NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended
December 31, 2018
,
2017
and
2016
Note 1 — Organization and Business of Company
Allegiant Travel Company (the “Company”) is a leisure travel company focused on providing travel services and products to residents of under-served cities in the United States. The Company operates a low-cost passenger airline which sells air transportation both on a stand-alone basis and bundled with the sale of air-related and third party services and products. The Company also provides air transportation under fixed fee flying arrangements, generates other ancillary revenues, and operates non-airline related entities which include the development of Sunseeker Resort, family entertainment centers, and Teesnap.
Scheduled service and fixed fee air transportation services have similar operating margins, economic characteristics, and production processes (check-in, baggage handling and flight services) which target the same class of customers, and are subject to the same regulatory environment. As a result, the Company believes it currently operates
one
reportable segment and does not separately track expenses for scheduled service and fixed fee air transportation services.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Allegiant Travel Company (the "Company") and its majority-owned operating subsidiaries. The Company has no independent assets or operations, and all guarantees of the Company's publicly held debt are full and unconditional and joint and several. Any subsidiaries of the parent company other than the subsidiary guarantors are minor. The Company's investments in unconsolidated affiliates, which are
50 percent
or less owned, are accounted for under the equity or cost method. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates.
The Company adopted the New Revenue Standard and ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)" effective January 1, 2018. All amounts and disclosures in this Form 10-K reflect the adoption of these standards. See below for further information.
The Company has reclassified certain amounts for the years ended December 31, 2017 and 2016, respectively, to conform with current year presentation. Such reclassifications had no impact on operating income or net income.
Cash and Cash Equivalents
Cash and cash equivalents include investments and interest bearing instruments with maturities of three months or less at the balance sheet date. Such investments are carried at cost which approximates fair value.
Restricted Cash
Restricted cash represents escrowed funds under fixed fee contracts, and cash collateral held against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties. Restricted cash at
December 31, 2018
and
2017
was
$14.4 million
and
$11.2 million
, respectively.
Accounts Receivable
Accounts receivable are carried at face amount which approximates fair value. They consist primarily of amounts due from credit card companies associated with the sale of tickets for future travel. These receivables are short-term and generally settle within a few days of sale. There are also receivables related to commission amounts due from Enterprise Holdings Inc. based on terms in the rental car provider agreement, as well as income tax receivables, and amounts due related to fixed fee charter agreements. If deemed necessary, the Company records charges to its allowance for doubtful accounts for amounts not expected to be collected, for which the balance was immaterial for all years presented. The Company also had outstanding receivables from a third party as of
December 31, 2018
and 2017, for which
$12.7 million
and
$6.3 million
, respectively, was due more than one year after the balance sheet date and is classified with the Company's other assets.
Short-term and Long-term Investments
The Company’s investments in marketable securities are classified as available-for-sale and are reported at fair value with the net unrealized gain or (loss) reported as a component of accumulated other comprehensive income in shareholders’ equity.
Investment securities are classified as cash equivalents, short-term investments and long-term investments based on maturity date as of the balance sheet date. Cash equivalents have maturities of three months or less, short-term investments have maturities of greater than three months but equal to or less than one year, and long-term investments are those with a maturity date greater than one year. As of
December 31, 2018
, the Company’s long-term investments consisted of corporate debt securities, federal agency debt securities, US Treasury Bonds, and municipal debt securities with contractual maturities of less than 24 months.
The amortized cost of investment securities sold is determined by the specific identification method with any realized gains or losses reflected in other (income) expense. The Company had minimal realized losses during the years ended
December 31, 2018
,
2017
, and
2016
. The Company believes unrealized losses related to debt securities are not other-than-temporary and does not intend to sell these securities prior to amortized cost recoverability.
The Company attempts to minimize its concentration risk with regard to its cash, cash equivalents, and investment portfolio. This is accomplished by diversifying and limiting amounts among different counterparties, the type of investment, and the amount invested in any individual security, commercial paper, or money market fund.
Expendable Parts, Supplies and Fuel, Net
Expendable parts, supplies and fuel inventories are valued at cost using the first-in, first-out method. Such inventories are charged to expense as they are used in operations. An obsolescence allowance for expendable parts and supplies is based on the remaining useful lives of the corresponding fleet type and salvage values. The allowance for expendable parts and supplies was
$14.4 million
and
$13.8 million
at
December 31, 2018
and
2017
, respectively. Rotable aircraft parts inventories are included in property and equipment.
Software Capitalization
The Company capitalizes certain internal and external costs related to the acquisition and development of computer software during the application development stage of projects. The Company amortizes these capitalized costs using the straight-line method over the estimated useful life of the software, which typically ranges from three to seven years. The Company had unamortized computer software development costs of
$41.3 million
and
$41.0 million
as of
December 31, 2018
and
2017
, respectively. Amortization expense related to computer software was
$14.1 million
,
$15.9 million
and
$13.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Costs incurred during the preliminary and post-implementation stages are expensed as incurred.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives less any estimated salvage value. Property under capital leases and related obligations are initially recorded at an amount equal to the present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing rate, and depreciation is recorded on a straight-line basis and is included within depreciation and amortization expense. The estimated useful lives of the principal asset classes are shown below.
|
|
|
Aircraft, engines and related rotable parts
|
10-25 years
|
Buildings
|
25 years
|
Equipment and leasehold improvements
|
3-7 years
|
Computer hardware and software
|
3-7 years
|
In estimating the useful lives and residual values of aircraft, the Company primarily relies upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from other industry sources. Subsequent revisions to these estimates could be caused by changing market prices of the Company’s aircraft, changes in utilization of the aircraft, and other fleet events. These estimates are evaluated each reporting period and adjusted if
necessary. Changes in the estimate for useful lives or residual values of the Company’s property and equipment could result in changes in depreciation expense.
Interest is capitalized using the Company’s weighted average borrowing rate and depreciated over the estimated useful life of the asset(s). Capitalized interest for
2018
and
2017
was
$2.4 million
and
$3.2 million
, respectively.
Aircraft Maintenance and Repair Costs
The Company accounts for MD-80 airframes and JT8D-219 engine major maintenance, as well as all non-major maintenance and repair costs incurred, for both the MD-80 and Airbus fleets, under the direct expense method. Under this method, maintenance and repair costs for aircraft are charged to operating expenses as incurred. Maintenance and repair costs includes all parts, materials, and line maintenance activities required to maintain the Company's fleet types.
The Company accounts for major maintenance costs of its Airbus airframes and the related CFM engines using the deferral method. Under this method, the Company capitalizes the cost of major maintenance events, which are amortized as a component of depreciation and amortization expense, over the estimated period until the next scheduled major maintenance event. During 2018 and 2017, the Company capitalized
$49.6 million
and
$20.7 million
of costs for major maintenance with associated amortization expense charged to depreciation and amortization of
$12.5 million
and
$6.7 million
, respectively.
Measurement of Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations, consisting principally of property and equipment, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired, and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In making these determinations, the Company utilizes certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service for which the asset will be used in operations, and estimated salvage values.
For the years ended December 31,
2017
and
2016
, the Company incurred impairment losses related to various aircraft parts of
$1.3 million
and
$3.0 million
, respectively, which are classified within Other operating expense. For the year ended
December 31, 2018
, the Company did not incur any related impairment losses.
