prorate
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-14719
SKYWEST, INC.
Incorporated under the laws of Utah |
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87-0292166 |
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(I.R.S. Employer ID No.) |
444 South River Road
St. George, Utah 84790
(435) 634-3000
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class |
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Outstanding at October 31, 2016 |
Common stock, no par value |
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51,741,724 |
SKYWEST, INC.
QUARTERLY REPORT ON FORM 10-Q
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3 | ||
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Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 |
3 |
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5 | |
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6 | |
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7 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 | |
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38 | ||
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39 | ||
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39 | ||
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39 | ||
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40 | ||
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40 | ||
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41 | |
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Exhibit 31.1 |
Certification of Chief Executive Officer |
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Exhibit 31.2 |
Certification of Chief Financial Officer |
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Exhibit 32.1 |
Certification of Chief Executive Officer |
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Exhibit 32.2 |
Certification of Chief Financial Officer |
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2
SKYWEST, INC. AND SUBSIDIARIES
(Dollars in Thousands)
ASSETS
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September 30, |
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December 31, |
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2016 |
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2015 |
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(unaudited) |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
49,767 |
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$ |
203,035 |
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Marketable securities |
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506,170 |
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286,668 |
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Restricted cash |
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8,235 |
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8,216 |
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Income tax receivable |
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4,307 |
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2,871 |
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Receivables, net |
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49,649 |
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62,162 |
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Inventories, net |
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142,872 |
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140,312 |
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Prepaid aircraft rents |
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171,347 |
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195,216 |
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Deferred tax assets |
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164,586 |
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100,730 |
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Other current assets |
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27,904 |
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18,360 |
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Total current assets |
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1,124,837 |
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1,017,570 |
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PROPERTY AND EQUIPMENT: |
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Aircraft and rotable spares |
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5,819,701 |
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5,242,790 |
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Deposits on aircraft |
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38,150 |
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38,150 |
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Buildings and ground equipment |
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254,647 |
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275,788 |
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6,112,498 |
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5,556,728 |
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Less-accumulated depreciation and amortization |
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(2,218,391) |
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(2,085,981) |
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Total property and equipment, net |
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3,894,107 |
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3,470,747 |
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OTHER ASSETS |
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Intangible assets, net |
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8,811 |
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10,499 |
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Non-current prepaid aircraft rents |
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219,161 |
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229,180 |
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Other assets |
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52,848 |
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53,988 |
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Total other assets |
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280,820 |
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293,667 |
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Total assets |
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$ |
5,299,764 |
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$ |
4,781,984 |
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See accompanying notes to condensed consolidated financial statements.
3
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
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September 30, |
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December 31, |
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2016 |
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2015 |
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(unaudited) |
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CURRENT LIABILITIES: |
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Current maturities of long-term debt |
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$ |
300,142 |
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$ |
268,667 |
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Accounts payable |
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248,176 |
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279,864 |
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Accrued salaries, wages and benefits |
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140,002 |
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138,291 |
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Accrued aircraft rents |
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1,519 |
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3,226 |
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Taxes other than income taxes |
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24,393 |
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17,176 |
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Other current liabilities |
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45,387 |
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40,802 |
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Total current liabilities |
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759,619 |
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748,026 |
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OTHER LONG TERM LIABILITIES |
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52,822 |
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56,191 |
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LONG TERM DEBT, net of current maturities |
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1,924,991 |
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1,659,234 |
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DEFERRED INCOME TAXES PAYABLE |
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882,352 |
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749,575 |
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DEFERRED AIRCRAFT CREDITS |
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55,866 |
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62,523 |
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COMMITMENTS AND CONTINGENCIES (Note 6) |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock, 5,000,000 shares authorized; none issued |
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— |
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— |
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Common stock, no par value, 120,000,000 shares authorized; 79,759,540 and 79,020,371 shares issued, respectively |
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657,662 |
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641,643 |
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Retained earnings |
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1,376,585 |
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1,275,142 |
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Treasury stock, at cost, 28,015,386 and 28,015,386 shares, respectively |
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(410,090) |
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(410,090) |
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Accumulated other comprehensive loss |
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(43) |
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(260) |
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Total stockholders’ equity |
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1,624,114 |
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1,506,435 |
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Total liabilities and stockholders’ equity |
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$ |
5,299,764 |
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$ |
4,781,984 |
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See accompanying notes to condensed consolidated financial statements.
