EXPRESSJET HOLDINGS INC - 10-Q Quarterly Report

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)

		Three Months Ended September 30,
		Three Months Ended September 30,

		2004			2003

Operating Revenue................................................	$	385,666		$	343,629

Operating Expenses:
Wages, salaries and related costs.....................		82,960			73,703
Aircraft rentals.................................................		71,565			64,205
Aircraft fuel and related taxes............................		48,336			41,305
Maintenance, materials and repairs...................		40,251			33,508
Ground handling...............................................		27,412			23,614
Other rentals and landing fees...........................		23,844			27,267
Outside services..............................................		6,044			5,829
Depreciation and amortization...........................		6,027			5,265
Aircraft related and other insurance....................		2,278			1,987
Other operating expenses.................................		25,318			19,967

		334,035			296,650

Operating Income..................................................		51,631			46,979

Nonoperating Income (Expense):
Interest expense..............................................		(3,105	)		(2,578	)
Interest income................................................		1,099			455
Capitalized interest..........................................		158			298
Other, net........................................................		(3	)		(15	)

		(1,851	)		(1,840	)

Income before Income Taxes..................................		49,780			45,139
Income Tax Expense.............................................		19,016			17,328

Net Income Applicable to Common Stockholders.....	$	30,764		$	27,811

Basic Earnings per Common Share........................	$	0.57		$	0.48

Diluted Earnings per Common Share......................	$	0.57		$	0.48

Shares Used in Computing Basic Earnings per Common Share................................................		54,236			58,069
Shares Used in Computing Diluted Earnings per Common Share................................................		54,242			58,132

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)

		Nine Months Ended September 30,
		Nine Months Ended September 30,

		2004			2003

Operating Revenue................................................	$	1,120,549		$	970,494

Operating Expenses:
Wages, salaries and related costs.....................		239,434			209,000
Aircraft rentals.................................................		208,766			182,911
Aircraft fuel and related taxes............................		138,381			112,023
Maintenance, materials and repairs...................		115,066			96,657
Ground handling...............................................		78,552			65,824
Other rentals and landing fees...........................		66,494			74,983
Outside services..............................................		22,721			21,939
Depreciation and amortization...........................		17,623			14,911
Aircraft related and other insurance....................		7,228			4,076
Security fee reimbursement..............................		—			(3,034	)
Other operating expenses.................................		75,879			55,792

		970,144			835,082

Operating Income..................................................		150,405			135,412

Nonoperating Income (Expense):
Interest expense..............................................		(9,145	)		(6,770	)
Interest income................................................		2,465			1,493
Capitalized interest..........................................		391			846
Other, net........................................................		130			(46	)

		(6,159	)		(4,477	)

Income before Income Taxes and Dividends.............		144,246			130,935
Income Tax Expense.............................................		55,102			50,303

Income before Dividends........................................		89,144			80,632

Dividends on Mandatorily Redeemable Preferred Stock of Subsidiary...................................................		—			(352	)

Net Income Applicable to Common Stockholders.....	$	89,144		$	80,280

Basic Earnings per Common Share........................	$	1.64		$	1.29

Diluted Earnings per Common Share......................	$	1.64		$	1.29

Shares Used in Computing Basic Earnings per Common Share................................................		54,212			62,001
Shares Used in Computing Diluted Earnings per Common Share................................................		54,230			62,005

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS		September 30,			December 31,
		2004			2003

		(Unaudited)
Current Assets:
Cash and cash equivalents.........................	$	179,608		$	189,892
Restricted cash.........................................		6,303			3,200
Accounts receivable, net............................		4,970			4,510
Spare parts and supplies, net.....................		25,857			25,538
Prepayments and other..............................		7,230			10,400
Deferred income taxes...............................		2,318			—

Total Current Assets...............................		226,286			233,540

Property and Equipment:
Owned property and equipment:
Flight equipment.....................................		211,274			193,523
Other.....................................................		112,606			101,828

		323,880			295,351
Less: Accumulated depreciation.............		(72,573	)		(59,001	)

		251,307			236,350

Capital Leases:
Flight equipment.....................................		8,515			10,643
Other.....................................................		4,264			4,375

