Mesa Airlines(MESA) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Presents unaudited condensed consolidated financial statements as of March 31, 2020, reflecting decreased net income from maintenance and COVID-19 impacts Condensed Consolidated Balance Sheets Total assets increased to $1.51 billion due to new lease standard adoption; cash and equivalents decreased to $52.4 million | | March 31, 2020 (In thousands) | September 30, 2019 (In thousands) | | :--- | :--- | :--- | | Total current assets | $98,311 | $157,841 | | Total assets | $1,511,740 | $1,451,917 | | Total current liabilities | $300,609 | $256,706 | | Total liabilities | $1,070,388 | $1,026,049 | | Total stockholders' equity | $441,352 | $425,868 | - The company adopted a new lease standard (Topic 842) effective October 1, 2019, recognizing $140.8 million in operating lease right-of-use assets and corresponding lease liabilities[46][110] Condensed Consolidated Statements of Operations Net income sharply declined for both three and six months ended March 31, 2020, primarily due to increased maintenance expenses | Metric (In thousands, except per share) | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $179,896 | $177,147 | $363,931 | $355,303 | | Total operating expenses | $166,004 | $142,770 | $322,854 | $281,696 | | Operating income | $13,892 | $34,377 | $41,077 | $73,607 | | Net income | $1,885 | $13,249 | $12,670 | $32,330 | | Diluted EPS | $0.05 | $0.38 | $0.36 | $0.92 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $441.4 million, driven by net income and stock compensation, with all warrants converted - Stockholders' equity grew to $441.4 million as of March 31, 2020, up from $425.9 million at the start of the fiscal year[20] - As of March 31, 2020, all outstanding warrants had been converted to common shares[92] Condensed Consolidated Statements of Cash Flows Operating cash flow slightly decreased; significant cash used in financing for debt payments, ending with $55.8 million cash | Cash Flow Activity (In thousands) | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $65,202 | $69,770 | | Net cash used in investing activities | ($24,773) | ($18,491) | | Net cash used in financing activities | ($57,090) | ($77,024) | | Net change in cash, cash equivalents and restricted cash | ($16,661) | ($25,745) | | Cash, cash equivalents and restricted cash at end of period | $55,840 | $81,389 | Notes to Condensed Consolidated Financial Statements Notes detail COVID-19 impacts, reliance on capacity purchase agreements, new lease standard, and CARES Act support - The COVID-19 pandemic caused a material decline in demand for block hours from both American and United Airlines, with April 2020 block hours dropping 72.4% year-over-year[27][128] - Subsequent to the quarter end, the company was granted $92.5 million in payroll support under the CARES Act and applied for additional secured loans[121][123] | Partner | Revenue Contribution (6 Months Ended Mar 31, 2020) | | :--- | :--- | | American Airlines | 51% | | United Airlines | 49% | - As of March 31, 2020, the company operated 145 aircraft under capacity purchase agreements: 59 CRJ-900s for American and a mix of 20 CRJ-700s and 60 E-175s for United[25][33][40] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's adverse impact on demand and revenue, highlighting increased maintenance costs and liquidity measures COVID-19 Pandemic Impact and Response The pandemic severely impacted revenues and financial position, leading to cost-saving initiatives and liquidity bolstering actions - The pandemic caused an unprecedented and materially adverse impact on revenues and financial position, with a significant reduction in variable revenue based on block hours[135] - The company drew $23.0 million from its revolving credit facility to increase liquidity[33][136] - In April 2020, the company was granted $92.5 million in emergency relief through the CARES Act payroll support program[33][136] Results of Operations - Three Months Ended March 31, 2020 Operating income significantly declined due to a 41.8% surge in maintenance expenses, despite a slight revenue increase | Metric (In thousands) | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Contract Revenue | $165,781 | $169,771 | (2.4)% | | Total Operating Revenues | $179,896 | $177,147 | 1.6% | | Maintenance Expense | $64,335 | $45,380 | 41.8% | | Total Operating Expenses | $166,004 | $142,770 | 16.3% | | Operating Income | $13,892 | $34,377 | (59.6)% | - The primary driver of increased operating expenses was a $19.0 million rise in maintenance costs, stemming from more engine overhauls and airframe C-checks[163] Results of Operations - Six Months Ended March 31, 2020 Operating income decreased by 44.2%, primarily due to a 43.7% increase in maintenance expenses over the six-month period | Metric (In thousands) | Six Months 2020 | Six Months 2019 | % Change | | :--- | :--- | :--- | :--- | | Contract Revenue | $337,580 | $340,220 | (0.8)% | | Total Operating Revenues | $363,931 | $355,303 | 2.4% | | Maintenance Expense | $122,430 | $85,182 | 43.7% | | Total Operating Expenses | $322,854 | $281,696 | 14.6% | | Operating Income | $41,077 | $73,607 | (44.2)% | - Maintenance costs for the six-month period increased by $37.2 million, primarily due to a 173.9% increase in engine overhaul expenses[180][181] Liquidity and Capital Resources The company bolstered liquidity with credit facility draws, debt deferrals, and CARES Act aid, expecting adequate funding for 12 months - Key liquidity actions include drawing $23.0 million from a credit facility, deferring $28 million in debt payments, and receiving $92.5 million in CARES Act aid[191][192][193] - The company expects to defer approximately $7.0 million in employer social security tax payments under the CARES Act[196] - The company believes cash on hand, cash from operations, and government assistance will be adequate to fund operating and capital needs for at least the next 12 months[201] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate risk on $533.1 million variable-rate debt, with minimal foreign currency and fuel price risks - As of March 31, 2020, the company had $533.1 million of variable-rate debt; a 50 basis point change in interest rates would impact annual interest expense by about $2.7 million[222] - The company acknowledges the risk associated with the planned discontinuation of LIBOR after 2021, which could affect interest payments on its variable-rate debt[224][225] - Fuel price risk is largely mitigated as fuel costs for flights under capacity purchase agreements are directly paid by major airline partners[227] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020 - Based on an evaluation as of the end of the reporting period, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[229] PART II – OTHER INFORMATION Legal Proceedings The company faces two class action lawsuits alleging federal securities law violations related to its IPO - The company is facing two class action lawsuits alleging securities law violations in connection with its IPO, claiming false or misleading statements in the registration statement[232] Risk Factors A new primary risk factor is the COVID-19 pandemic, severely impacting demand, block hours, and financial condition - A new primary risk factor is the COVID-19 pandemic, which has caused a severe decline in air travel demand, adversely affecting the company's partners and its own operations[236] - As a result of partner capacity reductions due to COVID-19, the company's block hours in April 2020 dropped by 72.4% compared to April 2019[238] - The company's receipt of financial assistance under the CARES Act comes with conditions, including restrictions on involuntary furloughs, dividends, share repurchases, and executive compensation[241] Other Information (Items 2-6) The company reported no unregistered sales, defaults, or other material information, and listed exhibits - The company reported no unregistered sales of equity securities, defaults upon senior securities, or other material information during the reporting period[244][245][247]