FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-13934
MIDWEST EXPRESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6744 South Howell Avenue
Oak Creek, Wisconsin 53154
(Address of Principal executive offices)
(Zip code)
414-570-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 31, 1998, there were 14,081,542 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
Page 1
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended September 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Unaudited Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 7
Operationsand Financial Condition
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
Part I Item I - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- -------- -------- -------
Operating revenues:
<S> <C> <C> <C> <C>
Passenger service................................... $ 95,172 $ 81,731 $265,970 $229,578
Cargo............................................... 2,894 3,156 8,763 8,448
Other............................................... 5,757 4,512 17,599 14,637
---------- ------- ------- -------
Total operating revenues.......................... 103,823 89,399 292,332 252,663
---------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits........................ 28,579 23,921 84,060 66,483
Aircraft fuel and oil............................... 10,532 12,043 32,144 37,405
Commissions ........................................ 8,434 8,423 23,187 23,606
Dining services..................................... 5,314 4,580 14,632 12,768
Station rental, landing and other fees.............. 6,274 5,800 19,720 18,183
Aircraft maintenance materials and repairs.......... 10,496 7,146 26,949 21,409
Depreciation and amortization....................... 2,615 2,110 7,364 6,359
Aircraft rentals.................................... 4,899 4,373 14,323 12,947
Other............................................... 9,764 9,215 26,803 26,735
---------- ----- ------ -------
Total operating expenses.......................... 86,907 77,611 249,182 225,895
---------- ------ ------- -------
Operating income........................................... 16,916 11,788 43,150 26,768
---------- ------ ------- -------
Other income (expense):
Interest income..................................... 415 257 1,304 896
Interest expense.................................. (70) (24) (211) (24)
Other............................................. (19) (18) (57) (37)
---------- -------- -------- -------
Total other income (expense)...................... 326 215 1 ,036 835
---------- -------- -------- -------
Income before income taxes................................. 17,242 12,003 44,186 27,603
Provision for income taxes................................. 6,447 4,445 16,551 10,216
---------- -------- -------- -------
Net income................................................. $ 10,795 $ 7,558 $ 27,635 $17,387
========== ======== ======== =======
Net income per common share - basic........................ $ .77 $ .53 $ 1.96 $ 1.22
========== ======== ======== =======
Net income per common share - diluted...................... $ .75 $ .53 $ 1.93 $ 1.21
========== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Part I Item I - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1998 1997
----- ----
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................................... $ 27,967 $ 32,066
Accounts receivable:
Traffic, less allowance for doubtful accounts
of $236 and $231 at
September 30, 1998 and December 31, 1997, 5,887 5,106
respectively.............................................
Other receivables............................................ 435 444
-------- --------
Total accounts receivable........................... 6,322 5,550
Inventories...................................................... 4,043 3,942
Prepaid expenses................................................. 4,855 3,414
Deferred income taxes............................................ 6,128 4,655
Aircraft and modifications intended to be financed
by sale and leaseback 951 6,000
-------- --------
transactions.....................................................
Total current assets................................ 50,266 55,627
-------- --------
Property and equipment, at cost....................................... 233,034 160,048
Less accumulated depreciation.................................... 79,460 70,892
-------- --------
Net property and equipment............................................ 153,574 89,156
Landing slots and leasehold rights, net............................... 4,654 4,900
Purchase deposits on flight equipment................................. 2,333 14,500
Other assets.......................................................... 1,864 2,565
-------- --------
Total assets.......................................................... $ 212,691 $166,748
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 5,805 $ 5,560
Income taxes payable............................................. 3,062 215
Air traffic liability............................................ 37,223 28,934
Accrued liabilities.............................................. 41,618 33,774
--------- --------
Total current liabilities........................... 87,708 68,483
--------- --------
Long-term debt........................................................ 3,246 3,333
Deferred income taxes................................................. 10,406 12,509
Noncurrent scheduled maintenance expense.............................. 10,016 7,594
Accrued pension and other postretirement benefits..................... .6,577 5,462
Other noncurrent liabilities.......................................... 5,449 5,969
--------- --------
Total liabilities..................................................... $ 123,402 $103,350
--------- --------
Shareholders' equity:
Preferred stock, without par value, 5,000,000 shares
authorized, no shares issued or outstanding.................... - -
Common stock, $.01 par value, 25,000,000 shares authorized,
14,464,056 shares issued in 1998 and 9,642,807 in 1997........ 145 96
Additional paid-in capital....................................... 9,635 9,531
