Quarterly report with a continuing view of a company's financial position

10-Q
Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q

 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
or
 o         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 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
3375 Koapaka Street, Suite G-350
 
 
Honolulu, HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
 
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
  
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
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.  ý Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of October 14, 2016, 53,426,475 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended September 30, 2016
 
Table of Contents
 
Part I.
Financial Information
3
 
 
 
Item 1.
Consolidated Financial Statements of Hawaiian Holdings, Inc. (Unaudited)
3
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015
3
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015
4
 
 
 
 
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
5
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
6
 
 
 
 
Notes to Consolidated Financial Statements
7
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
37
 
 
 
Item 4.
Controls and Procedures
39
 
 
 
Part II.
Other Information
40
 
 
 
Item 1.
Legal Proceedings
40
 
 
 
Item 1A.
Risk Factors
40
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
40
 
 
 
Item 3.
Defaults Upon Senior Securities
40
 
 
 
Item 4.
Mine Safety Disclosures
40
 
 
 
Item 5.
Other Information
40
 
 
 
Item 6.
Exhibits
40
 
 
 
 
Signatures
41

2



PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
591,496

 
$
556,929

 
$
1,592,095

 
$
1,525,461

Other
 
80,341

 
74,809

 
225,512

 
217,852

Total
 
671,837

 
631,738

 
1,817,607

 
1,743,313

Operating Expenses:
 
 

 
 

 
 
 
 
Wages and benefits
 
141,410

 
125,884

 
410,936

 
369,875

Aircraft fuel, including taxes and delivery
 
94,818

 
105,483

 
248,516

 
329,329

Maintenance, materials and repairs
 
51,812

 
56,196

 
166,901

 
168,512

Aircraft and passenger servicing
 
33,971

 
30,284

 
93,245

 
87,948

Aircraft rent
 
32,891

 
29,544

 
92,345

 
86,732

Commissions and other selling
 
29,480

 
30,305

 
93,936

 
91,217

Other rentals and landing fees
 
28,926

 
24,728

 
78,338

 
70,807

Depreciation and amortization
 
27,495

 
26,061

 
81,629

 
78,777

Purchased services
 
25,614

 
19,458

 
72,889

 
60,540

Other
 
31,565

 
29,118

 
94,279

 
82,319

Total
 
497,982

 
477,061

 
1,433,014

 
1,426,056

Operating Income
 
173,855

 
154,677

 
384,593

 
317,257

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(8,539
)
 
(13,506
)
 
(28,453
)
 
(42,742
)
Gains (losses) on fuel derivatives
 
(3,601
)
 
(25,009
)
 
15,421

 
(28,670
)
Interest income
 
1,113

 
691

 
3,044

 
2,052

Capitalized interest
 
719

 
698

 
1,407

 
2,966

Loss on extinguishment of debt
 

 
(54
)
 
(9,993
)
 
(7,296
)
Other, net
 
612

 
(4,515
)
 
9,884

 
(9,325
)
Total
 
(9,696
)
 
(41,695
)
 
(8,690
)
 
(83,015
)
Income Before Income Taxes
 
164,159

 
112,982

 
375,903

 
234,242

Income tax expense
 
61,705

 
42,953

 
142,413

 
89,496

Net Income
 
$
102,454

 
$
70,029

 
$
233,490

 
$
144,746

Net Income Per Share
 
 

 
 

 
 
 
 
Basic
 
$
1.92

 
$
1.30

 
$
4.37

 
$
2.67

Diluted
 
$
1.91

 
$
1.15

 
$
4.35

 
$
2.32

 
See accompanying Notes to Consolidated Financial Statements.


