Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Unless the context requires otherwise, references to the “Company”, “WLFC”, “we”, “us” or “our” in these consolidated financial statements on Form 10-K refer to Willis Lease Finance Corporation and its subsidiaries.
(a)Organization
Willis Lease Finance Corporation with its subsidiaries is a provider of aviation services whose primary focus is providing operating leases of commercial aircraft, aircraft engines and other aircraft-related equipment to air carriers, manufacturers and overhaul/repair facilities worldwide. The Company also engages in the selective purchase and resale of commercial aircraft engines.
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 engines.
Willis Asset Management Limited (“Willis Asset Management”) is a wholly-owned subsidiary whose primary focus is the engine management and consulting business.
Willis Engine Securitization Trust III (“WEST III” or the “WEST III Notes”) is a bankruptcy remote special purpose vehicle which was established for the purpose of financing aircraft engines through an asset-backed securitization (“ABS”), of which the Company is the sole beneficiary. WEST III is a variable interest entity (“VIE”) which the Company owns 100% of the interest and consolidates in its financial statements.
Willis Engine Securitization Trust IV (“WEST IV” or the “WEST IV Notes”) is a bankruptcy remote special purpose vehicle which was established for the purpose of financing aircraft engines through an ABS, of which the Company is the sole beneficiary. WEST IV is a VIE which the Company owns 100% of the interest and consolidates in its financial statements.
In March 2020, the Company and its direct, consolidated VIE Willis Engine Structured Trust V (“WEST V”) (formerly Willis Engine Securitization Trust II), closed its offering of $366.2 million aggregate principal amount of fixed rate notes (the “WEST V Notes”). The WEST V Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $303.0 million, the Series B Notes issued in an aggregate principal amount of $42.1 million and the Series C Notes issued in an aggregate principal amount of $21.1 million.
In May 2021, the Company and its direct, consolidated VIE Willis Engine Structured Trust VI (“WEST VI”), closed its offering of $336.7 million aggregate principal amount of fixed rate notes (the “WEST VI Notes”). The WEST VI Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $278.6 million, the Series B Notes issued in an aggregate principal amount of $38.7 million and the Series C Notes issued in an aggregate principal amount of $19.4 million.
Principal and interest on the WEST III, WEST IV, WEST V and WEST VI Notes are payable monthly to the extent of available cash in accordance with a priority of payments included in the respective indenture agreements.
The WEST III, WEST IV, WEST V and WEST VI Notes are secured by, among other things, the respective ABS’s direct and indirect interests in a portfolio of assets. The WEST III, WEST IV, WEST V and WEST VI Notes have scheduled amortizations and are payable solely from revenue received from the engines and the engine leases, after payment of certain expenses of the respective ABS. The assets of WEST III, WEST IV, WEST V and WEST VI are not available to satisfy the Company’s obligations other than the obligations specific to the respective ABS. WEST III, WEST IV, WEST V and WEST VI are consolidated for financial statement presentation purposes, with the respective assets and liabilities on the Company’s balance sheet. The ABS’ ability to make distributions and pay dividends to the Company is subject to the prior payments of its debt and other obligations and maintenance of adequate reserves and capital. Under each ABS, cash is collected in a restricted account, which is used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of the maintenance reserve payments and lease security deposits are formulaically accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively.
Additionally, in connection with WEST III, WEST IV, WEST V and WEST VI, the Company entered into servicing agreements and administrative agency agreements to provide certain engine, lease management and reporting functions in return for fees based on a percentage of collected lease revenues and asset sales. Because WEST III, WEST IV, WEST V and WEST VI are consolidated for financial statement reporting purposes, all fees eliminate upon consolidation.
(b)Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of WLFC and its wholly owned subsidiaries, including VIEs where the Company is the primary beneficiary, in accordance with consolidation guidance. The Company first evaluates all entities in which it has an economic interest to determine whether for accounting purposes the entity is either a VIE or voting interest entity. If the entity is a VIE, the Company consolidates the financial statements of that entity if it is the primary beneficiary of such entities’ activities. If the entity is a voting interest entity, the Company consolidates the entity when it has a majority of voting interests in such entity. Intercompany transactions and balances have been eliminated in consolidation.
(c)Revenue Recognition
Leasing revenue
Revenue from leasing of engines, aircraft and related parts and equipment is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Revenue is not recognized when cash collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received.
Under the terms of some of the Company’s leases, the lessees pay use fees (also known as maintenance reserves) to the Company based on usage of the leased asset, which are designed to cover expected future maintenance costs. Some of these amounts are reimbursable to the lessee if they make specifically defined maintenance expenditures. Use fees received are recognized in revenue as maintenance reserve revenue if they are not reimbursable to the lessee. Use fees that are reimbursable are recorded as a maintenance reserve liability until they are reimbursed to the lessee, the lease terminates, or the obligation to reimburse the lessee for such reserves ceases to exist, at which time they are recognized in revenue as maintenance reserve revenue.
Certain lessees may be significantly delinquent in their rental payments and may default on their lease obligations. As of December 31, 2021, the Company had an aggregate of approximately $6.8 million in lease rent and $4.1 million in maintenance reserve receivables more than 30 days past due. Inability to collect receivables or to repossess engines or other leased equipment in the event of a default by a lessee could have a material adverse effect on the Company. The Company estimates an allowance for doubtful accounts for receivables it does not consider fully collectible. The allowance for doubtful accounts includes the following: (1) specific reserves for receivables which are impaired for which management believes full collection is doubtful; and (2) a general reserve for estimated losses based on historical experience.
One customer accounted for more than 10% of total lease rent revenue during the year ended December 31, 2021 and 2020, respectively.
Gain on sale of leased equipment
The Company regularly sells equipment from its lease portfolio. This equipment may or may not be subject to a lease at the time of sale. The net gain or loss on such sales is recognized as revenue and consists of proceeds associated with the sale less the net book value of the asset sold and any direct costs associated with the sale. To the extent that deposits associated with the equipment are not included in the sale, any such amount is included in the calculation of gain or loss.
Spare parts sales
The Spare Parts Sales reportable segment primarily engages in the sale of aircraft engine parts and materials through the acquisition or consignment of engines from third parties or the Company’s leasing operations. The parts are sold at a fixed price with no right of return. In determining the performance obligation, management has identified the promise in the contract to be the shipment of the spare parts to the customer. Title passes to the buyer when the goods are shipped, and the buyer is responsible for any loss in transit, and the Company has a legal right to payment for the spare parts. Management has determined that physical acceptance of the spare parts to be a formality in accordance with Accounting Standards Codification (“ASC”) 606-10-5-86.
The spare parts transaction price is a fixed dollar amount and is stated on each purchase order for a fixed amount by total number of parts. Spare parts revenue is based on a set price for a set number of parts as defined in the purchase order. The performance obligation is completed once the parts have shipped and, as a result, all of the transaction price is allocated to that performance obligation. Management has determined that it is appropriate for the Company to recognize spare parts sales at a point in time (i.e., the date the parts are shipped) under ASC 606.
Equipment Sales
Equipment sales represent the selective purchase and resale of commercial aircraft engines and other aircraft equipment. The Company and customer enter into an agreement which outlines the place and date of sale, purchase price, payment terms, condition of
the asset, bill of sale, and the assignment of rights and warranties from the Company to the customer. Management has identified the promise in the equipment sale contract to be the transfer of ownership of the asset. Management believes the asset holds standalone value to the customer as it is not dependent on any other services for functionality purposes and therefore is distinct within the context of the contract and as described in ASC 606-10. As such, management has identified the transfer of the asset as the performance obligation. The transaction price is set at a fixed dollar amount per fixed quantity (number of assets) and is explicitly stated in each contract. Equipment sales revenue is based on a set price for a set number of assets, which is allocated to the performance obligation discussed above, in its entirety. The Company has determined the date of transfer to the customer to be the date the customer obtains control and title over the asset and the date which revenue is to be recognized and payment is due.
Managed Services
Managed services revenue predominantly represents fleet management and engine storage services which may be combined on a single contract with a customer. Fleet management services are performed for a stated fixed fee as agreed upon in the services agreement. Engine storage services are for a fixed monthly fee. For a contract containing more than one performance obligation, the allocation of the transaction price is generally performed on the basis of the relative stand-alone selling price of each distinct good or service in the contract. As each of the services provided within the contract have separate prices, the Company allocates the price to its related performance obligation described above. Management has determined each of the revenue elements contain performance obligations that are satisfied over time and therefore recognizes revenue over time in accordance with ASC 606-10-25-27. The Company utilizes the percentage-of-completion method (input method) for recognizing fleet management services and will calculate revenues based on labor hours incurred. Additionally, as is required by ASC 606-10-25-35, as circumstances change over time, the Company will update its measure of progress to reflect any changes in the outcome of the performance obligation. Engine storage services are recognized on a monthly basis utilizing the input method of days passed.