Treasury stock, at cost..................................... (6,466) (4,572)
Retained earnings................................................ 85,975 58,343
--------- --------
Total shareholders' equity............................................ 89,289 63,398
--------- --------
Total liabilities and shareholders' equity............................ $ 212,691 $166,748
========= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Part I Item I- Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1998 1997
------ ------
Operating activities:
<S> <C> <C>
Net income....................................................... $ 27,635 $17,387
Items not involving the use of cash:
Depreciation and amortization................................ 7,364 6,359
Deferred income taxes........................................ (3,576) 292
Other........................................................ 3,637 3,236
Changes in operating assets and liabilities:
Accounts receivable.......................................... (772) 177
Inventories................................................. (101) (346)
Prepaid expenses............................................. (1,441) 403
Accounts payable............................................. 245 495
Income taxes payable......................................... 2,847 2,009
Accrued liabilities.................................... 7,844 (2,358)
Air traffic liability........................................ 8,289 9,246
-------- -------
Net cash provided by operating activities........................ 51,971 36,900
-------- -------
Investing activities:
Capital expenditures............................................. (75,482) (23,042)
Aircraft acquisitions and modifications financed
by or intended to be financed by sale and leaseback
transactions................................................... 557 (11,799)
Proceeds from sale of property and equipment..................... 309 49
Other............................................................ 12,868 (3,570)
-------- --------
Net cash used in investing activities............................ (61,748) (38,362)
-------- --------
Financing activities:
Proceeds from sale and leaseback transactions.................... 4,492 1,266
Purchase of treasury stock....................................... (2,003) (1,977)
Other............................................................ 3,189 (918)
-------- --------
Net cash provided by (used in) financing activities............. 5,678 1,629)
-------- --------
Net (decrease) increase in cash and cash equivalents.................. (4,099) (3,091)
Cash and cash equivalents, beginning of period........................ 32,066 27,589
-------- -------
Cash and cash equivalents, end of period.............................. $ 27,967 $24,498
======== =======
Supplemental schedule of non-cash investing and financing activities:
Long-term debt assumed in connection with capital expenditures $ - $ 3,487
======== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Basis of Presentation
The consolidated financial statements for the nine-month period ended
September 30, 1998 are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim period. The
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results
of operations, contained in the Company's Annual Report to Shareholders
and incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations
for the nine-month period ended September 30, 1998 are not necessarily
indicative of the results for the entire fiscal year ending December
31, 1998.
Stock Split
On April 22, 1998, the Company announced that its Board of Directors
had approved a plan to split its stock 3-for-2 in the form of a 50%
stock dividend. The new shares were issued May 27 to shareholders of
record as of May 11. The financial and share information presented
herein for all periods has been adjusted to reflect the effect of the
stock dividend.
2. New Accounting Standards
The Company is required to adopt SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the fourth
quarter of 1998. SFAS No. 131 will supersede the business segment
disclosure requirements currently in effect under SFAS No. 14. SFAS No.
131, among other things, establishes standards regarding the
information a company is required to disclose about its operating
segments and provides guidance regarding what constitutes a reportable
operating segment. For the 1998 year end reporting, the Company will
report additional financial information on two operating segments,
Midwest Express and Skyway Airlines.
The Company is required to adopt the disclosure requirements of SFAS
No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits," in the fourth quarter of 1998. SFAS No. 132
revises disclosure requirements for such pension and postretirement
benefit plans to, among other things, standardize certain disclosures
and eliminate certain other disclosures no longer deemed useful. SFAS
No. 132 does not change the measurement or recognition criteria for
such plans.
6
<PAGE>
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's 1998 third quarter operating income was $16.9 million, an increase
of $5.1 million from the third quarter 1997. Net income increased by $3.2
million, or 42.8%, to $10.8 million. For the first nine months of 1998,
operating income was $43.2 million, an increase of $16.4 million from 1997.
Year-to-date net income increased from $17.4 million to $27.6 million, or 58.9%.
Year-to-date diluted earnings per share were $1.93, a $.72, or 59.5%, increase
from 1997 results.
The Company's total revenue in the third quarter increased $14.4 million, or
16.1%, relative to the third quarter 1997. The increase in revenue was primarily
attributable to record passenger traffic, which increased 18.9%, which was
partially due to three additional aircraft in service. The principal new routes
were Milwaukee-Hartford and Milwaukee-Raleigh/Durham. In addition, the Company's
traffic increased because of Northwest Airlines' and Air Canada's pilot strikes.
The Company estimates that operating income increased $1.2 million in the
quarter because of the incremental passengers transported during these strikes.
