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EX-31.2 - EX-31.2 - SKYWEST INCskyw-20180930ex312a2e680.htm
EX-31.1 - EX-31.1 - SKYWEST INCskyw-20180930ex31177d1a2.htm

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, 2018

 

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 every Interactive Data File required to be submitted 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 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 

 

 

 

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, 2018

Common stock, no par value

 

51,895,343

 

 

 

 


 

SKYWEST, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

PART I 

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

3

 

 

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2018 and 2017

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

20

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

Item 4.

Controls and Procedures

35

 

 

 

 

PART II 

OTHER INFORMATION

 

 

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

37

 

 

Signature

38

 

 

 

 

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


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

    

2018

    

2017 (a)

 

 

 

(unaudited)

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

324,561

 

$

181,792

 

Marketable securities

 

 

380,242

 

 

503,503

 

Income tax receivable

 

 

18,118

 

 

5,316

 

Receivables, net

 

 

62,233

 

 

42,731

 

Inventories, net

 

 

124,037

 

 

119,755

 

Prepaid aircraft rents

 

 

89,839

 

 

115,098

 

Other current assets

 

 

53,042

 

 

26,938

 

Total current assets

 

 

1,052,072

 

 

995,133

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

Aircraft and rotable spares

 

 

6,229,941

 

 

5,335,870

 

Deposits on aircraft

 

 

27,579

 

 

49,000

 

Buildings and ground equipment

 

 

297,862

 

 

265,608

 

 

 

 

6,555,382

 

 

5,650,478

 

Less-accumulated depreciation and amortization

 

 

(1,680,115)

 

 

(1,467,475)

 

Total property and equipment, net

 

 

4,875,267

 

 

4,183,003

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Long-term prepaid assets

 

 

189,357

 

 

230,923

 

    Other assets

 

 

68,164

 

 

65,341

 

Total other assets

 

 

257,521

 

 

296,264

 

Total assets

 

$

6,184,860

 

$

5,474,400

 

 

(a)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information. 

 

See accompanying notes to condensed consolidated financial statements.

3


 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

    

 

    

2018

    

2017 (a)

 

 

 

 

(unaudited)

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

357,327

 

$

309,678

 

 

Accounts payable

 

 

320,432

 

 

288,904

 

 

Accrued salaries, wages and benefits

 

 

150,881

 

 

154,367

 

 

Taxes other than income taxes

 

 

21,618

 

 

19,228

 

 

Other current liabilities

 

 

63,187

 

 

48,648

 

 

Total current liabilities

 

 

913,445

 

 

820,825

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities

 

 

2,751,722

 

 

2,377,346

 

 

 

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES PAYABLE

 

 

493,562

 

 

419,020

 

 

 

 

 

 

 

 

 

 

 

DEFERRED AIRCRAFT CREDITS

 

 

34,580

 

 

44,225

 

 

 

 

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

 

62,678

 

 

58,662

 

 

 

 

 

 

 

 

 

 

 

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; 81,239,194 and 80,398,104 shares issued, respectively

 

 

688,168

 

 

672,593

 

 

Retained earnings

 

 

1,714,621

 

 

1,516,957

 

 

Treasury stock, at cost, 29,310,836 and 28,643,535 shares, respectively

 

 

(473,898)

 

 

(435,178)

 

 

Accumulated other comprehensive loss

 

 

(18)

 

 

(50)

 

 

Total stockholders’ equity

 

 

1,928,873

 

 

1,754,322

 

 

Total liabilities and stockholders’ equity

 

$

6,184,860

 

$

5,474,400

 

 

 

(a)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information. 

 

See accompanying notes to condensed consolidated financial statements.

