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/A for the year ended December 31, 2019 filed with the Securities and Exchange Commission on April 16, 2020.
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. In addition, the Company experienced significant impacts from the global coronavirus ("COVID-19") pandemic during the three and six months ended June 30, 2020.
2. Impact of COVID-19
As the COVID-19 pandemic continues to evolve, the Company's financial and operational outlook remains subject to change. The Company continues to monitor the impacts of the pandemic on its operations and financial condition, and to implement mitigation strategies while working to preserve cash and protect the long-term sustainability of the Company.
The Company has implemented measures for the safety of its Guests and Team Members as well as to mitigate the impact of COVID-19 on its financial position and operations.
Caring for Guests and Team Members
The Company’s Operations and Task Force teams remain in constant contact with authorities, continuing to evolve its response to ensure the safety of Guests and Team Members. In addition to previously existing procedures including utilization of hospital-grade disinfectants and state-of-the-art HEPA filters that capture 99.97% of airborne particles on board the aircraft, the Company has implemented the following steps to protect its Guests and Team Members:
•Secured and distributed additional supplies of gloves and sanitizer across the Company's network and augmented the contents of onboard supply kits to contain additional cleaning and sanitizing materials;
•Secured and provided face coverings for all crew and Guest facing team members;
•Expanded cleaning protocols at airports and other facilities, including the use of EPA-registered disinfectants in all check-in and gate areas and the use of electrostatic sprayers at high-traffic airports;
•Expanded aircraft turn and overnight cleaning protocols focusing on high frequency touch points as well as enhanced cockpit cleaning and the use of ultra-low volume ("ULV") fogging process to apply a safe, high grade- EPA-registered airborne disinfectant that is effective against coronaviruses;
•Launched a new antimicrobial fogging tool in our facilities and aircraft that uses a product that forms an invisible barrier on all surfaces killing bacteria and viruses on contact for 30 days;
•Split the Company's Operational Control Center ("OCC") into multiple units to enable social distancing and prepared the OCC to work remotely to minimize potential operational disruption;
•Implemented a remote work policy for the Support Center teams to maintain support of the Company's operations;
•Required all Guests and Guest-facing Team Members to wear an appropriate face covering when traveling through the airport or onboard aircraft;
•Offered future flight credits with extended expiration dates to Guests with impacted travel plans and waived change and cancellation fees for Guests who booked travel by July 31, 2020.
Supporting Communities
During this unprecedented time, many travelers became stranded abroad when bans and other restrictions on travel were implemented globally and domestically with little notice. The Company has worked with embassies and local governments in Aruba, Colombia, Dominican Republic, Ecuador, Haiti, Honduras, Panama and the U.S. to operate special flights for stranded travelers in such countries. Thus far, the Company has provided over 140 flights to more than 18,000 stranded travelers and preparations continue to transport many more. In addition, the Company has pledged $250 thousand in vouchers for flights to minority organizations.
The Company has also made efforts to address the growing needs of its communities through The Spirit Airlines Charitable Foundation (the “Foundation”). As part of the its focus on supporting families, the Foundation partnered with other non-profit organizations including the YMCA and Jack and Jill Children’s Center to provide food to seniors and families struggling during this time and supported organizations creating face coverings for healthcare workers. In addition, the Company has partnered to offer Guests face coverings for a small contribution to the Red Cross.
Capacity Reductions
In March 2020, in response to government restrictions on travel and drastically reduced consumer demand, the Company began to reduce capacity. The Company reduced capacity for April 2020 by 76.2%, year over year and May 2020 capacity was reduced by 93.9%, year over year. The Company had initially expected to reduce June 2020 capacity by approximately 95%, year over year. However, due to an increase in demand for air travel, the Company added some flights back to the June schedule, building throughout the month, resulting in an average capacity reduction of 79.0%, year over year. Capacity in July, August and September of 2020 has been reduced by approximately 18%, 35% and 45% respectively, year over year. The Company continues to closely monitor demand and will make adjustments to the flight schedule as appropriate. The Company currently estimates that air travel demand recovery will be volatile and will fluctuate in the upcoming months as the lingering effects of COVID-19 continue to emerge. The Company expects that air travel demand will continue to gradually recover in the second half of 2020 through 2021. However, the situation continues to be fluid and actual capacity adjustments may be different than what the Company currently expects. Refer to Note 4, Revenue, for discussion of the impact of COVID-19 on the Company's air traffic liability, credit shells and refunds.
CARES Act
On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") into law. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing the airline industry with up to $25 billion in grants to be used for employee salaries, wages and benefits and up to$25.0 billion in secured loans.
On April 20, 2020, the Company entered into a Payroll Support Program Agreement ("PSP") with the United States Department of the Treasury ("Treasury"), pursuant to which the Company expects to receive a total of $334.7 million, to be used exclusively to pay for salaries, wages and benefits for the Company’s Team Members through September 30, 2020. Of that amount, $70.4 million is in the form of a low-interest 10-year loan. In addition, in connection with its participation in the PSP, the Company is obligated to issue to Treasury warrants pursuant to a warrant agreement to purchase up to 500,150 shares of the Company’s common stock at a strike price of $14.08 per share (the closing price for the shares of the Company's common stock on April 9, 2020). As of June 30, 2020, the Company received total proceeds of $301.3 million, representing 3 of the 4 installments of funding under the PSP, in exchange for which the Company issued to Treasury $60.4 million in 10-year notes and warrants to purchase 428,829 shares of common stock valued and recorded at $2.5 million in additional paid-in-capital ("APIC") and $238.4 million in deferred salaries, wages and benefits within the Company's condensed balance sheets. Refer to Note 13, Debt and Other Obligations, for additional information on the notes issued and Note 14, Equity, for additional information on the warrants. The Company expects to receive the remaining proceeds of $33.4 million with the fourth and final installment of the PSP on or around July 31, 2020, in exchange for an additional $10.0 million in 10-year notes and warrants to purchase an additional 71,321 shares of common stock to be issued to the Treasury. The warrants issued represent less than 1% of the outstanding shares of the Company's common stock as of July 15, 2020.
During the three and six months ended June 30, 2020, the Company recognized $123.9 million of deferred salaries, wages and benefits within special credits on the Company’s condensed statements of operations. Refer to Note 6, Special Credits, for additional information.
In connection with the Company’s receipt of funds under the PSP, the Company is subject to certain restrictions, including, but not limited to:
•Restrictions on payment of dividends and stock buybacks through September 30, 2021;
•Requirements to maintain certain levels of scheduled service through September 30, 2020;
•A prohibition on involuntary terminations or furloughs of the Company's employees (except for health, disability, cause, or certain disciplinary reasons) through September 30, 2020;
•A prohibition on reducing the salary, wages, or benefits of the Company's employees (other than the Company's executive officers or independent contractors, or as otherwise permitted under the terms of the PSP) through September 30, 2020;
•Limits on certain executive compensation, including limiting pay increases and severance pay or other benefits upon terminations, through March 24, 2022;
•Use of the grant funds exclusively for the continuation of payment of employee wages, salaries and benefits and;
•The Company is subject to additional reporting and recordkeeping requirements relating to the CARES Act funds.
On April 29, 2020, the Company applied for additional funds under the Treasury's loan program under the CARES Act (“Loan Program”). The expected maximum availability to the Company under the Loan Program is approximately $741 million in the form of a secured loan. However, the loan amount is dependent on the amount and types of collateral accepted, which may result in an actual loan less than $741 million, if the Company accepts the loan. Any loan received pursuant to the Loan Program would be subject to the restrictions and relevant provisions of the CARES Act, including many of those noted above for the PSP. The Company’s participation in the Loan Program could materially increase the funds available to the Company as it works through the operational and business issues related to the COVID-19 pandemic and provide a base of available funding that could encourage private market transactions. On July 1, 2020, the Company executed a non-binding letter of intent with the Treasury which summarizes the principal terms of the financing request submitted by the Company to the Treasury. The Company continues to negotiate the terms of a definitive financing agreement under the Loan Program with the Treasury. In addition, subject to such negotiations, the Company will continue to evaluate its future cash flow needs and will determine whether or not to accept any or all of the funds available from the Loan Program. The deadline to make the election under the Loan Program is September 30, 2020.
