<PAGE> 1
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, 1999
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
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 3, 1999
----- -------------------------------
<S> <C>
Common stock, no par value 24,556,509
</TABLE>
<PAGE> 2
SKYWEST, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
As of September 30, 1999 and
March 31, 1999 3
Condensed Consolidated Statements of
Income For the Three and Six
Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of
Cash Flows For the Six Months Ended
September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Submission of Matters to a Vote of Security 14
Holders
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 23,400 $ 52,237
Available-for-sale securities 159,737 109,580
Receivables, net 6,551 13,273
Inventories 15,649 13,863
Prepaid aircraft rents 14,959 18,755
Other current assets 12,920 8,976
--------- ---------
Total current assets 233,216 216,684
--------- ---------
PROPERTY AND EQUIPMENT:
Aircraft and rotable spares 237,193 225,233
Deposits on aircraft 55,045 41,463
Buildings and ground equipment 42,263 39,418
Rental vehicles 5,878 4,603
--------- ---------
340,379 310,717
Less accumulated depreciation and
amortization (123,771) (111,793)
--------- ---------
216,608 198,924
OTHER ASSETS 2,320 2,052
--------- ---------
$ 452,144 $ 417,660
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,560 $ 8,497
Trade accounts payable 52,198 45,630
Accrued salaries, wages and benefits 11,548 10,471
Income taxes payable 6,443 5,937
Taxes other than income taxes 3,340 2,372
Air traffic liability 1,494 1,419
--------- ---------
Total current liabilities 83,583 74,326
--------- ---------
LONG-TERM DEBT, net of current maturities 56,435 61,830
--------- ---------
DEFERRED INCOME TAXES PAYABLE 26,608 25,248
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 163,325 162,116
Retained earnings 142,478 114,425
Treasury stock (20,285) (20,285)
--------- ---------
Total stockholders' equity 285,518 256,256
--------- ---------
$ 452,144 $ 417,660
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 120,552 $ 99,257 $ 230,265 $ 179,771
Freight and other 2,185 1,972 4,034 3,417
------------ ------------ ------------ ------------
122,737 101,229 234,299 183,188
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Flying operations 43,810 34,964 83,394 64,137
Aircraft, traffic and passenger service 17,406 15,217 33,416 27,970
Maintenance 14,750 14,433 29,159 24,080
Promotion and sales 7,419 7,319 15,111 13,831
General and administrative 7,325 5,513 13,712 10,713
Depreciation and amortization 6,847 5,635 13,334 10,401
Other 519 440 1,036 845
------------ ------------ ------------ ------------
98,076 83,521 189,162 151,977
------------ ------------ ------------ ------------
OPERATING INCOME 24,661 17,708 45,137 31,211
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (890) (714) (1,453) (968)
Interest income 2,054 2,105 4,138 3,870
Gain on sales of property and equipment 101 163 191 249
------------ ------------ ------------ ------------
1,265 1,554 2,876 3,151
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 25,926 19,262 48,013 34,362
PROVISION FOR INCOME TAXES 9,982 7,450 18,488 13,279
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 15,944 11,812 29,525 21,083
DISCONTINUED OPERATIONS, net of income taxes:
Income from operations of Scenic Airlines -- 1,043 -- 1,513
------------ ------------ ------------ ------------
NET INCOME $ 15,944 $ 12,855 $ 29,525 $ 22,596
============ ============ ============ ============
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE:
Basic $ 0.65 $ 0.49 $ 1.20 $ 0.88
Diluted $ 0.64 $ 0.48 $ 1.18 $ 0.85
INCOME FROM DISCONTINUED
OPERATIONS PER COMMON SHARE:
Basic $ -- $ 0.04 $ -- $ 0.06
Diluted $ -- $ 0.04 $ -- $ 0.06
NET INCOME PER COMMON SHARE:
Basic $ 0.65 $ 0.53 $ 1.20 $ 0.94
Diluted $ 0.64 $ 0.52 $ 1.18 $ 0.91
WEIGHTED AVERAGE COMMON SHARES:
Basic 24,552,000 24,185,000 24,520,000 24,125,000
Diluted 24,952,000 24,798,000 24,954,000 24,715,000
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the
Six Months Ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,525 $ 22,596
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,334 10,401
Gain on sales of property and equipment (191) (243)
Maintenance expense related to disposition of rotable spares 451 79
Increase in deferred income taxes 1,359 310
Nonairline depreciation and amortization 547 2,131
