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Form 8-K Spirit Airlines, Inc. For: Jul 29

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July 29, 2016 8:08 AM EDT


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 29, 2016
____________________
SPIRIT AIRLINES, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

001-35186
(Commission File Number)
38-1747023
(IRS Employer Identification Number)

2800 Executive Way
Miramar, Florida 33025
(Address of principal executive offices, including Zip Code)

(954) 447-7920
(Registrant's telephone number, including area code)
____________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
[]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
[]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
[]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
  





The information in this report furnished pursuant to Item 2.02 shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. It may only be incorporated by reference in another filing under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”), if such subsequent filing specifically references the information furnished pursuant to Item 2.02 of this report.

Item 2.02.
Results of Operations and Financial Condition.
On July 29, 2016, Spirit Airlines, Inc. (the “Company” or “Spirit”) issued a press release announcing its unaudited financial results for the second quarter 2016. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
Non-GAAP financial measures that reflect adjustments from historical financial data prepared under GAAP, including adjustments for special items, are included in the press release as supplemental disclosures because the Company believes they are useful indicators of the Company's operating performance for comparative purposes. These non-GAAP financial measures are well recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in the airline industry. The non-GAAP financial measures provided have limitations as analytical tools. Because of these limitations, non-GAAP financial measures should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. The Company has also provided in the press release reconciliations of these non-GAAP financial measures to the appropriate GAAP financial measures.

Item 9.01.
Financial Statements and Exhibits.
(d)    Exhibits

The following is furnished as an exhibit to this report and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act:

Exhibit No.
Description
 
 
99.1
Press Release regarding second quarter 2016 financial results.









SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


Date: July 29, 2016
SPIRIT AIRLINES, INC.


By: /s/ Thomas Canfield    
Name: Thomas Canfield
Title: Senior Vice President and General Counsel




EXHIBIT INDEX

Exhibit No.
Description
 
 
99.1
Press Release regarding second quarter 2016 financial results.






EXHIBIT 99.1

Spirit Airlines Reports Second Quarter 2016 Results

MIRAMAR, FL. (July 29, 2016) - Spirit Airlines, Inc. (NASDAQ: SAVE) today reported second quarter 2016 financial results.
•
GAAP net income for the second quarter 2016 was $73.1 million ($1.03 per diluted share). Excluding special items, net income for the second quarter 2016 was $78.5 million ($1.11 per diluted share)1.

•
On a GAAP basis, operating margin for the second quarter 2016 was 20.9 percent. Adjusted operating margin for the second quarter 2016 was 22.3 percent2.

•
Unrestricted cash and cash equivalents as of June 30, 2016 was $1.0 billion.

•
Spirit's return on invested capital (before taxes and excluding special items) for the twelve months ended June 30, 2016 was 27.6 percent3.

“While in line with our expectations, our second quarter 2016 financial results were negatively impacted by continued pressure on yields.  Looking ahead, we see strong volumes for the peak summer leisure travel period but anticipate yield pressures will persist,” said Bob Fornaro, Spirit’s Chief Executive Officer.  “On the operations front, I’m pleased to report that the changes we’re making to improve our on-time performance are beginning to take root.  For the second quarter 2016, we achieved our highest second quarter on-time performance in the last five years.  We still have a lot of work to do to achieve consistent reliability and improve our customer’s overall experience, but I want to thank and congratulate the team for the progress made during the quarter."

Revenue Performance
For the second quarter 2016, Spirit's total operating revenue was $584.1 million, an increase of 5.5 percent compared to the second quarter 2015, driven by an increase in flight volume offset by a decrease in operating yields.