The CARES Act also provides an employee retention credit (“CARES Employee Retention credit”) which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages through year end. The Company qualified for the credit beginning on April 1, 2020 and expects to continue to receive additional credits for qualified wages through December 31, 2020. During the three and six months ended June 30, 2020, the Company recorded $28.0 million related to the CARES Employee Retention credit within special credits on the Company’s condensed statements of operations and within accounts receivable, net on the Company's condensed balance sheet. The Company expects to record an additional approximately $10 million in CARES Employee Retention credits in the remainder of 2020. Refer to Note 6, Special Credits, for additional information.
The CARES Act also provides for certain tax loss carrybacks and a waiver on federal fuel taxes through December 31, 2020. As of June 30, 2020, the Company had recognized $140.8 million in related tax loss carrybacks and $0.8 million in federal fuel tax savings reflected within fuel in the Company’s statements of operations. The Company expects to recognize an additional $5 million in savings related to the waiver on federal fuel taxes in the remainder of 2020.
Finally, the CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. This is expected to provide the Company with approximately $24 million of additional liquidity during the current year. As of June 30, 2020, the Company has deferred $10.0 million in social security tax payments. The deferred amounts are recorded as a liability within other current liabilities on the Company’s condensed balance sheet.
Income Taxes
The Company's effective tax rate for the six months ended June 30, 2020 was 40.0% compared to 22.7% for the six months ended June 30, 2019. The increase in tax rate, as compared to the prior year period, is primarily due to a $54.9 million discrete federal tax benefit recorded during the six months ended June 30, 2020 related to the passage of the CARES Act. The CARES Act allows for carryback of net operating losses generated at a 21% tax rate to recover taxes paid at a 35% tax rate. Excluding this discrete tax benefit, the Company's effective tax rate for the six months ended June 30, 2020 would have been 20.9%. While the Company expects its tax rate to be fairly consistent in the near term, it will tend to vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items particular to a given year may also affect our effective tax rates.
Balance Sheet, Cash Flow and Liquidity
Since the onset of the spread of COVID-19 in the U.S. in the first quarter of 2020, the Company has taken several actions to increase liquidity and strengthen its financial position. As a result of these actions, as of June 30, 2020, the Company had unrestricted cash and cash equivalents and short-term investment securities of $1,233.8 million.
In March 2020, the Company entered into a senior secured revolving credit facility (the "2022 revolving credit facility") for an initial commitment amount of $110.0 million, and subsequently, in the second quarter of 2020, increased its commitment amount to $180.0 million. As of June 30, 2020, the Company had fully drawn the available amount of $180.0 million under the 2022 revolving credit facility. The 2022 revolving credit facility matures on March 30, 2022. The Company continues to pursue additional financing secured by its unencumbered assets. Refer to Note 13, Debt and Other Obligations, for additional information about the 2022 revolving credit facility.
On May 12, 2020, the Company completed the public offering of $175.0 million aggregate principal amount of 4.75% convertible senior notes due 2025 (the “convertible notes”). The convertible notes will bear interest at the rate of 4.75% per year and will mature on May 15, 2025. Interest on the convertible notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2020. The Company received proceeds of $168.3 million, net of total issuance costs of $6.7 million and recorded $95.6 million in long-term debt, net of debt issuance costs of $3.8 million on its condensed balance sheets, related to the debt component of the convertible notes, and $72.7 million in APIC, net of issuance costs of $2.9 million on its condensed balance sheets, related to the equity component of the convertible notes. Refer to Note 13, Debt and Other Obligations for additional information about the Company’s convertible debt.
Also on May 12, 2020, the Company completed the public offering of 20,125,000 shares of its voting common stock, which includes full exercise of the underwriters’ option to purchase an additional 2,625,000 shares of common stock, at a public offering price of $10.00 per share (the “common stock offering”). The Company received proceeds of $192.4 million, net of issuance costs of $8.9 million. Refer to Note 14, Equity, for further information about the Company’s common stock offering.
In June 2020, the Company entered into an agreement to amend its revolving credit facility entered into in 2018 to finance aircraft pre-delivery payments. The agreement amends the revolving credit facility to extend the final maturity date from December 30, 2020 to March 31, 2021. Upon execution of the amended agreement, the maximum borrowing capacity decreased from $160.0 million to $111.2 million and during the six months ended June 30, 2020 we made net principal payments of $48.8 million. This facility is secured by the collateral assignment of certain of the Company’s rights under the purchase agreement with Airbus, related to 20 Airbus A320neo aircraft scheduled to be delivered between August 2020 and October 2022. The initial maximum borrowing capacity of $111.2 million will continue to decrease as the Company takes delivery of the related aircraft. The amendment will provide an additional approximately $54 million in liquidity through March 2021. Refer to Note 13, Debt and Other Obligations, for further information.
Also, in June 2020, the Company entered into an agreement to defer certain aircraft deliveries originally scheduled in 2020 and 2021, as well as the related pre-delivery deposit payments. During the six months ended June 30, 2020, the Company took delivery of 9 aircraft and with this agreement, the Company has 3 remaining aircraft scheduled for delivery during the remainder of 2020 and 16 aircraft scheduled for delivery in 2021. Refer to Note 11, Commitments and Contingencies, for further information about the Company’s future aircraft deliveries.
In addition, since the onset of the COVID-19 pandemic, the Company has taken additional action, including:
•Reduced planned discretionary non-aircraft capital spend in 2020 by approximately $50 million;
•Deferred $20 million in heavy maintenance events from 2020 to 2021;
•Reduced planned non-fuel operating costs for 2020 by $20 million to $30 million, excluding savings related to reduced capacity;
•Suspended hiring across the Company except to fill essential roles;
•Entered into agreements to defer payments in 2020 related to facility rents and other airport services contracts at certain locations;
•Continued to work with lessors and service providers to temporarily defer aircraft rent and other maintenance and service contract payments;
•Continued to work with unionized and non-unionized employees to create voluntary leave programs;
•Continued to pursue additional financing secured by its unencumbered assets.
The Company continues to engage in discussions with the Company's significant stakeholders and vendors regarding financial support or contract adjustments, including extensions of payment terms, during this transition period.
For purposes of assessing its liquidity needs, the Company estimates that demand will continue to improve slightly in the second half of 2020, but remain well below 2019 levels, and continue to recover into 2021. The Company believes the actions described above address its future liquidity needs, yet anticipates it may implement further discretionary changes and other cost reduction and liquidity preservation measures, as needed, to address the volatility and quickly changing dynamics of passenger demand and the impact of revenue changes, regulatory and public health directives and prevailing government policy and financial market conditions.
3. Recent Accounting Developments
Recently Adopted Accounting Pronouncements
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. For accounts receivables, aircraft maintenance deposits and security deposits (recorded within other long-term assets on the Company's condensed balance sheets) the Company is required to estimate lifetime expected credit losses. 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. As such, the Company is required to recognize an allowance for credit losses for its short-term available-for-sale investment securities, with the exception of U.S. Treasury securities which do not require an allowance for credit losses. The Company adopted this standard effective January 1, 2020. In connection with the adoption of this standard, the Company recognized a cumulative effect adjustment, net of tax, of $1.6 million to retained earnings on the Company's condensed balance sheets with corresponding reserves against certain of our outstanding financial instruments. These amounts were not material to the Company's financial statements individually or in the aggregate.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software." This new standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40, "Accounting for Internal-Use Software," to determine which implementation costs to capitalize as assets and amortize over the term of the hosting arrangement or expense as incurred. The Company adopted this standard effective January 1, 2020 and is applying the standard prospectively to all implementation costs incurred after the date of adoption. This adoption has not had a material impact on the Company's financial statement presentation or results.