		12,779			15,018
Less: Accumulated amortization.............		(4,391	)		(4,216	)

		8,388			10,802

Total Property and Equipment..................		259,695			247,152

Reorganization Value In Excess of Amounts
Allocable to Identifiable Assets, net.............		12,789			12,789
Airport Operating Rights, net...........................		4,255			4,443
Note Receivable.............................................		5,000			5,000
Debt Issuance Cost, net..................................		3,947			4,159
Other Assets, net...........................................		2,130			3,088

Total Assets..........................................	$	514,102		$	510,171

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EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)

LIABILITIES AND		September 30,			December 31,
STOCKHOLDERS' EQUITY (DEFICIT)		2004			2003

		(Unaudited)
Current Liabilities:
Current maturities of long-term debt .........................	$	865		$	865
Current maturities of note payable to Continental Airlines, Inc. ......................................		54,191			67,112
Current maturities of capital lease obligations............		1,012			1,795
Accounts payable...................................................		1,205			4,678
Accrued payroll and related costs............................		61,806			40,128
Amounts due to Continental Airlines, Inc., net...........		7,080			5,588
Deferred income taxes............................................		—			30,433
Accrued other liabilities...........................................		61,375			68,213

Total Current Liabilities.........................................		187,534			218,812


Long-term Debt............................................................		20,567			21,164

Note Payable to Continental Airlines, Inc.......................		44,613			126,060

4.25% Senior Convertible Notes due 2023......................		137,200			137,200

Capital Lease Obligations.............................................		1,990			2,599

Deferred Income Taxes.................................................		29,602			1,777

Other Long-term Liabilities............................................		12,595			12,846

Stockholders’ Equity (Deficit):
Preferred stock - $.01 par, 10,000,000 shares authorized, one share issued and outstanding........		—			—
Common stock - $.01 par, 200,000,000 shares authorized, 54,372,595 and 54,164,875 shares issued and outstanding, respectively.....................		544			542
Deferred compensation............................................		(1,392	)		—
Additional paid-in capital..........................................		162,375			159,841
Accumulated deficit................................................		(81,526	)		(170,670	)

Total Stockholders’ Equity (Deficit)........................		80,001			(10,287	)

Total Liabilities and Stockholders’ Equity (Deficit)............................................................	$	514,102		$	510,171

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

		Nine Months Ended September 30,

		2004			2003


Net Cash Flows from Operating Activities....................................	$	115,504		$	170,756

Cash Flows from Investing Activities:
Capital expenditures............................................................		(19,137	)		(38,168	)
Purchase of flight equipment from Continental Airlines, Inc. ....		(11,434	)		—
Proceeds from the sale of flight equipment to Continental Airlines, Inc. ...................................................		—			1,621
Proceeds from disposition of equipment.................................		298			145

Net cash used in investing activities...................................		(30,273	)		(36,402	)

Cash Flows from Financing Activities:
Gross proceeds from debt financing.......................................		—			137,200
Repurchase of common stock...............................................		—			(133,770	)
Proceeds from issuance of long-term debt..............................		—			17,297
Payments on note payable to Continental Airlines, Inc............		(94,368	)		(105,726	)
Payments on long-term debt.................................................		(597	)		—
Payments on capital lease obligations...................................		(1,392	)		(1,616	)
Payments related to IPO underwriting discounts and other expenses.................................................................		—			(34	)
Proceeds from issuance of common stock.............................		842			—
Dividends paid on mandatorily redeemable preferred stock...............................................................................		—			(352	)

Net cash used in financing activities...................................		(95,515	)		(87,001	)


Net Increase in Cash and Cash Equivalents................................		(10,284	)		47,353

Cash and Cash Equivalents – Beginning of Period.......................		189,892			120,930

Cash and Cash Equivalents – End of Period................................	$	179,608		$	168,283

Supplemental Cash Flow Information:
Interest paid........................................................................	$	10,498		$	5,717
Income taxes paid (including payments under our tax agreement with Continental Airlines, Inc.).....................	$	68,470		$	1,770