Changes in operating assets and liabilities:
Decrease (increase) in receivables, net 6,722 (1,831)
Increase in inventories (1,786) (6,872)
Increase in other current assets (148) (3,314)
Increase in trade accounts payable 6,567 22,674
Increase in other current liabilities 2,627 12,185
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,007 58,116
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities -- 771
Purchase of available-for-sale securities (50,157) --
Acquisition of property and equipment:
Aircraft and rotable spares (13,765) (15,432)
Buildings and ground equipment (2,845) (5,959)
Rental vehicles (3,038) (2,161)
Proceeds from sales of property and equipment 1,500 1,045
Increase in deposits on aircraft and rotable spares (13,583) (5,800)
Increase in other assets (364) (265)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (82,252) (27,801)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock upon exercise of stock options 1,209 1,944
Payment of cash dividends (1,469) (1,324)
Reduction of long-term debt (5,332) (4,071)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (5,592) (3,451)
--------- ---------
(Decrease) increase in cash and cash equivalents (28,837) 26,864
Cash and cash equivalents at beginning of period 52,237 139,772
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,400 $ 166,636
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,497 $ 1,326
Income taxes 11,202 7,037
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
SKYWEST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Consolidated Financial Statements
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements reflect all adjustments which, 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. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles 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. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
The results of operations for the three and six months ended September 30, 1999,
are not necessarily indicative of the results that may be expected for the year
ending March 31, 2000.
Note B - Available-for-Sale Securities
Available-for-sale securities are recorded at fair market value.
Note C - Income Taxes
For the six months ended September 30, 1999 and 1998, the Company provided for
income taxes based upon the estimated annualized effective tax rate. At
September 30, 1999, the Company has recorded a net current deferred tax asset of
$7.3 million and a net noncurrent deferred tax liability of $26.6 million.
Note D - Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the periods. Diluted
net income per common share reflects the potential dilution that could occur if
outstanding stock options were exercised. The calculation of the weighted
average number of common shares outstanding is as follows:
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands): (In thousands):
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding ........ 24,552 24,185 24,520 24,125
Effect of outstanding stock options ......................... 400 613 434 590
------ ------ ------ ------
Weighted average number of shares for diluted net income
per common share ......................................... 24,952 24,798 24,954 24,715
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
Note E - United Agreements
On July 23, 1997, SkyWest Airlines Inc.,("SkyWest") and United Airlines, Inc.
("United") announced a marketing agreement under which SkyWest has operated as
United Express in Los Angeles, Las Vegas, and in various intra-California
markets since October 1, 1997. The United Express code-share arrangement
provides extensive connecting opportunities for SkyWest/United Express customers
at United's Los Angeles hub where United is the largest major carrier. On
January 19, 1998, SkyWest and United executed a United Express Agreement for
United's Los Angeles hub and an addendum to the United Express Agreement
pursuant to which SkyWest would operate as the United Express carrier at
United's San Francisco hub, which began June 1, 1998. On February 9, 1998,
SkyWest executed an amendment to the United Express Agreement to provide service
as United Express in United's Portland and Seattle/Tacoma markets and in
additional Los Angeles markets, which began April 23, 1998. The related
financial impact for the three and six months ended September 30, 1999 and 1998,
has been included in the accompanying condensed consolidated financial
statements.