A 2.0% decrease in revenue yield offset the improvement in passenger traffic.
The decrease in revenue yield was due to higher traffic in lower yield markets
and lower yield traffic received as a result of Northwest Airlines' pilot
strike. The Company also posted increased supplemental revenue from the Midwest
Express MasterCard program, ticket exchange fees and aircraft charters.
The Company's costs increased by $9.3 million, or 12.0%, in the third quarter
1998 due to higher labor and maintenance costs and expenses associated with the
service expansions during 1997 and 1998. These higher costs were partially
offset by lower fuel prices and reduced travel agent commission expense. The
Company benefited from significantly lower fuel prices in the third quarter
1998, which averaged 21.3% less than in the third quarter 1997. Lower fuel
prices favorably impacted operating income by $2.8 million in the third quarter
1998. In addition, a reduced travel agent commission structure contributed $1.4
million to operating income in the third quarter 1998. The Company also incurred
incremental costs of $1.6 million for two aircraft heavy maintenance checks in
the third quarter 1998. Additional detail on cost changes is included in
subsequent sections.
7
<PAGE>
Operating Statistics
The following table provides selected operating statistics for Midwest
Express and Skyway.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
% %
1998 1997 Change* 1998 1997 Change*
--------- --------- --------- -------- -------- ---------
Midwest Express Operations
<S> <C> <C> <C> <C> <C> <C>
Origin & Destination Passengers 485,286 413,473 17.4 1,312,484 1,154,683 13.7
Revenue Passenger Miles (000s) 444,579 374,693 18.7 1,209,059 1,050,179 15.1
Scheduled Service Available Seat Miles (000s) 644,906 571,362 12.9 1,839,701 1,639,871 12.2
Total Available Seat Miles (000s) 651,038 576,684 12.9 1,861,471 1,667,040 11.7
Load Factor (%) 68.9% 65.6% 3.3 65.7% 64.0% 1.7
Revenue Yield $0.188 $0.191 -1.6 $0.194 $0.192 1.2
Cost per total ASM $0.120 $0.120 0.2 $0.120 $0.120 --
Average Passenger Trip Length 916.1 906.2 1.1 921.2 909.5 1.3
Number of Flights 10,739 9,961 7.8 30,659 28,793 6.5
Into-plane Fuel Cost per Gallon $0.534 $0.680 -21.4 $0.569 $0.735 -22.7
Full-time Equivalent Employees at End of Period 2,066 1,850 11.7 2,066 1,850 11.7
Aircraft in Service at End of Period 27 24 12.5 27 24 12.5
Skyway Airlines Operations
Origin & Destination Passengers 99,144 77,868 27.3 255,313 222,790 14.6
Revenue Passenger Miles (000s) 22,695 18,451 23.0 58,835 52,077 13.0
Scheduled Service Available Seat Miles (000s) 41,332 41,168 0.4 121,642 119,215 2.0
Total Available Seat Miles (000s) 41,473 41,236 0.6 121,818 119,465 2.0
Load Factor (%) 54.9% 44.8% 10.1 48.4% 43.7% 4.7
Revenue Yield $0.510 $0.551 -7.4 $0.537 $0.546 -1.5
Cost per total ASM $0.236 $0.231 2.5 $0.235 $0.238 -1.3
Average Passenger Trip Length 228.9 237.0 -3.4 230.4 233.7 -1.4
Number of Flights 11,148 10,771 3.5 32,589 31,200 4.5
Into-plane Fuel Cost per Gallon $0.623 $0.766 -18.6 $0.642 $0.794 -19.1
Full-time Equivalent Employees at End of Period 297 264 12.5 297 264 12.5
Aircraft in Service at End of Period 15 15 -- 15 15 --
</TABLE>
Note: All statistics exclude charter operations except the
following: total available seat miles, cost per total ASM,
into-plane fuel cost, number of employees and aircraft in
service. Aircraft acquired but not yet placed into service are
excluded from the aircraft in service statistics.
* Percentage change calculations may not be recomputed due to
rounding.
