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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________________________________
Form 10-Q
_______________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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: 001-35186
_______________________________________________________________________
SPIRIT AIRLINES, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________
Delaware
38-1747023
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
 
2800 Executive Way
Miramar
Florida
33025
(Address of principal executive offices)
(Zip Code)

(954) 447-7920
(Registrant’s telephone number, including area code) 
_______________________________________________________________________

Title of each class
 
Name of exchange on which registered
 
Trading Symbol
Common Stock, $0.0001 par value
 
New York Stock Exchange
 
SAVE

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.     
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes      No  




Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the close of business on October 17, 2019:
Class
 
Number of Shares
Common Stock, $0.0001 par value
 
68,448,433




Table of Contents
INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. Financial Information
ITEM 1.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Spirit Airlines, Inc.
Condensed Statements of Operations
(unaudited, in thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Operating revenues:
 
 
 
 
 
 
 
Passenger
$
973,353

 
$
887,956

 
$
2,805,848

 
$
2,413,447

Other
18,615

 
16,374

 
54,872

 
46,792

Total operating revenues
991,968

 
904,330

 
2,860,720

 
2,460,239

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Aircraft fuel
253,847

 
258,818

 
748,489

 
709,644

Salaries, wages and benefits
224,069

 
185,043

 
644,345

 
527,895

Landing fees and other rents
69,142

 
54,542

 
193,502

 
162,774

Aircraft rent
40,026

 
42,682

 
132,330

 
134,618

Depreciation and amortization
57,712

 
43,773

 
163,351

 
128,764

Distribution
39,160

 
37,868

 
115,481

 
103,496

Maintenance, materials and repairs
36,152

 
37,778

 
102,444

 
99,141

Special charges (credits)

 
(686
)
 

 
88,656

Loss on disposal of assets
13,410

 
1,069

 
16,873

 
6,561

Other operating
133,769

 
98,318

 
367,482

 
283,841

Total operating expenses
867,287

 
759,205

 
2,484,297

 
2,245,390

 
 
 
 
 
 
 
 
Operating income
124,681

 
145,125

 
376,423

 
214,849

 
 
 
 
 
 
 
 
Other (income) expense:
 
 
 
 
 
 
 
Interest expense
25,138

 
21,925

 
75,375

 
60,272

Capitalized interest
(3,400
)
 
(2,657
)
 
(8,932
)
 
(7,205
)
Interest income
(6,292
)
 
(4,776
)
 
(20,282
)
 
(13,272
)
Other expense
222

 
302

 
599

 
623

Special charges, non-operating

 
1,744

 


90,357

Total other (income) expense
15,668

 
16,538

 
46,760

 
130,775

 
 
 
 
 
 
 
 
Income before income taxes
109,013

 
128,587

 
329,663

 
84,074

Provision for income taxes
25,549

 
31,107

 
75,622

 
20,262

 
 
 
 
 
 
 
 
Net income
$
83,464

 
$
97,480

 
$
254,041

 
$
63,812

Basic earnings per share
$
1.22

 
$
1.43

 
$
3.71

 
$
0.94

Diluted earnings per share
$
1.22

 
$
1.42

 
$
3.71

 
$
0.93

The accompanying Notes are an integral part of these Condensed Financial Statements.

1




Spirit Airlines, Inc.
Condensed Statements of Comprehensive Income
(unaudited, in thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
83,464

 
$
97,480

 
$
254,041

 
$
63,812

Unrealized gain (loss) on short-term investment securities, net of deferred taxes of ($20), ($5), $47, and $21
(68
)
 
(7
)
 
161

 
70

Interest rate derivative loss reclassified into earnings, net of taxes of $17, $27, $63, and $66
57

 
52

 
157

 
172

Other comprehensive income (loss)
$
(11
)
 
$
45

 
$
318

 
$
242

Comprehensive income
$
83,453

 
$
97,525

 
$
254,359

 
$
64,054


The accompanying Notes are an integral part of these Condensed Financial Statements.