For the year ended
December 31, 2017
, the Company recorded a non-cash impairment charge of
$35.3 million
on its fleet of MD-80 aircraft, engines, and related assets, as a result of its review of fleet value. This represented a full impairment of these assets, and as such, these assets had no remaining book value as of
December 31, 2017
. The Company analyzed many factors, including the accelerated retirement dates of the MD-80 fleet, a reduction in aircraft utilization due to the continued induction of Airbus A320 series aircraft, and the significantly decreased level of demand in the secondary market for MD-80 aircraft, spare engines, and parts.
Revenue Recognition
Passenger revenue
Passenger revenue includes scheduled service revenue, ancillary air-related charges, and travel point redemptions from the co-branded Allegiant World Mastercard® credit card.
Scheduled service revenue, a component of passenger revenue, consists of ticket revenue generated from nonstop flights in the Company’s route network, recognized either when the transportation is provided or when the itinerary expires unused. Nonrefundable scheduled itineraries expire on the date of the intended flight, unless the date is extended by notification from the customer in advance. Itineraries sold for transportation not yet used, as well as unexpired credits, are included in air traffic liability.
Ancillary air-related charges, a component of passenger revenue, include various unbundled services and products related to the flight such as baggage fees, the use of the Company’s website to purchase scheduled service transportation, advance seat assignments, and other services. Revenues from air-related charges are recognized when the transportation is provided. If a customer cancels a flight, a voucher may be issued for a future flight, at which time the associated revenue is recognized. Additionally, the Company estimates the value of vouchers that will expire unused and recognizes such revenue at the time of issuance.
Third party products revenue
Ancillary third party products revenue is generated from the sale of hotel rooms, rental cars and ticket attractions, as well as marketing revenue associated with the co-branded credit card. Revenue from the sale of third party products is recognized at the time the product is utilized, such as the time a purchased hotel room is occupied. The Company follows accounting standards for determining the amount of revenue to be recognized for each element of a bundled sale involving third party products in addition to airfare. Revenue from the sale of third party products is recorded net (treatment as an agent) of amounts paid to wholesale providers, travel agent commissions, and transaction costs.
Pursuant to the co-brand arrangement with Bank of America, the Company has various performance obligations which are collectively referred to as the marketing component. These obligations consist of use of the Company’s brand and access to its member lists, and certain other advertising and marketing elements. The marketing component is recorded as third party products revenue in the period in which points are awarded to the credit card holders.
Fixed fee contract revenue
Fixed fee contract revenue consists of agreements to provide charter service on a year-round and ad hoc basis. Fixed fee contract revenue is recognized when the transportation is provided.
Other revenue
Other revenue is generated from leasing aircraft and engines, and other miscellaneous sources, including revenue from non-airline activities. Lease revenue is recognized ratably over the lease term.
Taxes and fees
Various taxes and fees, assessed on the sale of tickets to customers, are collected by the Company serving as an agent, and remitted to taxing authorities. These taxes and fees are not included as revenue in the Company’s consolidated statements of income and are recorded as a liability until remitted to the appropriate taxing authority.
Affinity Credit Card Program
The Allegiant World Mastercard® is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement with a seven year scheduled duration expiring in 2023. Under this arrangement, the Company identified the following deliverables: travel points to be awarded (the travel component), use of the Company’s brand and access to its member lists, and certain other advertising and marketing elements (collectively the marketing component). Applying guidance under Accounting Standards Update (“ASU”) 2009-13 - Revenue Recognition (Topic 606): Multiple-Deliverable Revenue Arrangements, each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable. The Company applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points to be redeemed.
Revenue from the travel component is deferred based on its relative selling price and is recognized into passenger revenue when the points are redeemed by cardholders. Revenue from the marketing component is considered earned in the period in which points are sold and is therefore recognized into third party products revenue in the same period.
Advertising Costs
Advertising costs are charged to expense in the period incurred. Advertising expense was
$28.8 million
,
$20.9 million
and
$13.6 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Earnings per Share
Basic and diluted earnings per share are computed pursuant to the two-class method as opposed to the treasury method. Under this method, the Company attributes net income to two classes, common stock and unvested restricted stock awards. Unvested restricted stock awards granted to employees under the Company’s Long-Term Incentive Plan are considered participating securities because they receive non-forfeitable rights to cash dividends at the same rate as common stock.
Diluted net income per share is calculated using the more dilutive of two methods. Under both methods, the exercise of employee stock options is assumed using the treasury stock method. The assumption of vesting of restricted stock, however, differs as described below:
|
|
1.
|
Assume vesting of restricted stock using the treasury stock method.
|
|
|
2.
|
Assume unvested restricted stock awards are not vested, and allocate earnings to common shares and unvested restricted stock awards using the two-class method.
|
For the years ended
December 31, 2018
,
2017
and
2016
, the second method above was used in the computation because it was more dilutive than the first method. The following table sets forth the computation of net income per share on a basic and diluted basis for the periods indicated (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
As recast
|
|
As recast
|
Basic:
|
|
|
|
|
|
Net income
|
$
|
161,802
|
|
|
$
|
198,148
|
|
|
$
|
220,866
|
|
Less net income allocated to participating securities
|
(2,106
|
)
|
|
(2,965
|
)
|
|
(1,758
|
)
|
Net income attributable to common stock
|
$
|
159,696
|
|
|
$
|
195,183
|
|
|
$
|
219,108
|
|
Earnings per share, basic
|
$
|
10.02
|
|
|
$
|
12.14
|
|
|
$
|
13.31
|
|
Weighted-average shares outstanding
|
15,941
|
|
|
16,073
|
|
|
16,465
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income
|
$
|
161,802
|
|
|
$
|
198,148
|
|
|
$
|
220,866
|
|
Less net income allocated to participating securities
|
(2,104
|
)
|
|
(2,962
|
)
|
|
(1,756
|
)
|
Net income attributable to common stock
|
$
|
159,698
|
|
|
$
|
195,186
|
|
|
$
|
219,110
|
|
Earnings per share, diluted
|
$
|
10.00
|
|
|
$
|
12.13
|
|
|
$
|
13.29
|
|
Weighted-average shares outstanding
|
15,941
|
|
|
16,073
|
|
|
16,465
|
|
Dilutive effect of stock options and restricted stock
|
53
|
|
|
74
|
|
|
42
|
|
Adjusted weighted-average shares outstanding under treasury stock method
|
15,994
|
|
|
16,147
|
|
|
16,507
|
|
Participating securities excluded under two-class method
|
(27
|
)
|
|
(52
|
)
|
|
(18
|
)
|
Adjusted weighted-average shares outstanding under two-class method
|
15,967
|
|
|
16,095
|
|
|
16,489
|
|
Stock awards outstanding of
77,037
;
5,752
; and
51,439
shares (not in thousands) for
2018
,
2017
, and
2016
, respectively, were excluded from the computation of diluted earnings per share as they were antidilutive.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with accounting standards which require the compensation cost related to share-based payment transactions be recognized in the Company’s consolidated statements of income. The share-based cost is measured based on grant date fair value. The Company’s share-based employee compensation plan is more fully discussed in Note 11.
Income Taxes
The Company recognizes deferred income taxes based on the asset and liability method required by accounting standards. Deferred tax assets and liabilities are determined based on the timing differences between book basis for financial reporting purposes and tax basis of the asset and liability and measured using the enacted tax rates. A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company determines the net non-current deferred tax assets or liabilities separately for federal, state, foreign and other local jurisdictions.