Amounts owed for managed services are typically billed upon contract completion. At December 31, 2021, unbilled revenue was $0.9 million and the Company expects the remaining revenue to be fully recognized by June 30, 2022. Additionally, managed services are presented within the Other revenue line in the Consolidated Statements of Income.
Other Revenue
Other revenue consists primarily of management fee income, lease administration fees, third party consignment commissions earned, service fee revenue, interest income on notes receivable related to failed sale-leasebacks where the Company was the buyer-lessor, and other discrete revenue items.
(d)Equipment Held for Operating Lease
Aircraft assets held for operating lease are stated at cost, less accumulated depreciation. Certain costs incurred in connection with the acquisition of aircraft assets are capitalized as part of the cost of such assets. Major overhauls paid for by the Company, which improve functionality or extend the original useful life, are capitalized and depreciated over the shorter of the estimated period to the next overhaul (“deferral method”) or the remaining useful life of the equipment. The Company does not accrue for planned major maintenance. The cost of overhauls of aircraft assets under long term leases, for which the lessee is responsible for maintenance during the period of the lease, are paid for by the lessee or from reimbursable maintenance reserves paid to the Company in accordance with the lease, and are not capitalized.
Based on specific aspects of the equipment, the Company generally depreciates engines on a straight-line basis over a 15-year period from the acquisition date to a 55% residual value. This methodology is believed to accurately reflect the Company’s typical holding period for the engine assets and that the residual value assumption reasonably approximates the selling price of the assets 15 years from the date of acquisition. The typical 15 year holding period is the estimated useful life of the Company’s engines based on its business model and plans, and represents how long the Company anticipates holding a newly acquired engine. The technical useful life of a new engine can be in excess of 25 years. The Company reviews the useful life and residual values of all engines periodically as demand changes to accurately depreciate the cost of equipment over the useful life of the engines.
The aircraft and airframes owned by the Company are generally depreciated on a straight-line basis over an estimated useful life of 13 to 20 years to a 15% to 17% residual value. The marine vessel owned by the Company is depreciated on a straight-line basis over an estimated useful life of 18 years to a 15% residual value. The other leased parts and related equipment owned by the Company are generally depreciated on a straight-line basis over an estimated useful life of 14 to 15 years to a 25% residual value.
The following table disaggregates equipment held for operating lease by asset class (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| Gross value | Accumulated depreciation | Net book value | | Gross value | Accumulated depreciation | Net book value |
| (in thousands) |
Engines and related equipment | $ | 2,368,496 | | $ | (515,442) | | $ | 1,853,054 | | | $ | 2,238,160 | | $ | (445,780) | | $ | 1,792,380 | |
Aircraft and airframes | 134,370 | | (7,790) | | 126,580 | | | 89,613 | | (7,312) | | 82,301 | |
Marine vessel | 13,470 | | (1,736) | | 11,734 | | | 12,963 | | (1,031) | | 11,932 | |
| $ | 2,516,336 | | $ | (524,968) | | $ | 1,991,368 | | | $ | 2,340,736 | | $ | (454,123) | | $ | 1,886,613 | |
The useful life of older generation engines and aircraft may be significantly less based upon the technical status of the engine, as well as supply and demand factors. For these older generation engines and aircraft, the remaining useful life and the remaining expected holding period are typically the same. For older generation engines or aircraft that are unlikely to be repaired at the end of the current expected useful lives, the Company depreciates the engines or aircraft over their estimated lives to a residual value based on an estimate of the wholesale value of the parts after disassembly. As of December 31, 2021, 40 engines having a net book value of $37.0 million were depreciated under this policy with estimated useful lives ranging from 1 to 113 months. The Company adjusts its estimates annually for these older generation assets, including updating estimates of an engine’s or aircraft’s remaining operating life as well as future residual value expected from part-out based on the current technical status of the engine or aircraft.
The Company reviews its long-lived assets, including certain failed sale-leaseback transactions classified as notes receivable under ASC 842, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets to be disposed are reported at the lower of carrying amount or fair value less cost to sell. Impairment is identified by review of appraisals or by comparison of undiscounted forecasted cash flows, including estimated sales proceeds, over the life of the asset with the assets’ book value. If the undiscounted forecasted cash flows are less than the book value, the asset is written down to its fair value. Fair value is determined per individual asset by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors considered relevant by the Company. The Company evaluates assets during the year if a triggering event is identified indicating impairment is possible and also conducts a formal annual review of the carrying value of long-lived assets. The formal annual review resulted in an impairment charge of $3.5 million and $4.9 million in 2021 and 2020, respectively. Additionally, the Company recorded an impairment charge of $4.2 million and $15.6 million in 2021 and 2020, respectively, as a result of triggering events occurring during the year. These write-downs are included in “Write-down of equipment” in the Consolidated Statements of Income.
(e)Equipment Held for Sale
Equipment held for sale includes assets being marketed for sale as well as third party consigned assets. The assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell.
(f)Debt Issuance Costs and Related Fees
Fees paid in order to secure debt are capitalized, included in Debt obligations on the Consolidated Balance Sheets, and amortized over the life of the related loan using the effective interest method.
(g)Interest Rate Hedging
The Company enters into various derivative instruments periodically to mitigate the exposure on variable rate borrowings. The derivative instruments are fixed-rate interest swaps that are recorded at fair value as either an asset or liability.
While substantially all of the Company’s derivative transactions are entered into for the purposes described above, hedge accounting is only applied where specific criteria have been met and it is practicable to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and it must be highly effective. The hedging instrument’s effectiveness is assessed utilizing regression analysis at the inception of the hedge and on at least a quarterly basis throughout its life. All of the transactions that the Company has designated as hedges are cash flow hedges. The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings. The ineffective portion of the hedges is recorded in earnings in the current period.
(h)Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in the tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs (see Note 8).
The Company files income tax returns in various states and countries which may have different statutes of limitations. The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. Such adjustments have historically been minimal and immaterial to our financial results.
(i)Property, Equipment and Furnishings
Property, equipment and furnishings are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets, which range from three to 39 years. Leasehold improvements are recorded at cost and depreciated by the straight-line method over the shorter of the lease term or useful life of the leasehold.
(j)Cash and Cash Equivalents
The Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less, as cash equivalents.
(k)Restricted Cash
The Company has certain bank accounts that are subject to restrictions in connection with its WEST III, WEST IV, WEST V and WEST VI notes payable. Under these borrowings cash is collected in restricted accounts, which are used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of projected maintenance obligations and some or all of the lease security deposits are accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively. Under WEST III, cash equal to a portion of the projected maintenance obligations for the subsequent nine months is held in a restricted account and is subject to a minimum balance of $9.6 million. Under WEST IV, cash equal to a portion of the projected maintenance obligations for the subsequent ten months is held in a restricted account and is subject to a minimum balance of $4.7 million. Under WEST V, cash equal to a portion of the projected maintenance obligations for the subsequent twelve months is held in a restricted account and is subject to a minimum balance of $5.0 million. Under WEST VI, cash equal to a portion of the projected maintenance obligations for the subsequent twelve months is held in a restricted account and is subject to a minimum balance of $1.0 million. Under WEST III, WEST IV and WEST V, security deposits are held in restricted accounts equal to a portion of the security deposits for leases scheduled to terminate over the subsequent four months, in each case, subject to a minimum balance of $1.0 million. Under WEST VI, all security deposits for leases scheduled to terminate before the expected maturity date of the notes are held in a restricted account, subject to a minimum balance of $1.0 million. Provided lease return conditions have been met, these deposits will be returned to the lessee. To the extent return conditions are not met, these deposits may be retained by the Company.
(l)Spare Parts Inventory
Spare parts inventory consists of spare aircraft and engine parts purchased either directly by Willis Aero and also engines removed from the lease portfolio to be parted out. Spare parts inventory is stated at lower of cost or net realizable value. An impairment charge for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usage patterns, future sales expectations and salvage value.
(m)Intangible Assets
Intangible assets include customer relationships and goodwill at Willis Asset Management. Intangible assets are accounted for in accordance with ASC 350, “Intangibles — Goodwill and Other.”
