Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
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
 
68-0070656
(State or other jurisdiction of incorporation or
organization)
 
(IRS Employer Identification No.)
 
 
 
4700 Lyons Technology Parkway, Coconut Creek, FL
 
33073
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code  (415) 408-4700
______________________________________________________________________
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  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer  x
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company  ¨
 
 
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of exchange on which registered
Common Stock, $0.01 par value per share
 
WLFC
 
NASDAQ
The number of shares of the registrant's Common Stock outstanding as of May 6, 2019 was 5,875,231 .
 

Table of Contents

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business, operations, growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC") on March 14, 2019 and our other reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our other filings with the SEC.

3
Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Cash and cash equivalents
$
12,181

 
$
11,688

Restricted cash
68,452

 
70,261

Equipment held for operating lease, less accumulated depreciation of $389,320 and $385,483 at March 31, 2019 and December 31, 2018, respectively
1,605,120

 
1,673,135

Maintenance rights
14,763

 
14,763

Equipment held for sale
629

 
789

Receivables, net of allowances of $2,465 and $2,559 at March 31, 2019 and December 31, 2018, respectively
24,986

 
23,270

Spare parts inventory
47,038

 
48,874

Investments
54,253

 
47,941

Property, equipment & furnishings, less accumulated depreciation of $7,437 and $6,945 at March 31, 2019 and December 31, 2018, respectively
27,758

 
27,679

Intangible assets, net
1,359

 
1,379

Notes receivables
30,854

 
238

Other assets
18,109

 
14,926

Total assets (1)
$
1,905,502

 
$
1,934,943

 
 
 
 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued expenses
$
32,410

 
$
42,939

Deferred income taxes
96,995

 
90,285

Debt obligations
1,297,836

 
1,337,349

Maintenance reserves
93,979

 
94,522

Security deposits
22,212

 
28,047

Unearned revenue
5,057

 
5,460

Total liabilities (2)
1,548,489

 
1,598,602

 
 
 
 
Redeemable preferred stock ($0.01 par value, 2,500 shares authorized; 2,500 shares issued at March 31, 2019 and December 31, 2018, respectively)
49,575

 
49,554

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock ($0.01 par value, 20,000 shares authorized; 6,160 and 6,176 shares issued at March 31, 2019 and December 31, 2018, respectively)
62

 
62

Paid-in capital in excess of par
563

 
—

Retained earnings
306,912

 
286,623

Accumulated other comprehensive (loss) income, net of income tax expense of $23 and $83 at March 31, 2019 and December 31, 2018, respectively
(99
)
 
102

Total shareholders’ equity
307,438

 
286,787

Total liabilities, redeemable preferred stock and shareholders' equity
$
1,905,502

 
$
1,934,943

_____________________________
(1)
Total assets at March 31, 2019 and December 31, 2018 , respectively, include the following assets of variable interest entities (“VIEs”) that can only be used to settle the liabilities of the VIEs: Cash $268 and $656 ; Restricted cash $68,072 and $70,261 ; Equipment $1,020,182 and $1,032,599 ; and Other assets  $328  and $1,075 , respectively.
(2)
Total liabilities at March 31, 2019 and December 31, 2018 , respectively, include the following liabilities of VIEs for which the VIEs’ creditors do not have recourse to Willis Lease Finance Corporation: Debt obligations $890,701 and $903,296 , respectively.
See accompanying notes to the unaudited condensed consolidated financial statements.

4

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
REVENUE
 
 
 
Lease rent revenue
$
48,369

 
$
39,644

Maintenance reserve revenue
25,350

 
15,440

Spare parts and equipment sales
17,502

 
12,986

Gain on sale of leased equipment
9,570

 
545

Other revenue
2,978

 
1,882

Total revenue
103,769

 
70,497

 
 
 
 
EXPENSES
 
 
 
Depreciation and amortization expense
20,258

 
17,355

Cost of spare parts and equipment sales
14,412

 
11,388

Write-down of equipment
1,105

 
—

General and administrative
21,440

 
15,611

Technical expense
1,788

 
3,677

Interest expense
17,879

 
13,595

Total expenses
76,882

 
61,626

 
 
 
 
Earnings from operations
26,887

 
8,871

Earnings from joint ventures
946

 
747

Income before income taxes
27,833

 
9,618

Income tax expense
6,955

 
2,536

Net income
20,878

 
7,082

Preferred stock dividends
801

 
801

Accretion of preferred stock issuance costs
21

 
20

Net income attributable to common shareholders
$
20,056

 
$
6,261

 
 
 
 
Basic weighted average earnings per common share
$
3.47

 
$
1.03

Diluted weighted average earnings per common share
$
3.35

 
$
1.00

 
 
 
 
Basic weighted average common shares outstanding
5,779

 
6,104

Diluted weighted average common shares outstanding
5,978

 
6,256

See accompanying notes to the unaudited condensed consolidated financial statements.


5

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
20,878

 
$
7,082

Other comprehensive income:
 
 
 
Currency translation adjustment
353

 
585

Unrealized (loss) gain on derivative instruments
(613
)
 
1,031

Net (loss) gain recognized in other comprehensive income
(260
)
 
1,616

Tax benefit (expense) related to items of other comprehensive income
59

 
(365
)
Other comprehensive (loss) income
(201
)
 
1,251

Total comprehensive income
$
20,677

 
$
8,333


See accompanying notes to the unaudited condensed consolidated financial statements.

6

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
Three Months Ended March 31, 2019 and 2018
(In thousands)
(Unaudited)
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity
 
 
Redeemable
 
 
 
 
 
 
 
 
 
Accumulated Other
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid in Capital in
 
Retained
 
Comprehensive
 
Total Shareholders'
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Excess of par
 
Earnings
 
Income (Loss)
 
Equity
Balances at December 31, 2018
 
2,500

 
$
49,554

 
6,176

 
$
62

 
$
—

 
$
286,623

 
$
102

 
$
286,787

Net income
 
—

 
—

 
—

 
—

 
—

 
20,878

 
—

 
20,878

Net unrealized gain from currency translation adjustment, net of tax expense of $80
 
—

 
—

 
—

 
—

 
—

 
—

 
273

 
273

Net unrealized loss from derivative instruments, net of tax benefit of $139
 
—

 
—

 
—

 
—

 
—

 
—

 
(474
)
 
(474
)
Shares repurchased
 
—

 
—

 
(8
)
 
—

 
(317
)
 
 
 
—

 
(317
)
Shares issued under stock compensation plans
 
—

 
—

 
7

 
—

 
160

 
—

 
—

 
160

Cancellation of restricted stock in satisfaction of withholding tax
 
—

 
—

 
(15
)
 
—

 
(545
)
 
—

 
—

 
(545
)
Stock-based compensation expense
 
—

 
—

 
—

 
—

 
1,265

 
—

 
—

 
1,265

Accretion of preferred stock issuance costs
 
—

 
21

 
—

 
—

 
—

 
(21
)
 
—

 
(21
)
Preferred stock dividends ($0.32 per share)
 
—

 
—

 
—

 
—

 
—

 
(801
)
 
—

 
(801
)
Adoption of ASU 2016-02
 
—

 
—

 
—

 
—

 
—

 
233

 
—

 
233

Balances at March 31, 2019
 
2,500

 
$
49,575

 
6,160

 
$
62

 
$
563

 
$
306,912

 
$
(99
)
 
$
307,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity
 
 
Redeemable
 
 
 
 
 
 
 
 
 
Accumulated Other
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid in Capital in
 
Retained
 
Comprehensive
 
Total Shareholders'
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Excess of par
 
Earnings
 
Income
 
Equity
Balances at December 31, 2017
 
2,500

 
$
49,471

 
6,419

 
$
64

 
$
2,319

 
$
256,301

 
$
226

 
$
258,910

Net income
 
—

 
—

 
—

 
—

 
—

 
7,082

 
—

 
7,082

Net unrealized gain from currency translation adjustment, net of tax expense of $132
 
—

 
—

 
—

 
—

 
—

 
—

 
453

 
453

Net unrealized gain from derivative instruments, net of tax expense of $233
 
—

 
—

 
—

 
—

 
—

 
—

 
799

 
799

Shares repurchased
 
—

 
—

 
(297
)
 
(2
)
 
(2,698
)
 
(7,483
)
 