4. Revenue
Operating revenues is comprised of passenger revenues, which includes fare and non-fare revenues, and other revenues. The following table shows disaggregated operating revenues for the three and six months ended June 30, 2020 and June 30, 2019.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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(in thousands)
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Operating revenues:
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Fare
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$
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63,769
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$
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515,696
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$
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385,216
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$
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932,041
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Non-fare
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67,048
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478,734
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499,151
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900,454
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Total passenger revenues
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130,817
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994,430
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884,367
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1,832,495
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Other
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7,712
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18,526
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25,243
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36,257
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Total operating revenues
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$
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138,529
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$
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1,012,956
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$
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909,610
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$
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1,868,752
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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:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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(in thousands)
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DOT—Domestic
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$
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134,373
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$
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890,388
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$
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832,293
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$
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1,644,502
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DOT—Latin America
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4,156
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122,568
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77,317
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224,250
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Total
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$
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138,529
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$
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1,012,956
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$
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909,610
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$
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1,868,752
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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 a result of the COVID-19 pandemic, the Company experienced significantly increased customer requests for credit shells, or customer travel funds held by the Company that can be redeemed for future travel, and refunds beginning in the second half of March 2020 and continuing through the second quarter of 2020 primarily due to flight cancellations. The total value of refunds issued during the three and six months ended June 30, 2020 were $77.4 million and $121.0 million, respectively.
The Company expects that the level of requests for credit shells and refunds in the upcoming months will continue to fluctuate and vary as the effects of COVID-19 continue to emerge. In addition, in response to COVID-19, the Company increased the expiration period on some of its credit shells from 60 days to 12 months and waived change and cancellation fees for the Guests who booked travel by July 31, 2020. As a result, the outstanding balance of the unused credit shells (which is recorded within ATL on the Company's condensed balance sheets), as of June 30, 2020, significantly exceeds the balance in the prior year period. As of June 30, 2020 and December 31, 2019, the Company had ATL balances of $452.0 million and $315.4 million, respectively. The balance of the Company's ATL, including the balance of credit shells, is expected to be recognized within 12 months of the respective balance sheet date. Refer to Note 2, Impact of COVID-19, for further information on COVID-19's impact to the Company.
For credit shells that the Company estimates are not likely to be used prior to expiration (“breakage”), the Company recognizes the associated value proportionally during the period over which the remaining credit shells may be used. Breakage estimates are based on the Company's historical information about customer behavior as well as assumptions about customers' future travel behavior. Assumptions used to generate breakage estimates can be impacted by several factors including, but not limited to, changes to the Company's ticketing policies, changes to the Company’s refund, exchange, and credit shell policies, and economic factors. Given the unprecedented amount of cancellations in the first and second quarters of 2020 and the related increase in credit shells provided, the Company expects additional variability in the amount of breakage revenue recorded in future periods, as the estimates of the portion of those funds that will expire unused may differ from historical experience.
5. Loss on Disposal of Assets
During the three and six months ended June 30, 2020, the Company had no loss on disposal of assets in the condensed statement of operations.
During the three and six months ended June 30, 2019, the Company recorded $1.6 million and $3.5 million in loss on disposal of assets in the condensed statement of operations. These amounts primarily related to the disposal of excess and obsolete inventory.
6. Special Credits
During the second quarter of 2020, the Company recorded $237.9 million, net of issuance costs of $0.5 million, related to the grant component of the PSP with the Treasury within deferred salaries, wages and benefits on the Company's condensed balance sheets. The funds are to be used exclusively to pay for salaries, wages and benefits for the Company's Team Members through September 30, 2020. During the three and six months ended June 30, 2020, the Company recognized $123.9 million of the deferred salaries, wages and benefits within special credits on the Company’s condensed statements of operations.
In addition, during the three and six months ended June 30, 2020, the Company recorded $28.0 million related to the CARES Act Employee Retention credit within special credits on the Company’s condensed statements of operation. Refer to Note 2, Impact of COVID-19, for further information on the CARES Act.
During the three and six months ended June 30, 2019, the Company had no special credits in the condensed statement of operations.
7. Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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(in thousands, except per share amounts)
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Numerator
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Net income (loss)
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$
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(144,428)
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$
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114,501
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$
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(172,256)
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$
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170,577
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Denominator
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Weighted-average shares outstanding, basic
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79,601
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68,439
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74,061
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68,410
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Effect of dilutive stock awards
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—
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181
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—
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158
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Adjusted weighted-average shares outstanding, diluted
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79,601
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68,620
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74,061
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68,568
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Earnings (loss) per share
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Basic earnings (loss) per common share
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$
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(1.81)
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$
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1.67
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$
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(2.33)
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$
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2.49
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Diluted earnings (loss) per common share
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$
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(1.81)
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$
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1.67
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$
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(2.33)
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$
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2.49
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Anti-dilutive weighted-average shares
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565
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127
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524
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143
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8. 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 June 30, 2020 and December 31, 2019, the Company had $106.3 million and $105.3 million in short-term available-for-sale investment securities, respectively. During the six months ended June 30, 2020, these investments earned interest income at a weighted-average fixed rate of approximately 1.5%. For the three and six months ended June 30, 2020, an unrealized loss and an unrealized gain of $199 thousand and $123 thousand, respectively, net of deferred taxes of $59 thousand and $36 thousand, respectively, was recorded within accumulated other comprehensive income ("AOCI") related to these investment securities. For the three and six months ended June 30, 2019, an unrealized gain of $98 thousand and $228 thousand, respectively, net of deferred taxes of $29 thousand and $67 thousand, respectively, was recorded within AOCI related to these investment securities. For the three and six months ended June 30, 2020, the Company had substantially no realized gains or losses related to these securities. For the three and six months ended June 30, 2019, the Company had no realized gains or losses as the Company did not sell any of these securities during these periods. As of June 30, 2020 and December 31, 2019, $227 thousand and $104 thousand, net of tax, respectively, remained in AOCI, related to these instruments.
9. Accrued Liabilities
Other current liabilities as of June 30, 2020 and December 31, 2019 consist of the following:
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June 30, 2020
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December 31, 2019
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(in thousands)
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|
|
Salaries, wages and benefits
|
$
|
92,056
|
|
|
$
|
89,163
|
|
|
Airport obligations
|
37,309
|
|
|
80,134
|
|
|
Federal excise and other passenger taxes and fees payable
|
22,947
|
|
|
65,312
|
|
|
Aircraft maintenance
|
21,615
|
|
|
38,099
|
|
|
Aircraft and facility lease obligations
|
21,163
|
|
|
20,656
|
|
|
Interest payable
|
17,871
|
|
|
16,941
|
|
|
Fuel
|
5,259
|
|
|
28,510
|
|
|
Other
|
28,793
|
|
|
34,706
|
|
|
Other current liabilities
|
$
|
247,013
|
|
|
$
|
373,521
|
|
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 99 years for other leased equipment and property.
As of June 30, 2020, the Company had a fleet consisting of 154 A320 family aircraft. As of June 30, 2020, the Company had 55 aircraft financed under operating leases with lease term expirations between 2022 and 2038. In addition, the Company owned 99 aircraft of which 29 were purchased off lease and were unencumbered as of June 30, 2020. As of June 30, 2020, the Company also had 8 spare engines financed under operating leases with lease term expiration dates ranging from 2023 to 2027 and owned 16 spare engines, all of which, as of June 30, 2020, were pledged as partial collateral under the Company's 2022 revolving credit facility.
In accordance with Topic 842, the Company has elected not to apply the recognition requirements to short-term leases (i.e., leases of 12 months or less). Instead, lease payments are recognized in profit or loss on a straight-line basis over the lease term. In addition, 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.
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.
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 June 30, 2020, 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.
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.