The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the jurisdictions where the Company operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria set forth in uncertain tax position accounting standards. The accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Accounting standards for income taxes utilize a two-step approach for evaluating tax positions. Recognition (Step I) occurs when the Company concludes that a tax position, based on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step II) is only addressed if the position is deemed to be more likely than not to be sustained. Under Step II, the tax benefit is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
The tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period they meet the “more likely than not” standard. If it is subsequently determined that a previously recognized tax position no longer meets the “more likely than not” standard, it is required that the tax position be derecognized. As applicable, the Company will recognize accrued penalties and interest related to unrecognized tax benefits in the provision for income taxes.
Recent Accounting Pronouncements
Standards Effective in Future Years
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), which is effective for interim and annual reporting periods beginning after December 15, 2018 with early adoption permitted. This standard will require leases, other than short-term, to be recognized on the balance sheet as a lease liability and a corresponding right-of-use asset. Lease payments will include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the standard. Lease payments will not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components.
In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." This update provides an optional modified retrospective adoption method. Under this new method, the cumulative effect adjustment to the opening balance of retained earnings is recognized at the adoption date.
The Company is in the process of assessing the impact of this standard. Real estate operating leases and various other operating leases are expected to be placed on the balance sheet as a result of this standard but it is not expected that airport terminal leases will have a significant impact, as they mostly include variable lease payments outside of those based on a fixed index and, as a result, are excluded from consideration. The expected impact of applying this standard will be the recognition of between
$15 million
and
$25 million
in right-of-use assets and corresponding lease liability. Adoption is not expected to significantly change the recognition, measurement or presentation of associated expenses within the consolidated statements of income or cash flows, or impact existing debt covenants. The Company also plans to elect the package of practical expedients and will adopt this standard under the modified retrospective transition method effective January 1, 2019.
Recently Adopted Standards
In 2014, the FASB issued the New Revenue Standard. Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The Company adopted this standard using the full retrospective transition method effective January 1, 2018 and has recast prior year results. See Note 3 for more information on the impact of this adoption.
While the adoption of the New Revenue Standard did not have a significant effect on earnings,
$621.9 million
of ancillary air-related fees for the twelve months ended
December 31, 2018
are now classified as passenger revenue. Adoption also resulted in a net reduction to air traffic liability at December 31, 2017 of
$5.9 million
. This change resulted from the recognition of breakage revenue on issuance of credit vouchers that are expected to expire unused. The Company recognizes revenue from the co-branded credit card program using the deferral method.
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) ("AOCI") to retained earnings. The Company adopted this standard effective January 1, 2018 and a one-time effect of
$0.6 million
has been reclassified from AOCI to retained earnings.
Note 3 — Revenue Recognition
Certain prior period amounts have been recast to conform to the adoption of the New Revenue Standard as shown in the tables below. See Note 2 for additional information on each revenue component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
(in thousands, except per share data)
|
|
As Previously Reported
|
|
Current Presentation
|
|
As Previously Reported
|
|
Current Presentation
|
|
Adjustments
|
|
Adjustments
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
Passenger revenue
(1)
|
|
$
|
818,136
|
|
$
|
553,901
|
|
$
|
1,372,037
|
|
|
$
|
753,414
|
|
$
|
515,653
|
|
$
|
1,269,067
|
|
Air-related charges
|
|
546,476
|
|
(546,476
|
)
|
—
|
|
|
499,542
|
|
(499,542
|
)
|
—
|
|
Sales and marketing
|
|
52,711
|
|
3,964
|
|
56,675
|
|
|
20,527
|
|
14,102
|
|
34,629
|
|
Income tax provision
|
|
644
|
|
215
|
|
859
|
|
|
126,368
|
|
733
|
|
127,101
|
|
Net income
|
|
194,902
|
|
3,246
|
|
198,148
|
|
|
219,590
|
|
1,276
|
|
220,866
|
|
Diluted earnings per share
|
|
$
|
11.93
|
|
$
|
0.20
|
|
$
|
12.13
|
|
|
$
|
13.21
|
|
$
|
0.08
|
|
$
|
13.29
|
|
(1) Passenger revenue previously reported as Scheduled service revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
As Previously Reported
|
|
Current Presentation
|
(in thousands)
|
|
Adjustments
|
Consolidated Balance Sheets:
|
|
|
|
|
Air traffic liability
|
|
$
|
210,184
|
|
$
|
(5,885
|
)
|
$
|
204,299
|
|
Deferred income taxes
|
|
118,492
|
|
521
|
|
119,013
|
|
Retained earnings
|
|
902,579
|
|
5,364
|
|
907,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Year ended December 31, 2016
|
|
|
As Previously Reported
|
|
Current Presentation
|
|
As Previously Reported
|
|
Current Presentation
|
(in thousands)
|
|
Adjustments
|
|
Adjustments
|
Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
194,902
|
|
$
|
3,246
|
|
$
|
198,148
|
|
|
$
|
219,590
|
|
$
|
1,276
|
|
$
|
220,866
|
|
Deferred income taxes
|
|
42,473
|
|
216
|
|
42,689
|
|
|
29,846
|
|
733
|
|
30,579
|
|
Change in air traffic liability
|
|
16,183
|
|
(3,462
|
)
|
12,721
|
|
|
(4,135
|
)
|
(2,009
|
)
|
(6,144
|
)
|
Net cash provided by operating activities
|
|
$
|
253,558
|
|
$
|
—
|
|
$
|
253,558
|
|
|
$
|
245,301
|
|
$
|
—
|
|
$
|
245,301
|
|
Passenger revenue allocation
Passenger revenue is primarily composed of passenger ticket sales, credit voucher breakage, seat fees, baggage fees, and other travel-related services performed in conjunction with a passenger’s flight, as well as co-brand point redemptions as outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Scheduled service
|
$
|
898,653
|
|
|
$
|
821,621
|
|
|
$
|
768,721
|
|
Ancillary air-related charges
|
621,939
|
|
|
547,860
|
|
|
500,346
|
|
Co-brand redemptions
|
13,109
|
|
|
2,556
|
|
|
—
|
|
Total passenger revenue
|
$
|
1,533,701
|
|
|
$
|
1,372,037
|
|
|
$
|
1,269,067
|
|
The contract term of passenger tickets is 12 months and revenue associated with future travel will principally be recognized within this time frame. Substantially all of the
$204.3 million
that was recorded in the air traffic liability balance at December 31, 2017 was recognized into passenger revenue during the twelve months ended December 31, 2018.
Co-brand redemptions
Bank of America has issued The Allegiant World Mastercard® in which points are earned and awarded to cardholders in exchange for consideration received under an agreement with a seven year scheduled duration expiring in 2023. Under this arrangement, the Company identified the following deliverables: travel points to be awarded (the travel component), use of the Company’s brand and access to its member lists, and certain other advertising and marketing elements (collectively the marketing component). Consideration received from the Company’s co-brand agreement is allocated between the two components based on the relative selling price of each deliverable. The Company applies a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points to be redeemed.
In relation to the travel component, the Company has a performance obligation to provide cardholders with points to be used for future travel award redemptions. Therefore, consideration received from Bank of America related to the travel component is deferred based on its relative selling price and is recognized into passenger revenue when the points are redeemed and the transportation is provided.
