SKYWEST INC - Quarter Report: 2015 September (Form 10-Q)

Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

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 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

 

Indicate by a 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 x No o

 

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 during the preceding 12 months (or for such shorter period that the registrant was  required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer x
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).  Yes o No x

 

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, 2015
Common stock, no par value		50,752,301

 

 

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SKYWEST, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION:		3
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	3
		Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2015 and 2014	5
		Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
	Item 4.	Controls and Procedures	32
PART II	OTHER INFORMATION:
	Item 1.	Legal Proceedings	33
	Item 1A.	Risk Factors	33
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 6.	Exhibits	33
		Signature	34
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

 

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PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 

		September 30, 2015			December 31, 2014
		(unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	126,744		$	132,275
Marketable securities		429,806			415,273
Restricted cash		11,584			11,582
Income tax receivable		393			2,779
Receivables, net		64,702			83,099
Inventories, net		140,109			137,452
Prepaid aircraft rents		402,685			397,850
Deferred tax assets		148,054			94,385
Other current assets		34,308			16,308
Total current assets		$	1,358,385		$	1,291,003
PROPERTY AND EQUIPMENT:
Aircraft and rotable spares		5,193,614			4,608,663
Deposits on aircraft		34,822			40,000
Buildings and ground equipment		273,102			274,900
		$	5,501,538		$	4,923,563
Less-accumulated depreciation and amortization		(2,029,907		)	(1,902,375		)
Total property and equipment, net		$	3,471,631		$	3,021,188
OTHER ASSETS
Intangible assets, net		11,061			12,748
Other assets		85,366			84,989
Total other assets		$	96,427		$	97,737
Total assets		$	4,926,443		$	4,409,928

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

		September 30,			December 31,
		2015			2014
		(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt		$	264,852		$	211,821
Accounts payable		265,807			270,097
Accrued salaries, wages and benefits		134,725			138,902
Accrued aircraft rents		2,495			3,303
Taxes other than income taxes		22,457			17,457
Other current liabilities		43,798			42,775
Total current liabilities		$	734,134		$	684,355
OTHER LONG-TERM LIABILITIES		$	50,052		$	49,625
LONG-TERM DEBT, net of current maturities		$	1,842,855		$	1,533,990
DEFERRED INCOME TAXES PAYABLE		$	772,710		$	669,385
DEFERRED AIRCRAFT CREDITS		$	64,989		$	72,227
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, 5,000,000 shares authorized; none issued		—			—
Common stock, no par value, 120,000,000 shares authorized; 78,705,286 and 77,951,411 shares issued, respectively		635,217			626,521
Retained earnings		1,236,627			1,165,478
Treasury stock, at cost, 28,015,386 and 26,765,386 shares, respectively		(410,090		)	(391,364		)
Accumulated other comprehensive (loss)		(51		)	(289		)
Total stockholders’ equity		$	1,461,703		$	1,400,346
Total liabilities and stockholders’ equity		$	4,926,443		$	4,409,928