—

 
(10,183
)
Shares issued under stock compensation plans
 
—

 
—

 
18

 
1

 
117

 
—

 
—

 
118

Cancellation of restricted stock in satisfaction of withholding tax
 
—

 
—

 
(24
)
 
(2
)
 
(663
)
 
—

 
—

 
(665
)
Stock-based compensation expense
 
—

 
—

 
—

 
—

 
925

 
—

 
—

 
925

Accretion of preferred stock issuance costs
 
—

 
20

 
—

 
—

 
—

 
(20
)
 
—

 
(20
)
Preferred stock dividends ($0.32 per share)
 
—

 
—

 
—

 
—

 
—

 
(801
)
 
—

 
(801
)
Adoption of ASU 2018-02
 
—

 
—

 
—

 
—

 
—

 
(59
)
 
59

 
—

Balances at March 31, 2018
 
2,500

 
$
49,491

 
6,116

 
$
61

 
$
—

 
$
255,020

 
$
1,537

 
$
256,618


7

WILLIS LEASE FINANCE CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
20,878

 
$
7,082

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
20,258

 
17,355

Write-down of equipment
1,105

 
—

Stock-based compensation expenses
1,265

 
925

Amortization of deferred costs
1,757

 
1,433

Allowances and provisions
274

 
242

Gain on sale of leased equipment
(9,570
)
 
(545
)
Income from joint ventures
(946
)
 
(747
)
Loss on disposal of property, equipment and furnishings
(36
)
 
—

Income taxes
7,014

 
2,300

Changes in assets and liabilities:
 
 
 
Receivables
(1,990
)
 
(6,026
)
Inventory
8,538

 
1,830

Other assets
(308
)
 
276

Accounts payable and accrued expenses
(8,954
)
 
(437
)
Maintenance reserves
(543
)
 
9,389

Security deposits
(2,711
)
 
1,038

Unearned revenue
(403
)
 
1,166

Net cash provided by operating activities
35,628

 
35,281

 
 
 
 
Cash flows from investing activities:
 
 
 
Proceeds from sale of equipment (net of selling expenses)
133,768

 
18,393

Issuance of notes receivables
(30,783
)
 
—

Payments received on notes receivables
166

 
8

Capital contributions to joint ventures
(5,013
)
 
—

Deposit received for proposed sale of equipment
—

 
3,400

Purchase of equipment held for operating lease
(92,226
)
 
(138,626
)
Purchase of property, equipment and furnishings
(606
)
 
(290
)
Net cash provided by (used in) investing activities
5,306

 
(117,115
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt obligations
102,120

 
123,000

Principal payments on debt obligations
(142,880
)
 
(29,779
)
Proceeds from shares issued under stock compensation plans
160

 
118

Cancellation of restricted stock units in satisfaction of withholding tax
(545
)
 
(665
)
Repurchase of common stock
(286
)
 
(74
)
Preferred stock dividends
(819
)
 
(917
)
Net cash (used in) provided by financing activities
(42,250
)
 
91,683

 
 
 
 
(Decrease)/Increase in cash, cash equivalents and restricted cash
(1,316
)
 
9,849

Cash, cash equivalents and restricted cash at beginning of period
81,949

 
47,324

Cash, cash equivalents and restricted cash at end of period
$
80,633

 
$
57,173

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Net cash paid for:
 
 
 
Interest
$
17,301

 
$
12,187

Income Taxes
$
(359
)
 
$
71

 
 
 
 
Supplemental disclosures of non-cash activities:
 
 
 
Purchase of aircraft and engines
$
—

 
$
3,762

Transfers from Equipment held for operating lease to Equipment held for sale
$
—

 
$
1,898

Transfers from Equipment held for operating lease to Spare parts inventory
$
6,702

 
$
—

Transfers from Equipment held for sale to Spare parts inventory
$
4,471

 
$
24,014

Accrued preferred stock dividends
$
667

 
$
667

Accrued share repurchases
$
100

 
$
10,109

See accompanying notes to the unaudited condensed consolidated financial statements.

8

WILLIS LEASE FINANCE CORPORATION  
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
Unless the context requires otherwise, references to the “Company”, “WLFC”, “we”, “us” or “our” in this Quarterly Report on Form 10-Q refer to Willis Lease Finance Corporation and its subsidiaries .
1.  Summary of Significant Accounting Policies

The significant accounting policies of the Company were described in Note 1 to the audited consolidated financial statements included in the Company’s 2018 Annual Report on Form 10-K (“2018 Form 10-K”). There have been no significant changes in the Company’s significant accounting policies for the three months ended March 31, 2019 , except as disclosed in Note 1(d).

(a)   Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Therefore, they do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the 2018 Form 10-K. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of income, statements of comprehensive income, statements of redeemable preferred stock and shareholders' equity and statements of cash flows for such interim periods presented. Additionally, operating results for interim periods are not necessarily indicative of the results that can be expected for a full year.

In accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. These estimates and judgments are based on historical experience and other assumptions that management believes are reasonable. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. The significant estimates made in the accompanying Unaudited Condensed Consolidated Financial Statements include certain assumptions related to goodwill, intangible assets, long-lived assets, equipment held for sale, estimated income taxes and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions.

(b)   Adjustments to Prior Period

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” and has identified the transfer of engines and airframes from the lease portfolio to the Spare Parts segment for part out as sales to customers in accordance with the ordinary operations of our Spare Parts reportable segment. As such, the Company presents the sale of these assets on a gross basis and have reclassified the three months ended March 31, 2018 gross revenue and costs on sale to the Spare parts and equipment sales and Cost of spare parts and equipment sales line items from the net gain (loss) presentation within the Gain on sale of leased equipment line item. The reclassification resulted in an increase in Spare parts and equipment sales of $6.7 million , a decrease in Gain on sale of leased equipment of $0.1 million and an increase in Cost of spare parts and equipment sales of $6.6 million with no impact to the Company's net income for the three months ended March 31, 2018 . The Company's Consolidated Statement of Cash Flows for the three months ended March 31, 2018 were adjusted for this matter by increasing cash flows provided by operating activities by $4.9 million and decreasing cash flows provided by investing activities by a similar amount.

(c) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, including VIEs, where the Company is the primary beneficiary in accordance with consolidation guidance. The Company evaluates all entities in which it has 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 VIE, the Company consolidates the financial statements of that entity if it is the

9

primary beneficiary of the entities’ activities.  If the entity is a voting interest entity, the Company consolidates the entity when it has a majority of voting interests. Intercompany transactions and balances have been eliminated in consolidation.

(d)   Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted by the Company

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) that amends the accounting guidance on leases for both lessees and lessors. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The FASB also subsequently issued amendments to the standard, including providing an additional and optional transition method to adopt the new standard, as well as certain practical expedients related to land easements and lessor accounting.

The accounting standard update originally required the use of a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements with the option to elect certain practical expedients. A subsequent amendment to the standard provided an additional and optional transition method that allowed entities to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopted the new leases standard would continue to be in accordance with ASC Topic 840 if the optional transition method is elected. The Company adopted the standard using the optional transition method with no restatement of comparative periods and a cumulative effect adjustment recognized as of the date of adoption.

Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately  $4.5 million  and  $4.3 million , respectively, as of January 1, 2019 . The cumulative effect adjustment to retained earnings as of January 1, 2019 was $0.2 million . The standard did not materially impact our consolidated financial statements.
 
As part of the implementation process, the Company assessed its lease arrangements and evaluated practical expedients and accounting policy elections to meet the reporting requirements of this standard. The Company also evaluated the changes in controls and processes that were necessary to implement the new standard, and no material changes were required. The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’ which permitted us not to reassess under the new standard the prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to WLFC.
 
Under ASC 842, a lease is a sales-type lease if any one of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all the risks and benefits of the underlying asset to the lessee, the lease is a direct financing lease. All leases that are not sales-type or direct financing leases are operating leases. Furthermore, the Company will assess on an ongoing basis, the updated guidance provided for sale leaseback transactions and whether failed sale leaseback accounting treatment is triggered. As lessor, the Company's leases remained as operating leases under the new standard. In addition, due to the new standard’s narrowed definition of initial direct costs, the Company expenses as incurred, certain lease origination costs that were previously capitalized as initial direct costs and amortized to expense over the lease term.
 
