UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(Mark One)
(Mark One) | ||
(X) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2002.
ORMarch 31, 2003.
OR | ||
( ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
EXCHANGE ACT OF 1934 |
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIR GROUP, INC.
Delaware (State or other jurisdiction of incorporation or organization) | 91-1292054 (I.R.S. Employer Identification No.) |
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant’s telephone number, including area code: (206) 431-7040
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesX[X]No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The registrant has 26,549,16126,605,733 common shares, par value $1.00, outstanding at OctoberMarch 31, 2002.2003.
1
PART I. FINANCIAL INFORMATION
ASSETS
Restated | ||||||||||||||||
December 31, | September 30, | December 31, | March 31, | |||||||||||||
(In Millions) | 2001 | 2002 | 2002 | 2003 | ||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 490.3 | $ | 308.2 | $ | 269.0 | $ | 205.8 | ||||||||
Marketable securities | 170.4 | 354.4 | 366.8 | 409.8 | ||||||||||||
Receivables — net | 83.4 | 85.4 | ||||||||||||||
Inventories and supplies — net | 71.5 | 71.4 | ||||||||||||||
Prepaid expenses and other assets | 108.9 | 136.7 | ||||||||||||||
Receivables - net | 125.4 | 134.8 | ||||||||||||||
Inventories and supplies | 71.9 | 67.8 | ||||||||||||||
Deferred income taxes | 61.2 | 74.0 | ||||||||||||||
Prepaid expenses and other current assets | 82.0 | 98.1 | ||||||||||||||
Total Current Assets | 924.5 | 956.1 | 976.3 | 990.3 | ||||||||||||
Property and Equipment | ||||||||||||||||
Flight equipment | 2,002.8 | 2,039.3 | 2,066.4 | 2,155.3 | ||||||||||||
Other property and equipment | 395.5 | 432.5 | 430.9 | 432.9 | ||||||||||||
Deposits for future flight equipment | 112.4 | 87.6 | 93.5 | 89.6 | ||||||||||||
2,510.7 | 2,559.4 | 2,590.8 | 2,677.8 | |||||||||||||
Less accumulated depreciation and amortization | 701.3 | 786.5 | 811.4 | 838.5 | ||||||||||||
Total Property and Equipment — Net | 1,809.4 | 1,772.9 | ||||||||||||||
Total Property and Equipment - Net | 1,779.4 | 1,839.3 | ||||||||||||||
Goodwill | 51.4 | 51.4 | ||||||||||||||
Intangible Assets | 50.9 | 50.9 | ||||||||||||||
Other Assets | 157.0 | 164.8 | 74.1 | 111.6 | ||||||||||||
Total Assets | $ | 2,942.3 | $ | 2,945.2 | $ | 2,880.7 | $ | 2,992.1 | ||||||||
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS’ EQUITY
Restated | December 31, | March 31, | |||||||||||||||||
December 31, | September 30, | ||||||||||||||||||
(In Millions Except Share Amounts) | 2001 | 2002 | |||||||||||||||||
(In Millions) | (In Millions) | 2002 | 2003 | ||||||||||||||||
Current Liabilities | Current Liabilities | Current Liabilities | |||||||||||||||||
Accounts payable | Accounts payable | $ | 122.0 | $ | 132.2 | Accounts payable | $ | 132.1 | $ | 139.5 | |||||||||
Accrued aircraft rent | Accrued aircraft rent | 90.1 | 76.4 | Accrued aircraft rent | 76.0 | 56.2 | |||||||||||||
Accrued wages, vacation and payroll taxes | Accrued wages, vacation and payroll taxes | 79.9 | 87.2 | Accrued wages, vacation and payroll taxes | 87.4 | 90.0 | |||||||||||||
Other accrued liabilities | Other accrued liabilities | 207.6 | 180.8 | Other accrued liabilities | 222.2 | 248.3 | |||||||||||||
Air traffic liability | Air traffic liability | 219.4 | 233.7 | Air traffic liability | 211.6 | 257.9 | |||||||||||||
Current portion of long-term debt and capital lease obligations | Current portion of long-term debt and capital lease obligations | 43.2 | 46.2 | Current portion of long-term debt and capital lease obligations | 48.6 | 39.9 | |||||||||||||
Total Current Liabilities | Total Current Liabilities | 762.2 | 756.5 | Total Current Liabilities | 777.9 | 831.8 | |||||||||||||
Long-Term Debt and Capital Lease Obligations | Long-Term Debt and Capital Lease Obligations | 847.9 | 843.7 | Long-Term Debt and Capital Lease Obligations | 856.7 | 979.0 | |||||||||||||
Other Liabilities and Credits | Other Liabilities and Credits | Other Liabilities and Credits | |||||||||||||||||
Deferred income taxes | Deferred income taxes | 177.6 | 171.6 | Deferred income taxes | 157.2 | 138.2 | |||||||||||||
Deferred revenue | Deferred revenue | 176.6 | 177.9 | Deferred revenue | 232.0 | 233.1 | |||||||||||||
Other liabilities | Other liabilities | 128.8 | 159.1 | Other liabilities | 201.2 | 210.0 | |||||||||||||
483.0 | 508.6 | 590.4 | 581.3 | ||||||||||||||||
Shareholders’ Equity | Shareholders’ Equity | Shareholders’ Equity | |||||||||||||||||
Common stock, $1 par value | Common stock, $1 par value | Common stock, $1 par value | |||||||||||||||||
Authorized: 100,000,000 shares Issued: 2001 - 29,268,869 shares 2002 - 29,285,569 shares | 29.3 | 29.3 | Authorized: 100,000,000 shares | ||||||||||||||||
Capital in excess of par value | 482.5 | 482.9 | Issued: 2002 - 29,309,726 shares | ||||||||||||||||
Treasury stock, at cost: 2001 - 2,740,501 shares 2002 - 2,736,408 shares | (62.6 | ) | (62.5 | ) | 2003 - 29,342,020 shares | 29.3 | 29.3 | ||||||||||||
Capital in excess of par value | 483.3 | 483.9 | |||||||||||||||||
Treasury stock, at cost: 2002 and 2003 - 2,736,287 shares | (62.5 | ) | (62.5 | ) | |||||||||||||||
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (3.9 | ) | 10.8 | Accumulated other comprehensive income (loss) | (80.2 | ) | (80.2 | ) | ||||||||||
Retained earnings | Retained earnings | 403.9 | 375.9 | Retained earnings | 285.8 | 229.5 | |||||||||||||
849.2 | 836.4 | 655.7 | 600.0 | ||||||||||||||||
Total Liabilities and Shareholders’ Equity | Total Liabilities and Shareholders’ Equity | $ | 2,942.3 | $ | 2,945.2 | Total Liabilities and Shareholders’ Equity | $ | 2,880.7 | $ | 2,992.1 | |||||||||
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS (unaudited)
Alaska Air Group, Inc.
Three Months Ended September 30 | Restated | |||||||||||||||||
(In Millions Except Share and Per Share Amounts) | 2001 | 2002 | ||||||||||||||||
Three Months Ended March 31 | Three Months Ended March 31 | |||||||||||||||||
(In Millions Except Per Share Amounts) | (In Millions Except Per Share Amounts) | 2002 | 2003 | |||||||||||||||
Operating Revenues | Operating Revenues | Operating Revenues | ||||||||||||||||
Passenger | Passenger | $ | 536.9 | $ | 569.8 | Passenger | $ | 455.9 | $ | 475.5 | ||||||||
Freight and mail | Freight and mail | 22.6 | 21.0 | Freight and mail | 17.1 | 18.6 | ||||||||||||
Other — net | 28.5 | 29.3 | ||||||||||||||||
Other - net | Other - net | 27.1 | 24.6 | |||||||||||||||
Total Operating Revenues | Total Operating Revenues | 588.0 | 620.1 | Total Operating Revenues | 500.1 | 518.7 | ||||||||||||
Operating Expenses | Operating Expenses | Operating Expenses | ||||||||||||||||
Wages and benefits | Wages and benefits | 204.9 | 224.8 | Wages and benefits | 202.9 | 227.1 | ||||||||||||
Contracted services | Contracted services | 21.4 | 22.0 | Contracted services | 24.7 | 25.7 | ||||||||||||
Aircraft fuel | Aircraft fuel | 85.6 | 82.8 | Aircraft fuel | 64.7 | 90.2 | ||||||||||||
Aircraft maintenance | Aircraft maintenance | 43.3 | 35.8 | Aircraft maintenance | 43.2 | 46.5 | ||||||||||||
Aircraft rent | Aircraft rent | 46.0 | 48.3 | Aircraft rent | 46.5 | 46.9 | ||||||||||||
Food and beverage service | Food and beverage service | 15.2 | 18.6 | Food and beverage service | 14.3 | 13.4 | ||||||||||||
Commissions | Commissions | 16.0 | 7.2 | Commissions | 12.4 | 3.3 | ||||||||||||
Other selling expenses | Other selling expenses | 31.8 | 32.5 | Other selling expenses | 30.2 | 27.2 | ||||||||||||
Depreciation and amortization | Depreciation and amortization | 34.5 | 34.8 | Depreciation and amortization | 32.3 | 32.4 | ||||||||||||
Loss (gain) on sale of assets | Loss (gain) on sale of assets | 0.3 | (0.2 | ) | Loss (gain) on sale of assets | (0.6 | ) | 0.1 | ||||||||||
Landing fees and other rentals | Landing fees and other rentals | 33.8 | 38.9 | Landing fees and other rentals | 29.8 | 37.1 | ||||||||||||
Other | Other | 42.4 | 51.0 | Other | 49.3 | 47.4 | ||||||||||||
Total Operating Expenses | Total Operating Expenses | 575.2 | 596.5 | Total Operating Expenses | 549.7 | 597.3 | ||||||||||||
Operating Income | 12.8 | 23.6 | ||||||||||||||||
Operating Loss | Operating Loss | (49.6 | ) | (78.6 | ) | |||||||||||||
Nonoperating Income (Expense) | Nonoperating Income (Expense) | Nonoperating Income (Expense) | ||||||||||||||||
Interest income | Interest income | 7.1 | 5.8 | Interest income | 4.4 | 0.6 | ||||||||||||
Interest expense, net | (10.2 | ) | (10.5 | ) | ||||||||||||||
U.S. government compensation | 29.1 | 0.5 | ||||||||||||||||
Other — net | (0.4 | ) | (3.0 | ) | ||||||||||||||
Interest expense | Interest expense | (11.9 | ) | (11.1 | ) | |||||||||||||
Interest capitalized | Interest capitalized | 0.2 | 0.8 | |||||||||||||||
Other - net | Other - net | 4.5 | 0.4 | |||||||||||||||
25.6 | (7.2 | ) | (2.8 | ) | (9.3 | ) | ||||||||||||
Income before income tax | 38.4 | 16.4 | ||||||||||||||||
Income tax expense | 13.1 | 5.8 | ||||||||||||||||
Loss before income tax and accounting change | Loss before income tax and accounting change | (52.4 | ) | (87.9 | ) | |||||||||||||
Income tax benefit | Income tax benefit | (18.7 | ) | (31.6 | ) | |||||||||||||
Net Income | $ | 25.3 | $ | 10.6 | ||||||||||||||
Loss before accounting change | Loss before accounting change | (33.7 | ) | (56.3 | ) | |||||||||||||
Cumulative effect of accounting change | Cumulative effect of accounting change | (51.4 | ) | — | ||||||||||||||
Basic Earnings Per Share | $ | 0.95 | $ | 0.40 | ||||||||||||||
Net Loss | Net Loss | $ | (85.1 | ) | $ | (56.3 | ) | |||||||||||
Diluted Earnings Per Share | $ | 0.95 | $ | 0.40 | ||||||||||||||
Basic and Diluted Loss Per Share: | Basic and Diluted Loss Per Share: | |||||||||||||||||
Loss before accounting change | $ | (1.27 | ) | $ | (2.12 | ) | ||||||||||||
Cumulative effect of accounting change | $ | (1.94 | ) | — | ||||||||||||||
Net Loss Per Share | Net Loss Per Share | $ | (3.21 | ) | $ | (2.12 | ) | |||||||||||
Shares used for computation: | Shares used for computation: | Shares used for computation: | ||||||||||||||||
Basic | 26.514 | 26.549 | Basic and diluted | 26.532 | 26.582 | |||||||||||||
Diluted | 26.559 | 26.562 |
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTSSTATEMENT OF INCOMESHAREHOLDERS’ EQUITY (unaudited)
Alaska Air Group, Inc.