8
<PAGE>
The following table provides operating revenues and expenses for the
Company expressed as cents per total ASM, including charter operations,
and as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---------- ---------- ---------- ---------
Per Total % of Per Total % of Per Total % of Per Total % of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Operating revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passenger service $0.137 91.7% $0.132 91.4% $0.134 91.0% $0.129 90.9%
Cargo 0.004 2.8% 0.005 3.5% 0.004 3.0% 0.005 3.3%
Other 0.008 5.5% 0.007 5.1% 0.009 6.0% 0.008 5.8%
----- ---- ----- ---- ----- ---- ----- ----
Total operating revenues 0.150 100.0% 0.145 100.0% 0.147 100.0% 0.141 100.0%
Operating expenses:
Salaries, wages and benefits 0.041 27.5% 0.039 26.7% 0.042 28.8% 0.037 26.3%
Aircraft fuel and oil 0.015 10.1% 0.020 13.5% 0.016 11.0% 0.021 14.8%
Commissions 0.012 8.1% 0.014 9.4% 0.012 7.9% 0.013 9.3%
Dining services 0.008 5.1% 0.007 5.1% 0.007 5.0% 0.007 5.1%
Station rental, landing and 0.009 6.0% 0.009 6.5% 0.010 6.7% 0.010 7.2%
other fees
Aircraft maintenance 0.015 10.1% 0.012 8.0% 0.014 9.2% 0.012 8.5%
materials/repairs
Depreciation and amoritization 0.004 2.5% 0.003 2.4% 0.004 2.5% 0.004 2.5%
Aircraft rentals 0.007 4.7% 0.007 4.9% 0.007 4.9% 0.007 5.1%
Other 0.014 9.4% 0.015 10.3% 0.014 9.2% 0.015 10.6%
----- ---- ----- ----- ----- ---- ----- -----
Total operating expenses $0.126 83.5% $0.126 86.8% $0.126 85.2% $0.126 89.4%
====== ===== ====== ===== ====== ===== ====== =====
Total ASMs (000s) 692,511 617,920 1,983,289 1,786,505
</TABLE>
Note: Numbers, percents, and totals in this table may not be recomputed
due to rounding.
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Operating Revenues
Company operating revenues totaled $103.8 million in the third quarter 1998, a
$14.4 million, or 16.1%, increase over revenues for the third quarter 1997.
Passenger revenues accounted for 91.7% of total revenues and increased $13.4
million, or 16.4%, from 1997 to $95.2 million. The increase is attributable to a
18.9% increase in passenger volume, as measured by revenue passenger miles,
offset by a 2.0% decrease in revenue yield. Part of the increase in passenger
volume was caused by pilot strikes at Northwest Airlines and Air Canada. The
Company estimates that operating income increased $1.2 million in the quarter
because of the incremental passengers transported during these strikes.
Midwest Express Airlines passenger revenue increased by $12.0 million, or 16.8%,
from 1997 to $83.6 million. This increase reflects a 17.4% increase in origin
and destination passengers, offset by a 1.6% decrease in revenue yield. Total
capacity, as measured by scheduled service ASMs, increased 12.9% because of
three additional aircraft in scheduled service during the 1998 quarter. Load
factor increased from 65.6% in 1997 to 68.9% in 1998. Revenue yield was
negatively impacted by higher traffic in lower yield markets and lower yield
traffic received as a result of Northwest Airlines' pilot strike.
Skyway passenger revenue increased by $1.4 million, or 13.9%, from 1997 to $11.6
million. This increase was caused by a 27.3% increase in origin and destination
passengers, offset by a 7.4% decrease in revenue yield. Load factor increased
from 44.8% in 1997 to 54.9% in 1998. Revenue yield was negatively impacted by
the lower yield traffic diverted to Skyway as a result
9
<PAGE>
of Northwest Airlines' pilot strike and a competitive situation in one market,
which increased load factor with reduced yield.
Revenue from cargo, charter and other services increased $1.0 million in the
third quarter 1998. Midwest Express benefited from increased revenue of $.7
million from the Midwest Express MasterCard program and $.5 million from ticket
exchange fees. Lower mail freight revenues partially offset these increases as a
result of the U.S. Postal Service transporting more mail via ground
transportation.
Operating Expenses
1998 operating expenses increased by $9.3 million, or 12.0%, from 1997. The cost
increase was primarily due to expanded operations as capacity, measured by
scheduled service available seat miles, increased 12.0%. Higher maintenance
costs and a higher employee profit sharing accrual offset lower fuel prices and
lower distribution costs. Cost per total ASM of 12.6(cent) decreased .1% from
third quarter 1997.
