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EX-32.1 - EXHIBIT 32.1 - HAWAIIAN HOLDINGS INCex321q12016.htm
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EX-31.2 - EXHIBIT 31.2 - HAWAIIAN HOLDINGS INCex312q12016.htm
EX-32.2 - EXHIBIT 32.2 - HAWAIIAN HOLDINGS INCex322q12016.htm
EX-31.1 - EXHIBIT 31.1 - HAWAIIAN HOLDINGS INCex311q12016.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q

 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
or
 o         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 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
3375 Koapaka Street, Suite G-350
 
 
Honolulu, HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
 
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
  
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
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.  ý Yes o 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).  ý Yes o 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 the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of April 15, 2016, 53,589,252 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended March 31, 2016
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.               FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
(unaudited)
Operating Revenue:
 
 

 
 

Passenger
 
$
482,027

 
$
469,145

Other
 
69,153

 
71,135

Total
 
551,180

 
540,280

Operating Expenses:
 
 

 
 

Aircraft fuel, including taxes and delivery
 
69,900

 
111,327

Wages and benefits
 
133,643

 
120,014

Aircraft rent
 
29,388

 
28,371

Maintenance, materials and repairs
 
60,504

 
55,245

Aircraft and passenger servicing
 
28,551

 
28,316

Commissions and other selling
 
33,031

 
30,428

Depreciation and amortization
 
27,146

 
25,179

Other rentals and landing fees
 
24,434

 
22,831

Purchased services
 
22,732

 
21,240

Other
 
29,983

 
26,165

Total
 
459,312

 
469,116

Operating Income
 
91,868

 
71,164

Nonoperating Income (Expense):
 
 

 
 

Interest expense and amortization of debt discounts and issuance costs
 
(11,004
)
 
(15,518
)
Interest income
 
844

 
636

Capitalized interest
 
225

 
1,293

Losses on fuel derivatives
 
(2,065
)
 
(5,687
)
Loss on extinguishment of debt
 
(3,350
)
 
(6,955
)
Other, net
 
6,586

 
(2,934
)
Total
 
(8,764
)
 
(29,165
)
Income Before Income Taxes
 
83,104

 
41,999

Income tax expense
 
31,638

 
16,116

Net Income
 
$
51,466

 
$
25,883

Net Income Per Share
 
 

 
 

Basic
 
$
0.96

 
$
0.47

Diluted
 
$
0.95

 
$
0.40

 
See accompanying Notes to Consolidated Financial Statements.


3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)

 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
(unaudited)
Net Income
 
$
51,466

 
$
25,883

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $570 and $1,009 for 2016 and 2015, respectively
 
927

 
1,658

Net change in derivative instruments, net of tax benefit of $5,007 and $488 for 2016 and 2015, respectively
 
(8,228
)
 
(802
)
Net change in available-for-sale investments, net of tax expense of $323 and $185 for 2016 and 2015, respectively
 
532

 
304

Total other comprehensive income (loss)
 
(6,769
)
 
1,160

Total Comprehensive Income
 
$
44,697

 
$
27,043


See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
 
March 31, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
388,913

 
$
281,502

Restricted cash
 
5,000

 
5,000

Short-term investments
 
280,155

 
278,545

Accounts receivable, net
 
79,757

 
81,723

Spare parts and supplies, net
 
19,803

 
19,164

Prepaid expenses and other
 
37,508

 
75,050

Total
 
811,136

 
740,984

Property and equipment, less accumulated depreciation and amortization of $451,385 and $432,510 as of March 31, 2016 and December 31, 2015, respectively
 
1,563,613

 
1,552,742

Other Assets:
 
 

 
 

Long-term prepayments and other
 
70,603

 
70,873

Intangible assets, less accumulated amortization of $29,060 and $28,400 as of March 31, 2016 and December 31, 2015, respectively
 