The following table presents the activity of the current and non-current point liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Balance at January 1
|
$
|
8,903
|
|
|
$
|
790
|
|
Points awarded
|
14,914
|
|
|
10,669
|
|
Points redeemed
|
(13,109
|
)
|
|
(2,556
|
)
|
Balance at December 31
|
$
|
10,708
|
|
|
$
|
8,903
|
|
As of December 31, 2018,
$9.6 million
of the current points liability is reflected in Accrued liabilities and represents the current estimate of revenue to be recognized in the next twelve months based on historical trends, with the remaining balance reflected in Other noncurrent liabilities expected to be recognized into revenue in periods thereafter.
Note 4 — Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
Flight equipment, including pre-delivery deposits
|
$
|
1,905,157
|
|
|
$
|
1,539,433
|
|
Computer hardware and software
|
140,385
|
|
|
123,675
|
|
Land and buildings/leasehold improvements
|
85,925
|
|
|
77,409
|
|
Other property and equipment
|
89,778
|
|
|
48,446
|
|
Total property and equipment
|
2,221,245
|
|
|
1,788,963
|
|
Less accumulated depreciation and amortization
|
(373,977
|
)
|
|
(276,548
|
)
|
Property and equipment, net
|
$
|
1,847,268
|
|
|
$
|
1,512,415
|
|
As of
December 31, 2018
, the Company had firm commitments to purchase
14
new and used Airbus A320 series aircraft which are expected to be delivered between 2019 and 2022.
As of
December 31, 2018
, the majority of the year-over-year increase in Other property and equipment noted above is related to the development of Sunseeker Resort as well as the family entertainment center initiatives.
Note 5 — Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
Salaries, wages and benefits
|
$
|
34,406
|
|
|
$
|
35,516
|
|
Interest
|
14,276
|
|
|
13,326
|
|
Station expenses
|
12,918
|
|
|
12,026
|
|
Maintenance and repairs
|
11,016
|
|
|
5,481
|
|
Passenger fees
|
10,465
|
|
|
11,420
|
|
Loyalty card program liability
|
9,625
|
|
|
—
|
|
Property taxes
|
8,017
|
|
|
7,851
|
|
Advertising accruals
|
4,337
|
|
|
4,154
|
|
Passenger taxes
|
517
|
|
|
447
|
|
Other accruals
|
16,450
|
|
|
14,906
|
|
Total accrued liabilities
|
$
|
122,027
|
|
|
$
|
105,127
|
|
Note 6 — Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
Fixed-rate debt and capital lease obligations due through 2030
(1) (2)
|
$
|
640,806
|
|
|
$
|
465,462
|
|
Variable-rate debt due through 2028
|
630,927
|
|
|
699,430
|
|
Total long-term debt and capital lease obligations, net of related costs
|
1,271,733
|
|
|
1,164,892
|
|
Less current maturities, net of related costs
(1)
|
152,287
|
|
|
214,761
|
|
Long-term debt and capital lease obligations, net of current maturities and related costs
|
$
|
1,119,446
|
|
|
$
|
950,131
|
|
|
|
|
|
Weighted average fixed-interest rate on debt
|
5.3
|
%
|
|
5.4
|
%
|
Weighted average variable-interest rate on debt
|
4.2
|
%
|
|
3.3
|
%
|
(1) As of December 31, 2018,
$428.0 million
of the Company's Unsecured Senior Notes were classified as long-term as management had the intent and ability to refinance the borrowings on a long-term basis. The Notes were refinanced in February 2019, as discussed below.
(2) As of December 31, 2018, includes capital lease obligations secured by five A320 series aircraft.
Maturities of long-term debt as of
December 31, 2018
, for the next five years and thereafter, in the aggregate, are:
2019
-
$580.3 million
;
2020
-
$168.3 million
;
2021
-
$94.6 million
;
2022
-
$67.2 million
;
2023
-
$54.2 million
; and
$307.1 million
thereafter. Total long-term debt is presented net of related costs of
$5.0 million
and
$6.1 million
at
December 31, 2018
and
2017
, respectively.
Consolidated Variable Interest Entities
The Company evaluates ownership, contractual lease arrangements and other interests in entities to determine if they are variable interest entities ("VIEs") based on the nature and extent of those interests. The Company consolidates a VIE when, among other criteria, it has the power to direct the activities that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or the right to receive benefits of the VIE, thus making the Company the primary beneficiary of the VIE.
In September 2018, the Company, through a wholly owned subsidiary, entered into agreements with a trust to borrow
$44.0 million
secured by
one
Airbus A320 series aircraft. The trust was funded on inception. These borrowings bear interest at a
blended rate of
4.0 percent
, payable in quarterly installments through September 2028, at which time the Company will have a purchase option at a fixed amount. As this transaction is a common control transaction, the Company, as the primary beneficiary, has measured and recorded the assets and liabilities at their carrying values, which were
$37.8 million
and
$44.0 million
, respectively, at the time of borrowing.
In December 2017, the Company entered into an agreement with a trust to finance
three
Airbus A320 aircraft, under which the aircraft serve as collateral for the financing. The trust was funded on inception by a
$102.0 million
long-term debt agreement entered into by the trust. These borrowings bear interest at a floating rate based on LIBOR and are payable in quarterly installments through December 2027. As this transaction is a common control transaction, the Company, as the primary beneficiary, has measured and recorded the assets and liabilities at their carrying values, which were
$112.8 million
and
$102.0 million
, respectively, at the time of borrowing.
Senior Secured Revolving Credit Facility
In 2015, the Company, through a wholly owned subsidiary, entered into a senior secured revolving credit facility under which it was entitled to borrow up to
$56.0 million
. In March 2018, the Company paid off the balance of the facility and amended it to increase the borrowing limit to
$81.0 million
. The amended facility has a term of
24
months and the borrowing ability is based on the value of the Airbus A320 series aircraft placed in the collateral pool. In July 2018, the Company drew down
$46.9 million
under this facility, and
no
principal payments have been made as of
December 31, 2018
. Aircraft may remain in the collateral pool for up to
two
years, and, as of
December 31, 2018
, there were
nine
aircraft in the collateral pool, having been placed into the pool in September and December 2018. The notes for the amounts borrowed under the facility bear interest at a floating rate based on LIBOR and are due in March 2020.
Other Secured Debt
In September 2018, the Company entered into a senior secured credit facility under which it borrowed
$75.0 million
in September and October 2018 secured by
four
Airbus A320 series aircraft. The borrowing bears interest at a floating rate based on LIBOR, and is payable in quarterly installments over
seven
years.
In July 2018, the Company borrowed
$34.5 million
under a loan agreement secured by
one
Airbus A320 series aircraft. The note bears interest at a floating rate based on LIBOR, and is payable in quarterly installments over
ten
years.
In June 2018, the Company borrowed
$10.8 million
under a loan agreement secured by various ground equipment. The note bears interest at a fixed rate of
4.2 percent
per year, and is payable in monthly installments over
five
years.
In February 2019, the Company entered into a Credit and Guaranty Agreement (the “Term Loan”) to borrow
$450.0 million
, guaranteed by all of the Company's subsidiaries excluding Sunseeker Resorts Inc. and its subsidiaries and other insignificant subsidiaries (the "Term Loan Guarantors").
$428.0 million
net proceeds from the Term Loan have been, or will be, used to purchase the Company's senior unsecured obligations (the "Notes") as outlined below. See Note 14 for further detail.
General Unsecured Senior Notes
In June 2014, the Company completed an offering of
$300.0 million
aggregate principal amount of the Notes which mature in July 2019. In December 2016, the Company completed an offering of an additional
$150.0 million
principal amount of these notes, which were issued at a price of
101.5 percent
of the principal amount, plus accrued interest from July 15, 2016. The Notes bear interest at a rate of
5.5 percent
per year, payable in cash semi-annually, on January 15th and July 15th of each year.