Total revenue per passenger flight segment ("PFS") for the second quarter 2016 decreased 15.0 percent, or $18.40, year over year to $104.19, primarily driven by a 22.6 percent, or $15.48, decrease in ticket revenue per PFS. Non-ticket revenue declined 5.4 percent, or $2.92, year over year on a per flight segment basis to $51.32. Although non-ticket revenue per passenger segment remains relatively stable, the Company has experienced modest pressure on take rates for certain ancillary items which it believes is correlated to low fare levels in its markets. The Company has several new initiatives it plans to begin phasing in by year-end that should help mitigate these and other deflationary non-ticket pressures.

Cost Performance
Total GAAP operating expenses, including special items of $8.6 million4 primarily related to lease termination charges, increased 7.2 percent, or $31.2 million, year over year to $462.3 million. Adjusted operating expense for the second quarter 2016 increased 4.5 percent, or $19.7 million, to $453.7 million5 on a capacity increase of 23.1 percent year over year.

1



Aircraft fuel expense decreased in the second quarter of 2016 by 11.5 percent, or $14.7 million, compared to the same period last year, due primarily to a 29.3 percent decrease in the average economic fuel cost per gallon6, partially offset by a 22.0 percent increase in fuel gallons consumed.
 
Spirit reported second quarter 2016 cost per available seat mile ("ASM") excluding special items and fuel (“Adjusted CASM ex-fuel”)3 of 5.30 cents, a decrease of 8.6 percent compared to the same period last year. The primary drivers of this improvement were lower aircraft rent per ASM this year, primarily driven by a change in the mix of leased and purchased aircraft, as well as higher expense in the second quarter last year related to an unusual number of flight cancellations and delays. Additionally, the Company purchased one A319 aircraft formerly under a lease arrangement and negotiated four A319 aircraft lease extensions during the quarter, which contributed to lower aircraft rent per ASM.

"I am pleased to say that we remain on track to achieve adjusted CASM ex-fuel of about flat for the full year 2016," said Ted Christie, Spirit's Chief Financial Officer. "Maintaining our ultra-low unit costs is core for Spirit, and our investments in operational improvement will yield benefits to the cost structure over the next year. Consistent financial performance in a wide variety of macro environments is a true differentiator for the Spirit story, and one that will prove even more valuable as we head into the latter part of this decade."

Labor
During the second quarter, Spirit's flight attendants, represented by the Association of Flight Attendants - CWA ("AFA-CWA"), ratified an agreement for a five-year contract. Also, during the second quarter, the Company's ramp service team members at Fort Lauderdale-Hollywood International Airport, represented by the International Associations of Machinists ("IAM"), also ratified an agreement for a five-year contract.

Fleet
During the second quarter 2016, Spirit took delivery of 4 new aircraft (1 A320ceo and 3 A321ceo aircraft), ending the quarter with 87 aircraft in its fleet.  Also, during the quarter, Spirit purchased one A319 off lease and extended leases on four additional A319 aircraft.

Share Repurchase
Under its current share repurchase authorization, Spirit repurchased approximately 1.2 million shares during the second quarter for $51.3 million.

Recent New Service Announcements
Boston - Orlando (10/7/16)
Philadelphia - Orlando (10/7/16)
Newark - Fort Lauderdale (10/30/16)
Newark - Orlando (10/30/16)
Kansas City - Orlando (11/10/16)
Akron-Canton - Fort Lauderdale (11/10/16)
Akron-Canton - Orlando (11/10/16)
Akron-Canton - Tampa* (11/10/16)
Akron-Canton - Fort Myers* (11/11/16)
Niagara Falls - Orlando (11/17/16)
Plattsburgh - Orlando (11/17/16
Baltimore - Fort Myers (11/10/16)
Baltimore - Tampa (11/10/16)
Newark - Myrtle Beach (3/9/17)
Akron-Canton - Myrtle Beach (4/27/17)*
Fort Lauderdale - Havana, Cuba (TBD)**


2



*seasonal
**Tentatively awarded by the Department of Transportation (DOT). Final DOT determination is expected during the third quarter 2016.

