skyw_Current folio_10Q

Table of Contents

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, 2017

 

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

 

87-0292166

 

 

(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, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

 

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Outstanding at October 31, 2017

Common stock, no par value

 

51,842,527

 

 

 

 

 


 

Table of Contents

 

SKYWEST, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

PART I 

 

 

Item 1.

Financial Statements

3

 

 

Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2017 and 2016

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

Item 4.

Controls and Procedures

35

 

 

 

 

PART II 

 

 

Item 1.

Legal Proceedings

36

 

Item 1A.

Risk Factors

36

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

Item 6.

Exhibits

36

 

 

Signature

37

 

 

 

 

Exhibit 31.1

Certification of Chief Executive Officer

 

Exhibit 31.2

Certification of Chief Financial Officer

 

Exhibit 32.1

Certification of Chief Executive Officer

 

Exhibit 32.2

Certification of Chief Financial Officer

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

98,085

 

$

146,766

 

Marketable securities

 

 

569,080

 

 

409,898

 

Restricted cash

 

 

8,278

 

 

8,243

 

Receivables, net

 

 

40,337

 

 

46,916

 

Inventories, net

 

 

121,235

 

 

118,509

 

Prepaid aircraft rents

 

 

126,693

 

 

162,360

 

Other current assets

 

 

30,424

 

 

25,100

 

Total current assets

 

 

994,132

 

 

917,792

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

Aircraft and rotable spares

 

 

5,252,416

 

 

4,839,501

 

Deposits on aircraft

 

 

49,000

 

 

38,800

 

Buildings and ground equipment

 

 

246,055

 

 

261,704

 

 

 

 

5,547,471

 

 

5,140,005

 

Less-accumulated depreciation and amortization

 

 

(1,405,207)

 

 

(1,318,308)

 

Total property and equipment, net

 

 

4,142,264

 

 

3,821,697

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Intangible assets, net

 

 

6,121

 

 

8,249

 

  Long-term prepaid assets

 

 

204,457

 

 

218,505

 

Other assets

 

 

42,472

 

 

41,723

 

Total other assets

 

 

253,050

 

 

268,477

 

Total assets

 

$

5,389,446

 

$

5,007,966

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

    

 

    

2017

    

2016

 

 

 

 

(unaudited)

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

303,423

 

$

305,460

 

 

Accounts payable

 

 

276,307

 

 

241,215

 

 

Accrued salaries, wages and benefits

 

 

149,881

 

 

139,885

 

 

Taxes other than income taxes

 

 

23,883

 

 

15,618

 

 

Other current liabilities

 

 

45,640

 

 

45,087

 

 

Total current liabilities

 

 

799,134

 

 

747,265

 

 

 

 

 

 

 

 

 

 

 

OTHER LONG TERM LIABILITIES

 

 

46,574

 

 

50,844

 

 

 

 

 

 

 

 

 

 

 

LONG TERM DEBT, net of current maturities

 

 

2,380,792

 

 

2,240,051

 

 

 

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES PAYABLE

 

 

640,685

 

 

565,404

 

 

 

 

 

 

 

 

 

 

 

DEFERRED AIRCRAFT CREDITS

 

 

46,546

 

 

53,459

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 6)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, 5,000,000 shares authorized; none issued

 

 

 —

 

 

 —

 

 

Common stock, no par value, 120,000,000 shares authorized; 80,266,365 and 79,781,305 shares issued, respectively

 

 

668,970

 

 

657,353

 

 

Retained earnings

 

 

1,231,169

 

 

1,103,751

 

 

Treasury stock, at cost, 28,423,779 and 28,015,386 shares, respectively

 

 

(424,420)

 

 

(410,090)

 

 

Accumulated other comprehensive loss

 

 

(4)

 

 

(71)

 

 

Total stockholders’ equity

 

 

1,475,715

 

 

1,350,943

 

 

Total liabilities and stockholders’ equity

 

$

5,389,446

 

$

5,007,966

 

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars and Shares in Thousands, Except per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger

 

$

812,295

 

$

781,475

 

$

2,349,047

 

$

2,310,678

 

Ground handling and other

 

 

19,641

 

 

18,301

 

 

58,063

 

 

52,512

 

Total operating revenues

 

 

831,936

 

 

799,776

 

 

2,407,110

 

 

2,363,190

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

303,997

 

 

305,958

 

 

899,966

 

 

915,743

 

Aircraft maintenance, materials and repairs

 

 

148,787

 

 

143,573

 

 

433,467

 

 

424,722

 

Depreciation and amortization

 

 

74,095

 

 

71,743

 

 

215,415

 

 

209,431

 

Aircraft rentals

 

 

54,976

 

 

65,766

 

 

168,098

 

 

205,458

 

Aircraft fuel

 

 

42,071

 

 

33,189

 

 

113,564

 

 

90,827

 

Ground handling services

 

 

16,693

 

 

16,498

 

 

52,130

 

 

54,225

 

Other operating expenses

 

 

78,948

 

 

77,215

 

 

229,211

 

 

231,004

 

Total operating expenses

 

 

719,567

 

 

713,942

 

 

2,111,851

 

 

2,131,410

 

OPERATING INCOME

 

 

112,369

 

 

85,834

 

 

295,259

 

 

231,780

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and other

 

 

1,408

 

 

591

 

 

3,398

 

 

1,506

 

Interest expense

 

 

(27,101)

 

 

(19,865)

 

 

(78,713)

 

 

(55,876)

 

Total other expense, net

 

 

(25,693)

 

 

(19,274)

 

 

(75,315)

 

 

(54,370)

 

INCOME BEFORE INCOME TAXES

 

 

86,676

 

 

66,560

 

 

219,944

 

 

177,410

 

PROVISION FOR INCOME TAXES

 

 

32,960

 

 

25,238

 

 

80,966

 

 

68,751

 

NET INCOME

 

$

53,716

 

$

41,322

 

$

138,978

 

$

108,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

1.04

 

$

0.80

 

$

2.68

 

$

2.11

 

DILUTED EARNINGS PER SHARE

 

$

1.01

 

$

0.79

 

$

2.62

 

$

2.08

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,833

 

 

51,627

 

 

51,801

 

 

51,421

 

Diluted

 

 

53,080

 

 

52,471

 

 

53,087

 

 

52,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

53,716

 

$

41,322

 

$

138,978

 

$

108,659

 

Net unrealized appreciation (depreciation) on marketable securities, net of taxes

 

 

11

 

 

(11)

 

 

67

 

 

217

 

TOTAL COMPREHENSIVE INCOME

 

$

53,727

 

$

41,311

 

$

139,045

 

$

108,876

 

 

See accompanying notes to condensed consolidated financial statements

5


 

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

532,289

 

$

399,318

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(1,002,624)

 

 

(2,160,567)

 

Sales of marketable securities

 

 

843,509

 

 

1,941,209

 

Proceeds from the sale of aircraft, property and equipment

 

 

51,079

 

 

1,848

 

Acquisition of property and equipment:

 

 

 

 

 

 

 

Aircraft and rotable spare parts

 

 

(563,524)

 

 

(619,805)

 

Deposits on aircraft

 

 

(46,733)

 

 

 —

 

Buildings and ground equipment

 

 

(8,275)

 

 

(11,256)

 

Aircraft deposits applied towards acquired aircraft

 

 

36,533

 

 

 —

 

Increase in other assets

 

 

(5,019)

 

 

(2,156)

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(695,054)

 

 

(850,727)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

384,825

 

 

497,510

 

Principal payments on long-term debt

 

 

(245,745)

 

 

(198,394)

 

Net proceeds from issuance of common stock

 

 

3,447

 

 

10,214

 

Purchase of treasury stock and cash tax withholding on shares issued

 

 

(14,330)

 

 

 —

 

Increase in debt issuance cost

 

 

(3,245)

 

 

(4,520)

 

Payment of cash dividends

 

 

(10,868)

