2020 Q4 Chorus MD&A
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INTRODUCTION Section Page Section Page 1 OVERVIEW ....................................................... 3 13 CHANGES IN ACCOUNTING STANDARDS..... 42 2 ABOUT CHORUS............................................... 7 14 FAIR VALUE OF FINANCIAL INSTRUMENTS.. 43 3 STRATEGY........................................................ 10 15 PENSION PLANS............................................... 44 4 OUTLOOK ......................................................... 12 16 RELATED PARTY TRANSACTIONS................. 45 5 FLEET ................................................................ 16 17 CONTROLS AND PROCEDURES..................... 45 6 CONSOLIDATED FINANCIAL ANALYSIS ........ 17 18 NON-GAAP FINANCIAL MEASURES................ 46 SUMMARY OF QUARTERLY FINANCIAL 7 SEGMENTED ANALYSIS ................................. 19 19 RESULTS....................................................... 51 8 CAPITAL STRUCTURE ..................................... 24 20 SELECTED ANNUAL INFORMATION............... 52 9 LIQUIDITY.......................................................... 32 21 REGIONAL AVIATION SERVICES REVENUE.. 53 10 RISK FACTORS................................................. 38 22 CONSOLIDATED STATEMENTS OF INCOME. 54 11 ECONOMIC DEPENDENCE ............................. 38 23 ADDITIONAL INFORMATION............................ 54 12 CRITICAL ACCOUNTING ESTIMATES ............ 39 24 GLOSSARY OF TERMS.................................... 55 CAUTION REGARDING FORWARD-LOOKING 25 57 INFORMATION............................................... In this MD&A, references to Chorus refer, as the context may require, to one or more of Chorus Aviation Inc. and its current and former subsidiaries. Where this MD&A discusses the CPA, references to Chorus are exclusively intended to refer to Jazz. Please refer to Section 24 - Glossary of Terms for definition of capitalized terms and acronyms used in this MD&A. This MD&A, which presents a discussion of the financial condition and results of operations for Chorus, should be read in conjunction with the accompanying audited consolidated financial statements of Chorus and the notes therein for the years ended December 31, 2020 and 2019 and Chorus' 2020 Annual Information Form dated February 18, 2021. All financial information has been prepared in accordance with GAAP, as set out in the CPA Canada Handbook, except for any financial information specifically denoted otherwise. Except as otherwise noted or where the context may otherwise require, this MD&A is prepared as of February 18, 2021. The earnings and cash flows of Chorus are affected by certain risks. For a description of those risks, please refer to the discussion of specific risks in Section 8 – Capital Structure and Section 10 – Risk Factors. Except where the context otherwise requires, all amounts are stated in Canadian dollars. Management's Discussion and Analysis 2020 2 1 OVERVIEW Net Income Adjusted Net Income* Adjusted EBITDA* $ (millions) $ (millions) $ (millions) 133.2 95.0 347.5 341.7 64.0 36.6 41.5 23.3 82.0 88.6 9.2 7.7 Q4 Q4 2020 2019 Q4 Q4 2020 2019 Q4 Q4 2020 2019 2020 2019 2020 2019 2020 2019 * These are non-GAAP financial measures. Refer to Section 18 – Non-GAAP Financial Measures. Q4 2020 Financial Highlights: • Net income of $9.2 million, or $0.06 per basic Share, a quarter-over-quarter decrease of $27.4 million due to decreased passenger demand related to the impact of global travel restrictions along with health concerns related to COVID-19 and, offset by the change in unrealized foreign exchange of $25.3 million. • Adjusted net income of $7.7 million, or $0.05 per basic Share, a decrease of $15.6 million quarter-over- quarter, primarily due to the impact of COVID-19 on results. • Adjusted EBITDA of $82.0 million decreased $6.7 million quarter-over-quarter, primarily due to the impact of COVID-19 on results. • Liquidity of approximately $201.0 million, a decrease of $17.0 million over third quarter 2020. 2020 Annual Financial Highlights: • Net income of $41.5 million, or $0.26 per basic Share, a period-over-period decrease of $91.7 million primarily due to decreased passenger demand related to the impact of global travel restrictions along with health concerns related to COVID-19. • Adjusted net income of $64.0 million, or $0.40 per basic Share, a decrease of $30.9 million period-over- period, primarily due to the impact of COVID-19 on results. • Adjusted EBITDA of $347.5 million increased $5.7 million period-over-period, primarily due to additional aircraft earning lease revenue offset by the impact of COVID-19 on results. • Liquidity of approximately $201.0 million, an increase of $49.0 million over December 31, 2019. While Chorus is encouraged by the development of various