Note F- Discontinued Operations
During the year ended March 31, 1999, the Company sold all of the assets and
operations of its wholly owned subsidiary, Scenic Airlines, Inc. (Scenic"). The
accompanying condensed consolidated financial statements reflect the disposition
of the assets and operations of Scenic as discontinued operations. Accordingly,
the revenues, costs and expenses, assets and liabilities have been excluded from
the respective captions in the financial statements and have been reported
through the date of disposition as income (loss) from discontinued operations,
net of income taxes. The revenues of Scenic amounted to $9.7 and $12.2 million
for the three and six months ended September 30, 1998, respectively.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
<TABLE>
<CAPTION>
Operating Statistics
--------------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------------- ---------------------------------------
1999 1998 % Change 1999 1998 % Change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Passengers carried 1,487,297 1,321,955 12.5% 2,853,003 2,339,267 22.0%
Revenue passenger miles (000s) 323,282 278,281 16.2% 613,872 494,007 24.3%
Available seat miles (000s) 550,629 473,025 16.4% 1,075,733 866,780 24.1%
Passenger load factor 58.7% 58.8% (.1) pts 57.1% 57.0% .1 pts
Passenger breakeven load factor 47.3% 49.0% (1.7) pts 46.4% 47.6% (1.2) pts
Yield per revenue passenger mile 37.3c 35.7c 4.5% 37.5c 36.4c 3.0%
Revenue per available seat mile 22.2c 21.3c 4.2% 21.7c 21.0c 3.3%
Cost per available seat mile 17.9c 17.7c 1.1% 17.6c 17.5c .6%
Average passenger trip (miles) 217 211 2.8% 215 211 1.9%
</TABLE>
- ----------
* For the purpose of this Form 10-Q, c equals cent(s).
For the Three Months Ended September 30, 1999 and 1998
For the quarter ended September 30, 1999, the Company enplaned a record number
of passengers and reported record consolidated net income of $15.9 million, or
$0.64 per share on a diluted basis, compared to $12.9 million, or $0.52 per
share on a diluted basis for the same period last year. Consolidated operating
revenues increased 21.2 percent to $122.7 million for the quarter ended
September 30, 1999 from $101.2 million for the quarter ended September 30, 1998.
Passenger revenues, which represented 98.2 percent of consolidated operating
revenues, increased 21.5 percent to $120.6 million for the quarter ended
September 30,1999 from $99.3 million or 98.1 percent of consolidated operating
revenues for the quarter ended September 30, 1998. The increase was primarily
the result of a 16.2 percent increase in revenue passenger miles ("RPMs") as
well as a 4.5 percent increase in yield per RPM. SkyWest began operating as
United Express in Los Angeles, California beginning October 1, 1997. In
addition, SkyWest began operating as United Express in Portland, Oregon and
Seattle/Tacoma, Washington on April 23, 1998 and in San Francisco, California
beginning June 1, 1998. This new code-sharing relationship has resulted in both
increased RPMs and increased yield per RPM. The increased yield per RPM also
resulted from an increase in SkyWest's portion of prorated fares with Delta in
certain markets. SkyWest also continues to use a state-of-the-art revenue
management and control system which utilizes historical booking data to optimize
revenue. Together these factors have resulted in a 4.2 percent increase in
revenue per available seat mile to 22.2 cent(s) for the quarter ended September
30,1999 from 21.3 cent(s) for the quarter ended September 30,1998. Passenger
load factor was 58.7 percent and 58.8 percent for the quarters ended September
30, 1999 and 1998, respectively.
Total operating expenses and interest increased 17.5 percent to $98.9 million
for the quarter ended September 30, 1999 compared to $84.2 million for the
quarter ended September 30, 1998. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 80.6 percent for
the quarter ended September 30, 1999 from 83.2 percent for the comparable
quarter ended September 30, 1998. For the quarter ended September 30, 1999 total
airline operating expenses and interest (excluding nonairline expenses) were
80.6 percent of airline operating revenues compared to 83.7 percent for the
quarter ended September 30, 1998. The improved margin is the result of increased
passenger enplanements and operating revenues which have outpaced the increase
in operating expenses.
Airline operating costs per available seat mile (including interest expense)
increased only 1.1 percent to 17.9 cent(s) for the quarter ended September 30,
1999 from 17.7 cent(s) for the quarter ended September 30, 1998. Factors
relating to the change in operating expenses are discussed below.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Salaries, wages and employee benefits decreased as a percentage of airline
operating revenues to 25.4 percent for the quarter ended September 30, 1999 from
25.6 percent for the quarter ended September 30, 1998. The average number of
full-time equivalent employees for the quarter ended September 30, 1999 was
3,264 compared to 2,850 for the quarter ended September 30, 1998. The increase
in number of personnel was due to the United Express expansion. Salaries, wages
and employee benefits per ASM increased to 5.6 cent(s) for the quarter ended
September 30, 1999 compared to 5.4 cent(s) for the quarter ended September 30,
1998 as a result of higher employee incentives based on increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 16.6 percent for the quarter ended
September 30, 1999 from 17.7 percent for the quarter ended September 30, 1998.
