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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 001-33166
https://cdn.kscope.io/a8991a154ecbfac57f0cb03470fb745f-algtheaderq417a09.jpg
Allegiant Travel Company
(Exact Name of Registrant as Specified in Its Charter)
Nevada
20-4745737
 
 
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
 
 
 
1201 North Town Center Drive
 
Las Vegas,
Nevada
89144
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (702) 851-7300

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, par value $.001
 
ALGT
 
NASDAQ Stock Market

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 every Interactive Data File required to be submitted 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 such files).   Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
 
Accelerated filer
☐
 
 
 
 
 
Non-accelerated filer
☐
 
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 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No ☒

As of October 28, 2019, the registrant had 16,288,448 shares of common stock, $.001 par value per share, outstanding.



Allegiant Travel Company
Form 10-Q
Table of Contents

PART I.
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)

 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
88,114

 
$
81,520

Restricted cash
20,475

 
14,391

Short-term investments
314,822

 
314,464

Accounts receivable
31,450

 
36,014

Expendable parts, supplies and fuel, net
27,210

 
19,516

Prepaid expenses and other current assets
43,356

 
29,343

TOTAL CURRENT ASSETS
525,427

 
495,248

Property and equipment, net
2,102,815

 
1,847,268

Long-term investments
39,057

 
51,526

Deferred major maintenance, net
99,564

 
67,873

Operating lease right-of-use assets, net
22,433

 
—

Deposits and other assets
45,184

 
36,753

TOTAL ASSETS:
$
2,834,480

 
$
2,498,668

CURRENT LIABILITIES
 
 
 
Accounts payable
$
21,493

 
$
27,452

Accrued liabilities
121,399

 
122,027

Air traffic liability
267,676

 
212,230

Current maturities of long-term debt and finance lease obligations, net of related costs
138,685

 
152,287

TOTAL CURRENT LIABILITIES
549,253

 
513,996

Long-term debt and finance lease obligations, net of current maturities and related costs
1,213,299

 
1,119,446

Deferred income taxes
211,801

 
164,027

Other noncurrent liabilities
33,519

 
10,878

TOTAL LIABILITIES:
2,007,872

 
1,808,347

SHAREHOLDERS' EQUITY
 
 
 
Common stock, par value $.001
23

 
23

Treasury shares
(620,655
)
 
(605,037
)
Additional paid in capital
285,318

 
270,935

Accumulated other comprehensive income (loss), net
29

 
(661
)
Retained earnings
1,161,893

 
1,025,061

TOTAL EQUITY:
826,608

 
690,321

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY:
$
2,834,480

 
$
2,498,668

 
The accompanying notes are an integral part of these consolidated financial statements.

3



ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 (unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
OPERATING REVENUES:
 
 
 
 
 
 
 
Passenger
$
391,222

 
$
355,100

 
$
1,265,978

 
$
1,157,443

Third party products
18,207


15,921

 
53,557

 
44,045

Fixed fee contracts
19,797

 
14,791

 
42,859

 
33,000

Other
7,283

 
7,297

 
17,498

 
20,845

   Total operating revenues
436,509

 
393,109

 
1,379,892

 
1,255,333

OPERATING EXPENSES:
 
 
 
 
 
 
 
Salary and benefits
107,586

 
97,706

 
340,589

 
312,314

Aircraft fuel
104,583

 
113,525

 
324,253

 
342,006

Station operations
43,522

 
43,128

 
128,357

 
122,265

Depreciation and amortization
39,436

 
34,658

 
114,112

 
92,641

Maintenance and repairs
24,768

 
31,983

 
68,470

 
75,864

Sales and marketing
17,591

 
16,798

 
59,057

 
54,224

Aircraft lease rental
—

 
671

 
—

 
767

Other
26,907

 
28,459

 
73,756

 
74,881

   Total operating expenses
364,393

 
366,928

 
1,108,594

 
1,074,962

OPERATING INCOME
72,116

 
26,181

 
271,298

 
180,371

OTHER (INCOME) EXPENSES:
 
 
 
 
 
 
 
Interest expense
19,506

 
14,309

 
58,531

 
40,467

Capitalized interest
(903
)
 
—

 
(3,444
)
 
(279
)
Interest income
(3,335
)
 