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. As a result, for those leases that qualify, the Company did not recognize ROU assets or lease liabilities, including for existing short-term leases. The Company also elected the practical expedient to not separate lease and non-lease components for the majority of its leases as both lessee and lessor.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The ASU is targeted at simplifying the application of hedge accounting and aims at aligning the recognition and presentation of the effects of hedge instruments and hedge items. This guidance became effective for the Company on January 1, 2019 and it did not result in an adjustment to the opening balance of retained earnings for the Company's existing cash flow hedge. Additionally, the presentation and disclosure aspect of ASU 2017-12 was applied on a prospective basis within Note 6.

In June 2018, the FASB issued ASU 2018-07, “ Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. ” The ASU expands the scope of Topic 718 to include share-based payment transactions

10

for acquiring goods and services from non-employees. The Company adopted this guidance effective January 1, 2019 and it did not materially impact our consolidated financial statements.

Recent Accounting Pronouncements To Be Adopted by the Company

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. ASU 2016-13 affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. The effective date will be the first quarter of fiscal year 2020, with early adoption permitted. The Company is evaluating the potential effects on the consolidated financial statements.
2. Leases

As lessor, as of March 31, 2019 , all of our leases were operating leases with the exception of two leases entered into during the first quarter of 2019 which are classified as notes receivables under the failed sale leaseback guidance provided by ASC 842.

The significant majority of leases the Company enters as lessee are for real estate (office and warehouse space for our operations as well as automobiles). These lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have any significant leases that have not yet commenced but that create significant rights and obligations. Leases with terms of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Some of the Company's leases include variable non-lease components (e.g., taxes) which are not separated from associated lease components (e.g. fixed rent, common-area maintenance costs, vehicle protection plans and other service fees) as elected under the practical expedient package provided by ASC 842.

The Company's leases have remaining lease terms of one to eight years, some of which include options to renew or extend the lease term from one to five years. Our automobile leases include an option to purchase the vehicle at lease termination. The depreciable life of assets are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
The exercise of lease renewal options or purchase at lease termination is at the Company's sole discretion. If it is reasonably certain that we will exercise such options, the periods covered by such options are included in the lease term and are recognized as part of our ROU assets and lease liabilities.

Supplemental balance sheet information related to leases was as follows:
Leases
 
Classification
 
March 31, 2019
 
 
 
 
(in thousands, except lease term and discount rate)
Assets
 
 
 
 
Operating lease right-of-use assets
 
Other assets
 
$
4,309

Total leased assets
 
 
 
$
4,309

 
 
 
 
 
Liabilities
 
 
 
 
Operating lease right-of-use liabilities
 
Accounts payable and accrued expenses
 
$
4,092

Total lease liabilities
 
 
 
$
4,092

 
 
 
 
 
Weighted average remaining lease term (years)
 
 
 
 
Operating leases
 
 
 
6

Weighted average discount rate
 
 
 
 
Operating leases
 
 
 
4.5
%


11

Future maturities of the Company's operating lease liabilities at March 31, 2019 are as follows:
Year
 
(in thousands)
Remaining for year ending December 31, 2019
 
$
639

2020
 
852

2021
 
752

2022
 
705

2023
 
510

Thereafter
 
1,276

Total lease payments
 
4,734

Less: interest
 
(642
)
Total lease liabilities
 
$
4,092


The following table represents future minimum lease payments under noncancelable operating leases at December 31, 2018 as presented in the Company’s Annual Report on Form 10-K filed March 14, 2019:
Year
 
(in thousands)
2019
 
$
1,172

2020
 
676

2021
 
638

2022
 
645

2023
 
483

Thereafter
 
1,183

 
 
$
4,797


The components of lease expense for the three months ended March 31, 2019 were as follows:
Lease expense
 
Classification
 
(in thousands)
Operating lease cost
 
General and administrative
 
$
381

Net lease cost
 
 
 
$
381


Supplemental cash flow information related to leases for the three months ended March 31, 2019 was as follows:
 
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
199

 
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
 
Operating leases
 
$
—


12

3. Revenue from Contracts with Customers

The following table disaggregates revenue by major source for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
 
Leasing and  Related Operations
 
Spare Parts Sales
 
Eliminations (1)
 
Total
Leasing revenue (2)
 
$
75,358

 
$
—

 
$
—

 
$
75,358

Spare parts and equipment sales
 
2,485

 
15,017

 
—

 
17,502

Gain on sale of leased equipment
 
9,570

 
—

 
—

 
9,570

Managed services
 
1,339

 
—

 
—

 
1,339

Other revenue
 
—

 
94

 
(94
)
 
—

Total revenue
 
$
88,752

 
$
15,111

 
$
(94
)
 
$
103,769

 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018
 
Leasing and Related Operations
 
Spare Parts Sales
 
Eliminations (1)
 
Total
Leasing revenue (2)
 
$
56,014

 
$
—

 
$
—

 
$
56,014

Spare parts and equipment sales
 
—

 
12,986

 
—

 
12,986

Gain on sale of leased equipment
 
545

 
—

 
—

 
545

Managed services
 
921

 
—

 
—

 
921

Other revenue
 
—

 
1,113

 
(1,082
)
 
31

Total revenue
 
$
57,480

 
$
14,099

 
$
(1,082
)
 
$
70,497

_____________________________
(1)
Represents revenue generated between our reportable segments.
(2)
Leasing revenue is recognized under the lease accounting guidance, and therefore qualifies for the scope exception under ASC 606. Total Leasing revenue includes $1.6 million and $0.9 million for the three months ended March 31, 2019 and 2018 , respectively, that is presented in the Other revenue line item on the Consolidated Statements of Income.
4.  Investments

In 2011, the Company 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. As of March 31, 2019 , WMES owned a lease portfolio of 33 engines and six aircraft with a net book value of $318.4 million .

In 2014, the Company 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 joint venture based in Shanghai, China. Each partner holds a fifty percent interest in the joint venture and the Company uses the equity method in recording investment activity. CASC Willis acquires and leases jet engines to Chinese airlines and concentrates on the demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. As of March 31, 2019 , CASC Willis owned a lease portfolio of four engines with a net book value of $52.7 million .
Three Months Ended March 31, 2019
 
WMES
 
CASC Willis
 
Total
 
 
(in thousands)
Investment in joint ventures as of December 31, 2018
 
$
34,183

 
$
13,758

 
$
47,941

Earnings from joint ventures
 
747

 
199

 
946

Investment
 
5,013

 
—

 
5,013

Foreign currency translation adjustment
 
—

 
353

 
353

Investment in joint ventures as of March 31, 2019
 
$
39,943

 
$
14,310

 
$
54,253


“Other revenue” on the Condensed Consolidated Statements of Income includes management fees earned of $0.6 million   and $0.7 million during the three months ended March 31, 2019 and 2018 , respectively. These fees related to the servicing of engines

13

for the WMES lease portfolio. During the three months ended March 31, 2019 , the Company sold five aircraft to WMES for $75.5 million . During the three months ended March 31, 2018 , the Company sold one aircraft and one engine to WMES for $21.4 million .

Summarized financial information for 100% of WMES is presented in the following tables:
 
Three Months Ended March 31
 
2019
 
2018
 
(in thousands)
Revenue
$
9,543

 
$
7,606

Expenses
8,205

 
6,904

WMES income before income taxes
$
1,338

 
$
702

 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Total assets
$
325,763

 
$
274,744

Total liabilities
238,318

 
198,534

Total WMES net equity
$
87,445

 
$
76,210


14

5.  Debt Obligations

Debt obligations consisted of the following:
 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Credit facility at a floating rate of interest of one-month LIBOR plus 1.5% at March 31, 2019, secured by engines. The facility has a committed amount of $890.0 million at March 31, 2019, which revolves until the maturity date of April 2021
$
392,000

 
$
427,000

WEST IV Series A 2018 term notes payable at a fixed rate of interest of 4.75%, maturing in September 2043, secured by engines
319,390

 
323,075

WEST IV Series B 2018 term notes payable at a fixed rate of interest of 5.44%, maturing in September 2043, secured by engines
45,627

 
46,154

WEST III Series A 2017 term notes payable at a fixed rate of interest of 4.69%, maturing in August 2042, secured by engines
270,901

 
274,205

WEST III Series B 2017 term notes payable at a fixed rate of interest of 6.36%, maturing in August 2042, secured by engines
38,740

 
39,212

WEST II Series A 2012 term notes payable at a fixed rate of interest of 5.50%, maturing in September 2037, secured by engines
232,409

 
237,847

Note payable at three-month LIBOR plus a margin ranging from 1.85% to 5.25% at March 31, 2019, maturing in July 2022, secured by engines
8,120

 
—

Note payable at fixed interest rates ranging from 2.60% to 2.97%, maturing in July 2024, secured by an aircraft
10,483

 
10,937

 
1,317,670

 
1,358,430

Less: unamortized debt issuance costs
(19,834
)
 
(21,081
)
Total debt obligations
$
1,297,836

 
$
1,337,349


Principal outstanding at March 31, 2019 , is repayable as follows:
Year
 
(in thousands)
2019
 
$
42,333

2020
 
56,128

2021 (includes $392.0 million outstanding on revolving credit facility)
 
448,418

2022 (includes $163.1 million outstanding on WEST II Series A 2012 term notes)
 
212,671

2023
 
34,008

Thereafter
 
524,112

Total
 
$
1,317,670


The Company maintains a revolving credit facility to finance the acquisition of  commercial aircraft and aircraft engines and related aircraft equipment for lease as well as for general working capital purposes. The $890 million revolving credit facility has an accordion feature which would expand the entire credit facility up to $1 billion . The interest rate is adjusted quarterly, based on the Company’s leverage ratio, as calculated under the terms of the revolving credit facility. 

