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, 2000 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 12, 2001 ----- -------------------------------- Common stock, no par value 56,085,580
2 SKYWEST, INC. TABLE OF CONTENTS Part I - Financial Information <TABLE> <S> <C> Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of December 31, 2000 and March 31, 2000 3 Condensed Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2000 and 1999 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2000 and 1999 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
3 PART I. FINANCIAL INFORMATION SKYWEST, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) ASSETS <TABLE> <CAPTION> December 31, March 31, 2000 2000 ----------- --------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 66,190 $ 24,544 Available-for-sale securities 227,440 146,804 Receivables, net 17,230 9,512 Inventories 18,982 16,195 Prepaid aircraft rents 10,712 23,880 Other current assets 14,044 12,891 --------- --------- Total current assets 354,598 233,826 --------- --------- PROPERTY AND EQUIPMENT: Aircraft and rotable spares 291,381 230,248 Deposits on aircraft 98,510 68,372 Buildings and ground equipment 50,550 38,832 Rental vehicles - 3,861 --------- --------- 440,441 341,313 Less-accumulated depreciation and amortization (128,254) (107,359) --------- --------- 312,187 233,954 --------- --------- OTHER ASSETS 2,623 2,403 --------- --------- $ 669,408 $ 470,183 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 3
4 SKYWEST, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in Thousands) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> December 31, March 31, 2000 2000 --------- --------- <S> <C> <C> CURRENT LIABILITIES: Current maturities of long-term debt $ 10,174 $ 12,437 Trade accounts payable 41,273 42,385 Accrued salaries, wages and benefits 13,687 10,254 Engine overhaul accrual 12,990 9,889 Income taxes payable 1,785 - Taxes other than income taxes 2,163 3,230 Air traffic liability 1,648 1,452 --------- --------- Total current liabilities 83,720 79,647 --------- --------- LONG-TERM DEBT, net of current maturities 75,751 48,321 --------- --------- DEFERRED INCOME TAXES PAYABLE 28,686 29,995 --------- --------- STOCKHOLDERS' EQUITY: Common stock 290,485 165,765 Retained earnings 212,026 168,331 Treasury stock (20,285) (20,285) Net unrealized depreciation on available-for-sale securities (975) (1,591) --------- --------- Total stockholders' equity 481,251 312,220 --------- --------- $ 669,408 $ 470,183 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 4
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, ------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> OPERATING REVENUES: Passenger $ 129,483 $ 115,378 $ 395,068 $ 345,643 Freight and other 1,398 2,003 4,831 6,037 ------------ ------------ ------------ ------------ 130,881 117,381 399,899 351,680 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Flying operations 57,310 44,512 160,680 127,906 Aircraft, traffic and passenger service 20,204 16,744 56,416 50,160 Maintenance 15,928 14,688 46,765 43,847 Promotion and sales 6,536 6,750 20,756 21,861 General and administrative 6,478 6,738 22,378 20,450 Depreciation and amortization 8,587 7,243 24,688 20,577 Other - 526 531 1,562 ------------ ------------ ------------ ------------ Total operating expenses 115,043 97,201 332,214 286,363 ------------ ------------ ------------ ------------ OPERATING INCOME 15,838 20,180 67,685 65,317 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense - (466) (1,704) (1,919) Interest income 4,737 2,359 10,453 6,497 Gain on sales of property and equipment - 70 470 261 ------------ ------------ ------------ ------------ 4,737 1,963 9,219 4,839 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 20,575 22,143 76,904 70,156 PROVISION FOR INCOME TAXES (8,024) (8,525) (29,991) (27,013) ------------ ------------ ------------ ------------ NET INCOME $ 12,551 $ 13,618 $ 46,913 $ 43,143 ============ ============ ============ ============ NET INCOME PER COMMON SHARE: Basic $ 0.23 $ 0.28 $ 0.90 $ 0.88 Diluted $ 0.22 $ 0.27 $ 0.88 $ 0.87 WEIGHTED AVERAGE COMMON SHARES Basic 55,653,000 49,128,000 52,263,000 49,069,000 Diluted 56,830,000 49,958,000 53,389,000 49,759,000 </TABLE> See notes to condensed consolidated financial statements. 5
