<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 December 31, 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.
Class Outstanding at February 8, 2000
----- -------------------------------
Common stock, no par value 24,630,302
<PAGE> 2
SKYWEST, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of December 31, 1999 and
March 31, 1999 3
Condensed Consolidated Statements of
Income for the Three and Nine
Months Ended December 31, 1999 and 1998 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
December 31, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
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>
December 31, March 31,
1999 1999
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,656 $ 52,237
Available-for-sale securities 160,490 109,580
Receivables, net 5,147 13,273
Inventories 15,464 13,863
Prepaid aircraft rents 10,873 18,755
Other current assets 12,530 8,976
--------- ---------
Total current assets 240,160 216,684
--------- ---------
PROPERTY AND EQUIPMENT:
Aircraft and rotable spares 245,427 225,233
Deposits on aircraft 55,045 41,463
Buildings and ground equipment 42,300 39,418
Rental vehicles 4,250 4,603
--------- ---------
347,022 310,717
Less-accumulated depreciation and
amortization (130,056) (111,793)
--------- ---------
216,966 198,924
OTHER ASSETS 2,355 2,052
--------- ---------
$ 459,481 $ 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>
December 31, March 31,
1999 1999
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,637 $ 8,497
Trade accounts payable 57,591 45,630
Accrued salaries,wages and benefits 10,993 10,471
Taxes other than income taxes 1,017 2,372
Income taxes payable - 5,937
Air traffic liability 1,446 1,419
--------- ---------
Total current liabilities 79,684 74,326
--------- ---------
LONG-TERM DEBT, net of current maturities 53,873 61,830
--------- ---------
DEFERRED INCOME TAXES PAYABLE 27,398 25,248
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 163,451 162,116
Retained earnings 155,360 114,425
Treasury stock (20,285) (20,285)
--------- ---------
Total stockholders' equity 298,526 256,256
--------- ---------
$ 459,481 $ 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 Nine Months Ended
December 31, December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 115,378 $ 100,403 $ 345,643 $ 280,174
Freight and other 2,003 1,852 6,037 5,269
------------ ------------ ------------ ------------
117,381 102,255 351,680 285,443
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Flying operations 44,512 37,686 127,906 101,823
Aircraft, traffic and passenger service 16,744 15,649 50,160 43,619
Maintenance 14,688 13,700 43,847 37,780
Promotion and sales 6,750 8,009 21,861 21,840
General and administrative 6,738 5,474 20,450 16,187
Depreciation and amortization 7,243 6,011 20,577 16,412
Other 526 450 1,562 1,296
------------ ------------ ------------ ------------
Total operating expenses 97,201 86,979 286,363 238,957
------------ ------------ ------------ ------------
OPERATING INCOME 20,180 15,276 65,317 46,486
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (466) (334) (1,919) (1,302)
Interest income 2,359 2,083 6,497 5,953
Gain on sales of property and equipment 70 67 261 316
------------ ------------ ------------ ------------
1,963 1,816 4,839 4,967
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 22,143 17,092 70,156 51,453
PROVISION FOR INCOME TAXES (8,525) (6,709) (27,013) (19,988)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 13,618 10,383 43,143 31,465
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS, net of income taxes:
(Loss) income from operations of Scenic Airlines - (1,233) 280
Loss from disposition of Scenic Airlines - (625) - (625)
------------ ------------ ------------ ------------
- (1,858) - (345)
------------ ------------ ------------ ------------
NET INCOME $ 13,618 $ 8,525 $ 43,143 $ 31,120
============ ============ ============ ============
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE:
Basic $ 0.55 $ 0.43 $ 1.76 $ 1.30
Diluted $ 0.54 $ 0.42 $ 1.73 $ 1.28
LOSS FROM DISCONTINUED
OPERATIONS PER COMMON SHARE:
Basic $ - $ (0.08) $ - $ (0.01)
Diluted $ - $ (0.07) $ - $ (0.01)
NET INCOME PER COMMON SHARE:
Basic $ 0.55 $ 0.35 $ 1.76 $ 1.29
Diluted $ 0.54 $ 0.34 $ 1.73 $ 1.27
WEIGHTED AVERAGE COMMON SHARES
Basic 24,564,000 24,225,000 24,535,000 24,158,000
Diluted 24,979,000 24,828,000 24,879,000 24,536,000
</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>
Nine Months Ended
December 31,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,143 $ 31,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,577 16,412