4


 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended 

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017 (a)

    

2018

    

2017 (a)

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Flying agreements

 

$

816,057

 

$

800,965

 

$

2,377,659

 

$

2,317,218

 

Airport customer service and other

 

 

13,218

 

 

11,708

 

 

40,531

 

 

34,133

 

Total operating revenues

 

 

829,275

 

 

812,673

 

 

2,418,190

 

 

2,351,351

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

301,378

 

 

304,014

 

 

901,775

 

 

896,476

 

Aircraft maintenance, materials and repairs

 

 

142,285

 

 

148,787

 

 

423,665

 

 

433,467

 

Depreciation and amortization

 

 

86,088

 

 

74,095

 

 

246,386

 

 

215,415

 

Aircraft rentals

 

 

36,827

 

 

54,976

 

 

119,015

 

 

168,098

 

Aircraft fuel

 

 

30,258

 

 

22,791

 

 

87,208

 

 

61,295

 

Airport-related expenses

 

 

25,655

 

 

30,209

 

 

80,852

 

 

91,106

 

Other operating expenses

 

 

68,859

 

 

65,432

 

 

206,511

 

 

190,235

 

Total operating expenses

 

 

691,350

 

 

700,304

 

 

2,065,412

 

 

2,056,092

 

OPERATING INCOME

 

 

137,925

 

 

112,369

 

 

352,778

 

 

295,259

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,283

 

 

1,408

 

 

5,692

 

 

3,398

 

Interest expense

 

 

(31,440)

 

 

(27,101)

 

 

(86,485)

 

 

(78,713)

 

Other income (expense), net

 

 

1,157

 

 

 —

 

 

3,470

 

 

 —

 

Total other expense, net

 

 

(28,000)

 

 

(25,693)

 

 

(77,323)

 

 

(75,315)

 

INCOME BEFORE INCOME TAXES

 

 

109,925

 

 

86,676

 

 

275,455

 

 

219,944

 

PROVISION FOR INCOME TAXES

 

 

26,879

 

 

32,960

 

 

62,189

 

 

80,966

 

NET INCOME

 

$

83,046

 

$

53,716

 

$

213,266

 

$

138,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

1.60

 

$

1.04

 

$

4.10

 

$

2.68

 

DILUTED EARNINGS PER SHARE

 

$

1.57

 

$

1.01

 

$

4.03

 

$

2.62

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

52,039

 

 

51,833

 

 

52,002

 

 

51,801

 

Diluted

 

 

52,981

 

 

53,080

 

 

52,976

 

 

53,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

83,046

 

$

53,716

 

$

213,266

 

$

138,978

 

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

 

 

(2)

 

 

11

 

 

32

 

 

67

 

TOTAL COMPREHENSIVE INCOME

 

$

83,044

 

$

53,727

 

$

213,298

 

$

139,045

 

 

(a)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information. 

 

See accompanying notes to condensed consolidated financial statements

5


 

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

573,127

 

$

532,289

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(1,575,991)

 

 

(1,002,624)

 

Sales of marketable securities

 

 

1,699,284

 

 

843,509

 

Proceeds from the sale of aircraft, property and equipment

 

 

 —

 

 

51,079

 

Acquisition of property and equipment:

 

 

 

 

 

 

 

Aircraft and rotable spare parts

 

 

(848,723)

 

 

(563,524)

 

Deposits on aircraft

 

 

 —

 

 

(46,733)

 

Buildings and ground equipment

 

 

(35,870)

 

 

(8,275)

 

Aircraft deposits applied towards acquired aircraft

 

 

21,421

 

 

36,533

 

Increase in other assets

 

 

(2,479)

 

 

(5,019)

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(742,358)

 

 

(695,054)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

626,163

 

 

384,825

 

Principal payments on long-term debt

 

 

(262,923)

 

 

(245,745)

 

Net proceeds from issuance of common stock

 

 

5,212

 

 

3,447

 

Purchase of treasury stock and employee income tax paid on equity awards

 

 

(38,720)

 

 

(14,330)

 

Increase in debt issuance cost

 

 

(3,182)

 

 

(3,245)

 

Payment of cash dividends

 

 

(14,550)

 

 

(10,868)

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

312,000

 

 

114,084

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

142,769

 

 

(48,681)

 

Cash and cash equivalents at beginning of period

 

 

181,792

 

 

146,766

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

324,561

 

$

98,085

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

Acquisition of rotable spare parts

 

$

10,346

 

$

 —

 

Debt assumed on aircraft acquired off lease

 

$

59,132

 

$

 —

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized amounts

 

$

85,611

 

$

77,915

 

Income taxes

 

