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ATLAS AIR WORLDWIDE HOLDINGS INC - Quarter Report: 2015 March (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

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: 001-16545

 

 

 

 

LOGO

Atlas Air Worldwide Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-4146982

(State or other jurisdiction of

incorporation)

 

(IRS Employer

Identification No.)

2000 Westchester Avenue, Purchase, New York   10577
(Address of principal executive offices)   (Zip Code)

(914) 701-8000

(Registrant’s telephone number, including area code)

Not Applicable

(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.    Yes  x    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).    Yes  x    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 definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 27, 2015, there were 25,003,943 shares of the registrant’s Common Stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

             Page  

PART I. FINANCIAL INFORMATION

 
 

Item 1.

   Financial Statements  
     Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (unaudited)     3   
     Consolidated Statements of Operations for the Three Months ended March 31, 2015 and 2014 (unaudited)     4   
     Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2015 and 2014 (unaudited)     5   
     Consolidated Statements of Cash Flows for the Three Months ended March 31, 2015 and 2014 (unaudited)     6   
     Consolidated Statements of Stockholders’ Equity as of and for the Three Months ended March 31, 2015 and 2014 (unaudited)     7   
     Notes to Unaudited Consolidated Financial Statements     8   
 

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations     15   
 

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk     22   
 

Item 4.

   Controls and Procedures     22   
PART II. OTHER INFORMATION  
 

Item 1.

   Legal Proceedings     24   
 

Item 1A.

   Risk Factors     24   
 

Item 6.

   Exhibits     24   
     Signatures     25   
     Exhibit Index     26   


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)

 

     March 31, 2015     December 31, 2014  

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 336,406      $ 298,601   

Short-term investments

     23,287        17,802   

Restricted cash

     15,028        14,281   

Accounts receivable, net of allowance of $1,168 and $1,658, respectively

     149,360        162,092   

Prepaid maintenance

     26,339        20,806   

Deferred taxes

     40,923        40,923   

Prepaid expenses and other current assets

     32,546        51,599   
  

 

 

   

 

 

 

Total current assets

  623,889      606,104   

Property and Equipment

Flight equipment

  3,472,230      3,448,791   

Ground equipment

  52,976      51,418   

Less: accumulated depreciation

  (373,442   (348,036

Purchase deposits for flight equipment

  17,541      20,054   
  

 

 

   

 

 

 

Property and equipment, net

  3,169,305      3,172,227   

Other Assets

Long-term investments and accrued interest

  114,863      120,478   

Deposits and other assets

  72,561      80,258   

Intangible assets, net

  65,157      67,410   
  

 

 

   

 

 

 

Total Assets

$ 4,045,775    $ 4,046,477   
  

 

 

   

 

 

 

Liabilities and Equity

Current Liabilities

Accounts payable

$ 39,737    $ 42,864   

Accrued liabilities

  264,705      251,594   

Current portion of long-term debt

  180,661      181,202   
  

 

 

   

 

 

 

Total current liabilities

  485,103      475,660   

Other Liabilities

Long-term debt

  1,690,184      1,736,739   

Deferred taxes

  357,934      350,868   

Other liabilities

  65,927      65,415   
  

 

 

   

 

 

 

Total other liabilities

  2,114,045      2,153,022   

Commitments and contingencies

Equity

Stockholders’ Equity

Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued

  —        —     

Common stock, $0.01 par value; 50,000,000 shares authorized; 28,887,466 and 28,561,160 shares issued, 25,002,862 and 24,807,718, shares outstanding (net of treasury stock), as of March 31, 2015 and December 31, 2014, respectively

  289      286   

Additional paid-in-capital

  578,504      573,133   

Treasury stock, at cost; 3,884,604 and 3,753,442 shares, respectively

  (151,440   (145,322

Accumulated other comprehensive loss

  (9,228   (9,572

Retained earnings

  1,028,502      999,270   
  

 

 

   

 

 

 

Total equity

  1,446,627      1,417,795   
  

 

 

   

 

 

 

Total Liabilities and Equity

$ 4,045,775    $ 4,046,477   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

     For the Three Months Ended  
     March 31, 2015     March 31, 2014  

Operating Revenue

    

ACMI

   $ 189,047      $ 198,141   

Charter

     220,138        177,373   

Dry leasing

     31,919        24,676   

Other

     3,741        3,173   
  

 

