Qualitative Factors on ExpressJet

Qualitative Factors on ExpressJet

In this article we relate some of the factors discussed in the article “Qualitative Warning Signs for Hazardous Stocks” and apply those principles to ExpressJet.  

1. Auditors Statement

We mentioned that every company must have its year-end financial statement audited by a certified public accountant who is also independent to the company. On page 44 of the 2006 10-K, Ernst & Young LLP write that they are the auditors of the financial statements, and that their responsibility is to express an opinion on these statements based on the audit. The third paragraph states:

“In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the company as of December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S generally accepted accounting principles”

 Page 45 goes on further to state that Ernst and Young LLP is an independent, registered public accounting firm. They confirm that ExpressJet Holdings Inc, maintains effective internal control over financial reporting. Based on the auditors’ statement, ExpressJet has transparently accurate accounting statements.

2. Law Suits

We also mentioned that every investor or analyst must check to see if the company has any impending lawsuits. ExpressJet is a defendant in two major lawsuits. ExpressJet claims that the disposition of these lawsuits will not have a material adverse effect on their financial position.  

In September 2006 ExpressJet began discussions with Continental on how to adjust their scheduled block hour rates for 2007. Continental and ExpressJet expressed disagreement on each others rates and submitted it to arbitration. Whatever the outcome of the arbitration, ExpressJet will be paid under the 2006 block hour rates and will adjust its rates retroactively to January 1, 2007. If the courts render an adverse decision for XJT, the result could have material effects on their financial statements.

XJT states that it is subject to occasional environmentally-related lawsuits. Currently, however, there are no pending environmental suits or investigations against XJT, however. Furthermore, ExpressJet does not have any unresolved comments from the SEC’s staff as of its last financial statement. 

Earnings Restatements

We discussed that “earnings restatements” were the famous last words of many a now-bankrupt, formerly-famous company. After diligently researching XJT, we find no evidence of any earnings restatements on XJT’s part in the relevant timeframe.

 Management

XJT’s 10-K does not have much written specifically by the CEO; however, the content makes XJT’s activities, risks and future outlook very clear. The conference call transcripts reveal very concise answers to pointed questions on the part of XJT’s CEO. One potential issue lies in aviation jargon; however, anyone with a basic understanding of the industry should be able to understand it with minimal difficulty. The CEO further explains the financial downturn, consistent with other conference calls as well as the risks outlined in the 10-K.

             The company has made some investments where there wasn’t much yield however the risks were outlined. In a nutshell, XJT leases planes and flies them for different carriers. One of the reasons that XJT’s price is dropping is that Continental Airlines, a huge client of XJT, has grounded 69 aircraft out of a 250-plane fleet, which puts XJT’s income stream at a risk.

             The CEO is not the chairman of the board of directors, and does not have any board memberships to other companies.
 

5. The Board of Directors

Ever since Continental Airlines grounded 30 percent of its fleet, there have been no shared board members between Continental Airlines and ExpressJet. Many board members who had other strong links with Continental also left XJT. Below is a table of the current executives and board members of Expressjet.

As one can see the majority of the board and management are not boards at other companies. The ones on boards of other companies have no evident conflicts of interest. Salvatore Badalamenti was the ex-CFO of Kohlberg Kravis Roberts, the private equity company of Barbarians at the Gate legend. He is also the founder and president of Churchill Asset Management LLC. 

There doesn’t seem to be any clear evidence that anyone on the board is a supplier for ExpressJet. In fact, ExpressJet does not really sell goods, but rather it provides a service. The only supplies it needs are spare parts, usually a small proportion of operating income or total assets.
 

Ernst and Young is a well-known, trusted, independent auditing brand. Furthermore, they have to be voted by shareholders to be approved as the company auditors.

The CEO very often praises the company’s employees, helping ExpressJet enhance its brand as a service- and people-oriented company. The mass layoffs that have characterized much of the airline industry do not seem to have been an issue f