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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EXPRESSJET HOLDINGS, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We are a regional U.S. air carrier engaged in the business of transporting passengers, cargo and mail. Our principal asset is all of the issued and outstanding shares of capital stock of XJT Holdings, Inc., the sole owner of the issued and outstanding shares of common stock of ExpressJet Airlines, Inc., which operates as “Continental Express” (together, "ExpressJet", "we", "us" and "our"). All of our flying is currently performed on behalf of Continental Airlines, Inc. (“Continental”) pursuant to a capacity purchase agreement, and substantially all of our revenue is received under that agreement. We provide all of Continental’s regional jet service out of New York/Newark, Houston and Cleveland and additional non-hub service to and from Mexico. The capacity purchase agreement covers all of our existing fleet and all of our regional jets currently subject to firm aircraft orders. We are economically dependent upon Continental for our operations and cash flows.

The accompanying interim consolidated condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States and are consistent in all material respects with those applied in our 2003 annual report on Form 10-K. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and the related disclosures. The accounting estimates that require our most difficult and subjective judgments include, but are not limited to the assessment of the required accrual for any expected increase in cost related to new labor agreements as they become amendable; the valuation of inventory; and the estimation of our maintenance repair liability. The actual results may differ from our estimates.

The interim financial information is unaudited, but reflects all adjustments that are, in our opinion, necessary to provide a fair presentation of our financial results for the interim periods presented. These adjustments are of a normal, recurring nature. Certain amounts reported in previous periods have been reclassified to conform to the current presentation. These interim consolidated condensed financial statements should be read in conjunction with the financial statements and the notes thereto contained in our 2003 annual report on Form 10-K.

Note 1 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2004 and 2003 (in thousands):

		Three Months Ended September 30,				Nine Months Ended September 30,
		Three Months Ended September 30,				Nine Months Ended September 30,

		2004		2003		2004		2003

Numerator for basic earnings per share – net income.............................................................................	$	30,764	$	27,811	$	89,144	$	80,280

Denominator for basic earnings per share – weighted average shares....................................................		54,236		58,069		54,212		62,001
Employee stock options..........................................................		—		63		11		4
Restricted stock.....................................................................		6		—		7		—

Denominator for diluted earnings per share – adjusted and assumed conversions.....................................		54,242		58,132		54,230		62,005

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We excluded 134,750 shares of restricted stock from the weighted average shares used in computing basic earnings per share for the three and nine months ended September 30, 2004, as these shares were not vested as of the end of these periods.

Weighted average common shares outstanding for diluted earnings per share calculation includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and restricted stock. We excluded the following common stock equivalents from our diluted earnings per share calculations, because their inclusion would have been anti-dilutive:

·		options to purchase 1.4 million and 1.1 million shares of our common stock for the three and nine months ended September 30, 2004, respectively, and 1.0 million shares for the three and nine months ended September 30, 2003. These options' exercise prices were greater than the average market price of the common shares for the respective periods; and
·		123,250 shares of restricted stock for the three months ended September 30, 2004.

We also excluded approximately 7.5 million shares of potential common stock equivalents related to our senior convertible notes from our computation of diluted earnings per share for the three and nine months ended September 30, 2004, and 4.6 million and 2.5 million shares for the three and nine months ended September 30, 2003, as these shares were not convertible under the terms of the notes. We expect to include these shares in the calculation for diluted earnings per share by year end as a result of a new accounting pronouncement. See “Note 6 – Recently Issued Accounting Standards” below for discussion of an accounting standard that was issued in October 2004 and will impact our diluted earnings per share calculation in the future.

Note 2 – Stock Plans and Awards

We continue to account for our stock-based compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 - “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. We have two stock-based compensation plans: the ExpressJet Holdings, Inc. 2002 Stock Incentive Plan (the “Incentive Plan”) and the ExpressJet Holdings, Inc. 2003 Employee Stock Purchase Plan (the “ESPP”).