Nine Months Ended September 30 | Restated | ||||||||
(In Millions Except Share and Per Share Amounts) | 2001 | 2002 | |||||||
Operating Revenues | |||||||||
Passenger | $ | 1,550.9 | $ | 1,551.3 | |||||
Freight and mail | 67.3 | 59.4 | |||||||
Other — net | 71.8 | 86.1 | |||||||
Total Operating Revenues | 1,690.0 | 1,696.8 | |||||||
Operating Expenses | |||||||||
Wages and benefits | 590.7 | 642.4 | |||||||
Contracted services | 65.1 | 69.0 | |||||||
Aircraft fuel | 265.1 | 222.6 | |||||||
Aircraft maintenance | 143.7 | 121.3 | |||||||
Aircraft rent | 138.5 | 141.6 | |||||||
Food and beverage service | 44.6 | 49.9 | |||||||
Commissions | 47.8 | 31.1 | |||||||
Other selling expenses | 96.4 | 96.2 | |||||||
Depreciation and amortization | 97.3 | 101.6 | |||||||
Loss (gain) on sale of assets | 1.5 | (0.8 | ) | ||||||
Landing fees and other rentals | 92.8 | 105.1 | |||||||
Other | 135.6 | 151.1 | |||||||
Total Operating Expenses | 1,719.1 | 1,731.1 | |||||||
Operating Loss | (29.1 | ) | (34.3 | ) | |||||
Nonoperating Income (Expense) | | | | | | | | | |
Interest income | 20.9 | 16.0 | |||||||
Interest expense, net | (27.1 | ) | (33.3 | ) | |||||
U.S. government compensation | 29.1 | 0.5 | |||||||
Other — net | (2.3 | ) | 8.0 | ||||||
20.6 | (8.8 | ) | |||||||
Loss before income tax | (8.5 | ) | (43.1 | ) | |||||
Income tax benefit | (3.0 | ) | (15.1 | ) | |||||
Net Loss | $ | (5.5 | ) | $ | (28.0 | ) | |||
Basic Loss Per Share | $ | (0.21 | ) | $ | (1.05 | ) | |||
Diluted Loss Per Share | $ | (0.21 | ) | $ | (1.05 | ) | |||
Shares used for computation: | |||||||||
Basic | 26.489 | 26.543 | |||||||
Diluted | 26.489 | 26.543 |
Accumulated | |||||||||||||||||||||||||||||
Common | Capital in | Treasury | Other | ||||||||||||||||||||||||||
Shares | Common | Excess of | Stock, | Comprehensive | Retained | ||||||||||||||||||||||||
(In Millions) | Outstanding | Stock | Par Value | at Cost | Income (Loss) | Earnings | Total | ||||||||||||||||||||||
Balances at December 31, 2002 | 26.573 | $ | 29.3 | $ | 483.3 | $ | (62.5 | ) | $ | (80.2 | ) | $ | 285.8 | $ | 655.7 | ||||||||||||||
Net loss for the three months ended March 31, 2003 | (56.3 | ) | (56.3 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||
Related to marketable securities: | |||||||||||||||||||||||||||||
Change in fair value | 2.9 | ||||||||||||||||||||||||||||
Reclassification to earnings | (0.1 | ) | |||||||||||||||||||||||||||
Income tax effect | (1.1 | ) | |||||||||||||||||||||||||||
1.7 | 1.7 | ||||||||||||||||||||||||||||
Related to fuel hedges: | |||||||||||||||||||||||||||||
Change in fair value | 6.2 | ||||||||||||||||||||||||||||
Reclassification to earnings | (9.1 | ) | |||||||||||||||||||||||||||
Income tax effect | 1.2 | ||||||||||||||||||||||||||||
(1.7 | ) | (1.7 | ) | ||||||||||||||||||||||||||
Total comprehensive loss | (56.3 | ) | |||||||||||||||||||||||||||
Stock issued under stock plans | 0.033 | 0.6 | 0.6 | ||||||||||||||||||||||||||
Balances at March 31, 2003 | 26.606 | $ | 29.3 | $ | 483.9 | $ | (62.5 | ) | $ | (80.2 | ) | $ | 229.5 | $ | 600.0 | ||||||||||||||
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)Alaska Air Group, Inc.
Accumulated | |||||||||||||||||||||||||||||
Common | Capital in | Treasury | Other | ||||||||||||||||||||||||||
Shares | Common | Excess of | Stock, | Comprehensive | Retained | ||||||||||||||||||||||||
(In Millions) | Outstanding | Stock | Par Value | at Cost | Income (Loss) | Earnings | Total | ||||||||||||||||||||||
Balances at December 31, 2001: | |||||||||||||||||||||||||||||
As previously reported | 26.528 | $ | 29.3 | $ | 482.5 | $ | (62.6 | ) | $ | (3.9 | ) | $ | 375.0 | $ | 820.3 | ||||||||||||||
Prior period adjustment (see Note 2) | 28.9 | 28.9 | |||||||||||||||||||||||||||
As restated | 26.528 | 29.3 | 482.5 | (62.6 | ) | (3.9 | ) | 403.9 | 849.2 | ||||||||||||||||||||
Net loss for the nine months ended September 30, 2002 | (28.0 | ) | (28.0 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||
Related to fuel hedges: | |||||||||||||||||||||||||||||
Change in fair value | 26.3 | ||||||||||||||||||||||||||||
Reclassification to earnings | (5.5 | ) | |||||||||||||||||||||||||||
Income tax effect | (8.1 | ) | |||||||||||||||||||||||||||
12.7 | 12.7 | ||||||||||||||||||||||||||||
Related to marketable securities: | |||||||||||||||||||||||||||||
Change in fair value | 1.9 | ||||||||||||||||||||||||||||
Reclassification to earnings | 0.7 | ||||||||||||||||||||||||||||
Income tax effect | (0.6 | ) | |||||||||||||||||||||||||||
2.0 | 2.0 | ||||||||||||||||||||||||||||
Total comprehensive loss | (13.3 | ) | |||||||||||||||||||||||||||
Treasury stock sales | 0.005 | 0.1 | 0.1 | ||||||||||||||||||||||||||
Stock issued under stock plans | 0.016 | 0.4 | 0.4 | ||||||||||||||||||||||||||
Balances at September 30, 2002 | 26.549 | $ | 29.3 | $ | 482.9 | $ | (62.5 | ) | $ | 10.8 | $ | 375.9 | $ | 836.4 | |||||||||||||||
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Alaska Air Group, Inc.