3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)

 
 
Three Months Ended September 30,
 
 
2016
 
2015
 
 
(unaudited)
Net Income
 
$
102,454

 
$
70,029

Other comprehensive loss, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $714 and $1,117 for 2016 and 2015, respectively
 
1,293

 
1,894

Net change in derivative instruments, net of tax benefit of $1,141 and $1,628 for 2016 and 2015, respectively
 
(1,858
)
 
(2,681
)
Net change in available-for-sale investments, net of tax benefit of $150 and tax expense of $35 for 2016 and 2015, respectively
 
(246
)
 
59

Total other comprehensive loss
 
(811
)
 
(728
)
Total Comprehensive Income
 
$
101,643

 
$
69,301



 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
(unaudited)
Net Income
 
$
233,490

 
$
144,746

Other comprehensive income (loss), net:
 
 
 
 

Net change related to employee benefit plans, net of tax expense of $2,028 and $3,163 for 2016 and 2015, respectively
 
3,448

 
5,251

Net change in derivative instruments, net of tax benefit of $10,457 and $3,014 for 2016 and 2015, respectively
 
(17,166
)
 
(4,958
)
Net change in available-for-sale investments, net of tax expense of $266 and $145 for 2016 and 2015, respectively
 
437

 
239

Total other comprehensive income (loss)
 
(13,281
)
 
532

Total Comprehensive Income
 
$
220,209

 
$
145,278


See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
 
September 30, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
405,713

 
$
281,502

Restricted cash
 
5,000

 
5,000

Short-term investments
 
287,995

 
278,545

Accounts receivable, net
 
85,388

 
81,723

Spare parts and supplies, net
 
18,238

 
19,164

Prepaid expenses and other
 
57,918

 
75,050

Total
 
860,252

 
740,984

Property and equipment, less accumulated depreciation and amortization of $494,121 and $432,510 as of September 30, 2016 and December 31, 2015, respectively
 
1,581,027

 
1,552,742

Other Assets:
 
 

 
 

Long-term prepayments and other
 
67,468

 
70,873

Intangible assets, less accumulated amortization of $30,222 and $28,400 as of September 30, 2016 and December 31, 2015, respectively
 
18,726

 
18,660

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,634,136

 
$
2,489,922

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
107,456

 
$
101,310

Air traffic liability
 
515,388

 
430,766

Other accrued liabilities
 
150,848

 
160,258

Current maturities of long-term debt and capital lease obligations
 
58,349

 
74,441

Total
 
832,041

 
766,775

Long-Term Debt and Capital Lease Obligations
 
506,328

 
677,915

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
363,732

 
372,700

Other liabilities and deferred credits
 
100,674

 
89,845

Deferred tax liability, net
 
165,677

 
136,625

Total
 
630,083

 
599,170

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2016 and December 31, 2015
 

 

Common stock, $0.01 par value per share, 53,426,475 and 53,401,439 shares outstanding as of September 30, 2016 and December 31, 2015, respectively
 
534

 
534

Capital in excess of par value
 
123,504

 
124,091

Accumulated income
 
654,204

 
420,714

Accumulated other comprehensive loss, net
 
(112,558
)
 
(99,277
)
Total
 
665,684

 
446,062

Total Liabilities and Shareholders’ Equity
 
$
2,634,136

 
$
2,489,922

 

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
417,307

 
$
389,472

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(104,250
)
 
(105,329
)
Proceeds from purchase assignment and leaseback transactions
 
31,851

 
86,033

Proceeds from disposition of equipment
 

 
3,606

Purchases of investments
 
(217,964
)
 
(178,177
)
Sales of investments
 
208,075

 
170,904

Net cash used in investing activities
 
(82,288
)
 
(22,963
)
Cash flows from Financing Activities:
 
 

 
 

Repayments of long-term debt and capital lease obligations
 
(205,532
)
 
(74,719
)
Repurchases and redemptions of convertible notes
 
(1,426
)
 
(171,598
)
Repurchases of common stock
 
(13,763
)
 
(37,622
)
Excess tax benefit from equity awards
 
17,615

 

Other
 
(7,702
)
 
(1,483
)
Net cash used in financing activities
 
(210,808
)
 
(285,422
)
Net increase in cash and cash equivalents
 
124,211

 
81,087

Cash and cash equivalents - Beginning of Period
 
281,502

 
264,087

Cash and cash equivalents - End of Period
 
$
405,713

 
$
345,174

 
See accompanying Notes to Consolidated Financial Statements.