 

 

(6,669)

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

114,084

 

 

298,141

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(48,681)

 

 

(153,268)

 

Cash and cash equivalents at beginning of period

 

 

146,766

 

 

203,035

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

98,085

 

$

49,767

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized amounts

 

$

77,915

 

$

54,314

 

Income taxes

 

$

2,354

 

$

944

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

Table of Contents

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. These condensed consolidated financial statements should 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, 2016.  The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

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

 

Standards Effective in Future Years and Not Yet Adopted

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.  In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer and the application of identifying performance obligations.  The Company continues to assess the potential impacts of ASU No. 2014‑09 on its fixed-fee contracts, prorate flying agreements, ground handling agreements and other revenue transactions.  The Company believes the principal versus agent considerations under ASU No. 2014-09 may result in the Company recording certain directly reimbursed expenses under its fixed-fee contracts, such as fuel and certain airport related expenses as a reduction to the applicable operating expense rather than revenue.    The Company currently does not anticipate the adoption of ASU No. 2014‑09 will have a material impact on its net income.    ASU No. 2014‑09 is required to be applied either full retrospective to each prior reporting period presented or modified retrospective with the cumulative effect of initially applying it at the date of initial application.  The Company anticipates using the full retrospective method of adoption.

7


 

Table of Contents

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 2016, the FASB issued Accounting Standards Update 2016‑15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” and Accounting Standard Update 2016‑18, “Statement of Cash Flows (Topic 230): Restricted Cash” related to the classification of certain cash receipts and cash payments and the presentation of restricted cash within an entity’s statement of cash flows, respectively.  These standards are effective for interim and annual reporting periods beginning after December 15, 2017, but early adoption is permitted.  The Company does not anticipate these standards to have a material impact on the Company’s Consolidated Statement of Cash Flows.

 

Recently Adopted Standards

Pursuant to the guidelines of the recently issued Accounting Standards Update 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015‑17”), all deferred tax assets and liabilities are to be classified as non-current. As permitted under ASU 2015‑17, the Company adopted this guidance for the quarter ended March 31, 2017. The guidance indicates that ASU 2015‑17 may be applied either prospectively or retrospectively. The Company elected to adopt ASU 2015‑17 retrospectively. Upon adoption, approximately $129.3 million of formerly recorded current deferred tax assets as of December 31, 2016 were reclassified to non-current and netted against non-current deferred income taxes payable as of December 31, 2016 in the accompanying 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 amendments to Topic 718, which simplified the accounting for share-based payment transactions, including the income tax consequences, the calculation of diluted earnings per share, the treatment of forfeitures and the classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted.  Amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively.  Prior to the adoption of ASU No. 2016‑09, GAAP required tax effects of deductions for share-based payments in excess of compensation cost and tax deficiencies to be recorded in equity.  Under ASU No. 2016‑09, the tax effects of awards are treated as discrete income tax expense items in the reporting period in which they occur.

The Company adopted ASU No. 2016‑09 as of January 1, 2017.  As a result of employee stock awards that vested and stock options that were exercised during the three months ended March  31, 2017, the Company recorded a discrete income tax benefit of $3.0 million for the same period.  The adoption of ASU No. 2016-09 did not have a material effect on the Company’s financial results for the three months ended September 30, 2017. The adoption of ASU No. 2016‑09 did not have a material impact on the statement of cash flows presentation, which the Company adopted prospectively. 

8


 

Table of Contents

Property and Equipment

 

Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight‑line method. The Company changed the estimated useful lives and residual values for certain long-lived assets as of January 1, 2017 as follows:

Assets

 

Current Depreciable Life

 

Prior Policy Depreciable Life

 

Current Residual Value

 

Prior Policy Residual Value

New Aircraft

 

20 - 22 years

 

18 years

 

17.5 - 20

%

 

30

%

Used Aircraft, rotable spares, and spare engines

 

up to 18 years

 

up to 18 years

 

0 - 20

%

 

0 - 30

%

Ground equipment

 

up to 10 years

 

No Change

 

 0

%

 

No Change

Office equipment

 

up to 7 years

 

No Change

 

0

%

 

No Change

Leasehold improvements

 

Shorter of 15 years or lease term

 

No Change

 

0

%

 

No Change

Buildings

 

20 - 39.5 years

 

No Change

 

0

%

 

No Change

 

The Company estimates that the impact of the change in estimated useful lives and residual values for certain long-lived assets will increase depreciation expense by an additional $1.8 million on an annualized basis for 2017. 