Customer relationships are amortized on a straight line basis over their estimated useful life of five years. Aside from goodwill, the Company has no intangible assets with indefinite useful lives. Goodwill is assessed for impairment annually.
(n)Other assets
Other assets typically include prepaid purchase deposits and other prepaid expenses. As of December 31, 2021 and 2020, other assets included prepaid deposits of $8.5 million and $10.5 million, respectively, relating to commitments to purchase equipment.
(o)Management Estimates
These financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis, including those related to residual values, estimated asset lives, impairments and bad debts. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes that the accounting policies on revenue recognition, maintenance reserves and expenditures, useful life of equipment, asset residual values, asset impairment and allowance for doubtful accounts are critical to the results of operations.
If the useful lives or residual values are lower than those estimated, upon sale of the asset a loss may be realized. Significant management judgment is required in the forecasting of future operating results, which are used in the preparation of projected undiscounted cash-flows and should different conditions prevail, material impairment write-downs may occur.
(p)Earnings per share information
Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of unvested restricted stock awards (“RSAs”). See Note 10 for more information on the computation of earnings per share.
(q)Investments
The Company’s investments are joint ventures, where it owns 50% of the equity of the ventures and are accounted for using the equity method of accounting. The investments are recorded at the amount invested plus or minus our 50% share of net income or loss, less any distributions or return of capital received from the entities.
(r)Stock Based Compensation
The Company recognizes stock based compensation expense in the financial statements for share-based awards based on the grant-date fair value of those awards. Stock based compensation expense is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term. Forfeitures are accounted for as they occur.
(s)Initial Direct Costs associated with Leases
The Company accounts for the initial direct costs, including sales commissions and legal fees, incurred in obtaining a new lease by deferring and amortizing those costs over the term of the lease. The amortization of these costs is recorded under general and administrative expenses in the Consolidated Statements of Income. The amounts amortized were $1.5 million for the years ended December 31, 2021 and 2020, respectively.
(t)Maintenance Rights
The Company identifies, measures and accounts for maintenance right assets and liabilities associated with acquisitions of equipment with in-place leases. A maintenance right asset represents the fair value of the contractual right under a lease to receive equipment in an improved maintenance condition as compared to the maintenance condition on the acquisition date. A maintenance right liability represents the Company’s obligation to pay the lessee for the difference between the lease-end contractual maintenance condition of the equipment and the actual maintenance condition of the equipment on the acquisition date. The equipment condition at the end of the lease term may result in either overhaul work being performed by the lessee to meet the required return condition or a financial settlement.
When a capital event is performed on the equipment by the lessee, which satisfies their maintenance right obligation, the maintenance rights are added to the equipment basis and depreciated to the next capital event. When equipment is sold before the end of the pre-existing lease, the maintenance rights are applied against any accumulated maintenance reserves, if paid by the lessee, and
the remaining balance is applied to the disposition gain or loss. When a lease terminates, an end of lease true-up is performed and the maintenance right is applied against the accumulated maintenance reserves or, for non-reserve lessees the final settlement payment, and any remaining net maintenance right is recorded in the income statement.
(u)Foreign Currency Translation
The Company’s foreign investments have been converted at rates of exchange in effect at the balance sheet dates. The changes in exchange rates in our foreign investments reported under the equity method are included in stockholders’ equity as accumulated other comprehensive income.
(v)Risk Concentrations
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash deposits, lease receivables and interest rate swaps.
The Company places its cash deposits, which exceed federally insured limits, with financial institutions and other credit-worthy institutions, such as money market funds, and limits the amount of credit exposure to any one party. Management opts for security of principal as opposed to yield. Concentrations of credit risk with respect to lease receivables are limited due to the large number of customers comprising the customer base, and their dispersion across different geographic areas. Some lessees are required to make payments for maintenance reserves at the end of the lease however, this risk is considered limited due to the relatively few lessees which have this provision in the lease. The Company enters into interest rate swap agreements with counterparties that are investment grade financial institutions.
(w)Risks and Uncertainties
As a result of the COVID-19 pandemic, the Company has continued to temporarily close its headquarters and other offices, require its employees and contractors to predominately work remotely, and implement travel restrictions, all of which represent a significant disruption in how the Company operates its business. The Company has also taken various proactive actions in an attempt to mitigate the financial impact of the COVID-19 pandemic. During 2020, 9% of our employees were either furloughed, or subject to a form of reduced compensation which was subsequently reversed in 2021. The operations of the Company’s partners and customers have likewise been disrupted. The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In particular, the ongoing COVID-19 pandemic has caused significant disruptions to the airline industry and has resulted in a dramatic reduction in demand for air travel domestically and abroad, which is likely to continue for the foreseeable future. Lower demand for air travel in turn presents significant risks to the Company, resulting in impacts which have adversely affected the Company’s business, results of operation, and financial condition. Lower demand for spare parts and engine and airframe leasing has negatively impacted collections of accounts receivable, caused the Company’s lessee customers to not enter into new leases, resulted in reduced spending by new and existing customers for leases or spare parts or equipment, resulted in lower usage fees, caused some of the Company’s customers to go out of business, and limited the ability of the Company’s personnel to travel to customers and potential customers. The Company is not able to evaluate or foresee the full extent of these impacts at the current time. During the year ended December 31, 2021, the Company experienced declining lease rent revenue and maintenance reserve revenue as compared to the prior year. Additionally, as of December 31, 2021, the Company has, in certain situations, agreed to rent concessions which resulted in a total reduction to rent revenues of $0.5 million for the year ended December 31, 2021. Rent concessions for the year ended December 31, 2020 resulted in a total reduction of rent revenue of $6.5 million. The rent concessions provide lessees with payment deferral options or reduced rent, where the revised cash flows are substantially the same or less (i.e., the rights of the lessor and obligations of the lessee have not substantially increased) as the original lease agreements. There is no impact on the timing of revenue recognition for rent concessions that result in short term payment deferrals. The rent concessions with reduced rent qualify for the COVID-19 practical expedient to account for the rent concessions outside of the modification framework.
Other than what has been reflected in the Consolidated Financial Statements, the Company is not aware of any specific event or circumstance related to the COVID-19 pandemic that would require it to update its estimates or judgments or adjust the carrying value of its assets or liabilities. Actual results could differ from those estimates and any such differences may be material to the Consolidated Financial Statements.
(x)Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted by the Company
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted this guidance effective January 1, 2021 and it did not impact our consolidated financial statements and related disclosures.
In March 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848), Scope”, which clarifies certain optional expedients to all derivatives affected by the discounting transition, regardless of whether the derivatives reference the London Interbank Offered Rate (“LIBOR”) or another rate expected to be discounted or whether the modification replaces or has the potential to replace the reference rate expected to be discounted. The amendments in this guidance are effective upon issuance through December 31, 2022. The Company adopted this guidance upon issuance. When the transition occurs, the Company expects to apply this expedient to its existing debt instruments and interest rate swaps that reference LIBOR, and to any other new transactions that reference LIBOR or another reference rate that is discontinued, through December 31, 2022. The adoption of this ASU did not impact the Company’s 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 receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies various scoping and other issues arising from ASU 2016-13. In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU improves the Codification and amends the interaction of Topic 842 and Topic 326. The amendments in this ASU are effective for the Company on January 1, 2023, with early adoption permitted. The Company expects to adopt this accounting standard update effective January 1, 2023. The Company is evaluating the potential effects on the consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, “Lease (Topic 842): Lessors – Certain Leases with Variable Lease Payments” related to accounting for sales-type leases or direct financing leases with variable lease payments. This ASU is effective for interim and annual years beginning after December 15, 2021, with early adoption permitted. The Company plans to adopt this guidance effective January 1, 2022 on a prospective basis for sales-type leases entered into after the effective date and is currently evaluating the potential impact adoption will have on the consolidated financial statements and related disclosures.
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” related to disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This ASU is effective for annual periods beginning after December 15, 2021, with early application permitted. The Company plans to adopt this guidance effective January 1, 2022 on a prospective basis and is currently evaluating the potential impact adoption will have on the consolidated financial statements and related disclosures.
2. Leases
As lessor, and as of December 31, 2021, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842.