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. Management assesses the factors listed above and the need to accrue lease return costs throughout the lease as facts and circumstances warrant an assessment. As a result of COVID-19, the Company is currently operating its aircraft at lower utilization levels. If the Company continues flying its aircraft at lower utilization levels beyond its current projections, the timing of future maintenance events may change such that the Company will be required to accrue lease return costs and/or record reserves against its maintenance deposits earlier than it would have expected and such amounts could be significant. 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.
During the six months ended June 30, 2020, the Company took delivery of six aircraft under secured debt arrangements, purchased two previously leased aircraft, and took delivery of three aircraft under operating leases. In addition, the Company also purchased two engines and returned one previously leased engine.
On December 31, 2019, the Company entered into an aircraft sale agreement to acquire two A319 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 two aircraft. In January 2020, the purchase of the two aircraft was completed. These aircraft were recorded within flight equipment on the Company's condensed balance sheets as of June 30, 2020.
As of June 30, 2020, the Company's finance lease obligations primarily relate to the lease of computer equipment used by the Company's flight crew and office equipment. Payments under these finance lease agreements are fixed for terms ranging from 4 to 5 years. 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.
During the fourth quarter of 2019, the Company purchased an 8.5-acre parcel of land for $41.0 million and entered into a 99-year lease agreement for the lease of a 2.6-acre parcel of land, in Dania Beach, Florida, where the Company intends to build a new headquarters campus. In connection with the lease agreement, the Company is expected to build a 200-unit residential building. The 8.5-acre parcel of land is capitalized within ground property and equipment on the Company's condensed balance sheets. The 99-year lease was determined to be an operating lease and is recorded within operating lease right-of-use asset and operating lease liability on the Company's condensed balance sheets. Operating lease commitments related to this lease are included in the table below within property facility leases.
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 June 30, 2020. 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 2020
|
|
$
|
381
|
|
|
$
|
102,077
|
|
|
$
|
2,237
|
|
|
$
|
228
|
|
|
$
|
104,923
|
|
|
2021
|
|
753
|
|
|
204,153
|
|
|
4,552
|
|
|
—
|
|
|
209,458
|
|
|
2022
|
|
725
|
|
|
205,231
|
|
|
4,262
|
|
|
—
|
|
|
210,218
|
|
|
2023
|
|
349
|
|
|
192,586
|
|
|
3,260
|
|
|
—
|
|
|
196,195
|
|
|
2024
|
|
98
|
|
|
170,524
|
|
|
2,722
|
|
|
—
|
|
|
173,344
|
|
|
2025 and thereafter
|
|
—
|
|
|
1,065,928
|
|
|
144,127
|
|
|
—
|
|
|
1,210,055
|
|
|
Total minimum lease payments
|
|
$
|
2,306
|
|
|
$
|
1,940,499
|
|
|
$
|
161,160
|
|
|
$
|
228
|
|
|
$
|
2,104,193
|
|
|
Less amount representing interest
|
|
192
|
|
|
568,343
|
|
|
135,335
|
|
|
3
|
|
|
703,873
|
|
|
Present value of minimum lease payments
|
|
$
|
2,114
|
|
|
$
|
1,372,156
|
|
|
$
|
25,825
|
|
|
$
|
225
|
|
|
$
|
1,400,320
|
|
|
Less current portion
|
|
658
|
|
|
125,219
|
|
|
3,092
|
|
|
225
|
|
|
129,194
|
|
|
Long-term portion
|
|
$
|
1,456
|
|
|
$
|
1,246,937
|
|
|
$
|
22,733
|
|
|
$
|
—
|
|
|
$
|
1,271,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments related to the Company's noncancellable short-term operating leases not recorded on the Company's condensed balance sheets are expected to be $2.6 million for the remainder of 2020 and none for 2021 and beyond. During the six months ended 2020, the Company entered into agreements to defer payments in 2020 related to facility rents and other airport services contracts at certain locations.
The table below presents information for lease costs related to the Company's finance and operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
$
|
135
|
|
|
$
|
519
|
|
|
$
|
270
|
|
|
$
|
728
|
|
|
Interest of lease liabilities
|
26
|
|
|
309
|
|
|
139
|
|
|
339
|
|
|
Operating lease cost
|
|
|
|
|
|
|
|
|
Operating lease cost (1)
|
51,006
|
|
|
48,639
|
|
|
98,223
|
|
|
98,353
|
|
|
Short-term lease cost (1)
|
6,884
|
|
|
3,509
|
|
|
13,598
|
|
|
6,958
|
|
|
Variable lease cost (1)
|
25,568
|
|
|
31,653
|
|
|
55,383
|
|
|
59,770
|
|
|
Total lease cost
|
$
|
83,619
|
|
|
$
|
84,629
|
|
|
$
|
167,613
|
|
|
$
|
166,148
|
|
(1) Expenses are classified within aircraft rent and landing fees and other rents on the Company's condensed statements of operations.
The table below presents lease terms and discount rates related to the Company's finance and operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
June 30, 2019
|
|
Weighted-average remaining lease term
|
|
|
|
|
Operating leases
|
13.1 years
|
|
9.8 years
|
|
Finance leases
|
3.1 years
|
|
0.8 years
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
6.07
|
%
|
|
6.52
|
%
|
|
Finance leases
|
5.56
|
%
|
|
3.93
|
%
|
11. Commitments and Contingencies
Aircraft-Related Commitments and Financing Arrangements
The Company’s contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. During the fourth quarter of 2019, the Company entered into an A320 NEO Family Purchase Agreement with Airbus for the purchase of 100 new Airbus A320neo family aircraft, with options to purchase up to 50 additional aircraft. In June 2020, the Company entered into an agreement to defer certain aircraft deliveries scheduled in 2020 and 2021, as well as the related pre-delivery deposit payments. During the six months ended June 30, 2020, the Company took delivery of 9 aircraft and with this agreement, the Company has 3 remaining aircraft scheduled for delivery during the remainder of 2020 and 16 aircraft scheduled for delivery in 2021. For additional information, please refer to Note 2, Impact of COVID-19. As of June 30, 2020, the Company's total firm aircraft orders consisted of 129 A320 family aircraft with Airbus, including A319neos, A320neos and A321neos, with deliveries expected through 2027. In addition, the Company has financing agreements in place for 10 direct operating leases for A320neos with third-party lessors with deliveries scheduled in 2021.
The Company also has one spare engine order for a V2500 SelectTwo engine with International Aero Engines ("IAE") and two spare engine orders for PurePower PW1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2021 through 2023. As of June 30, 2020, purchase commitments for these aircraft and engines, including estimated amounts for contractual price escalations and pre-delivery payments, are expected to be $119.0 million for the remainder of 2020, $356.4 million in 2021, $606.1 million in 2022, $707.6 million in 2023, $1,073.0 million in 2024, and $3,763.4 million in 2025 and beyond. During the third quarter of 2019, the United States announced its decision to levy tariffs on certain imports from the European Union, including commercial aircraft and related parts. These tariffs include aircraft and other parts that the Company is already contractually obligated to purchase including those reflected above. In February 2020, the rate of this tariff was increased from 10% to 15%. The imposition of these tariffs may substantially increase the cost of new Airbus aircraft and parts required to service the Company's Airbus fleet.
As of June 30, 2020, the Company has secured debt financing commitments for two aircraft scheduled for delivery from Airbus in 2020. As of June 30, 2020, the Company did not have financing commitments in place for the remaining 127 Airbus aircraft on firm order through 2027. However, the Company has a financing letter of agreement with Airbus which provides
backstop financing for a majority of the aircraft included in the A320 NEO Family Purchase Agreement signed in the fourth quarter of 2019. The agreement provides a standby credit facility in the form of senior secured mortgage debt financing. In addition, as of June 30, 2020, the Company has secured 10 direct operating leases for A320neos with third-party lessors, with deliveries expected in 2021.