(2,425
)
 
(10,038
)
 
(6,259
)
Loss on debt extinguishment
—

 
—

 
3,677

 
—

Other, net
(57
)
 
(118
)
 
(41
)
 
(408
)
   Total other expenses
15,211

 
11,766

 
48,685

 
33,521

INCOME BEFORE INCOME TAXES
56,905

 
14,415

 
222,613

 
146,850

PROVISION FOR INCOME TAXES
12,976

 
(732
)
 
51,017

 
26,494

NET INCOME
$
43,929

 
$
15,147

 
$
171,596

 
$
120,356

Earnings per share to common shareholders:
 
 
 
 
 
 
 
Basic
$
2.70

 
$
0.94

 
$
10.55

 
$
7.46

Diluted
$
2.70

 
$
0.94

 
$
10.54

 
$
7.45

Shares used for computation:
 
 
 
 
 
 
 
Basic
16,037

 
15,957

 
16,037

 
15,929

Diluted
16,039

 
15,962

 
16,045

 
15,938

 
 
 
 
 
 
 
 
Cash dividends declared per share:
$
0.70

 
$
0.70

 
$
2.10

 
$
2.10


The accompanying notes are an integral part of these consolidated financial statements.

4


ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME
$
43,929

 
$
15,147

 
$
171,596

 
$
120,356

Other comprehensive income:
 

 
 

 
 
 
 
Change in available for sale securities, net of tax
16

 
(83
)
 
669

 
(926
)
Foreign currency translation adjustments
17

 
4

 
21

 
218

Change in derivatives, net of tax
—

 
1,325

 
—

 
2,321

Total other comprehensive income
33

 
1,246

 
690

 
1,613

TOTAL COMPREHENSIVE INCOME
$
43,962

 
$
16,393

 
$
172,286

 
$
121,969


The accompanying notes are an integral part of these consolidated financial statements.

5


ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
Three Months Ended September 30, 2019
 
Common stock outstanding
 
Par value
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Treasury shares
 
Total shareholders' equity
Balance at June 30, 2019
16,305

 
$
23

 
$
280,783

 
$
(4
)
 
$
1,128,822

 
$
(605,115
)
 
$
804,509

Share-based compensation
—

 
—

 
4,535

 
—

 
—

 
—

 
4,535

Shares repurchased by the Company and held as treasury shares
(110
)
 
—

 
—

 
—

 
—

 
(15,540
)
 
(15,540
)
Cash dividends, $0.70 per share
—

 
—

 
—

 
—

 
(11,409
)
 
—

 
(11,409
)
Other comprehensive income
—

 
—

 
—

 
33

 
551

 
—

 
584

Net income
—

 
—

 
—

 
—

 
43,929

 
—

 
43,929

Balance at September 30, 2019
16,195

 
$
23

 
$
285,318

 
$
29

 
$
1,161,893

 
$
(620,655
)
 
$
826,608


 
Nine Months Ended September 30, 2019
 
Common stock outstanding
 
Par value
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Treasury shares
 
Total shareholders' equity
Balance at December 31, 2018
16,183

 
$
23

 
$
270,935

 
$
(661
)
 
$
1,025,061

 
$
(605,037
)
 
$
690,321

Share-based compensation
124

 
—

 
14,383

 
—

 
—

 
—

 
14,383

Shares repurchased by the Company and held as treasury shares
(132
)
 
—

 
—

 
—

 
—

 
(18,549
)
 
(18,549
)
Stock issued under employee stock purchase plan
20

 
—

 
—

 
—

 
—

 
2,931

 
2,931

Cash dividends, $2.10 per share
—

 
—

 
—

 
—

 
(34,214
)
 
—

 
(34,214
)
Other comprehensive income
—

 
—

 
—

 
690

 
—

 
—

 
690

Net income
—

 
—

 
—

 
—

 
171,596

 
—

 
171,596

Cumulative effect of the New Lease Standard (see Note 5)
—

 
—

 
—

 
—

 
(550
)
 
—

 
(550
)
Balance at September 30, 2019
16,195

 
$
23

 
$
285,318

 
$
29

 
$
1,161,893

 
$
(620,655
)
 