18,000

 
18,660

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,570,015

 
$
2,489,922

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
111,596

 
$
101,310

Air traffic liability
 
527,509

 
430,766

Other accrued liabilities
 
146,441

 
160,258

Current maturities of long-term debt and capital lease obligations
 
70,183

 
74,441

Total
 
855,729

 
766,775

Long-Term Debt and Capital Lease Obligations
 
612,596

 
677,915

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
378,473

 
372,700

Other liabilities and deferred credits
 
96,358

 
89,845

Deferred tax liability, net
 
140,627

 
136,625

Total
 
615,458

 
599,170

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of March 31, 2016 and December 31, 2015
 

 

Common stock, $0.01 par value per share, 53,589,252 and 53,401,439 shares outstanding as of March 31, 2016 and December 31, 2015, respectively
 
536

 
534

Capital in excess of par value
 
119,562

 
124,091

Accumulated income
 
472,180

 
420,714

Accumulated other comprehensive loss, net
 
(106,046
)
 
(99,277
)
Total
 
486,232

 
446,062

Total Liabilities and Shareholders’ Equity
 
$
2,570,015

 
$
2,489,922

 

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
198,505

 
$
161,688

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(30,017
)
 
(49,633
)
Proceeds from purchase assignment and leaseback transactions
 
31,851

 
37,797

Proceeds from disposition of equipment
 

 
908

Purchases of investments
 
(54,748
)
 
(66,125
)
Sales of investments
 
53,320

 
63,640

Net cash provided by (used in) investing activities
 
406

 
(13,413
)
Cash flows from Financing Activities:
 
 

 
 

Repayments of long-term debt and capital lease obligations
 
(82,303
)
 
(28,459
)
Repurchases and redemptions of convertible notes
 
(1,426
)
 
(156,464
)
Repurchases of common stock
 
(2,464
)
 

Other
 
(5,307
)
 
(1,323
)
Net cash used in financing activities
 
(91,500
)
 
(186,246
)
Net increase (decrease) in cash and cash equivalents
 
107,411

 
(37,971
)
Cash and cash equivalents - Beginning of Period
 
281,502

 
264,087

Cash and cash equivalents - End of Period
 
$
388,913

 
$
226,116

 
See accompanying Notes to Consolidated Financial Statements.


6



Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented.  Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
 
2. Significant Accounting Policies
 
Recently Issued Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. ASU 2016-09 will also allow an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect that the provisions of ASU 2016-09 will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02), requiring a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is currently evaluating the effect that the provisions of ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), requiring an entity to present its debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015. As a result, the Company adopted ASU 2015-03 as of January 1, 2016 and retrospectively applied it to all periods presented in the consolidated balance sheets. The adoption of ASU 2015-03 resulted in a $19.8 million reclassification of the Company's unamortized debt issuance costs from long-term prepayments and other to long-term debt on the consolidated balance sheet as of December 31, 2015.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB voted to defer the amendments in ASU 2014-09 by one year to December 15, 2017. The terms of ASU 2014-09 are effective for fiscal years, and interim periods within those fiscal years, beginning after the revised effective date, and allow for either full retrospective or modified retrospective adoption. Organizations are permitted to adopt the new revenue standard early, but not before December 15, 2016.
The Company is currently evaluating the effect that the provisions of ASU 2014-09 will have on its consolidated financial statements and related disclosures. We have determined that the new standard, once effective, will preclude the Company from accounting for miles earned under its HawaiianMiles customer loyalty program using the incremental cost method, and will require use of the deferred revenue method. This change could have a significant impact on the Company's financial statements.

7



3. Accumulated Other Comprehensive Loss
 
Reclassifications out of accumulated other comprehensive loss by component is as follows: 
Details about accumulated other comprehensive loss components
 
Three months ended March 31,
 
Affected line items in the statement where net income is presented
 
2016
 
2015
 
 
 
(in thousands)
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 
Foreign currency derivative gains, net
 
$
(2,653
)
 
$
(3,952
)
 
Passenger revenue
Interest rate derivative losses (gains)
 
(291
)
 
187

 
Interest expense
Total before tax
 
(2,944
)
 
(3,765
)
 
 
Tax expense
 
1,114

 
1,422

 
 
Total, net of tax
 
$
(1,830
)
 
$
(2,343
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 
Actuarial loss
 
$
1,915

 
$
2,680

 
Wages and benefits
Prior service cost
 
57

 
57

 
Wages and benefits
Total before tax
 
1,972

 
2,737

 
 