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
OPERATING REVENUES:
Passenger		$	777,480		$	815,867		$	2,293,085		$	2,372,054
Ground handling and other		16,524			18,766			49,734			51,538
Total operating revenues		$	794,004		$	834,633		$	2,342,819		$	2,423,592
OPERATING EXPENSES:
Salaries, wages and benefits		$	304,633		$	315,766		$	906,051		$	944,253
Aircraft maintenance, materials and repairs		147,396			159,920			461,972			509,905
Aircraft rentals		68,003			72,899			206,857			232,682
Depreciation and amortization		66,603			65,822			196,953			192,389
Aircraft fuel		31,762			49,177			90,254			154,420
Ground handling services		18,892			31,114			62,981			100,446
Special charges		—			—			—			4,713
Other operating expenses		78,419			80,855			235,447			240,236
Total operating expenses		$	715,708		$	775,553		$	2,160,515		$	2,379,044
OPERATING INCOME		$	78,296		$	59,080		$	182,304		$	44,548
OTHER INCOME (EXPENSE):
Interest income		$	311		$	2,549		$	1,647		$	3,608
Interest expense		(19,914		)	(16,883		)	(56,460		)	(48,697		)
Other, net		1,070			23,598			1,070			20,709
Total other expense, net		$	(18,533	)	$	9,264		$	(53,743	)	$	(24,308	)
INCOME BEFORE INCOME TAXES		$	59,763		$	68,344		$	128,561		$	20,168
PROVISION FOR INCOME TAXES		23,495			27,006			51,198			16,455
NET INCOME		$	36,268		$	41,338		$	77,363		$	3,713
BASIC EARNINGS PER SHARE		$	0.72		$	0.81		$	1.51		$	0.07
DILUTED EARNINGS PER SHARE		$	0.71		$	0.79		$	1.49		$	0.07
Weighted average common shares:
Basic		50,616			51,322			51,143			51,324
Diluted		51,282			52,036			51,882			51,562
Dividends declared per share		$	0.04		$	0.04		$	0.12		$	0.12
COMPREHENSIVE INCOME:
Net income		$	36,268		$	41,338		$	77,363		$	3,713
Proportionate share of other companies foreign currency translation adjustment, net of taxes		—			(1,130		)	—			(1,130		)
Net unrealized appreciation (depreciation) on marketable securities, net of taxes		161			(222		)	239			(157		)
TOTAL COMPREHENSIVE INCOME		$	36,429		$	39,986		$	77,602		$	2,426

 

See accompanying notes to condensed consolidated financial statements

 

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SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

		Nine Months Ended September 30
		2015			2014
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	313,540		$	186,369
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities		$	(864,241	)	$	(198,690	)
Sales of marketable securities		849,942			293,056
Proceeds from the sale of equipment		5,771			3,468
Proceeds received from sale of Trip Linhas Aereas S.A. stock		—			17,237
Acquisition of property and equipment:
Aircraft and rotable spare parts		(647,250		)	(479,451		)
Buildings and ground equipment		(7,443		)	(16,017		)
Return of deposits on aircraft		5,178			—
Increase in other assets		(2,713		)	(12,218		)
NET CASH USED IN INVESTING ACTIVITIES		$	(660,756	)	$	(392,615	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		$	546,232		$	323,665
Principal payments on long-term debt		(184,336		)	(124,660		)
Tax deficiency from exercise of common stock options		(2,093		)	(1,245		)
Net proceeds from issuance of common stock		6,791			3,831
Purchase of treasury stock		(18,726		)	(8,414		)
Payment of cash dividends		(6,183		)	(6,174		)
NET CASH PROVIDED BY FINANCING ACTIVITIES		$	341,685		$	187,003
Decrease in cash and cash equivalents		$	(5,531	)	$	(19,243	)
Cash and cash equivalents at beginning of period		132,275			170,636
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	126,744		$	151,393
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized amounts		$	56,117		$	46,757
Income taxes		$	1,494		$	485

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note A — Condensed Consolidated Financial Statements

 

Basis of Presentation

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines Inc. (“ExpressJet”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The results of operations for the three and nine-month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

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.

 

Note B — Passenger and Ground Handling Revenue

 

The Company recognizes passenger and ground handling revenues when the service is provided under its code-share agreements.  Under the Company’s fixed-fee arrangements (referred to as “fixed-fee arrangements, “contract flying” or “capacity purchase agreements”) with Delta Airlines Inc. (“Delta”), United Airlines Inc. (“United”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”), the major airline generally pays the Company a fixed-fee for each departure, flight or block time incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement, such as fuel expense and landing fee expenses. Under the fixed-fee arrangements, revenue is earned when each flight is completed and is reflected in passenger revenues.  Ground handling revenue primarily consists of customer service functions such as gate and ramp agent services at applicable airports where the Company provides such services to other airlines.

 

Under the Company’s revenue-sharing arrangements (referred to as “revenue-sharing” or “pro-rate” arrangements), the major airline and the Company negotiate a passenger fare proration formula when a passenger has a connecting flight operated by both the Company and the major airline partner, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for the portion of their trip operated by the Company, and the major airline retains the ticket revenues for the other portion of  the passengers’ trips on the major airline. Revenue is recognized under the Company’s pro-rate flying agreements when each flight is completed based upon the portion of the pro-rate passenger fare the Company anticipates that it will receive for each completed flight.