4
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars and Shares in Thousands, Except per Share Amounts)
(Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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OPERATING REVENUES: |
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Passenger |
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$ |
781,475 |
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$ |
777,480 |
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$ |
2,310,678 |
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$ |
2,293,085 |
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Ground handling and other |
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18,301 |
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16,524 |
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52,512 |
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49,734 |
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Total operating revenues |
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799,776 |
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794,004 |
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2,363,190 |
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2,342,819 |
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OPERATING EXPENSES: |
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Salaries, wages and benefits |
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305,958 |
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304,633 |
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915,743 |
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906,051 |
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Aircraft maintenance, materials and repairs |
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143,573 |
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147,396 |
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424,722 |
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461,972 |
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Aircraft rentals |
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65,766 |
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68,003 |
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205,458 |
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206,857 |
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Depreciation and amortization |
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71,743 |
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66,603 |
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209,431 |
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196,953 |
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Aircraft fuel |
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33,189 |
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31,762 |
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90,827 |
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90,254 |
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Ground handling services |
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16,498 |
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18,892 |
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54,225 |
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62,981 |
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Other, net |
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77,215 |
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78,419 |
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231,004 |
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235,447 |
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Total operating expenses |
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713,942 |
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715,708 |
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2,131,410 |
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2,160,515 |
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OPERATING INCOME |
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85,834 |
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78,296 |
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231,780 |
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182,304 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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591 |
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311 |
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1,506 |
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1,647 |
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Interest expense |
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(19,865) |
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(19,914) |
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(55,876) |
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(56,460) |
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Other, net |
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— |
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1,070 |
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— |
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1,070 |
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Total other expense, net |
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(19,274) |
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(18,533) |
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(54,370) |
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(53,743) |
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INCOME BEFORE INCOME TAXES |
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66,560 |
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59,763 |
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177,410 |
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128,561 |
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PROVISION FOR INCOME TAXES |
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25,238 |
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23,495 |
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68,751 |
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51,198 |
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NET INCOME |
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$ |
41,322 |
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$ |
36,268 |
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$ |
108,659 |
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$ |
77,363 |
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BASIC EARNINGS PER SHARE |
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$ |
0.80 |
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$ |
0.72 |
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$ |
2.11 |
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$ |
1.51 |
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DILUTED EARNINGS PER SHARE |
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$ |
0.79 |
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$ |
0.71 |
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$ |
2.08 |
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$ |
1.49 |
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Weighted average common shares: |
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Basic |
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51,627 |
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50,616 |
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51,421 |
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51,143 |
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Diluted |
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52,471 |
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51,282 |
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52,224 |
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51,882 |
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COMPREHENSIVE INCOME: |
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Net income |
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$ |
41,322 |
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$ |
36,268 |
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$ |
108,659 |
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$ |
77,363 |
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Net unrealized appreciation (depreciation) on marketable securities, net of taxes |
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(11) |
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161 |
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217 |
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|
239 |
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TOTAL COMPREHENSIVE INCOME |
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$ |
41,311 |
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$ |
36,429 |
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$ |
108,876 |
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$ |