$
826,608



 
Three Months Ended September 30, 2018
 
Common stock outstanding
 
Par value
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Treasury shares
 
Total shareholders' equity
Balance at June 30, 2018
16,161

 
$
23

 
$
263,034

 
$
(2,473
)
 
$
991,109

 
$
(607,025
)
 
$
644,668

Share-based compensation
—

 
—

 
3,873

 
—

 
—

 
—

 
3,873

Issuance of common stock, net of forfeitures
3

 
—

 
—

 
—

 
—

 
—

 
—

Shares repurchased by the Company and held as treasury shares
(5
)
 
—

 
—

 
—

 
—

 
(624
)
 
(624
)
Cash dividends, $0.70 per share
—

 
—

 
—

 
—

 
(11,314
)
 
—

 
(11,314
)
Other comprehensive income
—

 
—

 
—

 
1,246

 
—

 
—

 
1,246

Net income
—

 
—

 
—

 
—

 
15,147

 
—

 
15,147

Balance at September 30, 2018
16,159

 
$
23

 
$
266,907

 
$
(1,227
)
 
$
994,942

 
$
(607,649
)
 
$
652,996



6


 
Nine Months Ended September 30, 2018
 
Common stock outstanding
 
Par value
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Treasury shares
 
Total shareholders' equity
Balance at December 31, 2017
16,066

 
$
23

 
$
253,840

 
$
(2,840
)
 
$
907,943

 
$
(605,655
)
 
$
553,311

Share-based compensation
98

 
—

 
13,067

 
—

 
—

 
—

 
13,067

Issuance of common stock, net of forfeitures
8

 
—

 
—

 
—

 
—

 
—

 
—

Shares repurchased by the Company and held as treasury shares
(23
)
 
—

 
—

 
—

 
—

 
(3,617
)
 
(3,617
)
Stock issued under employee stock purchase plan
10

 
—

 
—

 
—

 
—

 
1,623

 
1,623

Cash dividends, $2.10 per share
—

 
—

 
—

 
—

 
(33,919
)
 
—

 
(33,919
)
Other comprehensive income
—

 
—

 
—

 
1,613

 
562

 
—

 
2,175

Net income
—

 
—

 
—

 
—

 
120,356

 
—

 
120,356

Balance at September 30, 2018
16,159

 
$
23

 
$
266,907

 
$
(1,227
)
 
$
994,942

 
$
(607,649
)
 
$
652,996






The accompanying notes are an integral part of these consolidated financial statements.


7


ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Nine Months Ended September 30,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
171,596

 
$
120,356

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
114,112

 
92,641

(Gain)/loss on aircraft and other equipment disposals
(8,553
)
 
2,274

Share-based compensation expense
13,563

 
11,043

Deferred income taxes
47,795

 
21,760

Other adjustments
7,330

 
1,833

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
4,564

 
38,005

Prepaid expenses
(13,493
)
 
(6,709
)
Accounts payable
(3,655
)
 
(2,437
)
Accrued liabilities
(8,158
)
 
5,960

Air traffic liability
55,446

 
27,432

Deferred major maintenance
(48,081
)
 
(21,699
)
Other assets/liabilities
(11,039
)
 
(336
)
Net cash provided by operating activities
321,427

 
290,123

INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(397,504
)
 
(263,057
)
Proceeds from maturities of investment securities
413,038

 
355,325

Purchase of property and equipment, including capitalized interest
(350,187
)
 
(273,999
)
Other investing activities
10,647

 
(5,399
)
Net cash used in investing activities
(324,006
)
 
(187,130
)
FINANCING ACTIVITIES:
 
 
 
Cash dividends paid to shareholders
(34,214
)
 
(33,919
)
Proceeds from the issuance of debt
770,435

 
191,724

Repurchase of common stock
(18,549
)
 
(3,617
)
Principal payments on debt and finance lease obligations
(670,148
)
 
(171,438
)
Debt issuance costs
(32,592
)
 
(1,147
)
Other financing activities
325

 
5,834

Net cash provided by (used in) financing activities
15,257

 
(12,563
)
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
12,678

 
90,430

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
95,911

 
70,639

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
108,589

 
$
161,069

 
 
 
 
CASH PAYMENTS (RECEIPTS) FOR:
 
 
 
Interest paid, net of amount capitalized
$
53,089

 
$
43,751

Income tax refunds
(2,227
)
 
(41,145
)
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
 
 
 
Property capitalized under operating leases
$
25,533

 
$
—

Flight equipment acquired under finance leases
—

 
127,625




The accompanying notes are an integral part of these consolidated financial statements.