Restated | ||||||||||||||||||||
Nine Months Ended September 30 (In millions) | 2001 | 2002 | ||||||||||||||||||
Three Months Ended March 31 (In Millions) | Three Months Ended March 31 (In Millions) | 2002 | 2003 | |||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | ||||||||||||||||||
Net loss | Net loss | ($5.5 | ) | ($28.0 | ) | Net loss | $ | (85.1 | ) | $ | (56.3 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||||||||||
Depreciation and amortization | 97.3 | 101.6 | Cumulative effect of accounting change | 51.4 | — | |||||||||||||||
Amortization of airframe and engine overhauls | 55.9 | 46.5 | Depreciation and amortization | 32.3 | 32.4 | |||||||||||||||
Changes in derivative fair values | 3.1 | (5.3 | ) | Amortization of airframe and engine overhauls | 15.5 | 15.2 | ||||||||||||||
Loss (gain) on disposition of assets | 1.5 | (.8 | ) | Loss (gain) on marketable securities | 1.0 | (1.7 | ) | |||||||||||||
Increase (decrease) in deferred income taxes | 17.3 | (14.7 | ) | Changes in derivative fair values | (3.5 | ) | 1.2 | |||||||||||||
Increase in accounts receivable — net | (6.1 | ) | (7.1 | ) | Loss on sale of assets | (0.6 | ) | 0.1 | ||||||||||||
Decrease (increase) in other current assets | 10.8 | (12.9 | ) | Decrease in deferred income taxes | (10.0 | ) | (31.7 | ) | ||||||||||||
Increase in air traffic liability | 25.8 | 14.3 | Increase in accounts receivable | (21.0 | ) | (9.5 | ) | |||||||||||||
Increase (decrease) in other current liabilities | 70.4 | (11.4 | ) | Increase in other current assets | (34.0 | ) | (11.0 | ) | ||||||||||||
Increase in other liabilities | 3.4 | 27.1 | Increase in air traffic liability | 50.3 | 46.3 | |||||||||||||||
Increase in deferred revenue | 5.0 | 1.3 | Increase (decrease) in other current liabilities | (36.1 | ) | 13.2 | ||||||||||||||
Other, net | (4.2 | ) | 6.4 | Increase (decrease) in deferred revenue and other-net | 12.0 | (3.0 | ) | |||||||||||||
Net cash provided by operating activities | 274.7 | 117.0 | ||||||||||||||||||
Net cash used in operating activities | Net cash used in operating activities | (27.8 | ) | (4.8 | ) | |||||||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||||||
Proceeds from disposition of assets | Proceeds from disposition of assets | 1.2 | 3.5 | Proceeds from disposition of assets | 1.9 | 0.8 | ||||||||||||||
Purchases of marketable securities | Purchases of marketable securities | (670.6 | ) | (457.1 | ) | Purchases of marketable securities | (117.7 | ) | (171.8 | ) | ||||||||||
Sales and maturities of marketable securities | Sales and maturities of marketable securities | 394.5 | 275.7 | Sales and maturities of marketable securities | 22.2 | 131.6 | ||||||||||||||
Property and equipment additions: | Property and equipment additions: | Property and equipment additions: | ||||||||||||||||||
Aircraft purchase deposits | (41.4 | ) | (24.8 | ) | Aircraft purchase deposits | — | (9.3 | ) | ||||||||||||
Capitalized overhauls | (40.7 | ) | (40.7 | ) | Capitalized overhauls | (11.9 | ) | (22.5 | ) | |||||||||||
Aircraft | (257.4 | ) | (36.8 | ) | Aircraft | — | (59.3 | ) | ||||||||||||
Other flight equipment | (41.1 | ) | (12.6 | ) | Other flight equipment | (8.3 | ) | (10.9 | ) | |||||||||||
Other property | (33.7 | ) | (33.5 | ) | Other property | (7.2 | ) | (5.5 | ) | |||||||||||
Aircraft deposits returned | 59.6 | 41.4 | ||||||||||||||||||
Aircraft deposits returned | Aircraft deposits returned | 21.9 | 1.2 | |||||||||||||||||
Restricted deposits and other | Restricted deposits and other | (18.6 | ) | (13.4 | ) | Restricted deposits and other | (2.2 | ) | (22.4 | ) | ||||||||||
Net cash used in investing activities | Net cash used in investing activities | (648.2 | ) | (298.3 | ) | Net cash used in investing activities | (101.3 | ) | (168.1 | ) | ||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | ||||||||||||||||||
Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | 359.5 | 25.5 | Proceeds from issuance of long-term debt | — | 150.0 | ||||||||||||||
Offering costs in connection with issuance of long-term debt | Offering costs in connection with issuance of long-term debt | — | (4.5 | ) | ||||||||||||||||
Long-term debt and capital lease payments | Long-term debt and capital lease payments | (57.8 | ) | (26.8 | ) | Long-term debt and capital lease payments | (7.6 | ) | (36.4 | ) | ||||||||||
Proceeds from issuance of common stock | Proceeds from issuance of common stock | 1.4 | .5 | Proceeds from issuance of common stock | 0.3 | 0.6 | ||||||||||||||
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 303.1 | (.8 | ) | Net cash provided by (used in) financing activities | (7.3 | ) | 109.7 | ||||||||||||
Net change in cash and cash equivalents | Net change in cash and cash equivalents | (70.4 | ) | (182.1 | ) | Net change in cash and cash equivalents | (136.4 | ) | (63.2 | ) | ||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 101.1 | 490.3 | Cash and cash equivalents at beginning of period | 490.8 | 269.0 | ||||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 30.7 | $ | 308.2 | Cash and cash equivalents at end of period | $ | 354.4 | $ | 205.8 | ||||||||||
Supplemental disclosure of cash paid (refunded) during the period for: | ||||||||||||||||||||
Supplemental disclosure of cash paid during the period for: | Supplemental disclosure of cash paid during the period for: | |||||||||||||||||||
Interest (net of amount capitalized) | $ | 34.8 | $ | 32.1 | Interest (net of amount capitalized) | $ | 9.9 | $ | 7.8 | |||||||||||
Income taxes paid (refunds received) | (16.7 | ) | (20.8 | ) | Income taxes | — | — | |||||||||||||
Noncash investing and financing activities | Noncash investing and financing activities | None | None | Noncash investing and financing activities | None | None |
See accompanying notes to consolidated financial statements.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Alaska Air Group, Inc.
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Alaska Air Group, Inc. (the Company)Company or Air Group) include the accounts of itsour principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). These interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2001, subject to the restatement described in Note 2 below2002. In the opinion of management, all adjustments (consisting only of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company as of September 30, 2002,March 31, 2003, as well as the results of its operations for the three and nine months ended September 30,March 31, 2002 and 2001. Except for the restatement of the prior year’s financial statements as described below, the2003. The adjustments made were of a normal recurring nature. Certain reclassifications
These consolidated financial statements have been made in the prior year’s restated financial statements to conform to the 2002 presentation.
The preparation of consolidated financial statementsprepared in conformity with accounting principles generally accepted in the United States of America (GAAP) requiresand require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates include assumptions used to record liabilities, expenses and revenue associated with the Company’s Mileage Plan, estimated useful lives of property and equipment and the amounts of certain accrued liabilities. Actual results may differ from these estimates.
As further discussedChange in Note 2, in June 2002, the Company restated its consolidated financial statements for the year ended December 31, 2001 and its unaudited consolidated financial statements for the quarterly period ended March 31, 2002 and for all quarterly periods during the year ended December 31, 2001. The Company expects to file an amendment to its Annual Report on Form 10-K for the year ended December 31, 2001, which will include its restated financial statements.
Accounting Principle
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. UnderAssets.” In connection with the adoption of this Statementstatement, the Company’sCompany determined that all of its goodwill will no longer be amortized, but instead will be tested for impairment onwas impaired. As a minimum of an annual basis. The impact of discontinuing amortization of existing goodwill has resulted in an increase of net income of $1.5 million for the nine months ended September 30, 2002. During the second quarter ofresult, effective January 1, 2002, the Company completed the first steprecorded a one-time, non-cash charge of $51.4 million ($12.5 million Alaska and $38.9 million Horizon) to write-off all of its impairment test related to its $51.4 milliongoodwill. This charge is reflected as a cumulative effect of goodwill. The test was performed using Alaska and Horizon as separate reporting units. Results of the test indicate that there may be an impairment in each reporting unit as it was determined that the net book value of each reporting unit exceeded its fair value. As a result, the Company isaccounting change in the processConsolidated Statement of completingOperations for the second step of the impairment test to determine the amount of impairment, if any. The Company is unable to estimate the amount of the possible impairment, but is expected to complete the second step of the impairment test during the fourth quarter ofthree months ended March 31, 2002.
New Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting StandardsSFAS No. 143, “Accounting for Asset Retirement Obligations”, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs arebe capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002.January 1, 2003. The adoption of this
8
statement is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Adoption of this Statement, in the fiscal year beginning January 1, 2002, did not have a material impact on the Company’s financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. Additionally, this Interpretation clarifies the requirements for recognizing a liability at the inception of the guarantee equal to the fair value of the obligation undertaken in issuing the guarantee and
7
incorporates the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” Disclosures under Interpretation No. 45 are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, the adoption of the liability recognition provision of Interpretation No. 45 had no significant impact on the financial condition and results of operations of the Company.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. This Interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective July 1, 2003. Disclosures are required currently if the Company expects to consolidate any variable interest entities. The Company does not currently believe that any entities will be consolidated as a result of Interpretation No. 46.
In April 2002,2003, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission149, “Amendment of FASB StatementsStatement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 4, 44149). SFAS No. 149 amends and 64, Amendmentclarifies certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for certain contracts entered into or modified by the Company after June 30, 2003. The Company is currently evaluating SFAS No. 149 to determine its impact on the financial condition and results of FASBoperations of the Company.
Note 2. Prepaid Expenses and Other Assets
At December 31, 2002 and March 31, 2003, prepaid expenses and other assets included prepaid aircraft rent of $30.4 million and $51.2 million, respectively.
Note 3. Stock Option Plans
The Company has three stock option plans that provide for the grant of options to purchase Air Group common stock at stipulated prices on the date of the grant by certain officers and key employees of Air Group and its subsidiaries. The Company applies the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized for these plans as the exercise price of options equals the fair market value on the date of grant.
Had compensation cost for the Company’s stock options been determined in accordance with Statement of Financial Accounting Standards No. 13,123, loss before accounting change and Technical Corrections” (“applicable loss per share (EPS) would have been increased to the pro forma amounts indicated below (in millions except per share amounts):
March 31, 2002 | March 31, 2003 | |||||||
Loss before accounting change: | ||||||||
As reported | $ | (33.7 | ) | $ | (56.3 | ) | ||
Pro forma | (35.1 | ) | (57.9 | ) | ||||
Net loss: | ||||||||
As reported | $ | (85.1 | ) | $ | (56.3 | ) | ||
Pro Forma | (86.5 | ) | (57.9 | ) |
8
March 31, 2002 | March 31, 2003 | |||||||
Basic and diluted loss per share before accounting change: | ||||||||
As reported | $ | (1.27 | ) | $ | (2.12 | ) | ||
Pro forma | (1.32 | ) | (2.18 | ) | ||||
Basic and diluted loss per share: | ||||||||
As reported | $ | (3.21 | ) | $ | (2.12 | ) | ||
Pro forma | (3.26 | ) | (2.18 | ) |
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement 145”)of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS No. 148). This Statement requires that only certain debt extinguishment transactions be classified as an extraordinary item. Additionally, under this Statement, capital leases that are modified so thatSFAS No. 148 amends the resulting agreement is an operating lease shall be accounted for under the sale-leasebacktransition and disclosure provisions of SFAS No. 98. Statement 145 also includes minor modifications123. During the fourth quarter of 2002, the Company adopted the disclosure provisions of SFAS No. 148 and is currently evaluating SFAS No. 148 to existing GAAP literature. Statement 145 is generally effectivedetermine if it will adopt SFAS No. 123 to account for financial statements issued for fiscal years beginning after May 15, 2002. The adoptionemployee stock options using the fair value method and, if so, when to transition to that method. If the Company had adopted the prospective transition method as prescribed by SFAS No. 148 in the first quarter of this statement is not expected to2003, compensation expense of $0.1 million would have a materialbeen recorded on an after-tax basis, and would have had an insignificant impact on the Company’s financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Statement is effective for the Company for transactions on or after January 1, 2003 and is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.loss per share.
Note 2. Restatement of Financial Statements
In June 2002, the Company changed its accounting policies relating to the accrual for certain lease return costs and the capitalization of software development costs, and restated its previously issued consolidated financial statements for the year ended December 31, 2001, including the interim periods within that year. The effect of these changes is as shown below and results in an increase in shareholders’ equity of $28.9 million as of December 31, 2001. In addition, the Company changed its accounting for aircraft purchase commitments assumed by a third party, and made a reclassification of deferred income taxes, neither of which impact previously reported equity or earnings. These changes are more fully described below. Because the former methods are not considered to be in compliance with generally accepted accounting principles in the United States of America, the financial statements have been restated to give retroactive effect to these changes.
Leased Aircraft Return Costs
The Company leases many of its aircraft under relatively long-term operating lease agreements. These aircraft are subject to periodic airframe and engine overhauls based on the Company’s maintenance program. The Company’s previous policy was to capitalize these overhauls and amortize the costs over the estimated lives of the overhauls. Separately, many of the Company’s lease agreements contain provisions which require that at the end of the lease, either certain minimum times remain until the next overhaul or the Company make a cash payment to the lessor. At the inception of the lease, the Company does not know the balance between actual time remaining to the next overhaul and cash
9
payments that will be used to satisfy its return commitments. Under the previous method, the Company accrued the costs of returning leased aircraft, including any cash payments due to lessors and any unamortized overhauls, on a straight-line basis over the lives of the leases. Airframe and engine overhauls are now capitalized and amortized over the remaining lease term, if shorter than the life of the overhaul. Additionally, under our new method, since the amount of cash payments by themselves cannot be reasonably predicted at the inception of the lease, the Company will accrue cash payments expected to be made to lessors over the last few years of the lease when probable and estimable, versus over the entire lease term.