77,602 |
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See accompanying notes to condensed consolidated financial statements
5
SKYWEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
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Nine months ended |
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September 30, |
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2016 |
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2015 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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$ |
399,318 |
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$ |
313,540 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of marketable securities |
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(2,160,567) |
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(864,241) |
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Sales of marketable securities |
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1,941,209 |
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849,942 |
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Proceeds from the sale of aircraft, property and equipment |
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1,848 |
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5,771 |
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Acquisition of property and equipment: |
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Aircraft and rotable spare parts |
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(619,805) |
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(647,250) |
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Buildings and ground equipment |
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(11,256) |
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(7,443) |
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Return of deposits on aircraft |
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— |
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5,178 |
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Decrease (increase) in other assets |
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(2,156) |
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1,672 |
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NET CASH USED IN INVESTING ACTIVITIES |
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(850,727) |
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(656,371) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of long-term debt |
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497,510 |
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546,232 |
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Principal payments on long-term debt |
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(198,394) |
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(184,336) |
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Net proceeds from issuance of common stock |
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10,214 |
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|
4,698 |
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Purchase of treasury stock |
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— |
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(18,726) |
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Increase in debt issuance cost |
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(4,520) |
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(4,385) |
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Payment of cash dividends |
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(6,669) |
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(6,183) |
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NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
298,141 |
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|
337,300 |
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Decrease in cash and cash equivalents |
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(153,268) |
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(5,531) |
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Cash and cash equivalents at beginning of period |
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|
203,035 |
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|
132,275 |
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|
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
49,767 |
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$ |
126,744 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest, net of capitalized amounts |
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$ |
54,314 |
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$ |
56,117 |
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Income taxes |
|
$ |
944 |
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$ |
1,494 |
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See accompanying notes to condensed consolidated financial statements.
6
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Condensed Consolidated Financial Statements
Basis of Presentation
The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines, Inc. (“ExpressJet”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the three and nine-month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will likely differ, and may differ materially, from those estimates and assumptions. The Company reclassified certain prior period amounts to conform to the current period presentation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-09”). Under ASU No. 2014-09, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. In July 2015, the FASB deferred the effective date of ASU No. 2014-09 for annual reporting periods beginning after December 15, 2017. The FASB also proposed permitting early adoption of ASU No. 2014-09, but not before January 1, 2017. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The Company’s management is currently evaluating the impact the adoption of ASU No. 2014-09 is anticipated to have on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs related to a recognized debt liability to be presented as a direct deduction from the carrying amount of that debt liability. The new guidance only impacts financial statement presentation. The guidance was effective in the first quarter of 2016. The Company adopted this guidance January 1, 2016 on a retrospective basis. As a result, $20.9 million of unamortized debt issuance costs that had been included in the Other assets line on the consolidated balance sheets as of December 31, 2015 are now presented as direct deductions from the carrying amounts of the related debt liabilities.
In November 2015, the FASB issued Accounting Standards Update 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU No. 2015-17”). ASU No. 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by ASU No. 2015-17. ASU No. 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company’s management currently anticipates the impact of
7
adopting ASU No. 2015-17 to result in reducing the Company’s current deferred tax asset to zero with corresponding resolution in the recorded amount of the Company’s long-term deferred tax liabilities.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). ASU No. 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU No. 2016-02 is permitted. ASU No. 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company’s management is currently evaluating the impact the adoption of ASU 2016-02 is anticipated to have on the Company’s consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation—Stock Compensation (Topic 718)” (“ASU No. 2016-09”). ASU No. 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company’s management is currently evaluating the impact the adoption of ASU No. 2016-09 is anticipated to have on the Company’s consolidated financial statements.
Note 2 — Passenger and Ground Handling Revenue
The Company recognizes passenger and ground handling revenues when the service is provided under its code-share agreements. Under the Company’s fixed-fee arrangements (referred to as “fixed-fee arrangements,” “fixed-fee contracts” or “capacity purchase agreements”) with Delta Air Lines, Inc. (“Delta”), United Airlines, Inc. (“United”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”), the major airline partner generally pays the Company a fixed-fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement, such as fuel expenses and landing fee expenses. Under the fixed-fee arrangements, revenue is earned when each flight is completed and is reflected in passenger revenues. For the nine months ended September 30, 2016, approximately 95.5% of the Company’s available seat miles (“ASMs”) were flown under fixed-fee arrangements. Ground handling revenue primarily consists of customer service functions, such as gate and ramp agent services at applicable airports where the Company provides such services to other airlines.