2



Spirit Airlines, Inc.
Condensed Balance Sheets
(unaudited, in thousands)
 
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
935,678

 
$
1,004,733

Short-term investment securities
104,792

 
102,789

Accounts receivable, net
71,372

 
47,660

Aircraft maintenance deposits, net
132,842

 
106,901

Income tax receivable
21,693

 

Prepaid expenses and other current assets
136,905

 
83,383

Total current assets
1,403,282

 
1,345,466

 
 
 
 
Property and equipment:
 
 
 
Flight equipment
3,549,087

 
3,257,215

Ground property and equipment
234,740

 
191,661

Less accumulated depreciation
(450,195
)
 
(332,864
)
 
3,333,632

 
3,116,012

Operating lease right-of-use assets
1,059,766

 

Pre-delivery deposits on flight equipment
330,951

 
236,775

Long-term aircraft maintenance deposits
79,361

 
138,738

Deferred heavy maintenance, net
328,109

 
249,010

Other long-term assets
40,113

 
79,456

Total assets
$
6,575,214

 
$
5,165,457

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
41,915

 
$
39,320

Air traffic liability
361,218

 
291,981

Current maturities of long-term debt and finance leases
194,582

 
163,557

Current maturities of operating leases
117,376

 

Other current liabilities
337,685

 
339,677

Total current liabilities
1,052,776

 
834,535

 
 
 
 
Long-term debt and finance leases, less current maturities
1,968,901

 
2,024,774

Operating leases, less current maturities
915,977

 

Deferred income taxes
446,940

 
355,141

Deferred gains and other long-term liabilities
10,533

 
22,503

Shareholders’ equity:
 
 
 
Common stock

7

 
7

Additional paid-in-capital
379,354

 
371,225

Treasury stock, at cost
(72,372
)
 
(67,016
)
Retained earnings
1,873,973

 
1,625,481

Accumulated other comprehensive income (loss)
(875
)
 
(1,193
)
Total shareholders’ equity
2,180,087

 
1,928,504

Total liabilities and shareholders’ equity
$
6,575,214

 
$
5,165,457

The accompanying Notes are an integral part of these Condensed Financial Statements.

3



Spirit Airlines, Inc.
Condensed Statements of Cash Flows
(unaudited, in thousands) 
 
Nine Months Ended September 30,
 
2019
 
2018
Operating activities:

 

Net income
$
254,041

 
$
63,812

Adjustments to reconcile net income to net cash provided by operations:

 

Losses reclassified from other comprehensive income
220


238

Share-based compensation
8,128

 
8,293

Allowance for doubtful accounts (recoveries)

 
(12
)
Amortization of debt issuance costs
6,540

 
6,508

Depreciation and amortization
163,351

 
128,764

Deferred income tax expense
91,688

 
21,243

Loss on disposal of assets
16,873

 
6,561

Special charges, non-operating

 
90,357

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(23,712
)
 
(14,191
)
Aircraft maintenance deposits, net
(14,955
)
 
10,543

Prepaid income taxes
1,431



Other assets
(24,474
)
 
(5,760
)
Deferred heavy maintenance, net
(123,299
)
 
(121,643
)
Income tax receivable
(21,693
)
 
(8,662
)
Accounts payable
883

 
38,771

Air traffic liability
69,237

 
59,916

Other liabilities
(45,169
)
 
23,896

Other
(693
)
 
(136
)
Net cash provided by operating activities
358,397

 
308,498

Investing activities:
 
 
 
Purchase of available-for-sale investment securities
(93,557
)

(100,228
)
Proceeds from the maturity of available-for-sale investment securities
92,395


99,134

Proceeds from sale of property and equipment

 
9,500

Pre-delivery deposits on flight equipment, net of refunds
(169,200
)
 
(132,297
)
Capitalized interest
(7,707
)

(6,116
)
Assets under construction for others
(7,591
)
 

Purchase of property and equipment
(114,396
)
 
(420,586
)
Net cash used in investing activities
(300,056
)
 
(550,593
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
94,706


518,171

Proceeds from stock options exercised
1

 
5

Payments on debt obligations
(125,914
)
 
(93,225
)
Payments on finance lease obligations
(95,608
)
 
(205,566
)
Reimbursement for assets under construction for others
5,389

 

Repurchase of common stock
(5,356
)
 
(1,145
)
Debt issuance costs
(614
)

(3,284
)
Net cash (used in) provided by financing activities
(127,396
)
 
214,956

Net decrease in cash and cash equivalents
(69,055
)
 
(27,139
)
Cash and cash equivalents at beginning of period
1,004,733

 
800,849

Cash and cash equivalents at end of period
$
935,678

 
$
773,710

Supplemental disclosures
 
 
 
Cash payments for:
 
 
 
Interest, net of capitalized interest
$
59,840

 
$
35,977

Income taxes paid, net of refunds
$
8,288

 
$
3,366

Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows for operating leases
$
141,019

 
$

Financing cash flows for finance leases
$
641

 
$

Non-cash transactions:
 
 
 
Capital expenditures funded by finance lease borrowings
$
96,371


$
144,106

Capital expenditures funded by operating lease borrowings
$
189,487

 
$

The accompanying Notes are an integral part of these Condensed Financial Statements.

