28.1% increase in lease rent revenue. This reflects the company’s ability to maintain high utilization rates and secure favorable lease terms, even in a challenging market environment.

Another strength is the company’s focus on technical expertise and maintenance services, which provide a steady stream of revenue and help to support the leasing business. The company’s maintenance services revenue remained relatively flat during the quarter, but this segment provides valuable complementary services to the core leasing operations.

However, the company also faces some weaknesses, particularly in the area of rising expenses. The significant increase in general and administrative expenses, driven by consultant fees and personnel costs, has put pressure on the company’s profitability. While the company was still able to generate net income, the rise in expenses could potentially erode margins if it continues.

Additionally, the company’s reliance on debt financing, with a significant portion of its debt at variable interest rates, exposes it to interest rate risk. If interest rates continue to rise, the company may face higher borrowing costs that could not be fully passed on to customers through higher lease rates in the short term.

Outlook and Future Prospects

Looking ahead, the company’s future prospects appear promising, as it continues to capitalize on the strong demand for aircraft engines and aviation equipment. The company’s diversified revenue streams, technical expertise, and focus on maintaining a high-quality lease portfolio position it well to navigate the challenges of the aviation industry.

The company’s investment in sustainable aviation fuel projects, while currently incurring significant consulting expenses, could also provide a long-term growth opportunity as the industry seeks to reduce its environmental impact. However, the company will need to carefully manage the costs associated with these initiatives to ensure they do not unduly burden its profitability.

To mitigate the risks associated with rising interest rates and debt financing, the company may need to explore additional strategies, such as further hedging its variable-rate debt or seeking alternative financing sources. Maintaining a strong balance sheet and liquidity position will be crucial in the face of potential market volatility.

Overall, the company’s financial performance for the first quarter of 2025 demonstrates its ability to adapt and grow in a dynamic industry. By leveraging its technical expertise, diversified revenue streams, and strategic investments, the company appears well-positioned to continue delivering value to its shareholders in the years to come.