6



Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented.  Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
 
2. Significant Accounting Policies
 
Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02, Leases (ASU 2016-02), requiring a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is currently evaluating the effect that the provisions of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), requiring an entity to present its debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015. As a result, the Company adopted ASU 2015-03 as of January 1, 2016 and retrospectively applied it to all periods presented in the consolidated balance sheets. The adoption of ASU 2015-03 resulted in a $19.8 million reclassification of the Company's unamortized debt issuance costs from long-term prepayments and other to long-term debt on the consolidated balance sheet as of December 31, 2015.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and allows for either full retrospective or modified retrospective adoption. Organizations are permitted to adopt the new revenue standard early, but not before December 15, 2016.
The Company is currently evaluating the effect that the provisions of ASU 2014-09 will have on its consolidated financial statements and related disclosures. We have determined that the new standard, once effective, will preclude the Company from accounting for miles earned under its HawaiianMiles customer loyalty program using the incremental cost method, and will instead require the use of the deferred revenue method. This change could have a significant impact on the Company's financial statements.

7



3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component is as follows: 
Details about accumulated other comprehensive loss components
 
Three months ended September 30,
 
Nine months ended September 30,
 
Affected line items in the statement where net income is presented
 
2016
 
2015
 
2016
 
2015
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 

 
 

 
 
Foreign currency derivative losses (gains)
 
$
1,842

 
$
(5,003
)
 
$
(1,679
)
 
$
(13,415
)
 
Passenger revenue
Interest rate derivative losses, net
 

 
170

 
944

 
536

 
Interest expense
Total before tax
 
1,842

 
(4,833
)
 
(735
)
 
(12,879
)
 
 
Tax expense (benefit)
 
(701
)
 
1,826

 
272

 
4,866

 
 
Total, net of tax
 
$
1,141

 
$
(3,007
)
 
$
(463
)
 
$
(8,013
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
1,950

 
$
2,955

 
$
5,780

 
$
8,315

 
Wages and benefits
Prior service cost
 
57

 
57

 
171

 
171

 
Wages and benefits
Total before tax
 
2,007

 
3,012

 
5,951

 
8,486

 
 
Tax benefit
 
(714
)
 
(1,118
)
 
(2,207
)
 
(3,194
)
 
 
Total, net of tax
 
$
1,293

 
$
1,894

 
$
3,744

 
$
5,292

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(129
)
 
$
(1
)
 
$
(189
)
 
$
(36
)
 
Other nonoperating income
Total before tax
 
(129
)
 
(1
)
 
(189
)
 
(36
)
 
 
Tax expense
 
49

 

 
69

 
7

 
 
Total, net of tax
 
(80
)
 
$
(1
)
 
$
(120
)
 
$
(29
)
 
 
Total reclassifications for the period
 
$
2,354

 
$
(1,114
)
 
$
3,161

 
$
(2,750
)
 
 

8




A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and nine months ended September 30, 2016 and 2015 is as follows:
Three months ended September 30, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
(10,348
)
 
$
(101,710
)
 
$
311

 
$
(111,747
)
Other comprehensive loss before reclassifications, net of tax
 

 
(2,999
)
 

 
(166
)
 
(3,165
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
1,141

 
1,293

 
(80
)
 
2,354

Net current-period other comprehensive income (loss)
 

 
(1,858
)
 
1,293

 
(246
)
 
(811
)
Ending balance
 
$

 
$
(12,206
)
 
$
(100,417
)
 
$
65

 
$
(112,558
)

Three months ended September 30, 2015
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
262

 
$
10,423

 
$
(132,163
)
 
$
(74
)
 
$
(121,552
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(641
)
 
967

 

 
60

 
386

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
104

 
(3,111
)
 
1,894

 
(1
)
 
(1,114
)
Net current-period other comprehensive income (loss)
 
(537
)
 
(2,144
)
 