6 SKYWEST, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended December 31, ------------------------- 2000 1999 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 46,913 $ 43,143 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,688 20,577 Nonairline depreciation and amortization 249 850 Gain on sales of property and equipment (470) (261) Maintenance expense related to disposition of rotable spares 1,034 678 (Decrease) increase in deferred income taxes (1,309) 2,150 Changes in operating assets and liabilities: (Increase) decrease in receivables, net (7,718) 8,126 Increase in inventories (2,787) (1,601) Decrease in other current assets 12,015 4,328 Increase in trade accounts payable 1,863 11,958 Increase (decrease) in other current liabilities 4,347 (6,743) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 78,825 83,205 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (80,020) (50,910) Acquisition of property and equipment: Aircraft and rotable spares (65,260) (22,908) Buildings and ground equipment (11,706) (2,882) Rental vehicles (875) (3,480) Proceeds from sales of property and equipment 4,442 3,110 Increase in deposits on aircraft and rotable spares (30,138) (13,582) Increase in other assets (417) (446) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (183,974) (91,098) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 32,299 - Issuance of common stock, net of issuance costs 124,720 1,335 Payment of cash dividends (3,092) (2,206) Reduction of long-term debt (7,132) (7,817) --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 146,795 (8,688) --------- --------- Increase (decrease) in cash and cash equivalents 41,646 (16,581) Cash and cash equivalents at beginning of period 24,544 52,237 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66,190 $ 35,656 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 2,559 $ 2,127 Income taxes 29,325 25,587 </TABLE> See notes to condensed consolidated financial statements. 6
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, 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 accounting principles generally accepted in the United States 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. We suggest that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K for the year ended March 31, 2000. The results of operations for the three and nine months ended December 31, 2000, are not necessarily indicative of the results that may be expected for the year ending March 31, 2001. Note B - Available-for-Sale Securities Available-for-sale securities are recorded at fair market value. Our position in available-for-sale securities consists primarily of investment grade bonds, bond funds, and commercial paper. Unrealized appreciation and depreciation has been recorded as a separate component of stockholders' equity. Note C - Income Taxes For the nine months ended December 31, 2000 and 1999, the Company provided for income taxes based upon the estimated annualized effective tax rate. At December 31, 2000, the Company has recorded a net current deferred tax asset of $9.2 million and a net noncurrent deferred tax liability of $28.7 million. Note D - Interest Expense During the three months ended December 31, 2000, the Company began to capitalize interest costs incurred on long-term construction projects and advance payments on aircraft purchase contracts. Total interest costs incurred were $787,000 and $466,000 for the three months ended December 31, 2000 and 1999, and $2,491,000 and $1,919,000 for the nine months ended December 31, 2000 and 1999, respectively. Interest capitalized during the three and nine months ended December 31, 2000 was $787,000. Note E - 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, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ (In thousands) (In thousands) <S> <C> <C> <C> <C> Weighted average number of common shares outstanding ... 55,653 49,128 52,263 49,069 Effect of outstanding stock options .................... 1,177 830 1,126 690 ------ ------ ------ ------ Weighted average number of shares for diluted net income per common share .................................... 56,830 49,958 53,389 49,759 ====== ====== ====== ====== </TABLE> 7
8 SKYWEST, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Note F - Stock Offering On September 12, 2000, the Company completed a public offering of 5,790,830 shares of common stock which generated net proceeds of $122.1 million after deducting underwriting commissions and other expenses. Note G - Stock Dividend On November 7, 2000, the Board of Directors declared a dividend distribution of one share of common stock for each outstanding share of common stock. The stock dividend was distributed on December 15, 2000 to shareholders of record as of November 30, 2000. The effect of the stock dividend has been retroactively reflected in the accompanying financial statements. 8