4



Spirit Airlines, Inc.
Condensed Statements of Shareholders’ Equity
(unaudited, in thousands)
 
Three and Nine Months Ended September 30, 2018
 
Common Stock
 
Additional Paid-In-Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance at December 31, 2017
$
7

 
$
360,153

 
$
(65,854
)
 
$
1,469,732

 
$
(1,464
)
 
$
1,762,574

Share-based compensation

 
3,075

 

 

 

 
3,075

Repurchase of common stock

 

 
(959
)
 

 

 
(959
)
Proceeds from options exercised

 
2

 

 

 

 
2

Changes in comprehensive income

 

 

 

 
35

 
35

Net loss

 

 

 
(44,922
)
 

 
(44,922
)
Balance at March 31, 2018
$
7

 
$
363,230

 
$
(66,813
)
 
$
1,424,810

 
$
(1,429
)
 
$
1,719,805

Share-based compensation

 
2,306

 

 

 

 
2,306

Repurchase of common stock

 

 
(27
)
 

 

 
(27
)
Proceeds from options exercised

 

 

 

 

 

Changes in comprehensive income

 

 

 

 
162

 
162

Net income

 

 

 
11,254

 

 
11,254

Balance at June 30, 2018
$
7

 
$
365,536

 
$
(66,840
)
 
$
1,436,064

 
$
(1,267
)
 
$
1,733,500

Share-based compensation

 
2,912

 

 

 

 
2,912

Repurchase of common stock

 

 
(159
)
 

 

 
(159
)
Proceeds from options exercised

 
4

 

 

 

 
4

Changes in comprehensive income

 

 

 

 
45

 
45

Net income

 

 

 
97,480

 

 
97,480

Balance at September 30, 2018
$
7

 
$
368,452

 
$
(66,999
)
 
$
1,533,544

 
$
(1,222
)
 
$
1,833,782

 
Three and Nine Months Ended September 30, 2019
 
Common Stock
 
Additional Paid-In-Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance at December 31, 2018
$
7

 
$
371,225

 
$
(67,016
)
 
$
1,625,481

 
$
(1,193
)
 
$
1,928,504

Effect of ASU No. 2016-02 implementation (refer to Note 2)

 

 

 
(5,549
)
 

 
(5,549
)
Share-based compensation

 
3,671

 

 

 

 
3,671

Repurchase of common stock

 

 
(5,223
)
 

 

 
(5,223
)
Proceeds from options exercised

 

 

 

 

 

Changes in comprehensive income

 

 

 

 
177

 
177

Net income

 

 

 
56,076

 

 
56,076

Balance at March 31, 2019
$
7

 
$
374,896

 
$
(72,239
)
 
$
1,676,008

 
$
(1,016
)
 
$
1,977,656

Share-based compensation

 
2,742

 

 

 

 
2,742

Repurchase of common stock

 

 
(25
)
 

 

 
(25
)
Proceeds from options exercised

 
1

 

 

 

 
1

Changes in comprehensive income

 

 

 

 
152

 
152

Net income

 

 

 
114,501

 

 
114,501

Balance at June 30, 2019
$
7

 
$
377,639

 
$
(72,264
)
 
$
1,790,509

 
$
(864
)
 
$
2,095,027

Share-based compensation

 
1,715

 

 

 

 
1,715

Repurchase of common stock

 

 
(108
)
 

 

 
(108
)
Proceeds from options exercised

 

 

 

 

 

Changes in comprehensive income

 

 

 

 
(11
)
 
(11
)
Net income

 

 

 
83,464

 

 
83,464

Balance at September 30, 2019
$
7

 
$
379,354

 
$
(72,372
)
 
$
1,873,973

 
$
(875
)
 
$
2,180,087

The accompanying Notes are an integral part of these Condensed Financial Statements.