$

2,382

 

$

2,354

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 — Condensed Consolidated Financial Statements

 

Basis of Presentation

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines, Inc. (“ExpressJet”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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, 2017.  The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

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 February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2016‑02, “Leases (Topic 842)” (“Topic 842”). Topic 842 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. Topic 842 will be effective beginning in the first quarter of 2019. Early adoption of Topic 842 is permitted.  In July 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements - Leases (Topic 842).” This update provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented.  The Company anticipates electing this adoption method and expects to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has not completed its assessment, but the adoption of Topic 842 will have a significant impact on its consolidated balance sheets. However, the Company does not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the condensed consolidated statements of operations and comprehensive income or the condensed consolidated statements of cash flows. See Note 6, “Commitments and Contingencies,” about the Company’s undiscounted future lease payments and the timing of those payments.

7


 

Recently Adopted Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014‑09, “Revenue from Contracts with Customers, (Topic 606)” (“Topic 606”).  Under Topic 606, 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 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 adopted this standard as of January 1, 2018, utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented. Under the new standard, the Company concluded that, in addition to the aircraft lease, the individual flights are distinct services and the flight services promised in a capacity purchase agreement represent a series of services that should be accounted for as a single performance obligation, recognized over time as the flights are completed. The adoption of Topic 606 did not have a material impact on recorded amounts when applied to the opening balance sheet as of January 1, 2018. The adoption of Topic 606 only affected the Company’s consolidated balance sheets and statements of comprehensive income classification, with no impact on the Company’s operating income (loss), net income (loss), earnings (loss) per share or cash flows, however the principal versus agent considerations under Topic 606 resulted in the Company recording directly reimbursed fuel expense under its fixed-fee contracts as a reduction to the applicable operating expense (net) rather than revenue (gross).  This classification change resulted in a reduction to total revenue and a reduction to operating expenses by the same amount, resulting in no change to operating income. Additionally, under the nonrefundable up-front fees and contract costs considerations of Topic 606, reimbursements from the Company’s major airline partners for up-front contract costs will be deferred and amortized over the contract term.  The related up-front costs to obtain the contract will also be capitalized and amortized over the contract term.  As the amount of the up-front reimbursement is determined from the Company’s actual costs to fulfill the contract, this change is not expected to impact the Company’s operating income (loss) as the amount of deferred revenue and the amount of capitalized costs will be recognized over the same period.  This change also resulted in a deferred revenue liability and a capitalized contract cost on the balance sheet of the same amount. 

 

Prior to the Company’s adoption of Topic 606, the Company segregated its revenue into two categories: “Passenger revenue” and “Ground handling and other revenue.”  “Passenger revenue” included revenue from fixed-fee contracts, prorate flying agreements and airport customer service agreements for flights operated by the Company.  “Ground handling and other revenue” included revenue from airport customer service agreements for flights operated by third parties and other revenue.  Under the disaggregated revenue disclosure considerations in Topic 606, the Company segregated its revenue into the following categories: “Flying agreements revenue” and “Airport customer service and other revenues.”  “Flying agreements revenue” includes revenue from fixed-fee contracts, prorate flying agreements and other revenue, primarily lease revenue for the use of the aircraft.  “Airport customer service and other revenues” includes revenue from airport customer services agreements.  This change reclassifies amounts previously reported as “Passenger revenue” and “Ground handling and other revenue”. Additionally, in connection with the Company’s adoption of Topic 606, the Company renamed the operating expense “Ground handling services” to “Airport-related expenses.”  Certain airport-related expenses, such as landing fees and airport facility rents, were previously reported as “Other operating expenses” and have been reclassified as “Airport-related expenses.”

 

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.  The Company adopted this standard in the first quarter of 2018 and modified the presentation to include changes in restricted cash in the Company’s Consolidated Statement of Cash Flows, which had an immaterial impact.