Nonairline depreciation and amortization 850 705
Gain on sales of property and equipment (261) (316)
Loss on sale of discontinued operations - 992
Maintenance expense related to disposition of rotable spares 678 130
Increase in deferred income taxes 2,150 1,489
Changes in operating assets and liabilities:
Decrease in receivables, net 8,126 826
Increase in inventories (1,601) (4,502)
Decrease in other current assets 4,328 4,744
Decrease in net current assets of discontinued operations - 819
Increase in trade accounts payable 11,958 14,535
(Decrease) increase in other current liabilities (6,743) 3,661
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 83,205 70,615
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of available-for-sale securities (50,910) 12,800
Acquisition of property and equipment:
Aircraft and rotable spares (22,908) (59,413)
Buildings and ground equipment (2,882) (7,655)
Rental vehicles (3,480) (2,772)
Proceeds from sales of property and equipment 3,110 1,910
Proceeds from sale of discontinued operations - 16,178
Increase in deposits on aircraft and rotable spares (13,582) (8,300)
Increase in net long-term assets of discontinued operations - (895)
Increase in other assets (446) (230)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (91,098) (48,377)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 22,220
Issuance of common stock upon exercise of stock options 1,335 2,330
Tax benefit of options exercised - 904
Payment of cash dividends (2,206) (2,050)
Reduction of long-term debt (7,817) (13,801)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (8,688) 9,603
--------- ---------
(Decrease) increase in cash and cash equivalents (16,581) 31,841
Cash and cash equivalents at beginning of period 52,237 139,772
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,656 $ 171,613
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,127 $ 1,786
Income taxes 25,587 15,995
</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 nine months ended December 31, 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 nine months ended December 31, 1999 and 1998, the Company provided for
income taxes based upon the estimated annualized effective tax rate. At December
31, 1999, the Company has recorded a net current deferred tax asset of $7.7
million and a net noncurrent deferred tax liability of $27.4 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 Nine Months Ended
December 31, December 31,
------------------ -------------------
1999 1998 1999 1998
------- ------ ------- -------
(In thousands): (In thousands):
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 24,564 24,225 24,535 24,158
Effect of outstanding stock options............................ 415 603 344 378
------ ------ ------ ------
Weighted average number of shares for diluted net income
per common share........................................... 24,979 24,828 24,879 24,536
====== ====== ====== ======
</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 nine months ended December 31, 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 $5.7 and $27.7 million
for the three and nine months ended December 31, 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 Nine Months Ended
December 31, December 31,
------------------------------------------------------------------------------------
1999 1998 % Change 1999 1998 % Change
--------- --------- -------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Passengers carried 1,354,955 1,322,740 2.4% 4,207,958 3,662,007 14.9%
Revenue passenger miles (000s) 292,397 266,216 9.8% 906,269 760,223 19.2%
Available seat miles (000s) 542,050 495,063 9.5% 1,617,783 1,361,844 18.8%
Passenger load factor 53.9% 53.8% .1 pts 56.0% 55.8% .2 pts
Passenger breakeven load factor 44.8% 45.9% (1.1) pts 45.9% 47.0% (1.1) pts
Yield per revenue passenger mile 39.5cents 37.7cents 4.8% 38.1cents 36.9cents 3.3%
Revenue per available seat mile 21.6cents 20.6cents 4.9% 21.6cents 20.9cents 3.3%
Cost per available seat mile 17.9cents 17.5cents 2.3% 17.7cents 17.5cents 1.1%
Average passenger trip (miles) 216 201 7.5% 215 208 3.4%
</TABLE>
For the Three Months Ended December 31, 1999 and 1998
For the quarter ended December 31, 1999, the Company enplaned a record number of
passengers and reported a 59.7 percent increase in consolidated net income of
$13.6 million, or $0.54 per share on a diluted basis, compared to $8.5 million,
or $0.34 per share on a diluted basis for the same period last year.
Consolidated operating revenues increased 14.8 percent to $117.4 million for the
quarter ended December 31, 1999 from $102.3 million for the quarter ended
December 31, 1998.