8


ALLEGIANT TRAVEL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Allegiant Travel Company (the “Company”) and its majority-owned operating subsidiaries. The Company's investments in unconsolidated affiliates, which are 50 percent or less owned, are accounted for under the equity or cost method, and are insignificant to the consolidated financial statements. All intercompany balances and transactions have been eliminated.

These unaudited consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2018 and filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect 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.

Recent Accounting Pronouncements

Recently Adopted Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), (the "New Lease Standard"). This standard requires 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 include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and other payments as required by the standard. Lease payments do 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. This standard is effective for interim and annual reporting periods beginning after December 15, 2018 and the Company adopted the New Lease Standard as of January 1, 2019. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

The Company adopted the New Lease Standard using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on January 1, 2019.

The Company's consolidated balance sheet was affected by this standard, but the consolidated statements of income and the Company's liquidity were not significantly impacted. The most significant change to the consolidated balance sheet upon adoption on January 1, 2019 relates to the recognition of new right-of-use (ROU) assets of $18.0 million and operating liabilities of $19.1 million. The Company's accounting for finance leases remains substantially unchanged.

See Note 5, "Leases," for more information.


9

Note 2 — Revenue Recognition

Passenger Revenue

Passenger revenue is the most significant category in our reported operating revenues. Passenger revenue is primarily composed of scheduled service revenue (including passenger ticket sales and credit voucher breakage), revenue from ancillary air-related charges (including seat fees, baggage fees, and other travel-related services performed in conjunction with a passenger’s flight), as well as co-brand credit card point redemptions, as outlined below:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Scheduled service
$
200,233

 
$
202,796

 
$
672,690

 
$
677,061

Ancillary air-related charges
187,776

 
150,095

 
583,003

 
472,443

Co-brand redemptions
3,213

 
2,209

 
10,285

 
7,939

Total passenger revenue
$
391,222

 
$
355,100

 
$
1,265,978

 
$
1,157,443



Sales of passenger tickets not yet flown are recorded in air traffic liability. Passenger revenue is recognized when transportation is provided or when ticket voucher breakage occurs, to the extent different from estimated breakage.

The contract term of passenger tickets is twelve months and revenue associated with future travel will principally be recognized within this time frame. During the nine months ended September 30, 2019, $210.1 million was recognized into passenger revenue that was recorded in the air traffic liability balance of $212.2 million at December 31, 2018.

Co-brand redemptions

In relation to the travel component of the co-branded credit card contract with Bank of America, 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 co-brand point liability as of the dates indicated:
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Balance at January 1
$
10,708

 
$
8,903

Points awarded (deferral of revenue)
14,308

 
10,872

Points redeemed (recognition of revenue)
(10,285
)
 
(7,939
)
Balance at September 30
$
14,731

 
$
11,836



As of September 30, 2019 and 2018, $10.6 million and $8.1 million, respectively, of the current points liability is reflected in Accrued liabilities and represents our 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.


10


Note 3 — Property and Equipment

Property and equipment:

(in thousands)
As of September 30, 2019
 
As of December 31, 2018
Flight equipment, including pre-delivery deposits
$
2,168,557

 
$
1,905,157

Computer hardware and software
158,720

 
140,385

Land and buildings/leasehold improvements
86,163

 
85,925

Other property and equipment
142,198

 
89,778

Total property and equipment
2,555,638

 
2,221,245

Less accumulated depreciation and amortization
(452,823
)
 
(373,977
)
Property and equipment, net
$
2,102,815

 
$
1,847,268



Accrued capital expenditures as of September 30, 2019 and September 30, 2018 were $6.1 million and $3.8 million, respectively.