Internally Developed Software
The Company also revised its accounting practices for certain costs of internally developed software. These costs were previously charged to expense as they were incurred, and they are now capitalized and amortized over the estimated lives of the software.
Aircraft Purchase Commitments
The Company has a purchase commitment that may trigger a liability under certain events of default. The Company previously recognized a portion of this commitment which was funded by a third party as a liability, and related aircraft purchase deposits, on its balance sheet. Since the executory contract for the purchase commitment is not an obligation of the Company until the aircraft is delivered, this commitment is disclosed as a purchase commitment and not included in long-term debt or deposits for future flight equipment.
The effect of the restatement for the three and nine months ended September 30, 2001 is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2001 | September 30, 2001 | |||||||||||||||
As Previously | As Previously | |||||||||||||||
Reported | Restated | Reported | Restated | |||||||||||||
(in millions, except per share) | ||||||||||||||||
Total Operating Expenses | $ | 570.6 | $ | 575.2 | $ | 1,704.1 | $ | 1,719.1 | ||||||||
Net Income (Loss) | $ | 25.3 | $ | 25.3 | $ | (3.1 | ) | $ | (5.5 | ) | ||||||
Basic and Diluted Earnings (Loss) per Share | $ | 0.95 | $ | 0.95 | $ | (0.12 | ) | $ | (0.21 | ) | ||||||
The effect of the restatement on selected balance sheet items is as follows as of December 31, 2001:
December 31, 2001 | ||||||||
As Previously | ||||||||
Reported | Restated | |||||||
(in millions) | ||||||||
Current Assets | $ | 900.4 | $ | 924.5 | ||||
Property and Equipment-Net | $ | 1,825.0 | $ | 1,809.4 | ||||
Current Liabilities | $ | 756.2 | $ | 762.2 | ||||
Long-Term Debt | $ | 863.3 | $ | 847.9 | ||||
Shareholders’ Equity | $ | 820.3 | $ | 849.2 | ||||
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Note 3.4. Frequent Flyer Program
Alaska’s Mileage Plan liabilities are included under the following balance sheet captions:captions (in millions):
December 31, 2001 | September 30, 2002 | |||||||||||||||
December 31, 2002 | March 31, 2003 | |||||||||||||||
(In millions) | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Other accrued liabilities | $ | 67.3 | $ | 77.5 | $ | 87.0 | $ | 98.5 | ||||||||
Other Liabilities and Credits: | ||||||||||||||||
Deferred revenue | 123.0 | 126.0 | 183.9 | 186.8 | ||||||||||||
Other liabilities | 58.0 | 80.0 | 32.1 | 26.0 | ||||||||||||
Total | $ | 248.3 | $ | 283.5 | $ | 303.0 | $ | 311.3 | ||||||||
Note 4. Other Assets
At December 31, 2001 and September 30, 2002, other assets included prepaid pension cost of $98.4 million and $90.2 million, respectively.
Note 5. Earnings perLoss Per Share
Earnings
Loss per share (EPS) calculations were as follows (in millions except per share amounts). The calculation is the same for basic and diluted EPS. Stock options are excluded from the calculation of diluted EPS because they are antidilutive and they represented 2.03.0 million and 3.13.7 million shares, respectively, for the three months ended September 30, 2001 andMarch 31, 2002 and 2.3 million and 2.4 million shares, respectively, for the nine months ended September 30, 2001 and 2002.2003.
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
Restated 2001 | 2002 | Restated 2001 | 2002 | |||||||||||||
Basic | ||||||||||||||||
Net income (loss) | $ | 25.3 | $ | 10.6 | $ | (5.5 | ) | $ | (28.0 | ) | ||||||
Average shares outstanding | 26.514 | 26.549 | 26.489 | 26.543 | ||||||||||||
Earnings (loss) per share | $ | 0.95 | $ | 0.40 | $ | (0.21 | ) | $ | (1.05 | ) | ||||||
Diluted | ||||||||||||||||
Net income (loss) | $ | 25.3 | $ | 10.6 | $ | (5.5 | ) | $ | (28.0 | ) | ||||||
Average shares outstanding | 26.514 | 26.549 | 26.489 | 26.543 | ||||||||||||
Assumed exercise of stock options | .045 | .013 | — | — | ||||||||||||
Diluted EPS shares | 26.559 | 26.562 | 26.489 | 26.543 | ||||||||||||
Earnings (loss) per share | $ | 0.95 | $ | 0.40 | $ | (0.21 | ) | $ | (1.05 | ) | ||||||
Three Months Ended March 31, | ||||||||
2002 | 2003 | |||||||
Basic and Diluted | ||||||||
Loss before accounting change | $ | (33.7 | ) | $ | (56.3 | ) | ||
Weighted average shares outstanding | 26.532 | 26.582 | ||||||
Loss per share before accounting change | $ | (1.27 | ) | $ | (2.12 | ) | ||
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Note 6. Operating Segment Information
Operating segment information for Alaska and Horizon for the three months ended March 31 was as follows (in millions):
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
Restated 2001 | 2002 | Restated 2001 | 2002 | 2002 | 2003 | |||||||||||||||||||||
Operating revenues: | Operating revenues: | Operating revenues: | ||||||||||||||||||||||||
Alaska | $ | 484.6 | $ | 512.0 | $ | 1,380.7 | $ | 1,403.5 | Alaska | $ | 412.2 | $ | 427.0 | |||||||||||||
Horizon | 107.5 | 115.5 | 323.4 | 311.8 | Horizon | 93.2 | 98.9 | |||||||||||||||||||
Elimination of intercompany revenues | (4.1 | ) | (7.4 | ) | (14.1 | ) | (18.5 | ) | Elimination of intercompany revenues | (5.3 | ) | (7.2 | ) | |||||||||||||
Consolidated | 588.0 | 620.1 | 1,690.0 | 1,696.8 | Consolidated | $ | 500.1 | $ | 518.7 | |||||||||||||||||
Income (loss) before income tax: | ||||||||||||||||||||||||||
Loss before income tax and accounting change: | Loss before income tax and accounting change: | |||||||||||||||||||||||||
Alaska | 31.6 | 10.4 | 3.2 | (34.8 | ) | Alaska | $ | (41.7 | ) | $ | (70.6 | ) | ||||||||||||||
Horizon | 7.0 | 5.8 | (10.1 | ) | (7.2 | ) | Horizon | (10.2 | ) | (15.3 | ) | |||||||||||||||
Other | (0.2 | ) | 0.2 | (1.6 | ) | (1.1 | ) | Other | (0.5 | ) | (2.0 | ) | ||||||||||||||
Consolidated | 38.4 | 16.4 | (8.5 | ) | (43.1 | ) | Consolidated | $ | (52.4 | ) | $ | (87.9 | ) | |||||||||||||
Total assets at end of period: | Total assets at end of period: | |||||||||||||||||||||||||
Alaska | $ | 2,730.0 | $ | 2,853.5 | ||||||||||||||||||||||
Horizon | 229.4 | 262.1 | ||||||||||||||||||||||||
Other | 808.7 | 828.6 | ||||||||||||||||||||||||
Elimination of intercompany accounts | (889.0 | ) | (952.1 | ) | ||||||||||||||||||||||
Consolidated | $ | 2,879.1 | $ | 2,992.1 | ||||||||||||||||||||||
Note 7. Long-Term Debt and Capital Lease Obligations
At December 31, 2002, and March 31, 2003, long-term debt and capital lease obligations were as follows (in millions):
December 31, | March 31, | |||||||
2002 | 2003 | |||||||
Fixed rate notes payable due through 2015 | $ | 439.9 | $ | 410.0 | ||||
Variable rate notes payable due through 2018 | 453.6 | 448.8 | ||||||
Senior convertible notes due through 2023 | — | 150.0 | ||||||
Long-term debt | 893.5 | 1,008.8 | ||||||
Capital lease obligations | 11.8 | 10.1 | ||||||
Less current portion | (48.6 | ) | (39.9 | ) | ||||
$ | 856.7 | $ | 979.0 | |||||
On March 21, 2003, the Company completed the private placement of $150.0 million of floating rate senior convertible notes due 2023 (the Notes). The private placement was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended. The Notes bear cash interest at a variable rate of interest of 3-month LIBOR plus 2.5% (3.79% at March 31, 2003) for the first five years from date of issuance. Thereafter, the Notes will cease bearing cash interest and will increase daily by the variable yield, which will equal the variable interest rate, up to a maximum of 5.25%, to produce the variable principal amount.
10
The Notes are convertible into shares of the Company’s common stock at the option of the holder (or cash, at the Company’s option) only upon the occurrence of certain events which include the Company’s common stock trading at a value for a 20 day period greater than the conversion price in a 30 day period ending on the fiscal quarter, the Company obtaining a low credit rating as defined, upon redemption of the Notes, or upon certain corporate transactions. The conversion price is equal to the original or variable principal, divided by 38.4615. At date of issuance, the conversion price was equal to $26.00 per share. Upon conversion, the Company may deliver, in lieu of common stock, cash or a combination of cash and common stock. The Company may redeem all or a portion of the Notes in cash or common stock or a combination of cash and common stock at any time on or after the third anniversary of the issuance of the Notes. In addition, holders may require the Company to purchase all or a portion of their Notes on the 5th, 10th and 15th anniversaries of the issuance of the Notes and upon the occurrence of a change of control or tax event at principal plus accrued interest.
The Notes are senior unsecured obligations and rank equally with the Company’s existing and future senior unsecured indebtedness.
Net proceeds from the offering totaled $145.5 million. Approximately $22.3 million of these net proceeds are restricted to collateralize interest payments for the first three years and are reported as restricted cash ($4.3 million recorded in prepaid expenses and other assets and $18.0 million in other assets) in the Consolidated Balance Sheet as of March 31, 2003.
Note 8. Contingencies
Oakland Maintenance Investigation
In December 1998, the U.S. Attorney for the Northern District of California initiated a grand jury investigation concerning certain 1998 maintenance activities at Alaska’s Oakland maintenance base. In January 2000, the investigation was expanded to include the aircraft involved in the loss of Flight 261. The Federal Aviation Administration (FAA) separately proposed a civil penalty in connection with the 1998 maintenance activities, which Alaska and the FAA have settled for an agreed amount. In December 2001, the U.S. Attorney notified Alaska that the evidence it had gathered relative to the 1998 maintenance activities did not warrant the filing of criminal charges, and closed that part of the investigation. The U.S. Attorney also placed the portion of its investigation related to Flight 261 on inactive status, with the possibility of reactivating and reviewing the matter when the National Transportation Safety Board (NTSB) issued its final report on the accident. Accordingly, following the final NTSB hearing on the Flight 261 investigation in December 2002, the U.S. Attorney’s Office reactivated the matter in order to review it in light of the final NTSB report.
