Mesa Airlines(MESA) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended June 30, 2020, reflect the significant impact of the COVID-19 pandemic, showing declining revenues and net income supported by a CARES Act grant Condensed Consolidated Balance Sheets As of June 30, 2020, total assets slightly increased to $1.495 billion, with cash decreasing and liabilities rising to $1.05 billion due to new lease accounting standards Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $64,934 | $68,855 | | Total current assets | $112,557 | $157,841 | | Property and equipment, net | $1,233,727 | $1,273,585 | | Operating lease right-of-use assets | $131,480 | — | | Total assets | $1,495,313 | $1,451,917 | | Liabilities & Equity | | | | Total current liabilities | $308,046 | $256,706 | | Long-term debt and financing leases, net | $586,877 | $677,423 | | Noncurrent operating lease liabilities | $71,068 | — | | Total liabilities | $1,049,819 | $1,026,049 | | Total stockholders' equity | $445,494 | $425,868 | Condensed Consolidated Statements of Operations Q3 2020 operating revenues significantly decreased by 59.4% to $73.1 million due to COVID-19, yet net income increased to $3.4 million primarily due to a $43.0 million CARES Act grant Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $73,099 | $180,224 | $437,030 | $535,527 | | Total operating expenses | $57,875 | $163,147 | $380,729 | $444,843 | | CARES Act grant recognition | ($43,018) | — | ($43,018) | — | | Operating income | $15,224 | $17,077 | $56,301 | $90,684 | | Net income | $3,419 | $3,007 | $16,089 | $35,337 | | Diluted EPS | $0.10 | $0.09 | $0.46 | $1.01 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $445.5 million by June 30, 2020, driven by net income and stock compensation, partially offset by share repurchases - Total stockholders' equity grew to $445.5 million as of June 30, 2020, up from $425.9 million at the start of the fiscal year[19] - During the nine months ended June 30, 2020, all remaining outstanding warrants were converted to common stock[19] Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2020, operating activities provided $103.6 million in cash, while investing and financing activities used $25.1 million and $82.6 million respectively Cash Flow Summary (Nine Months Ended June 30, in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $103,601 | $114,077 | | Net cash used in investing activities | ($25,114) | ($96,033) | | Net cash used in financing activities | ($82,610) | ($41,622) | | Net change in cash | ($4,123) | ($23,578) | Notes to Condensed Consolidated Financial Statements The notes detail the severe impact of COVID-19 on flight demand, reliance on capacity agreements, CARES Act assistance, new lease accounting, and debt obligations - The COVID-19 pandemic caused a material decline in block hours from both American and United partners starting in March 2020, with significant reductions in the June 2020 quarter[25] - The company received $46.3 million in payroll support grants under the CARES Act as of June 30, 2020, and is eligible for a $277.0 million secured loan, with discussions ongoing[28] - Due to a significant reduction in flights, the company deferred $16.0 million of revenue in the quarter, as fixed monthly payments from partners exceeded the revenue recognizable under GAAP based on flights completed[55] - The company adopted the new lease accounting standard (ASC 842) on October 1, 2019, recognizing $154.6 million in right-of-use assets and $141.9 million in lease liabilities on the balance sheet[113] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe impact of COVID-19, leading to significant revenue decline, and details cost-saving and liquidity-enhancing measures, including CARES Act relief, to maintain an adequate liquidity position Results of Operations Q3 2020 operating revenue decreased by 59.4% due to COVID-19, offset by a 64.5% decrease in operating expenses, largely due to a $43.0 million CARES Act grant Q3 2020 vs Q3 2019 Operating Revenue (in thousands) | Revenue Type | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Contract | $71,648 | $170,366 | $(98,718) | (57.9)% | | Pass-through and other | $1,451 | $9,858 | $(8,407) | (85.3)% | | Total | $73,099 | $180,224 | $(107,125) | (59.4)% | - The decrease in Q3 revenue was primarily driven by a 72.3% decrease in block hours flown due to the impact of COVID-19[152][155] - Q3 maintenance costs decreased by $31.7 million (58.4%) due to fewer heavy maintenance events and reduced flying[160] - The company recognized a $43.0 million CARES Act grant, which offset payroll expenses and was a primary contributor to the reduction in total operating expenses[167] Liquidity and Capital Resources The company bolstered liquidity to $65 million by June 30, 2020, through credit facility draws, $46.3 million in CARES Act support, and deferred debt and tax payments, expecting adequacy for the next 12 months - Drew $23.0 million from the undrawn revolving credit facility with CIT Bank, N.A[194] - Received $46.3 million of a $92.5 million CARES Act payroll support grant, with the remainder expected by September 2020[197] - Deferred $28.0 million in principal debt payments until September 30, 2020, and expects to defer approximately $7.0 million of employer social security taxes[195][200] - As of June 30, 2020, the company had $64.9 million in cash and cash equivalents and five unencumbered CRJ-700 aircraft available for potential financing[201][207] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility on $510.4 million of variable-rate debt, with fuel price risk largely mitigated by capacity purchase agreements - The company is subject to interest rate risk on $510.4 million of variable-rate debt. A hypothetical 50 basis point change in interest rates would affect annual interest expense by approximately $2.6 million[226] - The company faces uncertainty related to the planned discontinuation of LIBOR after 2021, which could affect interest payable on its debt[228][229] - Fuel price risk is largely sheltered because fuel for flights under capacity purchase agreements is directly paid for by major airline partners[231] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - 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[232] - No material changes to the company's internal control over financial reporting occurred during the third quarter of fiscal 2020[233] PART II – OTHER INFORMATION Legal Proceedings The company is defending two class action lawsuits alleging federal securities law violations related to its IPO, with management not expecting a material adverse impact - The company is defending two class action lawsuits alleging securities law violations in connection with its IPO[236] Risk Factors This section updates significant risk factors, primarily concerning the severe impact of COVID-19 on air travel demand, substantial debt, financing challenges for new aircraft, and retention of key personnel - The COVID-19 pandemic has caused a severe decline in air travel demand, which has had and will continue to have a material adverse impact on the business, operating results, and financial condition[240][241] - The company has a significant amount of debt ($777.7 million as of June 30, 2020) and may require additional liquidity. Its ability to raise capital may be difficult due to its debt level and non-investment grade credit ratings[248][250][251] - A significant risk is the inability to secure financing for twenty new Embraer E-175 aircraft scheduled for delivery starting in September 2020, which could result in forfeiting the aircraft and adversely affecting business prospects[256] - CARES Act restrictions on executive compensation may make it challenging to retain key management personnel, which could adversely affect the business[255] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 112,587 common shares for $0.5 million during the nine months ended June 30, 2020, to cover income tax obligations from vested equity awards and warrant exercises - The Company repurchased 112,587 shares of its common stock for $0.5 million to cover income tax obligations on vested employee equity awards and warrant exercises[257] Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities occurred[258] Mine Safety Disclosures This item is not applicable - Not applicable[258] Other Information No other information was reported under this item - No other information was reported under this item[259] Exhibits This section lists exhibits filed with the Form 10-Q, including an amendment to a code-share agreement, CEO/CFO certifications, and Inline XBRL data files - Filed exhibits include the Twenty-First Amendment to the Code Share and Revenue Sharing Agreement, CEO/CFO certifications, and XBRL data[261]