Conference Call/Webcast Detail
Spirit will conduct a conference call to discuss these results today, July 29, 2016, at 9:00 a.m. ET. A live audio webcast of the conference call will be available to the public on a listen-only basis at http://ir.spirit.com. An archive of the webcast will be available under Webcasts & Presentations for 60 days.

About Spirit Airlines:
Spirit Airlines (NASDAQ: SAVE) is committed to offering the lowest total price to the places we fly, on average much lower than other airlines. Our customers start with an unbundled, stripped-down Bare Fare™ and get Frill Control™ which allows them to pay only for the options they choose - like bags, seat assignments and refreshments - the things other airlines bake right into their ticket prices. We help people save money and travel more often, create new jobs and stimulate business growth in the communities we serve. With our Fit Fleet™, the youngest fleet of any major US airline, we operate more than 425 daily flights to 56 destinations in the U.S., Latin America and the Caribbean. Come save with us at www.spirit.com.

Investors are encouraged to read the Company's periodic and current reports filed with or furnished to the Securities and Exchange Commission, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, for additional information regarding the Company.

End Notes
(1)
See "Reconciliation of Adjusted Net Income to GAAP Net Income" table below for more details.
(2) See "Reconciliation of Adjusted Operating Income to GAAP Operating Income" table below for more details.
(3)
See "Calculation for Return on Invested Capital" table below for more details.
(4)
See "Special Items" table for more details.
(5) See "Reconciliation of Adjusted Operating Expense to GAAP Operating Expense" table below for more details.
(6) See "Reconciliation of Economic Fuel Expense to GAAP Fuel Expense" table below for more details.


3





Forward-Looking Statements
Statements in this release and certain oral statements made from time to time by representatives of the Company contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Additional risks or uncertainties (i) that are not currently known to us, (ii) that we currently deem to be immaterial, or (iii) that could apply to any company, could also materially adversely affect our business, financial condition, or future results. You should carefully consider the risks described below and the other information in this report. If any of the following risks materialize, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. References in this report to “Spirit,” “we,” “us,” “our,” or the “Company” shall mean Spirit Airlines, Inc., unless the context indicates otherwise. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings, including but not limited to the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.


4



SPIRIT AIRLINES, INC.
Statement of Operations
(unaudited, in thousands, except per share data)


 
Three Months Ended

 
 
Six Months Ended
 
 
 
June 30,
 
Percent
 
June 30,
 
Percent

2016

2015

Change
 
2016
 
2015
 
Change
Operating revenues:





 
 
 
 
 
 
Passenger
$
296,401


$
308,573


(3.9
)
 
$
569,027

 
$
582,039

 
(2.2
)
Non-ticket
287,732


244,848


17.5

 
553,249

 
464,737

 
19.0

Total operating revenues
584,133


553,421


5.5

 
1,122,276

 
1,046,776

 
7.2







 
 
 
 
 
 
Operating expenses:





 
 
 
 
 
 
Aircraft fuel
113,192


127,907


(11.5
)
 
199,174

 
240,333

 
(17.1
)
Salaries, wages and benefits
112,930


97,037


16.4

 
229,340

 
186,094

 
23.2

Aircraft rent
49,864


53,127


(6.1
)
 
102,066

 
105,915

 
(3.6
)
Landing fees and other rents
39,944


33,364


19.7

 
74,751

 
63,910

 
17.0

Distribution
24,692


22,349


10.5

 
47,625

 
42,846

 
11.2

Maintenance, materials and repairs
20,627


21,271


(3.0
)
 
41,567

 
40,431

 
2.8

Depreciation and amortization
24,957


17,139


45.6

 
48,066

 
32,002

 
50.2

Other operating
67,511


58,173


16.1

 
131,556

 
101,920

 
29.1

Loss on disposal of assets
529


415


27.5

 
743

 
1,010

 
(26.4
)
Special charges
8,052


324


nm

 
24,254

 
749

 
nm

Total operating expenses
462,298


431,106


7.2

 
899,142

 
815,210

 
10.3










 
 