Salaries, wages and benefits increased by $4.7 million, or 19.5%. On a cost per
total ASM basis, these costs increased 6.6%, from 3.9(cent) in 1997 to 4.1(cent)
in 1998. Labor costs increased $1.8 million because of accruals for employee
profit sharing and management incentive programs. The profit sharing and
incentive plans, which benefit substantially all employees and are dependent
entirely on achieving certain levels of profitability, are payable annually and
accrued monthly based on earnings-to-date and projected results for the
remainder of the year. Excluding profit sharing, labor costs increased .4% on a
cost per total ASM basis. The labor cost increase also reflects the addition of
approximately 249 full-time equivalent employees (216 at Midwest Express and 33
at Skyway) since September 30, 1997 and increases in labor rates. Midwest
Express added employees throughout the organization to support the aircraft
placed in service during 1997 and 1998; Skyway added employees primarily in the
flight operations and maintenance functions.
Aircraft fuel and oil and associated taxes decreased $1.5 million, or 12.5%, in
1998. Into-plane fuel prices decreased 21.3% in 1998, averaging 54.0(cent) per
gallon in 1998 and 68.7(cent) per gallon in 1997. Fuel consumption increased by
11.4% in the quarter because Midwest Express operated 9.2% more aircraft block
hours. Fuel prices have increased at Midwest Express since the end of the
quarter averaging 58.3(cent) per gallon in October 1998 for scheduled service.
Commission costs were almost the same third quarter 1998 versus third quarter
1997, but decreased 10.7% on a cost per total ASM basis. The new commission rate
structure implemented in September 1997, which lowered travel agent commissions
from 10% to 8%, reduced commission expenses by $1.4 million. This reduction was
offset by the increase in passenger revenue of 16.4%.
Dining services costs increased by $.7 million, or 16.0%, from 1997. The
increase was primarily due to the 17.4% increase in Midwest Express origin and
destination passengers. Total dining services cost per Midwest Express passenger
decreased 1.2% to $10.95.
Station rental, landing and other fees increased by $.5 million, or 8.2%, from
1997. The increase was caused by 7.8% more flight segments by Midwest Express
and higher airport costs,
10
<PAGE>
particularly at Ronald Reagan National Airport in Washington D.C.
Maintenance costs increased by $3.4 million, or 46.9%, from 1997. The increase
was attributable to more flight hours at Midwest Express, an increase in accrual
rates for future engine overhauls and higher aircraft component repair costs. In
addition, the Company incurred $1.6 million of incremental costs for two major
aircraft maintenance checks that required outsourcing.
Depreciation and amortization increased by $.5 million, or 23.9%, from 1997. The
increase was primarily the result of depreciation associated with aircraft
placed in service during the last year.
Aircraft rental costs increased by $.5 million in 1998, as a result of Midwest
Express leasing two additional aircraft in 1998.
Other operating expenses increased by $.5 million, or 6.0%, from 1997. Other
cost increases included additional passenger booking fees, professional and
financial services, flight standards training, costs associated with the
Company's frequent flyer program, telecommunication costs and naming rights
costs for the Midwest Express Center. These cost increases were partially offset
by lower costs for hull and liability insurance, legal services, advertising,
uncollectible accounts, and software.
Provision for Income Taxes
Income tax expense for the third quarter 1998 was $6.4 million, a $2.0 million
increase from 1997. The effective tax rates for the third quarter of 1998 and
1997 were 37.4% and 37.0%, respectively. For purposes of calculating the
Company's income tax expense and effective tax rate, the Company treats amounts
payable to an affiliate of Kimberly-Clark Corporation under a tax allocation and
separation agreement entered into in connection with the Company's initial
public offering as if they were payable to taxing authorities.
Net Income
Net income for the third quarter increased $3.2 million from 1997. The net
income margin increased from 8.5% in 1997 to 10.4% in 1998.
Nine Months Ended September 30, 1998 compared to
Nine Months Ended September 30, 1997
Operating Revenues
Company operating revenues totaled $292.3 million for the nine months ended
September 30, 1998, a $39.7 million, or 15.7%, increase over 1997. Passenger
revenues accounted for 91.0% of total revenues and increased $36.4 million, or
15.9%, from 1997 to $266.0 million. The increase is attributable to a 15.0%
increase in passenger volume, as measured by revenue passenger miles, and a .7%
increase in revenue yield.
Midwest Express Airlines passenger revenue increased by $33.2 million, or 16.5%,
from 1997 to $234.4 million. This increase was caused by a 13.7% increase in
passengers and a 1.3% increase in average passenger trip length. Total Midwest
Express capacity, as measured by scheduled service ASMs, increased 12.2%. Load
factor increased from 64.0% in 1997 to 65.7% in 1998.