The decrease is due to airline operating revenues increasing at a faster rate
than aircraft costs. Aircraft costs per ASM decreased slightly to 3.7 cent(s)
for the quarter ended September 30, 1999 from 3.8 cent(s) for the quarter ended
September 30, 1998.
Maintenance expense decreased as a percentage of airline operating revenues to
8.4 percent for the quarter ended September 30, 1999 compared to 10.4 percent
for the quarter ended September 30, 1998. Maintenance expense was higher in the
quarter ended September 30, 1998 due to expenses incurred on used Brasilia
aircraft related to the United Express expansion. Subsequent to the initial
expenditures incurred to ready the acquired aircraft for service, maintenance
expense has reduced to a level which is consistent with management's expectation
for normal operations. As a result, maintenance expense per ASM decreased to 1.9
cent(s) for the quarter ended September 30, 1999 from 2.2 cent(s) for the
quarter ended September 30, 1998.
Fuel costs increased as a percentage of airline operating revenues to 9.9
percent for the quarter ended September 30, 1999 from 7.8 percent for the
quarter ended September 30, 1998, primarily due to an increase in the average
fuel price per gallon to $0.87 from $0.68. Fuel costs per ASM increased to 2.2
cent(s) for the quarter ended September 30, 1999 from 1.7 cent(s) for the
quarter ended September 30, 1998.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
decreased as a percentage of airline operating revenues to 19.6 percent for the
quarter ended September 30, 1999 from 21.1 percent for the quarter ended
September 30, 1998. The decrease is primarily the result of the airline not
incurring commissions on United Express contract related passenger revenues.
For the Six Months Ended September 30, 1999 and 1998
For the six months ended September 30, 1999, the Company enplaned a record
number of passengers and reported record consolidated net income of $29.5
million, or $1.18 per share on a diluted basis, compared to $22.6 million, or
$0.91 per share on a diluted basis for the same period last year. Consolidated
operating revenues increased 27.9 percent to $234.3 million for the six months
ended September 30, 1999 from $183.2 million for the six months ended September
30, 1998.
Passenger revenues, which represented 98.3 percent of the consolidated operating
revenues, increased 28.1 percent to $230.3 million for the six months ended
September 30, 1999 from $179.8 million or 98.1 percent of consolidated operating
revenues for the six months ended September 30, 1998. The increase was primarily
the result of a 24.3 percent increase in RPMs as well as a 3.0 percent increase
in yield per RPM. SkyWest entered into a new code-sharing relationship with
United and began operating as United Express in Los Angeles, California
beginning October 1, 1997. In addition, SkyWest began operating as United
Express in Portland, Oregon and Seattle/Tacoma, Washington on April 23, 1998 and
in San Francisco, California beginning June 1, 1998. This new code-sharing
relationship has resulted in both increased RPMs and increased yield per RPM.
The increased yield per RPM also resulted from an increase in SkyWest's portion
of prorated fares with Delta in certain markets. SkyWest also continues to use a
state-of-the-art revenue management and control system which utilizes historical
booking data to optimize revenue. Together these factors have resulted in a 3.3
percent increase in revenue per available seat mile to 21.7 cent(s) for the six
months ended September 30, 1999 from 21.0 cent(s) for the six months ended
September 30, 1998. Passenger load factor was 57.1 percent and 57.0 percent for
the quarters ended September 30, 1999 and 1998, respectively.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Total operating expenses and interest increased 24.6 percent to $190.6 million
for the six months ended September 30, 1999 compared to $152.9 million for the
six months ended September 30, 1998. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 81.4 percent for
the six months ended September 30, 1999 from 83.5 percent for the six months
ended September 30, 1998. For the six months ended September 30, 1999, total
airline operating expenses and interest (excluding nonairline expenses) were
81.3 percent of airline operating revenues compared to 83.5 percent for the six
months ended September 30, 1998. The improved margin is the result of increased
passenger enplanements and operating revenues which have outpaced the increase
in operating expenses. Airline operating costs per ASM (including interest
expense) increased to 17.6 cent(s) for the six months ended September 30, 1999
from 17.5 cent(s) for the six months ended September 30, 1998. Factors relating
to the change in operating expenses are discussed below.