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, ---------------------------------------------- ------------------------------------------- 2000 1999 % Change 2000 1999 % Change --------- --------- --------- --------- --------- -------- <S> <C> <C> <C> <C> <C> <C> Passengers carried 1,430,436 1,354,955 5.6 4,303,167 4,207,958 2.3 Revenue passenger miles (000s) 328,606 292,397 12.4 986,590 906,269 8.9 Available seat miles (000s) 567,672 542,050 4.7 1,709,038 1,617,783 5.6 Passenger load factor 57.9% 53.9% 4.0 pts 57.7% 56.0% 1.7 pts Passenger breakeven load factor 50.9% 44.8% 6.1 pts 48.2% 45.9% 2.3 pts Yield per revenue passenger mile 39.4(cents) 39.5(cents) (0.3) 40.0(cents) 38.1(cents) 5.0 Revenue per available seat mile 23.1(cents) 21.6(cents) 6.9 23.4(cents) 21.6(cents) 8.3 Cost per available seat mile 20.3(cents) 17.9(cents) 13.4 19.5(cents) 17.7(cents) 10.2 Average passenger trip (miles) 230 216 6.5 229 215 6.5 </TABLE> For the Three Months Ended December 31, 2000 and 1999 For the three months ended December 31, 2000, the Company reported consolidated net income of $12.6 million, or $0.22 per share on a diluted basis, compared to $13.6 million, or $0.27 per share on a diluted basis for the same period last year. The decrease is primarily related to the impact of inclement weather and Air Traffic Control ("ATC") flight cancellations experienced during the 2000 quarter. Additionally, we accelerated the training of flight crews which will be required for our significant fleet expansion and incurred related expenses prior to the aircraft deliveries. Consolidated operating revenues increased 11.5% to $130.9 million for the three months ended December 31, 2000 from $117.4 million for the three months ended December 31, 1999. Passenger revenues, which represented 98.9% of consolidated operating revenues, increased 12.2% to $129.5 million for the three months ended December 31, 2000 from $115.4 million or 98.3% of consolidated operating revenues for the three months ended December 31, 1999. The increase was primarily the result of a 12.4% increase in revenue passenger miles ("RPMs"). The increase in RPMs is the result of five additional regional jet aircraft deliveries. In spite of the 12.2% increase in passenger revenues, the increase did not keep pace with the increase in operating costs due to the impact of inclement weather and ATC flight cancellations during the quarter ended December 31, 2000. We experienced approximately 5,200 flight cancellations during the quarter, which is an increase of about 2,700 when compared to historical averages for the same three month periods. These flight cancellations occurred primarily in fee-per-departure, or contract flying markets, where the contracted compensation rates are collected only when flights are completed. Typically, these cancellations occur shortly prior to or around the scheduled departure time so a significant amount of the associated costs is still incurred, without receipt of the revenue that would otherwise be earned. Total operating expenses and interest increased 17.8% to $115.0 million for the three months ended December 31, 2000 compared to $97.7 million for the three months ended December 31, 1999. As a percentage of consolidated operating revenues, total operating expenses and interest increased to 87.9% for the three months ended December 31, 2000 from 83.2% for the comparable three months ended December 31, 1999. Airline operating costs per available seat mile ("ASM") (including interest expense) increased 13.4% to 20.3 cents for the three months ended December 31, 2000 from 17.9 cents for the three months ended December 31, 1999. The increase is primarily the result of lower than expected ASM production because of the high rate of flight cancellations during the 2000 quarter. The majority of the operating costs are still incurred when flights are cancelled. Additionally, cost per ASM was significantly impacted by increased fuel costs. Factors relating to the change in operating expenses are discussed below. 9
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 27.4% for the three months ended December 31, 2000 from 26.8% for the three months ended December 31, 1999. The average number of full-time equivalent employees for the three months ended December 31, 2000 was 3,891 compared to 3,341 for the three months ended December 31, 1999. The increase in number of personnel was due to continued Delta Connection and United Express expansion. Additionally, we accelerated the training of flight crews which will be required for our significant fleet expansion and incurred the related expenses prior to the aircraft deliveries. Salaries, wages and employee benefits per ASM increased to 6.3 cents for the three months ended December 31, 2000 compared to 5.8 cents for the three months ended December 31, 1999 as a result of additional employees. Aircraft costs, including aircraft rent and depreciation, decreased slightly as a percentage of airline operating revenues to 17.7% for the three months ended December 31, 2000 from 17.9% for the three months ended December 31, 1999. The decrease is due to airline operating revenues increasing at a faster rate than aircraft costs. However, aircraft costs per ASM increased slightly to 4.1 cents for the three months ended December 31, 2000 from 3.8 cents for the three months ended December 31, 1999 due to the flight cancellations previously discussed. Maintenance expense decreased as a percentage of airline operating revenues to 8.1% for the three months ended December 