As lessee, the significant majority of leases the Company enters 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. 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 is 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 | | December 31, 2021 | | December 31, 2020 |
| | | | (in thousands, except lease term and discount rate) |
Assets | | | | | | |
Operating lease right-of-use assets | | Other assets | | $ | 6,067 | | | $ | 3,784 | |
Total leased assets | | | | $ | 6,067 | | | $ | 3,784 | |
| | | | | | |
Liabilities | | | | | | |
Operating lease right-of-use liabilities | | Accounts payable and accrued expenses | | $ | 5,206 | | | $ | 3,873 | |
Total lease liabilities | | | | $ | 5,206 | | | $ | 3,873 | |
| | | | | | |
Weighted average remaining lease term (years) | | | | |
Operating leases | | | | 6.49 | | 4.20 |
Weighted average discount rate | | | | | | |
Operating leases | | | | 3.4 | % | | 3.1 | % |
The weighted average discount rate is based on the discount rate for each lease and the remaining balance of the lease payments for each lease at the reporting date.
Future maturities of the Company’s operating lease liabilities at December 31, 2021 are as follows:
| | | | | | | | |
Year | | (in thousands) |
2022 | | $ | 1,056 | |
2023 | | 901 | |
2024 | | 812 | |
2025 | | 793 | |
2026 | | 790 | |
Thereafter | | 1,562 | |
Total lease payments | | 5,914 | |
Less: interest | | (708) | |
Total lease liabilities | | $ | 5,206 | |
The following table represents future minimum lease payments under non-cancelable operating leases at December 31, 2021:
| | | | | | | | |
Year | | (in thousands) |
2022 | | $ | 1,071 | |
2023 | | 904 | |
2024 | | 812 | |
2025 | | 793 | |
2026 | | 790 | |
Thereafter | | 1,562 | |
| | $ | 5,932 | |
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
Lease expense | | Classification | | 2021 | | 2020 |
| | | | (in thousands) |
Operating lease cost | | General and administrative | | $ | 1,239 | | | $ | 1,141 | |
Net lease cost | | | | $ | 1,239 | | | $ | 1,141 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 1,446 | | | $ | 1,083 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 4,131 | | | $ | 705 | |
3. Revenue from Contracts with Customers
The following tables disaggregate revenue by major source for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2021 | | Leasing and Related Operations | | Spare Parts Sales | | Eliminations | | Total |
Leasing revenue | | $ | 134,831 | | | $ | — | | | $ | — | | | $ | 134,831 | |
Maintenance reserve revenue | | 73,961 | | | — | | | — | | | 73,961 | |
Spare parts and equipment sales | | 365 | | | 17,042 | | | 10 | | | 17,417 | |
Gain on sale of leased equipment | | 5,975 | | | — | | | — | | | 5,975 | |
Gain on sale of financial assets (1) | | 10,874 | | | — | | | — | | | 10,874 | |
Asset transition fee (2) | | 6,256 | | | — | | | — | | | 6,256 | |
Managed services | | 11,434 | | | — | | | — | | | 11,434 | |
Other revenue | | 13,088 | | | 523 | | | (157) | | | 13,454 | |
Total revenue | | $ | 256,784 | | | $ | 17,565 | | | $ | (147) | | | $ | 274,202 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2020 | | Leasing and Related Operations | | Spare Parts Sales | | Eliminations | | Total |
Leasing revenue | | $ | 142,895 | | | $ | — | | | $ | — | | | $ | 142,895 | |
Maintenance reserve revenue | | 105,365 | | | — | | | — | | | 105,365 | |
Spare parts and equipment sales | | 1,514 | | | 17,514 | | | (403) | | | 18,625 | |
Gain on sale of leased equipment | | 3,391 | | | — | | | — | | | 3,391 | |
Managed services | | 8,753 | | | — | | | — | | | 8,753 | |
Other revenue | | 9,651 | | | 327 | | | (315) | | | 9,663 | |
Total revenue | | $ | 271,569 | | | $ | 17,841 | | | $ | (718) | | | $ | 288,692 | |
________________________________________________________
(1)Gain on sale of financial assets reflects the sales of two notes receivable during 2021.
(2)Asset transition fee reflects the settlement received from the close out of an engine transition program.
4. Equipment Held for Operating Lease
As of December 31, 2021, the Company’s $1,991.4 million equipment held for operating lease portfolio and $115.5 million notes receivable represented 304 engines, twelve aircraft, one marine vessel and other leased parts and equipment. As of December 31, 2020, the Company’s $1,886.6 million equipment held for operating lease portfolio and $158.7 million notes receivable represented 291 engines, eight aircraft, one marine vessel and other leased parts and equipment.
A majority of the equipment is leased and operated internationally. Substantially all leases relating to this equipment are denominated and payable in U.S. dollars.
The Company leases equipment to lessees domiciled in seven geographic regions. The tables below set forth geographic information about the leased equipment grouped by domicile of the lessee (which is not necessarily indicative of the asset’s actual location):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
Lease rent revenue | | 2021 | | 2020 |
Region | | (in thousands) |
United States | | $ | 61,947 | | | $ | 33,291 | |
Europe | | 30,299 | | | 57,972 | |
Asia | | 26,587 | | | 32,198 | |
South America | | 11,338 | | | 11,686 | |
Mexico | | 2,461 | | | 3,670 | |
Canada | | 1,245 | | | 2,011 | |
Middle East | | 954 | | | 2,067 | |
Totals | | $ | 134,831 | | | $ | 142,895 | |
| | | | | | | | | | | | | | |
| | As of December 31, |
Net book value of equipment held for operating lease | | 2021 | | 2020 |
Region | | (in thousands) |
Europe | | $ | 479,921 | | | $ | 460,664 | |
United States | | 425,822 | | | 362,471 | |
Asia | | 365,831 | | | 324,946 | |
Mexico | | 163,526 | | | 168,593 | |
South America | | 111,941 | | | 104,671 | |
Canada | | 55,109 | | | 8,500 | |
Middle East | | 22,320 | | | 47,899 | |
Off-lease and other | | 366,898 | | | 408,869 | |
Totals | | $ | 1,991,368 | | | $ | 1,886,613 | |
As of December 31, 2021, the lease status of the equipment held for operating lease (in thousands) was as follows:
| | | | | | | | |
Lease Term | | Net Book Value |
Off-lease and other | | $ | 366,898 | |
Month-to-month leases | | 206,813 | |
Leases expiring 2022 | | 776,831 | |
Leases expiring 2023 | | 311,814 | |
Leases expiring 2024 | | 147,450 | |
Leases expiring 2025 | | 30,558 | |
Leases expiring 2026 | | 26,000 | |
Leases expiring thereafter | | 125,004 | |
| | $ | 1,991,368 | |
As of December 31, 2021, minimum future payments under non-cancelable leases were as follows:
| | | | | | | | |
Year | | (in thousands) |
2022 | | $ | 111,643 | |
2023 | | 46,447 | |
2024 | | 22,412 | |
2025 | | 9,306 | |
2026 | | 6,177 | |
Thereafter | | 27,179 | |
| | $ | 223,164 | |
5. 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 50% interest in the joint venture and the Company uses the equity method in recording investment activity. As of December 31, 2021, WMES owned a lease portfolio, inclusive of a note receivable, of 37 engines and five aircraft with a net book value of $292.5 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 Lease Finance Company Limited (“CASC Willis”), a joint venture based in Shanghai, China. Each partner holds a 50% 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 December 31, 2021, CASC Willis owned a lease portfolio of four engines with a net book value of $49.0 million.
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2021 | | WMES | | CASC Willis | | Total |
| | (in thousands) |
Investment in joint ventures as of December 31, 2019 | | $ | 44,134 | | | $ | 13,802 | | | $ | 57,936 | |
Earnings from joint ventures | | 1,552 | | | 1,090 | | | 2,642 | |
Distribution | | (7,200) | | | — | | | (7,200) | |
Foreign currency translation adjustment | | — | | | 1,018 | | | 1,018 | |
Other comprehensive loss from joint ventures | | (1,121) | | | — | | | (1,121) | |
Investment in joint ventures as of December 31, 2020 | | 37,365 | | | 15,910 | | | 53,275 | |
Earnings from joint ventures | | 250 | | | 550 | | | 800 | |
| | | | | | |
| | | | | | |
Foreign currency translation adjustment | | — | | | 398 | | | 398 | |
Other comprehensive loss from joint ventures | | 1,454 | | | — | | | 1,454 | |
Investment in joint ventures as of December 31, 2021 | | $ | 39,069 | | | $ | 16,858 | | | $ | 55,927 | |
“Other revenue” on the Consolidated Statements of Income includes management fees earned of $2.1 million and $1.6 million during the years ended December 31, 2021 and 2020, respectively, related to the servicing of engines for the WMES lease portfolio.