On February 28, 2019, the Company closed on a loan with a maturity date of July 2022 totaling $8.1 million .  Interest is payable at three-month LIBOR plus a margin ranging from 1.85% to 5.25% and principal and interest are paid quarterly.  The loan is secured by two engines.

Virtually all of the above debt requires 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 either monthly or quarterly and the Company was in full compliance with all financial covenant requirements at March 31, 2019 .

15

6.  Derivative Instruments

The Company periodically holds interest rate derivative instruments to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $392.0 million and $427.0 million of such borrowings at March 31, 2019 and December 31, 2018 , respectively, tied to this rate. As a matter of policy, management does not use derivatives for speculative purposes.  During 2016, the Company entered into one interest rate swap agreement which has a notional outstanding amount of $100.0 million , with a remaining term of 25 months as of March 31, 2019 . The derivatives were designated in a cash flow hedging relationship.

The Company evaluated the effectiveness of the swap to hedge its interest rate risk associated with its variable rate debt and concluded at the swap inception date that the swap was highly effective in hedging that risk. The Company will evaluate the effectiveness of the hedging relationship on an ongoing basis.

The fair value of the swap at March 31, 2019 and December 31, 2018 was $1.0 million and $1.7 million , respectively, representing a net asset. The Company recorded a $(0.2) million and $24.0 thousand adjustment to interest expense during the three months ended March 31, 2019 and 2018 , respectively, from derivative instruments.

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 counterparty’s 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. The Company applies hedge accounting and accounts for the change in fair value of its cash flow hedges through other comprehensive income for all derivative instruments.

Effect of Derivative Instruments on Earnings in the Statements of Income and on Comprehensive Income  

The following tables provide additional information about the financial statement effects related to the cash flow hedges for the three months ended March 31, 2019 and 2018 :
Derivatives in Cash Flow Hedging Relationships
 
Amount of Loss (Gain) Recognized
in OCI on Derivatives
(Effective Portion)
 
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income
(Effective Portion)
 
Amount of Gain (Loss) Recognized
from Accumulated OCI into Income
(Effective Portion)
 
Three Months Ended March 31,
 
 
Three Months Ended March 31,
 
2019
 
2018
 
 
2019
 
2018
 
 
(in thousands)
 
 
 
(in thousands)
Interest rate contracts
 
$
613

 
$
(1,031
)
 
Interest expense
 
$
203

 
$
(24
)
Total
 
$
613

 
$
(1,031
)
 
Total
 
$
203

 
$
(24
)

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, if any, is recorded in earnings in the current period. There was no ineffectiveness in the hedge for the period ended March 31, 2019.

Counterparty Credit Risk

The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The counterparty for the interest rate swap 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.
7.  Income Taxes

Income tax expense for the three months ended March 31, 2019 and 2018 was $7.0 million and $2.5 million , respectively. The effective tax rate for the three months ended March 31, 2019 and 2018 was 25.0% and 26.4% , respectively.

The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur. The Company’s tax rate is subject to change based on changes in the mix of assets leased to domestic and foreign lessees, the proportions

16

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.
8. Fair Value Measurements

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision.

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

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.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

•
Cash and cash equivalents, restricted cash, operating lease related receivables, and accounts payable : The amounts reported in the accompanying Consolidated Balance Sheets approximate fair value due to their short-term nature.

•
Notes receivables : The carrying amount of the Company’s outstanding balance on its Notes receivables as of March 31, 2019 and December 31, 2018 was estimated to have a fair value of approximately $31.1 million and $0.2 million , respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each period end (Level 2 inputs).

•
Debt obligations : The carrying amount of the Company’s outstanding balance on its Debt obligations as of March 31, 2019 and December 31, 2018 was estimated to have a fair value of approximately $1,333.6 million and $1,348.1 million respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each period end (Level 2 inputs).

Assets Measured and Recorded at Fair Value on a Recurring Basis

As of March 31, 2019 and December 31, 2018 , the Company measured the fair value of its interest rate swap 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 has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The interest rate swap agreement had a net fair value of $1.0 million and $1.7 million as of March 31, 2019 and December 31, 2018 , respectively. For the three months ended March 31, 2019 and 2018 , $(0.2) million and $24.0 thousand was realized through the income statement as an adjustment to Interest expense.


17

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company determines 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 Company used Level 2 inputs to measure write-downs of equipment held for lease and equipment held for sale as of March 31, 2019 and December 31, 2018 .
 
Assets Written Down to Fair Value
 
Total Losses
 
March 31, 2019
 
December 31, 2018
 
Three Months Ended March 31,
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Equipment held for lease
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
17,756

 
$
—

 
$
17,756

 
$
1,105

 
$
—

Equipment held for sale
—

 
—

 
—

 
—

 
—

 
472

 
—

 
472

 
—

 
—

Total
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
18,228

 
$
—

 
$
18,228

 
$
1,105

 
$
—


A write-down of $1.1 million was recorded during the three months ended March 31, 2019 for two engines due to a management decision to part-out the engines, in which the net book values exceeded the estimated proceeds. There were no write-downs recorded during the three months ended March 31, 2018 .
9.  Earnings Per Share

Basic earnings per common share is computed by dividing net income, less preferred stock dividends and accretion of preferred stock issuance costs, by the weighted average number of common shares outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the vesting of restricted stock using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. Additionally, redeemable preferred stock is not convertible and does not affect dilutive shares.

There were no shares that would have had an antidilutive impact to earnings per share for the three months ended March 31, 2019 . The computation of diluted weighted average earnings per share do not include 275 restricted shares for the three months ended March 31, 2018 , as the effect of their inclusion would have been antidilutive to earnings per share.

The following table presents the calculation of basic and diluted EPS (in thousands, except per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Net income attributable to common shareholders
$
20,056

 
$
6,261

 
 
 
 
Basic weighted average common shares outstanding
5,779

 
6,104

Potentially dilutive common shares
199

 
152

Diluted weighted average common shares outstanding
5,978

 
6,256

 
 
 
 
Basic weighted average earnings per common share
$
3.47

 
$
1.03

Diluted weighted average earnings per common share
$
3.35

 
$
1.00


18

10. Equity

Common Stock Repurchase

In September 2012, the Company announced that its Board of Directors authorized a plan to repurchase up to $100.0 million of its common stock over the next five years. The Board of Directors reaffirmed the repurchase plan in 2016 and extended the plan to December 31, 2018. Effective December 31, 2018, the Board of Directors approved the renewal of the repurchase plan extending the plan through December 31, 2020 and amending the plan to allow for repurchases of up to $60.0 million of the Company's common stock until such date. Repurchased shares are immediately retired. During the three months ended March 31, 2019 , the Company repurchased a total of 7,671 shares of common stock for approximately $0.3 million at a weighted average price of $41.34 per share. At March 31, 2019 , approximately $59.7 million is available to purchase shares under the plan.