Tax benefit
 
(746
)
 
(1,038
)
 
 
Total, net of tax
 
$
1,226

 
$
1,699

 
 
Short-term investments
 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(3
)
 
$
(10
)
 
Other nonoperating income
Total before tax
 
(3
)
 
(10
)
 
 
Tax expense
 
1

 
1

 
 
Total, net of tax
 
(2
)
 
$
(9
)
 
 
Total reclassifications for the period
 
$
(606
)
 
$
(653
)
 
 

8




A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, for the three months ended March 31, 2016 and 2015 is as follows:
Three months ended March 31, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
81

 
$
4,879

 
$
(103,865
)
 
$
(372
)
 
$
(99,277
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(668
)
 
(5,730
)
 
(299
)
 
534

 
(6,163
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(181
)
 
(1,649
)
 
1,226

 
(2
)
 
(606
)
Net current-period other comprehensive income (loss)
 
(849
)
 
(7,379
)
 
927

 
532

 
(6,769
)
Ending balance
 
$
(768
)
 
$
(2,500
)
 
$
(102,938
)
 
$
160

 
$
(106,046
)

Three months ended March 31, 2015
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
254

 
$
12,708

 
$
(135,520
)
 
$
(254
)
 
$
(122,812
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(476
)
 
2,017

 
(41
)
 
313

 
1,813

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
114

 
(2,457
)
 
1,699

 
(9
)
 
(653
)
Net current-period other comprehensive income (loss)
 
(362
)
 
(440
)
 
1,658

 
304

 
1,160

Ending balance
 
$
(108
)
 
$
12,268

 
$
(133,862
)
 
$
50

 
$
(121,652
)

 
4. Earnings Per Share
 
Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three months ended March 31, 2016 and 2015, anti-dilutive shares excluded from the calculation of diluted earnings per share were not material.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

Net Income
 
$
51,466

 
$
25,883

Denominator:
 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,656

 
54,614

Assumed exercise of stock options and awards
 
275

 
546

Assumed conversion of convertible note premium
 
24

 
3,958

Assumed conversion of warrants
 

 
5,808

Weighted average common stock shares outstanding - Diluted
 
53,955

 
64,926

Net Income Per Share
 
 

 
 

Basic
 
$
0.96

 
$
0.47

Diluted
 
$
0.95

 
$
0.40

 

9



Convertible Note Transaction

In March 2011, the Company entered into a convertible note transaction which included the sale of convertible notes, purchase of call options and sale of warrants. The call options and warrants were settled by the Company with its respective counterparties in 2015. The outstanding convertible notes matured on March 15, 2016.

Stock Repurchase Program

In April 2015, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase up to $100 million of its outstanding common stock over a two-year period through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. The Company spent $2.5 million to repurchase approximately 73 thousand shares of the Company's common stock in open market transactions during the three months ended March 31, 2016. As of March 31, 2016, the Company has $57.4 million remaining to spend under the stock repurchase program. See Part II, Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.
 
5. Short-Term Investments
 
Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated at fair value.  Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the unaudited consolidated statements of operations.  Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive loss.

The following is a summary of short-term investments held as of March 31, 2016 and December 31, 2015:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
March 31, 2016
 
(in thousands)
Corporate debt
 
$
176,628

 
$
305

 
$
(98
)
 
$
176,835

U.S. government and agency debt
 
60,025

 
103

 
(12
)
 
60,116

Municipal bonds
 
18,159

 
2

 
(3
)
 
18,158

Other fixed income securities
 
25,046

 

 

 
25,046

Total short-term investments
 
$
279,858

 
$
410

 
$
(113
)
 
$
280,155

 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2015
 
(in thousands)
Corporate debt
 
$
167,066

 
$
13

 
$
(481
)
 
$
166,598

U.S. government and agency debt
 
62,376

 
9

 
(123
)
 
62,262

Municipal bonds
 
22,865

 
3

 
(12
)
 
22,856

Other fixed income securities
 
26,835

 

 
(6
)
 
26,829

Total short-term investments
 
$
279,142

 
$
25

 
$
(622
)
 
$
278,545


Contractual maturities of short-term investments as of March 31, 2016 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
54,427

 
$
122,408

 
$
176,835

U.S. government and agency debt
 
40,583

 
19,533

 
60,116

Municipal bonds
 
15,629

 
2,529

 
18,158

Other fixed income securities
 
21,544

 
3,502

 
25,046

Total short-term investments
 
$
132,183

 
$
147,972

 
$
280,155

 
The Company classifies investments as current assets as these securities are available for use in its current operations.