 

   

 

 

 

Total Operating Revenue

  444,845      403,363   
  

 

 

   

 

 

 

Operating Expenses

Salaries, wages and benefits

  88,773      72,855   

Aircraft fuel

  78,115      81,744   

Maintenance, materials and repairs

  58,832      59,046   

Aircraft rent

  34,261      35,410   

Depreciation and amortization

  32,030      28,155   

Navigation fees, landing fees and other rent

  23,503      27,126   

Travel

  20,813      17,282   

Passenger and ground handling services

  19,963      19,371   

Loss on disposal of aircraft

  1,209      —     

Special charge

  (568   8,029   

Other

  30,944      26,215   
  

 

 

   

 

 

 

Total Operating Expenses

  387,875      375,233   
  

 

 

   

 

 

 

Operating Income

  56,970      28,130   
  

 

 

   

 

 

 

Non-operating Expenses / (Income)

Interest income

  (4,488   (4,727

Interest expense

  24,548      26,452   

Capitalized interest

  (26   (312

Other expense (income), net

  675      152   
  

 

 

   

 

 

 

Total Non-operating Expenses (Income)

  20,709      21,565   
  

 

 

   

 

 

 

Income before income taxes

  36,261      6,565   

Income tax expense

  7,029      2,539   
  

 

 

   

 

 

 

Net Income

  29,232      4,026   

Less: Net income (loss) attributable to noncontrolling interests

  —        (3,918
  

 

 

   

 

 

 

Net Income Attributable to Common Stockholders

$ 29,232    $ 7,944   
  

 

 

   

 

 

 

Earnings per share:

Basic

$ 1.18    $ 0.32   
  

 

 

   

 

 

 

Diluted

$ 1.17    $ 0.32   
  

 

 

   

 

 

 

Weighted average shares:

Basic

  24,876      25,096   
  

 

 

   

 

 

 

Diluted

  25,070      25,151   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

     For the Three Months Ended  
     March 31, 2015     March 31, 2014  

Net Income

   $ 29,232      $ 4,026   

Other comprehensive income (loss):

    

Interest rate derivatives:

    

Net change in fair value

     —          (251

Reclassification to interest expense

     650        690   

Income tax benefit (expense)

     (248     (246

Foreign currency translation:

    

Translation adjustment

     (58     158   
  

 

 

   

 

 

 

Other comprehensive income (loss)

  344      351   
  

 

 

   

 

 

 

Comprehensive Income

  29,576      4,377   

Less: Comprehensive income (loss) attributable to noncontrolling interests

  —        (3,837
  

 

 

   

 

 

 

Comprehensive Income Attributable to Common Stockholders

$ 29,576    $ 8,214   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     For the Three Months Ended  
     March 31, 2015     March 31, 2014  

Operating Activities:

    

Net Income

   $ 29,232      $ 4,026   

Adjustments to reconcile Net Income to net cash provided by operating activities:

    

Depreciation and amortization

     36,375        32,401   

Accretion of debt securities discount

     (1,902     (2,073

Provision for allowance for doubtful accounts

     (174     83   

Special charge, net of cash payments

     (568     8,029   

Loss on disposal of aircraft

     1,209        —     

Deferred taxes

     7,029        2,554   

Stock-based compensation expense

     5,285        1,907   

Changes in:

    

Accounts receivable

     11,088        (14,585

Prepaid expenses and other current assets

     (10,272     7,050   

Deposits and other assets

     9,323        6,724   

Accounts payable and accrued liabilities

     4,023        (4,848
  

 

 

   

 

 

 
Net cash provided by operating activities   90,648      41,268   
Investing Activities:

Capital expenditures

  (10,385   (4,095

Purchase deposits and delivery payments for flight equipment

  (14,925   (478,739

Changes in restricted cash

  (747   (6,046

Proceeds from short-term investments

  1,202      783   

Proceeds from disposal of aircraft

  24,345      —     
  

 

 

   

 

 

 
Net cash used for investing activities   (510   (488,097
Financing Activities:

Proceeds from debt issuance

  —        572,552   

Customer maintenance reserves received

  4,129      4,176   

Proceeds from stock option exercises

  52      —     

Purchase of treasury stock

  (6,118   (2,420

Excess tax benefit from stock-based compensation expense

  449      (982
Payment of debt issuance costs   —        (16,974
Payments of debt   (50,845   (151,687
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

  (52,333   404,665   

Net increase (decrease) in cash and cash equivalents

  37,805      (42,164

Cash and cash equivalents at the beginning of period

  298,601      321,816   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of period

$ 336,406    $ 279,652   
  

 

 

   

 

 

 

Non-cash Investing and Financing Activities:

Acquisition of flight equipment included in Accounts payable and accrued liabilities $ —      $ 41,581   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

 

     Common
Stock
     Treasury
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
     Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total Equity  

Balance at December 31, 2013

   $ 282       $ (125,826   $ 561,481      $ (10,677   $ 892,513       $ 1,317,773      $ 4,352      $ 1,322,125   

Net Income (loss)

     —           —          —          —          7,944         7,944        (3,918     4,026   

Other comprehensive income (loss)

     —           —          —          270        —           270        81        351   

Stock option and restricted stock compensation

     —           —          1,907        —          —           1,907        —          1,907   

Purchase of 74,583 shares of treasury stock

     —           (2,420     —          —          —           (2,420     —          (2,420

Issuance of 195,555 shares of restricted stock

     2         —          (2     —          —           —          —          —     

Tax benefit (expense) on restricted stock and stock options

     —           —          (982     —          —           (982     —          (982
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

$ 284    $ (128,246 $ 562,404    $ (10,407 $ 900,457    $ 1,324,492    $ 515    $ 1,325,007   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Common
Stock
     Treasury
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
     Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
                  
                  
                  

Balance at December 31, 2014

   $ 286       $ (145,322   $ 573,133      $ (9,572   $ 999,270       $ 1,417,795      $ —        $ 1,417,795   

Net Income (loss)

     —           —          —          —          29,232         29,232        —          29,232   

Other comprehensive income (loss)

     —           —          —          344        —           344        —          344   

Stock option and restricted stock compensation

     —           —          5,285        —          —           5,285        —          5,285   

Purchase of 131,162 shares of treasury stock

     —           (6,118     —          —          —           (6,118     —          (6,118

Exercise of 1,900 employee stock options

     —           —          52        —          —           52        —          52   

Issuance of 324,406 shares of restricted stock

     3         —          (3     —          —           —          —          —     

Tax benefit (expense) on restricted stock and stock options

     —           —          37        —          —           37        —          37   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

$ 289    $ (151,440 $ 578,504    $ (9,228 $ 1,028,502    $ 1,446,627    $ —      $ 1,446,627   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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Atlas Air Worldwide Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

March 31, 2015

1. Basis of Presentation

Our consolidated financial statements include the accounts of the holding company, Atlas Air Worldwide Holdings, Inc. (“AAWW”) and its consolidated subsidiaries. AAWW is the parent company of its principal operating subsidiary, Atlas Air, Inc. (“Atlas”), and of Polar Air Cargo LLC (“Old Polar”). AAWW is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as “Titan”).

The terms “we,” “us,” “our,” and the “Company” mean AAWW and all entities included in its consolidated financial statements.

We provide outsourced aircraft and aviation operating services throughout the world, serving Africa, Asia, Australia, Europe, the Middle East, North America and South America through: (i) contractual service arrangements, including those through which we provide aircraft to customers and value-added services, including crew, maintenance and insurance (“ACMI”), as well as those through which we provide crew, maintenance and insurance, with the customer providing the aircraft (“CMI”); (ii) cargo and passenger charter services (“Charter”); and (iii) dry leasing aircraft and engines (“Dry Leasing” or “Dry Lease”).

The accompanying unaudited consolidated financial statements and related notes (the “Financial Statements”) have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) requirements for quarterly reports on Form 10-Q, and consequently exclude certain disclosures normally included in audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated. The Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes included in the AAWW Annual Report on Form 10-K for the year ended December 31, 2014, which includes additional disclosures and a summary of our significant accounting policies. The December 31, 2014 balance sheet data was derived from that Annual Report. In our opinion, the Financial Statements contain all adjustments, consisting of normal recurring items, necessary to fairly state the financial position of AAWW and its consolidated subsidiaries as of March 31, 2015, the results of operations for the three months ended March 31, 2015 and 2014, comprehensive income for the three months ended March 31, 2015 and 2014, cash flows for the three months ended March 31, 2015 and 2014, and shareholders’ equity as of and for the three months ended March 31, 2015 and 2014.