Under the Company’s revenue-sharing arrangements (referred to as a “revenue-sharing” or “prorate” arrangement), the major airline partner and the Company negotiate a passenger fare proration formula, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on a Company airline and the other portion of their trip on the major airline partner. Revenue is recognized under the Company’s prorate flying agreements when each flight is completed based upon the portion of the prorate passenger fare the Company anticipates that it will receive for each completed flight. For the nine months ended September 30, 2016, approximately 4.5% of the Company’s ASMs were flown under prorate arrangements.
Other ancillary revenues commonly associated with airlines, such as baggage fee revenue, ticket change fee revenue and the marketing component of the sale of mileage credits, are retained by the Company’s major airline partners on flights that the Company operates under its code‑share agreements.
In the event that the contractual rates under the Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of the prior period’s approved rates, as adjusted to reflect any contract negotiations, and the Company’s estimate of rates that will be implemented in accordance with revenue recognition guidelines. In the event the Company has a reimbursement dispute with a major airline partner, the Company evaluates the dispute under its established revenue recognition criteria and,
8
provided the revenue recognition criteria have been met, the Company recognizes revenue based on management’s estimate of the resolution of the dispute.
In several of the Company’s agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or semi‑annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly.
The following table summarizes the significant provisions of each code share agreement the Company has with each major airline partner:
Delta Connection Agreements
Agreement |
Aircraft type |
Number of Aircraft |
Term / Termination |
||||||
SkyWest Airlines Delta Connection Agreement (fixed-fee arrangement) |
|
CRJ 200 CRJ 700 CRJ 900 E175
|
|
48 29 36 5 |
|
The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2025 |
|
||
|
|
|
|
|
|
|
|
||
ExpressJet Delta Connection Agreement (fixed-fee arrangement) |
|
CRJ 200 CRJ 700 CRJ 900 |
|
38 36 28 |
|
The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2022 |
|
||
|
|
|
|
|
|
|
|
||
SkyWest Airlines Delta Connection Prorate Agreement (revenue-sharing arrangement) |
|
CRJ 200
|
|
21 |
|
Terminable with 30-day notice |
|
United Express Agreements
Agreement |
|
Aircraft type |
|
Number of Aircraft |
|
Term / Termination |
|
SkyWest Airlines United Express Agreements (fixed-fee arrangement) |
|
CRJ 200 CRJ 700 E175 |
|
54 47 49
|
|
The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2027 |
|
|
|
|
|
|
|
|
|
ExpressJet United ERJ Agreement (fixed-fee arrangement) |
|
ERJ 135 ERJ 145 |
|
5 149 |
|
The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2017, subject to two one-year extension provisions |
|
|
|
|
|
|
|
|
|
SkyWest Airlines United Express Prorate Agreement (revenue-sharing arrangement) |
|
CRJ 200
|
|
21 |
|
Terminable with 120-day notice |
|
9
Alaska Capacity Purchase Agreement
Agreement |
|
Aircraft type |
|
Number of Aircraft |
|
Term / Termination |
|
SkyWest Airlines Alaska Agreement (fixed-fee arrangement) |
CRJ 700 E175 |
5 13 |
CRJ 700 aircraft is scheduled to expire on an individual basis in 2016 E175 aircraft is scheduled to expire in 2027 |
American Agreements
Agreement |
|
Aircraft type |
|
Number of Aircraft |
|
Term / Termination Dates |
|
SkyWest Airlines American Agreement (fixed-fee arrangement) |
|
CRJ 200 CRJ 700
|
|
12 13 |
|
CRJ 200 aircraft is scheduled to expire on an individual aircraft basis commencing in 2016 CRJ 700 aircraft is scheduled to expire in 2020 |
|
|
|
|
|
|
|
|
|
SkyWest Airlines American Prorate Agreement (revenue-sharing arrangement) |
|
CRJ 200 |
|
5 |
|
Terminable with 120-day notice |
|
|
|
|
|
|
|
|
|
ExpressJet American Agreement (fixed-fee arrangement) |
|
CRJ 200 ERJ 145 |
|
11 14 |
|
Scheduled to expire in 2017 |
|
|
|
|
|
|
|
|
|
ExpressJet American Prorate Agreement (revenue-sharing arrangement) |
|
CRJ 200 |
|
3 |
|
Terminable with 120-day notice |
|
When an aircraft is scheduled to be removed from a fixed-fee arrangement, the Company may, as practical under the circumstances, negotiate an extension with the respective major airline partner, negotiate the placement of the aircraft with another major airline partner, return the aircraft to the lessor if the aircraft is leased and the lease is expiring, place owned aircraft for sale, or pursue other uses for the aircraft.