Flight 261 Litigation
Alaska is a defendant in a number of lawsuits relating to the loss of Flight 261 on January 31, 2000. Representatives of all 88 passengers and crew on board have filed cases against Alaska, the Boeing Company, and others. The suits were originally filed in various state and federal courts in Alaska, California, Washington and Illinois. Since then, they have all been consolidated in the U.S. District Court for the Northern District of California. The suits seek unspecified compensatory and punitive damages. In May 2001, the judge presiding over the majority of the cases ruled that punitive damages are not available against Alaska. Alaska has settled the majority of these cases and continues in its efforts to settle the remaining ones. Trial on the
11
Note 6 (continued)
December 31, | September 30, | December 31, | September 30, | ||||||||||||||
2001 | 2002 | 2001 | 2002 | ||||||||||||||
Total assets at end of period (in millions): | |||||||||||||||||
Alaska | 2,750.3 | 2,766.6 | 2,750.3 | 2,766.6 | |||||||||||||
Horizon | 240.1 | 255.0 | 240.1 | 255.0 | |||||||||||||
Other | 876.1 | 852.1 | 876.1 | 852.1 | |||||||||||||
Elimination of intercompany accounts | (924.2 | ) | (928.5 | ) | (924.2 | ) | (928.5 | ) | |||||||||
Consolidated | $ | 2,942.3 | $ | 2,945.2 | $ | 2,942.3 | $ | 2,945.2 | |||||||||
Note 7. U.S. Government Compensation
In September 2001,Management believes the U.S. Government passed the Air Transportation Safety and System Stabilization Act to compensate the airlines for direct and incremental losses as a resultultimate disposition of the September 11th terrorist attacks. Inabove matters is not likely to materially affect the Company’s financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
The Company is also a party to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected.
Note 9. Subsequent Event
On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act (the Act) was signed into legislation. The Act includes a $2.3 billion one-time cash payment which will be allocated to air carriers based on each carrier’s share of security fees remitted and carrier fees paid to the Transportation Security Administration (TSA) since its inception in February 2002. The Company believes its share of the grant will range between $60.0 million and $70.0 million, and is expected to be received during the second quarter of 2002, Alaska and Horizon each submitted final applications to the Department of Transportation (DOT) based on each company’s losses. During the third quarter of 2002, the DOT completed its review procedures and remitted final compensation payments to Alaska and Horizon of $0.3 million and $0.2 million, respectively. These amounts are reflected in the consolidated statement of income during the three months ended September 30, 2002.2003.
12
ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA (unaudited)Alaska Airlines Financial and Statistical Data
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||
Restated | % | Restated | % | Three Months Ended March 31 | ||||||||||||||||||||||||||||||||
2001 | 2002 | Change | 2001 | 2002 | Change | |||||||||||||||||||||||||||||||
% | ||||||||||||||||||||||||||||||||||||
Financial Data (in millions): | 2002 | 2003 | Change | |||||||||||||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||||||||||
Passenger | $ | 441.8 | $ | 467.1 | 5.7 | % | $ | 1,261.6 | $ | 1,274.9 | 1.1 | % | $ | 374.0 | $ | 387.0 | 3.5 | % | ||||||||||||||||||
Freight and mail | 20.8 | 19.7 | -5.3 | % | 60.5 | 55.6 | -8.1 | % | 15.9 | 17.4 | 9.4 | % | ||||||||||||||||||||||||
Other — net | 22.0 | 25.2 | 14.5 | % | 58.6 | 73.0 | 24.6 | % | ||||||||||||||||||||||||||||
Other - net | 22.3 | 22.6 | 1.3 | % | ||||||||||||||||||||||||||||||||
Total Operating Revenues | 484.6 | 512.0 | 5.7 | % | 1,380.7 | 1,403.5 | 1.7 | % | 412.2 | 427.0 | 3.6 | % | ||||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||||||
Wages and benefits | 166.5 | 186.0 | 11.7 | % | 479.0 | 529.1 | 10.5 | % | 165.7 | 188.0 | 13.5 | % | ||||||||||||||||||||||||
Contracted services | 19.0 | 19.0 | 0.0 | % | 57.0 | 59.9 | 5.1 | % | 21.8 | 20.7 | -5.0 | % | ||||||||||||||||||||||||
Aircraft fuel | 71.7 | 70.7 | -1.4 | % | 219.8 | 190.1 | -13.5 | % | 55.2 | 76.9 | 39.3 | % | ||||||||||||||||||||||||
Aircraft maintenance | 32.5 | 31.6 | -2.8 | % | 100.0 | 103.3 | 3.3 | % | 35.6 | 37.9 | 6.5 | % | ||||||||||||||||||||||||
Aircraft rent | 33.7 | 32.1 | -4.7 | % | 104.0 | 95.7 | -8.0 | % | 31.8 | 30.5 | -4.1 | % | ||||||||||||||||||||||||
Food and beverage service | 14.5 | 17.8 | 22.8 | % | 42.4 | 47.9 | 13.0 | % | 13.9 | 12.9 | -7.2 | % | ||||||||||||||||||||||||
Commissions | 16.3 | 12.1 | -25.8 | % | 50.4 | 40.6 | -19.4 | % | 14.2 | 8.2 | -42.3 | % | ||||||||||||||||||||||||
\ | ||||||||||||||||||||||||||||||||||||
Other selling expenses | 26.3 | 26.1 | -0.8 | % | 78.9 | 78.8 | -0.1 | % | ||||||||||||||||||||||||||||
Other selling expenses | 24.9 | 21.9 | -12.0 | % | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 27.4 | 29.5 | 7.7 | % | 76.5 | 86.8 | 13.5 | % | 28.2 | 28.5 | 1.1 | % | ||||||||||||||||||||||||
Loss on sale of assets | 0.6 | 0.5 | -16.7 | % | 1.8 | 0.7 | -61.1 | % | — | 0.3 | NM | |||||||||||||||||||||||||
Landing fees and other rentals | 25.9 | 30.2 | 16.6 | % | 70.7 | 82.3 | 16.4 | % | 23.6 | 28.7 | 21.6 | % | ||||||||||||||||||||||||
Other | 34.0 | 39.5 | 16.2 | % | 108.4 | 114.0 | 5.2 | % | 36.3 | 34.1 | -6.1 | % | ||||||||||||||||||||||||
Total Operating Expenses | 468.4 | 495.1 | 5.7 | % | 1,388.9 | 1,429.2 | 2.9 | % | 451.2 | 488.6 | 8.3 | % | ||||||||||||||||||||||||
Operating Income (Loss) | 16.2 | 16.9 | 4.3 | % | (8.2 | ) | (25.7 | ) | NM | |||||||||||||||||||||||||||
Operating Loss | (39.0 | ) | (61.6 | ) | 57.9 | % | ||||||||||||||||||||||||||||||
Interest income | 7.9 | 6.3 | 24.2 | 17.4 | 5.0 | 1.2 | ||||||||||||||||||||||||||||||
Interest expense | (11.9 | ) | (11.3 | ) | (34.6 | ) | (34.8 | ) | (11.9 | ) | (11.3 | ) | ||||||||||||||||||||||||
Interest capitalized | 1.0 | 0.5 | 4.8 | 1.0 | 0.1 | 0.7 | ||||||||||||||||||||||||||||||
U.S. government compensation | 18.7 | 0.3 | 18.7 | 0.3 | ||||||||||||||||||||||||||||||||
Other — net | (0.3 | ) | (2.3 | ) | (1.7 | ) | 7.0 | |||||||||||||||||||||||||||||
Other - net | 4.1 | 0.4 | ||||||||||||||||||||||||||||||||||
15.4 | (6.5 | ) | 11.4 | (9.1 | ) | (2.7 | ) | (9.0 | ) | |||||||||||||||||||||||||||
Income (Loss) Before Income Tax | $ | 31.6 | $ | 10.4 | NM | $ | 3.2 | $ | (34.8 | ) | NM | |||||||||||||||||||||||||
Loss Before Income Tax and Accounting Change | $ | (41.7 | ) | $ | (70.6 | ) | 69.3 | % | ||||||||||||||||||||||||||||
Operating Statistics: | ||||||||||||||||||||||||||||||||||||
Revenue passengers (000) | 3,747 | 3,978 | 6.2 | % | 10,643 | 10,787 | 1.4 | % | 3,193 | 3,258 | 2.0 | % | ||||||||||||||||||||||||
RPMs (000,000) | 3,328 | 3,673 | 10.4 | % | 9,514 | 10,022 | 5.3 | % | 2,977 | 3,143 | 5.6 | % | ||||||||||||||||||||||||
ASMs (000,000) | 4,687 | 5,207 | 11.1 | % | 13,798 | 14,602 | 5.8 | % | 4,467 | 4,708 | 5.4 | % | ||||||||||||||||||||||||
Passenger load factor | 71.0 | % | 70.5 | % | -0.5pts | 69.0 | % | 68.6 | % | -0.4pts | 66.7 | % | 66.7 | % | 0.0pts | |||||||||||||||||||||
Breakeven load factor | 70.0 | % | 69.8 | % | -0.2pts | 71.2 | % | 71.8 | % | 0.6pts | 76.0 | % | 80.5 | % | 4.5pts | |||||||||||||||||||||
Yield per passenger mile | 13.27¢ | 12.72¢ | -4.2 | % | 13.26¢ | 12.72¢ | -4.1 | % | 12.56 | ¢ | 12.31 | ¢ | -2.0 | % | ||||||||||||||||||||||
Operating revenue per ASM | 10.34¢ | 9.83¢ | -4.9 | % | 10.01¢ | 9.61¢ | -4.0 | % | 9.23 | ¢ | 9.07 | ¢ | -1.7 | % | ||||||||||||||||||||||
Operating expenses per ASM | 10.00¢ | 9.51¢ | -4.9 | % | 10.07¢ | 9.79¢ | -2.8 | % | 10.10 | ¢ | 10.38 | ¢ | 2.7 | % | ||||||||||||||||||||||
Expense per ASM excluding fuel | 8.46¢ | 8.15¢ | -3.7 | % | 8.47¢ | 8.49¢ | 0.2 | % | ||||||||||||||||||||||||||||
Operating expenses per ASM excluding fuel | 8.87 | ¢ | 8.75 | ¢ | -1.3 | % | ||||||||||||||||||||||||||||||
Fuel cost per gallon | 90.1¢ | 81.6¢ | -9.4 | % | 93.1¢ | 77.9¢ | -16.3 | % | 73.6 | ¢ | 99.1 | ¢ | 34.7 | % | ||||||||||||||||||||||
Fuel gallons (000,000) | 79.6 | 86.6 | 8.8 | % | 236.1 | 243.9 | 3.3 | % | 75.0 | 77.6 | 3.5 | % | ||||||||||||||||||||||||
Average number of employees | 10,222 | 10,465 | 2.4 | % | 10,209 | 10,167 | -0.4 | % | 9,815 | 9,988 | 1.8 | % | ||||||||||||||||||||||||