8


 

Impact of Recently Adopted Standards

The Company recast certain prior period amounts to conform with the adoption of Topic 606, as shown in the tables below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

September 30, 2017

Income Statement:

    

Previously Reported

 

Adjustments

 

Current

Presentation

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 Flying agreements (1)

 

$

812,295

 

$

(11,330)

 

$

800,965

 Airport customer service and other (2)

 

 

19,641

 

 

(7,933)

 

 

11,708

 Total operating revenues

 

$

831,936

 

$

(19,263)

 

$

812,673

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 Salaries, wages and benefits

 

$

303,997

 

$

17

 

$

304,014

 Aircraft fuel

 

 

42,071

 

 

(19,280)

 

 

22,791

 Airport-related expenses (3)

 

 

16,693

 

 

13,516

 

 

30,209

 Other operating expenses

 

 

78,948

 

 

(13,516)

 

 

65,432

 Total operating expenses

 

 

719,567

 

 

(19,263)

 

 

700,304

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

$

112,369

 

$

 

$

112,369

1.

In previously reported periods, this line item was presented as passenger revenue.

2.

In previously reported periods, this line item was presented as ground handling and other.

3.

In previously reported periods, this line item was presented as ground handling services.

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

September 30, 2017

Income Statement:

    

Previously Reported

 

Adjustments

 

Current

Presentation

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 Flying agreements (1)

 

$

2,349,047

 

$

(31,829)

 

$

2,317,218

 Airport customer service and other (2)

 

 

58,063

 

 

(23,930)

 

 

34,133

 Total operating revenues

 

$

2,407,110

 

$

(55,759)

 

$

2,351,351

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 Salaries, wages and benefits

 

$

899,966

 

$

(3,490)

 

$

896,476

 Aircraft fuel

 

 

113,564

 

 

(52,269)

 

 

61,295

 Airport-related expenses (3)

 

 

52,130

 

 

38,976

 

 

91,106

 Other operating expenses

 

 

229,211

 

 

(38,976)

 

 

190,235

 Total operating expenses

 

 

2,111,851

 

 

(55,759)

 

 

2,056,092

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

$

295,259

 

$

 

$

295,259

1.

In previously reported periods, this line item was presented as passenger revenue.

2.

In previously reported periods, this line item was presented as ground handling and other.

3.

In previously reported periods, this line item was presented as ground handling services.

 

9


 

 

 

 

 

 

 

 

 

 

 

Balance Sheet:

 

Previously Reported

December 31, 2017

 

Adjustments

 

Current Presentation

December 31, 2017

ASSETS:

 

 

 

 

 

 

 

Other long-term assets

 

$

49,220

 

$

16,121

 

$

65,341

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Other long-term liabilities

 

$

42,541

 

$

16,121

 

$

58,662

 

The $16.1 million adjustment to other long-term assets and other long-term liabilities reflects the amount of capitalized up-front contract costs and the amount of deferred revenue for up-front reimbursements as of December 31, 2017. The $16.1 million capitalized contract costs and deferred revenue is expected to be amortized over the applicable remaining contract term. For the nine months ended September 30, 2018 and 2017, the Company recognized $1.4 million and $1.1 million, respectively, of revenue associated with the amortization of the up-front contract reimbursements.

 

As of September 30, 2018, the Company had $62.2 million in accounts receivable of which $56.4 million related to flying agreements. As of December 31, 2017, the Company had $42.7 million in accounts receivable of which $33.9 million related to flying agreements.

 

Note 2 — Flying Agreements Revenue and Airport Customer Service and Other Revenues

 

The Company recognizes flying agreements revenue and airport customer service and other 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 airport landing fees and airport rents. Under the fixed-fee arrangements, revenue is earned when each flight is completed and is reflected in flying agreements revenue. The transaction price for the fixed-fee agreements is determined from the fixed-fee consideration, incentive consideration and directly reimbursed expenses earned as flights are completed over the agreement term.  For the nine months ended September 30, 2018, fixed-fee arrangements represented approximately 84.3% of the Company’s flying agreements 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. The transaction price for the prorate agreements is determined from the proration formula derived from each passenger ticket amount on each completed flight over the agreement term.  For the nine months ended September 30, 2018, prorate flying arrangements represented approximately 15.7% of the Company’s flying agreements revenue.

Airport customer service and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. The transaction price for airport customer service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled by the Company over the agreement term.

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.