 

Other ancillary revenues commonly associated with airlines such as baggage fee revenue, ticket change fee revenue and the marketing component of the sale of mileage credits are retained by the Company’s major airline partners on flights that the Company operates under its code-share agreements.

 

In the event that the contractual rates under the Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of the prior period’s approved rates, as adjusted to reflect any contract negotiations, and the Company’s estimate of rates that will be implemented in accordance with revenue recognition guidelines. In the event the Company has a reimbursement dispute with a major partner, the Company evaluates the dispute under its established revenue recognition criteria and, provided the revenue recognition criteria have been met, the Company recognizes revenue based on management’s estimate of the resolution of the dispute.

 

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In several of the Company’s agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly.

 

The following table summarizes the significant provisions of each code share agreement the Company has with each major partner:

 

Delta Connection Agreements

 

 

United Express Agreements

 

 

Alaska Capacity Purchase Agreement

 

 

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American Agreements

 

 

In addition to the contractual arrangements described above, SkyWest Airlines has entered into agreements with Alaska, United and Delta to place additional Embraer E175 dual-class jet (“E175”) aircraft into service for those major partners.  In June 2015, SkyWest Airlines reached an agreement with Alaska to place eight additional E175 aircraft into service pursuant to the SkyWest Airlines Alaska Agreement. The Company anticipates that those eight E175 aircraft, when added to the three E175 aircraft in service for Alaska and four additional E175 aircraft that Alaska has agreed to place into service under the SkyWest Airlines Alaska Agreement,  will result in a total of 15 E175 aircraft under contract with Alaska.  In September 2015, SkyWest Airlines reached an agreement with United to place 18 additional E175 aircraft into service pursuant to the SkyWest Airlines United Express Agreement, which the Company believes will result in a total of 58 E175 aircraft under contract with United.  In October 2015, SkyWest Airlines reached an agreement with Delta to place 19 new E175 aircraft into service pursuant to the SkyWest Airlines Delta Connection Agreement.  Under the agreement, the Company anticipates that delivery of the E175 aircraft to be flown for Delta will begin in August 2016, with all 19 aircraft being delivered by mid-2017.

 

Other Revenue Items

 

The Company’s passenger and ground handling revenues could be impacted by a number of factors, including changes to the Company’s code-share agreements with its major airline partners, contract modifications resulting from contract re-negotiations, 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 C — Share-Based Compensation and Stock Repurchases

 

The fair value of stock options granted by the Company has been estimated as of the grant date using the Black-Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s traded stock and other factors.  During the nine months ended September 30, 2015, the Company granted options to purchase 266,304 shares of common stock under the SkyWest, Inc. 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”).  The following table shows the assumptions used and weighted average fair value for stock option grants during the nine months ended September 30, 2015.

 

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Expected annual dividend rate		1.18		%
Risk-free interest rate		1.62		%
Average expected life (years)		5.7
Expected volatility of common stock		0.401
Forfeiture rate		0.0		%
Weighted average fair value of option grants		$	4.75

 

During the nine months ended September 30, 2015, the Company granted 36,950 fully-vested shares of common stock to the Company’s directors. Additionally, during the nine months ended September 30, 2015, the Company granted 407,042 restricted stock units and 224,869 performance restricted stock units to employees of the Company and its subsidiaries under the 2010 Incentive Plan.  Both the restricted stock and performance restricted stock units have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries.  In addition to the three-year vesting period, certain profit metrics of the Company must be met before the recipient will receive any shares of stock attributable to the performance restricted stock units.  Upon vesting, a restricted stock unit and a performance restricted stock unit will be replaced with a share of common stock.   The fair value of the restricted stock units on the date of grant was $13.51 per share.

 

The Company records share-based compensation expense only for those options and restricted and performance restricted stock units that are expected to vest.  The estimated fair value of the stock options and restricted stock units is amortized over the applicable vesting periods.  During the three months ended September 30, 2015 and 2014, the Company recorded pre-tax share-based compensation expense of $1.1 million and $0.9 million, respectively.  During the nine months ended September 30, 2015 and 2014, the Company recorded pre-tax share-based compensation expense of $4.0 million and $3.7 million, respectively.