Passenger revenues, which represented 98.3 percent of consolidated operating
revenues, increased 14.9 percent to $115.4 million for the quarter ended
December 31, 1999 from $100.4 million or 98.2 percent of consolidated operating
revenues for the quarter ended December 31, 1998. The increase was primarily the
result of a 9.8 percent increase in revenue passenger miles ("RPMs") as well as
a 4.8 percent increase in yield per RPM. SkyWest began operating as United
Express in Los Angeles, California on 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. Subsequent to these new United Express operations, SkyWest has continued
to expand the United Express system which required eight additional aircraft and
has resulted in both increased RPMs and increased yield per RPM. 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 4.9 percent increase in revenue per available seat mile to
21.6cents for the quarter ended December 31, 1999 from 20.6cents for the quarter
ended December 31, 1998.
Total operating expenses and interest increased 11.9 percent to $97.7 million
for the quarter ended December 31, 1999 compared to $87.3 million for the
quarter ended December 31, 1998. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 83.2 percent for
the quarter ended December 31, 1999 from 85.4 percent for the comparable quarter
ended December 31, 1998. For the quarter ended December 31, 1999, total airline
operating expenses and interest (excluding nonairline expenses) were 83.1
percent of airline operating revenues compared to 85.3 percent for the quarter
ended December 31, 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 ("ASM") (including interest
expense) increased only 2.3 percent to 17.9cents for the quarter ended December
31, 1999 from 17.5cents for the quarter ended December 31, 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 increased as a percentage of airline
operating revenues to 26.8 percent for the quarter ended December 31, 1999 from
26.1 percent for the quarter ended December 31, 1998. The average number of
full-time equivalent employees for the quarter ended December 31, 1999 was 3,341
compared to 3,027 for the quarter ended December 31, 1998. The increase in
number of personnel was due to continued United Express expansion. Salaries,
wages and employee benefits per ASM increased to 5.8cents for the quarter ended
December 31, 1999 compared to 5.4cents for the quarter ended December 31, 1998
as a result of additional employees and higher employee incentives based on
increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 17.9 percent for the quarter ended
December 31, 1999 from 18.8 percent for the quarter ended December 31, 1998. The
decrease is due to airline operating revenues increasing at a faster rate than
aircraft costs. Aircraft costs per ASM decreased slightly to 3.8cents for the
quarter ended December 31, 1999 from 3.9cents for the quarter ended December 31,
1998.
Maintenance expense decreased as a percentage of airline operating revenues to
8.7 percent for the quarter ended December 31, 1999 compared to 9.5 percent for
the quarter ended December 31, 1998. This decrease is due to airline operating
revenues increasing at a faster rate than maintenance costs. Maintenance expense
per ASM was 1.9cents for both quarters ended December 31, 1999 and 1998.
Fuel costs increased as a percentage of airline operating revenues to 10.3
percent for the quarter ended December 31, 1999 from 8.2 percent for the quarter
ended December 31, 1998, primarily due to a substantial increase in the average
fuel price per gallon to $0.97 from $0.65. The substantial increase in price is
the result of oil producing countries limiting the supply of oil thereby forcing
prices to increase. Fuel costs per ASM increased to 2.2cents for the quarter
ended December 31, 1999 from 1.7cents for the quarter ended December 31, 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 18.9 percent for the
quarter ended December 31, 1999 from 22.4 percent for the quarter ended December
31, 1998. The decrease is primarily the result of the airline not incurring
commissions on contract related passenger revenues.
For the Nine Months Ended December 31, 1999 and 1998
For the nine months ended December 31, 1999, the Company enplaned a record
number of passengers and reported a 38.6 percent increase in consolidated net
income of $43.1 million, or $1.73 per share on a diluted basis, compared to
$31.1 million, or $1.27 per share on a diluted basis for the same period last
year. Consolidated operating revenues increased 23.2 percent to $351.7 million
for the nine months ended December 31, 1999 from $285.4 million for the nine
months ended December 31, 1998.