Our quarterly results are subject to seasonal and other fluctuations, and the operating results for any quarter are therefore not necessarily indicative of results that may be otherwise expected for the entire year.

Except for per share data, all dollar amounts are in thousands unless otherwise noted.

Certain reclassifications have been made to prior periods’ consolidated financial statement amounts and related note disclosures to conform to the current year’s presentation, including the presentation of segments.

2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for revenue recognition. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and consideration that a company expects to receive for the services provided. It also requires additional disclosures necessary for the financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On April 1, 2015, the FASB proposed deferring the effective date by one year to the beginning of 2018. The FASB also proposed permitting early adoption of the standard, but not before the beginning of 2017. We are currently assessing the impact the amended guidance will have on our financial statements.

In April 2015, the FASB amended its guidance for presenting debt issuance costs. The new guidance requires debt issuance costs to be presented in the balance sheet as a reduction of the carrying amount of the related debt liability instead of as an asset. We early adopted this guidance retrospectively effective March 31, 2015 and its adoption did not have a material impact on our financial condition, results of operations or cash flows. The amount of debt issuance costs classified as a reduction of debt was $52.8 million at March 31, 2015 and $55.1 million at December 31, 2014.

 

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3. Related Parties

DHL Investment and Polar

AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). DHL Network Operations (USA), Inc. (“DHL”), a subsidiary of Deutsche Post AG (“DP”), holds a 49% equity interest and a 25% voting interest in Polar. Polar is a variable interest entity that we do not consolidate because we are not the primary beneficiary as the risks associated with the direct costs of operation are with DHL. We record our share of Polar’s results under the equity method of accounting. Under a 20-year blocked space agreement (the “BSA”), Polar provides air cargo capacity to DHL. Atlas has several agreements with Polar to provide ACMI, CMI, administrative, sales and ground support services to one another. We do not have any financial exposure to fund debt obligations or operating losses of Polar, except for any liquidated damages that we could incur under these agreements. The following table summarizes our transactions with Polar:

 

     For the Three Months Ended  
Revenue and Expenses:    March 31, 2015        March 31, 2014  

ACMI segment revenue from Polar

   $ 91,413       $ 69,695   

Other revenue from Polar

   $ 2,845       $ 2,842   

Ground handling and airport fees paid to Polar

   $ 797       $ 324   
Accounts receivable/payable as of:    March 31, 2015        December 31, 2014  

Receivables from Polar

   $ 6,467       $ 5,702   

Payables to Polar

   $ 406       $ 2,611   

Aggregate Carrying Value of Polar

Investment as of:

   March 31, 2015        December 31, 2014  
   $ 4,870       $ 4,870   

GATS

We hold a 50% interest in Global Aviation Technical Solutions Co, Ltd. (“GATS”), a joint venture with an unrelated third party. The purpose of the joint venture is to purchase rotable parts and provide repair services for those parts, primarily for our 747-8F aircraft. The joint venture is a variable interest entity that we do not consolidate because we are not the primary beneficiary as we do not exercise financial control. As of March 31, 2015 and December 31, 2014, our investment in GATS was $16.8 million and $16.4 million, respectively, and our maximum exposure to losses from the entity is limited to our investment, which is comprised primarily of rotable inventory parts. GATS does not have any third-party debt obligations. We had Accounts payable to GATS of $1.4 million as of March 31, 2015 and $1.5 million as of December 31, 2014.

4. Special Charge

During the three months ended March 31, 2015 and March 31, 2014, we recorded adjustments of $0.4 million and $0.6 million, respectively, to the Special charge related to the early termination of operating leases for two 747-400BCF aircraft that we parked in December 2013. Substantially all remaining cash payments related to the lease termination costs are expected to be paid in 2015.

During the three months ended March 31, 2014, we recognized $2.3 million of employee termination benefits related to British Airways Plc’s (“British Airways”) return of three 747-8F aircraft in 2014. In addition, we recognized a reserve of $5.1 million during the three months ended March 31, 2014 related to a loan from Global Supply Systems Limited (“GSS”), a consolidated subsidiary, to its 51% U.K. shareholder.