Note 2 — Passenger and Ground Handling and Other 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, 2017, fixed-fee arrangements represented approximately 87.8% of the Company’s total passenger revenue.  

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, 2017, prorate flying arrangements represented approximately 12.2% of the Company’s total passenger revenue.

Ground handling and other 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. Ground handling and other revenue primarily consists of ground handling services the Company provides to third‑party airlines and government subsidies the Company receives for operating certain routes under its prorate agreements. Revenues associated with ground handling services the Company provides for its aircraft are recorded as passenger revenues.

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 

9


 

Table of Contents

with a major airline partner, the Company evaluates the dispute under its established revenue recognition criteria and, 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
Dates

SkyWest Airlines

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

CRJ 900

E175

 

63

27

36

18

 

Individual aircraft have scheduled removal dates from 2017 to 2026

ExpressJet

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

CRJ 900

 

2

33

24

 

Individual aircraft have scheduled removal dates from 2017 to 2018

SkyWest Airlines

Delta Connection Prorate Agreement (revenue-sharing arrangement)

 

CRJ 200

 

24

 

Terminable with 30-day notice

 

 

 

 

 

 

 

United Express Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

United Express Agreements

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

E175

 

56

20

65

 

Individual aircraft have scheduled removal dates from 2017 to 2029

ExpressJet

United ERJ Agreement

(fixed-fee arrangement)

 

ERJ 135

ERJ 145

 

3

115

 

Individual aircraft have scheduled removal dates from 2017 to 2022

SkyWest Airlines

United Express Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

22

 

Terminable with 120-day notice

 

American Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

American Agreement

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

 

10

37

 

CRJ200 aircraft are scheduled to expire in 2017 and the CRJ700 aircraft are scheduled to expire in 2019

SkyWest Airlines

American Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

7

 

Terminable with 120-day notice

ExpressJet

American Agreement

(fixed-fee arrangement)

 

CRJ 700

 

12

 

CRJ700 aircraft are scheduled to expire in 2019

10


 

Table of Contents

 

 

 

 

 

 

 

Alaska Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

Alaska Agreement

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

E175

 

7

2

21

 

Individual aircraft have scheduled removal dates from 2017 to 2029

 

 

In addition to the contractual arrangements described above, SkyWest Airlines has entered into agreements with Alaska and Delta to place additional Embraer E175 dual-class regional jet aircraft (which are typically configured with 76 seats) (“E175”) or E175 SC dual-class regional jet aircraft (which are typically configured with 70 seats) (“E175 SC”) into service for those major airline partners.  As of September 30, 2017, the Company anticipated placing an additional 14 E175 aircraft with Alaska and 31 E175 or E175 SC aircraft with Delta. The delivery dates for the new E175/E175 SC aircraft are expected to take place by the end of 2018.

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, including placing the aircraft in a prorate arrangement.

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

 

During the nine months ended September 30, 2017, the Company granted 22,617 fully-vested shares of common stock to the Company’s directors at a grant date fair value of $35.81. Additionally, during the nine months ended September 30, 2017, the Company granted 160,137 restricted stock units and 119,315 performance shares to certain employees of the Company and its subsidiaries under the SkyWest, Inc. 2010 Long-Term Incentive Plan.  Both the restricted stock units and performance shares 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 performance metrics of the Company must be met before the recipient will receive any shares of stock attributable to the restricted stock units and performance shares. Upon vesting, each restricted stock unit and performance share will be replaced with one share of common stock. The fair value of the restricted stock units and performance shares on the date of grant was $35.81 per share. During the nine months ended September 30, 2017, the Company did not grant any options to purchase shares of common stock.