Passenger revenues, which represented 98.3 percent of consolidated operating
revenues, increased 23.4 percent to $345.6 million for the nine months ended
December 31, 1999 from $280.2 million or 98.2 percent of consolidated operating
revenues for the nine months ended December 31, 1998. The increase was primarily
the result of a 19.2 percent increase in RPMs as well as a 3.3 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. Subsequent to these new
United Express operations, SkyWest has continued to expand the United Express
system which required the acquisition of eight additional aircraft and has
resulted in both increased RPMs and increased yield per RPM. 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
21.6cents for the nine months ended December 31, 1999 from 20.9cents for the
nine months ended December 31, 1998.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Total operating expenses and interest increased 20.0 percent to $288.3 million
for the nine months ended December 31, 1999 compared to $240.2 million for the
nine months ended December 31, 1998. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 82.0 percent for
the nine months ended December 31, 1999 from 84.2 percent for the nine months
ended December 31, 1998. For the nine months ended December 31, 1999, total
airline operating expenses and interest (excluding nonairline expenses) were
81.9 percent of airline operating revenues compared to 84.7 percent for the nine
months ended December 31, 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 17.7cents for the nine months ended December 31, 1999 from
17.5cents for the nine months ended December 31, 1998. Factors relating to the
change in operating expenses are discussed below.
Salaries, wages and employee benefits as a percentage of airline operating
revenues was 26.0 percent for each of the nine month periods ended December 31,
1999 and 1998. The average number of full-time equivalent employees for the nine
months ended December 31, 1999 was 3,275 compared to 2,744 for the nine months
ended December 31, 1998. The increase in number of personnel was due to the
United Express expansion. Salaries, wages and employee benefits per ASM
increased slightly to 5.6cents for the nine months ended December 31, 1999 from
5.4cents for the nine months ended December 31, 1998 as a result of additional
employees and higher employee incentives based on increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 17.3 percent for the nine months
ended December 31, 1999 from 18.3 percent for the nine months ended December 31,
1998. The decrease is due to airline operating revenues increasing at a faster
rate than aircraft costs. Aircraft costs per ASM decreased slightly to 3.7cents
for the nine months ended December 31, 1999 from 3.8cents for the nine months
ended December 31, 1998.
Maintenance expense decreased as a percentage of airline operating revenues to
8.8 percent for the nine months ended December 31, 1999 from 9.5 percent for the
nine months ended December 31, 1998. Maintenance expense was higher in the
quarter ended December 31, 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 been reduced to a level which is consistent with management's
expectation for normal operations. Maintenance expense per ASM decreased to
1.9cents for the nine months ended December 31, 1999 from 2.0cents for the nine
months ended December 30, 1998.
Fuel costs increased as a percentage of airline operating revenues to 9.5
percent for the nine months ended December 31, 1999 from 7.9 percent for the
nine months ended December 31, 1998, primarily due to an increase in the average
fuel price per gallon to $.86 from $.66. The increase in price is the result of
oil producing countries limiting the supply of oil thereby forcing prices to
increase. Fuel costs per ASM increased to 2.1cents for the nine months ended
December 31, 1999 from 1.6cents for the nine months ended December 31, 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 19.7 percent for the
nine months ended December 31, 1999 from 22.0 percent for the nine months ended
December 31, 1998. The decrease is primarily the result of the airline not
incurring commissions on contract related passenger revenues.
Liquidity and Capital Resources
The Company had working capital of $160.5 million and a current ratio of 3.0:1
at December 31, 1999 compared to working capital of $142.4 million and a current
ratio of 2.9:1 at March 31, 1999. During the nine months ended December 31,
1999, the principal sources of funds were $83.2 million generated from
operations, $3.1 million of proceeds from the sale of property and equipment and
$1.3 million from the issuance of common stock upon the exercise of stock
options. During the nine months ended December 31, 1999 the Company invested
$50.9 million in available-for-sale securities, $22.9 million in flight
equipment, $13.6 million in aircraft deposits, reduced long-term debt by $7.8
million, invested $3.5 million in rental vehicles, $3.3 million in ground
equipment and other and paid cash dividends of $2.2 million. These factors
resulted in a decrease of $16.6 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 $160.5 million at December
31, 1999 compared to $109.6 million at March 31, 1999. At December 31, 1999, the
Company's long-term debt to equity position was 15 percent debt and 85 percent
equity compared to 19 percent debt and 81 percent equity at March 31, 1999.