As of June 30, 2020, principal and interest commitments related to the Company's future secured debt financing of the two undelivered aircraft are approximately $0.9 million for the remainder of 2020, $8.5 million in 2021, $6.5 million in 2022, $7.0 million in 2023, $7.1 million in 2024, and $64.7 million in 2025 and beyond. Aircraft rent commitments for future aircraft deliveries to be financed under direct leases from third-party lessors are expected to be approximately zero for the remainder of 2020, $18.2 million in 2021, $33.4 million in 2022, $33.4 million in 2023, $33.4 million in 2024, and $282.5 million in 2025 and beyond.
Interest commitments related to the secured debt financing of 70 delivered aircraft as of June 30, 2020 are $40.7 million for the remainder of 2020, $76.2 million in 2021, $69.5 million in 2022, $58.9 million in 2023, $47.9 million in 2024, and $131.2 million in 2025 and beyond. As of June 30, 2020, interest commitments related to the Company's unsecured term loans and convertible debt financing are $4.4 million for the remainder of 2020, $8.9 million in 2021, $8.9 million in 2022, $8.9 million in 2023, $8.9 million in 2024, and $10.7 million in 2025 and beyond. For principal commitments related to the Company's debt financing, refer to Note 13, Debt and Other Obligations.
The Company is contractually obligated to pay the following minimum guaranteed payments for its reservation system and other miscellaneous subscriptions and services as of June 30, 2020: $10.7 million for the remainder of 2020, $17.1 million in 2021, $16.2 million in 2022, $14.4 million in 2023, $14.5 million in 2024, and $50.3 million in 2025 and thereafter. During the first quarter of 2018, the Company entered into a contract renewal with its reservation system provider which expires in 2028.
Litigation
The Company is subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may be asserted or maintained from time to time. The Company believes the ultimate outcome of such lawsuits, proceedings and reviews will not, individually or in the aggregate, have a material adverse effect on its financial position, liquidity or results of operations.
Credit Card Processing Arrangements
The Company has agreements with organizations that process credit card transactions arising from the purchase of air travel, baggage charges, and other ancillary services by customers. As is standard in the airline industry, the Company's contractual arrangements with credit card processors permit them, under certain circumstances, to retain a holdback or other collateral, which the Company records as restricted cash, when future air travel and other future services are purchased via credit card transactions. The required holdback is the percentage of the Company's overall credit card sales that its credit card processors hold to cover refunds to customers if the Company fails to fulfill its flight obligations.
The Company's credit card processors do not require the Company to maintain cash collateral provided that the Company satisfies certain liquidity and other financial covenants. Failure to meet these covenants would provide the processors the right to place a holdback resulting in a commensurate reduction of unrestricted cash. As of June 30, 2020 and December 31, 2019, the Company's credit card processors were holding back no remittances.
The maximum potential exposure to cash holdbacks by the Company's credit card processors, based upon advance ticket sales and $9 Fare Club memberships as of June 30, 2020 and December 31, 2019, was $417.3 million and $342.3 million, respectively.
Employees
The Company has 5 union-represented employee groups that together represented approximately 81% of all employees as of June 30, 2020. The table below sets forth the Company's employee groups and status of the collective bargaining agreements as of June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Groups
|
|
Representative
|
|
Amendable Date
|
|
Percentage of Workforce
|
|
Pilots
|
|
Air Line Pilots Association, International ("ALPA")
|
|
February 2023
|
|
28%
|
|
Flight Attendants
|
|
Association of Flight Attendants ("AFA-CWA")
|
|
May 2021
|
|
46%
|
|
Dispatchers
|
|
Professional Airline Flight Control Association ("PAFCA")
|
|
October 2023
|
|
1%
|
|
Ramp Service Agents
|
|
International Association of Machinists and Aerospace Workers ("IAMAW")
|
|
June 2020
|
|
3%
|
|
Passenger Service Agents
|
|
Transport Workers Union of America ("TWU")
|
|
NA
|
|
3%
|
In February 2020, the IAMAW notified the Company, as required by the Railway Labor Act, that it intends to submit proposed changes to the collective bargaining agreement covering the Company's ramp service agents which became amendable in June 2020. The parties expect to schedule meeting dates for negotiations soon.
The Company's passenger service agents are represented by the TWU, but the representation applies only to the Company's Fort Lauderdale station where the Company has direct employees in the passenger service classification. The Company and the TWU began meeting in late October 2018 to negotiate an initial collective bargaining agreement. As of June 30, 2020, the Company continued to negotiate with the TWU.
The Company is self-insured for healthcare claims, up to a stop-loss amount for eligible participating employees and qualified dependent medical claims, subject to deductibles and limitations. The Company’s liabilities for claims incurred but not reported are determined based on an estimate of the ultimate aggregate liability for claims incurred. The estimate is calculated from actual claim rates and adjusted periodically as necessary. The Company has accrued $5.2 million and $5.2 million in health care claims as of June 30, 2020 and December 31, 2019, respectively.
12.Fair Value Measurements
Under ASC 820, "Fair Value Measurements and Disclosures," disclosures relating to how fair value is determined for assets and liabilities are required, and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs, as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of the Company’s financial assets and liabilities.
The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value. The Company has assessed whether any impairment of its long-lived assets existed and has determined that no charges were deemed necessary under applicable accounting standards as of June 30, 2020. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
Long-Term Debt
The estimated fair value of the Company's term loan debt agreements and revolving credit facilities have been determined to be Level 3 as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes a discounted cash flow method to estimate the fair value of the Level 3 long-term debt. The estimated fair value of the Company's publicly and non-publicly held EETC debt agreements and the Company's convertible notes has been determined to be Level 2 as the Company utilizes quoted market prices in markets with low trading volumes to estimate the fair value of its Level 2 long-term debt.
The carrying amounts and estimated fair values of the Company's long-term debt at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
Fair Value Level Hierarchy
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
Fixed-rate senior term loans
|
$
|
279.4
|
|
|
$
|
262.8
|
|
|
$
|
296.1
|
|
|
$
|
296.4
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate term loans
|
992.2
|
|
|
976.8
|
|
|
778.2
|
|
|
823.6
|
|
|
Level 3
|
|
Unsecured term loans
|
60.4
|
|
|
60.4
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
|
2015-1 EETC Class A
|
333.5
|
|
|
321.9
|
|
|
348.6
|
|
|
372.2
|
|
|
Level 2
|
|
2015-1 EETC Class B
|
68.0
|
|
|
59.3
|
|
|
72.0
|
|
|
74.5
|
|
|
Level 2
|
|
2015-1 EETC Class C
|
92.4
|
|
|
65.8
|
|
|
98.1
|
|
|
100.5
|
|
|
Level 2
|
|
2017-1 EETC Class AA
|
221.4
|
|
|
208.1
|
|
|
228.4
|
|
|
237.0
|
|
|
Level 2
|
|
2017-1 EETC Class A
|
73.8
|
|
|
61.8
|
|
|
76.1
|
|
|
78.8
|
|
|
Level 2
|
|
2017-1 EETC Class B
|
65.6
|
|
|
51.8
|
|
|
70.6
|
|
|
72.0
|
|
|
Level 2
|
|
2017-1 EETC Class C
|
85.5
|
|
|
60.5
|
|
|
85.5
|
|
|
88.0
|
|
|
Level 2
|
|
Convertible debt
|
101.4
|
|
|
264.1
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Revolving credit facilities
|
291.2
|
|
|
291.2
|
|
|
160.0
|
|
|
160.0
|
|
|
Level 3
|
|
Total long-term debt
|
$
|
2,664.8
|
|
|
$
|
2,684.5
|
|
|
$
|
2,213.6
|
|
|
$
|
2,303.0
|
|
|
|
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2020 and December 31, 2019 are comprised of liquid money market funds and cash, and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial institutions.
Restricted Cash
Restricted cash is comprised of cash held in account subject to account control agreements or otherwise pledged as collateral against the Company's letters of credit and is categorized as a Level 1 instrument. As of June 30, 2020, the Company had a $30.0 million standby letter of credit secured by cash, of which $23.1 million had been drawn upon for issued letters of credit.