1,894

 
59

 
(728
)
Ending balance
 
$
(275
)
 
$
8,279

 
$
(130,269
)
 
$
(15
)
 
$
(122,280
)

Nine months ended September 30, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
81

 
$
4,879

 
$
(103,865
)
 
$
(372
)
 
$
(99,277
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(668
)
 
(16,035
)
 
(296
)
 
557

 
(16,442
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
587

 
(1,050
)
 
3,744

 
(120
)
 
3,161

Net current-period other comprehensive income (loss)
 
(81
)
 
(17,085
)
 
3,448

 
437

 
(13,281
)
Ending balance
 
$

 
$
(12,206
)
 
$
(100,417
)
 
$
65

 
$
(112,558
)

Nine months ended September 30, 2015
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
254

 
$
12,708

 
$
(135,520
)
 
$
(254
)
 
$
(122,812
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(857
)
 
3,912

 
(41
)
 
268

 
3,282

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
328

 
(8,341
)
 
5,292

 
(29
)
 
(2,750
)
Net current-period other comprehensive income (loss)
 
(529
)
 
(4,429
)
 
5,251

 
239

 
532

Ending balance
 
$
(275
)
 
$
8,279

 
$
(130,269
)
 
$
(15
)
 
$
(122,280
)

 

9



4. Earnings Per Share
 
Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and nine months ended September 30, 2016 and 2015, anti-dilutive shares excluded from the calculation of diluted earnings per share were nil.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
102,454

 
$
70,029

 
$
233,490

 
$
144,746

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,427

 
53,731

 
53,488

 
54,266

Assumed exercise of stock options and awards
 
161

 
396

 
219

 
458

Assumed conversion of convertible note premium
 

 
350

 
8

 
1,618

Assumed conversion of warrants
 

 
6,351

 

 
6,139

Weighted average common stock shares outstanding - Diluted
 
53,588

 
60,828

 
53,715

 
62,481

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.92

 
$
1.30

 
$
4.37

 
$
2.67

Diluted
 
$
1.91

 
$
1.15

 
$
4.35

 
$
2.32


Stock Repurchase Program

In April 2015, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase up to $100 million of its outstanding common stock over a two-year period through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. The Company spent $3.7 million and $13.8 million to repurchase approximately 98 thousand shares and 379 thousand shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2016, respectively. As of September 30, 2016, the Company has $46.1 million remaining to spend under the stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.
 
5. Short-Term Investments
 
Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated at fair value.  Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the unaudited consolidated statements of operations.  Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive loss.

The following is a summary of short-term investments held as of September 30, 2016 and December 31, 2015:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2016
 
(in thousands)
Corporate debt
 
$
173,122

 
$
247

 
$
(93
)
 
$
173,276

U.S. government and agency debt
 
63,996

 
76

 
(18
)
 
64,054

Municipal bonds
 
21,198

 

 
(66
)
 
21,132

Other fixed income securities
 
29,534

 
1

 
(2
)
 
29,533

Total short-term investments
 
$
287,850

 
$
324

 
$
(179
)
 
$
287,995

 

10



 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2015
 
(in thousands)
Corporate debt
 
$
167,066

 
$
13

 
$
(481
)
 
$
166,598

U.S. government and agency debt
 
62,376

 
9

 
(123
)
 
62,262

Municipal bonds
 
22,865

 
3

 
(12
)
 
22,856

Other fixed income securities
 
26,835

 

 
(6
)
 
26,829

Total short-term investments
 
$
279,142

 
$
25

 
$
(622
)
 
$
278,545


Contractual maturities of short-term investments as of September 30, 2016 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
58,812

 
$
114,464

 
$
173,276

U.S. government and agency debt
 
35,815

 
28,240

 
64,055

Municipal bonds
 
8,859

 
12,273

 
21,132

Other fixed income securities
 
28,032

 
1,500

 
29,532

Total short-term investments
 
$
131,518

 
$
156,477

 
$
287,995

 
The Company classifies investments as current assets as these securities are available for use in its current operations.
 