During the nine months ended December 31, 1999, SkyWest took delivery of five
Brasilia aircraft in connection with the United Express expansion. Additionally,
as of December 31, 1999, SkyWest had agreed to purchase 55 Canadair Regional
Jets ("CRJs") and related spare parts inventory and support equipment at an
aggregate cost of approximately $1.2 billion. SkyWest will take delivery of
these aircraft beginning in June 2000 and deliveries will continue through
October 2003. Depending on the state of the aircraft financing market at the
time of delivery, management will determine whether to acquire these aircraft
through third party, long-term loans or lease agreements. SkyWest also has
options to acquire 75 additional CRJs at fixed prices (subject to cost
escalations) and delivery schedules and are exercisable through December 2005.
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 December 31, 1999, SkyWest leased 82 aircraft under leases with an
average remaining term of approximately 9.4 years. Future minimum lease payments
due under all long-term operating leases were approximately $571.8 million at
December 31, 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 4.0 percent on $36.1 million of the long-term
debt, at December 31, 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
December 31, 1999 and the lender has assumed the risk of the subsidy payments.
The Company spent approximately $29.3 million for nonaircraft capital
expenditures during the nine months ended December 31, 1999, consisting
primarily of aircraft engine overhauls, rotable spare parts, buildings and
ground equipment and rental vehicles.
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
8.25 percent at December, 31, 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.
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
involved personnel in all areas of the Company and had 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 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 had 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 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 were not available.
Readiness
Our internal mission critical systems and equipment were repaired or replaced by
December 1, 1999. Third party systems and service providers had 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 were certified
year 2000 compliant by their manufactures. Company contingency plans were
enhanced to specifically address year 2000 issues and were 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 fiscal year ending March 31, 2000.
Costs
Several key internal systems have been replaced during the past two years in
support of both growth and replacement of year 2000 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. We will continue to monitor key third party service providers through
the fiscal year ending March 31, 2000.
Impact of Date Change
As the date change occurred, the Company did not experience any disruption of
air service nor did it experience any disruption in any of its automated
processing systems. The Company has continued to monitor its equipment and
systems subsequent to the date change with all equipment and systems functioning
as intended. The Company will continue to monitor its equipment and systems
through the fiscal year ending March 31, 2000.
13
<PAGE> 14
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 nine months ended
December 31, 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 $423,000 for the
quarter ended December 31, 1999 and $291,000 for the quarter ended December 31,
1998. The Company would have experienced an increase in fuel expense of
approximately $1,164,000 for the nine months ended December 31, 1999 and
$785,000 for the nine months ended December 31, 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. The interest rate applicable to 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 December 31,
1999 the Company had variable rate notes representing 8 percent of the total
long-term debt and 10 percent at December 31, 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 $12,000 in interest expense and received $474,000 in
additional interest income for the quarter ended December 31, 1999 and an
additional $16,000 in interest expense and received $442,000 in additional
interest income for the quarter ended December 31, 1998. Additionally, the
Company would have incurred $40,000 in interest expense and received $1,342,000
in additional interest income for the nine months ended December 31, 1999 and an
additional $50,000 in interest expense and received $1,229,000 in additional
interest income for the nine months ended December 31, 1998. As a result of this
hypothetical 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 December 31, 1999 and 90 percent at December 31, 1998.
14
<PAGE> 15
PART II. OTHER INFORMATION
SKYWEST, INC.
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 December 31, 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
February 8, 2000 BY: /s/ Bradford R. Rich
-----------------------------
Bradford R. Rich
Executive Vice President,
Chief Financial Officer and Treasurer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. 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> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,656
<SECURITIES> 160,490
<RECEIVABLES> 5,209
<ALLOWANCES> 62
<INVENTORY> 15,464
<CURRENT-ASSETS> 240,160
<PP&E> 347,022
<DEPRECIATION> 130,056
<TOTAL-ASSETS> 459,481
<CURRENT-LIABILITIES> 79,684
<BONDS> 53,873
0
0
<COMMON> 143,166
<OTHER-SE> 155,360
<TOTAL-LIABILITY-AND-EQUITY> 459,481
<SALES> 117,381
<TOTAL-REVENUES> 117,381
<CGS> 0
<TOTAL-COSTS> 97,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 466
<INCOME-PRETAX> 22,143
<INCOME-TAX> 8,525
<INCOME-CONTINUING> 13,618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,618
<EPS-BASIC> .55
<EPS-DILUTED> .54
</TABLE>