5



Notes to Condensed Financial Statements
(unaudited)
1.
Basis of Presentation
The accompanying unaudited condensed financial statements include the accounts of Spirit Airlines, Inc. (the "Company"). These unaudited condensed financial statements reflect all normal recurring adjustments which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the audited annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements of the Company and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 13, 2019.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect both the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
The interim results reflected in the unaudited condensed financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The air transportation business is subject to significant seasonal fluctuations as demand is generally greater in the second and third quarters of each year. The air transportation business is also volatile and highly affected by economic cycles and trends.
2.
Recent Accounting Developments

Recently Adopted Accounting Pronouncements

Leases

The Company adopted ASU No. 2016-02, "Leases (Topic 842)," effective January 1, 2019. The Company adopted Topic 842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company's contracts are or contain leases, (2) lease classification and (3) initial direct costs. Therefore, the condensed financial statements for 2019 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. This standard requires all lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, for all leases with a term greater than 12 months. The adoption of the new lease standard had a significant impact on the Company's condensed balance sheets due to the recognition of $1.0 billion of right-of-use assets for operating leases, $128.1 million of current maturities of operating leases and $895.1 million of operating leases, less current maturities. In addition, the Company recognized a $5.5 million cumulative effect adjustment, net of tax, to retained earnings. This adjustment was driven by the recognition of unamortized deferred gains and losses related to aircraft sale-leaseback transactions entered into in prior periods. Prior to the adoption of Topic 842, gains and losses on sale-leaseback transactions were generally deferred and recognized in income over the lease term. The accounting for finance leases is substantially unchanged. The adoption of Topic 842 did not have a significant impact on the Company's lease classification or a material impact on its statements of operations and liquidity. Additionally, the adoption of Topic 842 did not have a material impact on the Company’s debt-covenant compliance under its current agreements. Refer to Note 10, Leases for information regarding the Company's adoption of Topic 842 and the Company's undiscounted future lease payments and the timing of those payments. 

Recently Issued Accounting Pronouncements Not Yet Adopted

Cloud Computing Arrangements

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software." This new standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40, "Accounting for Internal-Use Software," to determine which implementation costs to capitalize as assets and amortize over the term of the hosting arrangement or expense as incurred. This standard is effective for the Company for fiscal years, and interim periods within those years, beginning

6



January 1, 2020. Early adoption is permitted, including during an interim period. The Company has elected not to early adopt. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement presentation or results.

Accounting for Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses." The standard requires the use of an "expected loss" model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale securities and requires estimated credit losses to be recorded as allowances rather than as reductions to the amortized cost of the securities. This standard is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2020, with early adoption permitted. The Company has elected not to early adopt. The Company is evaluating the new guidance, but does not expect it to have a material impact on its financial statement presentation or results.

3.
Revenue
Operating revenues is comprised of passenger revenues, which includes fare and non-fare revenues, and other revenues. The following table shows disaggregated operating revenues for the three and nine months ended September 30, 2019 and September 30, 2018.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Operating revenues:
 
 
 
 
 
 
 
Fare
$
493,376

 
$
476,660

 
$
1,425,417

 
$
1,258,904

Non-fare
479,977

 
411,296

 
1,380,431

 
1,154,543

Total passenger revenues
973,353

 
887,956

 
2,805,848

 
2,413,447

Other
18,615

 
16,374

 
54,872

 
46,792

Total operating revenues
$
991,968

 
$
904,330

 
$
2,860,720

 
$
2,460,239



The Company is managed as a single business unit that provides air transportation for passengers. Operating revenues by geographic region as defined by the Department of Transportation ("DOT") are summarized below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
DOT—Domestic
$
880,868

 
$
819,323

 
$
2,526,016

 
$
2,236,334

DOT—Latin America
111,100

 
85,007

 
334,704

 
223,905

Total
$
991,968

 
$
904,330

 
$
2,860,720

 
$
2,460,239


The Company defers the amount for award travel obligation as part of loyalty deferred revenue within air traffic liability ("ATL") on the Company's condensed balance sheets and recognizes loyalty travel awards in passenger revenues as the mileage credits are used for travel or expire unused.
As of September 30, 2019 and December 31, 2018, the Company had ATL balances of $361.2 million and $292.0 million, respectively. The balance of the Company's ATL is expected to be recognized within 12 months of the respective balance sheet date.

7




4.
Special Charges

Special Charges (Credits), Operating

During the nine months ended September 30, 2019, the Company had no special charges (credits) within operating expenses in the statement of operations.