Redeemable Preferred Stock

Dividends: The Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share. During the three months ended March 31, 2019 and 2018 , the Company paid total dividends of $0.8 million and $0.9 million , respectively, on the Series A-1 and Series A-2 Preferred Stock. For additional disclosures on the Company’s Redeemable Preferred Stock, refer to Note 11 in the 2018 Form 10-K.
11.  Stock-Based Compensation Plans

The components of stock-based compensation expense for the three months ended March 31, 2019 and 2018 were as follows:
 
Three months ended March 31,
 
2019
 
2018
 
(in thousands)
2007 Stock Incentive Plan
$
1,259

 
$
905

Employee Stock Purchase Plan
6

 
20

Total Stock Compensation Expense
$
1,265

 
$
925


The 2007 Stock Incentive Plan (the “2007 Plan”) was adopted on May 24, 2007. Under this 2007 Plan, a total of 2,800,000 shares are authorized for stock based compensation available in the form of either restricted stock awards (“RSA’s”) or stock options. The RSA’s are subject to service-based vesting, typically between one and three years, where a specific period of continued employment must pass before an award vests. The expense associated with these awards is recognized on a straight-line basis over the respective vesting period, with forfeitures accounted for as they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date fair value of the award tranche that is actually vested at that date. There are no stock options outstanding under the 2007 Plan.

The 2018 Stock Incentive Plan (the “2018 Plan”) was adopted on May 24, 2018. Under this 2018 Plan, a total of 800,000 shares are authorized for stock based compensation, plus the number of shares remaining under the 2007 Plan and any future forfeited awards under the 2007 Plan, in the form of RSA’s. The RSA’s are subject to service-based vesting, typically between one and three years, where a specific period of continued employment or service must pass before an award vests. The expense associated with these awards is recognized on a straight-line basis over the respective vesting period, with forfeitures accounted for as they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date fair value of the award tranche that is actually vested at that date.

As of March 31, 2019 , the Company has 890,730 shares available for future issuance. The fair value of the restricted stock awards equaled the stock price at the grant date.

As of March 31, 2019 , the Company has not granted RSA’s under the 2018 Plan.

19


The following table summarizes restricted stock activity during the three months ended March 31, 2019 :
 
Shares
Restricted stock at December 31, 2018
417,890

Shares granted
—

Shares forfeited
—

Shares vested
(91,229
)
Restricted stock at March 31, 2019
326,661


Under the Employee Stock Purchase Plan (“ESPP”), as amended and restated effective April 1, 2018, 325,000 shares of common stock have been reserved for issuance. 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 the three months ended March 31, 2019 and 2018 , 6,732 and 5,497 shares of common stock, respectively, were issued under the ESPP. The Company issues new shares through its transfer agent upon employee stock purchase.
12. Reportable Segments

The Company has two reportable 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 other related businesses 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.

The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses. While the Company believes there are synergies between the two business segments, the segments are managed separately because each requires different business strategies.

20


The following tables present a summary of the reportable segments (in thousands):
Three Months Ended March 31, 2019
 
Leasing and 
Related Operations
 
Spare Parts Sales
 
Eliminations (1)
 
Total
Revenue:
 
 
 
 
 
 
 
 
Lease rent revenue
 
$
48,369

 
$
—

 
$
—

 
$
48,369

Maintenance reserve revenue
 
25,350

 
—

 
—

 
25,350

Spare parts and equipment sales
 
2,485

 
15,017

 
—

 
17,502

Gain on sale of leased equipment
 
9,570

 
—

 
—

 
9,570

Other revenue
 
2,978

 
94

 
(94
)
 
2,978

Total revenue
 
88,752

 
15,111

 
(94
)
 
103,769

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
20,236

 
22

 
—

 
20,258

Cost of spare parts and equipment sales
 
1,836

 
12,576

 
—

 
14,412

Write-down of equipment
 
1,105

 
—

 
—

 
1,105

General and administrative
 
19,974

 
1,466

 
—

 
21,440

Technical expense
 
1,787

 
1

 
—

 
1,788

Interest expense
 
17,879

 
—

 
—

 
17,879

Total expenses
 
62,817

 
14,065

 
—

 
76,882

Earnings from operations
 
$
25,935

 
$
1,046

 
$
(94
)
 
$
26,887


Three months ended March 31, 2018
 
Leasing and 
Related Operations
 
Spare Parts Sales
 
Eliminations (1)
 
Total
Revenue:
 
 
 
 
 
 
 
 
Lease rent revenue
 
$
39,644

 
$
—

 
$
—

 
$
39,644

Maintenance reserve revenue
 
15,440

 
—

 
—

 
15,440

Spare parts and equipment sales (2)
 
—

 
12,986

 
—

 
12,986

Gain on sale of leased equipment (2)
 
545

 
—

 
—

 
545

Other revenue
 
1,851

 
1,113

 
(1,082
)
 
1,882

Total revenue
 
57,480

 
14,099

 
(1,082
)
 
70,497

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
17,269

 
86

 
—

 
17,355

Cost of spare parts and equipment sales (2)
 
—

 
11,388

 
—

 
11,388

Write-down of equipment
 
—

 
—

 
—

 
—

General and administrative
 
14,495

 
1,116

 
—

 
15,611

Technical expense
 
3,677

 
—

 
—

 
3,677

Interest expense
 
13,595

 
—

 
—

 
13,595

Total expenses
 
49,036

 
12,590

 
—

 
61,626

Earnings from operations
 
$
8,444

 
$
1,509

 
$
(1,082
)
 
$
8,871

______________________________
(1)
Represents revenue generated between our operating segments.
(2)
Effective January 1, 2018, the Company adopted ASC 606 – Revenue from Contracts with Customers and has identified the transfer of engines and airframes from the lease portfolio to the Spare Parts segment for part out as sales to customers in accordance with the ordinary operations of our Spare Parts reportable segment. As such, the Company presents the sale of these assets on a gross basis and have reclassified the gross revenue and costs on sale to the Spare parts and equipment sales and Cost of spare parts and equipment sales line items from the net gain (loss) presentation within the Gain on sale of leased equipment line item.
 
 
Leasing and 
Related Operations
 
Spare Parts Sales
 
Eliminations
 
Total
Total assets as of March 31, 2019
 
$
1,851,884

 
$
53,618

 
$
—

 
$
1,905,502

Total assets as of December 31, 2018
 
$
1,882,860

 
$
52,083

 
$
—

 
$
1,934,943

13. Related Party Transactions

In January 2019, the Special Committee of the Board of Directors approved a transaction in which the Company's Chief Executive Officer, Charles F. Willis, purchased a car for $0.1 million from the Company.

21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Annual Report on Form 10-K (“ 2018 Form 10-K”). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements.  The financial information included in this discussion and in our consolidated financial statements may not be indicative of our consolidated financial position, operating results, changes in equity and cash flows in the future. See “Special Note Regarding Forward-Looking Statements” included earlier in this report.
Overview

Our core business is acquiring and leasing commercial aircraft and aircraft engines and related aircraft equipment pursuant to operating leases, all of which we sometimes collectively refer to as “equipment.” As of March 31, 2019 , all of our leases were operating leases with the exception of two leases entered into during the first quarter of 2019 which are classified as notes receivables under Accounting Standards Update 2016-02, “Leases (Topic 842).” As of March 31, 2019 , we had 81 lessees in 47 countries. Our portfolio is continually changing due to equipment acquisitions and sales. As of March 31, 2019 , our lease portfolio consisted of 244 engines, 13 aircraft, 10 other leased parts and equipment and one marine vessel with an aggregate net book value of $1,605.1 million . As of March 31, 2019 , we also managed 437 engines, aircraft and related equipment on behalf of other parties.

Our wholly owned subsidiary Willis Asset Management Limited (“Willis Asset Management”) is focused on the engine management and consulting business. Willis Aeronautical Services, Inc. (“Willis Aero”) is 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.