During 2021, the Company sold two engines to WMES for $25.0 million. During 2020, the Company sold one note receivable to WMES for $8.4 million.
There were no aircraft or engine sales to CASC Willis during 2021 or 2020.
Unaudited summarized financial information for 100% of WMES is presented in the following table:
| | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 |
(in thousands) |
Revenue | $ | 29,596 | | | $ | 38,086 | |
Expenses | 29,303 | | | 35,190 | |
WMES net income | $ | 293 | | | $ | 2,896 | |
| | | | | | | | | | | |
| As of December 31, |
2021 | | 2020 |
(in thousands) |
Total assets | $ | 310,260 | | | $ | 303,886 | |
Total liabilities | 225,917 | | | 219,836 | |
Total WMES net equity | $ | 84,343 | | | $ | 84,050 | |
The difference between the Company’s investment in WMES and 50% of total WMES net equity is primarily attributable to the recognition of deferred gains, prior to the adoption of ASU 2017-05, related to engines sold by the Company to WMES.
6. Debt Obligations
Debt obligations consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
2021 | | 2020 |
(in thousands) |
Credit facility at a floating rate of interest of one-month LIBOR plus 1.75% at December 31, 2021, secured by engines. The facility has a committed amount of $1.0 billion at December 31, 2021, which revolves until the maturity date of June 2024 | $ | 590,000 | | | $ | 777,000 | |
WEST VI Series A 2021 term notes payable at a fixed rate of interest of 3.10%, maturing in May 2046, secured by engines | 273,723 | | | — | |
WEST VI Series B 2021 term notes payable at a fixed rate of interest of 5.44%, maturing in May 2046, secured by engines | 38,022 | | | — | |
WEST VI Series C 2021 term notes payable at a fixed rate of interest of 7.39%, maturing in May 2046, secured by engines | 18,158 | | | — | |
WEST V Series A 2020 term notes payable at a fixed rate of interest of 3.23%, maturing in March 2045, secured by engines | 272,909 | | | 286,863 | |
WEST V Series B 2020 term notes payable at a fixed rate of interest of 4.21%, maturing in March 2045, secured by engines | 38,004 | | | 39,855 | |
WEST V Series C 2020 term notes payable at a fixed rate of interest of 6.66%, maturing in March 2045, secured by engines | 16,342 | | | 19,043 | |
WEST IV Series A 2018 term notes payable at a fixed rate of interest of 4.75%, maturing in September 2043, secured by engines | 262,260 | | | 277,481 | |
WEST IV Series B 2018 term notes payable at a fixed rate of interest of 5.44%, maturing in September 2043, secured by engines | 38,885 | | | 39,640 | |
WEST III Series A 2017 term notes payable at a fixed rate of interest of 4.69%, maturing in August 2042, secured by engines | 223,815 | | | 227,138 | |
WEST III Series B 2017 term notes payable at a fixed rate of interest of 6.36%, maturing in August 2042, secured by engines | 32,195 | | | 32,481 | |
Note payable at three-month LIBOR plus a margin ranging from 1.85% to 2.50%, repaid in May 2021, secured by engines | — | | | 6,138 | |
Note payable at a fixed rate of interest of 3.18%, maturing in July 2024, secured by an aircraft | 5,307 | | | 7,247 | |
| 1,809,620 | | | 1,712,886 | |
Less: unamortized debt issuance costs | (19,356) | | | (19,133) | |
Total debt obligations | $ | 1,790,264 | | | $ | 1,693,753 | |
One-month LIBOR was 0.10% and 0.14% as of December 31, 2021 and 2020, respectively.
Principal outstanding at December 31, 2021, is expected to be repayable as follows:
| | | | | | | | |
Year | | (in thousands) |
2022 | | $ | 79,726 | |
2023 | | 63,069 | |
2024 | | 652,236 | |
2025 | | 61,001 | |
2026 | | 280,029 | |
Thereafter | | 673,559 | |
Total | | $ | 1,809,620 | |
At December 31, 2021, the Company had a revolving credit facility to finance the acquisition of equipment for lease as well as for general working capital purposes, with the amounts drawn under the facility not to exceed that which is allowed under the borrowing base as defined by the credit agreement. In June 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (“Amended Credit Agreement”) which incorporates an accordion feature that can expand the $1.0 billion credit facility up to $1.3 billion. Pursuant to the Amended Credit Agreement, all obligations under the revolving credit facility are collateralized by the title and interest of the Company and certain of its subsidiaries, and to substantially all of its assets and properties.
In October 2020, the Company entered into a Limited Waiver (the “Waiver”) to its Amended Credit Agreement. The Waiver provides for the partial exclusion for specified periods of certain asset book values in the calculation of customer concentration limits, as such limits are defined in the Amended Credit Agreement.
In June 2021, the Company entered into Amendment No. 2 to the Amended Credit Agreement, which updates the provisions relating to the future discontinuance of LIBOR and sets forth the mechanics for establishing the Secured Overnight Financing Rate (“SOFR”) as a benchmark replacement rate.
As of December 31, 2021 and 2020, $410.0 million and $223.0 million were available under this facility, respectively. On a quarterly basis, the interest rate is adjusted based on the Company’s leverage ratio, as calculated under the terms of the revolving credit facility. Under the revolving credit facility, all subsidiaries except WEST III, WEST IV, WEST V and WEST VI jointly and severally guarantee payment and performance of the terms of the loan agreement. The guarantee would be triggered by a default under the agreement.
In March 2020, WLFC and its direct, wholly-owned subsidiary WEST V, closed its offering of $366.2 million aggregate principal amount of fixed rate notes. The WEST V Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $303.0 million, the Series B Notes issued in an aggregate principal amount of $42.1 million and the Series C Notes issued in an aggregate principal amount of $21.1 million. The WEST V Notes are secured by, among other things, WEST V’s direct and indirect ownership interests in a portfolio of aircraft engines and airframes.
The Series A Notes have a fixed coupon of 3.228%, an expected maturity of approximately eight years and a final maturity date in March 2045, the Series B Notes have a fixed coupon of 4.212%, an expected maturity of approximately eight years and a final maturity date in March 2045 and the Series C Notes have a fixed coupon of 6.657%, an expected maturity of approximately eight years and a final maturity date in March 2045. The Series A Notes were issued at a price of 99.99859% of par, the Series B Notes were issued at a price of 99.99493% of par and the Series C Notes were issued at a price of 99.99918% of par. Principal on the WEST V Notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture for the WEST V Notes. Proceeds from asset sales by WEST V will be used, at WEST V’s election subject to certain conditions, to reduce WEST V's debt or to acquire other engines or airframes.
The Company recognized a $4.7 million loss on debt extinguishment upon the repayment of the WEST II Series A 2012 term notes in March 2020.
In May 2021, WLFC and its direct, wholly-owned subsidiary WEST VI, closed its offering of $336.7 million aggregate principal amount of fixed rate notes. The WEST VI Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $278.6 million, the Series B Notes issued in an aggregate principal amount of $38.7 million and the Series C Notes issued in an aggregate principal amount of $19.4 million. The WEST VI Notes are secured by, among other things, WEST VI’s direct and indirect ownership interests in a portfolio of aircraft engines and an airframe.
The Series A Notes have a fixed coupon of 3.104%, an expected maturity of approximately eight years and a final maturity date in May 2046, the Series B Notes have a fixed coupon of 5.438%, an expected maturity of approximately eight years and a final maturity date in May 2046 and the Series C Notes have a fixed coupon of 7.385%, an expected maturity of approximately eight years and a final maturity date in May 2046. The Series A Notes were issued at a price of 99.99481% of par, the Series B Notes were issued at a price of 99.99996% of par and the Series C Notes were issued at a price of 99.99869% of par. Principal on the WEST VI Notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.
In May 2021, WLFC repaid an existing note payable that was secured by two engines.
The assets of WEST III, WEST IV, WEST V and WEST VI are not available to satisfy the Company’s obligations other than the obligations specific to that WEST entity. WEST III, WEST IV, WEST V and WEST VI are consolidated for financial statement presentation purposes. WEST III, WEST IV, WEST V and WEST VI’s ability to make distributions and pay dividends to the Company is subject to the prior payments of their debt and other obligations and their maintenance of adequate reserves and capital. Under WEST III, WEST IV, WEST V and WEST VI, cash is collected in restricted accounts, which are used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance reserve payments and lease security deposits are formulaically accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively. The WEST III, WEST IV, WEST V and WEST VI indentures require that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts.
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 December 31, 2021.