During the first quarter of 2018, the Company negotiated and amended the collective bargaining agreement with the Air Line Pilots Association, International ("ALPA"), under the guidance of the National Mediation Board ("NMB"). In connection with the amended agreement, the Company recorded a one-time ratification incentive of $80.2 million, including payroll taxes, and an $8.5 million adjustment related to other contractual provisions. As a result, the Company recorded $88.7 million in special charges (credits) within operating expenses in the condensed statement of operations for the nine months ended September 30, 2018.
    
Special Charges, Non-Operating

During the nine months ended September 30, 2019, the Company had no special charges, non-operating within other (income) expense in the statement of operations.

During the nine months ended September 30, 2018, the Company recorded $90.4 million in special charges, non-operating within other (income) expense in the statement of operations. During the first quarter of 2018, the Company entered into an aircraft purchase agreement for the purchase of 14 A319 aircraft previously operated under operating leases by the Company. The aggregate gross purchase price for the 14 aircraft was $285.0 million, and the price for each aircraft at the time of the sale was comprised of a cash payment net of the amount of maintenance reserves and security deposits for such aircraft held by the applicable lessor pursuant to the lease for such aircraft. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the 14 aircraft. During the first quarter of 2018, the finance lease assets were recorded at the lower of cost or fair value of the aircraft within flight equipment on the condensed balance sheets. During the second quarter of 2018, the purchase of the 14 aircraft was completed and the obligation was accreted up to the net cash payment price with interest charges recognized in special charges, non-operating in the statement of operations. The Company determined the valuation of the aircraft based on third-party appraisals considering the condition of the aircraft (a Level 3 measurement). 

5.
Loss on Disposal of Assets
During the nine months ended September 30, 2019, the Company recorded $16.9 million in loss on disposal of assets in the statement of operations. This loss on disposal of assets consists of $11.6 million related to the disposal of excess and obsolete inventory, $3.1 million related to the write-down of certain held-for-sale assets to fair value less cost to sell and $2.3 million related to the write-off of certain unrecoverable costs previously capitalized with a project to upgrade the Company's enterprise accounting software. This project was suspended in the third quarter of 2019 and the Company has elected to re-evaluate and pursue an alternative solution. Refer to Note 12, Fair Value Measurements for information regarding the Company's held-for-sale assets. These losses were partially offset by a $0.1 million gain on the sale-leaseback transaction for one aircraft in the period. Refer to Note 10, Leases for information regarding the Company's accounting policy on sale-leaseback transactions.

During the nine months ended September 30, 2018, the Company recorded $6.6 million in loss on disposal of assets in the statement of operations. During the second quarter of 2018, the Company sold 5 used engines for $9.5 million at a loss of $4.4 million. In addition, the Company wrote off $2.2 million related to the disposal of excess and obsolete inventory.

8



6.
Earnings per Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share amounts)
Numerator
 
 
 
 
 
 
 
Net income
$
83,464

 
$
97,480

 
$
254,041

 
$
63,812

Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic
68,442

 
68,254

 
68,421

 
68,243

Effect of dilutive stock awards
103

 
249

 
140

 
103

Adjusted weighted-average shares outstanding, diluted
68,545

 
68,503

 
68,561

 
68,346

Earnings per share
 
 
 
 
 
 
 
Basic earnings per common share
$
1.22

 
$
1.43

 
$
3.71

 
$
0.94

Diluted earnings per common share
$
1.22

 
$
1.42

 
$
3.71

 
$
0.93

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares
136


5

 
141

 
192



7.
Short-term Investment Securities

The Company's short-term investment securities are classified as available-for-sale and generally consist of U.S. Treasury and U.S. government agency securities with contractual maturities of 12 months or less. These securities are stated at fair value within current assets on the Company's condensed balance sheets. Realized gains and losses on sales of investments, if any, are reflected in non-operating income (expense) in the condensed statements of operations.

As of September 30, 2019 and December 31, 2018, the Company had $104.8 million and $102.8 million in short-term available-for-sale investment securities, respectively. During the nine months ended September 30, 2019, these investments earned interest income at a weighted-average fixed rate of approximately 2.4%. For the three and nine months ended September 30, 2019, an unrealized loss of $68 thousand and an unrealized gain of $161 thousand, net of deferred taxes of $20 thousand and $47 thousand, respectively, was recorded within accumulated other comprehensive income ("AOCI") related to these investment securities. For the three and nine months ended September 30, 2018, an unrealized loss of $7 thousand and an unrealized gain of $70 thousand, net of deferred taxes of $5 thousand and $21 thousand, respectively, was recorded within AOCI related to these investment securities. The Company has not recognized any realized gains or losses related to these securities as the Company has not sold any of these securities. As of September 30, 2019 and December 31, 2018, $87 thousand and $74 thousand, net of tax, respectively, remained in AOCI, related to these instruments.