Aircraft utilization (blk hrs/day) | 10.3 | 11.2 | 8.2 | % | 10.8 | 10.7 | -0.9 | % | 10.1 | 10.3 | 2.4 | % | ||||||||||||||||||||||||
Operating fleet at period-end | 102 | 102 | 0.0 | % | 102 | 102 | 0.0 | % | 102 | 106 | 3.9 | % | ||||||||||||||||||||||||
NM = Not Meaningful |
13
HORIZON AIR FINANCIAL AND STATISTICAL DATA (unaudited)Horizon Air Financial and Statistical Data
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended March 31 | ||||||||||||||||||||||||||||||||||
Restated | % | Restated | % | % | ||||||||||||||||||||||||||||||||
Financial Data (in millions): | 2001 | 2002 | Change | 2001 | 2002 | Change | 2002 | 2003 | Change | |||||||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||||||||||
Passenger | $ | 98.4 | $ | 108.9 | 10.7 | % | $ | 301.0 | $ | 291.6 | -3.1 | % | $ | 86.3 | $ | 94.0 | 8.9 | % | ||||||||||||||||||
Freight and mail | 1.9 | 1.4 | -26.3 | % | 6.8 | 3.8 | -44.1 | % | 1.2 | 1.2 | 0.0 | % | ||||||||||||||||||||||||
Other — net | 7.2 | 5.2 | -27.8 | % | 15.6 | 16.4 | 5.1 | % | ||||||||||||||||||||||||||||
Other - net | 5.7 | 3.7 | -35.1 | % | ||||||||||||||||||||||||||||||||
Total Operating Revenues | 107.5 | 115.5 | 7.4 | % | 323.4 | 311.8 | -3.6 | % | 93.2 | 98.9 | 6.1 | % | ||||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||||||
Wages and benefits | 38.4 | 38.7 | 0.8 | % | 111.7 | 113.2 | 1.3 | % | 37.3 | 39.1 | 4.8 | % | ||||||||||||||||||||||||
Contracted services | 3.3 | 4.2 | 27.3 | % | 10.4 | 12.3 | 18.3 | % | 3.9 | 6.6 | 69.2 | % | ||||||||||||||||||||||||
Aircraft fuel | 13.8 | 12.0 | -13.0 | % | 45.2 | 32.5 | -28.1 | % | 9.5 | 13.3 | 40.0 | % | ||||||||||||||||||||||||
Aircraft maintenance | 10.7 | 4.3 | -59.8 | % | 43.6 | 18.1 | -58.5 | % | 7.6 | 8.6 | 13.2 | % | ||||||||||||||||||||||||
Aircraft rent | 12.3 | 16.2 | 31.7 | % | 34.6 | 45.9 | 32.7 | % | 14.8 | 16.4 | 10.8 | % | ||||||||||||||||||||||||
Food and beverage service | 0.8 | 0.8 | 0.0 | % | 2.3 | 2.0 | -13.0 | % | 0.4 | 0.5 | 25.0 | % | ||||||||||||||||||||||||
Commissions | 3.0 | 1.3 | -56.7 | % | 9.0 | 5.7 | -36.7 | % | 2.3 | 0.6 | -73.9 | % | ||||||||||||||||||||||||
Other selling expenses | 5.5 | 6.4 | 16.4 | % | 17.6 | 17.4 | -1.1 | % | 5.3 | 5.3 | 0.0 | % | ||||||||||||||||||||||||
Depreciation and amortization | 6.7 | 4.9 | -26.9 | % | 19.8 | 13.9 | -29.8 | % | 3.9 | 3.6 | -7.7 | % | ||||||||||||||||||||||||
Gain on sale of assets | (0.3 | ) | (0.7 | ) | NM | (0.3 | ) | (1.4 | ) | NM | (0.6 | ) | (0.2 | ) | NM | |||||||||||||||||||||
Landing fees and other rentals | 7.9 | 8.6 | 8.9 | % | 22.1 | 22.8 | 3.2 | % | 6.4 | 8.7 | 35.9 | % | ||||||||||||||||||||||||
Other | 8.7 | 12.4 | 42.5 | % | 27.3 | 37.4 | 37.0 | % | 12.7 | 11.5 | -9.4 | % | ||||||||||||||||||||||||
Total Operating Expenses | 110.8 | 109.1 | -1.5 | % | 343.3 | 319.8 | -6.8 | % | 103.5 | 114.0 | 10.1 | % | ||||||||||||||||||||||||
Operating Income (Loss) | (3.3 | ) | 6.4 | NM | (19.9 | ) | (8.0 | ) | NM | |||||||||||||||||||||||||||
Operating Loss | (10.3 | ) | (15.1 | ) | 46.6 | % | ||||||||||||||||||||||||||||||
Interest expense | (0.7 | ) | (0.6 | ) | (2.8 | ) | (1.6 | ) | (0.5 | ) | (0.3 | ) | ||||||||||||||||||||||||
Interest capitalized | 0.6 | 0.1 | 2.7 | 0.4 | 0.2 | 0.1 | ||||||||||||||||||||||||||||||
U.S. government compensation | 10.4 | 0.2 | 10.4 | 0.2 | ||||||||||||||||||||||||||||||||
Other — net | 0.0 | (0.3 | ) | (0.5 | ) | 1.8 | ||||||||||||||||||||||||||||||
Other - net | 0.4 | — | ||||||||||||||||||||||||||||||||||
10.3 | (0.6 | ) | 9.8 | 0.8 | 0.1 | (0.2 | ) | |||||||||||||||||||||||||||||
Income (Loss) Before Income Tax | $ | 7.0 | $ | 5.8 | -17.1 | % | $ | (10.1 | ) | $ | (7.2 | ) | -28.7 | % | ||||||||||||||||||||||
Loss Before Income Tax and Accounting Change | $ | (10.2 | ) | $ | (15.3 | ) | 50.0 | % | ||||||||||||||||||||||||||||
Operating Statistics: | ||||||||||||||||||||||||||||||||||||
Revenue passengers (000) | 1,207 | 1,334 | 10.5 | % | 3,635 | 3,621 | -0.4 | % | 1,095 | 1,088 | -0.6 | % | ||||||||||||||||||||||||
RPMs (000,000) | 357 | 424 | 19.0 | % | 1,050 | 1,128 | 7.4 | % | 329 | 357 | 8.6 | % | ||||||||||||||||||||||||
ASMs (000,000) | 555 | 657 | 18.4 | % | 1,674 | 1,795 | 7.3 | % | 531 | 616 | 15.9 | % | ||||||||||||||||||||||||
Passenger load factor | 64.3 | % | 64.6 | % | 0.3pts | 62.7 | % | 62.8 | % | 0.1pts | 62.0 | % | 58.1 | % | -3.9 | pts | ||||||||||||||||||||
Breakeven load factor | 66.9 | % | 61.6 | % | -5.3pts | 67.4 | % | 65.0 | % | -2.4pts | 69.5 | % | 68.3 | % | -1.2 | pts | ||||||||||||||||||||
Yield per passenger mile | 27.59¢ | 25.66¢ | -7.0 | % | 28.66¢ | 25.86¢ | -9.8 | % | 26.22 | ¢ | 26.30 | ¢ | 0.3 | % | ||||||||||||||||||||||
Operating revenue per ASM | 19.36¢ | 17.58¢ | -9.2 | % | 19.32¢ | 17.37¢ | -10.1 | % | 17.55 | ¢ | 16.07 | ¢ | -8.5 | % | ||||||||||||||||||||||
Operating expenses per ASM | 19.97¢ | 16.60¢ | -16.9 | % | 20.51¢ | 17.81¢ | -13.2 | % | 19.49 | ¢ | 18.53 | ¢ | -4.9 | % | ||||||||||||||||||||||
Expense per ASM excluding fuel | 17.48¢ | 14.77¢ | -15.5 | % | 17.81¢ | 16.00¢ | -10.1 | % | ||||||||||||||||||||||||||||
Operating expenses per ASM excluding fuel | 17.70 | ¢ | 16.37 | ¢ | -7.5 | % | ||||||||||||||||||||||||||||||
Fuel cost per gallon | 94.0¢ | 81.9¢ | -12.9 | % | 97.6¢ | 80.1¢ | -17.9 | % | 77.2 | ¢ | 102.0 | ¢ | 32.1 | % | ||||||||||||||||||||||
Fuel gallons (000,000) | 14.7 | 14.7 | 0.0 | % | 46.4 | 40.6 | -12.5 | % | 12.3 | 13.0 | 5.7 | % | ||||||||||||||||||||||||
Average number of employees | 3,811 | 3,518 | -7.7 | % | 3,840 | 3,462 | -9.8 | % | 3,452 | 3,415 | -1.1 | % | ||||||||||||||||||||||||
Aircraft utilization (blk hrs/day) | 7.6 | 7.7 | 0.9 | % | 7.9 | 7.4 | -6.2 | % | 7.1 | 7.8 | 9.9 | % | ||||||||||||||||||||||||
Operating fleet at period-end | 65 | 63 | -3.1 | % | 65 | 63 | -3.1 | % | 62 | 59 | -4.8 | % | ||||||||||||||||||||||||
NM = Not Meaningful |
14
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
As discussedResults of Operations
First Quarter 2003 Compared with First Quarter 2002
During the first quarter of 2003, the Company’s financial performance continued to be adversely affected by weak economic conditions and a continued negative impact from the 2001 terrorist attacks. In addition, the U.S. war in Iraq further adversely affected the financial performance of Alaska Air Group and the airline industry. The consolidated net loss for the first quarter of 2003 was $56.3 million, or $2.12 per share, compared with a net loss of $85.1 million, or $3.21 per share, in 2002. The 2002 net loss includes the write-off of all of the Company’s goodwill ($51.4 million) in accordance with SFAS No. 142 (see Note 21 to the consolidated financial statements, in Junestatements). Excluding this goodwill write-off, net loss for 2002 the Company restated its financial statementswas $33.7 million, or $1.27 per share. The consolidated operating loss for the year ended December 31, 2001 and the interim periods within that year. The accompanying management’s discussion and analysis gives effect to the restatement.
Results of Operations
Alaska Airlines
Yield per passenger mile was down 2.0% due to a combination of fewer business passengers,fares and a drop off in demand due tocaused by the September 11, 2001 terrorist attacksU.S. war in Iraq and the slowing economy, and fare sales offered to stimulate demand. Yields were down in all major markets except the Pacific Northwest to Southern California market. The lower yielda continued slow U.S. economy. Higher traffic combined with the lower load factoryields resulted in a 4.9% decrease in revenue per available seat mile (ASM). The higher traffic combined with the lower yield resulted in a 5.7%$13.0 million, or 3.5% increase in passenger revenue.
Freight and mail revenues decreased 5.3% during the three months ended September 30, 2002 when compared to comparable periods in 2001. This decrease is primarily a result of increases in freight revenues offset by decreases in mail revenues.
15
Freight and mail revenues increased $1.5 million, or 9.4%, due to higher freight and mail volumes attributable to a reduction of security restrictions. Other-net revenues increased 14.5%$0.3 million, or 1.3%, due largely to increased revenue related tofrom the sale of miles in Alaska’s frequent flyer program, new security fee reimbursement revenue and higher essential air service subsidy rates.program.