7. Derivative Instruments
The Company periodically holds interest rate derivative instruments to mitigate exposure to changes in interest rates, to predominantly one-month LIBOR, with $590.0 million and $783.1 million of variable rate borrowings at December 31, 2021 and 2020, respectively. As a matter of policy, management does not use derivatives for speculative purposes. As of December 31, 2021, the Company has five interest rate swap agreements. During the first quarter of 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two with remaining terms of 25 months and two with remaining terms of 49 months as of December 31, 2021. One interest rate swap agreement was entered into during 2019 which has a notional outstanding amount of $100.0 million with a remaining term of 30 months as of December 31, 2021. One interest rate swap agreement which the Company entered into in 2016 expired in April 2021. The derivative instruments were designated as cash flow hedges at inception and recorded at fair value.
The Company evaluated the effectiveness of the swaps to hedge the interest rate risk associated with its variable rate debt and concluded at the swap inception date that the swaps were highly effective in hedging that risk. The Company evaluates the effectiveness of the hedging relationship on an ongoing basis and concluded there was no ineffectiveness in the hedges for the year ended December 31, 2021.
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period. 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.
The net fair value of the swaps as of December 31, 2021 was $7.3 million, representing an asset of $8.0 million and a liability of $0.7 million. The net fair value of the interest rate swaps as of December 31, 2020 was $4.0 million, representing a liability. The Company recorded interest expense of $2.4 million and $2.0 million during the years ended December 31, 2021 and 2020, respectively, from derivative investments. As of December 31, 2021 the accumulative derivative gain was $7.3 million and as of December 31, 2020 the accumulative derivative loss was $3.8 million.
Effect of Derivative Instruments on Earnings in the Statements of Income and of Comprehensive Income
The following table provides additional information about the financial statement effects related to the cash flow hedges for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
| Years Ended December 31, |
| 2021 | | 2020 |
| | (in thousands) |
Interest rate contracts | | $ | 11,250 | | | $ | (2,298) | |
Total | | $ | 11,250 | | | $ | (2,298) | |
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 hedges for the years ended December 31, 2021 and 2020.
Counterparty Credit Risk
The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The counterparties for the interest rate swaps are large financial institutions that possessed an investment grade credit rating. Based on this rating, the Company believes that the counterparties were credit-worthy and that their continuing performance under the hedging agreement was probable and did not require the counterparties to provide collateral or other security to the Company.
8. Income Taxes
The components of income before income taxes are as follows:
| | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
United States | $ | 4,659 | | | $ | 16,990 | |
Foreign | 4,481 | | | 346 | |
Income before income taxes | $ | 9,140 | | | $ | 17,336 | |
The components of income tax expense for the years ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | State | | Foreign | | Total |
| (in thousands) |
2021 | | | | | | | |
Current | $ | — | | | $ | (2) | | | $ | 1,597 | | | $ | 1,595 | |
Deferred | 4,072 | | | 121 | | | — | | | 4,193 | |
Total | $ | 4,072 | | | $ | 119 | | | $ | 1,597 | | | $ | 5,788 | |
| | | | | | | |
2020 | | | | | | | |
Current | $ | — | | | $ | (88) | | | $ | 723 | | | $ | 635 | |
Deferred | 6,251 | | | 702 | | | — | | | 6,953 | |
Total | $ | 6,251 | | | $ | 614 | | | $ | 723 | | | $ | 7,588 | |
The following is a reconciliation of the federal income tax expense at the statutory rate of 21% for the years ended December 31, 2021 and 2020 to the effective income tax expense:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
Statutory federal income tax expense | $ | 1,844 | | | $ | 3,640 | |
State taxes, net of federal benefit | 119 | | | 633 | |
Foreign tax paid | — | | | — | |
Foreign jurisdiction rate differential | 705 | | | 508 | |
Permanent differences-nondeductible executive compensation | 2,042 | | | 2,748 | |
Permanent differences and other | 1,078 | | | 59 | |
Effective income tax expense | $ | 5,788 | | | $ | 7,588 | |
Permanent differences and other includes Subpart F income of $1.4 million from foreign operations for the year-ended December 31, 2021. The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
| | | | | |
| (in thousands) |
Balance as of December 31, 2019 | $ | 270 | |
Increases related to current year tax positions | 66 | |
Decreases due to tax positions expired | (6) | |
Balance as of December 31, 2020 | 330 | |
Decreases related to current year tax positions | — | |
Decreases due to tax positions expired | (317) | |
Balance as of December 31, 2021 | $ | 13 | |
A $0.0 and $0.3 million reserve was established as of December 31, 2021 and 2020, respectively, for the exposure in Europe. Due to law changes in the United Kingdom, the Company believes that it is at a more likely than not position and has released the 2020 $0.3 million reserve.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (in thousands) |
Deferred tax assets: | | | |
Unearned lease revenue | $ | 2,217 | | | $ | 2,519 | |
State taxes | — | | | 10 | |
Inventory | 1,486 | | | 2,153 | |
Reserves and allowances | 6,781 | | | 4,356 | |
Other accruals | 2,577 | | | 1,769 | |
Foreign tax credit | — | | | — | |
Lease liability | 146 | | | 198 | |
Net operating loss carry forward | 68,168 | | | 74,045 | |
California alternative minimum tax credit | 33 | | | 33 | |
Charitable contributions | 2 | | | 65 | |
Total deferred tax assets | 81,410 | | | 85,148 | |
Less: valuation allowance | (518) | | | (468) | |
Net deferred tax assets | 80,892 | | | 84,680 | |
| | | |
Deferred tax liabilities: | | | |
Depreciation and impairment on aircraft engines and equipment | (183,131) | | | (163,773) | |
Inventory | — | | | — | |
Notes receivable | (15,911) | | | (34,426) | |
Right of use liability | (139) | | | (184) | |
Other deferred tax liabilities | (4,595) | | | (4,616) | |
Net deferred tax liabilities | (203,776) | | | (202,999) | |
| | | |
Other comprehensive (income) loss deferred tax liability | (1,448) | | | 1,481 | |
| | | |
Net deferred tax liabilities | $ | (124,332) | | | $ | (116,838) | |
As of December 31, 2021, the Company had net operating loss carry forwards of approximately $316.3 million for federal tax purposes and $2.2 million (tax effected) for state tax purposes. The majority of the federal net operating loss carry forwards were generated in 2020 and can be carried forward indefinitely, the remainder will expire at various times from 2032 to 2037, and the state net operating loss carry forwards will expire at various times from 2026 to 2042. There is a $0.5 million valuation allowance for net operating losses in California that expire between 2034 and 2042 and a $0.1 million valuation allowance for net operating losses in Georgia that expire between 2032 and 2040. The Company’s ability to utilize the net operating loss and tax credit carry forwards in the future may be subject to restriction in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax law. Management believes that no valuation allowance is required on deferred tax assets related to federal net operating loss carry forwards, as it is more likely than not that all amounts are recoverable through future taxable income. The open tax years for federal and state tax purposes are from 2004 to 2021, respectively.
It is the Company's intention to reinvest undistributed earnings of their wholly owned foreign operations and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or U.S. Income taxes.
9. 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, receivables, and accounts payable: The amounts reported in the accompanying Consolidated Balance Sheets approximate fair value due to their short-term nature.
•Notes receivable: The carrying amount of the Company’s outstanding balance on its Notes receivable as of December 31, 2021 and 2020 was estimated to have a fair value of approximately $117.7 million and $159.2 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 December 31, 2021 and 2020 was estimated to have a fair value of approximately $1,827.4 million and $1,691.0 million, respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each year end (Level 2 inputs).
Assets Measured and Recorded at Fair Value on a Recurring Basis
As of December 31, 2021 and 2020, the Company measured the fair value of its interest rate swaps 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 net fair value of the interest rate swaps as of December 31, 2021 was $7.3 million, representing an asset of $8.0 million and a liability of $0.7 million. The net fair value of the interest rate swaps as of December 31, 2020 was $4.0 million, representing a liability. The Company recorded interest expense of $2.4 million and $2.0 million during the years ended December 31, 2021 and 2020, respectively, from derivative investments.
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.
| | | | | | | | | | | |
| Total Losses |
| Years Ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
Equipment held for lease | $ | 7,651 | | | $ | 20,470 | |
Equipment held for sale | 64 | | | 70 | |
Total | $ | 7,715 | | | $ | 20,540 | |
Write-downs of equipment to their estimated fair values totaled $7.7 million for the year ended December 31, 2021 which included write-downs of $3.9 million due to a management decision to monetize three engines and one airframe either by sale to a third party or for part-out and $3.8 million for the adjustment of the carrying value of seven impaired engines. As of December 31, 2021, included within equipment held for lease and equipment held for sale was $36.0 million in remaining book value of 22 assets which were previously written down.
