Filing summary
Issuer and period: The supplied filing is a Mesa Air Group, Inc. Form 10-Q for the quarter ended June 30, 2020 (its fiscal third quarter), filed August 10, 2020. This does not match the requested company, Republic Airways Holdings Inc. The summary below covers the filing text provided, which reports Mesa Air Group.
Business context and financial results
Mesa operates regional flights as American Eagle and United Express under capacity purchase agreements with American Airlines and United Airlines. At June 30, 2020, it operated 145 aircraft, serving 66 cities, with approximately 175 daily departures. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
- Quarter: Revenue was $73.1 million, down 59.4% from $180.2 million a year earlier. Operating income was $15.2 million versus $17.1 million; net income was $3.4 million versus $3.0 million. Basic and diluted EPS were $0.10, compared with $0.09.
- Quarterly operating margin was approximately 20.8% and net margin approximately 4.7%, calculated from reported revenue and income. The operating result includes $43.0 million of CARES Act payroll support recognized as an offset to expenses.
- Operating activity fell sharply: block hours declined 72.3%, available seat miles 71.2%, and passengers 85.4% year over year. Mesa deferred $16.0 million of revenue because fixed payments received exceeded revenue recognized based on completed flights.
- Nine months: Revenue was $437.0 million, down 18.4%; operating income was $56.3 million versus $90.7 million, and net income was $16.1 million versus $35.3 million. Basic EPS was $0.46 versus $1.02.
- Nine-month operating cash flow was $103.6 million, compared with $114.1 million. Investing cash outflow was $25.1 million and financing cash outflow was $82.6 million. Cash, cash equivalents and restricted cash ended at $68.4 million, down $4.1 million from the period’s beginning.
- Reported non-GAAP Adjusted EBITDA was $35.9 million for the quarter and $118.7 million for nine months, versus $45.9 million and $157.8 million, respectively, in 2019. Adjusted EBITDAR was $51.5 million and $157.9 million, respectively. These measures exclude or adjust for items and should not be treated as GAAP profit or cash flow.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $64.9 million, with restricted cash of $3.4 million. Current assets were $112.6 million and current liabilities $308.0 million.
- Gross debt, including current maturities, was $777.8 million; $176.9 million was classified as current. The company also reported operating lease liabilities of $114.3 million ($43.2 million current and $71.1 million noncurrent). Cash and debt amounts are not netted here.
- Mesa drew $23.0 million on its $35.0 million working-capital facility; $12.0 million remained available. A lender deferred $28.0 million of principal payments through September 30, 2020, with the deferred amount due in a lump sum then. Mesa said it was seeking more favorable repayment terms.
- Operating cash flow exceeded reported capital spending in the first nine months, but the company remained reliant on partner payments, financing and government support. Management said available cash, financing, CARES Act assistance and operating cash flows were expected to meet needs for the next 12 months; this is a forward-looking assessment.
Material changes, outlook and risks
- COVID-19-related flight reductions drove the steep quarterly revenue and activity declines. Management reported modest recovery but expected similar schedule reductions in the fourth quarter, potentially continuing through the rest of 2020 and into 2021.
- Mesa received $46.3 million of a $92.5 million CARES Act payroll grant by June 30; $43.0 million was recognized against quarterly payroll costs and $3.3 million deferred for future payroll costs. The remaining $46.2 million was scheduled for payment in three installments from July through September. Grant conditions included restrictions on involuntary furloughs and pay reductions through September 30, continued essential air service, and executive compensation limits.
- Mesa had been allocated up to $277.0 million under the CARES Act secured-loan program and was discussing terms and participation with the Treasury; the filing does not report that this loan had been obtained.
- All reported operating revenue came from American and United. American represented approximately 60% of quarterly revenue and United 40%. American withdrew aircraft during the quarter, and Mesa disclosed ongoing extension discussions for American aircraft agreements expiring in 2021, 2022 and 2025. Loss or material reduction of either partner agreement could materially harm results and cash flows.
- Financing was not yet in place for 20 new E-175 aircraft planned for delivery from September 2020 through June 2021. The company warned it could forfeit some or all of the aircraft if it could not secure financing on time. Separately, it had approximately $108.0 million of commitments for 20 spare engines, with deliveries rescheduled to 2021.
- Management reported no impairment of long-lived assets or finite-lived intangibles at June 30, but planned additional impairment testing in the fourth quarter given uncertainty around COVID-19 forecasts.
- Risks highlighted include the pandemic and travel demand, partner financial health and capacity decisions, pilot availability and attrition, significant debt and covenant compliance, variable-rate debt exposure, and the timing and cost of maintenance. A hypothetical 50-basis-point rate change was estimated to affect annual interest expense by approximately $2.6 million on variable-rate debt.
- The company disclosed two putative securities class actions related to its IPO. Management did not believe they were likely to have a material adverse impact, while noting litigation outcomes are uncertain. It also reported no defaults on senior securities and stated disclosure controls were effective.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Mesa Air Group, not Republic Airways Holdings.
- Track actual flight schedules, block hours and revenue recognition, including when the $16.0 million deferred revenue is recognized.
- Reconcile earnings excluding the $43.0 million grant recognition and assess dependence on further government assistance.
- Check the September 30 repayment of the deferred $28.0 million debt principal, remaining revolver availability, and progress on any Treasury loan.
- Monitor liquidity, debt maturities, covenant compliance and financing for the 20 E-175 aircraft and $108.0 million spare-engine commitment.
- Follow American and United capacity decisions, American agreement extensions, and potential impairment testing as demand forecasts change.