31, 2000 compared to 8.7% for the three months ended December 31, 1999. This decrease is due to airline operating revenues increasing at a faster rate than maintenance costs. Maintenance expense per ASM was 1.9 cents for both three month periods ended December 31, 2000 and 1999. Fuel costs increased as a percentage of airline operating revenues to 15.2% for the three months ended December 31, 2000 from 10.3% for the three months ended December 31, 1999 primarily due to a substantial increase in the average fuel price per gallon to $1.29 from $0.97. Fuel costs per ASM increased to 3.5 cents for the three months ended December 31, 2000 from 2.2 cents for the three months ended December 31, 1999. Other expenses, primarily consisting of commissions, landing fees, station rentals, computer reservation system fees and hull and liability insurance, increased as a percentage of airline operating revenues to 19.5% for the three months ended December 31, 2000 from 18.9% for the three months ended December 31, 1999. Other expenses per ASM increased to 4.5 cents for the three months ended December 31, 2000 from 4.1 cents for the three months ended December 31, 1999. For the Nine Months Ended December 31, 2000 and 1999 For the nine months ended December 31, 2000, the Company enplaned a record number of passengers and reported an 8.7% increase in consolidated net income of $46.9 million, or $0.88 per share on a diluted basis, compared to $43.1 million, or $0.87 per share on a diluted basis for the same period last year. Consolidated operating revenues increased 13.7% to $399.9 million for the nine months ended December 31, 2000 from $351.7 million for the nine months ended December 31, 1999. Passenger revenues, which represented 98.8% of consolidated operating revenues, increased 14.3% to $395.1 million for the nine months ended December 31, 2000 from $345.6 million or 98.3% of consolidated operating revenues for the nine months ended December 31, 1999. The increase was primarily the result of an 8.9% increase in RPMs as well as a 5.0% increase in yield per RPM. The increase in RPMs is the result of additional aircraft deliveries and flights, period over period. The increase in yield per RPM is primarily the result of competitors eliminating and reducing scheduled service in the San Francisco and Los Angeles markets. Additionally, the Company implemented selected fare increases during the 2000 fiscal year which have remained in effect. Fuel surcharges have also been added to fares to mitigate the increase in fuel prices. On SkyWest-controlled flights, 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 an 8.3% increase in revenue per available seat mile to 23.4 cents for the nine months ended December 31, 2000 from 21.6 cents for the nine months ended December 31, 1999. 10
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total operating expenses and interest increased 15.8% to $333.9 million for the nine months ended December 31, 2000 compared to $288.3 million for the nine months ended December 31, 1999. As a percentage of consolidated operating revenues, total operating expenses and interest increased to 83.5% for the nine months ended December 31, 2000 from 82.0% for the nine months ended December 31, 1999. For the nine months ended December 31, 2000, total airline operating expenses and interest (excluding nonairline expenses) were 84.4% of airline operating revenues compared to 81.9% for the nine months ended December 31, 1999. Airline operating costs per ASM (including interest expense) increased to 19.5 cents for the nine months ended December 31, 2000 from 17.7 cents for the nine months ended December 31, 1999. Factors relating to the changes in operating expenses are discussed below. Salaries, wages and employee benefits as a percentage of airline operating revenues was 26.4% for the nine months ended December 31, 2000 and 26.0% for the nine months ended December 31, 1999. The average number of full-time equivalent employees for the nine months ended December 31, 2000 was 3,705 compared to 3,275 for the nine months ended December 31, 1999. The increase in number of personnel was due to the Delta Connection and United Express expansion. Salaries, wages and employee benefits per ASM increased to 6.2 cents for the nine months ended December 31, 2000 from 5.6 cents for the nine months ended December 31, 1999 as a result of additional employees. Aircraft costs, including aircraft rent and depreciation, decreased as a percentage of airline operating revenues to 16.7% for the nine months ended December 31, 2000 from 17.3% for the nine months ended December 31, 1999. The decrease is due to airline operating revenues increasing at a faster rate than aircraft costs. However, aircraft costs per ASM increased slightly to 3.9 cents for the nine months ended December 31, 2000 from 3.7 cents for the nine months ended December 31, 1999 primarily due to flight