With the adoption of ASU No. 2016‑09, the Company accounts for forfeitures of restricted stock units and performance share grants in 2017 when forfeitures occur.  The estimated fair value of the stock options, restricted stock units and performance shares is amortized over the applicable vesting periods.  During the three months ended September 30, 2017 and 2016, the Company recorded pre-tax share-based compensation expense of $2.4 million and $1.9 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company recorded pre-tax share-based compensation expense of $8.2 million and $5.8 million, respectively.

The Company repurchased 281,000 shares of its common stock for $10.0 million during the nine months ended September 30, 2017. Additionally, during the nine months ended September 30, 2017, the Company paid $4.3 million for a net settlement of the income tax obligation on employee equity awards. The Company did not repurchase any shares of its common stock during the nine months ended September 30, 2016.

 

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

11


 

Table of Contents

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, 2017, all outstanding options were included in the computation of Diluted EPS. During the three months ended September 30, 2016, all outstanding options were included in the computation of Diluted EPS. During the nine months ended September 30, 2016, options to acquire 2,000 shares were excluded from the Diluted EPS computation as the impact would have been 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,

 

 

    

2017

    

2016

 

 

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

53,716

 

$

41,322

 

 

$

138,978

 

$

108,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

51,833

 

 

51,627

 

 

 

51,801

 

 

51,421

 

Effect of outstanding share-based awards

 

 

1,247

 

 

844

 

 

 

1,286

 

 

803

 

Weighted average number of shares for diluted net income per common share

 

 

53,080

 

 

52,471

 

 

 

53,087

 

 

52,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.04

 

$

0.80

 

 

$

2.68

 

$

2.11

 

Diluted earnings per share

 

$

1.01

 

$

0.79

 

 

$

2.62

 

$

2.08

 

 

 

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). 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 ownership and activity of four CRJ200 aircraft leased to a third party.

12


 

Table of Contents

The following represents the Company’s segment data for the three-month periods ended September 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 2017

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

    

Airlines

    

ExpressJet

    

Leasing

    

Consolidated

 

Operating revenues

 

$

578,109

 

$

191,516

 

$

62,311

 

$

831,936

 

Operating expense

 

 

491,115

 

 

200,492

 

 

27,960

 

 

719,567

 

Depreciation and amortization expense

 

 

34,049

 

 

12,573

 

 

27,473

 

 

74,095

 

Interest expense

 

 

5,276

 

 

1,017

 

 

20,808

 

 

27,101

 

Segment profit (loss) (1)

 

 

81,718

 

 

(9,993)

 

 

13,543

 

 

85,268

 

Identifiable intangible assets, other than goodwill

 

 

 —

 

 

6,121

 

 

 —

 

 

6,121

 

Total assets (as of September 30, 2017)

 

 

2,088,048

 

 

721,939

 

 

2,579,459

 

 

5,389,446

 

Capital expenditures (including non-cash)

 

 

27,118

 

 

2,259

 

 

24,122

 

 

53,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (as of September 30, 2016)

 

 

2,174,376

 

 

1,268,096

 

 

1,692,706

 

 

5,135,178

 

Capital expenditures (including non-cash)

 

 

15,385

 

 

3,296

 

 

290,420

 

 

309,101

 


(1)

Segment profit (loss) is equal to operating income less interest expense

 

The following represents the Company’s segment data for the nine-month periods ended September 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

    

Airlines

    

ExpressJet

    

Leasing

    

Consolidated

 

Operating revenues

 

$

1,598,812

 

$

632,199

 

$

176,099

 

$

2,407,110

 

Operating expense

 

 

1,387,125

 

 

645,055

 

 

79,671

 

 

2,111,851

 

Depreciation and amortization expense

 

 

98,396

 

 

38,808

 

 

78,211

 

 

215,415

 

Interest expense

 

 

16,811

 

 

3,219

 

 

58,683

 

 

78,713

 