In February 2019, the Company purchased
$347.9 million
aggregate principal amount of its outstanding senior unsecured Notes validly tendered pursuant to a tender offer for such Notes, using the net proceeds of the Term Loan. The Company expects to call the remaining balance of the Notes in advance of their maturity in July 2019.
As of December 31, 2018, the indenture pursuant to which the Notes were issued included operating and financial restrictions on the Company. These restrictions limited or restricted, among other things, the Company’s ability and the ability of its restricted subsidiaries to (i) incur additional indebtedness; (ii) incur liens; (iii) make restricted payments (including paying dividends on, redeeming, repurchasing or retiring capital stock); (iv) make investments; and (v) consolidate, merge or sell all or substantially all of its assets. These covenants were subject to various exceptions and qualifications under the terms of the indenture, and the restrictions were eliminated pursuant to the third supplemental indenture for these notes. For the four quarters ended December 31, 2018, the Company exceeded the consolidated total leverage ratio limit, which had no effect on the ability to make restricted payments during 2018.
Capital Leases
The Company has capital lease obligations related to aircraft, which significantly impacted the Company's recognized assets and liabilities as of
December 31, 2018
, but did not result in any significant cash receipts or cash payments during the year.
Note 7 — Shareholders’ Equity
The Company is authorized by its Board of Directors to acquire the Company’s stock through open market and private purchases under its share repurchase program. As repurchase authority is used, the Board of Directors has, to date, authorized additional expenditures for share repurchases.
Share repurchases consisted of the following during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Shares repurchased
(1)
|
—
|
|
|
604,497
|
|
|
391,972
|
|
Average price per share
|
NA
|
|
|
$
|
142.66
|
|
|
$
|
164.99
|
|
Total (in thousands)
|
$
|
—
|
|
|
$
|
86,240
|
|
|
$
|
64,673
|
|
(1) Share amounts shown above include only open market repurchases and do not include shares withheld from employees for tax withholding obligations related to restricted stock vestings, which were
22,981
,
27,606
, and
10,103
shares for 2018, 2017 and 2016, respectively.
Cash dividends declared by the Board and paid by the Company consisted of the following during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Total quarterly cash dividends declared, per share
|
$
|
2.80
|
|
|
$
|
2.80
|
|
|
$
|
2.40
|
|
Total cash dividends paid (in thousands)
(1)
|
45,247
|
|
|
45,720
|
|
|
67,540
|
|
(1) 2016 includes
$27.7 million
paid on January 8, 2016, as part of a special cash dividend of $
1.65
per share declared by the Board prior to year-end 2015, for shareholders of record on December 18, 2015.
As of
December 31, 2018
, the Company had
$100.0 million
in unused share repurchase authority remaining under the Board approved program.
Note 8 — Fair Value Measurements
Investments
The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities
Level 2 - Defined as inputs other than Level 1 inputs that are either directly or indirectly observable
Level 3 - Defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions
The Company uses the market approach valuation technique to determine fair value for investment securities. The assets classified as Level 1 consist of money market funds for which original cost approximates fair value. The assets classified as Level 2 consist of commercial paper, municipal debt securities, federal agency debt securities, corporate debt securities, and US treasury bonds, which are valued using quoted market prices or alternative pricing sources including transactions involving
identical or comparable assets and models utilizing market observable inputs. The Company has no investment securities classified as Level 3.
For those assets classified as Level 2 that are not in active markets, the Company obtains fair value from pricing sources using quoted market prices for identical or comparable instruments, and uses pricing models which include all significant observable inputs: maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers and other market related data. These inputs are observable or can be derived from, or corroborated by, observable market data for substantially the full term of the asset.
Financial instruments measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
|
|
As of
December 31, 2017
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
43,281
|
|
|
$
|
43,281
|
|
|
$
|
—
|
|
|
$
|
1,297
|
|
|
$
|
1,297
|
|
|
$
|
—
|
|
Commercial paper
|
|
29,138
|
|
|
—
|
|
|
29,138
|
|
|
27,910
|
|
|
—
|
|
|
27,910
|
|
US Treasury Bonds
|
|
1,415
|
|
|
—
|
|
|
1,415
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal debt securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,782
|
|
|
—
|
|
|
2,782
|
|
Total cash equivalents
|
|
73,834
|
|
|
43,281
|
|
|
30,553
|
|
|
31,989
|
|
|
1,297
|
|
|
30,692
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
180,846
|
|
|
—
|
|
|
180,846
|
|
|
108,678
|
|
|
—
|
|
|
108,678
|
|
Corporate debt securities
|
|
101,489
|
|
|
—
|
|
|
101,489
|
|
|
107,878
|
|
|
—
|
|
|
107,878
|
|
Municipal debt securities
|
|
14,252
|
|
|
—
|
|
|
14,252
|
|
|
101,290
|
|
|
—
|
|
|
101,290
|
|
Federal agency debt securities
|
|
11,887
|
|
|
—
|
|
|
11,887
|
|
|
31,428
|
|
|
—
|
|
|
31,428
|
|
US Treasury Bonds
|
|
5,990
|
|
|
—
|
|
|
5,990
|
|
|
3,407
|
|
|
—
|
|
|
3,407
|
|
Total short-term
|
|
314,464
|
|
|
—
|
|
|
314,464
|
|
|
352,681
|
|
|
—
|
|
|
352,681
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
37,334
|
|
|
—
|
|
|
37,334
|
|
|
60,396
|
|
|
—
|
|
|
60,396
|
|
Federal agency debt securities
|
|
11,291
|
|
|
—
|
|
|
11,291
|
|
|
5,775
|
|
|
—
|
|
|
5,775
|
|
US Treasury Bonds
|
|
2,901
|
|
|
—
|
|
|
2,901
|
|
|
2,994
|
|
|
—
|
|
|
2,994
|
|
Municipal debt securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,405
|
|
|
—
|
|
|
9,405
|
|
Derivative instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
282
|
|
|
—
|
|
|
282
|
|
Total long-term
|
|
51,526
|
|
|
—
|
|
|
51,526
|
|
|
78,852
|
|
|
—
|
|
|
78,852
|
|
Total financial instruments
|
|
$
|
439,824
|
|
|
$
|
43,281
|
|
|
$
|
396,543
|
|
|
$
|
463,522
|
|
|
$
|
1,297
|
|
|
$
|
462,225
|
|
There were no significant transfers between Level 1 and Level 2 assets for the years ended
December 31, 2018
or
2017
.
Long-term Debt
The fair value of the Company’s publicly held long-term debt is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized its publicly held debt as Level 2. The remaining debt agreements are not publicly held. The Company has determined the estimated fair value of these notes to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.