A summary of the Special charge liabilities is as follows:

 

     Lease
Termination
Costs
     GSS Employee
Termination
Benefits
     Other      Total  

Liability as of December 31, 2014

   $ 2,437       $ 1,014       $ 100       $ 3,551   

Special charge items, net

     (447      (132      11         (568

Cash payments

     (1,786      (882      —           (2,668
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability as of March 31, 2015

$ 204    $ —      $ 111    $ 315   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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5. Accrued Liabilities

Accrued liabilities consisted of the following as of:

 

           March 31, 2015      December 31, 2014  

Maintenance

   $ 69,844       $ 50,702   

Customer maintenance reserves

     62,227         64,756   

Salaries, wages and benefits

     34,324         48,548   

Aircraft fuel

     24,542         15,078   

Deferred revenue

     13,639         10,705   

Other

     60,129         61,805   
  

 

 

    

 

 

 

Accrued liabilities

$ 264,705    $ 251,594   
  

 

 

    

 

 

 

6. Income Taxes

Our effective income tax rate was 19.4% for the three months ended March 31, 2015 and 38.7% for the three months ended March 31, 2014. The effective rate for the three months ended March 31, 2015 differed from the U.S. federal statutory rate primarily due to an income tax benefit of $4.0 million, net of reserves, related to extraterritorial income (“ETI”) from leasing certain of our aircraft. The effective rate for the three months ended March 31, 2014 differed from the U.S. federal statutory rate primarily due to losses associated with GSS for which we have recognized a valuation allowance due to the uncertainty that the benefit of the losses will be realized. The effective rates also differed from the U.S. federal statutory rate due to the income tax impact of foreign operations taxed at different rates, our assertion to indefinitely reinvest the net earnings of certain foreign subsidiaries outside the U.S., U.S. state income taxes, the nondeductibility of certain expenses for tax purposes, adjustments to our liability for uncertain tax positions, and the relationship of these items to our projected operating results for the year. For interim accounting purposes, we recognize income taxes using an estimated annual effective tax rate.

As a result of current and expected future growth in our Dry Leasing business, we determined to indefinitely reinvest the net earnings of certain foreign subsidiaries engaged in this business outside of the U.S. Our effective income tax rates for the three months ended March 31, 2015 and 2014 were favorably impacted by this determination. As of March 31, 2015, our undistributed net earnings of foreign subsidiaries for which deferred taxes have not been provided were $53.0 million, and the unrecognized deferred tax liability associated with these earnings was $18.5 million.

7. Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Inputs used to measure fair value are classified in the following hierarchy:

 

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2

Other inputs that are observable directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, or inactive quoted prices for identical assets or liabilities in inactive markets;

Level 3 Unobservable inputs reflecting assumptions about the inputs used in pricing the asset or liability.

We endeavor to utilize the best available information to measure fair value.

The carrying value of Cash and cash equivalents, Short-term investments and Restricted cash is based on cost, which approximates fair value.

Long-term investments consist of debt securities for which we have both the ability and the intent to hold until maturity. These investments are classified as held-to-maturity and reported at amortized cost. The fair value of our Long-term investments is based on a discounted cash flow analysis using the contractual cash flows of the investments and a discount rate derived from unadjusted quoted interest rates for debt securities of comparable risk. Such debt securities represent investments in Pass-Through Trust Certificates related to enhanced equipment trust certificates (“EETCs”) issued by Atlas in 1998, 1999 and 2000.

 

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The fair value of our term loans, notes guaranteed by the Export-Import Bank of the United States (“Ex-Im Bank”) and EETCs are based on a discounted cash flow analysis using current borrowing rates for instruments with similar terms.