10


 

 

The following table represents the Company’s flying agreements revenue by type for the three and nine-month periods ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Capacity purchase agreements revenue: flight operations

 

$

472,952

 

$

462,832

 

$

1,404,801

 

$

1,367,901

 

Capacity purchase agreements revenue: aircraft lease revenue

 

 

208,813

 

 

213,967

 

 

599,188

 

 

621,099

 

Prorate agreements revenue

 

 

134,292

 

 

124,166

 

 

373,670

 

 

328,218

 

   Flying agreements revenue

 

$

816,057

 

$

800,965

 

$

2,377,659

 

$

2,317,218

 

 

A portion of the Company’s compensation under its fixed-fee agreements is designed to reimburse the Company for certain aircraft ownership costs. The aircraft compensation structure varies by agreement, but is intended to cover either the Company’s aircraft principal and interest debt service costs, its aircraft depreciation and interest expense or its aircraft lease expense costs while the aircraft is under contract. The consideration associated with the use of the aircraft under the Company’s fixed-fee agreements is deemed to be lease revenue, inasmuch as the agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. The lease revenue associated with the Company’s fixed-fee agreements is accounted for as an operating lease and is reflected as flying agreements revenue on the Company’s consolidated statements of comprehensive income. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income since the use of the aircraft is not a separate activity of the total service provided.

The Company’s fixed-fee and prorate agreements include weekly provisional cash payments from the respective major airline partner based on a projected level of flying each month. The Company and each major airline partner subsequently reconcile these payments to the actual completed flight activity on a monthly or quarterly basis.  In the event a flying agreement includes a mid-term rate reset to adjust rates prospectively and the contractual rates under the Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company applies the variable constraint guidance under Topic 606, where the Company records revenue to the extent it believes that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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, subject to the variable constraint guidance under Topic 606.

 

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

 

65

25

37

41

 

Individual aircraft have scheduled removal dates from 2018 to 2027

ExpressJet

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 700

 

 

12

 

 

 

Individual aircraft have scheduled removal dates throughout 2018

SkyWest Airlines

Delta Connection Prorate Agreement (revenue-sharing arrangement)

 

CRJ 200

 

29

 

Terminable with 30-day notice

11


 

 

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

 

61

19

65

 

Individual aircraft have scheduled removal dates from 2018 to 2029

ExpressJet

United ERJ Agreement

(fixed-fee arrangement)

 

ERJ 145

 

100

 

Individual aircraft have scheduled removal dates from 2018 to 2022

SkyWest Airlines

United Express Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

23

 

Terminable with 120-day notice

 

American Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

American Agreement

(fixed-fee arrangement)

 

CRJ 700

 

42

 

Individual aircraft have scheduled removal dates from 2019 to 2023

SkyWest Airlines

American Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

7

 

Terminable with 120-day notice

ExpressJet

American Agreement

(fixed-fee arrangement)

 

CRJ 700

 

16

 

Individual aircraft have scheduled removal dates from 2018 to 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alaska Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

Alaska Agreement

(fixed-fee arrangement)

 

E175

 

32

 

Individual aircraft have scheduled removal dates from 2027 to 2030

 

 

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 or 70 seats) (“E175”) into service for those major airline partners.  As of September 30, 2018, the Company anticipated placing an additional three E175 aircraft with Alaska and eight E175 aircraft with Delta. The delivery dates for the new E175 aircraft are expected to take place by the end of 2018 or early 2019 with the exception of three E175 aircraft with Alaska that have been deferred until 2021. Final delivery dates may be adjusted based on various factors.

SkyWest Airlines also entered into an agreement with Delta in the second quarter of 2018 to operate 20 new Canadair CRJ900 regional jet aircraft. The aircraft will be acquired by Delta with delivery dates beginning in 2018 that are expected to continue through the end of 2020. These aircraft will replace 20 Canadair CRJ700 regional jet aircraft (“CRJ700”) scheduled to expire under SkyWest’s flying contracts with Delta.

SkyWest Airlines also reached an agreement with American in the second quarter of 2018 to place 20 used CRJ700 aircraft into service under a four-year contract. The 20 CRJ700 aircraft are being sourced from within the Company’s fleet. SkyWest Airlines began transitioning the CRJ700 aircraft into service during the second and third quarters of 2018 and all 20 aircraft are expected to be in service by early 2019.