Carrying value and estimated fair value of long-term debt, including current maturities and without reduction for related costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Fair Value Level
|
Publicly held debt
|
|
$
|
450,463
|
|
|
$
|
451,026
|
|
|
$
|
451,321
|
|
|
$
|
462,604
|
|
|
2
|
Non-publicly held debt
|
|
703,372
|
|
|
619,379
|
|
|
719,681
|
|
|
660,065
|
|
|
3
|
Total long-term debt
|
|
$
|
1,153,835
|
|
|
$
|
1,070,405
|
|
|
$
|
1,171,002
|
|
|
$
|
1,122,669
|
|
|
|
Other
In the fourth quarter of 2017, the Company recorded a non-cash impairment charge of $
35.3 million
on its fleet of MD-80 aircraft, engines, and related assets as a result of a review of fleet value. The Company concluded that the carrying value of these aircraft and related assets was no longer fully recoverable when compared to the estimated remaining future undiscounted cash flows from these assets. Therefore, an adjustment to their fair value with inputs classified as Level 3 was recorded. As of
December 31, 2018
, the MD-80 aircraft and related engines have been retired and there was zero carrying value remaining.
Due to the short term nature, carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.
Note 9 — Income Taxes
Impact of U.S. Federal Income Tax Reform
The Company is subject to income taxation in the United States, foreign countries and various state jurisdictions in which it operates. In accordance with income tax reporting accounting standards, the Company recognizes tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. The Company has recorded reserves for tax contingencies which relate primarily to an outstanding one-time tax refund claim.
The "Tax Cuts and Jobs Act" (the "Tax Act") signed into law in 2017 significantly changed the U.S. corporate income tax rules including, but not limited to, the reduction of U.S. corporate income tax rate from
35.0 percent
to
21.0 percent
, ability to claim 100 percent bonus depreciation on qualified property placed in service from September 28, 2017 through December 31, 2022, and elimination of certain deductions.
ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a one-year measurement period in order to complete the accounting for income tax effects of the Tax Act. The Company recognized a one-time tax benefit of
$74.7 million
due to the remeasurement of deferred tax assets and deferred tax liabilities to the new statutory rate. The Company recognized provisional estimates which may be impacted by the Company’s understanding and application of the Tax Act related to the deductibility of acquired assets, state conformity and additional guidance from federal and state agencies as well as the FASB and the SEC. In 2018, the Company completed its determination of the accounting implications of the Tax Act, and there were no material changes.
Components of Income before Income Taxes from Continuing Operations
The components of income before taxes for domestic and foreign operations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
As Recast
|
|
As Recast
|
Domestic
|
|
$
|
195,843
|
|
|
$
|
180,314
|
|
|
$
|
331,827
|
|
Foreign
|
|
3,475
|
|
|
18,693
|
|
|
16,140
|
|
Total
|
|
$
|
199,318
|
|
|
$
|
199,007
|
|
|
$
|
347,967
|
|
Income Tax Provision/(Benefit)
The provision for income taxes is composed of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
As recast
|
|
As recast
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(3,707
|
)
|
|
$
|
(44,385
|
)
|
|
$
|
89,014
|
|
State
|
(650
|
)
|
|
664
|
|
|
5,204
|
|
Foreign
|
1,086
|
|
|
558
|
|
|
1,262
|
|
Total current
|
(3,271
|
)
|
|
(43,163
|
)
|
|
95,480
|
|
Deferred:
|
|
|
|
|
|
Federal
|
41,593
|
|
|
41,015
|
|
|
28,653
|
|
State
|
3,744
|
|
|
1,978
|
|
|
1,703
|
|
Foreign
|
(4,550
|
)
|
|
1,029
|
|
|
1,265
|
|
Total deferred
|
40,787
|
|
|
44,022
|
|
|
31,621
|
|
Total income tax provision
|
$
|
37,516
|
|
|
$
|
859
|
|
|
$
|
127,101
|
|
Reconciliation of Effective Tax Rate
The effective tax rate on income before income taxes differed from the federal statutory income tax rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
As recast
|
|
As recast
|
Income tax expense at federal statutory rate
|
$
|
41,857
|
|
|
$
|
68,639
|
|
|
$
|
121,789
|
|
State income taxes, net of federal income tax benefit
|
3,560
|
|
|
2,739
|
|
|
5,517
|
|
Federal tax reform impact
|
—
|
|
|
(74,738
|
)
|
|
—
|
|
Domestic production activities deduction
|
(3,539
|
)
|
|
—
|
|
|
—
|
|
Other
|
(4,362
|
)
|
|
4,219
|
|
|
(205
|
)
|
Total income tax expense
|
$
|
37,516
|
|
|
$
|
859
|
|
|
$
|
127,101
|
|
Deferred Taxes
The major components of the Company’s net deferred tax assets and liabilities are as follows (in thousands)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
|
|
As recast
|
Deferred tax assets:
|
|
|
|
Accrued vacation
|
$
|
595
|
|
|
$
|
690
|
|
Accrued bonus
|
3,792
|
|
|
628
|
|
State taxes
|
86
|
|
|
318
|
|
Accrued property taxes
|
1,615
|
|
|
1,573
|
|
Stock-based compensation expense
|
1,310
|
|
|
1,983
|
|
Net operating loss
|
38,875
|
|
|
635
|
|
Other
|
—
|
|
|
3,160
|
|
Less: valuation allowance
|
1,193
|
|
|
422
|
|
Total deferred tax assets
|
45,080
|
|
|
8,565
|
|
Deferred tax liabilities:
|
|
|
|
Prepaid expenses
|
4,436
|
|
|
4,275
|
|
Depreciation
|
202,595
|
|
|
118,743
|
|
Foreign deferred
|
—
|
|
|
4,569
|
|
Other
|
2,103
|
|
|
—
|
|
Total deferred tax liabilities
|
209,134
|
|
|
127,587
|
|
Net deferred tax liabilities
|
$
|
164,054
|
|
|
$
|
119,022
|
|
Net Operating Loss and Tax Credit Carryforwards
At December 31, 2018, the Company recognized federal and state net operating loss carryforwards for income tax purposes in the amount of
$37.4 million
and
$1.5 million
, respectively. The federal net operating loss carryforward will not expire per the Tax Act and the state net operating loss carryforwards will expire between 2032 and 2038.
The Company previously recognized a federal capital loss carryforward of
$0.7 million
, as remeasured pursuant to the Tax Act, as of December 31, 2016 which begins to expire in 2021. As of December 31, 2018, the Company also recognized foreign tax credit and R&D tax credit in the amount of
$1.8 million
and
$0.9 million
which will expire in 2029 and 2024, respectively.
Tax Contingencies
The reconciliation of the Company's tax contingencies is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Beginning Balance
|
|
$
|
778
|
|
|
$
|
837
|
|
|
$
|
512
|
|
Increases for tax position of prior years
|
|
3,364
|
|
|
251
|
|
|
140
|
|
Increases for tax position of current year
|
|
293
|
|
|
46
|
|
|
492
|
|
Decreases for tax positions of prior years
|
|
(10
|
)
|
|
—
|
|
|
(307
|
)
|
Settlements
|
|
(110
|
)
|
|
(356
|
)
|
|
—
|
|
Decreases for lapses in statute of limitations
|
|
(140
|
)
|
|
—
|
|
|
—
|
|
Ending Balance
|
|
$
|
4,175
|
|
|
$
|
778
|
|
|
$
|
837
|
|
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The timing of the resolution of income tax examinations is uncertain, and the tax liability of the issues raised by taxing authorities may differ from the amounts accrued. Therefore, the Company cannot currently provide an estimate of the range of possible outcomes in the next twelve months.
Note 10— Related Party Transactions
During the year ended
December 31, 2018
, no related party transactions occurred requiring disclosure.