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 IV commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce and International Aero Engines. These engines are the most widely used engines in the world, powering Airbus, Boeing, Bombardier and Embraer aircraft.
Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Form 10-K, with the exception of the adoption of ASU 2016-02.
Results of Operations
Three months ended March 31, 2019 compared to the three months ended March 31, 2018 :
Lease Rent Revenue. Lease rent revenue increased by $8.7 million , or 22.0% , to $48.4 million in the three months ended March 31, 2019 from $39.6 million for the three months ended March 31, 2018 . Lease rent revenue consists of rental income from long-term and short-term engine leases, aircraft leases, and other leased parts and equipment. The increase is primarily driven by an increase in lease rates, increased net book value of the leased assets and increased utilization. During the three months ended March 31, 2019 , we purchased equipment (including capitalized costs) totaling $92.2 million , which primarily consisted of five engines, four aircraft and one marine vessel purchased for our lease portfolio. During the three months ended March 31, 2018 , we purchased equipment (including capitalized costs) totaling $138.6 million , which primarily consisted of 20 engines purchased for our lease portfolio.
The aggregate net book value of equipment held for lease at March 31, 2019 and March 31, 2018 , was $1,605.1 million and $1,466.1 million , respectively, an increase of 9.5% . Average utilization (based on net book value) for the three months ended March 31, 2019 increased to approximately 89% from 86% for the three months ended March 31, 2018 .
Maintenance Reserve Revenue . Maintenance reserve revenue increased $9.9 million , or 64.2% , to $25.4 million for the three months ended March 31, 2019 from $15.4 million for the three months ended March 31, 2018 . The increase is primarily related to the increase in engines out on lease with “non-reimbursable” usage fees, generating $17.6 million of short term maintenance revenues compared to $13.0 million in the comparable prior period. Long term maintenance revenue increased to $7.8 million for the three months ended March 31, 2019 compared to $2.4 million in the comparable prior period.

22
Table of Contents

Spare Parts and Equipment Sales .  Spare parts and equipment sales increased by $4.5 million , or 34.8% , to $17.5 million for the three months ended March 31, 2019 compared to $13.0 million for the three months ended March 31, 2018 . Spare parts sales for the three months ended March 31, 2019 were $15.1 million compared to $13.0 million in 2018 . Equipment sales for the three months ended March 31, 2019 were $2.5 million for the sale of an airframe. There were no equipment sales for the three months ended March 31, 2018 .
Gain on Sale of Leased Equipment. Gain on sale of leased equipment increased by $9.0 million  to $9.6 million in the three months ended March 31, 2019 from $0.5 million in the three months ended March 31, 2018 .  The $9.6 million gain in the three months ended March 31, 2019 reflects the sale of six engines, six aircraft, and two airframes. The $0.5 million gain in the three months ended March 31, 2018 reflects the sale of one engine and one aircraft.
Other Revenue .  Other revenue increased by $1.1 million , or 58.2% , to $3.0 million in the three months ended March 31, 2019 from $1.9 million in the three months ended March 31, 2018 . Other revenue primarily reflects fees earned related to engines managed on behalf of third parties, service fee revenue and interest.  
Depreciation and Amortization Expense. Depreciation and amortization expense increased by $2.9 million , or 16.7% , to $20.3 million for the three months ended March 31, 2019 compared to $17.4 million for the three months ended March 31, 2018 . The increase reflects the larger net book value of the lease portfolio, and the change in mix of portfolio, as compared to the prior year period.
Cost of Spare Parts and Equipment Sales .  Cost of spare parts and equipment sales increased by $3.0 million , or 26.6% , to $14.4 million for the three months ended March 31, 2019 compared to $11.4 million for the three months ended March 31, 2018 . Cost of spare parts sales for the three months ended March 31, 2019 was $12.6 million compared to $11.4 million in the comparable prior year period. Cost of equipment sales for the three months ended March 31, 2019 was $1.8 million . There were no costs of equipment sales for the three months ended March 31, 2018 .
Write-down of Equipment. Write-down of equipment increased to $1.1 million for the three months ended March 31, 2019 compared to zero for the three months ended March 31, 2018 . During the three months ended March 31, 2019 , we wrote down two engines. There were no write-downs during the three months ended March 31, 2018 .
General and Administrative Expenses. General and administrative expenses increased by $5.8 million , or 37.3% , to $21.4 million for the three months ended March 31, 2019 compared to $15.6 million for the three months ended March 31, 2018 . The increase, when compared to the prior year period, primarily reflects increased bonus accrual due to operating performance and investment in technology infrastructure.  
Technical Expense.  Technical expense decreased by $1.9 million , or 51.4% , to $1.8 million for the three months ended March 31, 2019 compared to $3.7 million for the three months ended March 31, 2018 . Technical expense consists of the cost of engine repairs, engine thrust rental fees, outsourced technical support services, sublease engine rental expense, engine storage and freight costs. The decrease primarily reflects a decrease of $2.1 million in engine maintenance costs, partly offset by an increase of $0.5 million in technical services costs.
Interest Expense. Interest expense increased to $17.9 million for the three months ended March 31, 2019 compared to $13.6 million for the three months ended March 31, 2018 . This increase is a result of higher debt obligation balances and increased borrowing cost in 2019 associated with our LIBOR based borrowings and our WEST IV notes. Debt obligations outstanding, net of unamortized debt issuance costs, as of March 31, 2019 and 2018 , were $1,297.8 million and $1,179.7 million , respectively.
Debt obligations outstanding tied to one-month LIBOR as of March 31, 2019 and 2018 were $392.0 million and $604.0 million , respectively. As of March 31, 2019 and 2018 , one-month LIBOR was 2.49% and 1.88% respectively. Debt obligations outstanding tied to three-month LIBOR as of March 31, 2019 and 2018 were $8.1 million and zero , respectively. As of March 31, 2019 , three-month LIBOR was 2.63% .
Income Tax Expense.  Income tax expense was $7.0 million for the three months ended March 31, 2019 compared to $2.5 million for the three months ended March 31, 2018 . The effective tax rate for the first quarter of 2019 was 25.0% compared to 26.4% in the prior year period. The decrease in the effective tax rate was predominantly due to the increase in foreign income.
Financial Position, Liquidity and Capital Resources
At March 31, 2019 , the Company had $80.6 million of cash, cash equivalents and restricted cash. We finance our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $102.1 million and $123.0 million in the three months

23
Table of Contents

ended March 31, 2019 and 2018 , respectively, was derived from this activity. In these same time periods, $142.9 million and $29.8 million , respectively, was used to pay down related debt.
Cash Flows Discussion
Cash flows provided by operating activities was $35.6 million and $35.3 million in the three months ended March 31, 2019 and 2018 , respectively.

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 88% , by book value, of our assets were on-lease as of March 31, 2019 and December 31, 2018 . The average utilization rate for the three months ended March 31, 2019 and 2018 was approximately 89% and 86% , respectively. 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.

Cash flows provided by investing activities was $5.3 million for the three months ended March 31, 2019 and primarily reflected $133.8 million in proceeds from sales of equipment (net of selling expenses), partly offset by $92.2 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made in the period) and $30.8 million related to two leases entered into during the first quarter of 2019 which are classified as notes receivables under ASU 2016-02, Leases (Topic 842). Cash flows used in investing activities was $117.1 million in the three months ended March 31, 2018 . Our primary use of funds was for the purchase of equipment for operating lease. Purchases of equipment held for operating lease (including capitalized costs and prepaid deposits made in the period) totaled $138.6 million .
Cash flows used in financing activities was $42.3 million for the three months ended March 31, 2019 and primarily reflected $142.9 million in principal payments and $0.3 million in share repurchases, partly offset by $102.1 million in proceeds from the issuance of debt obligations. Cash flows provided by financing activities of $91.7 million in the three months ended March 31, 2018 and primarily reflected $123.0 million in proceeds from debt obligations, partly offset by $29.8 million in principal payments and $0.1 million in share repurchases.
Preferred Stock Dividends
The Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share. During the three months ended March 31, 2019 and 2018 , the Company paid total dividends of $0.8 million and $0.9 million , respectively, on the Series A-1 and Series A-2 Preferred Stock.
Debt Obligations and Covenant Compliance
At March 31, 2019 , Debt obligations consist of loans totaling $1,297.8 million , net of unamortized issuance costs, payable with interest rates varying between approximately 2.6% and 6.4%. Substantially all of our assets are pledged to secure our obligations to creditors. For further information on our debt instruments, see the “Debt Obligations” Note 5 in Part I, Item 1 of this Form 10-Q.

On February 28, 2019, we closed on a loan with a maturity date of July 2022 totaling $8.1 million . Interest is payable at three-month LIBOR plus a margin ranging from 1.85% to 5.25% and principal and interest are paid quarterly. The loan is secured by two engines. 

Virtually all of the Company’s 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. Under our revolving credit facility, we can borrow no more than 85% of an engine’s net book value and 65% of an airframe’s or spare parts inventory’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 our revolver. 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 debt is secured by engines and aircraft, and to the extent that engines or aircraft are sold, repayment of that portion of the debt could be required.