In addition to the contractual arrangements described above, SkyWest Airlines has entered into agreements with Alaska, United and Delta to place additional Embraer E175 dual-class regional jet aircraft (“E175”) into service for those major airline partners. As of September 30, 2016, the Company anticipated placing an additional 16 E175 aircraft with United, an additional seven E175 aircraft with Alaska and 14 E175 aircraft with Delta. The delivery dates for the new aircraft are expected to take place from October 2016 through the end of 2017.
The SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi‑year rate reset provisions that became operative in 2010. A rate reset period became effective on January 1, 2016. The parties have agreed to contractual rates effective for the SkyWest Airlines and ExpressJet Delta Connection Agreements for the 2016 calendar year.
During the three and nine months ended September 30, 2016, the Company recorded $9.2 million and $19.4 million, respectively, in early lease return costs on six and nine CRJ700 aircraft, respectively, that were removed from operations under an early lease return arrangement.
10
Other Revenue Items
The Company’s passenger and ground handling revenues could be impacted by a number of factors, including changes to the Company’s code-share agreements with its major airline partners, contract modifications resulting from contract renegotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code-share agreements and settlement of reimbursement disputes with the Company’s major airline partners.
Note 3 — Share-Based Compensation and Stock Repurchases
The fair value of stock options granted by the Company has been estimated as of the grant date using the Black-Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s traded stock and other factors. During the nine months ended September 30, 2016, the Company granted options to purchase 206,021 shares of common stock under the SkyWest, Inc. 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”). The following table shows the assumptions used and weighted average fair value for stock option grants during the nine months ended September 30, 2016.
|
|
|
|
|
|
Expected annual dividend rate |
|
|
1.08 |
% |
|
Risk-free interest rate |
|
|
1.53 |
% |
|
Average expected life (years) |
|
|
5.7 |
|
|
Expected volatility of common stock |
|
|
0.401 |
|
|
Forfeiture rate |
|
|
0.0 |
% |
|
Weighted average fair value of option grants |
|
$ |
5.22 |
|
|
During the nine months ended September 30, 2016, the Company granted 42,624 fully-vested shares of common stock to the Company’s directors. Additionally, during the nine months ended September 30, 2016, the Company granted 380,453 restricted stock units and 183,416 restricted performance stock units to certain employees of the Company and its subsidiaries under the 2010 Incentive Plan. Both the restricted stock and restricted performance stock units have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries. In addition to the three-year vesting period, certain profit metrics of the Company must be met before the recipient will receive any shares of stock attributable to the restricted performance stock units. Upon vesting, a restricted stock unit and a restricted performance stock unit will be replaced with a share of common stock. The fair value of the restricted stock unit and the restricted performance stock unit on the date of grant was $14.85 per share.