Note 4 — Long-Term Debt

Long-term debt and finance lease obligations:

(in thousands)
As of September 30, 2019
 
As of December 31, 2018
Fixed-rate debt and finance lease obligations due through 2029(1)
$
215,839

 
$
640,806

Variable-rate debt due through 2029
1,136,145

 
630,927

Total long-term debt and finance lease obligations, net of related costs
1,351,984

 
1,271,733

Less current maturities, net of related costs(1)
138,685

 
152,287

Long-term debt and finance lease obligations, net of current maturities and related costs
$
1,213,299

 
$
1,119,446

 
 
 
 
Weighted average fixed-interest rate on debt
3.9
%
 
5.3
%
Weighted average variable-interest rate on debt
4.8
%
 
4.2
%

(1) As of December 31, 2018, $428.0 million of the Company's Unsecured Senior Notes were classified as long-term as management refinanced the borrowings on a long-term basis in February 2019, as discussed below. 

Maturities of long-term debt and finance lease obligations for the remainder of 2019 and for the next four years and thereafter, in the aggregate, are: remaining in 2019 - $33.0 million; 2020 - $138.9 million; 2021 - $133.4 million; 2022 - $113.8 million; 2023 - $100.9 million; and $832.0 million thereafter.

Consolidated Variable Interest Entity

In March 2019, the Company, through a wholly owned subsidiary, entered into agreements with a trust to borrow $44.0 million secured by one aircraft. The trust was funded on inception. These borrowings bear interest at a blended rate of 3.8 percent, payable in quarterly installments through April 2029, 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 $39.1 million and $44.0 million, respectively, at the time of borrowing.

Senior Secured Revolving Credit Facility

The Company has a senior secured revolving credit facility under which it is able to borrow up to $81.0 million. There was no balance under this facility as of September 30, 2019. The facility has a term of 24 months and is based on the value of aircraft placed in the collateral pool. Aircraft remain in the collateral pool for up to two years, and, as of September 30, 2019, there were four aircraft in the collateral pool.

Secured Debt

In June 2019, the Company entered into an agreement to borrow $213.0 million secured by 23 aircraft. The borrowing bears interest at a floating rate based on LIBOR, and is payable in quarterly installments over five years. A portion of the proceeds was

11


used for the prepayment of the balance under six existing debt agreements and the repayment of the outstanding balance on the senior secured revolving credit facility.

During the second quarter 2019, the Company borrowed a total of $63.4 million under loan agreements secured by spare engines. The borrowings bear interest at a floating rate based on LIBOR, and are payable in quarterly installments, with terms ranging from seven to ten years.

Term Loan

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"). The Term Loan 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, bears interest based on LIBOR and 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 senior unsecured obligation, as outlined below.

General Unsecured Senior Notes

Until February 2019, the Company had outstanding $450.0 million aggregate principal amount of senior unsecured obligations (the "Notes") which bore interest at 5.5 percent per year and matured in July 2019.

In connection with the Term Loan discussed above, the Company completed a tender offer in February 2019, whereby it purchased $347.9 million of the Notes, and incurred related debt extinguishment costs of $3.7 million. The remaining $102.1 million of the Notes were paid at their maturity in July 2019.

Construction Loan Agreement

In March 2019, Sunseeker Florida, Inc. (“SFI”), a wholly-owned subsidiary of the Company, entered into a Construction Loan Agreement with certain lenders affiliated with TPG Sixth Street Partners, LLC (the “Lender”). Under the Construction Loan Agreement, SFI may borrow up to $175.0 million (the “Loan”) to fund the construction of Phase 1 of Sunseeker Resort -Charlotte Harbor (the “Project”). No amount has been drawn under this agreement as of September 30, 2019.

Under the Construction Loan Agreement, the Lender is to provide the final $175.0 million of funding for the Project, with initial funding to come from the Company. The loan is secured by the Project and, for a period of time, the surrounding land owned by SFI. The Company has guaranteed one-third of the debt, has agreed to bear responsibility under a Non-Recourse Carve-Out Guaranty, and has agreed to guarantee completion of the Project in accordance with approved plans and specifications. All of the shares in SFI are also pledged to secure the loan. The Loan bears interest based on LIBOR and matures in March 2023.

Note 5 — Leases

The Company determines if an arrangement is a lease at inception and has lease agreements for office facilities, office equipment, certain airport and terminal facilities, and other space and assets. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2019 to 2036.