The following table summarizes the carrying amount, estimated fair value and classification of our financial instruments as of:

 

     March 31, 2015  
     Carrying      Fair Value      Level 1      Level 2      Level 3  

Assets

              

Cash and cash equivalents

   $ 336,406       $ 336,406       $ 336,406       $ —         $ —     

Short-term investments

     23,287         23,287         —           —           23,287   

Restricted cash

     15,028         15,028         15,028         —           —     

Long-term investments and accrued interest

     114,863         148,401         —           —           148,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 489,584    $ 523,122    $ 351,434    $ —      $ 171,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

Term loans

$ 927,333    $ 973,445    $ —      $ —      $ 973,445   

Ex-Im Bank guaranteed notes

  742,921      778,569      —        —        778,569   

EETCs

  200,591      257,776      —        —        257,776   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 1,870,845    $ 2,009,790    $ —      $ —      $ 2,009,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Carrying      Fair Value      Level 1      Level 2      Level 3  

Assets

              

Cash and cash equivalents

   $ 298,601       $ 298,601       $ 298,601       $ —         $ —     

Short-term investments

     17,802         17,802         —           —           17,802   

Restricted cash

     14,281         14,281         14,281         —           —     

Long-term investments and accrued interest

     120,478         154,743         —           —           154,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 451,162      485,427      312,882      —        172,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

Term loans

$ 945,813    $ 982,036    $ —      $ —      $ 982,036   

Ex-Im Bank guaranteed notes

  760,389      789,834      —        —        789,834   

EETCs

  211,739      270,333      —        —        270,333   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 1,917,941    $ 2,042,203    $ —      $ —      $ 2,042,203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the carrying value, gross unrealized gain (loss) and fair value of our long-term investments and accrued interest by contractual maturity as of:

 

     March 31, 2015      December 31, 2014  
     Carrying
Value
     Gross
Unrealized
Gain
(Loss)
     Fair Value      Carrying
Value
     Gross
Unrealized
Gain
(Loss)
     Fair Value  

Debt securities

                 

Due after one but within five years

   $ 47,994       $ 6,235       $ 54,229       $ 40,040       $ 9,700       $ 49,740   

Due after five but within ten years

     66,869         27,303         94,172         80,438         24,565         105,003   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 114,863    $ 33,538    $ 148,401    $ 120,478    $ 34,265    $ 154,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

8. Segment Reporting

We currently have the following three reportable segments: ACMI, Charter and Dry Leasing. We use an economic performance metric (“Direct Contribution”) that shows the profitability of each segment after allocation of operating and ownership costs. The following table sets forth Operating Revenue and Direct Contribution for our reportable segments reconciled to Operating Income and Income before Income Taxes:

 

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     For the Three Months Ended  
     March 31, 2015     March 31, 2014  

Operating Revenue:

    

ACMI

   $ 189,047      $ 198,141   

Charter

     220,138        177,373   

Dry Leasing

     31,919        24,676   

Other

     3,741        3,173   
  

 

 

   

 

 

 

Total Operating Revenue

$ 444,845    $ 403,363   
  

 

 

   

 

 

 

Direct Contribution:

ACMI

$ 39,847    $ 45,564   

Charter

  30,419      (4,117

Dry Leasing

  15,525      8,171   
  

 

 

   

 

 

 

Total Direct Contribution for Reportable Segments

  85,791      49,618   
  

 

 

   

 

 

 

Add back (subtract):

Unallocated income and expenses, net*

  (48,889   (35,024

Special charge

  568      (8,029

Loss on disposal of aircraft

  (1,209   —     
  

 

 

   

 

 

 

Income before Income Taxes

  36,261      6,565   
  

 

 

   

 

 

 

Add back (subtract):

Interest income

  (4,488   (4,727

Interest expense

  24,548      26,452   

Capitalized interest

  (26   (312

Other expense (income), net

  675      152   
  

 

 

   

 

 

 

Operating Income

$ 56,970    $ 28,130   
  

 

 

   

 

 

 
* During the first quarter of 2015, we changed the methodology for allocating certain unallocated expenses to our segments. The prior period information has been adjusted to consistently reflect this change.

We are exposed to a concentration of revenue from the U.S. Military Air Mobility Command (the “AMC”) and Polar (see Note 3 for further discussion regarding Polar). No other customer accounted for more than 10.0% of our Total Operating Revenue. Revenue from the AMC was $90.1 million for the three months ended March 31, 2015 and $62.9 million for the three months ended March 31, 2014. Accounts receivable from the AMC were $20.3 million and $15.3 million as of March 31, 2015 and December 31, 2014, respectively. We have not experienced any credit issues with either of these customers.