9



8.
Accrued Liabilities
Other current liabilities as of September 30, 2019 and December 31, 2018 consist of the following:
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Salaries and wages
$
82,572

 
$
82,900

Federal excise and other passenger taxes and fees payable
68,716

 
60,604

Airport obligations
65,351

 
52,029

Aircraft maintenance
30,113

 
59,805

Aircraft and facility lease obligations
21,807

 
15,149

Fuel
21,126

 
25,368

Interest payable
18,753

 
18,086

Other
29,247

 
25,736

Other current liabilities
$
337,685

 
$
339,677




9.
Financial Instruments and Risk Management
As part of the Company’s risk management program, the Company from time to time uses a variety of financial instruments to reduce its exposure to fluctuations in the price of jet fuel and in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company may be exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. The Company periodically reviews and seeks to mitigate exposure to the financial deterioration and nonperformance of any counterparty by monitoring the absolute exposure levels, each counterparty's credit ratings and the historical performance of the counterparties relating to hedge transactions. The credit exposure related to these financial instruments is limited to the fair value of contracts in a net receivable position at the reporting date. The Company also maintains security agreements that require the Company to post collateral if the value of selected instruments falls below specified mark-to-market thresholds. The Company records financial derivative instruments at fair value, which includes an evaluation of each counterparty's credit risk. As of September 30, 2019, the Company did not hold any derivatives with requirements to post collateral.

Fuel Derivative Instruments

From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in fuel prices. The Company's fuel derivative contracts, if any, generally consist of United States Gulf Coast jet fuel swaps ("jet fuel swaps") and United States Gulf Coast jet fuel options ("jet fuel options"). Both jet fuel swaps and jet fuel options are used at times to protect the refining price risk between the price of crude oil and the price of refined jet fuel, and to manage the risk of increasing fuel prices. Fair value of the instruments is determined using standard option valuation models.

The Company accounts for any fuel derivative contracts at fair value and recognizes them in the condensed balance sheets in prepaid expenses and other current assets or other current liabilities. The Company did not enter into any fuel derivative instruments during the nine months ended September 30, 2019 and 2018, and did not have any outstanding fuel derivatives as of September 30, 2019 and December 31, 2018. Historically, the Company has not elected hedge accounting on any fuel derivative instruments entered into and, as a result, changes in the fair value of fuel derivative contracts, if any, were recorded in aircraft fuel expense.
Interest Rate Swaps
From time to time, the Company may enter into interest rate swaps to fix the benchmark interest rate component of interest payments or for other reasons. These instruments limit the Company's exposure to changes in the benchmark interest rate in the period from the trade date through the date of maturity. Interest rate swaps may be designated as cash flow hedges. The Company generally accounts for interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current liabilities with changes in fair value recorded within AOCI. As of September 30, 2019 and December 31, 2018, the Company did not have any outstanding interest rate swaps.