 

The Company repurchased 1.25 million shares of its common stock for $18.7 million during the nine months ended September 30, 2015.  The Company repurchased 670,000 shares of its common stock for $8.4 million during the nine months ended September 30, 2014.

 

Note D — Net Income (Loss) Per Common Share

 

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.  During the three and nine months ended September 30, 2015, options to acquire no shares and 672,871 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive. During the three and nine months ended September 30, 2014, options to acquire 2,942,000 and 3,055,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive.

 

The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
		(Unaudited)						(Unaudited)
Numerator
Net Income		$	36,268		$	41,338		$	77,363		$	3,713
Denominator
Weighted average number of common shares outstanding		50,616			51,322			51,143			51,324
Effect of outstanding share-based awards		666			714			739			238
Weighted average number of shares for diluted net income per common share		51,282			52,036			51,882			51,562
Basic earnings per share		$	0.72		$	0.81		$	1.51		$	0.07
Diluted earnings per share		$	0.71		$	0.79		$	1.49		$	0.07

 

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Note E — Segment Reporting

 

Consistent with generally accepted accounting principles, the Company reports its operating results in two segments, based upon the operations of its two operating subsidiaries, SkyWest Airlines and ExpressJet. The following represents the Company’s segment data for the three-month periods ended September 30, 2015 and 2014 (in thousands).

 

		Three months ended September 30, 2015
		SkyWest Airlines			ExpressJet			Corporate / Consolidating			Consolidated
Operating revenues		$	504,531		$	283,034		$	6,439		$	794,004
Operating expense		428,116			286,941			651			715,708
Depreciation and amortization expense		44,766			21,575			262			66,603
Interest expense		17,048			2,866			—			19,914
Segment profit (loss)(1)		59,367			(6,773		)	5,788			58,382
Identifiable intangible assets, other than goodwill		—			11,061			—			11,061
Total assets		3,523,549			1,402,894			—			4,926,443
Capital expenditures (including non-cash)		144,367			5,137			—			149,504

 

		Three months ended September 30, 2014
		SkyWest Airlines			ExpressJet			Corporate / Consolidating			Consolidated
Operating revenues		$	493,606		$	340,553		$	474		$	834,633
Operating expense		430,024			345,606			(77		)	775,553
Depreciation and amortization expense		43,853			21,969			—			65,822
Interest expense		11,492			4,692			699			16,883
Segment profit (loss)(1)		52,090			(9,745		)	(148		)	42,197
Identifiable intangible assets, other than goodwill		—			13,311			—			13,311
Total assets		2,825,243			1,572,389			—			4,397,632
Capital expenditures (including non-cash)		186,678			6,152			—			192,830

 

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

 

The following represents the Company’s segment data for the nine-month periods ended September 30, 2015 and 2014 (in thousands).

 

		Nine months ended September 30, 2015
		SkyWest Airlines			ExpressJet			Corporate / Consolidating			Consolidated
Operating revenues		$	1,430,722		$	896,683		$	15,414		$	2,342,819
Operating expense		1,246,378			911,782			2,355			2,160,515
Depreciation and amortization expense		131,249			64,917			787			196,953
Interest expense		46,515			9,945			—			56,460
Segment profit (loss)(1)		137,829			(25,044		)	13,059			125,844
Identifiable intangible assets, excluding goodwill		—			11,061			—			11,061
Total assets		3,523,549			1,402,894			—			4,926,443
Capital expenditures (including non-cash)		652,714			19,860			—			672,574

 

		Nine months ended September 30, 2014
		SkyWest Airlines			ExpressJet			Corporate / Consolidating			Consolidated
Operating revenues		$	1,416,149		$	1,006,021		$	1,422		$	2,423,592
Operating expense		1,289,218			1,089,923			(97		)	2,379,044
Depreciation and amortization expense		125,811			66,578			—			192,389
Interest expense		32,180			14,309			2,208			48,697
Segment profit (loss)(1)		94,751			(98,211		)	(689		)	(4,149		)
Identifiable intangible assets, other than goodwill		—			13,311			—			13,311
Total assets		2,825,243			1,572,389			—			4,397,632
Capital expenditures (including non-cash)		487,711			18,653			—			506,364

