Gogo Inc. 2020 Q2 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, figures are USD millions. The filing was signed August 10, 2020.
Business context
Gogo provides in-flight connectivity, entertainment and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW), and Business Aviation (BA). COVID-19 sharply reduced commercial passenger traffic and business-aviation activity, materially affecting results.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $96.6 | $213.7 | $281.1 | $413.2 |
| Service revenue | $74.3 | $173.7 | $225.1 | $338.7 |
| Equipment revenue | $22.4 | $40.0 | $56.1 | $74.5 |
| Operating income (loss) | $(54.4) | $9.7 | $(105.5) | $21.1 |
| Net loss | $(86.0) | $(84.0) | $(170.8) | $(100.8) |
| Adjusted EBITDA (non-GAAP) | $(15.9) | $37.8 | $9.9 | $75.8 |
- Q2 GAAP operating margin was approximately negative 56%, versus positive 5% a year earlier. The filing does not present a consolidated gross-margin measure.
- Q2 revenue fell 54.8%; first-half revenue fell 32.0%. All three segments reported lower Q2 revenue: CA-NA down 71.6%, CA-ROW down 67.4%, and BA down 23.3%.
- At June 30, cash and cash equivalents were $156.3; current assets were $390.5 and current liabilities $291.6. Stockholders’ deficit was $569.0.
- Debt carrying value was $1,118.6, including $921.5 of 2024 senior secured notes, $208.3 of 2022 convertible notes and $11.0 under the ABL facility. The ABL balance was $17.0 including amounts classified as current; less than $1.0 remained available under the facility’s payment-condition criteria.
- First-half operating cash flow was $(8.6), investing cash flow $(21.0), and financing cash flow $13.9. First-half capital expenditures were $21.1; free cash flow, as defined by Gogo, was $(29.7). Cash and restricted cash declined $15.7 to $161.9.
- Interest expense was $31.3 in Q2 and $62.5 in the first half. Cash interest paid in the first half was $53.1.
Material changes and unusual items
- COVID-19 drove steep declines in flights, passenger opportunity, connectivity usage, equipment installations and BA activations. Commercial passenger traffic remained significantly below pre-pandemic levels through July; BA showed some recovery in June and July, which management said was not assured to continue.
- In June, Gogo amended its Delta 2Ku agreement, replacing a February 2027 common expiration with fleet-by-fleet expirations from November 2020 through July 2022. This prompted approximately $13.9 of accelerated depreciation and approximately $6.0 of accelerated amortization of deferred airborne lease incentives during the first half.
- Gogo recorded $47.4 of first-half long-lived-asset impairment, principally a $46.4 charge in Q1 related to assets under three airline agreements amid the travel downturn; Q2 included a further $1.0 impairment of certification costs associated with three airline partners in bankruptcy. A separate $3.0 impairment of a cost-basis investment was recorded in the first half.
- Expected credit-loss provisions were $11.9 for the first half, primarily related to COVID-19 exposure to one international airline partner. The June 30 accounts-receivable allowance was $5.0, and contract assets were reported net of $11.1 in allowances.
- Q2 2019 included a $58.0 loss on extinguishment of debt, so the year-over-year decrease in total other expense partly reflects that prior-year charge. Gogo repaid the remaining $2.5 of 2020 convertible notes at maturity in March 2020.
Outlook, management commentary and risks
- Management expected COVID-19 to continue significantly affecting revenue. It anticipated CA-NA and CA-ROW service revenue to be significantly lower in Q3 2020 than Q3 2019; CA-ROW equipment revenue was also expected to decline significantly because of delayed installations. BA service and equipment revenue were expected to decline year over year, though management did not expect an impact as severe as in commercial aviation.
- Management said available cash and expected operating cash flows should cover operating obligations, including capital expenditures, for at least the next 12 months, based on current plans. It also cautioned that prolonged travel weakness, an incomplete recovery, or unsuccessful cost reductions could materially harm liquidity.
- Cost and liquidity actions included furloughing approximately 54% of staff beginning May 4, salary reductions, a hiring freeze, delayed installations and capital spending, and supplier and airline negotiations. A reduction in force affecting approximately 14% of staff was announced for August 14; unaffected furloughed employees were expected to return August 31. The 2020 bonus could be paid in stock.
- Gogo applied for an $81 grant and a $150 loan under the CARES Act. It said it did not believe it would qualify for the loan, pending formal determination; grant eligibility and amount were uncertain, and assistance could impose operating, employment and compensation restrictions and require warrants.
- Key risks include continued aviation weakness, airline bankruptcies or payment delays, Delta’s transition toward free service and supplier diversification, substantial debt and limited ABL availability, reliance on single-source suppliers, technology and installation issues, possible further impairments and credit losses, and pending patent and securities-related litigation. No loss accruals were recorded for the disclosed litigation because outcomes or potential losses could not be reasonably predicted.
Important facts for investors to verify
- Whether commercial flight activity, passenger opportunity and BA usage recovered as management anticipated, and the resulting effect on revenue and cash generation.
- The effects of Delta’s revised fleet expiration schedule, any equipment deinstallations, and Delta’s stated plans regarding free service and supplier diversification.
- Actual cash burn, covenant and borrowing-base availability under the ABL facility, and the company’s ability to refinance debt due in 2022 and 2024.
- Whether further airline distress, parked aircraft or weaker forecasts require additional credit-loss provisions or asset impairments.
- The outcome of CARES Act grant consideration, litigation developments, and the execution and operational impact of workforce and supplier cost measures.