10



 
6.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820) clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1 — Observable inputs such as 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 for the assets or liabilities; and
 
Level 3 — Unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets or liabilities.

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of March 31, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
5,742

 
$
855

 
$
4,887

 
$

Cash equivalents measured at net asset value
 
116,630

 

 

 

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
280,155

 

 
280,155

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Heating oil swaps
 
905

 

 
905

 

Foreign currency derivatives
 
1,715

 

 
1,715

 

Total assets measured at fair value
 
$
410,147

 
$
5,855

 
$
287,662

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Heating oil swaps
 
$
23,676

 
$

 
$
23,676

 
$

Foreign currency derivatives
 
7,490

 

 
7,490

 

Interest rate derivative
 
1,235

 

 
1,235

 

Total liabilities measured at fair value
 
$
32,401

 
$

 
$
32,401

 
$

 

11



 
Fair Value Measurements as of December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Cash equivalents
$
5,665

 
$
1,648

 
$
4,017

 
$

Cash equivalents measured at net asset value
61,577

 

 

 

Restricted cash
5,000

 
5,000

 

 

Short-term investments
278,545

 

 
278,545

 

Fuel derivative contracts:
 
 
 

 
 

 
 

Heating oil put options
1,060

 

 
1,060

 

Foreign currency derivatives
6,550

 

 
6,550

 

Total assets measured at fair value
$
358,397

 
$
6,648

 
$
290,172

 
$

Fuel derivative contracts:
 

 
 

 
 

 
 

Heating oil swaps
$
40,530

 
$

 
$
40,530

 
$

Foreign currency derivatives
1,049

 

 
1,049

 

Interest rate derivative
312

 

 
312

 

Total liabilities measured at fair value
$
41,891

 
$

 
$
41,891

 
$


Cash equivalents.  The Company’s cash equivalents consist of money market securities, U.S. agency bonds, foreign and domestic corporate bonds, and commercial paper.  The instruments classified as Level 2 are valued using quoted prices for similar assets in active markets.

Cash equivalents measured at net asset value.  Cash equivalents measured at net asset value consist of money market securities that are measured at fair value using the net asset value per share practical expedient. In accordance with ASC 820, these instruments are not included in the fair value hierarchy.
 
Restricted cash.  The Company’s restricted cash consist of money market securities.
 
Short-term investments.  Short-term investments include U.S. and foreign government notes and bonds, U.S. agency bonds, variable-rate corporate bonds, asset backed securities, foreign and domestic corporate bonds, municipal bonds, and commercial paper.  These instruments are valued using quoted prices for similar assets in active markets or other observable inputs.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil puts and swaps which are not traded on a public exchange. The fair value of these instruments are determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves and measures of volatility among others.
 
Foreign currency derivatives.  The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued based primarily on data available or derived from public markets.
 
Interest rate derivatives.  The Company’s interest rate derivatives consists of interest rate swaps and is valued based primarily on data available or derived from public markets.

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value: 
Fair Value of Debt
March 31, 2016
 
December 31, 2015
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
599,785

 
$
590,005

 
$

 
$

 
$
590,005

 
$
677,203

 
$
665,507

 
$

 
$
283

 
$
665,224

 
The fair value estimates of the Company’s debt were based on either market prices or the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.
 
The carrying amounts of cash, other receivables and accounts payable approximate fair value due to the short-term nature of these financial instruments.

12



 
7.  Financial Derivative Instruments
 
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices and foreign currencies.
 
Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three months ended March 31, 2016, the Company primarily used heating oil puts and swaps to hedge its aircraft fuel expense.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.
 