The Company records share-based compensation expense only for those options, restricted stock units and restricted performance stock units that are expected to vest. The estimated fair value of the stock options, restricted stock units and restricted performance stock units is amortized over the applicable vesting periods. During the three months ended September 30, 2016 and 2015, the Company recorded pre-tax share-based compensation expense of $1.9 million and $1.1 million, respectively. During the nine months ended September 30, 2016 and 2015, the Company recorded pre-tax share-based compensation expense of $5.8 million and $4.0 million, respectively.
The Company repurchased 1.25 million shares of its common stock for $18.7 million during the nine months ended September 30, 2015. The Company did not repurchase any shares of its common stock during the nine months ended September 30, 2016.
11
Note 4 — Net Income Per Common Share
Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share. During the three and nine months ended September 30, 2016, options to acquire zero shares and two thousand shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive. During the three and nine months ended September 30, 2015, options to acquire zero shares and 673,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive.
The calculation of the weighted average number of shares of common stock outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||
|
|
2016 |
|
2015 |
|
|
2016 |
|
2015 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|||
Net Income |
|
$ |
41,322 |
|
$ |
36,268 |
|
|
$ |
108,659 |
|
$ |
77,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
51,627 |
|
|
50,616 |
|
|
|
51,421 |
|
|
51,143 |
|
Effect of outstanding share-based awards |
|
|
844 |
|
|
666 |
|
|
|
803 |
|
|
739 |
|
Weighted average number of shares for diluted net income per common share |
|
|
52,471 |
|
|
51,282 |
|
|
|
52,224 |
|
|
51,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per-share |
|
$ |
0.80 |
|
$ |
0.72 |
|
|
$ |
2.11 |
|
$ |
1.51 |
|
Diluted earnings per-share |
|
$ |
0.79 |
|
$ |
0.71 |
|
|
$ |
2.08 |
|
$ |
1.49 |
|
12
Note 5 - Segment Reporting
The Company’s three reporting segments consist of the operations of SkyWest Airlines, ExpressJet and SkyWest Leasing activities. Corporate overhead expenses incurred by the Company are allocated to the operating expenses of SkyWest Airlines and ExpressJet.
The Company’s chief operating decision maker analyzes the profitability of operating the E175 aircraft (including operating costs and associated revenue) separately from the profitability of the Company’s ownership, financing costs and associated revenue of the Company’s E175 aircraft (including depreciation expense, interest expense and associated revenue). Because of this change, the “SkyWest Leasing” segment includes revenue attributed to the Company’s E175 aircraft ownership cost earned under the applicable fixed-fee contracts and the depreciation and interest expense of the Company’s E175 aircraft. The “SkyWest Leasing” segment’s total assets and capital expenditures include the acquired E175 aircraft. The “SkyWest Leasing” segment additionally includes the activity of two CRJ200 aircraft leased to a third party. As a result of the change in segmentation, results for prior periods have been recast to conform to the current presentation.
The following represents the Company’s segment data for the three-month periods ended September 30, 2016 and 2015 (in thousands).