11
<PAGE>
Skyway passenger revenue increased $3.2 million, or 11.2%, from 1997 to $31.6
million. This increase was caused by a 14.6% increase in passengers, offset by a
1.5% decrease in revenue yield. Load factor increased from 43.7% in 1997 to
48.4% in 1998.
Revenue from cargo, charter and other services increased $3.3 million, or 14.2%,
in 1998. Midwest Express benefited from increased revenue of $2.0 million from
the Midwest Express MasterCard program and $.9 million from ticket exchange
fees. Revenue from mail and freight services increased 3.7% or $.3 million while
revenue from charter services decreased $.2 million.
Operating Expenses
1998 operating expenses increased $23.3 million, or 10.3%, from 1997, primarily
due to expanded operations as total capacity, measured by scheduled service
available seat miles, increased 11.5%. The Company has benefited from lower fuel
prices and lower distribution costs, but these were partially offset by higher
aircraft maintenance costs and a higher profit sharing accrual. Cost per total
ASM of 12.6(cent) decreased .6%, from 1997 to 1998.
Salaries, wages and benefits increased $17.6 million, or 26.4%, from 1997. On a
cost per total ASM basis, these costs increased 13.9%, from 3.7(cent) in 1997 to
4.2(cent) in 1998. Labor costs increased $6.3 million because of accruals for
employee profit sharing and management incentive programs. The profit sharing
and incentive plans, which benefit substantially all employees and are dependent
on achieving certain levels of profitability, are payable annually and accrued
monthly based on earnings-to-date and projected results for the remainder of the
year. Excluding the profit sharing accrual, labor cost increased 5.8% on an ASM
basis. The labor cost increase also reflects the addition of approximately 249
full-time equivalent employees (216 at Midwest Express and 33 at Skyway) since
September 30, 1997 and increases in labor rates. Midwest Express added employees
throughout the organization to support the aircraft placed in service during
1997 and 1998; Skyway added employees primarily in the flight operations and
maintenance functions.
Aircraft fuel and oil and associated taxes decreased $5.3 million, or 14.1%,
from 1997. Into-plane fuel prices decreased 22.4% in 1998, averaging 57.4(cent)
per gallon in 1998 and 74.0(cent) in 1997. Fuel consumption increased 10.9%,
primarily because of an 8.8% increase in Midwest Express aircraft block hours.
Commissions decreased by $.4 million, or 1.8%, and decreased 11.5% on a cost per
total ASM basis. The new commission rate structure implemented in September
1997, which lowered travel agent commissions from 10% to 8%, reduced commission
expenses by $4.1 million. This reduction was offset by the increase in passenger
revenue of 15.9%.
Dining services costs increased $1.9 million, or 14.6%, in 1998. The increase
was primarily due to the 13.7% increase in Midwest Express origin and
destination passengers. Total dining services cost per Midwest Express passenger
increased .8% to $11.15.
Station rental, landing and other fees increased by $1.5 million, or 8.4%, from
1997. The increase was caused by 6.5% more flight segments by Midwest Express
and higher airport costs, particularly at Ronald Reagan National Airport in
Washington D.C.
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Maintenance costs increased by $5.5 million, or 25.9%, from 1997. The increase
was attributable to more flight hours at Midwest Express, an increase in accrual
rates for future engine overhauls, higher aircraft component costs and $2.3
million cost for three major aircraft maintenance checks that required
outsourcing. The increase was offset by an unscheduled repair of one MD-88
engine that adversely affected costs by $1.3 million in 1997.
Depreciation and amortization increased by $1.0 million, or 15.8%, from 1997.
The increase was primarily the result of the depreciation associated with
additional aircraft placed in service.
Aircraft rental costs increased $1.4 million as a result of Midwest Express
leasing two additional aircraft in 1998.
Other operating expenses increased by .3% from 1997. Higher costs were incurred
for the Company's frequent flyer program, passenger booking fees,
telecommunications and professional and financial services. The increase was
offset primarily by a non-recurring $1.1 million airport rental credit received
from Milwaukee County due to an airport rental surplus. Other cost decreases
consisted of lower hull and liability insurance, software, and facilities
rental.
Provision for Income Taxes
Income tax expense for the first nine months of 1998 was $16.6 million, an
increase of $6.3 million from 1997. The effective tax rates for the first nine
months 1998 and 1997 were 37.5% and 37.0%, respectively.
Net Income
Net income for the first nine months increased $10.2 million from 1997. The net
income margin increased to 9.5% in 1998 from 6.9% in 1997.