 
Three months ended March 31,
Fuel derivative contracts
 
2016
 
2015
 
 
(in thousands)
Losses realized at settlement
 
$
(19,025
)
 
$
(14,591
)
Reversal of prior period unrealized amounts
 
17,810

 
14,413

Unrealized losses on contracts that will settle in future periods
 
(850
)
 
(5,509
)
Losses on fuel derivatives recorded as Nonoperating income (expense)
 
$
(2,065
)
 
$
(5,687
)

Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.  
The Company enters into foreign currency forward contracts to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net loss of approximately $0.5 million into earnings over the next 12 months from AOCI based on the values at March 31, 2016.
 

13



The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the net derivative positions and location of the asset and liability balances within the unaudited Consolidated Balance Sheets.

Derivative position as of March 31, 2016 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Interest rate derivative
 
Other accrued liabilities
 
$49,400 U.S. dollars
 
April 2023
 
$

 
$
(283
)
 
$
(283
)
 
 
Other liabilities and deferred credits (1)
 
 
 
 
 

 
(952
)
 
(952
)
Foreign currency derivatives
 
Other accrued liabilities
 
9,185,150 Japanese Yen
41,373 Australian Dollars
 
March 2017
 
1,704

 
(4,245
)
 
(2,541
)
 
 
Other liabilities and deferred credits
 
5,097,750 Japanese Yen
8,170 Australian Dollars
 
March 2018
 
7

 
(3,054
)
 
(3,047
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
1,650,000 Japanese Yen
5,287 Australian Dollars
 
March 2017
 
4

 
(191
)
 
(187
)
Fuel derivative contracts
 
Other accrued liabilities
 
84,946 gallons
 
March 2017
 
905

 
(23,676
)
 
(22,771
)
 
(1)
Represents the noncurrent portion of the $49.4 million interest rate derivative with final maturity in April 2023.


14



Derivative position as of December 31, 2015
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Interest rate derivative
 
Other accrued liabilities
 
$51,000 U.S. dollars
 
April 2023
 
$

 
$
(70
)
 
$
(70
)
 
 
Other liabilities and deferred credits (1)
 
 
 
 
 

 
(242
)
 
(242
)
Foreign currency derivatives
 
Prepaid expenses and other
 
7,594,750 Japanese Yen
44,917 Australian Dollars
 
December 2016
 
6,461

 
(525
)
 
5,936

 
 
Other liabilities and deferred credits
 
5,437,400 Japanese Yen
8,730 Australian Dollars
 
December 2017
 
78

 
(493
)
 
(415
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
2,762,000 Japanese Yen
3,303 Australian Dollars
 
August 2016
 
11

 

 
11

 
 
Other liabilities and deferred credits
 
2,845 Australian Dollars
 
March 2017
 

 
(31
)
 
(31
)
Fuel derivative contracts
 
Other accrued liabilities
 
84,067 gallons
 
December 2016
 
1,060

 
(40,530
)
 
(39,470
)

(1) Represents the noncurrent portion of the $51.0 million interest rate derivative with final maturity in April 2023.
 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended March 31,
 
Three months ended March 31,
 
Three months ended March 31,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Foreign currency derivatives
 
$
9,217

 
$
(3,245
)
 
$
(2,653
)
 
$
(3,952
)
 
$

 
$

Interest rate derivatives
 
923

 
557

 
148

 
187

 

 


Risk and Collateral
 
The financial derivative instruments expose the Company to possible credit loss in the event the counterparties to the agreements fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) regularly monitors the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.

The Company's agreements with its counterparties also requires the posting of cash collateral in the event the aggregate value of the Company's positions exceeds certain exposure thresholds that are based upon certain liquidity metrics of the Company. The aggregate fair value of the Company's derivative instruments that contain credit-risk related contingent features that are in a net liability position as of March 31, 2016 was $24.0 million.

ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty under a master netting agreement, or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with counterparties as of March 31, 2016 or December 31, 2015.


15



The Company is also subject to market risk in the event these financial instruments become less valuable in the market. However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.