Write-downs of equipment to their estimated fair values totaled $20.5 million for the year ended December 31, 2020 which included write-downs of $15.2 million due to a management decision to monetize 10 engines and two airframes either by sale to a third party or for part-out and $5.3 million for the adjustment of the carrying value of seven impaired engines.
10. 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 anti-dilutive. Additionally, redeemable preferred stock is not convertible and does not affect dilutive shares.
There were no anti-dilutive shares excluded in the computations of diluted weighted average earnings per common share for the years ended December 31, 2021 and 2020.
The following table presents the calculation of basic and diluted EPS:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
Net income attributable to common shareholders | $ | 18 | | | $ | 6,405 | |
| | | |
Basic weighted average common shares outstanding | 6,112 | | | 5,963 | |
Potentially dilutive common shares | 234 | | | 165 | |
Diluted weighted average common shares outstanding | 6,346 | | | 6,128 | |
| | | |
Basic weighted average earnings per common share | $ | — | | | $ | 1.07 | |
Diluted weighted average earnings per common share | $ | — | | | $ | 1.05 | |
11. Commitments, Contingencies, Guarantees and Indemnities
Other obligations
Other obligations, such as certain purchase obligations are not recognized as liabilities in the consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. These funding commitments could potentially require the Company’s performance in the event of demands by third parties or contingent events. As of December 31, 2021, the Company had $439.9 million in purchase commitments of equipment that will be satisfied within four fiscal years. The purchase obligations are subject to escalation based on the closing date of each transaction.
In May 2021, the Company entered into a commitment for future maintenance services which are anticipated to cost $24.0 million by 2024.
In December 2020, the Company entered into definitive agreements for the purchase of 25 modern technology aircraft engines. As part of the purchase, the Company has committed to certain future overhaul and maintenance services which are anticipated to range between $73.8 million and $112.0 million by 2030.
12. Equity
Common Stock Repurchase
Effective December 31, 2018, the Board of Directors approved the renewal of the existing common stock 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. Effective December 31, 2020, the Board of Directors approved the renewal of the existing common stock repurchase plan extending the plan through December 31, 2022. Repurchased shares are immediately retired. During 2021, the Company repurchased 268,408 shares of common stock for approximately $10.1 million under the plan, at a weighted average price of $37.57 per share. During 2020, the Company repurchased 55,426 shares of common stock for approximately $1.5 million under the plan, at a weighted average price of $27.24 per share. At December 31, 2021, approximately $44.8 million was available to purchase shares under the plan.
Redeemable Preferred Stock
In October 2016, the Company sold and issued to Development Bank of Japan Inc. (“DBJ”) an aggregate of 1,000,000 shares of the Company’s 6.5% Series A Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”) at a purchase price of $20.00 per share. The net proceeds to the Company after deducting investor fees were $19.8 million.
In September 2017, the Company sold and issued to DBJ an aggregate of 1,500,000 shares of the Company’s 6.5% Series A-2 Preferred Stock, $0.01 par value per share (the “Series A-2 Preferred Stock”) at a purchase price of $20.00 per share. The net proceeds to the Company after deducting issuance costs were $29.7 million.
The rights and privileges of the Preferred Stock are described below:
Voting Rights: Holders of the Preferred Stock do not have general voting rights.
Dividends: The 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 years ended December 31, 2021 and 2020, the Company paid total dividends of $3.3 million on the Series A-1 and Series A-2 Preferred Stock, respectively.
Liquidation Preference: The holders of the Preferred Stock have preference in the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the corporation, including a merger or consolidation. Upon such liquidation event, the Preferred Stockholders are entitled to be paid out of the assets of the Company available for distribution to its stockholders after payment of all the Company’s indebtedness and other obligations and before any payment shall be made to the holders of common stock or any other class or series of stock ranking on liquidation junior to the Preferred Stock an amount equal to $20.00 per share, plus any declared but unpaid dividends.
Redemption: The Preferred Stock has no stated maturity date, however the holders of the Preferred Stock have the option to require the Company to redeem all or any portion of the Preferred Stock for cash upon occurrence of any significant changes in operating results, ownership structure, or liquidity events as defined in the Preferred Stock purchase agreements. The redemption price is $20.00 per share plus dividends accrued but not paid. The Company is accreting the Preferred Stock to redemption value over the period from the date of issuance to the date first callable by the Preferred Stockholders (October 2023 for the Series A Preferred Stock and September 2024 for the Series A-2 Preferred Stock), such that the carrying amounts of the securities will equal the redemption amounts at the earliest redemption dates.
13. Stock-Based Compensation Plans
The components of stock compensation expense were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
2007 Stock Incentive Plan | $ | 1,659 | | | $ | 3,142 | |
2021 Stock Incentive Plan | 14,678 | | | 7,960 | |
Employee Stock Purchase Plan | 241 | | | 276 | |
Total Stock Compensation Expense | $ | 16,578 | | | $ | 11,378 | |
The significant stock compensation plans are described below.
The 2007 Stock Incentive Plan (the “2007 Plan”) was adopted in May 2007. Under this 2007 Plan, a total of 2,800,000 shares were authorized for stock-based compensation available in the form of either restricted stock awards (“RSAs”) or stock options. The
RSAs are subject to service-based vesting, typically between one and four 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. As of December 31, 2021, there are no stock options outstanding under the 2007 Plan.
The 2018 Stock Incentive Plan (the “2018 Plan”) was adopted in May 2018. Under this 2018 Plan total of 800,000 shares were 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 RSAs. In November 2021, the 2018 Plan was amended and restated as the 2021 Stock Incentive Plan (the “2021 Plan”) to increase the number of shares reserved for issuance under the 2021 Plan by 1,000,000 shares. The RSAs are subject to service-based vesting, typically between one and four 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.
As of December 31, 2021, the Company has granted 926,300 RSAs under the 2021 Plan and has 968,296 shares available for future issuance. The fair value of the restricted stock awards equaled the stock price at the grant date.
The following table summarizes restricted stock activity under the 2007 and 2021 Plans for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Grant Date Fair Value | |
Balance as of December 31, 2019 | 505,467 | | | $ | 37.70 | | |
Shares granted | 319,350 | | | 19.00 | | |
Shares forfeited | — | | | — | | |
Shares vested | (243,102) | | | 28.35 | | |
Balance as of December 31, 2020 | 581,715 | | | 31.34 | | |
Shares granted | 327,550 | | | 42.40 | | |
Shares forfeited | — | | | — | | |
Shares vested | (348,657) | | | 28.66 | | |
Balance as of December 31, 2021 | 560,608 | | | $ | 36.30 | | |
At December 31, 2021 the stock compensation expense related to the RSAs that will be recognized over the average remaining vesting period of 1.0 years totaled $9.7 million. At December 31, 2021, the intrinsic value of unvested RSAs was $21.1 million.
Under the Employee Stock Purchase Plan (“ESPP”), as amended and restated effective November 10, 2021, 425,000 shares of common stock have been reserved for issuance. Eligible employees may designate no more than 10% of their base cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan. Participants may purchase no 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 2021 and 2020, 18,211 and 11,394 shares of common stock, respectively, were issued under the ESPP. The Company issues new shares through its transfer agent upon employee stock purchase.
14. Employee 401(k) Plan
The Company adopted The Willis 401(k) Plan (the “401(k) Plan”) effective as of January 1997. The 401(k) Plan provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code. The 401(k) Plan is a contributory plan available to all full-time and part-time employees in the United States. In 2021, employees who participated in the 401(k) Plan could elect to defer and contribute to the 401(k) Plan up to 75% of pretax salary or wages up to $19,500 (or $26,000 for employees at least 50 years of age). The Company matches 50% of employee contributions and was capped at $13,000 per employee in 2021. The Company match totaled $0.7 million and $0.8 million for the years ended December 31, 2021 and 2020, respectively.
15. Related Party Transactions
Joint Ventures
“Other revenue” on the Consolidated Statement of Income includes management fees earned of $2.1 million and $1.6 million during the years ended December 31, 2021 and 2020, respectively, related to the servicing of engines for the WMES lease portfolio.
During 2021, the Company sold two engines to WMES for $25.0 million. During 2020, the Company sold one note receivable to WMES for $8.4 million.