At March 31, 2019 , we are in compliance with the covenants specified in our 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. The

24
Table of Contents

Interest Coverage Ratio, as defined in the credit facility, is the ratio of: earnings before interest, taxes, depreciation and amortization (EBITDA) and other one-time charges to consolidated interest expense. The Total Leverage Ratio, as defined in the credit facility, is the ratio of total indebtedness to tangible net worth. At March 31, 2019 , we are in compliance with the covenants specified in the WEST II, WEST III and WEST IV indentures, servicing and other debt related agreements.

Contractual Obligations and Commitments

Repayments of our gross debt obligations primarily consist of scheduled installments due under term loans and are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The table below summarizes our contractual commitments at March 31, 2019 :

 
 
 
Payment due by period (in thousands)
 
Total
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
Debt obligations
$
1,317,670

 
$
56,299

 
$
504,721

 
$
241,049

 
$
515,601

Interest payments under debt obligations
294,018

 
48,947

 
108,745

 
62,221

 
74,105

Operating lease obligations
5,466

 
1,227

 
1,910

 
1,145

 
1,184

Purchase obligations
103,400

 
103,400

 
—

 
—

 
—

Total
$
1,720,554

 
$
209,873

 
$
615,376

 
$
304,415

 
$
590,890


We have estimated the interest payments due under debt obligations by applying the interest rates applicable at March 31, 2019 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 and three-month LIBOR.

We believe our equity base, internally generated funds, including rental income and proceeds from sale of parts and of rental equipment, and existing debt facilities are sufficient to maintain our level of operations through the next twelve months. However, a decline in the level of internally generated funds or an inability to obtain lease commitments for our off-lease engines (including new engines from manufacturers), would limit availability of funding under our existing debt facilities, and/or result in a significant step-up in borrowing costs. Such limits on availability of funding and increased 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 could be constrained and our future growth limited to that which can be funded from internally generated capital.

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.

Off-Balance Sheet Arrangements

As of March 31, 2019 , we had no material off-balance sheet arrangements or obligations that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Recent Accounting Pronouncements

The most recent adopted accounting pronouncements and accounting pronouncements to be adopted by the Company are described in Note 1 to our Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3. 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 March 31, 2019 , $400.1 million of our outstanding debt is variable rate debt. We estimate that for every one percent increase or decrease in interest rates on our variable rate debt, our annual interest expense would increase or decrease $3.0 million .

25
Table of Contents

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. 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. Most of our leases require payment in U.S. dollars. During the three months ended March 31, 2019 , 79% of our lease rent revenues came from non-United States domiciled lessees.  If these lessees’ currency devalues against the U.S. dollar, the lessees could potentially encounter difficulty in making their lease payments.
One customer accounted for more than 10% of total lease rent revenue during the three months ended March 31, 2019 .
Item 4. Controls and Procedures
(a)  Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15b under the Securities Exchange Act of 1934, as amended (Exchange Act) we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness and design of our disclosure controls and procedures (as defined in Rules 13-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this report.  Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2019 our disclosure controls and procedures, were 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 Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) 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.
(c)  Changes in internal control over financial reporting. There has been no change in our internal controls over financial reporting during our fiscal quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1A. Risk Factors
Before making an investment decision, investors should carefully consider the risks in the “Risk Factors” in Part 1: Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 14, 2019 . These risks are not the only ones facing the Company. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations. Any of these risks could adversely affect our business, cash flows, financial condition and results of operations. The trading price of our common stock could fluctuate due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q. There have been no material changes in our risk factors from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 .

26
Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)  None.
(b)  None.
(c)  Issuer Purchases of Equity Securities. In September 2012, the Company announced that its Board of Directors 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 in 2016 and extended the plan to December 31, 2018. Effective December 31, 2018, the Board of Directors approved the renewal of the repurchase plan extending the plan through December 31, 2020 and amending the plan to allow for repurchases of up to $60.0 million of the Company's common stock until such date.
Common stock repurchases, under our authorized plan, in the three months ended March 31, 2019 were as follows:
Period
 
Total Number of
Shares Purchased
 
Average
Price
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
 
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
 
 
(in thousands, except share and per share data)
January 2019
 
—

 
$
—

 
—

 
$
60,000

February 2019
 
—

 
$
—

 
—

 
$
60,000

March 2019
 
7,671

 
$
41.34

 
7,671

 
$
59,683

Total
 
7,671

 
$
41.34

 
7,671

 
$
59,683

Item 5. Other Information
None.

27
Table of Contents

Item 6.
EXHIBITS
Exhibit  Number
 
Description
10.43*

 
31.1

 
31.2

 
32

 
101.INS

 
XBRL Instance Document
101.SCH

 
XBRL Taxonomy Extension Schema
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase
101.LAB

 
XBRL Taxonomy Extension Labels Linkbase
101.PRE

 
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.

28
Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 8, 2019
 
Willis Lease Finance Corporation
 
 
 
 
By:
/s/ Scott B. Flaherty
 
 
Scott B. Flaherty
 
 
Chief Financial Officer
 
 
(Principal Accounting Officer)

29



AMENDMENT NO. 3
DATED AS OF MARCH 22, 2019

TO THE
AGREEMENT TO PURCHASE [*] SPARE ENGINES
BY AND BETWEEN
IAE INTERNATIONAL AERO ENGINES AG
AND
WILLIS LEASE FINANCE CORPORATION,
for itself and as Servicer

DATED AS OF MARCH 16, 2018

This document contains proprietary information of IAE International Aero Engines AG (“IAE”). IAE offers the information contained in this document on the condition that you not disclose or reproduce the information in contravention of Section 8.4 of the Contract (as defined herein). Neither receipt nor possession of this document, from any source, constitutes IAE’s permission. Possessing, using, copying or disclosing this document to or for the benefit of any third party without IAE’s written consent may result in criminal and/or civil liability.
This document contains no technical data subject to the EAR or ITAR.
NOTE: Certain Confidential Information in this document (indicated by [*]) has been omitted because it is both (i) not material and (ii) would likely cause competitive harm if publicly disclosed.

Amdt 03-PA-IAE(WLFC) 5 Add'l [*] SPEs (2019-3-22) Final



AMENDMENT NO. 3
THIS AMENDMENT NO. 3 (this “ Amendment No. 3 ”) dated as of March 22, 2019, by and between IAE International Aero Engines AG, with a place of business at 400 Main Street, East Hartford, Connecticut 06118, United States of America (“ IAE ”), and Willis Lease Finance Corporation, with a place of business at 4700 Lyons Technology Parkway, Coconut Creek, Florida 33073, United States of America (for itself and in its capacity as Servicer on behalf of the Permitted Affiliates, " Willis "), amends that certain Agreement to Purchase [*] Spare Engines dated March 16, 2018, by and between IAE and Willis (as amended from time to time, the “ Contract ”).

Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in the Contract, unless expressly stated otherwise.

WHEREAS:

Willis desires to purchase from IAE, and IAE desires to sell to Willis, five (5) additional new [*] Spare Engines, which will be operated by one or more of Willis’ lessees on such lessees’ [*] aircraft powered by [*] engines; and

IAE and Willis desire to amend the Contract in order to add such five (5) additional new [*] Spare Engines to the Contract upon the terms and conditions set forth in the Contract together with this Amendment No. 3;

NOW THEREFORE:

In consideration of the foregoing recitals, conditions and of the mutual covenants herein contained, the parties hereby amend the Contract as follows:

1.
The recitals from page 3 of the Contract are hereby replaced in their entirety with the following:

“Willis desires to purchase from IAE, and IAE desires to sell to Willis, nineteen (19) new [*] Spare Engines, which will be operated by one or more lessees of Willis to support such lessees’ [*] aircraft powered by [*] engines; and
The parties hereby set out the terms upon which Willis will purchase from IAE, and IAE will sell to Willis, the nineteen (19) Spare Engines.”
2.
The definition of “Spare Engine” set forth in Section 1.9 is revised to read as follows:

““ Spare Engine ” means, individually or collectively as the context requires, the nineteen (19) [*] engines that are the subject of this Contract, as specified in Appendix 2 and described in the corresponding Specification. Each Spare Engine is [*].”