In December 2017, the Company completed a transaction with ISM Connect, LLC ("ISM"), an entity in which the Company's Chairman and Chief Executive Officer ("CEO") owns a majority interest. In exchange for a noncontrolling minority interest in ISM, the Company licensed the right to use certain portions of its internally developed software, but strictly limited to ISM's digital media signage business. The Company retains all rights in the software without restriction. This interest was valued at
$2.3 million
and no subsequent transactions with ISM are expected.
The Company previously entered into lease agreements for approximately
70,000
and
10,000
square feet of office space in buildings in which the Company’s Chairman and CEO and the Company's President own minority interests as limited partners. The Company exercised its option to terminate the lease for
70,000
square feet of office space effective in May 2015. In connection with the termination of this lease, the Company paid
$1.3 million
for unamortized expenses in January 2016.
Entities owned or controlled by the Company's Chairman and CEO have been paid for the building of corporate training content. The Company made
no
payments during 2018 and paid
$0.2 million
and
$1.7 million
in 2017 and 2016, respectively. No further payments are expected.
Note 11 — Employee Benefit Plans
401(k) Plan
The Company has a defined contribution plan covering all eligible employees. Under the plan, employees may contribute up to
90 percent
of their eligible annual compensation with the Company making matching contributions on employee deferrals of up to
5 percent
of eligible employee wages. In January 2017, the Company increased its matching contributions on pilot deferrals to
10 percent
of eligible wages resulting from the pilot collective bargaining agreement.
The Company recognized expense under this plan of
$19.1 million
,
$14.2 million
and
$5.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Share-based employee compensation
The Company reserved
2,000,000
shares of common stock for the Company to grant stock options, restricted stock, cash-settled stock appreciation rights ("SARs") and other stock-based awards to certain officers, directors and employees of the Company under the 2016 Long-Term Incentive Plan (the "2016 Plan"). The 2016 Plan is administered by the Company’s compensation committee of the Board of Directors. As of December 31, 2018, a portion of unvested restricted stock, and unexercised stock options and cash-settled SARs remain outstanding under the 2006 Long-Term Incentive Plan which has otherwise expired.
Employee Stock Purchase Plan
The Company reserved
1,000,000
shares of common stock for employee purchases under the 2014 Employee Stock Purchase Plan ("ESPP"). Shares are purchased semi-annually, at a discount, based on the market value at period-end. Employees may contribute up to
25 percent
of their base pay per offering period, not to exceed
$25,000
each calendar year, for the purchase of common stock. The ESPP is a compensatory plan under applicable accounting guidance and results in the recognition of compensation expense.
The following table provides information about the Company’s ESPP activity during 2018, 2017, and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of shares purchased
|
|
Average price paid per share
|
|
Weighted-average fair value of discount under the ESPP
(1)
|
As of December 31, 2016
|
|
13,400
|
|
|
$
|
120.63
|
|
|
$
|
14.80
|
|
As of December 31, 2017
|
|
18,498
|
|
|
$
|
126.81
|
|
|
$
|
14.09
|
|
As of December 31, 2018
|
|
33,300
|
|
|
$
|
134.31
|
|
|
$
|
16.79
|
|
(1) The weighted-average fair value of the discount under the ESPP granted is equal to a percentage discount from the market value of the Common Stock at the end of each semi-annual purchase period. The Company increased the discount from
10 percent
to
15 percent
for the second offering period of 2018.
15 percent
is the maximum allowable discount under the ESPP.
Compensation expense
For the years ended
December 31, 2018
,
2017
and
2016
, the Company recorded compensation expense of
$15.6 million
,
$14.0 million
and
$9.6 million
, respectively, related to stock options, restricted stock, cash-settled SARs and the ESPP. Forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are matched to actuals over the vesting period.
The unrecognized compensation cost was
$17.5 million
for unvested restricted stock expected to be recognized over a weighted-average period of
1.49
years. As of
December 31, 2018
, there is
no
unrecognized compensation cost for either cash-settled SARs or stock options.
Stock options
The fair value of stock options granted is estimated as of the grant date using the Black-Scholes option pricing model. The contractual terms of the Company’s stock option awards granted range from five to ten years. A summary of option activity as of
December 31, 2018
,
2017
and
2016
, and changes during the years then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (years)
|
|
Aggregate Intrinsic Value (thousands)
|
Outstanding at December 31, 2015
|
48,781
|
|
|
$
|
86.65
|
|
|
2.62
|
|
$
|
3,960
|
|
Exercised
|
(5,192
|
)
|
|
108.59
|
|
|
|
|
|
Outstanding at December 31, 2016
|
43,589
|
|
|
$
|
84.04
|
|
|
1.55
|
|
$
|
3,590
|
|
Exercised
|
(16,014
|
)
|
|
60.20
|
|
|
|
|
|
Outstanding at December 31, 2017
|
27,575
|
|
|
$
|
97.88
|
|
|
0.72
|
|
$
|
1,568
|
|
Exercised
|
(17,838
|
)
|
|
92.04
|
|
|
|
|
|
Outstanding at December 31, 2018
|
9,737
|
|
|
$
|
108.59
|
|
|
0.18
|
|
$
|
—
|
|
Fully vested and expected to vest at December 31, 2018
|
9,737
|
|
|
$
|
108.59
|
|
|
0.18
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
9,737
|
|
|
$
|
108.59
|
|
|
0.18
|
|
$
|
—
|
|
During the years ended
December 31, 2018
,
2017
and
2016
, the total intrinsic value of options exercised was
$1.4 million
,
$1.3 million
and
$0.2 million
, respectively. Cash received from option exercises for the years ended
December 31, 2018
,
2017
and
2016
was
$1.6 million
,
$1.0 million
and
$0.6 million
, respectively.
Restricted stock awards
The closing price of the Company's stock on the date of grant is used as the fair value for the issuance of restricted stock. A summary of the status of non-vested restricted stock grants during the years ended
December 31, 2018
,
2017
and
2016
is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested at December 31, 2015
|
82,957
|
|
|
$
|
155.30
|
|
Granted
|
224,018
|
|
|
144.74
|
|
Vested
|
(43,310
|
)
|
|
129.96
|
|
Forfeited
|
(10,007
|
)
|
|
158.74
|
|
Non-vested at December 31, 2016
|
253,658
|
|
|
$
|
146.01
|
|
Granted
|
125,442
|
|
|
165.61
|
|
Vested
|
(91,338
|
)
|
|
145.08
|
|
Forfeited
|
(94,872
|
)
|
|
157.95
|
|
Non-vested at December 31, 2017
|
192,890
|
|
|
$
|
153.32
|
|
Granted
|
102,842
|
|
|
155.02
|
|
Vested
|
(85,410
|
)
|
|
153.85
|
|
Forfeited
|
(14,128
|
)
|
|
154.65
|
|
Non-vested at December 31, 2018
|
196,194
|
|
|
$
|
153.88
|
|
The total fair value of restricted stock that vested during the years ended
December 31, 2018
,
2017
and
2016
was
$13.4 million
,
$13.3 million
and
$5.6 million
, respectively.
Cash-settled SARs
Cash-settled SARs are liability classified awards for which the fair value and compensation expense recognized are updated monthly using the Black-Scholes option pricing model.
The following range of assumptions in the Black-Scholes pricing model was used to determine fair value as of December 31 of the years indicated below:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average volatility
|
35.0
|
%
|
|
32.8
|
%
|
|
33.2
|
%
|
Expected term (in years)
|
0.8
|
|
|
0.2 - 1.9
|
|
|
0.3 - 3.1
|
|
Risk-free interest rate
|
2.6
|
%
|
|
0.6% - 1.9%
|
|
|
0.4% - 1.5%
|
|
Dividend yield
|
1.68
|
%
|
|
1.62
|
%
|
|
1.51
|
%
|
Expected volatilities used for award valuation are based on the historical volatility of the Company's common stock price.