 
 
 
 
Operating income
121,835


122,315


(0.4
)
 
223,134

 
231,566

 
(3.6
)






 
 
 
 
 
 
Other (income) expense:





 
 
 
 
 
 
Interest expense
10,166


4,419


nm

 
18,226

 
7,231

 
nm

Capitalized interest
(2,771
)

(2,829
)

(2.1
)
 
(6,096
)
 
(5,362
)
 
13.7

Interest income
(1,447
)

(177
)

nm

 
(3,013
)
 
(311
)
 
nm

Other expense
157


44


256.8

 
227

 
116

 
95.7

Total other (income) expense
6,105


1,457


nm

 
9,344

 
1,674

 
nm









 
 
 
 
 
 
Income before income taxes
115,730


120,858


(4.2
)
 
213,790

 
229,892

 
(7.0
)
Provision for income taxes
42,646


44,154


(3.4
)
 
78,786

 
84,186

 
(6.4
)
Net income
$
73,084


$
76,704


(4.7
)
 
$
135,004

 
$
145,706

 
(7.3
)
Basic earnings per share
$
1.03


$
1.06


(2.8
)
 
$
1.90

 
$
2.00

 
(5.0
)
Diluted earnings per share
$
1.03


$
1.05


(1.9
)
 
$
1.89

 
$
1.99

 
(5.0
)






 
 
 
 
 
 
Weighted average shares, basic
70,770


72,518


(2.4
)
 
71,173

 
72,784

 
(2.2
)
Weighted average shares, diluted
70,913


72,801


(2.6
)
 
71,347

 
73,083

 
(2.4
)







5



SPIRIT AIRLINES, INC.
Statements of Comprehensive Income
(unaudited, in thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
73,084

 
$
76,704

 
$
135,004

 
$
145,706

Unrealized gain (loss) on interest rate derivative instruments, net of deferred taxes of $0, $749, $0 and ($191)
—

 
1,238

 
—

 
(356
)
Interest rate swap losses reclassified into earnings
88

 
—

 
178

 
—

Other comprehensive income (loss)
$
88

 
$
1,238

 
$
178

 
$
(356
)
Comprehensive income
$
73,172

 
$
77,942

 
$
135,182

 
$
145,350





6



SPIRIT AIRLINES, INC.
Balance Sheets
(unaudited, in thousands)
 
June 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,014,080

 
$
803,632

Accounts receivable, net
40,650

 
28,266

Aircraft maintenance deposits
77,590

 
73,415

Prepaid income taxes
2,835

 
72,278

Prepaid expenses and other current assets
48,624

 
48,749

Total current assets
1,183,779

 
1,026,340

 
 
 
 
Property and equipment:
 
 
 
Flight equipment
1,225,219

 
827,282

Ground and other equipment
103,986

 
82,459

Less accumulated depreciation
(90,577
)
 
(65,524
)
 
1,238,628

 
844,217

Deposits on flight equipment purchase contracts
249,360

 
286,837

Long-term aircraft maintenance deposits
201,925

 
206,485

Deferred heavy maintenance, net
75,172

 
89,127

Other long-term assets
81,336

 
77,539

Total assets
$
3,030,200

 
$
2,530,545

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
27,728

 
$
17,043

Air traffic liability
283,851

 
216,831

Current maturities of long-term debt
78,596

 
49,637

Other current liabilities
217,370

 
182,729

Total current liabilities
607,545

 
466,240

 
 
 
 
Long-term debt, less current maturities
836,418

 
596,693

Long-term deferred income taxes
267,379

 
221,481

Deferred gains and other long-term liabilities
19,541

 
20,821

Shareholders’ equity:
 
 
 
Common stock
7

 
7

Additional paid-in-capital
547,763

 
544,277

Treasury stock, at cost
(180,756
)
 