IAE Proprietary - Subject to the Restrictions on the Front Page

NOTE: Certain Confidential Information in this document (indicated by [*]) has been omitted because it is both (i) not material and (ii) would likely cause competitive harm if publicly disclosed.
Amdt 03-PA-IAE(WLFC) 5 Add'l [*] SPEs (2019-3-22) Final    Page 2


3.
Sections 2.4.1.a, 2.4.1.b and 2.4.1.c are hereby deleted in their entireties and replaced with the following:

“a.    [*]

b.    [*]

“c.    [*]

4.
Section 2.4.3 is hereby deleted in its entirety and replaced with the following:

“All payments hereunder will be deemed to have been made only to the extent cleared or good value funds are received by IAE at a bank account in accordance with Section 2.4.2 above. [*], and provided that Willis submits the preliminary version of the form attached as Appendix 4 in accordance with Section 2.5.2, then, at least [*] prior to the due date of any payment hereunder, IAE will provide Willis with an invoice therefor. In respect of [*], IAE will provide Willis with an invoice therefor promptly upon execution of this Contract.”

5.
Section 2.5.2 is hereby deleted in its entirety and replaced with the following:

“[*], no less than (i) [*] for the preliminary version and (ii) [*] for the final version, in each case prior to the Delivery Date, Willis must provide IAE with instructions as to the marking and transportation details for each Spare Engine by completing the required portions of the form attached as Appendix 4. The Parties recognize that notwithstanding Section 2.5.2(ii) above, Willis shall be entitled to adjust [*] prior to the Delivery Date without any impact to the Delivery Date; provided, however, that if Willis makes any change to [*], or to [*], in each case within [*] of the Delivery Date, the Parties agree that IAE shall be entitled to up to [*] to process such adjustment and the Delivery Date will be extended accordingly without any liability to either Party.”

6.
Section 2.5.3 is hereby deleted in its entirety and replaced with the following:

“[*], provided that Willis complies with Section 2.5.2 above, IAE will provide Willis with the Spare Engine serial number no later than [*] prior to the Delivery Date.”

7.
Section 8.1.3 is hereby deleted in its entirety and replaced with the following:

“If IAE is hindered or prevented from Delivering any Spare Engine to Willis due to a reason other than Force Majeure for a period longer than the earlier to occur of (a) [*] after the Delivery Date set forth in Appendix 2 or (b) [*] (an " Inexcusable Delay "), both Parties shall meet to discuss in good faith an extension of the applicable Delivery Date or another amendment to this Contract. If the Parties do not agree on such extension or amendment, then Willis shall be entitled to terminate its obligation, at its option, to purchase either (i) the Spare Engine(s) affected by such Inexcusable Delay, or (ii) any undelivered Spare Engine(s) remaining under the Contract, with immediate effect and without judicial recourse, by giving IAE a written notice of its intention to do so, without liability resulting from such Inexcusable Delay for either Party; provided, however, that IAE will promptly return [*] for such Spare Engine(s).”


IAE Proprietary - Subject to the Restrictions on the Front Page

NOTE: Certain Confidential Information in this document (indicated by [*]) has been omitted because it is both (i) not material and (ii) would likely cause competitive harm if publicly disclosed.
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8.
A new Section 8.1.4 is hereby added, which shall provide as follows:

[*]

9.
Willis’s notice address set forth in Section 8.11 is revised to read as follows:

“Willis Lease Finance Corporation
60 East Sir Francis Drake Blvd.
Suite 209
Larkspur, California 94939
United States of America
Attention: [*]”

10.
Appendix 2 of the Contract, Delivery Schedule and Pricing, is hereby deleted and replaced with the following in order to add the five (5) additional Spares Engines:

“APPENDIX 2
DELIVERY SCHEDULE AND PRICING

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NOTE: Certain Confidential Information in this document (indicated by [*]) has been omitted because it is both (i) not material and (ii) would likely cause competitive harm if publicly disclosed.
Amdt 03-PA-IAE(WLFC) 5 Add'l [*] SPEs (2019-3-22) Final    Page 4


Spare Engine Rank
Spare Engine Model 1
Delivery Date 2
Spare Engine
Purchase Price
 
1
[*]
[*]
See below 3
 
2
[*]
[*]
 
3
[*]
[*]
 
4
[*]
[*]
 
5
[*]
[*]
 
6
[*]
[*]
 
7
[*]
[*]
 
8
[*]
[*]
 
9
[*]
[*]
 
10
[*]
[*]
 
11
[*]
[*]
 
12
[*]
[*]
 
13
[*]
[*]
 
14
[*]
[*]
 
15
[*]
[*]
[*]
 
16
[*]
[*]
[*]
 
17
[*]
[*]
[*]
 
18
[*]
[*]
[*]
 
19
[*]
[*]
[*]
 
1 For Spare Engine Ranks 1-14, Willis will notify IAE no later than [*] prior to the Delivery Date whether Willis requires that the Spare Engine be delivered in [*].

2 IAE will be obligated to deliver each Spare Engine by [*], as appropriate. Notwithstanding the foregoing, IAE and Willis agree to meet [*]to discuss in good faith the potential acceleration of one or more Delivery Dates within [*]. Should the Parties agree in writing to accelerate one or more Delivery Dates, such accelerated date(s) will become the Delivery Date(s) for all purposes of this Contract.

3 Spare Engine Purchase Price (for Spare Engine Ranks 1-14) :
[*]
[*]
. ”
The terms and conditions contained in this Amendment No. 3 constitute the entire agreement between the Parties with respect to the matters herein described, and supersede all prior understandings and agreements of the Parties with respect thereto. No amendment or modification of this Amendment No. 3 shall be binding upon a Party unless set forth in a written instrument executed by both Parties.

The Parties hereby acknowledge and agree that there has been full and adequate consideration for the mutual promises contained herein. The terms and conditions of the Contract are incorporated herein by reference. Except as expressly amended hereby, all other terms and conditions of the Contract shall remain unchanged and in full force and effect and are hereby ratified and confirmed in all respects.

This Amendment No. 3 is available for the Parties’ consideration until March 22, 2019. This Amendment No. 3 may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which when taken together shall constitute the same instrument.


IAE Proprietary - Subject to the Restrictions on the Front Page

NOTE: Certain Confidential Information in this document (indicated by [*]) has been omitted because it is both (i) not material and (ii) would likely cause competitive harm if publicly disclosed.
Amdt 03-PA-IAE(WLFC) 5 Add'l [*] SPEs (2019-3-22) Final    Page 5


Upon acceptance by IAE, as evidenced by execution of the signature block below, this Amendment No. 3 will become an enforceable amendment to the Contract. After acceptance by IAE, IAE will return one (1) fully executed duplicate original Amendment No. 3 to Willis. The Parties agree that facsimile or electronically transmitted signatures are deemed to be of the same force and effect as an original executed document. If executed by facsimile or electronic transmission, the Parties agree to provide original signature pages upon request.


[SIGNATURE PAGE FOLLOWS ON THE NEXT PAGE]



IAE Proprietary - Subject to the Restrictions on the Front Page

NOTE: Certain Confidential Information in this document (indicated by [*]) has been omitted because it is both (i) not material and (ii) would likely cause competitive harm if publicly disclosed.
Amdt 03-PA-IAE(WLFC) 5 Add'l [*] SPEs (2019-3-22) Final    Page 6



IN WITNESS WHEREOF , the Parties have caused this Amendment No. 3 to be duly executed as of the date first stated above.
WILLIS LEASE FINANCE CORPORATION,
for itself and as Servicer
By:___________________________
Name:_________________________
Title:___________________________
Date:___________________________

IAE INTERNATIONAL AERO ENGINES AG
 
By:___________________________
Name:_________________________
Title:___________________________
Date:___________________________



IAE Proprietary - Subject to the Restrictions on the Front Page

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Amdt 03-PA-IAE(WLFC) 5 Add'l [*] SPEs (2019-3-22) Final    Page 7



Exhibit 31.1
CERTIFICATIONS
I, Charles F. Willis IV, certify that:
1. I have reviewed this report on Form 10-Q 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:
May 8, 2019
 
/s/ Charles F. Willis, IV
 
 
 
Charles F. Willis, IV
 
 
 
Chief Executive Officer




Exhibit 31.2
CERTIFICATIONS
I, Scott B. Flaherty, certify that:
1. I have reviewed this report on Form 10-Q 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:
May 8, 2019
 
/s/ Scott B. Flaherty
 
 
 
Scott B. Flaherty
 
 
 
Chief Financial Officer




Exhibit 32
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 Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2019 fully complies with the requirements of Section 13(a) 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.
Dated: May 8, 2019
 
 
 
/s/ Charles F. Willis, IV
 
 Charles F. Willis, IV
 
 Chief Executive Officer
 
 
 
/s/ Scott B. Flaherty
 
 Scott B. Flaherty
 
 Chief Financial Officer