COVID-19 vaccines, recent global travel restrictions resulting from outbreaks of new variants of the virus and the resurgence of cases are expected to slow travel recovery and will continue to stress the balance sheets of airlines in 2021. Chorus remains focused on maximizing its available liquidity, protecting its assets and preserving operations and supporting its customers. Chorus is immensely grateful to its employees and business partners for their hard work, collaboration and diligence through this challenging period. Management's Discussion and Analysis 2020 3 The decreased passenger demand for aviation services due to global travel restrictions and health concerns over traveling impacted Chorus' results in the following predominant ways: • The RAL segment's Adjusted EBT was significantly down over 2019 due to 13 off-lease aircraft resulting from lease terminations, general aircraft impairment and expected credit loss provisions, and lease return costs in addition to increased finance costs related to additional aircraft debt and additional interest related to the loan deferral program; while the • The RAS segment's Adjusted EBITDA was largely unaffected by the reductions in contract flying primarily due to the nature of the CPA with the Fixed Margin being set at $75.2 million for 2020 and the nature of the Controllable Cost Guardrail (refer to Section 2- About Chorus). Chorus' working capital was also adversely impacted on a year-over-year basis by approximately $100.0 million primarily due to increased receivables related to the rent relief arrangements, increased Controllable Cost Guardrail receivable and decreased accounts payable (refer to Section 9 - Liquidity). Liquidity As of December 31, 2020, Chorus' liquidity was $201.0 million including cash of $165.7 million and $35.3 million of available room on its operating credit facility. Liquidity decreased from the third quarter by approximately $17.0 million primarily due to the equity funding on two previously committed A220-300s acquired in the fourth quarter as well as working capital requirements. In 2020, Chorus successfully implemented the following measures as part of its liquidity strategy by: • Obtaining a US $100.0 million unsecured revolving credit facility for general corporate purposes in the second quarter of 2020. In December 2020 renegotiated certain of the terms by replacing the repayment bullet of the entire facility in April 2022 with repayment due over eight equal instalments of principal and interest starting in July 2022 and ending in April 2024. • Obtaining a deferral of principal and interest payments of $28.9 million related to certain off-lease aircraft loans and in December 2020 renegotiated the repayment terms from 12 months to 18 months beginning in January 2021. • Securing the removal of the remarketing period deadline with its largest lender for aircraft repossessed up to April 24, 2021. This eliminates the requirement to repay the principal amount of the loans prior to maturity if the aircraft are not re-leased by the end of the remarketing period so long as Chorus continues to make the regularly scheduled principal and interest payments and otherwise complies with the loan terms (refer to Section 8 Capital Structure). • Utilizing the Canadian Emergency Wage Subsidy ("CEWS") program in Jazz and Voyageur and netting the $120.5 million government grant against salaries, wages and benefits expense in 2020. Although Jazz received CEWS of $115.6 million, this grant did not contribute to Jazz's operating income as it was either passed onto Air Canada as a reduction in Controllable Costs or paid to inactive employees. The CEWS received for active employees of $63.1 million reduced the amount of the Controllable Cost Guardrail receivable from Air Canada. • Suspending dividend payments and the Dividend Reinvestment Plan ("DRIP") following the payment of the March 2020 dividend on April 17, 2020. This measure saved approximately $40.0 million in dividend payments in 2020. On an annual basis this measure is estimated to save approximately $55.0 million in annual cash payments, assuming a DRIP participation rate of 29% (refer to Section 8 - Capital Structure). • Reducing non-essential maintenance and other capital expenditures as a result of reduced flying and other business activity in Jazz and Voyageur. Management's Discussion and Analysis 2020 4 • Implementing pay reductions for members of the management and administrative team and Board of Directors in 2020. • Offering voluntary employee separation program packages during the year in order to reduce overhead costs in Jazz. Chorus currently expects its liquidity to be relatively stable to the end of 2021 as it continues with measures to manage liquidity based on the continuation of the reduction of non-essential capital