(116,182
)
Retained earnings
933,758

 
798,754

Accumulated other comprehensive loss
(1,455
)
 
(1,546
)
Total shareholders’ equity
1,299,317

 
1,225,310

Total liabilities and shareholders’ equity
$
3,030,200

 
$
2,530,545



7



SPIRIT AIRLINES, INC.SPIRIT AIRLINES, INC.
Statement of Cash Flows
(unaudited, in thousands)
 
Six Months Ended June 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income
135,004

 
145,706

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Unrealized losses on open derivative contracts, net
—

 
4,257

Losses reclassified from other comprehensive income
178

 
—

Equity-based compensation
3,905

 
4,743

Allowance for doubtful accounts
221

 
8

Amortization of deferred gains and losses
2,810

 
397

Depreciation and amortization
48,066

 
32,002

Deferred income tax expense
45,810

 
559

Loss on disposal of assets
743

 
1,010

Lease termination cost
24,254

 
—

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(12,662
)
 
(8,137
)
Aircraft maintenance deposits
(29,721
)
 
(4,621
)
Prepaid income taxes
69,444

 
—

Long-term deposits and other assets
(22,055
)
 
(10,930
)
Accounts payable
3,024

 
7,856

Air traffic liability
66,531

 
90,056

Other liabilities
25,269

 
36,728

Net cash provided by operating activities
360,821

 
299,634

Investing activities:
 
 
 
Proceeds from sale of property and equipment
50

 
—

Pre-delivery deposits for flight equipment, net of refunds
(60,772
)
 
(70,971
)
Capitalized interest
(4,554
)
 
(2,763
)
Purchase of property and equipment
(303,175
)
 
(308,163
)
Net cash used in investing activities
(368,451
)
 
(381,897
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
300,547

 
296,000

Proceeds from stock options exercised
92

 
23

Payments on debt and capital lease obligations
(19,665
)
 
(8,940
)
Proceeds from sale and leaseback transactions
—

 
7,300

Excess tax benefit (deficiency) from equity-based compensation
(511
)
 
8,504

Repurchase of common stock
(62,278
)
 
(79,415
)
Debt issuance costs
(107
)
 
(4,669
)
Net cash provided by financing activities
218,078

 
218,803

Net increase in cash and cash equivalents
210,448

 
136,540

Cash and cash equivalents at beginning of period
803,632

 
632,784

Cash and cash equivalents at end of period
$
1,014,080

 
$
769,324

Supplemental disclosures
 
 
 
Cash payments for:
 
 
 
Interest, net of capitalized interest
$
21,804

 
$
1,758

Income taxes paid, net of refunds
$
(36,142
)
 
$
54,198


8



SPIRIT AIRLINES, INC.
Selected Operating Statistics (unaudited)
 