TotalAlaska Airlines Expenses
For the quarter, total operating expenses increased 5.7% during the three months ended September 30, 2002 when$37.4 million, or 8.3%, as compared to the same period in 2001, while our cost per ASM decreased by 4.9%. Our cost2002. This increase is due largely to a 5.4% increase in ASMs combined with higher fuel and wage and benefit costs. Operating expense per ASM excluding fuel decreased by 3.7%.1.3% as compared to the same period in 2002. Explanations of significant period over periodperiod-over-period changes in the components of operating expenses are as follows:
• | Wages and benefits increased | ||
• | |||
• | Aircraft maintenance | ||
• | Commissions decreased $6.0 million, or 42.3%, due primarily to the elimination of travel agent base commissions starting in June 2002, | ||
• | Other selling expenses decreased $3.0 million, or 12.0%, due to lower customer reservation system costs and mileage plan selling costs partially offset by increases in | ||
• | Landing fees and other rentals increased |
16
Horizon Air
Other-net revenues decreased $2.0 million, or 35.1%, primarily due to manufacturer support received in 2002 as compensation for delays in the delivery of CRJ 700 aircraft, which did not recur in 2003.
Horizon Air Expenses
Operating expenses increased $10.5 million, or 10.1%, as compared to the same period in 2001.2002. This increase is due principally to service in new markets (San Jose and Portland to Tucson, Sacramento and Portland to Palm Springs, Boise and Portland to Denver, Boise to San Francisco and San Diego). Our traffic grew by 19.0%, and our passenger load factor increased 0.3 percentage points. For 2001, capacity, traffic and load factors were adversely impacted by the September 11th terrorist attacks. For the quarter, passenger yields decreased 7.0% duelargely to a combination of fewer business passengers, a drop off in demand due to the September 11th terrorist attacks, an15.9% increase in average trip length, and fare sales offered to stimulate demand. The higher trafficASMs combined with the lower yield resulted in a 10.7% increase in passenger revenue.
Freight and mail revenues decreased 26.3% primarily due to lower freight volumes attributable to increased security restrictions and a slower economy. Other-net revenues decreased 27.8%, primarily due to lower levels of manufacturer support received as compensation for delays in delivery of new aircraft.
higher fuel costs. Operating expenses per ASM excluding fuel decreased by $1.7 million, or 1.5%, during the three months ended September 30, 20027.5% as compared to the same period in 2001. This decrease is due principally to decreases in maintenance expense and fuel expense benefits due to the transition to our new fleet. The decreases in operating expenses were largely offset by increases in aircraft rent and other expenses. Our cost per ASM decreased by 16.9%, while our cost per ASM excluding fuel decreased by 15.5%.2002. Explanations of significant year-over-yearperiod-over-period changes in the components of operating expenses are as follows:
• | Wages and benefits increased | ||
• | |||
• | Aircraft maintenance expense | ||
• | Aircraft rent increased $1.6 million, or 10.8%, due to the |
17
• | |||
Consolidated Nonoperating Income (Expense)
Nine Months 2002 Compared with Nine Months 2001
Alaska Airlines
Freight and mail revenue decreased 8.1% due to lower freight volumes attributable to increased security restrictions and a slower economy.
18
Other-net revenues increased 24.6% primarily due to increased revenue related to the sale of miles in Alaska’s frequent flyer program, new security fee reimbursement revenue and higher essential air service subsidy rates.
Total operating expenses increased 2.9% during the nine months ended September 30, 2002 when compared to the same period in 2001. Cost per ASM decreased 2.8% and cost per ASM excluding fuel increased slightly by 0.2 percentage points. Explanations of significant year-over-year changes in the components of operating expenses are as follows:
• | Landing fees and other rentals increased | ||
19
Horizon Air
Other-net revenues increased 5.1% primarily due to higher levels of manufacturer support received as compensation for delays in delivery of new aircraft during the first quarter of 2002.
Operating expenses decreased by $23.5 million, or 6.8%, during the nine months ended September 30, 2002 compared to the same period in 2001. This decrease is due principally to decreases in maintenance expense and fuel expense due to the transition to our new fleet. These decreases in operating expenses were largely offset by increases in aircraft rent and other expenses. Our cost per ASM decreased by 13.2%, while our cost per ASM excluding fuel decreased by 10.1%. Explanations of significant year-over-year changes in the components of operating expenses are as follows:
20
Consolidated Nonoperating Income (Expense)
Consolidated Income Tax Benefit (Expense)
Critical Accounting Policies
18
Liquidity and Capital Resources
December 31, 2001 Restated | September 30, 2002 | Change | December 31, 2002 | March 31, 2003 | Change | |||||||||||||||||||
(In millions, except debt-to-capital amounts) | (In millions, except debt-to-capital amounts) | |||||||||||||||||||||||
Cash and marketable securities | $ | 660.7 | $ | 662.6 | $ | 1.9 | $ | 635.8 | $ | 615.6 | $ | (20.2 | ) | |||||||||||
Working capital | 162.3 | 199.6 | 37.3 | 198.4 | 158.5 | (39.9 | ) | |||||||||||||||||
Long-term debt and capital lease obligations, net of current | 847.9 | 843.7 | (4.2 | ) | ||||||||||||||||||||
Long-term debt and capital lease obligations* | 856.7 | 979.0 | 122.3 | |||||||||||||||||||||
Shareholders’ equity | 849.2 | 836.4 | (12.8 | ) | 655.7 | 600.0 | (55.7 | ) | ||||||||||||||||
Book value per common share | $ | 32.01 | $ | 31.50 | $ | (0.51 | ) | $ | 24.68 | $ | 22.55 | $ | (2.13 | ) | ||||||||||
Debt-to-capital | 50%:50 | % | 50%:50 | % | NA | |||||||||||||||||||
Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent | 72%:28 | % | 72%:28 | % | NA | |||||||||||||||||||
Debt-to-capital* | 57%:43 | % | 62%:38 | % | NA | |||||||||||||||||||
Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent* | 77%:23 | % | 79%:21 | % | NA |
* Excludes current portion of long-term debt and capital lease obligations
The Company’sCompany has various options available to meet its capital and operating commitments in 2003, including cash and marketable securities portfolio increased $1.9 million duringon hand at March 31, 2003 of $615.6 million. In addition, to supplement cash requirements, the Company periodically considers various borrowing or leasing options. In the first nine monthsquarter of 2002. Operating activities provided $117.02003, the Company completed a private placement of $150.0 million of cash during this period. Additional cash was providedfloating rate senior convertible notes due 2023 to provide additional liquidity to be used in the Company’s operations (see discussion below in “Cash Provided by Financing Activities” and in Note 7, “Long-Term Debt and Capital Lease Obligations” in the issuanceNotes to the Consolidated Financial Statements).
During the first quarter of $25.5 million of new debt. Cash outflows included $107 million of capital expenditures, including the purchase of spare parts, airframe and engine
21
overhauls and $36.8 million for purchases of new aircraft. In addition, the Company made $26.8 million of debt repayments.
Shareholders’2003, shareholders’ equity decreased $12.8$55.7 million due principally to the net loss of $28.0$56.3 million.
Cash Used in Operating and Investing Activities
During the first quarter of 2003, net cash used in operating activities was $4.8 million, primarily reflecting the first quarter net loss of $56.3 million. Cash used in investing activities totaled $168.1 million, reflecting capital expenditures of $106.3 million, restricted cash deposits and other of $22.4 million and purchases of marketable securities of $171.8 million, partially offset by an increase in accumulated other comprehensive incomesales and maturities of $14.7marketable securities of $131.6 million and cash provided by disposition of assets of $0.8 million.
Cash Provided by Financing Activities- During the first nine months
In 2003, cash provided by financing activities was $109.7 million reflecting new debt issuances of 2002, Horizon added three Dash 8-400$150.0 million, partially offset by offering costs of $4.5 million and six CRJ 700 aircraft to its operating fleet. The aircraft were financed with a combination of U.S. leveraged leaseslong-term debt and single investor leases with terms of approximately 16.5 years. Future minimumcapital lease payments under these nine leases total $221.2of $36.4 million. Because these aircraftOn March 21, 2003, the Company completed the private placement of $150 million of floating rate senior convertible notes due 2023. The private placement was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended. Net proceeds from the offering were financed at delivery, they$145.5 million, of which $22.3 million are not includedrestricted to collateralize three years worth of interest payments and are reported as restricted cash ($4.3 million recorded in prepaid expenses and other assets and $18.0 million in other assets) in the capital expenditures amount stated above.Consolidated Balance Sheet as of March 31, 2003. See
19
Note 7, “Long-Term Debt and Capital Lease Obligations” in the Notes to Consolidated Financial Statements for additional discussion of this offering transaction.
Aircraft Purchase Commitments- At September 30, 2002,March 31, 2003, the Company had firm orders for 2928 aircraft requiring aggregate remaining payments of approximately $587$532.5 million, as set forth below. In addition, Alaska has options to acquire 24 more26 additional B737s, and Horizon has options to acquire 15 Dash 8-400s and 25 CRJ 700s. Alaska expects to finance five of the B737-700 deliveries in 2003 with operating leases and the remainder of the new planes with leases, long-term debt or internally generated cash. Horizon expects to finance its new aircraft with operating leases.
Delivery Period - Firm Orders | ||||||||||||||||||||||||||||||||||||||||
Delivery Period - Firm Orders | ||||||||||||||||||||||||||||||||||||||||
Beyond | ||||||||||||||||||||||||||||||||||||||||
Aircraft | 2002 | 2003 | 2004 | 2005 | Total | 2003 | 2004 | 2005 | 2005 | Total | ||||||||||||||||||||||||||||||
Boeing 737-700 | — | 6 | — | — | 6 | 6 | — | — | — | 6 | ||||||||||||||||||||||||||||||
Boeing 737-900 | — | 5 | 3 | — | 8 | 5 | 3 | — | — | 8 | ||||||||||||||||||||||||||||||
Bombardier CRJ 700 | 1 | 2 | 6 | 6 | 15 | 2 | 6 | 6 | — | 14 | ||||||||||||||||||||||||||||||
Total | 1 | 13 | 9 | 6 | 29 | 13 | 9 | 6 | — | 28 | ||||||||||||||||||||||||||||||
Payments (Millions) | $ | 51 | $ | 235 | $ | 194 | $ | 107 | $ | 587 | $ | 171.7 | $ | 251.9 | $ | 108.4 | $ | 0.5 | $ | 532.5 | ||||||||||||||||||||
The Company has a purchase commitment that may trigger a liability under certain events of default. The Company previously recognized a portion of this commitment, which was funded by a third party as a liability, and related aircraft purchase deposits on its balance sheet. Since the executory contract for the purchase commitment is not an obligation of the Company until the aircraft is delivered, thisdelivered. As a result, the purchase commitment is now disclosed as a purchase commitment and not included in current and long-term debt or deposits for future flight equipment. See Note 2 toequipment in the financial statements.Consolidated Balance Sheet.