8.  Debt
 
As of March 31, 2016, the expected maturities of long-term debt for the remainder of 2016 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2016
$
38,103

2017
60,618

2018
59,661

2019
83,944

2020
32,429

Thereafter
325,030

 
$
599,785

 
Debt Extinguishment

In March 2016, Hawaiian extinguished $51.9 million of existing debt under a secured financing agreement, which was originally scheduled to mature in April 2022. This debt extinguishment resulted in a loss of $3.4 million, which was reflected in nonoperating income (expense) in the unaudited Consolidated Statement of Operations.  
In April 2016, Hawaiian extinguished approximately $90 million of existing debt under a secured financing agreement, which was originally scheduled to mature in 2023.
9. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following: 
 
 
Three months ended March 31,
Components of Net Period Benefit Cost
 
2016
 
2015
 
 
(in thousands)
Service cost
 
$
3,713

 
$
4,225

Interest cost
 
7,582

 
7,389

Expected return on plan assets
 
(4,472
)
 
(4,716
)
Recognized net actuarial loss
 
1,973

 
2,737

Net periodic benefit cost
 
$
8,796

 
$
9,635

 
The Company contributed $0.3 million and $12.8 million to its defined benefit and other postretirement plans during the three months ended March 31, 2016 and 2015, respectively.
 
10. Commitments and Contingent Liabilities
 
Commitments

As of March 31, 2016, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:

16



Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 

 
Between 2017 and 2018
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for IT, accounting services and a capacity purchase agreement through 2024.
 
Committed capital and operating expenditures include escalation amounts based on estimates. The gross committed expenditures and committed financings for those deliveries as of March 31, 2016 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining months in 2016
 
$
85,955

 
$
55,171

 
$
141,126

2017
 
236,217

 
74,111

 
310,328

2018
 
395,652

 
67,867

 
463,519

2019
 
477,409

 
63,447

 
540,856

2020
 
227,031

 
65,277

 
292,308

Thereafter
 
205,488

 
300,080

 
505,568

 
 
$
1,627,752

 
$
625,953

 
$
2,253,705

 
Litigation and Contingencies
 
The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.0 million at March 31, 2016 and December 31, 2015.
 
In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company.
 
11. Supplemental Cash Flow Information
 
Non-cash investing and financing activities for the three months ended March 31, 2016 and 2015 were as follows:
 
Three months ended March 31,
 
2016
 
2015
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$
9,104

 
$


12. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 12 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 12 as Parent Issuer / Guarantor), is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft.

Condensed consolidating financial statements are presented in the following tables:


17



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
550,134

 
$
1,163

 
$
(117
)
 
$
551,180

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
69,900

 

 

 
69,900

Wages and benefits
 

 
133,643

 

 

 
133,643

Aircraft rent
 

 
29,388

 

 

 
29,388

Maintenance materials and repairs
 

 
59,100

 
1,404

 

 
60,504

Aircraft and passenger servicing
 

 
28,551

 

 

 
28,551

Commissions and other selling
 
1

 
33,052

 
16

 
(38
)
 
33,031

Depreciation and amortization
 

 
26,399

 
747

 

 
27,146

Other rentals and landing fees
 

 
24,434

 

 

 
24,434

Purchased services
 
35

 
22,640

 
72

 
(15
)
 
22,732

Other
 
1,326

 
28,596

 
125

 
(64
)
 
29,983

Total
 
1,362

 
455,703

 
2,364

 
(117
)
 
459,312

Operating Income (Loss)
 
(1,362
)
 
94,431

 
(1,201
)
 

 
91,868

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
51,816

 

 

 
(51,816
)
 

Interest expense and amortization of debt discounts and issuance costs
 
117

 
(11,121
)
 

 

 
(11,004
)
Interest income
 
59

 
785

 

 

 
844

Capitalized interest
 

 
225

 

 

 
225

Losses on fuel derivatives
 

 
(2,065
)
 

 

 
(2,065
)
Loss on extinguishment of debt
 

 
(3,350
)
 

 

 
(3,350
)
Other, net
 

 
6,586

 

 

 
6,586

Total
 
51,992

 
(8,940
)
 