Three Months Ended June 30,

 
Operating Statistics
2016

2015

Change
Available seat miles (ASMs) (thousands)
6,419,419


5,213,299


23.1
 %
Revenue passenger miles (RPMs) (thousands)
5,549,411


4,481,064


23.8
 %
Load factor (%)
86.4


86.0


0.4 pts

Passenger flight segments (thousands)
5,606


4,514


24.2
 %
Block hours
98,399


83,861


17.3
 %
Departures
38,025


32,164


18.2
 %
Total operating revenue per ASM (TRASM) (cents)
9.10


10.62


(14.3
)%
Average yield (cents)
10.53


12.35


(14.7
)%
Average ticket revenue per passenger flight segment ($)
52.87


68.35


(22.6
)%
Average non-ticket revenue per passenger flight segment ($)
51.32


54.24


(5.4
)%
Total revenue per passenger flight segment ($)
104.19


122.59


(15.0
)%
CASM (cents)
7.20


8.27


(12.9
)%
Adjusted CASM (cents) (1)
7.07


8.33


(15.1
)%
Adjusted CASM ex-fuel (cents) (2)
5.30


5.80


(8.6)%

Fuel gallons consumed (thousands)
77,013


63,134


22.0
 %
Average economic fuel cost per gallon ($)
1.47


2.08


(29.3
)%
Aircraft at end of period
87


73


19.2
 %
Average daily aircraft utilization (hours)
12.7


12.9


(1.6)%

Average stage length (miles)
971


974


(0.3
)%
 
Six Months Ended June 30,
 
 
Operating Statistics
2016

2015

Change
Available seat miles (ASMs) (thousands)
12,402,423


9,942,762


24.7
 %
Revenue passenger miles (RPMs) (thousands)
10,619,724


8,498,622


25.0
 %
Load factor (%)
85.6


85.5


0.1
  pts
Passenger flight segments (thousands)
10,594


8,494


24.7
 %
Block hours
191,943


160,896


19.3
 %
Departures
73,185


61,208


19.6
 %
Total operating revenue per ASM (TRASM) (cents)
9.05


10.53


(14.1
)%
Average yield (cents)
10.57


12.32


(14.2
)%
Average ticket revenue per passenger flight segment ($)
53.71


68.52


(21.6
)%
Average non-ticket revenue per passenger flight segment ($)
52.22


54.71


(4.6
)%
Total revenue per passenger flight segment ($)
105.93


123.23


(14.0
)%
CASM (cents)
7.25


8.20


(11.6
)%
Adjusted CASM (cents) (1)
7.05


8.20


(14.0
)%
Adjusted CASM ex-fuel (cents) (2)
5.44


5.76


(5.6
)%
Fuel gallons consumed (thousands)
147,563


119,857


23.1
 %
Average economic fuel cost per gallon ($)
1.35


2.02


(33.2
)%
Average daily aircraft utilization (hours)
12.8


12.8


—

Average stage length (miles)
983


982


0.1
 %



(1)
Excludes special items.
(2)
Excludes economic fuel expense and special items.



9




The Company is providing a reconciliation of GAAP financial information to non-GAAP financial information as it believes that non-GAAP financial measures provide management and investors the ability to measure the performance of the Company on a consistent basis. These non-GAAP financial measures have limitations as analytical tools. Because of these limitations, determinations of the Company's operating performance excluding unrealized gains and losses or special items should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
Special Items
 
Three Months Ended
 
June 30,
(in thousands)
2016

2015
Operating special items include the following (1):
 
 
 
Unrealized losses (gains) related to fuel derivative contracts
$
—

 
$
(3,669
)
Loss on disposal of assets
529

 
415

Special charges
8,052

 
324

Total operating special items
$
8,581

 
$
(2,930
)

Reconciliation of Adjusted Operating Expense to GAAP Operating Expense
(unaudited)


 
Three Months Ended

June 30,
(in thousands, except CASM data in cents)
2016

2015
Total operating expenses, as reported
$
462,298

 
$
431,106

Less operating special items (1)
8,581

 
(2,930
)
Adjusted operating expenses, non-GAAP (2)
453,717

 
434,036

Less: Economic fuel expense
113,192

 
131,576

Adjusted operating expenses excluding fuel, non-GAAP (3)
$
340,525

 
$
302,460


 
 
 
Available seat miles
6,419,419

 
5,213,299


 
 
 
CASM (cents)
7.20

 
8.27

Adjusted CASM (cents) (2)
7.07

 
8.33

Adjusted CASM ex-fuel (cents) (3)
5.30

 
5.80



(1)
Special items include unrealized gains and losses related to outstanding fuel derivative contracts, loss on disposal of assets, and special charges. Special charges for the second quarter 2016 are primarily related to lease termination costs.
(2)
Excludes operating special items.
(3)
Excludes operating special items and economic fuel expense as described in the "Reconciliation of Economic Fuel Expense to GAAP Fuel Expense" table below.