There were no aircraft or engine sales to CASC Willis during 2021 or 2020.
Other
On December 2, 2021, in a transaction approved by an independent committee, as well as the Audit Committee, of the Board of Directors, the Company purchased 60,000 shares of its common stock directly from the Company’s Chief Executive Officer (“CEO”), Charles F. Willis. The agreed and paid price per share was $35.43, the discounted volume weighted average price on December 2, 2021.
On October 1, 2021, the Board’s Independent Directors approved the payment of $0.2 million to the Company’s CEO, Charles F. Willis, for reimbursement of a golf club membership fee, as well as future payments of reasonable annual golf club dues.
During 2021, the Company paid approximately $27,000 of expenses payable to Mikchalk Lake, LLC, an entity in which our Chief Executive Officer (“CEO”) retains an ownership interest. These expenses were for lodging and other business related services. These transactions were approved by the Board’s Independent Directors.
During 2020, the Board’s Independent Directors approved the Company’s agreement to a lease with our CEO in support of the Company’s marine vessel leasing business. That lease provides for a payment to our CEO of $750 per day for the use of his tender in support of our vessel lease to a third-party lessee. In addition, the Company purchased a hull insurance policy, for our CEO’s tender, at a rate of $6,800 per annum, plus a one-time subscriber fee of $695 to insure his tender while in the service of the Company’s vessel leasing business. The Company has paid a total of $41,250 and $9,750 during the years ended December 31, 2021 and 2020, respectively, for usage of the tender. On November 11, 2021, in a transaction approved by the Independent Compensation Committee, the Company purchased the tender for $0.5 million. Additionally, during 2020, our CEO was charged $4,000 for personal expenses while onboard the Company’s marine vessel.
During 2020, the Company’s CEO was charged $9,100 for the purchase of artwork.
16. Reportable Segments
The Company has two reportable business segments: (i) Leasing and Related Operations which involves acquiring and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft engines and other aircraft equipment and the selective purchase and resale of commercial aircraft engines and other aircraft equipment and other related businesses and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine 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.
The following tables present a summary of the reportable segments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2021 | | Leasing and Related Operations | | Spare Parts Sales | | Eliminations | | Total |
Revenue: | | | | | | | | |
Lease rent revenue | | $ | 134,831 | | | $ | — | | | $ | — | | | $ | 134,831 | |
Maintenance reserve revenue | | 73,961 | | | — | | | — | | | 73,961 | |
Spare parts and equipment sales | | 365 | | | 17,042 | | | 10 | | | 17,417 | |
Gain on sale of leased equipment | | 5,975 | | | — | | | — | | | 5,975 | |
Gain on sale of financial assets (1) | | 10,874 | | | — | | | — | | | 10,874 | |
Asset transition fee (2) | | 6,256 | | | — | | | — | | | 6,256 | |
Other revenue | | 24,522 | | | 523 | | | (157) | | | 24,888 | |
Total revenue | | 256,784 | | | 17,565 | | | (147) | | | 274,202 | |
| | | | | | | | |
Expenses: | | | | | | | | |
Depreciation and amortization expense | | 90,391 | | | 113 | | | — | | | 90,504 | |
Cost of spare parts and equipment sales | | 29 | | | 14,898 | | | — | | | 14,927 | |
Write-down of equipment | | 7,715 | | | — | | | — | | | 7,715 | |
General and administrative | | 72,333 | | | 3,027 | | | (10) | | | 75,350 | |
Technical expense | | 9,381 | | | — | | | — | | | 9,381 | |
Net finance costs: | | | | | | | | |
Interest expense | | 67,985 | | | — | | | — | | | 67,985 | |
| | | | | | | | |
Total finance costs | | 67,985 | | | — | | | — | | | 67,985 | |
Total expenses | | 247,834 | | | 18,038 | | | (10) | | | 265,862 | |
Earnings (loss) from operations | | $ | 8,950 | | | $ | (473) | | | $ | (137) | | | $ | 8,340 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Year ended December 31, 2020 | | Leasing and Related Operations | | Spare Parts Sales | | Eliminations | | Total |
Revenue: | | | | | | | | |
Lease rent revenue | | $ | 142,895 | | | $ | — | | | $ | — | | | $ | 142,895 | |
Maintenance reserve revenue | | 105,365 | | | — | | | — | | | 105,365 | |
Spare parts and equipment sales | | 1,514 | | | 17,514 | | | (403) | | | 18,625 | |
Gain on sale of leased equipment | | 3,391 | | | — | | | — | | | 3,391 | |
Other revenue | | 18,404 | | | 327 | | | (315) | | | 18,416 | |
Total revenue | | 271,569 | | | 17,841 | | | (718) | | | 288,692 | |
| | | | | | | | |
Expenses: | | | | | | | | |
Depreciation and amortization expense | | 94,442 | | | 99 | | | — | | | 94,541 | |
Cost of spare parts and equipment sales | | 156 | | | 16,606 | | | — | | | 16,762 | |
Write-down of equipment | | 20,540 | | | — | | | — | | | 20,540 | |
General and administrative | | 63,993 | | | 3,514 | | | 403 | | | 67,910 | |
Technical expense | | 6,533 | | | — | | | — | | | 6,533 | |
Net finance costs: | | | | | | | | |
Interest expense | | 63,024 | | | — | | | — | | | 63,024 | |
Loss on debt extinguishment | | 4,688 | | | — | | | — | | | 4,688 | |
Total finance costs | | 67,712 | | | — | | | — | | | 67,712 | |
Total expenses | | 253,376 | | | 20,219 | | | 403 | | | 273,998 | |
Earnings (loss) from operations | | $ | 18,193 | | | $ | (2,378) | | | $ | (1,121) | | | $ | 14,694 | |
________________________
(1) Gain on sale of financial assets reflects the sales of two notes receivable during 2021.
(2) Asset transition fee reflects the settlement received from the close out of an engine transition program.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Leasing and Related Operations | | Spare Parts Sales | | Eliminations | | Total |
Total assets as of December 31, 2021 | | $ | 2,415,635 | | | $ | 47,292 | | | $ | — | | | $ | 2,462,927 | |
Total assets as of December 31, 2020 | | $ | 2,312,172 | | | $ | 52,776 | | | $ | — | | | $ | 2,364,948 | |
17. Subsequent Event
On March 3, 2022, the Board appointed Austin C. Willis, currently a member of the Board and the Company’s Senior Vice President, Corporate Development, as the Company’s Chief Executive Officer, effective April 1, 2022.
In connection with the appointment of Austin C. Willis, Charles F. Willis, IV, the Chairman and Chief Executive Officer of the Company, notified the Board of his decision to step down as Chief Executive Officer, effective April 1, 2022. Charles F. Willis, IV will continue to serve as the Chairman of the Board and will assume the role of Executive Chairman on April 1, 2022.
On March 3, 2022, the Company entered into an employment agreement with Charles F. Willis IV in connection with his assumption of the role of Executive Chairman of the Board, effective as of April 1, 2022. The agreement provides that Charles F. Willis IV is entitled to an initial annual base salary of $1,097,000 and establishes his target annual bonus opportunity at 100% of his annual base salary. In addition, the agreement provides for a $1,000,000 signing bonus.
Also, on March 3, 2022, the Company entered into an employment agreement with Austin C. Willis in connection with his appointment as Chief Executive Officer of the Company, effective as of April 1, 2022. The agreement provides that Austin C. Willis is entitled to an initial annual base salary of $640,000 and establishes his target annual bonus opportunity at 90% of his annual base salary.
WILLIS LEASE FINANCE CORPORATION AND SUBSIDIARIES
SCHEDULE II — VALUATION ACCOUNTS
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | | Additions Charged (Credited) to Expense | | Net (Deductions) Recoveries | | Balance at End of Period |
Year Ended December 31, 2020 | | | | | | | |
Accounts receivable, allowance for doubtful accounts | $ | 1,730 | | | $ | 5 | | | $ | (363) | | | $ | 1,372 | |
Deferred tax valuation allowance | $ | 153 | | | $ | 315 | | | $ | — | | | $ | 468 | |
Year Ended December 31, 2021 | | | | | | | |
Accounts receivable, allowance for doubtful accounts | $ | 1,372 | | | $ | (164) | | | $ | (54) | | | $ | 1,154 | |
Deferred tax valuation allowance | $ | 468 | | | $ | 50 | | | $ | — | | | $ | 518 | |
Deductions in allowance for doubtful accounts represent uncollectible accounts written off, net of recoveries.