13
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Liquidity and Capital Resources
The Company's cash and cash equivalents totalled $28.0 million at September 30,
1998, compared to $32.1 million at December 31, 1997. Net cash provided by
operating activities totalled $52.0 million for the nine months ended September
30, 1998. Net cash used in investing activities totalled $61.7 million,
primarily due to capital expenditures of $75.5 million.
As of September 30, 1998, the Company had a working capital deficit of $37.4
million versus a $12.9 million deficit on December 31, 1997. The working capital
deficit is due to the Company's air traffic liability (advance bookings, whereby
passengers have purchased tickets for future flights), accrued scheduled
maintenance expense and accrued lease payments. The increase in the deficit was
due to higher advance sales as a result of increased operations, higher profit
sharing liability, and higher accrued aircraft lease payments. Because of these
items, the Company expects to operate periodically with a working capital
deficit, which is not unusual for the industry.
As of September 30, 1998, the Company's two credit facilities, a $55.0 million
revolving bank credit facility and a $20.0 million secondary revolving credit
facility with Kimberly-Clark, have not been used except for letters of credit
totalling approximately $16.1 million that reduce the amount of available
credit.
Capital expenditures totalled $75.5 million for the nine months ended September
30, 1998. Capital expenditures consisted primarily of aircraft purchase and
refurbishment costs which totaled $68.1 million. Other capital expenditures
included engine overhauls, aircraft hush kit components, aircraft major
maintenance and ground equipment.
During 1997, the Company executed definitive purchase documents to acquire eight
used McDonnell Douglas MD-80 series aircraft. The Company has financed the first
four deliveries in 1998 using internal cash flow and expects to finance the
remaining four of these aircraft using internal cash flow.
As of March 31, 1998, leases relating to three of Midwest Express' jet aircraft
are guaranteed by Kimberly-Clark in return for a guarantee fee paid by the
Company. Kimberly-Clark will continue to guarantee these leases until the end of
the current lease terms. None of these jet aircraft leases expires before 2001.
The Company's Board of Directors has authorized a $15.0 million common stock
repurchase program. As of September 30, 1998, the Company has purchased a total
of 418,625 shares of common stock at a cost of $6.8 million under the share
repurchase program which included a repurchase of 65,300 shares at a cost of
$2.0 million during the quarter ending September 30, 1998.
On August 5, 1998, the Company completed an $8.3 million financing of a new
maintenance hangar facility in Milwaukee. The facility is financed by 32 year,
tax-exempt, variable rate, demand industrial revenue bonds issued by the City of
Milwaukee. Milwaukee County, a government unit, is the owner of the facility to
ensure the tax-exempt status. Interest payments made to bondholders and
amortization of the principal are recorded as rent expense.
14
<PAGE>
The Company believes its cash flow from operations, funds available from credit
facilities and available long-term financing for the acquisition of jet aircraft
will be adequate to provide for working capital needs and capital expenditures
through 1998.
Pending Developments
This 10-Q filing, and particularly this Pending Developments section, contains
forward-looking statements that may state the Company's or management's
intentions, hopes, beliefs, expectations or predictions for the future. It is
important to note that the Company's actual results could differ materially from
those projected results due to factors that include, but are not limited to,
uncertainties related to general economic factors, industry conditions,
scheduling developments, government regulations, labor relations, aircraft
maintenance and refurbishment schedules, and potential delays relating to
acquired aircraft. Additional information concerning factors that could cause
actual results to differ materially from those in the forward-looking statements
is contained from time to time in the Company's SEC filings, including but not
limited to the Company's prospectus dated May 23, 1996 included in Registration
Statement on Form S-1 No. 333-03325.
Stock Split - On April 22, 1998, the Company announced that its Board of
Directors had approved a plan to split its stock 3-for-2 in the form of a 50%
stock dividend. The new shares were issued May 27 to shareholders of record as
of May 11. Fractional shares were paid to shareholders in cash. The financial
and share information presented in Management's Discussion and Analysis of
Results of Operations and Financial Condition has been adjusted to reflect the
effect of the stock split for all periods.
MD-80 Aircraft - In September 1997 the Company announced plans to acquire eight
used MD-80 aircraft to be placed into scheduled service in 1998 and 1999. As of
September 30, 1998, one aircraft has been placed into service and three aircraft
have been delivered and are being refurbished. Two of these aircraft are
expected to be placed into scheduled service by the end of 1998 and the third
aircraft is expected to be placed into scheduled service in the first quarter of
1999. Two additional aircraft are expected to be delivered in January 1999 and
placed into service during the second quarter of 1999. The final two aircraft
are expected to be delivered in the fourth quarter of 1999 and are expected to
be placed into service early in 2000.