cancellations during the three months ended December 31, 2000. Maintenance expense decreased as a percentage of airline operating revenues to 7.8% for the nine months ended December 31, 2000 from 8.8% for the nine months ended December 31, 1999. Maintenance expense per ASM decreased to 1.8 cents for the nine months ended December 31, 2000 from 1.9 cents for the nine months ended December 31, 1999. Fuel costs increased as a percentage of airline operating revenues to 13.2% for the nine months ended December 31, 2000 from 9.5% for the nine months ended December 31, 1999, primarily due to an increase in the average fuel price per gallon to $1.20 from $0.86. Fuel costs per ASM increased to 3.1 cents for the nine months ended December 31, 2000 from 2.1 cents for the nine months ended December 31, 1999. 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% for the nine months ended December 31, 2000 from 19.7% for the nine months ended December 31, 1999. The decrease is primarily the result of the airline not incurring commissions on contract related passenger revenues. Liquidity and Capital Resources We had working capital of $270.9 million and a current ratio of 4.2:1 at December 31, 2000 compared to working capital of $154.2 million and a current ratio of 2.9:1 at March 31, 2000. The improvement in working capital is primarily the result of a common stock offering completed on September 12, 2000, wherein we generated net proceeds of $122.1 million. During the nine months ended December 31, 2000, the other principal sources of funds were $78.8 million generated from operations, $32.3 million from the issuance of long-term debt, $4.4 million of proceeds from the sale of property and equipment and $2.6 million from the issuance of common stock upon the exercise of stock options. During the nine months ended December 31, 2000, we invested $80.0 million in available-for-sale securities, $65.3 million in flight equipment, $30.1 million in aircraft deposits, $13.0 million in buildings, ground equipment and rental vehicles, reduced long-term debt by $7.1 million, and paid cash dividends of $3.1 million. These factors resulted in an increase of $41.6 million in cash and cash equivalents over the last nine months. 11
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 $227.4 million at December 31, 2000 compared to $146.8 million at March 31, 2000. At December 31, 2000, the Company's long-term debt to equity position was 13.6% compared to 13.4% at March 31, 2000. During the nine months ended December 31, 2000, SkyWest took delivery of five Canadair Regional Jets ("CRJs") in connection with the Delta Connection and United Express expansion. Additionally, as of December 31, 2000, SkyWest had agreed to purchase 114 CRJs and related spare parts inventory and support equipment at an aggregate cost of approximately $2.5 billion. SkyWest will take delivery of these aircraft beginning in January 2001 and deliveries will continue through December 2004. 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 119 additional CRJs at fixed prices (subject to cost escalations) and delivery schedules and are exercisable at various dates through April 2008. We have significant long-term operating lease obligations primarily relating to our aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in our consolidated balance sheets. At December 31, 2000, SkyWest leased 85 aircraft under leases with an average remaining term of approximately 8.4 years. Future minimum lease payments due under all long-term operating leases were approximately $601.6 million at December 31, 2000. At an 8% discount factor, the present value of these obligations would be equal to approximately $414.2 million at December 31, 2000. Our total long-term debt of $85.9 million was incurred in connection with the acquisition of Brasilia Turboprops and CRJs. Certain amounts related to Brasilia Turboprops 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 4.06% on $29.4 million of the long-term debt at December 31, 2000. The continuing subsidy payments are at risk if the Federative Republic of Brazil does not meet its obligations under the export support program. While we have no reason to believe, based on information currently available, that we 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 Brasilia Turboprop long-term debt of $24.4 million, the average effective rate is 3.82% at December 31, 2000 and the lender has assumed the risk of the subsidy payments. The average effective rate on the debt related to the Canadair Regional Jet aircraft of $32.1 million was 7.26% at December 31, 2000 and is not subject to subsidy payments. We spent approximately $49.5 million for nonaircraft capital expenditures during the nine months ended December 31, 2000, consisting primarily of aircraft engine overhauls, rotable spare parts, buildings and ground equipment and rental vehicles. We have 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 9.25% at December 31, 2000. We believe that, in the absence of unusual circumstances, the working capital available to us will be sufficient to meet our present requirements, including expansion, capital expenditures, lease payments and debt service requirements for at least the next 12 months. Seasonality As is common in the airline industry, SkyWest's operations are favorably affected by increased travel, historically occurring in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months. However, SkyWest does expect some mitigation of the historical seasonal trends due to an increase in the portion of its operations in contract flying. 12