Salaries, wages and employee benefits decreased as a percentage of airline
operating revenues to 25.6 percent for the six months ended September 30, 1999
from 25.9 percent for the six months ended September 30, 1998. The average
number of full-time equivalent employees for the six months ended September 30,
1999 was 3,222 compared to 2,595 for the six months ended September 30, 1998.
The increase in number of personnel was due to the United Express expansion.
Salaries, wages and employee benefits per ASM increased to 5.5 cent(s) for the
six months ended September 30, 1999 from 5.4 cent(s) for the six months ended
September 30, 1998 as a result of higher employee incentives based on increased
profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 17.1 percent for the six months
ended September 30, 1999 from 18.1 percent for the six months ended September
30, 1998. The decrease is due to airline operating revenues increasing at a
faster rate than aircraft costs. Aircraft costs per ASM decreased slightly to
3.7 cent(s) for the six months ended September 30, 1999 from 3.8 cent(s) for the
six months ended September 30, 1998.
Maintenance expense decreased as a percentage of airline operating revenues to
8.8 percent for the six months ended September 30, 1999 from 9.5 percent for the
six months ended September 30, 1998. Maintenance expense was higher in the six
months ended September 30, 1998 due to the expenses incurred on used Brasilia
aircraft related to the United Express expansion. Subsequent to the initial
expenditures incurred to ready the acquired aircraft for service, maintenance
expense has reduced to a level which is consistent with management's expectation
for normal operations. Maintenance expense per ASM decreased to 1.9 cent(s) for
the six months ended September 30, 1999 from 2.0 cent(s) for the six months
ended September 30, 1998.
Fuel costs increased as a percentage of airline operating revenues to 9.1
percent for the six months ended September 30, 1999 from 7.7 percent for the six
months ended September 30, 1998, primarily due to an increase in the average
fuel price per gallon to $.80 from $.67. Fuel costs per ASM increased to 2.0
cent(s) for the six months ended September 30, 1999 from 1.6 cent(s) for the six
months ended September 30, 1998.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
decreased as a percentage of airline operating revenues to 20.1 percent for the
six months ended September 30, 1999 from 21.8 percent for the six months ended
September 30, 1998. The decrease is primarily the result of the airline not
incurring commissions on United Express contract related passenger revenues.
Liquidity and Capital Resources
The Company had working capital of $149.6 million and a current ratio of 2.8:1
at September 30, 1999 compared to working capital of $142.4 million and a
current ratio of 2.9:1 at March 31, 1999. During the six months ended September
30, 1999, the principal sources of funds were $59.0 million generated from
operations, $1.2 million from the issuance of common stock, and $1.5 million of
proceeds from the sale of property and equipment. During the six months ended
September 30, 1999 the Company invested $50.1 million in available-for-sale
securities, $13.8 million in flight equipment, $13.6 million in aircraft
deposits, $3.2 million in buildings and ground equipment, $3.0 million in rental
vehicles, reduced long-term debt by $5.3 million and paid cash dividends of $1.5
million. These factors resulted in a decrease of $28.8 million in cash and cash
equivalents.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company's position in available-for-sale securities, consisting primarily of
bonds, bond funds and commercial paper, increased to $159.7 million at September
30, 1999 compared to $109.6 million at March 31, 1999. At September 30, 1999,
the Company's long-term debt to equity position was 16 percent debt and 84
percent equity compared to 19 percent debt and 81 percent equity at March 31,
1999.
During the six months ended September 30, 1999, SkyWest took delivery of five
Brasilia aircraft in connection with the United Express expansion. Additionally,
as of September 30, 1999, SkyWest had agreed to purchase 35 Canadair Regional
Jets ("CRJs") and related spare parts inventory and support equipment at an
aggregate cost of approximately $787.5 million. SkyWest also has options to
acquire 35 additional CRJs at fixed prices (subject to cost escalations) and
delivery schedules and are exercisable through July 2003.
The Company has significant long-term lease obligations primarily relating to
its aircraft fleet. These leases are classified as operating leases and
therefore are not reflected as liabilities in the Company's consolidated balance
sheets. At September 30, 1999, SkyWest leased 82 aircraft under leases with an
average remaining term of approximately 9.6 years. Future minimum lease payments
due under all long-term operating leases were approximately $587.7 million at
September 30, 1999.