Regional Jets - On July 8, 1998, the Company announced that it has entered into
an agreement with Fairchild Dornier to acquire five new regional jets, with an
option to purchase 10 additional aircraft. Although the aircraft were initially
anticipated to be delivered to Astral beginning March 1999 continuing through
September 1999, they are now expected beginning June 1999 with delivery to be
completed by the end of 1999 as a result of a delay in aircraft certification.
The Company expects that this project, including aircraft purchase price and
support equipment, will cost approximately $60.0 million and will be financed as
deliveries take place. The Company is continuing to evaluate financing
alternatives.
Year 2000 -The Company established a year 2000 team in January 1998 to evaluate
and remediate any year 2000 issues. As a result of the Company becoming publicly
owned in September 1995, many systems required immediate replacement. All of the
replacement systems purchased since then were represented to be year 2000
compliant by their respective vendors. In mid-1997 the
15
<PAGE>
Company designed and implemented a technology infrastructure composed of almost
all year 2000 compliant products.
Notwithstanding the above, the Company has developed plans to address issues
related to the impact of the year 2000 on its business. The Company's Year 2000
Project involves five phases: Awareness, Inventory/Assessment, Renovation,
Validation and Implementation. Internal financial, operational, non-information
technology systems and external interfaces have been inventoried and assessed,
and plans have been developed to remediate any non-compliant systems. The
Company has one major internally developed and maintained system that requires
modifications. This system, which is used for purchasing, inventory, accounts
payable and aircraft maintenance planning and records, was originally scheduled
for completion of these modifications using in-house personnel by the end of
1998; however, due to a delay in start up, completion is now scheduled by June
1999. The company is also evaluating non-technology systems that include
embedded technology, such as microcontrollers in aircraft parts, airport
equipment and facility infrastructures. The financial impact of making the
required system changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flow.
The Company realizes that preparedness is also predicated upon many external
factors. Therefore, the Company is actively pursuing suppliers and vendors to
evaluate their respective level of preparedness. Questionnaires have been mailed
out to the most critical suppliers and vendors and the evaluation of their
preparedness is in process. Follow-up action is dictated by the priority of the
service or commodity used and the response received. The Company is also
participating with the airline industry to identify potential year 2000 issues
at airports, and within industry infrastructure, including common vendors,
suppliers, government agencies, and the Federal Aviation Administration ("FAA").
FAA operations are made possible by many critical computer systems; without
these specialized systems, the FAA could not effectively control the current
level of air traffic, target airlines for inspection, or provide up-to-date
weather conditions to pilots and air traffic controllers.
The implications of the Company, a critical vendor or supplier, or the FAA not
being prepared for the year 2000 could have a material adverse affect on the
Company, resulting in customer inconvenience, increased costs, grounded or
delayed flights, or a degraded level of safety. To be prepared to address
unexpected occurrences, contingency plans will be developed during the first six
months of 1999 for those scenarios within the Company's control. However, due to
the complexity and pervasiveness of the Year 2000 issue and in particular the
uncertainty regarding the compliance programs of third parties, no assurance can
be given that the Company's estimates will be achieved, and actual results could
differ materially from those anticipated.
Other Issues - The Company's annual report for the year ended December 31, 1997,
disclosed certain issues relating to labor relations and sales taxes. These
issues remain pending.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
16
<PAGE>
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Express Holdings, Inc.
Date: November 16, 1998 By /s/ Robert S. Bahlman
---------------------- --------------------------------------------
Robert S. Bahlman
Senior Vice President, Chief Financial
Officer and Treasurer
17
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the financial
statements of Midwest Express Holdings, Inc. as of and for the period ended
September 30, 1998 and is qulaified in its entirety by reference to such
financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-20-1998
<CASH> 27,967
<SECURITIES> 0
<RECEIVABLES> 5,887
<ALLOWANCES> 236
<INVENTORY> 4,043
<CURRENT-ASSETS> 50,266
<PP&E> 233,034
<DEPRECIATION> 79,460
<TOTAL-ASSETS> 212,691
<CURRENT-LIABILITIES> 87,708
<BONDS> 3,246
0
0
<COMMON> 145
<OTHER-SE> 89,144
<TOTAL-LIABILITY-AND-EQUITY> 212,691
<SALES> 0
<TOTAL-REVENUES> 292,332
<CGS> 0
<TOTAL-COSTS> 249,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 44,186
<INCOME-TAX> 16,551
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,635
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.93
</TABLE>