Short-term Investment Securities
Short-term investment securities at June 30, 2020 and December 31, 2019 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. The Company's short-term investment securities are categorized as Level 1 instruments, as the Company uses quoted market prices in active markets when determining the fair value of these securities. For additional information, refer to Note 8, Short-term Investment Securities.
Assets Held for Sale
The Company's assets held for sale consist of rotable aircraft parts. When long-lived assets are identified as held for sale and the required criteria are met, the Company reclassifies the assets from property and equipment to prepaid expenses and
other current assets on the Company's condensed balance sheets and discontinues depreciation. The assets are measured at the lower of the carrying amount or fair value less cost to sell and a loss is recognized for any initial adjustment of the asset’s carrying amount to fair value less cost to sell. Such valuations include estimations of fair values and incremental direct costs to transact a sale. The fair value measurements for the Company's held-for-sale assets were based on Level 3 inputs, which include information obtained from third-party valuation sources. As of June 30, 2020 and December 31, 2019, the Company had $2.3 million in assets held for sale recorded within prepaid expenses and other current assets in the Company's condensed balance sheets.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, ,2020
|
|
|
|
|
|
|
|
|
Total
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,127.5
|
|
|
$
|
1,127.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
30.0
|
|
|
30.0
|
|
|
—
|
|
|
—
|
|
|
Short-term investment securities
|
106.3
|
|
|
106.3
|
|
|
—
|
|
|
—
|
|
|
Assets held for sale
|
2.3
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
|
Total assets
|
$
|
1,266.1
|
|
|
$
|
1,263.8
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2019
|
|
|
|
|
|
|
|
|
Total
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
979.0
|
|
|
$
|
979.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment securities
|
105.3
|
|
|
105.3
|
|
|
—
|
|
|
—
|
|
|
Assets held for sale
|
2.3
|
|
|
|
|
|
|
2.3
|
|
|
Total assets
|
$
|
1,086.6
|
|
|
$
|
1,084.3
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company had no transfers of assets or liabilities between any of the above levels during the three months ended June 30, 2020 and the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Held for Sale Activity for the Six Months Ended June 30, 2020
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
2.3
|
|
|
|
|
|
|
Purchases
|
—
|
|
|
|
|
|
|
Sales
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized or unrealized gains (losses) included in earnings, net
|
$
|
—
|
|
|
|
|
|
|
Balance at March 31, 2020
|
$
|
2.3
|
|
|
|
|
|
|
Purchases
|
—
|
|
|
|
|
|
|
Sales
|
—
|
|
|
|
|
|
|
Total realized or unrealized gains (losses) included in earnings, net
|
—
|
|
|
|
|
|
|
Balance at June 30, 2020
|
$
|
2.3
|
|
|
|
The Company's Valuation Group, which reports to the Chief Financial Officer, is made up of individuals from the Company's Treasury and Corporate Accounting departments. The Valuation Group is responsible for the execution of the Company's valuation policies and procedures. The Valuation Group compares the results of the Company's internally developed valuation methods with counterparty reports at each balance sheet date, assesses the Company's valuation methods for accurateness and identifies any needs for modification.
13. Debt and Other Obligations
As of June 30, 2020, the Company had outstanding non-public and public debt instruments. During the six months ended June 30, 2020, the Company incurred debt through fixed-rate secured and unsecured term loans, secured a new revolving credit facility and issued convertible notes described below.
Fixed-rate secured term loans
The Company entered into facility agreements which as of June 30, 2020, provided $249.0 million for six Airbus A320 aircraft delivered during the six months ended June 30, 2020. The loans extended under these facility agreements are secured by a first-priority security interest on the individual aircraft. These loans have a term life of 11 to 12 years and amortize on a mortgage-style basis, which requires quarterly principal and interest payments.
Fixed-rate unsecured term loans
On April 20, 2020, the Company entered into the PSP agreement with the Treasury, pursuant to which the Company has received $301.3 million as of June 30, 2020 and expects to receive an additional $33.4 million on or about July 31, 2020 for a total of $334.7 million under the PSP. These funds are to be used exclusively to pay for salaries, wages and benefits for the Company’s Team Members through September 30, 2020. Of the total amount received as of June 30, 2020, $60.4 million is in the form of a low-interest 10-year unsecured term loan. Of the $33.4 million expected in July 2020, $10.0 million will be in the form of an unsecured term loan under the PSP agreement, resulting in an expected maximum principal amount of $70.4 million. Interest on the loan is payable semi-annually at a rate of 1.0% in years 1 through 5 and a rate of the Secured Overnight Financing Rate plus 2.0% in years 6 through 10. The notes are prepayable at any time, without penalty, at the Company’s option and have principal due at maturity in 2030.
The Company has concluded that no terms exist within the contract that would require a short-term classification of the debt instrument within the Company’s condensed balance sheet at the inception of the loan. Therefore, the debt has been recorded at face value and classified within long-term debt in the Company’s condensed balance sheets. As of June 30, 2020, the Company had recorded $60.4 million in long-term debt on its condensed balance sheets, related to the PSP.
Revolving credit facility due in 2022
On March 30, 2020, the Company entered into the 2022 revolving credit facility for $110.0 million, with an option to increase the overall commitment amount up to $350 million with the consent of any participating lenders and subject to borrowing base availability. In the second quarter of 2020, the commitment was increased to $180.0 million. As of June 30, 2020, the Company had fully drawn the $180.0 million available. Any amounts drawn on this facility are included in long-term debt and finance leases, less current maturities on the Company's condensed balance sheets. The final maturity of the facility is March 30, 2022.
The Company may pledge the following types of assets as collateral to secure its obligations under the revolving credit facility: (i) certain take-off and landing rights of the Company at LaGuardia Airport, (ii) certain eligible aircraft spare parts and ground support equipment, (iii) aircraft, spare engines and flight simulators, (v) real property assets and (vi) cash and cash equivalents. The revolving credit facility bears variable interest based on LIBOR, plus a 2.00% margin per annum, or another rate, at the Company's election, based on certain market interest rates, plus a 1.00% margin per annum, in each case with a floor of 0%.
The 2022 revolving credit facility requires the Company to maintain (i) so long as any loans or letters of credit are outstanding under the 2022 revolving credit facility, unrestricted cash and cash equivalents and unused commitments available under all revolving credit facilities (including the 2022 revolving credit facility) aggregating not less than $400 million, of which no more than $200 million may be derived from unused commitments under the 2022 revolving credit facility, (ii) a minimum ratio of the borrowing base of the collateral described above (determined as the sum of a specified percentage of the appraised value of each type of such collateral) to outstanding obligations under the 2022 revolving credit facility of not less than 1.0 to 1.0 (if the Company does not meet the minimum collateral coverage ratio, it must either provide additional collateral to secure its obligations under the 2022 revolving credit facility or repay the loans under the 2022 revolving credit facility by an amount necessary to maintain compliance with the collateral coverage ratio), and (iii) at any time following the date that is one month after the effective date of the 2022 revolving credit facility, the pledged take-off and landing rights of the Company at LaGuardia Airport and a specified number of spare engines in the collateral described above so long as any loans or letters of credit are outstanding under the 2022 revolving credit facility.
Revolving credit facility due in 2021
During the fourth quarter of 2018, the Company entered into a revolving credit facility for up to $160.0 million secured by the collateral assignment of certain of the Company's rights under the purchase agreement with Airbus, related to 43 Airbus A320neo aircraft scheduled to be delivered between August 2019 and December 2021.
In June 2020, the Company entered into an agreement to amend the revolving credit facility originally maturing in December 2020. The agreement amends the revolving credit facility to extend the final maturity date from December 30, 2020 to March 31, 2021. Upon execution of the amended agreement, the maximum borrowing capacity decreased from $160.0 million to $111.2 million. This facility is secured by the collateral assignment of certain of the Company’s rights under the purchase agreement with Airbus, related to 20 Airbus A320neo aircraft scheduled to be delivered between August 2020 and September 2022. The initial maximum borrowing capacity of $111.2 million will decrease as the Company takes delivery of the related aircraft.
