(8) Capital Transactions

Preferred Stock

The Company is authorized to issue 5,000,000 shares of preferred stock in one or more series without shareholder approval. No shares of preferred stock are presently outstanding. The Company’s Board of Directors is authorized, without any further action by the shareholders of the Company, to (i) divide the preferred stock into series; (ii) designate each such series; (iii) fix and determine dividend rights; (iv) determine the price, terms and conditions on which shares of preferred stock may be redeemed; (v) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation; (vi) determine any sinking fund provisions; and (vii) establish any conversion privileges.

Stock Compensation

On May 4, 2010, the Company’s shareholders approved the adoption of the SkyWest, Inc. 2010 Long‑Term Incentive Plan, which provides for the issuance of up to 5,150,000 shares of common stock to the Company’s directors, employees, consultants and advisors (the “2010 Incentive Plan”). The 2010 Incentive Plan provides for awards in the form of options to acquire shares of common stock, stock appreciation rights, restricted stock grants, restricted stock units and performance awards. The 2010 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), which is authorized to designate option grants as either incentive stock options for income tax purposes (“ISO”) or non-statutory stock options ISOs are granted at not less than 100% of the market value of the underlying common stock on the date of grant. Non‑statutory stock options are granted at a price as determined by the Compensation Committee. As of December 31, 2018 the 2010 Incentive Plan had 2.0 million shares remaining available for future issuance.

Stock Options

The fair value of stock options awarded under the Company’s stock option plans has been estimated as of the grant date using the Black‑Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s traded stock and other factors. During the years ended December 31, 2018 and 2017, the Company did not grant any options to purchase shares of common stock. The Company granted 206,021 stock options to employees under the 2010 Incentive Plan during the years ended December 31, 2016. Stock options granted in 2016 vest in three equal installments over a three-year period. The following table shows the assumptions used and weighted average fair value for grants in the years ended December 31, 2016.


	2016
Expected annual dividend rate		1.08	%
Risk-free interest rate		1.15	%
Average expected life (years)		5.7
Expected volatility of common stock		0.412
Forfeiture rate		0.0	%
Weighted average fair value of option grants	$	5.27

The Company recorded share‑based compensation expense only for those options that are expected to vest. The estimated fair value of the stock options is amortized over the vesting period of the respective stock option grants.

Options are exercisable for a period as defined by the Compensation Committee on the date granted; however, no stock option will be exercisable before six months have elapsed from the date of grant and no stock option shall be exercisable after seven years from the date of grant. The following table summarizes the stock option activity for all of the Company’s plans for the years ended December 31, 2018, 2017 and 2016.


	2018							2017			2016
				Weighted
		Weighted		Average			Aggregate		Weighted			Weighted
		Average		Remaining			Intrinsic		Average			Average
	Number of	Exercise		Contractual			Value	Number of	Exercise		Number of	Exercise
	Options	Price		Term			($000)	Options	Price		Options	Price
Outstanding at beginning of year	458,103	$	13.73	4.0	years	$	18,034.1	819,981	$	13.58	1,064,429	$	13.64
Granted	—		—					—		—	206,021		14.90
Exercised	(157,523)		13.80					(356,209)		13.36	(351,296)		14.17
Cancelled	—		—					(5,669)		14.33	(99,173)		14.90
Outstanding at end of year	300,580		13.70	3.0	years	$	9,249.4	458,103		13.73	819,981		13.58
Exercisable at December 31, 2018	235,672		13.36	2.7	years	$	7,330.7
Exercisable at December 31, 2017	254,192		13.17	3.4	years	$	10,150.8

The total intrinsic value of options to acquire shares of the Company’s common stock that were exercised during the years ended December 31, 2018, 2017 and 2016 was $7,100,000, $9,940,000 and $4,250,000, respectively.