The following table is a summary of the Company’s material contractual obligations as of March 31, 2003 for the remainder of 2003 and by fiscal year:
Contractual Payments Due by Period | ||||||||||||||||||||||||||||
Beyond | ||||||||||||||||||||||||||||
(in millions) | 2003 | 2004 | 2005 | 2006 | 2007 | 2007 | Total | |||||||||||||||||||||
Long-term debt | $ | 25.3 | $ | 185.7 | $ | 38.8 | $ | 41.6 | $ | 44.5 | $ | 666.8 | $ | 1,002.7 | ||||||||||||||
Capital lease obligations | 1.7 | 8.0 | — | — | — | — | 9.7 | |||||||||||||||||||||
Operating lease commitments | 127.4 | 221.4 | 205.0 | 192.3 | 170.0 | 1,213.9 | 2,130.0 | |||||||||||||||||||||
Aircraft purchase commitments | 171.7 | 251.9 | 108.4 | 0.5 | — | — | 532.5 | |||||||||||||||||||||
Total | $ | 326.1 | $ | 667.0 | $ | 352.2 | $ | 234.4 | $ | 214.5 | $ | 1,880.7 | $ | 3,674.9 | ||||||||||||||
New Accounting Standards– Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Under this Statement the Company’s goodwill will no longer be amortized, but instead will be tested for impairment on a minimum of an annual basis. The impact of discontinuing amortization of existing goodwill has resulted in an increase of net income of $1.5 million for the nine months ended September 30, 2002. During the second quarter of 2002, the Company completed the first step of its impairment test related to its $51.4 million of goodwill. The test was performed using Alaska and Horizon as separate reporting units. Results of the test indicate that there may be an impairment in each reporting unit as it was determined that the net book value of each reporting unit exceeded its fair value. As a result, the Company is in the process of completing the second step of the
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impairment test to determine the amount of impairment, if any. The Company is unable to estimate the amount of the possible impairment, but is expected to complete the second step of the impairment test during the fourth quarter of 2002.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs arebe capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal yearsthe Company beginning after June 15, 2002.January 1, 2003. The adoption of this statement isdid not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In AprilNovember 2002, the FASB issued SFASInterpretation No. 145, “Rescission45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of FASB Statements No. 4, 44 and 64, AmendmentIndebtedness of FASB Statement No. 13, and Technical Corrections” (“Statement 145”)Others”. This Statement requires that only
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Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain debt extinguishment transactions be classified as an extraordinary item.guarantees. Additionally, this Interpretation clarifies the requirements for recognizing a liability at the inception of the guarantee equal to the fair value of the obligation undertaken in issuing the guarantee and incorporates the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”. Disclosures under this Statement, capital leases thatInterpretation No. 45 are modified so that the resulting agreement is an operating lease, shall be accounted for under the sale-leaseback provisions of SFAS No. 98. Statement 145 also includes minor modifications to existing U.S. Generally Accepted Accounting Principles literature. Statement 145 is generally effective for financial statements issued for fiscal years beginning after MayDecember 15, 2002. TheWhile the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, the adoption of this statement is not expected to have a materialthe liability recognition provision of Interpretation No. 45 had no significant impact on the Company’s financial position,condition and results of operations or cash flows.of the Company.
In JuneJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. This Interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective July 1, 2003. Disclosures are required currently if the Company expects to consolidate any variable interest entities. The Company does not currently believe that any entities will be consolidated as a result of Interpretation No. 46.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS No. 148). SFAS No. 146, “Accounting148 amends the transition and disclosure provisions of SFAS No. 123. During the fourth quarter of 2002, the Company adopted the disclosure provisions of SFAS 148 and is currently evaluating SFAS No. 148 to determine if it will adopt SFAS No. 123 to account for Costs Associated with Exit or Disposalemployee stock options using the fair value method and, if so, when to transition to that method.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 149). ThisSFAS No. 149 amends and clarifies certain derivative instruments embedded in other contracts, and for hedging activities under Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue133. SFAS No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Statement149 is effective for certain contracts entered into or modified by the Company on January 1, 2003 andafter June 30, 2003. The Company is not expectedcurrently evaluating SFAS No. 149 to have a materialdetermine its impact on the Company’s financial position, results of operations or cash flows.Company.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
On March 21, 2003, the Company completed the private placement of $150.0 million of floating rate senior convertible notes due 2023. The private placement was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended. Net proceeds from the offering were $145.5 million, of which $22.3 million are restricted to collateralize three years worth of interest payments and are reported as restricted cash ($4.3 million recorded in prepaid expenses and other assets and $18.0 million in other assets) in the Consolidated Balance Sheet as of March 31, 2003. See Note 7, “Long-Term Debt and Capital Lease Obligations” in the Notes to Consolidated Financial Statements for additional discussion of this offering transaction.
The Company utilizes financial derivative instruments as hedges to decrease its exposure to jet fuel price increases. The Company accounts for its fuel hedge derivative instruments as cash flow hedges as defined by SFAS No. 133, Accounting“Accounting for Derivative Instruments and Hedging Activities,Activities”, as amended (SFAS 133)
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amended). At September 30, 2002,March 31, 2003, the Company had hedgeswap agreements for crude oil contracts in place to hedge approximately 40% of its 2002 and 35% of its 2003 expected jet fuel requirements. Under SFAS No. 133, all changes in fair value that are considered to be effective are recorded in accumulated other comprehensive income (loss) until the underlying jet fuel is consumed. The fair value of the Company’s hedge instruments at September 30, 2002March 31, 2003 was a net asset of approximately $21.6$15 million, which is recorded in prepaid expenses and other assets in the consolidated balance sheetConsolidated Balance Sheet as of September 30, 2002.
During the three and nine months ended September 30,March 31, 2002 and March 31, 2003, the Company recognized approximately $5.8$0.6 million in realized hedging losses and $6.8$9.1 million in realized hedging gains, whichrespectively. These amounts are reflected in aircraft
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fuel in the consolidated statementsConsolidated Statements of income.Operations. During the three and nine months ended September 30,March 31, 2002 and March 31, 2003, the Company recorded $3.1$2.2 million expense and $5.5$0.7 million, income, respectively, in gains related to the ineffectiveness of the Company’s hedges. These amounts are recorded as non-operating income (expense) in other-net in the consolidated statementsConsolidated Statements of income.Operations.
At March 31, 2003, the fair value of the Company’s financial hedging instruments was a net asset of approximately $15.0 million, which is reflected in prepaid expenses and other current assets in the Consolidated Balance Sheet.
AsIn the first quarter of September 30, 2002,2003, the Company hadrecorded unrealized gains,hedging losses of $1.7 million net of tax of $12.7 million. These amounts aretax. This amount is reflected in accumulated other comprehensive income (loss) in the consolidated balance sheets as of September 30, 2002.Consolidated Balance Sheet.
ITEM 4. Controls and Procedures
In the 90-day period before the filing of this report, the chief executive officer and chief financial officer of the Company (collectively, the certifying officers) have evaluated the effectiveness of the Company’s disclosure controls and procedures.procedures and have reviewed significant changes in internal control. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports filed with the Securities and Exchange Commission (the Commission)SEC) is recorded, processed, summarized and reported within the time periods specified by the Commission’sSEC’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.
The certifying officers concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective for the Company, taking into consideration the size and nature of the Company’s business and operations.
No significant changes in the Company’s internal controls or in other factors were detected that could significantly affect the Company’s internal controls subsequent to the date when the internal controls were evaluated.
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PART II. OTHER INFORMATION
Flight 261 Litigation
Management believes the ultimate disposition of this matterthe above matters is not likely to materially affect the Company’s financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
The Company is also a party to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected.
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ITEM 5. Other Information
Alaska has a labor contract with the Transit Workers Union (TWU), which covers 29 dispatchers. The contract was amendable on August 9, 2002. During the third quarter 2002, the Company and TWU agreed to a five-year contract term on all issues except hourly wage rate and certain wage-related issues. By agreement of both parties, those issues were submitted to interest arbitration to determine wages for a three-year period. The Company hopes to have resolution to these issues in the fourth quarter of 2002.
Horizon is continuing negotiations with the Association of Flight Attendants regarding the flight attendant employee group, whose contract is amendable January 28, 2003. During the third quarter of 2002, negotiations started with AMFA (that recently replaced the Transport Workers Union) regarding the mechanics and related classifications employee group, whose contract is amendable December 15, 2002.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
Reports on Form 8-K
(b) On January 30, 2003, a report on Form 8-K was filed to furnish Alaska Air Group, Inc.’s press release reporting financial results for the quarter and calendar year ended December 31, 2002, including supplemental data in connection with the restated 2002 and 2001 quarterly information.
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(c) On March 12, 2003, a report on Form 8-K was filed disclosing Alaska Air Group, Inc.’s Board of Directors vote to increase the CEOsize of the board of directors from 12 to 13 and CFO sworn statements required by SEC Order 4-460.
(d) On March 18, 2003, a report on Form 8-K was filed to incorporate a press release filed on March 17, 2003 discussing Alaska Air Group, Inc.’s intentions to make a private offering of floating rate senior convertible notes due 2023.
(e) On March 19, 2003, a report on Form 8-K was filed to incorporate a press release filed on March 18, 2003 announcing the pricing of the Company’s intention to make a private offering of floating rate senior convertible notes due 2023.
(f) On March 25, 2003, a report on Form 8-K was filed to incorporate a press release filed on March 21, 2003 announcing the closing of a private offering of floating rate senior convertible notes due 2023.
(g) Exhibit 4.1- Indenture dated as of March 21, 2003 between Alaska Air Group, Inc. and U.S. Bank National Association, as Trustee, relating to senior convertible notes due 2023.
(h) Exhibit 4.2- Form of Senior Convertible Note due 2023 (Exhibit A-2 to Indenture filed as Exhibit 4.1 above)
(i) Exhibit 4.3- Registration Rights Agreement dated as of March 21, 2003 between Alaska Air Group, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and each of the Initial Purchasers of Senior Convertible Notes due 2023
(j) Exhibit 4.4- Pledge Agreement dated as of March 21, 2003 between Alaska Air Group, Inc. in favor of U.S. Bank National Association relating to Senior Convertible Notes due 2023
(k) Exhibit 4.5- Control Agreement dated as of March 21, 2003 Alaska Air Group, Inc. and U.S. Bank National Association relating to Senior Convertible Notes due 2023
(l) Exhibit 99.1- Section 906 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
(m) Exhibit 99.2- Section 906 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
(n) Exhibit 99.3- Section 302 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
(o) Exhibit 99.4- Section 302 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
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Signatures
ALASKA AIR GROUP, INC.
Date: May 14, 2003
/s/ Terri K. Maupin Terri K. Maupin Staff Vice President/Finance and Controller | ||
/s/ Bradley D. Tilden Bradley D. Tilden Executive Vice President/Finance and Chief Financial Officer | ||
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CERTIFICATIONS
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I, Bradley D. Tilden, certify that:
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