6.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820) clarifies that fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities;
 
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities; and
 
Level 3 — Unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets or liabilities.


11



The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of September 30, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
17,296

 
$
4,404

 
$
12,892

 
$

Cash equivalents measured at net asset value
 
166,780

 

 

 

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
287,995

 

 
287,995

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
4,072

 

 
4,072

 

Heating oil swaps
 
7,321

 

 
7,321

 

Foreign currency derivatives
 
88

 

 
88

 

Total assets measured at fair value
 
$
488,552

 
$
9,404

 
$
312,368

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Heating oil swaps
 
$
712

 
$

 
$
712

 
$

Foreign currency derivatives
 
18,757

 

 
18,757

 

Total liabilities measured at fair value
 
$
19,469

 
$

 
$
19,469

 
$

 
 
 
Fair Value Measurements as of December 31, 2015
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
5,665

 
$
1,648

 
$
4,017

 
$

Cash equivalents measured at net asset value
 
61,577

 

 

 

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
278,545

 

 
278,545

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Heating oil put options
 
1,060

 

 
1,060

 

Foreign currency derivatives
 
6,550

 

 
6,550

 

Total assets measured at fair value
 
$
358,397

 
$
6,648

 
$
290,172

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Heating oil swaps
 
$
40,530

 
$

 
$
40,530

 
$

Foreign currency derivatives
 
1,049

 

 
1,049

 

Interest rate derivatives
 
312

 

 
312

 

Total liabilities measured at fair value
 
$
41,891

 
$

 
$
41,891

 
$


Cash equivalents.  The Company’s cash equivalents consist of money market securities, U.S. agency bonds, foreign and domestic corporate bonds, and commercial paper.  The instruments classified as Level 2 are valued using quoted prices for similar assets in active markets.

Cash equivalents measured at net asset value.  Cash equivalents measured at net asset value consist of money market securities that are measured at fair value using the net asset value per share practical expedient. In accordance with ASC 820, these instruments are not included in the fair value hierarchy.
 
Restricted cash.  The Company’s restricted cash consists of money market securities.
 
Short-term investments.  Short-term investments include U.S. and foreign government notes and bonds, U.S. agency bonds, variable-rate corporate bonds, asset backed securities, foreign and domestic corporate bonds, municipal bonds, and commercial paper.  These instruments are valued using quoted prices for similar assets in active markets or other observable inputs.


12



Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil swaps and crude oil call options which are not traded on a public exchange. The fair value of these instruments are determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves, and measures of volatility among others.
 
Foreign currency derivatives.  The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued based primarily on data available or derived from public markets.
 
Interest rate derivatives.  The Company’s interest rate derivatives consist of interest rate swaps and are valued based primarily on data available or derived from public markets.

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value: 
Fair Value of Debt
September 30, 2016
 
December 31, 2015
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
487,209

 
$
490,382

 
$

 
$

 
$
490,382

 
$
677,203

 
$
665,507

 
$

 
$
283

 
$
665,224

 
The fair value estimates of the Company’s debt were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar instruments.
 
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
7.  Financial Derivative Instruments
 
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices and foreign currencies.
 
Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three and nine months ended September 30, 2016, the Company primarily used heating oil swaps and crude oil call options to hedge its aircraft fuel expense.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Fuel derivative contracts
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Losses realized at settlement
 
$
(2,525
)
 
$
(13,777
)
 
$
(30,349
)
 
$
(44,921
)
Reversal of prior period unrealized amounts
 
(7,115
)
 
9,953

 
33,577

 
38,293

Unrealized gains (losses) that will settle in future periods
 
6,039

 
(21,185
)
 
12,193

 
(22,042
)
Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)
 
$
(3,601
)
 
$
(25,009
)
 
$
15,421

 
$
(28,670
)

Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.  
The Company enters into foreign currency forward contracts to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other

13



comprehensive income (AOCI) and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net loss of approximately $14.0 million into earnings over the next 12 months from AOCI based on the values at September 30, 2016.
 