The following table summarizes the status of the Company’s non‑vested stock options as of December 31, 2018:


		Weighted-Average
	Number of	Grant-Date
	Shares	Fair Value
Non-vested shares at beginning of year	203,911	$	5.17
Granted	—		—
Vested	(139,003)		5.10
Cancelled	—		—
Non-vested shares at end of year	64,908	$	5.32

The following table summarizes information about the Company’s stock options outstanding at December 31, 2018:



			Options Outstanding					Options Exercisable
				Weighted Average
			Number	Remaining		Weighted Average		Number	Weighted Average
Range of Exercise Prices			Outstanding	Contractual Life		Exercise Price		Exercisable	Exercise Price
$12.00	to	$13.99	193,231	2.4	years	$	13.04	193,231	$	13.04
$14.00	to	$15.99	104,159	4.1	years		14.78	41,292		14.78
$16.00	to	$19.00	3,190	3.8	years		18.31	1,149		17.25
$12.00	to	$19.00	300,580	3.0	years	$	13.70	235,672	$	13.36

Restricted Stock Units (“RSUs”)

During the year ended December 31, 2018, the Company granted 115,044 restricted stock units to certain of the Company’s employees under the 2010 Incentive Plan. The restricted stock units granted during the year ended December 31, 2018 have a three‑year cliff-vesting period, during which the recipient must remain employed with the Company or its subsidiaries. The weighted average fair value of the restricted stock units at the date of grants made during the year ended December 31, 2018 was $53.40 per share.

The following table summarizes the activity of restricted stock units granted to certain Company employees for the years ended December 31, 2018, 2017 and 2016:

:
			Weighted-Average
			Grant-Date Fair
	Number of RSUs		Value
Non-vested RSUs outstanding at December 31, 2015	809,299	$	13.13
Granted	384,148		14.81
Vested	(215,146)		13.29
Cancelled	(51,370)		13.72
Non-vested RSUs outstanding at December 31, 2016	926,931	$	13.65
Granted	160,137		35.81
Vested	(230,903)		12.01
Cancelled	(40,575)		15.78
Non-vested RSUs outstanding at December 31, 2017	815,590	$	18.35
Granted	115,044		53.40
Vested	(330,580)		13.57
Cancelled	(24,273)		27.77
Non-vested RSUs outstanding at December 31, 2018	575,781	$	27.71

Performance Stock Units (“PSUs”)

During the year ended December 31, 2018, the Compensation Committee granted performance share units, which are performance based restricted stock units, to certain Company employees with three-year performance-based financial metrics that the Company must meet before those awards may be earned and the performance period is measured for the three years ending December 31, 2020. The Company’s compensation expense for performance share units is based upon the projected number of performance share units estimated to be awarded at the conclusion of the performance period. During 2018, the Compensation Committee awarded 92,335 additional shares of stock related to the performance share grant in 2015 based on the Company’s performance for the three years ended December 31, 2017 measured against the pre-established targets for the same period. The Compensation Committee will determine the achievement of performance results and corresponding vesting of performance shares for each year’s grant in 2016, 2017 and 2018. At the end of each performance period, the number of shares awarded can range from 0% to 200% of the original granted amount for performance share units granted in 2018 and 2017. Performance shares granted in 2016 can range from 0% to 150% of the original granted amount, depending on the performance against the pre-established targets.

The following table summarizes the activity of performance share units granted at target as of December 31, 2018.


			Weighted-Average
			Grant-Date
	Number of PSUs		Fair Value
Non-vested PSUs outstanding at December 31, 2015	202,829	$	13.62
Granted	183,577		14.89
Vested	—		—
Cancelled	(22,413)		14.16
Non-vested PSUs outstanding at December 31, 2016	363,993	$	14.23
Granted	119,315		35.81
Vested	—		—
Cancelled	(14,732)		15.00
Non-vested PSUs outstanding at December 31, 2017	468,576	$	19.70
Granted	90,264		53.41
Additional PSUs awarded from the 2015 grant	92,335		13.62
Vested	(277,029)		13.62
Cancelled	(3,229)		30.09
Non-vested PSUs outstanding at December 31, 2018	370,917	$	30.84

During the years ended December 31, 2018, 2017 and 2016 the Company granted fully‑vested shares of common stock to the Company’s directors in the amounts of 15,165, 22,617 and 42,624 shares, respectively, with a weighted average grant‑date fair value of $53.40, $35.81, and $14.78 respectively.

During the year ended December 31, 2018, 2017 and 2016, the Company recorded equity‑based compensation expense of $13.1 million, $10.6 million and $7.6 million, respectively.

As of December 31, 2018, the Company had $12.7 million of total unrecognized compensation cost related to non‑vested stock options, non‑vested restricted stock grants and non-vested performance stock units. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize this cost over a weighted average period of 1.7 years.

Taxes

The Company’s treatment of stock option grants of non‑qualified options, restricted stock units and performance shares results in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised or the restrictions lapse.