 

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

 

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Note F — Commitments and Contingencies

 

As of September 30, 2015, the Company leased aircraft, as well as airport facilities, office space, and various other property and equipment under non-cancelable operating leases which are generally on a long-term net rent basis where the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property.  The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases.  The following table summarizes future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2015 (in thousands):

 

October through December 2015		$	93,236
2016		267,353
2017		191,506
2018		153,042
2019		120,072
Thereafter		472,800
		$	1,298,009

 

During the three months ended September 30, 2015, the Company took delivery of five E175 aircraft and financed the aircraft through the issuance of $113.7 million of long-term debt.  During the nine months ended September 30, 2015, the Company took delivery of 23 E175s and financed the aircraft through the issuance of $521.2 million of long-term debt.  The debt associated with the E175 aircraft delivered during the nine months ended September 30, 2015 has a twelve-year term with a fixed annual interest rate ranging from 3.4% to 4.0% and is secured by the 23 E175 aircraft.

 

As of September 30, 2015 and December 31, 2014, the Company had accrued future lease obligations of $1.5 million and $3.8 million, respectively, associated with Embraer Brasilia EMB120 aircraft (“EMB120s”) removed from service.  The lease payments for the EMB120s are scheduled to continue through June 2016.

 

As of September 30, 2015, the Company had a firm purchase commitment for 49 E175 aircraft with scheduled delivery dates from October 2015 to mid-2017.

 

During the nine months ended September 30, 2015, the Company borrowed $25 million from a bank.  The debt has a four year term with a fixed annual interest rate of 3.3% with monthly payments and is secured by spare engines.

 

Note G — Fair Value Measurements

 

The Company holds certain assets that are required to be measured at fair value in accordance with GAAP. The Company determined fair value of these assets based on the following three levels of inputs:

 

 

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As of September 30, 2015 and December 31, 2014, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):

 

		Fair Value Measurements as of September 30, 2015
		Total			Level 1			Level 2			Level 3
Marketable Securities
Bonds and bond funds		$	429,756		$	—		$	429,756		$	—
Asset backed securities		50			—			50			—
		$	429,806		—			$	429,806		—
Cash, Cash Equivalents and Restricted Cash		138,328			138,328			—			—
Other Assets		2,313		(a)	—			—			2,313
Total Assets Measured at Fair Value		$	570,447		$	138,328		$	429,806		$	2,313

 

		Fair Value Measurements as of December 31, 2014
		Total			Level 1			Level 2			Level 3
Marketable Securities
Bonds and bond funds		$	410,163		$	—		$	410,163		$	—
Asset backed securities		5,110			—			5,110			—
		$	415,273		—			$	415,273		—
Cash, Cash Equivalents and Restricted Cash		143,857			143,857			—			—
Other Assets		2,309		(a)	—			—			2,309
Total Assets Measured at Fair Value		$	561,439		$	143,857		$	415,273		$	2,309

 

(a)         Comprised of auction rate securities which are reflected in “Other assets” in the Company’s unaudited condensed consolidated balance sheets

 

Based on market conditions, the Company uses a discounted cash flow valuation methodology for auction rate securities. Accordingly, for purposes of the foregoing condensed consolidated financial statements, these securities were categorized as Level 3 securities. The Company’s “Marketable Securities” classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities.

 

The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the nine months ended September 30, 2015.  The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

 

As of September 30, 2015 and December 31, 2014, the Company classified $429.8 million and $415.3 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year.  As of September 30, 2015 and December 31, 2014, the cost in the Company’s total cash and cash equivalents and available for sale securities (excluding restricted cash and auction rate securities, net of amortized discounts, recorded as other assets) was $556.5 million and $548.0 million, respectively.  As of September 30, 2015 and December 31, 2014, the fair value of the Company’s total cash and cash equivalents and available for sale securities (excluding restricted cash and auction rate securities recorded as other assets), was $556.6 million and $547.5 million, respectively.