The Company's long-term debt was incurred in connection with the acquisition of
Brasilia aircraft and certain amounts are supported by continuing subsidy
payments through the export support program of the Federative Republic of
Brazil. The subsidy payments reduce the stated interest rates to an average
effective rate of approximately 3.90 percent on $37.9 million of the long-term
debt, at September 30, 1999. The continuing subsidy payments are at risk to the
Company if the Federative Republic of Brazil does not meet its obligations under
the export support program. While the Company has no reason to believe, based on
information currently available, that the Company will not continue to receive
these subsidy payments from the Federative Republic of Brazil in the future,
there can be no assurance that such a default will not occur. On the remaining
long-term debt of $27.1 million, the average effective rate is 3.80 percent at
September 30, 1999 and the lender has assumed the risk of the subsidy payments.
The Company has available $10.0 million in an unsecured bank line of credit with
interest payable at the bank's base rate less one-quarter percent, which was a
net rate of 8.0 percent at September 30, 1999. The Company believes that, in the
absence of unusual circumstances, the working capital available to the Company
will be sufficient to meet its present requirements, including expansion,
capital expenditures, lease payments and debt service requirements for at least
the next 12 months.
The Company spent approximately $19.6 million for nonaircraft capital
expenditures during the six months ended September 30, 1999, consisting
primarily of aircraft engine overhauls, buildings and ground equipment and
rental vehicles.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements and information that are
based on management's belief, as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate", "estimate", "project", "expect", and similar expressions are
intended to identify forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that have a direct bearing on the Company's operating results
include, among other things, changes in SkyWest's code-sharing relationships,
fluctuations in the economy and the demand for air travel, the degree and nature
of competition and SkyWest's ability to expand services in new and existing
markets and to maintain profit margins in the face of pricing pressures.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Year 2000 Program
The Company has been addressing the Year 2000 date problem since 1997. This has
involved personnel in all areas of the Company and has been a collaborative
effort with industry trade groups, key suppliers, governmental agencies, and our
partners at United Airlines and Delta Air Lines. The project began with an
inventory of systems, equipment, and facilities that might have date
dependencies. Through internal testing and coordination with third parties
systems suppliers, we identified systems and equipment that would require repair
or replacement. Over the past two years we have installed many new systems which
are year 2000 compliant and we have applied software upgrades and repairs to
other systems which were affected by year 2000 date problems. We have surveyed
our key third party suppliers and reviewed their year 2000 preparations and
their ability to continue to provide needed goods and services. The final phase
of the program has included a review of our contingency plans to develop or
update manual processes that would allow continued safe operations in the event
that automated systems are not available.
Readiness
Our internal mission critical systems and equipment have been repaired or
replaced. Third party systems and service providers have provided assurances of
the continued availability of their systems and services. Customers have been
able to reserve flights and purchase tickets for year 2000 flights since
February 1999. Aircraft and navigational systems have been certified year 2000
compliant by their manufacturers. Company contingency plans have been enhanced
to specifically address year 2000 issues and are being coordinated with United
Airlines and Delta Air Lines contingency planning efforts. We will continue to
monitor the readiness of our internal systems and that of our key third party
service providers through the remainder of the year.
Costs
Several key internal systems have been replaced during the past two years in
support of both growth and replacement of year 2,000 affected systems. These
costs have been funded through internal cash flows and new software has been
capitalized and will be amortized over the software's useful life.
Risks
Management believes that completed modifications and conversions of the
Company's internal systems and equipment will allow us to operate safely and
efficiently in the new millennium. Despite our efforts to address year 2000
issues, we are heavily dependent on the year 2000 preparations of governmental
agencies, telecommunication companies, utility companies, and our airline
partners. The year 2000 related failure of internal mission critical systems or
the loss of services provided by third parties (which the Company believes to be
the most likely worst case scenario), could result in the reduction or
suspension of the Company's operations and could have a material adverse effect
on the Company's financial condition and results of operations.