The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the net derivative positions and location of the asset and liability balances within the unaudited Consolidated Balance Sheets.

Derivative position as of September 30, 2016 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Other accrued liabilities
 
15,789,800 Japanese Yen
41,423 Australian Dollars
 
September 2017
 
60

 
(14,548
)
 
(14,488
)
 
 
Other liabilities and deferred credits
 
4,376,750 Japanese Yen
7,552 Australian Dollars
 
September 2018
 
14

 
(3,973
)
 
(3,959
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
561,300 Japanese Yen
5,437 Australian Dollars
 
March 2017
 
14

 
(236
)
 
(222
)
Fuel derivative contracts
 
Prepaid expenses and other
 
36,419 gallons
 
September 2017
 
11,393

 
(712
)
 
10,681

 



14



Derivative position as of December 31, 2015
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Interest rate derivative
 
Other accrued liabilities
 
$51,000 U.S. dollars
 
April 2023
 
$

 
$
(70
)
 
$
(70
)
 
 
Other liabilities and deferred credits (1)
 
 
 
 
 

 
(242
)
 
(242
)
Foreign currency derivatives
 
Prepaid expenses and other
 
7,594,750 Japanese Yen
44,917 Australian Dollars
 
December 2016
 
6,461

 
(525
)
 
5,936

 
 
Other liabilities and deferred credits
 
5,437,400 Japanese Yen
8,730 Australian Dollars
 
December 2017
 
78

 
(493
)
 
(415
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
2,762,000 Japanese Yen
3,303 Australian Dollars
 
August 2016
 
11

 

 
11

 
 
Other liabilities and deferred credits
 
2,845 Australian Dollars
 
March 2017
 

 
(31
)
 
(31
)
Fuel derivative contracts
 
Other accrued liabilities
 
84,067 gallons
 
December 2016
 
1,060

 
(40,530
)
 
(39,470
)

(1) Represents the noncurrent portion of the $51.0 million interest rate derivative with final maturity in April 2023.
 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended September 30,
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Foreign currency derivatives
 
$
4,841

 
$
(1,558
)
 
$
1,842

 
$
(5,003
)
 
$

 
$

Interest rate derivatives
 

 
840

 

 
170

 

 


 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Foreign currency derivatives
 
$
24,996

 
$
(6,295
)
 
$
(1,679
)
 
$
(13,415
)
 
$

 
$

Interest rate derivatives
 
923

 
778

 
1,383

 
536

 

 


Risk and Collateral
 
Financial derivative instruments expose the Company to possible credit loss in the event the counterparties fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) regularly monitors the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.




15



ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty under a master netting agreement, or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with counterparties as of September 30, 2016 and December 31, 2015.

The Company is also subject to market risk in the event these financial instruments become less valuable in the market. However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.

8.  Debt
 
As of September 30, 2016, the expected maturities of long-term debt for the remainder of 2016 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2016
$
5,336

2017
48,801

2018
48,244

2019
72,927

2020
21,413

Thereafter
290,488

 
$
487,209

 
Debt Extinguishment

The Company extinguished $140.5 million of its existing debt under a secured financial agreement for the nine months ended September 30, 2016, which was originally scheduled to mature in 2023. This debt extinguishment resulted in a loss of $10.0 million for the nine months ended September 30, 2016, which was reflected in nonoperating income (expense) in the unaudited Consolidated Statement of Operations.
9.  Leases

The Company leases aircraft, engines, and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.
As of September 30, 2016, the scheduled future minimum rental payments under operating leases with non-cancellable basic terms of more than one year were as follows:
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2016
$
30,344

 
$
1,308

2017
117,226

 
4,856

2018
114,477

 
4,787

2019
114,332

 
4,494

2020
94,177

 
4,319

Thereafter
280,320

 
27,949

 
$
750,876

 
$
47,713

10. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following: 

16



 
 
Three months ended September 30,
 
Nine months ended September 30,
Components of Net Period Benefit Cost
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Service cost
 