10



Reconciliation of Adjusted Net Income to GAAP Net Income
(unaudited)

 
Three Months Ended
 
June 30,
(in thousands, except per share data)
2016
 
2015
Net income, as reported
$
73,084

 
$
76,704

Add: Provision for income taxes
42,646

 
44,154

Income before income taxes, as reported
115,730

 
120,858

Pre-tax margin, GAAP
19.8
%
 
21.8
%
Add operating special items (1)
8,581

 
(2,930
)
Income before income taxes, non-GAAP (2)
124,311

 
117,928

Adjusted pre-tax margin, non-GAAP (2)
21.3
%
 
21.3
%
Provision for income taxes (3)
45,808

 
43,084

Adjusted net income, non-GAAP (2)(3)
$
78,503

 
$
74,844

 
 
 
 
Weighted average shares, diluted
70,913

 
72,801

 
 
 
 
Adjusted net income per share, diluted (2)(3)
$1.11
 
$1.03



Reconciliation of Adjusted Operating Income to GAAP Operating Income
(unaudited)

 
Three Months Ended

June 30,
(in thousands)
2016
 
2015
Operating income, as reported
$
121,835


$
122,315

Operating margin, GAAP
20.9
%

22.1
%
Add operating special items (1)
8,581

 
(2,930
)
Adjusted operating income, non-GAAP (2)
$
130,416


$
119,385

Adjusted operating margin, non-GAAP (2)
22.3
%

21.6
%








(1)
See "Special Items" for more details.
(2)
Excludes operating special items.
(3)
Assumes same marginal tax rate as is applicable to GAAP net income.





11



The Company believes economic fuel expense is the best measure of the effect fuel prices are currently having on our business, because it most closely approximates the net cash outflow associated with purchasing fuel used for our operations during the period. Economic fuel expense is defined as into-plane fuel expense, realized gains or losses on derivative contracts, plus the economic premium expense related to fuel option contracts in the period the option is benefiting. The key difference between aircraft fuel expense as recorded in our statement of operations and economic fuel expense is unrealized mark-to-market changes in the value of aircraft fuel derivatives outstanding and the timing of premium gain or loss recognition on our outstanding fuel option contracts. Many industry analysts evaluate airline results using economic fuel expense, and it is used in our internal management reporting.
Reconciliation of Economic Fuel Expense to GAAP Fuel Expense
(unaudited)
 
Three Months Ended
 
June 30,
(in thousands, except per gallon data)
2016
 
2015
Fuel expense



Aircraft fuel, as reported
$
113,192


$
127,907

Less:





     Unrealized losses (gains) related to fuel derivative contracts
—


(3,669
)
Economic fuel expense, non-GAAP
$
113,192


$
131,576





Fuel gallons consumed
77,013


63,134





Economic fuel cost per gallon, non-GAAP
$
1.47


$
2.08


Calculation of Return on Invested Capital
(unaudited)
 
Twelve Months Ended
(in thousands)
June 30, 2016
Operating Income
$
500,690

Add operating special items (1)
23,609

Adjustment for aircraft rent
207,682

Adjusted operating income (2)
731,981

Tax (37.0%) (3)
270,833

Adjusted operating income, after-tax
461,148

Invested Capital
 
Total debt
$
915,014

Book equity
1,299,317

Less: Unrestricted cash
1,014,080

Add: Capitalized aircraft operating leases (7x Aircraft Rent)
1,453,774

Total invested capital
2,654,025

 
 
Return on invested capital (ROIC), pre-tax (2)
27.6
%
Return on invested capital (ROIC), after-tax (2)(3)
17.4
%

(1)
Special items include unrealized gains or losses related to outstanding fuel derivative contracts, loss on disposal of assets, and special charges primarily related to lease termination costs.
(2)
Excludes special items as described above.
(3)
Assumes same marginal tax rate as is applicable to GAAP net income for the twelve months ended June 30, 2016.
###

12


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