Gogo Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. The filing presents Business Aviation (BA) as continuing operations and Commercial Aviation (CA) as discontinued operations following the announced sale.
Business context
Gogo provides in-flight connectivity and entertainment services and equipment. On August 31, 2020, it agreed to sell its CA business to Intelsat for $400 million cash, subject to adjustments and closing conditions. The company expects to continue as a standalone BA business and invest in growth opportunities including Gogo 5G.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Continuing-operations revenue | $66.5 | $81.3 | $192.1 | $223.1 |
| Continuing-operations operating income | $22.2 | $27.1 | $60.7 | $67.1 |
| Continuing-operations net loss | $(8.9) | $(2.9) | $(32.5) | $(87.5) |
| Discontinued-operations net loss | $(71.2) | $(20.0) | $(218.4) | $(36.2) |
| Total net loss | $(80.1) | $(22.9) | $(250.9) | $(123.7) |
| Adjusted EBITDA, company-reported non-GAAP measure | $30.2 | $33.2 | $79.0 | $85.7 |
Q3 continuing revenue declined 18.2% year over year: service revenue fell 3.7% and equipment revenue fell 49.2%, primarily reflecting COVID-related aircraft suspensions, fewer activations and lower equipment sales. Operating expenses declined to $44.3 million from $54.3 million; operating margin was approximately 33.4%, compared with 33.3% in Q3 2019. Interest expense was $31.2 million for the quarter, exceeding continuing-operations operating income.
CA discontinued-operations revenue was $44.0 million in Q3, down from $119.8 million. Its nine-month net loss included $47.4 million of long-lived asset impairment charges. Q3 CA loss also reflected accelerated depreciation following an amendment to Delta’s 2Ku contract.
For the first nine months, continuing-operations cash provided by operating activities was $20.3 million, versus $1.4 million a year earlier. Investing activities used $6.4 million and financing activities provided $16.0 million. Discontinued operations used $84.5 million of cash. Cash and cash equivalents were $117.5 million at September 30, 2020, down from $170.0 million at December 31, 2019; cash, cash equivalents and restricted cash totaled $123.1 million.
At quarter-end, reported long-term debt was $1,126.6 million net of deferred financing costs; debt principal was $1,147.3 million. The balance included $925.0 million principal of 9.875% senior secured notes due 2024, $237.8 million principal of 6.00% convertible notes due 2022, and $20.0 million outstanding under the ABL facility. Total liabilities were $1,631.6 million and stockholders’ deficit was $647.2 million. Less than $1 million was available under ABL borrowing conditions.
Material changes versus prior period
- Q3 total net loss increased to $80.1 million from $22.9 million, mainly because CA losses rose sharply amid the pandemic and accelerated Delta-related depreciation.
- Continuing revenue and operating income declined year over year, although lower operating expenses kept the calculated operating margin broadly stable.
- Nine-month continuing net loss improved versus 2019, when results included a $58.0 million debt-extinguishment loss; total net loss worsened because of CA discontinued operations.
- Gogo adopted a Section 382 rights plan in September to help protect tax attributes. It is intended to deter acquisitions of 4.9% or more of outstanding common stock, subject to the plan’s terms.
Outlook, risks and unusual items
- Management expected Q4 2020 total revenue to be lower than Q4 2019 and expected full-year interest expense to be down slightly from 2019. No specific revenue or earnings guidance ranges were provided.
- Management said BA activity was recovering from mid-April lows, but CA passenger traffic remained significantly below pre-pandemic levels through October. The duration and effects of COVID-19 remained uncertain.
- Management stated that cash and operating cash flows, based on current plans and measures, should cover operating obligations and capital expenditures for at least twelve months. The filing also identifies timely completion of the CA sale as an assumption in its liquidity planning.
- The CA sale was expected to close before the end of Q1 2021, subject to regulatory and other conditions. The HSR waiting period had expired and the bankruptcy court had approved the transaction; CFIUS and specified regulatory approvals remained among the closing conditions. Sale proceeds were intended to improve net debt and support investment, including Gogo 5G.
- After quarter-end, Gogo agreed to issue $50 million principal of additional 9.875% senior secured notes at 103.5% of face value, for $51.8 million gross proceeds, subject to closing conditions. A related agreement requires at least $20 million of equity proceeds by May 5, 2021 if the CA transaction has not closed by then, subject to the stated conditions.
- COVID response measures included workforce furloughs affecting approximately 54% of employees, a reduction in force of approximately 14%, salary reductions, and supplier and spending controls. These measures and the sale process may affect operations, personnel and business relationships.
- Other significant risks include substantial debt and refinancing needs, limited ABL availability, possible further impairment or credit-loss charges, Delta contract changes and aircraft removals, airline-partner bankruptcies, and pending patent and securities litigation. The company accrued no losses for the cited litigation because outcomes could not be reasonably predicted.
Important facts for investors to verify
- Whether the CA sale closes on the expected timetable, the final proceeds after adjustments, and the effect of closing on debt, guarantees, collateral and borrowing capacity.
- Whether the additional notes issuance closed and how its proceeds and any required equity issuance affect liquidity and leverage.
- BA revenue and aircraft activity trends, Gogo 5G investment requirements, and the impact of Delta’s revised contract expiration schedule.
- Cash burn, restricted cash, ABL availability and compliance with debt covenants as travel demand and the sale process evolve.
- Potential further CA asset impairments, expected credit losses, and developments in the disclosed litigation and regulatory approvals.