Segment profit (loss) (1)

 

 

194,876

 

 

(16,075)

 

 

37,745

 

 

216,546

 

Identifiable intangible assets, other than goodwill

 

 

 —

 

 

6,121

 

 

 —

 

 

6,121

 

Total assets (as of September 30, 2017)

 

 

2,088,048

 

 

721,939

 

 

2,579,459

 

 

5,389,446

 

Capital expenditures (including non-cash)

 

 

85,895

 

 

12,414

 

 

474,091

 

 

572,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (as of September 30, 2016)

 

 

2,174,376

 

 

1,268,096

 

 

1,692,706

 

 

5,135,178

 

Capital expenditures (including non-cash)

 

 

37,270

 

 

10,346

 

 

583,445

 

 

631,061

 

 


(1)

Segment profit (loss) is equal to operating income less interest expense 

13


 

Table of Contents

Note 6 — Commitments and Contingencies

 

As of September  30, 2017, 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, or the property may be purchased rather than leased. 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, 2017 (in thousands):

 

 

 

 

 

 

October through December 2017

    

$

43,077

 

2018

 

 

137,046

 

2019

 

 

102,877

 

2020

 

 

121,280

 

2021

 

 

112,535

 

Thereafter

 

 

236,503

 

 

 

$

753,318

 

 

As of September  30, 2017, the Company had a firm purchase commitment for 45 E175/E175 SC aircraft from Embraer, S.A. with scheduled delivery dates through the end of 2018.

 

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.

 

14


 

Table of Contents

As of September 30, 2017 and December 31, 2016, 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, 2017

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

414,578

 

$

 —

 

$

414,578

 

$

 —

Commercial paper

 

 

154,502

 

 

 —

 

 

154,502

 

 

 —

 

 

$

569,080

 

$

 —

 

$

569,080

 

$

 —

Cash, Cash Equivalents and Restricted Cash

 

 

106,363

 

 

106,363

 

 

 —

 

 

 —

Total Assets Measured at Fair Value

 

$

675,443

 

$

106,363

 

$

569,080

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2016

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

409,885

 

$

 

$

409,885

 

$

Commercial paper

 

 

13

 

 

 

 

13

 

 

 

 

$

409,898

 

$

 —

 

$

409,898

 

$

 —

Cash, Cash Equivalents and Restricted Cash

 

 

155,009

 

 

155,009

 

 

 

 

Total Assets Measured at Fair Value

 

$

564,907

 

$

155,009

 

$

409,898

 

$

 —

 

The Company’s “Marketable Securities” classified as Level 2 securities primarily utilize broker quotes in a non-active market for valuation of these securities.

 

The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the nine months ended September  30, 2017.  The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

 

As of September  30, 2017 and December 31, 2016, the Company classified $569.1 million and $409.9 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year.  As of September 30, 2017 and December 31, 2016, the cost of the Company’s total cash and cash equivalents and available for sale securities (excluding restricted cash) was $667.2 million and $556.8 million, respectively.  As of September 30, 2017 and December 31, 2016, the fair value of the Company’s total cash and cash equivalents and available for sale securities (excluding restricted cash) was $667.2 million and $556.7 million, respectively.

 

The fair value of the Company’s long-term debt classified as Level 2 debt was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be $2.72 billion as of September 30, 2017 and $2.57 billion as of December 31, 2016, as compared to the carrying amount of $2.71 billion as of September 30, 2017 and $2.57 billion as of December 31, 2016.

 

15


 

Table of Contents

Note 8 — Long-Term Debt

 

Long-term debt consisted of the following as of September  30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

December 31, 2016

Current portion of long-term debt

$

307,032

 

$

308,945

Current portion of unamortized debt issue cost, net

 

(3,609)

 

 

(3,485)

Current portion of long-term debt, net of debt issue costs

$

303,423

 

$

305,460

 

 

 

 

 

 

Long-term debt, net of current maturities

$

2,402,996

 

$

2,261,959

Long-term portion of unamortized debt issue cost, net