 

The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2015 (in thousands):

 

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Fair Value Measurements Using Significant Unobservable Inputs

 

(Level 3)

 

		Auction Rate Securities
Balance at January 1, 2015		$	2,309
Total realized and unrealized gains or (losses)
Included in earnings		—
Included in other comprehensive income		4
Transferred out		—
Settlements		—
Balance at September 30, 2015		$	2,313

 

The fair value of the Company’s long-term debt classified as Level 2 was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be $2,129.6 million as of September 30, 2015, as compared to the carrying amount of $2,107.7 million as of September 30, 2015. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and approximated $1,813.1 million as of December 31, 2014, as compared to the carrying amount of $1,745.8 million as of December 31, 2014.

 

Note H — Income Taxes

 

The Company’s estimated annual effective tax rate for the three and nine months ended September 30, 2015 varied from the federal statutory rate of 35% primarily due to the provision for state income taxes and the impact of non-deductible crew per diem meal expenses.

 

Note I — Legal Matters

 

The Company is subject to certain legal actions which it considers routine to its business activities. As of September 30, 2015, the Company’s management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations.

 

Note J — Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”).  In August 2015, ASU No. 2015-03 was amended to modify existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company anticipates reclassifying the unamortized debt issuance costs and present debt net of those unamortized costs on its balance sheet upon adoption of ASU No. 2015-03.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”   (“ASU No. 2014-09”).  Under ASU No. 2014-09, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. In July 2015, the FASB deferred the effective date of ASU No. 2014-09 to January 1, 2018.  The FASB also proposed permitting early adoption of the standard, but not before January 1, 2017.  Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The Company’s management is currently evaluating the impact the adoption of ASU No. 2014-09 is anticipated to have on the Company’s consolidated financial statements.

 

ITEM 2:               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three and nine-month periods ended September 30, 2015 and 2014. Also discussed is our financial position as of September 30, 2015 and December 31, 2014. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2015, including the notes thereto,

 

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appearing elsewhere in this Report.  This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of the uncertainties, risks and assumptions associated with these statements.

 

Cautionary Statement Concerning Forward-Looking Statements

 

Certain of the statements contained in this Report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, the revenue environment, our contract relationships and our expected financial performance.  These statements include, but are not limited to, statements about our future growth and development plans, including our future financial and operating results, our plans for SkyWest Airlines and ExpressJet, our objectives, expectations and intentions, and other statements that are not historical facts.  All forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect.  If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will likely vary, and may vary materially, from those anticipated, estimated, projected, or intended.

 

There may be other factors not identified above of which we are not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed.  We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by law.

 

Overview

 

Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of September 30, 2015, SkyWest Airlines and ExpressJet offered scheduled passenger service with approximately 3,500 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of September 30, 2015, SkyWest Airlines and ExpressJet had a total fleet of 715 aircraft, of which 656 were in scheduled service, summarized as follows:

 

		CRJ200		ERJ145		ERJ135		CRJ700		CRJ900		E175		EMB120		Total
United		76		169		5		70		—		40		—		360
Delta		106		—		—		60		64		—		—		230
American		38		16		—		—		—		—		—		54
Alaska		—		—		—		9		—		3		—		12
Aircraft in scheduled service		220		185		5		139		64		43		—		656
Subleased to an un-affiliated entity		2		—		—		—		—		—		—		2
Unassigned (a)		20		3		4		—		—		—		30		57
Total		242		188		9		139		64		43		30		715

 

(a)          As of September 30, 2015, these aircraft have been removed from service and are in the process for lease returns or are transitioning between flying code -share agreements with our major airline partners.

 

For the nine months ended September 30, 2015, approximately 57.6% of our aggregate capacity was operated for United, approximately 33.1% was operated for Delta, approximately 4.8% was operated for American, approximately 2.7% was operated for Alaska and approximately 1.8% was operated for US Airways.

 

Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of contract flying arrangements and our pro-rate flying arrangements. For the nine months ended September 30, 2015, contract flying revenue and pro-rate revenue represented approximately 88% and 12%, respectively, of our total passenger revenues. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours, flight departures and other operating measures.

 

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