As of June 30, 2020 and December 31, 2019, the Company had drawn $111.2 million and $160.0 million, respectively, on the facility, which is included in current maturities of long-term debt and capital leases on the Company's condensed balance sheets. The revolving credit facility bears variable interest based on LIBOR.
Convertible debt
On May 12, 2020, the Company completed the public offering of $175.0 million aggregate principal amount of 4.75% convertible senior notes due 2025. The convertible notes bear interest at the rate of 4.75% per year and will mature on May 15, 2025. Interest on the notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2020.
To allocate the proceeds of the convertible notes, the Company first determined the fair value of the debt component of the convertible notes based on a similar liability with no conversion feature and utilized a discounted cash flow method whereby the contractual cash flows have been discounted at a risk-adjusted yield reflective of both the time value of money and the credit risk inherent in the convertible notes, as well as certain observable inputs. The Company allocated the remaining proceeds of the convertible notes to the equity component within APIC. The Company will accrete the resulting discount on the debt component through interest expense, using the effective interest method, over the 5-year life of the instrument. The Company received proceeds of $168.3 million as a result of the offering, net of total issuance costs of $6.7 million. The Company recorded $95.6 million in long-term debt, net of debt issuance costs of $3.8 million on its condensed balance sheets, related to the debt component of the convertible notes, and $72.7 million in APIC, net of issuance costs of $2.9 million on its condensed balance sheets, related to the equity component of the convertible notes. As of June 30, 2020, the if-converted value exceeds the principal amount of the convertible notes by $38 million using an average stock price in the period.
Noteholders may convert their notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; and (4) at any time from, and including, February 18, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The initial conversion rate is 78.4314 shares of voting common stock per $1,000 principal amount of convertible notes (equivalent to an initial conversion price of approximately $12.75 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its convertible notes in connection with such a corporate event in certain circumstances. In the event of a “Fundamental Change,” as defined in the indenture governing the convertible notes, the holders may require the Company to purchase for cash all or a portion of their notes at a purchase price equal to the principal amount of the notes, plus accrued and unpaid interest, if any. The Company may not redeem the notes at its option prior to the maturity date.
Long-term debt is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
(in millions)
|
|
|
|
(weighted-average interest rates)
|
|
|
|
Fixed-rate senior term loans due through 2027
|
|
$
|
279.4
|
|
|
$
|
296.1
|
|
|
3.55
|
%
|
|
4.02
|
%
|
|
Fixed-rate loans due through 2031
|
|
992.2
|
|
|
778.2
|
|
|
3.34
|
%
|
|
3.70
|
%
|
|
Unsecured term loans due in 2030
|
|
60.4
|
|
|
—
|
|
|
1.00
|
%
|
|
N/A
|
|
Fixed-rate class A 2015-1 EETC due through 2028
|
|
333.5
|
|
|
348.6
|
|
|
4.10
|
%
|
|
4.10
|
%
|
|
Fixed-rate class B 2015-1 EETC due through 2024
|
|
68.0
|
|
|
72.0
|
|
|
4.45
|
%
|
|
4.45
|
%
|
|
Fixed-rate class C 2015-1 EETC due through 2023
|
|
92.4
|
|
|
98.1
|
|
|
4.93
|
%
|
|
4.93
|
%
|
Fixed-rate class AA 2017-1 EETC due through 2030
|
|
221.4
|
|
|
228.4
|
|
|
3.38
|
%
|
|
3.38
|
%
|
Fixed-rate class A 2017-1 EETC due through 2030
|
|
73.8
|
|
|
76.1
|
|
|
3.65
|
%
|
|
3.65
|
%
|
Fixed-rate class B 2017-1 EETC due through 2026
|
|
65.6
|
|
|
70.6
|
|
|
3.80
|
%
|
|
3.80
|
%
|
Fixed-rate class C 2017-1 EETC due through 2023
|
|
85.5
|
|
|
85.5
|
|
|
5.11
|
%
|
|
5.11
|
%
|
|
Convertible debt due in 2025
|
|
101.4
|
|
|
—
|
|
|
4.75
|
%
|
|
N/A
|
|
Revolving credit facility due in 2021
|
|
111.2
|
|
|
160.0
|
|
|
1.58
|
%
|
|
3.12
|
%
|
|
Revolving credit facility due in 2022
|
|
180.0
|
|
|
—
|
|
|
2.19
|
%
|
|
N/A
|
|
Long-term debt
|
|
2,664.8
|
|
|
2,213.6
|
|
|
|
|
|
|
Less current maturities
|
|
287.8
|
|
|
214.0
|
|
|
|
|
|
|
Less unamortized discounts, net
|
|
44.8
|
|
|
40.4
|
|
|
|
|
|
|
Total
|
|
$
|
2,332.2
|
|
|
$
|
1,959.2
|
|
|
|
|
|
During the three and six months ended June 30, 2020 the Company made scheduled principal payments of $106.9 million and $149.4 million, respectively, on its outstanding debt obligations. During the three and six months ended and June 30, 2019, the Company made scheduled principal payments of $47.9 million and $85.8 million, respectively, on its outstanding debt obligations.
At June 30, 2020, long-term debt principal payments for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
(in millions)
|
|
remainder of 2020
|
|
$
|
110.2
|
|
|
2021
|
|
278.3
|
|
|
2022
|
|
365.6
|
|
|
2023
|
|
329.8
|
|
|
2024
|
|
215.1
|
|
|
2025 and beyond
|
|
1,365.8
|
|
|
Total debt principal payments
|
|
$
|
2,664.8
|
|
Interest Expense
Interest expense related to long-term debt and finance leases consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate senior term loans
|
$
|
2,601
|
|
|
$
|
3,878
|
|
|
$
|
5,414
|
|
|
$
|
7,823
|
|
|
|
|
|
|
Fixed-rate junior term loans
|
—
|
|
|
489
|
|
|
—
|
|
|
1,012
|
|
|
|
|
|
|
Fixed-rate term loans
|
8,210
|
|
|
6,432
|
|
|
15,823
|
|
|
12,634
|
|
|
|
|
|
|
Unsecured term loans
|
57
|
|
|
—
|
|
|
57
|
|
|
—
|
|
|
|
|
|
|
Class A 2015-1 EETC
|
3,403
|
|
|
3,709
|
|
|
6,952
|
|
|
7,547
|
|
|
|
|
|
|
Class B 2015-1 EETC
|
752
|
|
|
841
|
|
|
1,548
|
|
|
1,721
|
|
|
|
|
|
|
Class C 2015-1 EETC
|
1,138
|
|
|
1,280
|
|
|
2,347
|
|
|
2,615
|
|
|
|
|
|
|
Class AA 2017-1 EETC
|
1,868
|
|
|
1,997
|
|
|
3,755
|
|
|
3,986
|
|
|
|
|
|
|
Class A 2017-1 EETC
|
673
|
|
|
720
|
|
|
1,354
|
|
|
1,437
|
|
|
|
|
|
|
Class B 2017-1 EETC
|
623
|
|
|
737
|
|
|
1,267
|
|
|
1,491
|
|
|
|
|
|
|
Class C 2017-1 EETC
|
1,092
|
|
|
1,092
|
|
|
2,184
|
|
|
2,171
|
|
|
|
|
|
|
Convertible debt (1)
|
3,138
|
|
|
—
|
|
|
3,138
|
|
|
—
|
|
|
|
|
|
|
Revolving credit facilities
|
1,456
|
|
|
1,559
|
|
|
2,614
|
|
|
2,973
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
2,526
|
|
|
2,177
|
|
|
4,632
|
|
|
4,369
|
|
|
|
|
|
|
Commitment and other fees
|
228
|
|
|
46
|
|
|
445
|
|
|
119
|
|
|
|
|
|
|
Finance leases
|
27
|
|
|
309
|
|
|
140
|
|
|
339
|
|
|
|
|
|
|
Total
|
$
|
27,792
|
|
|
$
|
25,266
|
|
|
$
|
51,670
|
|
|
$
|
50,237
|
|
|
|
|
|
(1) Includes $2.0 million of accretion and $1.1 million of interest expense for the three and six months ended June 30, 2020.