As a result of the New Lease Standard, certain real estate and property leases, and various other operating leases have been measured on the balance sheet with a lease liability and right-of-use asset ("ROU"). Airport terminal leases mostly include variable lease payments outside of those based on a fixed index, and are therefore excluded from consideration. Accounting for finance leases is substantially unchanged.

ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.

Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of twelve months or less are not recorded on the balance sheet. Additionally, lease and non-lease components are accounted for as a single lease component for real estate agreements.

In addition to operating leases, the Company had five aircraft under finance leases as of September 30, 2019, with remaining terms to 2029.

12


Lease Costs

The components of lease costs recognized on the statements of income were as follows:

 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
Classification on the Statements of Income
September 30, 2019
 
September 30, 2019
Finance lease costs:
 
 
 
 
Amortization of assets
Depreciation and amortization
$
1,629

 
$
4,888

Interest on lease liabilities
Interest expense
1,306

 
3,978

Operating lease cost
Station operations; Maintenance and repairs; Other operating expense
897

 
2,634

Variable lease cost
Station operations; Maintenance and repairs; Other operating expense
663

 
1,672

Total lease cost
 
$
4,495

 
$
13,172



Lease position as of September 30, 2019

The table below presents the lease-related assets and liabilities recorded on the balance sheet.

 
 
As of
(in thousands)
Classification on the Balance Sheet
September 30, 2019
Assets
 
 
Operating lease assets
Operating lease right-of-use assets, net
$
22,433

Finance lease assets
Property and equipment, net
113,294

Total lease assets
 
$
135,727

 
 
 
Liabilities
 
 
Current
 
 
Operating
Accrued liabilities
$
2,388

Finance
Current maturities of long-term debt and finance lease obligations
7,582

Noncurrent
 
 
Operating
Other noncurrent liabilities
21,744

Finance
Long-term debt and finance lease obligations
109,878

Total lease liabilities
 
$
141,592

 
 
 
Weighted-average remaining lease term
 
 
Operating leases
 
9.4 years

Finance leases
 
10.1 years

Weighted-average discount rate
 
 
Operating leases
 
4.3
%
Finance leases
 
4.4
%


Other Information

The table below presents supplemental cash flow information related to leases during the three and nine months ended September 30, 2019.


13

 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 30, 2019
 
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows for operating leases
$
725

 
$
2,190

Operating cash flows for finance leases
1,306

 
3,978

Financing cash flows for finance leases
1,844

 
5,472



Maturities of Lease Liabilities

The table below indicates the future minimum payments of lease liabilities as of September 30, 2019.

(in thousands)
Operating Leases
 
Finance Leases
Remaining in 2019
$
726

 
$
3,150

2020
3,566

 
12,600

2021
3,382

 
12,600

2022
3,361

 
11,095

2023
3,213

 
10,500

Thereafter
15,317

 
103,459

Total lease payments
29,565

 
153,404

Less imputed interest
(5,433
)
 
(35,944
)
Total lease obligations
24,132

 
117,460

Less current obligations
(2,388
)
 
(7,582
)
Long-term lease obligations
$
21,744

 
$
109,878



The Company adopted the New Lease Standard on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments as of December 31, 2018 were as follows:

(in thousands)
Operating Leases
 
Finance Leases
2019
$
8,102

 
$
12,600

2020
6,031

 
12,600

2021
3,643

 
12,600

2022
1,630

 
11,095

2023
1,626

 
10,500

Thereafter
8,297

 
103,458

Total lease payments
$
29,329

 
162,853

Less imputed interest
 
 
(39,922
)
Total lease obligations
 
 
122,931

Less current obligations
 
 
(7,336
)
Long-term lease obligations
 
 
$
115,595




Note 6 — Fair Value Measurements

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 by selling 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. These tiers include: 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

14

observable; and 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, US Treasury Bonds, and corporate debt securities, 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:
 
 
As of September 30, 2019
 
As of December 31, 2018
(in thousands)
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
65,014

 
$
65,014

 
$
—

 
$
43,281

 
$
43,281

 
$
—

Commercial paper
5,731

 
—

 
5,731

 
29,138

 
—

 
29,138

Municipal debt securities
4,087

 
—

 
4,087

 
—

 
—

 
—

Federal agency debt securities
124

 
—

 
124