$
3,438

 
$
4,006

 
$
10,864

 
$
12,456

Interest cost
 
7,518

 
7,454

 
22,682

 
22,232

Expected return on plan assets
 
(4,472
)
 
(4,702
)
 
(13,416
)
 
(14,134
)
Recognized net actuarial loss
 
2,008

 
3,012

 
5,952

 
8,486

Net periodic benefit cost
 
$
8,492

 
$
9,770

 
$
26,082

 
$
29,040

 
The Company contributed $15.6 million and $26.9 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2016, respectively, including $21.2 million above the minimum funding requirements. The Company contributed $3.2 million and $16.7 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2015, respectively.
 
11. Commitments and Contingent Liabilities
 
Commitments

As of September 30, 2016, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 
2

 
Between 2017 and 2018
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for IT, accounting services, and a capacity purchase agreement through 2024.
 
Committed capital and operating expenditures include escalation amounts based on estimates. The gross committed expenditures and committed financings for those deliveries as of September 30, 2016 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2016
 
$
44,490

 
$
20,421

 
$
64,911

2017
 
232,744

 
77,009

 
309,753

2018
 
396,342

 
64,529

 
460,871

2019
 
481,376

 
57,025

 
538,401

2020
 
232,736

 
57,122

 
289,858

Thereafter
 
214,789

 
287,500

 
502,289

 
 
$
1,602,477

 
$
563,606

 
$
2,166,083

 
Litigation and Contingencies
 
The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.


17



General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.0 million at September 30, 2016 and December 31, 2015.
 
In the event of a material adverse change in the Company's business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company.

12. Supplemental Cash Flow Information
 
Non-cash investing and financing activities for the nine months ended September 30, 2016 and 2015 were as follows:
 
Nine months ended September 30,
 
2016
 
2015
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$
6,092

 
$
2,791


13. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 13 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 13 as Parent Issuer / Guarantor) is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft.

Condensed consolidating financial statements are presented in the following tables:


18



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
670,115

 
$
1,800

 
$
(78
)
 
$
671,837

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
94,818

 

 

 
94,818

Wages and benefits
 

 
141,410

 

 

 
141,410

Aircraft rent
 

 
32,891

 

 

 
32,891

Maintenance materials and repairs
 

 
51,354

 
458

 

 
51,812

Aircraft and passenger servicing
 

 
33,971

 

 

 
33,971

Commissions and other selling
 

 
29,494

 
15

 
(29
)
 
29,480

Depreciation and amortization
 

 
26,496

 
999

 

 
27,495

Other rentals and landing fees
 

 
28,926

 

 

 
28,926

Purchased services
 
34

 
25,404

 
191

 
(15
)
 
25,614

Other
 
1,348

 
29,807

 
444

 
(34
)
 
31,565

Total
 
1,382

 
494,571

 
2,107

 
(78
)
 
497,982

Operating Income (Loss)
 
(1,382
)
 
175,544

 
(307
)
 

 
173,855

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
103,211

 

 

 
(103,211
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(8,539
)
 

 

 
(8,539
)
Interest income
 
71

 
1,042

 

 

 
1,113

Capitalized interest
 

 
719

 

 

 
719

Losses on fuel derivatives
 

 
(3,601
)
 

 

 
(3,601
)
Loss on extinguishment of debt
 

 

 

 

 

Other, net
 

 
612

 

 

 
612

Total
 
103,282

 
(9,767
)
 

 
(103,211
)
 
(9,696
)
Income (Loss) Before Income Taxes
 
101,900

 
165,777

 
(307
)
 
(103,211
)
 
164,159

Income tax expense (benefit)
 
(554
)
 
62,259

 

 

 
61,705

Net Income (Loss)
 
$
102,454

 
$
103,518

 
$
(307
)
 
$
(103,211
)
 
$
102,454

Comprehensive Income (Loss)
 
$
101,643

 
$
102,707

 
$
(307
)
 
$
(102,400
)
 
$
101,643



19