13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 we believe that the expectations reflected in such forward-looking statements are reasonable, we 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. The key factors that have a direct bearing on our operating results include, among other things, employee relations and labor costs, 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. 13
14 PART II. OTHER INFORMATION SKYWEST, INC. Item 3: Quantitative and Qualitative Disclosures About Market Risk Aircraft Fuel We are exposed to fluctuations in the price and availability of aircraft fuel that affect our earnings. Our financial statements reflect both the cost of fuel we purchase for SkyWest controlled flights, as well as fuel we purchase for contract flights which is subject to reimbursement by our code-sharing partners. Currently, we have limited exposure to fuel price increases with respect to approximately 65% of ASMs produced, due to contractual arrangements with Delta and United. These major airlines reimburse us for the actual cost of fuel on contracted flights. For illustrative purposes only, we have estimated the impact of market risk using a hypothetical increase in fuel price per gallon of 10% for the three months and nine months ended December 31, 2000 and 1999. Based on this hypothetical assumption and after considering the impact of the contractual arrangements, we would have experienced an increase in fuel expense of approximately $778,000 for the three months ended December 31, 2000 and $423,000 for the three months ended December 31, 1999. We would have experienced an increase in fuel expense of approximately $1,914,000 for the nine months ended December 31, 2000 and $1,164,000 for the nine months ended December 31, 1999. We currently intend to use cash generated by operating activities to fund any adverse change in the price of fuel. Interest Rates Our 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 rates applicable to variable rate notes may rise and increase the amount of interest expense. We would also receive higher amounts of interest income on our cash and securities held at the time; however, the market value of our available-for-sale securities would decline. At December 31, 2000 we had variable rate notes representing 22% of the total long-term debt and 8% at December 31, 1999. We do not have significant exposure to the changing interest rates on our fixed-rate long-term debt instruments, which represented 78% of the total long-term debt at December 31, 2000 and 92% at December 31, 1999. For illustrative purposes only, we have estimated the impact of market risk using a hypothetical increase in interest rates of one percentage point for both our variable rate long-term debt and cash and securities. Based on this hypothetical assumption, we would have incurred an additional $48,000 in interest expense and received $755,000 in additional interest income for the three months ended December 31, 2000 and an additional $12,000 in interest expense and received $474,000 in additional interest income for the three months ended December 31, 1999. Additionally, we would have incurred $129,000 in interest expense and received $1,831,000 in additional interest income for the nine months ended December 31, 2000 and an additional $40,000 in interest expense and received $1,342,000 in additional interest income for the nine months ended December 31, 1999. As a result of this assumption, we can fund interest rate increases on our variable rate long-term debt with the increased amounts of interest income. 14
15 PART II. OTHER INFORMATION SKYWEST, INC (Continued) Item 6: Exhibits and Reports on Form 8-K a. Reports on Form 8-K - There were no reports on Form 8-K filed during the quarter ended December 31, 2000. b. Exhibits -- 10.1 - Master Purchase Agreement between Bombardier, Inc. and SkyWest Airlines, Inc. 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 13, 2001 BY: /s/ Bradford R. Rich ------------------------------------- Bradford R. Rich Executive Vice President, Chief Financial Officer and Treasurer 15
16 EXHIBIT INDEX Exhibit No. Description - ------- ------------- 10.1 Master Purchase Agreement between Bombardier Inc. and SkyWest Airlines, Inc.