 
(51,816
)
 
(8,764
)
Income (Loss) Before Income Taxes
 
50,630

 
85,491

 
(1,201
)
 
(51,816
)
 
83,104

Income tax expense (benefit)
 
(836
)
 
32,474

 

 

 
31,638

Net Income (Loss)
 
$
51,466

 
$
53,017

 
$
(1,201
)
 
$
(51,816
)
 
$
51,466

Comprehensive Income (Loss)
 
$
44,697

 
$
46,248

 
$
(1,201
)
 
$
(45,047
)
 
$
44,697



18



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2015
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
539,207

 
$
1,173

 
$
(100
)
 
$
540,280

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
111,327

 

 

 
111,327

Wages and benefits
 

 
120,014

 

 

 
120,014

Aircraft rent
 

 
28,371

 

 

 
28,371

Maintenance materials and repairs
 

 
54,913

 
332

 

 
55,245

Aircraft and passenger servicing
 

 
28,316

 

 

 
28,316

Commissions and other selling
 
4

 
30,441

 
12

 
(29
)
 
30,428

Depreciation and amortization
 

 
24,432

 
747

 

 
25,179

Other rentals and landing fees
 

 
22,831

 

 

 
22,831

Purchased services
 

 
21,240

 

 

 
21,240

Other
 
1,985

 
24,081

 
170

 
(71
)
 
26,165

Total
 
1,989

 
465,966

 
1,261

 
(100
)
 
469,116

Operating Income (Loss)
 
(1,989
)
 
73,241

 
(88
)
 

 
71,164

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
32,563

 

 

 
(32,563
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(1,436
)
 
(14,082
)
 

 

 
(15,518
)
Interest income
 
56

 
580

 

 

 
636

Capitalized interest
 

 
1,293

 

 

 
1,293

Losses on fuel derivatives
 

 
(5,687
)
 

 

 
(5,687
)
Loss on extinguishment of debt
 
(6,955
)
 

 

 

 
(6,955
)
Other, net
 

 
(2,934
)
 

 

 
(2,934
)
Total
 
24,228

 
(20,830
)
 

 
(32,563
)
 
(29,165
)
Income (Loss) Before Income Taxes
 
22,239

 
52,411

 
(88
)
 
(32,563
)
 
41,999

Income tax expense (benefit)
 
(3,644
)
 
19,760

 

 

 
16,116

Net Income (Loss)
 
$
25,883

 
$
32,651

 
$
(88
)
 
$
(32,563
)
 
$
25,883

Comprehensive Income (Loss)
 
$
27,043

 
$
33,811

 
$
(88
)
 
$
(33,723
)
 
$
27,043



19



Condensed Consolidating Balance Sheets
March 31, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
67,605

 
$
313,338

 
$
7,970

 
$

 
$
388,913

Restricted cash
 

 
5,000

 

 

 
5,000

Short-term investments
 

 
280,155

 

 

 
280,155

Accounts receivable, net
 
63

 
79,523

 
433

 
(262
)
 
79,757

Spare parts and supplies, net
 

 
19,803

 

 

 
19,803

Prepaid expenses and other
 
113

 
37,317

 
78

 

 
37,508

Total
 
67,781

 
735,136

 
8,481

 
(262
)
 
811,136

Property and equipment at cost
 

 
1,956,345

 
58,653

 

 
2,014,998

Less accumulated depreciation and amortization
 

 
(445,443
)
 
(5,942
)
 

 
(451,385
)
Property and equipment, net
 

 
1,510,902

 
52,711

 

 
1,563,613

Long-term prepayments and other
 

 
70,103

 
500

 

 
70,603

Deferred tax assets, net
 
26,894

 

 

 
(26,894
)
 

Goodwill and other intangible assets, net
 

 
124,663

 

 

 
124,663

Intercompany receivable
 

 
251,163

 

 
(251,163
)
 

Investment in consolidated subsidiaries
 
645,872

 

 

 
(645,872
)
 

TOTAL ASSETS
 
$
740,547

 
$
2,691,967

 
$
61,692

 
$
(924,191
)
 
$
2,570,015