13
<PAGE> 14
PART II. OTHER INFORMATION
SKYWEST, INC.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Aircraft Fuel
The Company is exposed to fluctuations in the price and availability of aircraft
fuel that affect the Company's earnings. Currently, the Company is effectively
hedged with respect to approximately 65 percent of available seat miles
produced, due to contractual arrangements with two major airlines. These major
airlines reimburse the Company for the actual cost of fuel on contracted
flights. The impact of market risk is estimated using a hypothetical increase in
fuel price per gallon of 10 percent for the quarter and six months ended
September 30, 1999 and 1998. Based on this hypothetical assumption and after
considering the impact of the contractual arrangements, the Company would have
experienced an increase in fuel expense of approximately $421,000 for the
quarter ended September 30, 1999 and $511,000 for the quarter ended September
30, 1998. The Company would have experienced an increase in fuel expense of
approximately $741,000 for the six months ended September 30, 1999 and $494,000
for the six months ended September 30, 1998. The Company will use cash generated
by operating activities to fund any adverse change in the price of fuel.
Interest Rates
The Company's earnings are affected by changes in interest rates due to the
amounts of variable rate long-term debt and the amount of cash and securities
held. Variable rate notes may rise and increase the amount of interest expense.
The Company would also receive higher amounts of interest income on its cash and
securities held at the time. At September 30, 1999 the Company had variable rate
notes representing 8 percent of the total long-term debt and 12 percent at
September 30, 1998. The impact of market risk is estimated using a hypothetical
increase in interest rates of one percentage point for both the Company's
variable rate long-term debt and cash and securities. Based on this hypothetical
assumption, the Company would have incurred an additional $13,000 in interest
expense and received $420,000 in additional interest income for the quarter
ended September 30, 1999 and an additional $17,000 in interest expense and
received $392,000 in additional interest income for the quarter ended September
30, 1998. Additionally, the Company would have incurred $27,000 in interest
expense and received $862,000 in additional interest income for the six months
ended September 30, 1999 and an additional $34,000 in interest expense and
received $837,000 in additional interest income for the six months ended
September 30, 1998. As a result of this assumption, the Company would fund
interest rate increases on its variable rate long-term debt with the increased
amounts of interest income. The Company does not have significant exposure to
the changing interest rates on its fixed-rate long-term debt instruments, which
represent 92 percent of the total long-term debt at September 30, 1999 and 88
percent at September 30, 1998.
Item 4: Submission of Matters to a Vote of Security Holders
The registrant held its Annual Meeting of Shareholders on August 10, 1999. The
shareholders elected the following Board of Directors to serve for one year:
<TABLE>
<CAPTION>
Name Shares Voted For
---- ----------------
<S> <C>
Jerry C. Atkin 19,148,429
Sidney J. Atkin 19,148,396
J. Ralph Atkin 19,147,242
Mervyn K. Cox 19,148,103
Ian M. Cumming 19,147,800
Steven F. Udvar-Hazy 19,149,076
Hyrum W. Smith 19,139,488
Henry J. Eyring 19,149,043
</TABLE>
The shareholders also ratified the appointment of Arthur Andersen LLP as
independent auditors for fiscal year 2000 by a vote of 19,286,735 shares for and
18,487 against.
14
<PAGE> 15
Item 6: Exhibits and Reports on Form 8-K
a. Exhibits - Financial Data Schedule Exhibit 27
b. Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended September 30, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYWEST, INC.
Registrant
November 3, 1999 BY: /s/ Bradford R. Rich
-------------------------------------
Bradford R. Rich
Executive Vice President,
Chief Financial Officer and Treasurer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Index Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,400
<SECURITIES> 159,737
<RECEIVABLES> 6,748
<ALLOWANCES> 197
<INVENTORY> 15,649
<CURRENT-ASSETS> 233,216
<PP&E> 340,379
<DEPRECIATION> 123,771
<TOTAL-ASSETS> 452,144
<CURRENT-LIABILITIES> 83,583
<BONDS> 56,435
0
0
<COMMON> 143,040
<OTHER-SE> 142,478
<TOTAL-LIABILITY-AND-EQUITY> 452,144
<SALES> 122,737
<TOTAL-REVENUES> 122,737
<CGS> 0
<TOTAL-COSTS> 98,076
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 890
<INCOME-PRETAX> 25,926
<INCOME-TAX> 9,982
<INCOME-CONTINUING> 15,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,944
<EPS-BASIC> .65
<EPS-DILUTED> .64
</TABLE>
