REPUBLIC AIRWAYS HOLDINGS INC. quarterly report, Q3 FY2018

Business context and reporting period

Filing identity: The supplied filing is Mesa Air Group, Inc.’s Form 10-Q, not a Republic Airways Holdings Inc. filing. It covers the fiscal quarter and nine months ended June 30, 2018; Mesa’s fiscal year ends September 30. Amounts below are in U.S. dollars.

Mesa operated 145 regional aircraft and about 600 daily departures, providing flights as American Eagle and United Express under capacity purchase agreements. All operating revenue came from American and United; they control routes, pricing and seat inventory, and supply fuel for contracted flying.

Financial performance and position

For the nine months, operating cash flow was $63.2 million, investing cash outflow was $101.4 million, and financing cash inflow was $23.2 million. Capital expenditures were $98.5 million; operating cash flow less capital expenditures was approximately negative $35.3 million. Cash and cash equivalents fell $15.1 million from the fiscal-year opening balance to $41.7 million; restricted cash was an additional $3.8 million.

At June 30, total assets were $1.390 billion, total liabilities $1.157 billion, and stockholders’ equity $232.6 million. Current assets of $122.4 million were below current liabilities of $246.9 million. Reported total debt, including current maturities and before unamortized issuance costs, was $994.1 million; current debt was $149.9 million. Variable-rate debt was $662.2 million, and a hypothetical 50-basis-point rate change would have affected nine-month interest expense by about $1.7 million. Contractual debt and lease obligations, including projected interest, totaled $1.448 billion.

Changes, unusual items and management outlook

• Quarter revenue increased $4.8 million, but operating expenses rose $41.7 million. Flight operations expense increased 36.5% to $51.8 million, mainly due to pilot training, premium pay and additional labor; general and administrative expense more than doubled, primarily reflecting share-award revaluation.
• Quarter results included $15.1 million of non-cash lease termination expense after Mesa bought nine previously leased CRJ-900 aircraft, and $11.1 million of non-cash compensation expense from revaluing stock appreciation rights. These items materially affected reported profitability.
• Nine-month flight operations expense rose 41.1% to $155.6 million; maintenance expense declined 6.2% to $154.0 million, largely due to the timing of engine overhauls. Interest expense increased to $41.6 million from $33.7 million.
• The Tax Cuts and Jobs Act produced a $21.4 million discrete tax benefit in the nine-month period. The company reported a net tax benefit of $24.7 million for the period; management noted that tax accounting for some provisions remained incomplete.
• After quarter-end, Mesa completed an IPO on August 14, 2018, selling 9.63 million shares at $12 each for about $115.6 million gross proceeds. The filing cites different net proceeds figures in different passages: approximately $104.1 million after discounts and estimated offering costs, and $107.5 million net of underwriting discounts and commissions. Mesa subsequently paid down its $25.7 million CIT revolving-credit balance.
• Management said cash, operating cash generation and available facilities were expected to support operating and capital needs and covenant compliance for at least 12 months. No earnings or revenue guidance was provided.

Risks, contingencies and other disclosures

• Pilot supply, retention and training constraints reduced scheduled flying and drove higher training costs and premium pay. Mesa had temporarily removed two United aircraft from service in February; both returned to service by July 2018. The company reported $4.6 million of American utilization credits during the nine months.
• Revenue was highly concentrated: American represented 57% and United 43% of nine-month revenue. Contract renewal, utilization, partner financial health and contract disputes are material exposures. Mesa was negotiating with United concerning 20 CRJ-700 aircraft whose agreements were due to expire in 2019.
• Debt, aircraft leases and covenants pose liquidity risks; substantially all aircraft and equipment debt is secured. Mesa stated it was in compliance with the specific debt covenants described, but warned that covenant failure could trigger acceleration and cross-defaults.
• Other disclosed risks include rising labor and maintenance costs, aging aircraft, aircraft lease-return obligations, dependence on aircraft and engine suppliers, operational disruption, and regulatory, safety and weather events. The company reported ordinary-course legal and FAA matters that it did not expect to have a material adverse effect.
• Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control during the quarter. Mesa was an emerging growth company and had elected not to use the extended transition period for new accounting standards.

Important facts for investors to verify

1. Confirm the filing is for Mesa Air Group, Inc.; the request metadata names Republic Airways Holdings Inc.
2. Review the drivers and recurrence potential of pilot-related costs, utilization credits, the $11.1 million stock-award charge and $15.1 million lease termination charge.
3. Check the status and terms of United contract negotiations and upcoming capacity purchase agreement expirations, and monitor dependence on the two airline partners.
4. Reconcile IPO net proceeds as presented in the filing and assess the post-IPO cash position, debt repayment and near-term maturities.
5. Assess cash conversion, capital expenditure needs, liquidity relative to current liabilities, variable-rate exposure and compliance with debt covenants.