14. Equity
Common Stock Offering
On May 12, 2020, Spirit Airlines, Inc. (the “Company”) completed the public offering of 20,125,000 shares of voting common stock of the Company, which includes full exercise of the underwriters’ option to purchase an additional 2,625,000 shares of common stock, at a public offering price of $10.00 per share (the “Common Stock Offering”). In connection with the common stock offering, the Company received proceeds of $192.4 million, net of $8.9 million in related issuance costs. The Company recorded common stock at par of $20.2 thousand and the excess proceeds within APIC.
Preferred Stock and Material Modifications to Rights of Security Holders
On March 29, 2020, the Board of Directors of the Company declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of common stock of the Company. The dividend was paid on April 9, 2020 (the “Record Date”) to holders of record as of the close of business on that date. Pursuant to a Rights Agreement (the "Rights Agreement") between the Company and Equiniti Trust Company, as Rights Agent. The Rights will initially trade with, and will be inseparable from, the Company's common stock, and the registered holders of the Company's common stock will be deemed to be the registered holders of the Rights. In addition, each share issued upon conversion of the convertible notes and the common stock issued on May 12, 2020 pursuant to our offering of common stock will have such Right.
The Board of Directors has adopted the Rights Agreement to reduce the likelihood that a potential acquirer would gain (or seek to influence or change) control of the Company by open market accumulation or other tactics without paying an appropriate premium for the Company’s shares. In general terms and subject to certain exceptions, it works by imposing a significant penalty upon any person or group (including a group of persons that are acting in concert with each other) that acquires 10% or more of the outstanding common stock of the Company without the approval of the Board of Directors.
The Rights will not be exercisable until after the Distribution Date (as defined below). After the Distribution Date, each Right will be exercisable to purchase, for $60.00 (the “Purchase Price”), one one-thousandth of a share of Series A Participating Cumulative Preferred Stock, par value $0.0001 per share (the “Preferred Stock”). This portion of a share of Preferred Stock will give the stockholder approximately the same dividend, voting or liquidation rights as would one share of the Company’s common stock. Prior to exercise, Rights holders in their capacity as such have no rights as a stockholder of the Company, including the right to vote and to receive dividends. The Rights will expire on March 29, 2021, unless earlier exercised, exchanged, amended or redeemed.
The Board of Directors may redeem all of the Rights at a price of $0.001 per Right at any time before any person has become an Acquiring Person. If the Board of Directors redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price per Right. The redemption price will be subject to adjustment.
The “Distribution Date” generally means the earlier of:
•the close of business on the 10th business day after the date of the first public announcement that a person or any of its affiliates and associates has become an “Acquiring Person,” as defined below, and
•the close of business on the 10th business day (or such later day as may be designated by the Board of Directors before any person has become an Acquiring Person) after the date of the commencement of a tender or exchange offer by any person which would, if consummated, result in such person becoming an Acquiring Person.
An “Acquiring Person” generally means any person who or which, together with all affiliates and associates of such person obtains beneficial ownership of 10% or more of shares of the Company’s common stock, with certain exceptions, including that an Acquiring Person does not include the Company, any subsidiary of the Company, any employee benefit plan of the Company or any subsidiary of the Company, any entity or trustee holding the Company’s common stock for or pursuant to the terms of any such plan or for the purpose of funding any such plan or other benefits for employees of the Company or of any subsidiary of the Company or any passive investor. A passive investor generally means any person beneficially owning shares of the Company’s common stock without a plan or an intent to seek control of or influence the Company. The Rights Agreement also provides that any person that would otherwise be deemed an Acquiring Person as of the date of the adoption of the Rights Agreement will be exempted but only for so long as it does not acquire, without the prior approval of the Board, beneficial ownership of any additional common stock of the Company following the adoption of the Rights Agreement.
The value of one one-thousandth interest in a share of Preferred Stock should approximate the value of one share of Common Stock, subject to adjustment. Each one one-thousandth of a share of Preferred Stock, if issued:
•will not be redeemable,
•will entitle holders to quarterly dividend payments of $0.01 per share, or an amount equal to the dividend paid on one share of Common Stock, whichever is greater,
•will entitle holders upon liquidation either to receive $1.00 per share or an amount equal to the payment made on one share of Common Stock, whichever is greater,
•will have the same voting power as one share of Common Stock,
•if shares of the Common Stock are exchanged via merger, consolidation, or a similar transaction, will entitle holders to a per share payment equal to the payment made on one share of Common Stock.
Consequences of a Person or Group Becoming an Acquiring Person
Flip in. Subject to the Company’s exchange rights, described below, at any time after any person has become an Acquiring Person, each holder of a Right (other than an Acquiring Person, its affiliates and associates) will be entitled to purchase for each Right held, at the Purchase Price, a number of shares of the Company’s common stock having a market value of twice the Purchase Price.
Exchange. At any time on or after any person has become an Acquiring Person (but before any person becomes the beneficial owner of 50% or more of the outstanding shares of the Company's common stock or the occurrence of any of the events described in the next paragraph), the Board of Directors may exchange all or part of the Rights (other than Rights beneficially owned by an Acquiring Person, its affiliates and associates) for shares of the Company’s common stock at an exchange ratio of one share of the Company’s common stock per Right.
Flip over. If, after any person has become an Acquiring Person, (1) the Company is involved in a merger or other business combination in which the Company is not the surviving corporation or its common stock is exchanged for other securities or assets or (2) the Company and/or one or more of its subsidiaries sell or otherwise transfer assets or earning power aggregating more than 50% of the assets or earning power of the Company and its subsidiaries, taken as a whole, then each Right (other than Rights beneficially owned by an Acquiring Person, its affiliates and associates) will entitle the holder to purchase for each Right held, for the Purchase Price, a number of shares of common stock of the other party to such business combination or sale (or in certain circumstances, an affiliate) having a market value of twice the Purchase Price.
Warrants
In connection with its participation in the PSP agreement with the Treasury, the Company is obligated to issue to Treasury warrants pursuant to a warrant agreement to purchase up to 500,150 shares of the Company’s common stock at a strike price of $14.08 per share (the closing price for the shares of the Company's common stock on April 9, 2020). The warrant agreement sets out the Company’s obligations to issue warrants in connection with disbursements under the PSP and to file a resale shelf registration statement for the warrants and the underlying shares of common stock. The Company has also granted the Treasury certain demand and piggyback registration rights with respect to the warrants and the underlying common stock. The warrants will include adjustments for below market issuances, payment of dividends and other customary anti-dilution provisions. The warrants will be transferable and have no voting rights. The warrants will expire in five years from the date of issuance and, at the Company’s option, may be settled on a “net cash” or “net shares” basis. Refer to Note 2, Impact of COVID-19, for further information on the PSP agreement with Treasury. As of June 30, 2020, the Company received total proceeds of $301.3 million, representing 3 of the 4 installments of funding under the PSP, in exchange for which the Company issued to Treasury $60.4 million in 10-year notes and warrants to purchase 428,829 shares of the Company's common stock, representing less than 1% of the outstanding shares of the Company's common stock as of July 15, 2020.
The Company concluded that the PSP warrants agreement is a derivative contract classified within equity, at fair value upon issuance, within the Company’s condensed balance sheet. Equity-classified contracts are initially measured at fair value and subsequent changes in fair value are not recognized as long as the contract continues to be classified in equity. As of June 30, 2020, the Company had recorded $2.5 million, net of issuance cost, in APIC related to the fair value of the warrants issued in the period.