Additionally, in the second quarter of 2018, SkyWest Airlines and United agreed to extend the flying contract for 19 CRJ700 aircraft. These aircraft previously had expirations scheduled for mid-2019, which were extended to mid-2022.

During the third quarter of 2018, ExpressJet began transitioning 20 Canadair CRJ200 regional jet aircraft (“CRJ200s”) into service under a previously announced three-year agreement with United. The aircraft are being sourced

12


 

from within the Company’s existing fleet through other contract expirations. The first aircraft was placed into service in October 2018 and all 20 CRJ200 aircraft are scheduled to be placed into service with United by early 2019.

 

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. Other uses for the aircraft may include placing the aircraft in a prorate arrangement, leasing the aircraft to a third party or parting out the aircraft to use the engines and parts as spare inventory or to lease the engine to a third party.

 

The Company’s operating 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, 2018, the Company granted 15,165 fully-vested shares of common stock to the Company’s directors at a grant date fair value of $53.40. Additionally, during the nine months ended September 30, 2018, the Company granted 114,856 restricted stock units and 89,982 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. The number of performance shares awardable from the 2018 grants can range from 0% to 200% of the original amount granted depending on the Company’s performance over the three-year vesting period against the pre-established targets. 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 $53.40 per share. During the nine months ended September 30, 2018, the Company did not grant any options to purchase shares of common stock.

The Company accounts for forfeitures of stock options, restricted stock units and performance share grants in 2018 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 nine months ended September 30, 2018 and 2017, the Company recorded pre-tax share-based compensation expense of $10.4 million and $8.2 million, respectively.

The Company repurchased 427,869 shares of its common stock for $25.2 million, and paid $13.6 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees during the nine months ended September 30, 2018.  The Company repurchased 281,000 shares of its common stock for $10.0 million and paid $4.3 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees during the nine months ended September 30, 2017. 

 

Note 4 — Net Income Per Common Share

 

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share. During the nine months ended September 30, 2018, 207,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of September 30, 2018. During the nine months ended September 30, 2017, 284,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of September 30, 2017.

 

13


 

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,

 

 

 

    

2018

    

2017

 

 

2018

    

2017

    

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

83,046

 

$

53,716

 

 

$

213,266

 

$

138,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

52,039

 

 

51,833

 

 

 

52,002

 

 

51,801

 

 

Effect of outstanding share-based awards

 

 

942

 

 

1,247

 

 

 

974

 

 

1,286

 

 

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

 

 

52,981

 

 

53,080

 

 

 

52,976

 

 

53,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.60

 

$

1.04

 

 

$

4.10

 

$

2.68

 

 

Diluted earnings per share

 

$

1.57

 

$

1.01

 

 

$

4.03

 

$

2.62

 

 

 

 

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, ExpressJet and SkyWest Leasing.

 

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 aircraft lease revenue attributed to the Company’s E175 aircraft ownership related revenues 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.

 

14


 

The following represents the Company’s segment data for the three-month periods ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 2018

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

   

Airlines

 

ExpressJet

  

Leasing

  

Consolidated

 

Operating revenues (1)

 

$

607,052

 

$

140,155

 

$

82,068

 

$

829,275

 

Operating expense

 

 

512,278

 

 

139,736

 

 

39,336

 

 

691,350

 

Depreciation and amortization expense

 

 

39,651

 

 

8,683

 

 

37,754

 

 

86,088

 

Interest expense

 

 

4,044

 

 

649

 

 

26,747

 

 

31,440

 

Segment profit (loss) (2)

 

 

90,730

 

 

(230)

 

 

15,985

 

 

106,485

 

Identifiable intangible assets, other than goodwill

 

 

 —

 

 

1,224

 

 

 —

 

 

1,224

 

Total assets (as of September 30, 2018)

 

 

2,251,563

 

 

565,266

 

 

3,368,031

 

 

6,184,860

 

Capital expenditures (including non-cash)

 

 

44,689

 

 

3,069

 

 

273,808

 

 

321,566