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Realized gains and losses from cash flow hedges are recorded in the condensed statements of cash flows as a component of cash flows from operating activities. Subsequent to the issuance of each debt instrument, amounts remaining in AOCI are amortized over the life of the fixed-rate debt instrument. During the nine months ended September 30, 2019 and 2018, there were no unrealized gains or losses recorded within AOCI related to these instruments as they settled in 2015. For the three and nine months ended September 30, 2019, the Company reclassified interest rate swap losses of $57 thousand and $157 thousand, net of tax of $17 thousand and $63 thousand, respectively, into earnings. For the three and nine months ended September 30, 2018, the Company reclassified interest rate swap losses of $52 thousand and $172 thousand, net of tax of $27 thousand and $66 thousand, respectively, into earnings. As of September 30, 2019 and December 31, 2018, $1.0 million and $1.1 million, net of tax, respectively, remained in AOCI, related to these instruments.
10.
Leases
The Company leases aircraft, engines, airport terminals, maintenance and training facilities, aircraft hangars, commercial real estate, and office and computer equipment, among other items. Certain of these leases include provisions for variable lease payments which are based on several factors, including, but not limited to, relative leased square footage, enplaned passengers, and airports’ annual operating budgets. Due to the variable nature of the rates, these leases are not recorded on the Company's condensed balance sheets as a right-of-use asset and lease liability. Lease terms are generally 8 years to 18 years for aircraft and up to 30 years for other leased equipment and property.
The Company adopted Topic 842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019. The Company elected not to apply the recognition requirements in Topic 842 to short-term leases (i.e., leases of 12 months or less). Instead, a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term. The Company elected this accounting policy for all classes of underlying assets. In addition, in accordance with Topic 842, variable lease payments in the period in which the obligation for those payments is incurred are not included in the recognition of a lease liability or right-of-use asset.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. However, the Company's leases generally do not provide a readily determinable implicit rate. Therefore, the Company estimates the incremental borrowing rate to discount lease payments based on information available at lease commencement. The Company uses publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. The Company has options to extend certain of its operating leases for an additional period of time and options to early terminate several of its operating leases. The lease term consists of the noncancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option and periods covered by an option to extend or not terminate the lease in which the exercise of the option is controlled by the lessor. The Company's lease agreements do not contain any residual value guarantees. The Company has elected to not separate non-lease components from the associated lease component for all underlying classes of assets with lease and non-lease components.
As of September 30, 2019, the Company had 47 aircraft financed under operating leases, with lease term expirations between 2022 and 2034. In addition, as of September 30, 2019, the Company had 11 spare engines financed under operating leases with lease term expiration dates ranging from 2019 to 2027. One of the Company's leased aircraft has variable rent payments, which fluctuate based on changes in London Interbank Offered Rate ("LIBOR").
Prior to the adoption of Topic 842, the Company had entered into sale-leaseback transactions with third-party aircraft lessors for some of its leased aircraft and engines. Upon adoption of Topic 842, the Company recognized a $5.5 million cumulative effect adjustment, net of tax, to retained earnings driven by the recognition of unamortized deferred gains and losses related to aircraft sale-leaseback transactions entered into in prior periods. Prior to the adoption of Topic 842, gains and losses on sale-leaseback transactions were generally deferred and recognized in income over the lease term. Under Topic 842, gains and losses on sale-leaseback transactions, subject to adjustment for off-market terms, are recognized immediately and recorded within loss on disposal of assets on the Company's condensed statements of operations.
During the nine months ended September 30, 2019, the Company took delivery of two aircraft under secured debt arrangements, purchased five previously leased aircraft, and took delivery of five aircraft under operating leases. The Company also purchased two engines and purchased one previously leased engine. In addition, the Company entered into a sale-leaseback transaction for one aircraft in the period. With the sale-leaseback transaction, the Company recorded a gain of $0.1 million within loss on disposal of assets on the Company's condensed statements of operations. The sale-leaseback transaction had no off-market terms and therefore no such adjustment was recorded. Upon purchase off lease, the assets previously

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recorded in our operating lease right-of-use asset (in accordance with the adoption of Topic 842) were recorded within flight equipment on the Company's condensed balance sheets.
Some of the Company’s aircraft and engine master lease agreements provide that the Company pays maintenance reserves to aircraft lessors to be held as collateral in advance of the Company’s required performance of major maintenance activities. A majority of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, while some maintenance reserve payments are fixed, time-based contractual amounts. Maintenance reserve payments that are probable of being recovered when the Company performs qualifying maintenance are recorded in aircraft maintenance deposits on the Company's condensed balance sheets. Fixed maintenance reserve payments that are not probable of being recovered are considered lease payments and are included in the right-of-use asset and lease liability. Maintenance reserve payments that are based on a utilization measure and are not probable of being recovered are considered variable lease payments that are recognized when they are probable of being incurred and are not included in the right-of-use asset and lease liability.
Fixed maintenance reserve payments for the Company's aircraft and related flight equipment, including estimated amounts for contractual price escalations, are expected to be $0.7 million for the remainder of 2019, $2.6 million in 2020, $2.6 million in 2021, $2.7 million in 2022, $2.5 million in 2023, and $0.5 million in 2024 and beyond. Some of the master lease agreements do not require that the Company pay maintenance reserves so long as the Company's cash balance does not fall below a certain level. As of September 30, 2019, the Company is in full compliance with those requirements and does not anticipate having to pay reserves related to these master leases in the future.
Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the majority of the lease agreements are fixed for the term of the lease. The lease agreements contain standard termination events, including termination upon a breach of the Company's obligations to make rental payments and upon any other material breach of the Company's obligations under the leases, and standard maintenance and return condition provisions. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition) when it is probable that such amounts will be incurred. When determining probability and estimated cost of lease return obligations, there are various other factors that need to be considered such as the contractual terms of the lease, the ability to swap engines or other aircraft components, current condition of the aircraft, the age of the aircraft at lease expiration, utilization of engines and other components, the extent of repairs needed at return, return locations, current configuration of the aircraft and cost of repairs and materials at the time of return. As a result of the different factors listed above, management assesses the need to accrue lease return costs throughout the lease as facts and circumstances warrant an assessment. The Company expects lease return costs and unrecoverable maintenance deposits will increase as individual aircraft lease agreements approach their respective termination dates and the Company begins to accrue the estimated cost of return conditions for the corresponding aircraft. Upon a termination of the lease due to a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages suffered by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party.
Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the Company's aircraft and spare engine lease agreements recognized on a straight-line basis. Aircraft rent expense also includes maintenance reserves paid to aircraft lessors in advance of the performance of major maintenance activities that are not probable of being reimbursed and probable lease return condition obligations.