The Incentive Plan permits us to grant stock options and restricted stock to our outside directors and our employees. Under APB 25, if the exercise price of our stock options equals the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. Since our stock options have all been granted with exercise prices at fair market value, no compensation expense has been recognized under APB 25. We recognize compensation expense related to our restricted stock in accordance with the provisions of APB 25. The total compensation expense to be incurred for each restricted stock grant equals the product of the number of shares issued and the closing price of our common stock on the issuance date. Under APB 25, we do not recognize compensation expense related to the ESPP.

In 2004, our board of directors approved the issuance of 134,750 shares of restricted stock, net of forfeitures, as of September 30, 2004, to various employees and non-employee directors pursuant to the Incentive Plan. Restricted shares granted to our employees vest ratably over a four-year period. Restricted shares granted to our non-employee directors vest over six months.

Under our ESPP, we issued 36,684 shares of our common stock at $12.75 per share during the first half of 2004 related to the purchase period from July to December 2003. In July 2004, we issued 36,286 shares of our common stock at $10.32 per share related to the January to June 2004 purchase period.

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The following table illustrates the effect on net income and earnings per share assuming the compensation costs for our stock options, restricted stock and ESPP had been determined using the fair value method, prorated over the vesting periods at the grant dates, as required under Statement of Financial Accounting Standard No. 123 – “Accounting for Stock-Based Compensation” for the three and nine months ended September 30, 2004 and 2003 (in thousands, except for per share data):

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,						Nine Months Ended September 30,

		2004			2003			2004			2003

Net income as reported.............................................................	$	30,764		$	27,811		$	89,144		$	80,280
Add: Total stock-based compensation expense included in reported net income, net of related tax effects................................................................		118			—			189			—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effect........................		(595	)		(616	)		(1,860	)		(2,080)

Pro forma................................................................................	$	30,287		$	27,195		$	87,473		$	78,200

Basic earnings per share
As reported.........................................................................	$	0.57		$	0.48		$	1.64		$	1.29
Pro forma...........................................................................	$	0.56		$	0.47		$	1.61		$	1.26

Diluted earnings per share
As reported.........................................................................	$	0.57		$	0.48		$	1.64		$	1.29
Pro forma...........................................................................	$	0.56		$	0.47		$	1.61		$	1.26

The pro forma effect on net income per share is not representative of the pro forma effects in future periods.

Note 3 – Note Payable to Continental

At September 30, 2004, our note payable to Continental, including current maturities, had an outstanding balance of $98.8 million. The note accrues interest based on the three-month LIBOR plus 1.25% per annum. For the nine months ended September 30, 2004 and 2003, our average interest rates were 2.54% and 2.51%, respectively, which were below the agreed-upon interest rate caps under our note.

The quarterly payment on the note for principal and interest is $27.9 million, payable through the earlier of March 31, 2007 or until the principal balance and any accrued unpaid interest are paid in full. During 2003, we made discretionary prepayments of $83.3 million, of which a portion was due that year. On September 30, 2004, we made a $54.2 million discretionary prepayment in addition to our required quarterly payment of $27.9 million. The prepayment represents our December 31, 2004 and March 31, 2005 principal payments. Total quarterly payments made during the nine months ended September 30, 2004 were $98.0 million, of which $94.4 million related to principal. This includes the impact of reductions in scheduled quarterly payments as a result of prepayments made in prior years. The note is an unsecured general obligation and is subordinated in right of payment to all of our future senior indebtedness.

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Note 4 – Income Taxes

At December 31, 2003, we had federal net operating loss carryforwards of approximately $60.7 million, which expire between 2007 and 2020.</

[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended September 30, 2004
		or
[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from__________ to__________

Delaware (State or other jurisdiction of incorporation or organization)		76-0517977 (I.R.S. Employer Identification No.)

1600 Smith Street, Dept. HQSCE Houston, Texas (Address of principal executive offices)		77002 (Zip Code)


PART I.	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements:
	Consolidated Statements of Operations (Unaudited): Three and nine months ended September 30, 2004 and 2003	1
	Consolidated Balance Sheets: September 30, 2004 (Unaudited) and December 31, 2003	3
	Consolidated Condensed Statements of Cash Flows (Unaudited): Nine months ended September 30, 2004 and 2003	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
	Signatures	28
	Index to Exhibits	29