|
|
Three months ended September 30, 2016 |
|||||||||||
|
|
SkyWest |
|
|
|
SkyWest |
|
|
|
||||
|
|
Airlines |
|
ExpressJet |
|
Leasing |
|
Consolidated |
|
||||
Operating revenues |
|
$ |
502,600 |
|
$ |
260,362 |
|
$ |
36,814 |
|
$ |
799,776 |
|
Operating expense |
|
|
436,504 |
|
|
261,003 |
|
|
16,435 |
|
|
713,942 |
|
Depreciation and amortization expense |
|
|
34,942 |
|
|
20,726 |
|
|
16,075 |
|
|
71,743 |
|
Interest expense |
|
|
6,584 |
|
|
1,597 |
|
|
11,684 |
|
|
19,865 |
|
Segment profit (loss) (1) |
|
|
59,512 |
|
|
(2,238) |
|
|
8,695 |
|
|
65,969 |
|
Identifiable intangible assets, other than goodwill |
|
|
— |
|
|
8,811 |
|
|
— |
|
|
8,811 |
|
Total assets |
|
|
2,259,640 |
|
|
1,347,418 |
|
|
1,692,706 |
|
|
5,299,764 |
|
Capital expenditures (including non-cash) |
|
|
15,385 |
|
|
3,296 |
|
|
290,420 |
|
|
309,101 |
|
|
|
Three months ended September 30, 2015 |
|
||||||||||
|
|
SkyWest |
|
|
|
SkyWest |
|
|
|
||||
|
|
Airlines |
|
ExpressJet |
|
Leasing |
|
Consolidated |
|
||||
Operating revenues |
|
$ |
485,749 |
|
$ |
283,034 |
|
$ |
25,221 |
|
$ |
794,004 |
|
Operating expense |
|
|
417,599 |
|
|
286,941 |
|
|
11,168 |
|
|
715,708 |
|
Depreciation and amortization expense |
|
|
34,220 |
|
|
21,575 |
|
|
10,808 |
|
|
66,603 |
|
Interest expense |
|
|
9,002 |
|
|
2,757 |
|
|
8,155 |
|
|
19,914 |
|
Segment profit (loss) (1) |
|
|
59,148 |
|
|
(6,664) |
|
|
5,898 |
|
|
58,382 |
|
Identifiable intangible assets, other than goodwill |
|
|
— |
|
|
11,061 |
|
|
— |
|
|
11,061 |
|
Total assets |
|
|
2,377,655 |
|
|
1,400,015 |
|
|
1,125,236 |
|
|
4,902,906 |
|
Capital expenditures (including non-cash) |
|
|
5,251 |
|
|
5,137 |
|
|
124,146 |
|
|
134,534 |
|
(1) |
Segment profit (loss) is equal to operating income less interest expense |
13
The following represents the Company’s segment data for the nine-month periods ended September 30, 2016 and 2015 (in thousands).
|
|
Nine months ended September 30, 2016 |
|
||||||||||
|
|
SkyWest |
|
|
|
SkyWest |
|
|
|
||||
|
|
Airlines |
|
ExpressJet |
|
Leasing |
|
Consolidated |
|
||||
Operating revenues |
|
$ |
1,473,003 |
|
$ |
794,410 |
|
$ |
95,777 |
|
$ |
2,363,190 |
|
Operating expense |
|
|
1,278,730 |
|
|
809,478 |
|
|
43,202 |
|
|
2,131,410 |
|
Depreciation and amortization expense |
|
|
103,858 |
|
|
63,453 |
|
|
42,120 |
|
|
209,431 |
|
Interest expense |
|
|
19,997 |
|
|
5,337 |
|
|
30,542 |
|
|
55,876 |
|
Segment profit (loss) (1) |
|
|
174,276 |
|
|
(20,405) |
|
|
22,033 |
|
|
175,904 |
|
Identifiable intangible assets, other than goodwill |
|
|
— |
|
|
8,811 |
|
|
— |
|
|
8,811 |
|
Total assets |
|
|
2,259,640 |
|
|
1,347,418 |
|
|
1,692,706 |
|
|
5,299,764 |
|
Capital expenditures (including non-cash) |
|
|
37,270 |
|
|
10,346 |
|
|
583,445 |
|
|
631,061 |
|
|
|
Nine months ended September 30, 2015 |
|
||||||||||
|
|
SkyWest |
|
|
|
SkyWest |
|
|
|
||||
|
|
Airlines |
|
ExpressJet |
|
Leasing |
|
Consolidated |
|
||||
Operating revenues |
|
$ |
1,387,451 |
|
$ |
896,683 |
|
$ |
58,685 |
|
$ |
2,342,819 |
|
Operating expense |
|
|
1,221,909 |
|
|
911,782 |
|
|
26,824 |
|
|
2,160,515 |
|
Depreciation and amortization expense |
|
|
106,692 |
|
|
64,918 |
|
|
25,343 |
|
|
196,953 |
|
Interest expense |
|
|
27,874 |
|
|
9,590 |
|
|
18,996 |
|
|
56,460 |
|
Segment profit (loss) (1) |
|
|
137,668 |
|
|
(24,689) |
|
|
12,865 |
|
|
125,844 |
|
Identifiable intangible assets, other than goodwill |
|
|
— |
|
|
11,061 |
|
|
— |
|
|
11,061 |
|
Total assets |
|
|
2,377,655 |
|
|
1,400,015 |
|
|
1,125,236 |
|
|
4,902,906 |
|
Capital expenditures (including non-cash) |
|
|
30,169 |
|
|
19,713 |
|
|
604,811 |
|
|
654,693 |
|
(1) |
Segment profit (loss) is equal to operating income less interest expense |
During the nine months ended September 30, 2016, the Company had nine CRJ700 aircraft that terminated under multiple flying contracts with its major airline partners and were permanently removed from service prior to the lease termination. The Company also entered into an early lease return arrangement with a lessor on these nine CRJ700 aircraft.