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The following table provides details of the Company's future minimum lease payments under finance lease liabilities and operating lease liabilities recorded on the Company's condensed balance sheets as of September 30, 2019. The table does not include commitments that are contingent on events or other factors that are currently uncertain or unknown.
 
 
Finance Leases
 
Operating Leases
 
 
 
 
 
Aircraft and Spare Engine Leases
 
Property Facility Leases
 
Other
 
Total
Operating and Finance Lease Obligations
 
(in thousands)
Remainder of 2019
 
$
298

 
$
45,009

 
$
699

 
$
145

 
$
46,151

2020
 
780

 
175,661

 
2,417

 
517

 
179,375

2021
 
606

 
174,420

 
2,131

 

 
177,157

2022
 
578

 
176,203

 
1,528

 

 
178,309

2023
 
202

 
158,328

 
1,132

 

 
159,662

2024 and thereafter
 

 
617,315

 
4,938

 

 
622,253

Total minimum lease payments
 
$
2,464

 
$
1,346,936

 
$
12,845

 
$
662

 
$
1,362,907

Less amount representing interest
 
233

 
323,560

 
3,509

 
21

 
327,323

Present value of minimum lease payments
 
$
2,231

 
$
1,023,376

 
$
9,336

 
$
641

 
$
1,035,584

Less current portion
 
814

 
114,777

 
2,041

 
558

 
118,190

Long-term portion
 
$
1,417

 
$
908,599

 
$
7,295

 
$
83

 
$
917,394


Commitments related to the Company's noncancellable short-term operating leases not recorded on the Company's condensed balance sheets are expected to be $0.5 million for the remainder of 2019 and none in 2020 and beyond.
In June 2019, the Company entered into an aircraft sale agreement to acquire four A320 aircraft previously operated by the Company under operating leases. The contract was deemed a lease modification, which resulted in a change of classification from operating leases to finance leases for the four aircraft. The Company recorded a finance lease obligation of $94.9 million calculated as the present value of the remaining lease payments, including the final payment to purchase the aircraft and included within current maturities of long-term debt and finance leases on the Company's condensed balance sheets as of June 30, 2019. In addition, the Company recorded finance lease assets of $140.5 million, which include related amounts previously recorded as maintenance reserves and security deposits and included within flight equipment on the Company's condensed balance sheets as of June 30, 2019. During the third quarter of 2019, the purchase of the four aircraft was completed for an aggregate gross purchase price of $141.3 million, which was comprised of cash payments net of the amount of maintenance reserves and security deposits held by the previous lessor, and the related interest in the amount of $0.3 million was recognized within interest expense on the Company's condensed statements of operations for the nine months ended September 30, 2019. These aircraft were recorded within flight equipment on the Company's condensed balance sheets.
The remainder of the Company's finance lease obligations relate to leased computer and office equipment. Payments under these finance lease agreements are fixed for terms ranging from 3 to 5 years. Accounting for finance leases is substantially unchanged under Topic 842. Finance lease assets are recorded within property and equipment and the related liabilities are recorded within current maturities of long-term debt and finance leases and long-term debt and finance leases, less current maturities in the Company's condensed balance sheets.
The table below presents information for lease costs related to the Company's finance and operating leases:

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Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
(in thousands)
Finance lease cost
 
 
 
Amortization of leased assets
$
135

 
$
863

Interest of lease liabilities
302

 
641

Operating lease cost
 
 
 
Operating lease cost (1)
39,590

 
137,943

Short-term lease cost (1)
4,218