Expected term represents the weighted average time between the award’s grant date and its expected exercise date. The Company estimated the expected term assumption in
2018
,
2017
and
2016
using historical award exercise activity and employee termination activity.
The risk-free interest rate for periods equal to the expected term of an award is based on a blended historical rate using Federal Reserve rates for U.S. Treasury securities.
The dividend yield reflects the effect that paying a dividend has on the fair value of the Company's stock.
The contractual term of the Company’s cash-settled SARs awards granted is five years.
A summary of cash-settled SARs awards activity during the years ended
December 31, 2018
, 2017 and 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of SARs
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value (thousands)
|
Balance at December 31, 2015
|
|
131,741
|
|
|
$
|
136.13
|
|
|
|
|
|
Granted
|
|
15,000
|
|
|
146.03
|
|
|
|
|
|
Forfeited
|
|
(10,083
|
)
|
|
170.21
|
|
|
|
|
|
Exercised
|
|
(32,050
|
)
|
|
89.19
|
|
|
|
|
|
Balance at December 31, 2016
|
|
104,608
|
|
|
$
|
153.86
|
|
|
|
|
|
Forfeited
|
|
(14,682
|
)
|
|
177.6
|
|
|
|
|
|
Exercised
|
|
(9,462
|
)
|
|
106.25
|
|
|
|
|
|
Balance at December 31, 2017
|
|
80,464
|
|
|
$
|
155.13
|
|
|
|
|
|
Forfeited
|
|
(12,890
|
)
|
|
181.47
|
|
|
|
|
|
Exercised
|
|
(13,642
|
)
|
|
98.37
|
|
|
|
|
|
Balance at December 31, 2018
|
|
53,932
|
|
|
$
|
163.19
|
|
|
1.47
|
|
$
|
—
|
|
Vested or expected to vest at December 31, 2018
|
|
53,482
|
|
|
$
|
163.34
|
|
|
1.46
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
|
48,932
|
|
|
$
|
164.95
|
|
|
1.34
|
|
$
|
—
|
|
Note 12 — Commitments and Contingencies
The Company leases assets including office facilities, office equipment, certain airport and terminal facilities, and other space. These commitments have remaining non-cancelable lease terms, which range from 2019 to 2036. Total rental expense for operating leases for the years ended
December 31, 2018
,
2017
and
2016
was
$12.7 million
,
$9.0 million
and
$8.1 million
, respectively. Future minimum fixed payments for commitments under aircraft acquisition, certain airport and terminal facilities, and other operating lease obligations as of
December 31, 2018
(in thousands) are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024 - Thereafter
|
Aircraft and engine purchase obligations
|
$
|
259,160
|
|
|
$
|
33,800
|
|
|
$
|
500
|
|
|
$
|
18,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Airport fees under use and lease agreements
|
10,480
|
|
|
5,223
|
|
|
63
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
|
8,102
|
|
|
6,031
|
|
|
3,643
|
|
|
1,630
|
|
|
1,626
|
|
|
8,297
|
|
Total future payments
|
$
|
277,742
|
|
|
$
|
45,054
|
|
|
$
|
4,206
|
|
|
$
|
19,630
|
|
|
$
|
1,626
|
|
|
$
|
8,297
|
|
Aircraft sub-service expense was
$0.9 million
,
$3.1 million
, and
$0.9 million
, in 2018, 2017 and 2016, respectively.
The Company's Airbus fleet also includes
five
aircraft currently under capital lease.
Aircraft Commitments
During 2018, the Company entered into purchase agreements for
eight
Airbus A320 series aircraft as well as a purchase agreement for
seven
spare engines. Under these contracts and others previously entered into, we expect
11
aircraft to be acquired in 2019,
two
in 2020, and
one
in 2022. The
seven
spare engines are all expected to be acquired in 2019. Additionally, in February 2019, the Company entered into an agreement for
two
Airbus A320 series aircraft, for which delivery is expected in the first half of 2019.
During 2017, the Company entered into purchase agreements for
six
Airbus A320 series aircraft.
Four
of these aircraft were acquired in 2017 and the remaining
two
were acquired in 2018.
During 2017, the Company also entered into
13
capital lease agreements, each for one Airbus A320 series aircraft. Of these agreements, the Company received
five
aircraft in 2018, and the remaining
eight
agreements were terminated in the fourth quarter 2018 due to extensive delivery delays.
During 2016, the Company entered into purchase agreements for
six
Airbus A320 series aircraft that have yet to be purchased as of the end of 2018. These aircraft are expected to be acquired in 2019 and 2020.
Facility Lease Obligations
The Company leases other facilities in Las Vegas, Florida and throughout the network with approximately
650,000
square feet of space used for other corporate purposes. These leases expire between 2019 and 2036. The Company is responsible for its share of common area maintenance charges under each lease.
Airport and terminal facility leases are entered into with a number of local governments and other third parties. These lease arrangements have a variety of terms and conditions.
Contingencies
The Company is subject to certain legal and administrative actions it considers routine to its business activities. The Company believes the ultimate outcome of any pending legal or administrative matters will not have a material adverse impact on its financial position, liquidity or results of operations.
Note 13 — Valuation and Qualifying Accounts (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
Changes Charged to Statement of Income Accounts
|
|
Write Offs (net of recoveries)
|
|
Balance at End of Year
|
Allowance for expendable parts and supplies
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
$
|
13,756
|
|
|
$
|
2,624
|
|
|
$
|
(1,970
|
)
|
|
$
|
14,410
|
|
For the Year Ended December 31, 2017
(1)
|
7,205
|
|
|
6,551
|
|
|
—
|
|
|
13,756
|
|
For the Year Ended December 31, 2016
|
4,607
|
|
|
2,598
|
|
|
—
|
|
|
7,205
|
|
(1) Changes during the year and ending balance include additional reserve of
$2.0 million
related to the MD-80 impairment charge.
Note 14 — Subsequent Events
In February 2019, the Company entered into the Term Loan to borrow
$450.0 million
, guaranteed by the Term Loan Guarantors, which is secured by substantially all property and assets of the Company and the Term Loan Guarantors, excluding aircraft and aircraft engines, and excluding certain other assets. The Term Loan has a
five
-year term and bears interest based on LIBOR plus
4.5 percent
or an alternate base rate plus
3.5 percent
, respectively, subject to certain adjustments. The Term Loan provides for quarterly interest payments along with quarterly principal payments of
$1.1 million
through February 2024, at which time the Term Loan is due. The Term Loan may be prepaid at any time without penalty.
In connection with the Term Loan, the Company conducted a tender offer for its
5.5 percent
Notes due 2019. As a result of the tender offer, the Company purchased
$347.9 million
of its Notes and the indenture governing the Notes was amended to eliminate most of the restrictive covenants and certain events of default, reduce the minimum notice period required for redemptions of the Notes from 30 days as previously required by the indenture to three business days, and amend certain other provisions applicable to the Notes. The Company expects to call the remaining balance of the Notes in advance of their maturity in July 2019.
In February 2019, the Company executed a purchase agreement for
two
Airbus A320 series aircraft. The Company expects delivery of
one
of these aircraft in the first quarter 2019 and the other in the second quarter 2019.