During the three months ended September 30, 2016, the Company recorded $9.2 million of early aircraft lease return expense for six CRJ700 aircraft that were removed from operations, of which $3.9 million was recorded in the SkyWest Airlines segment and $5.3 million was recorded in the ExpressJet segment. During the nine months ended September 30, 2016, the Company recorded $19.4 million of early aircraft lease return expense for nine CRJ700 aircraft that were removed from operations, of which $3.9 million was recorded in the SkyWest Airlines segment and $15.5 million was recorded in the ExpressJet segment.
The early lease return expenses included the write-off of certain prepaid aircraft rents and accrued liabilities under the early lease return arrangement. As of September 30, 2016, the Company had $8.7 million of accrued liabilities associated with the early lease return arrangement for nine CRJ700 aircraft.
14
Note 6 — Commitments and Contingencies
As of September 30, 2016, the Company leased aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases which are generally on a long-term, triple net lease basis pursuant to which the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases. The following table summarizes future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms as of September 30, 2016 (in thousands):
October through December 2016 |
|
$ |
67,280 |
|
2017 |
|
|
191,086 |
|
2018 |
|
|
155,584 |
|
2019 |
|
|
122,627 |
|
2020 |
|
|
134,867 |
|
Thereafter |
|
|
349,039 |
|
|
|
$ |
1,020,483 |
|
As of September 30, 2016, the Company had a firm purchase commitment for 37 E175 aircraft with scheduled delivery dates from October 2016 through the end of 2017.
Note 7 — Fair Value Measurements
The Company holds certain assets that are required to be measured at fair value in accordance with GAAP. The Company determined the fair value of these assets based on the following three levels of inputs:
|
|
|
|
|
Level 1 |
|
— |
|
Quoted prices in active markets for identical assets or liabilities. |
Level 2 |
|
— |
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities. |
Level 3 |
|
— |
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.
|
15
As of September 30, 2016 and December 31, 2015, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):
|
|
Fair Value Measurements as of September 30, 2016 |
|
||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
Marketable Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and bond funds |
|
$ |
506,155 |
|
$ |
— |
|
$ |
506,155 |
|
$ |
— |
|
Commercial paper |
|
|
15 |
|
|
— |
|
|
15 |
|
|
— |
|
Asset backed securities |
|
$ |
506,170 |
|
$ |
— |
|
$ |
506,170 |
|
$ |
— |
|
Cash, Cash Equivalents and Restricted Cash |
|
|
58,002 |
|
|
58,002 |
|
|
— |
|
|
— |
|
Auction Rate Securities(1) |
|
|
2,394 |
|
|
— |
|
|
— |
|
|
2,394 |
|
Total Assets Measured at Fair Value |
|
$ |
566,566 |
|
$ |
58,002 |
|
$ |
506,170 |
|
$ |
2,394 |
|
|
|
Fair Value Measurements as of December 31, 2015 |
|
||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
Marketable Securities |
|
|
|
|
|
|
|
|
|
|