9. Legal Proceedings

Matters Related to Alleged Pricing Practices

The Company and Old Polar have been named defendants, along with a number of other cargo carriers, in several class actions in the United States arising from allegations about the pricing practices of Old Polar and a number of air cargo carriers that have now been centralized for pretrial purposes in the United States District Court for the Eastern District of New York. The consolidated complaint alleges, among other things, that the defendants, including the Company and Old Polar, manipulated the market price for air cargo services sold domestically and abroad through the use of surcharges, in violation of United States, state, and European Union antitrust laws. The suit seeks treble damages and injunctive relief.

In 2007, the Company and Old Polar commenced an adversary proceeding in bankruptcy court against each of the plaintiffs in this class action litigation seeking to enjoin the plaintiffs from prosecuting claims against the Company and Old Polar that arose prior to July 28, 2004, the date on which the Company and Old Polar emerged from bankruptcy. In 2007, the plaintiffs consented to the injunctive relief requested and the bankruptcy court entered an order enjoining plaintiffs from prosecuting Company claims arising prior to July 28, 2004.

 

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The court in the antitrust class actions has heard and decided a number of procedural motions. Among those was the plaintiffs’ motion to join Polar Air Cargo Worldwide, Inc. as an additional defendant, which the court granted for discovery purposes on April 13, 2011. There was substantial pretrial written discovery and document production, and a number of depositions were taken. A court hearing on whether or not to certify the case as a class action was held in October 2013, and oral arguments and an evidentiary hearing were held in November 2013. On October 15, 2014, the magistrate judge issued a decision recommending that the court enter an order certifying the class for adjudicating the claims. We filed our opposition to that recommendation with the judge on December 1, 2014 and also intend to vigorously pursue a number of defenses. We are unable to reasonably predict the court’s ruling on our opposition to class certification and our defenses, or the ultimate outcome of the litigation.

In the United Kingdom, several groups of named claimants have brought suit against British Airways in connection with the same alleged antitrust practices at issue in the proceedings described above and are seeking damages allegedly arising from that conduct. British Airways has filed claims in the lawsuit against Old Polar, the Company and a number of air cargo carriers for contribution should British Airways be found liable to claimants. Old Polar’s formal statement of defense was filed on February 28, 2015. Old Polar intends to mount a vigorous defense.

If the Company or Old Polar were to incur an unfavorable outcome in connection with one or more of the matters described above, such outcome is not expected to materially affect our business, financial condition, results of operations or cash flows.

Brazilian Customs Claim

Old Polar was cited for two alleged customs violations in Sao Paulo, Brazil, relating to shipments of goods dating back to 1999 and 2000. Each claim asserts that goods listed on the flight manifest of two separate Old Polar scheduled service flights were not on board the aircraft upon arrival and therefore were improperly brought into Brazil. The two claims, which also seek unpaid customs duties, taxes and penalties from the date of the alleged infraction, are approximately $6.1 million in aggregate based on March 31, 2015 exchange rates.

In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. Furthermore, we may seek appropriate indemnity from the shipper in each claim as may be feasible. In the pending claim for one of the cases, we have received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. As required to defend such claims, we have made deposits pending resolution of these matters. The balances were $4.4 million as of March 31, 2015 and $5.3 million as of December 31, 2014, and are included in Deposits and other assets.

We are currently defending these and other Brazilian customs claims and the ultimate disposition of these claims, either individually or in the aggregate, is not expected to materially affect our financial condition, results of operations or cash flows.

Other

We have certain other contingencies incident to the ordinary course of business. Management believes that the ultimate disposition of such other contingencies is not expected to materially affect our financial condition, results of operations or cash flows.

10. Earnings Per Share

Basic earnings per share (“EPS”) represent net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represent net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period. Anti-dilutive options that were out of the money for the three months ended March 31, 2015 and 2014 were de minimis and excluded.

 

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The calculations of basic and diluted EPS were as follows:

 

     For the Three Months Ended  
     March 31, 2015      March 31, 2014  

Numerator:

     

Net Income Attributable to Common Stockholders

   $ 29,232       $ 7,944   

Denominator:

     

Basic EPS weighted average shares outstanding

     24,876         25,096   

Effect of dilutive stock options and restricted stock

     194         55   
  

 

 

    

 

 

 

Diluted EPS weighted average shares outstanding

  25,070      25,151   
  

 

 

    

 

 

 

EPS:

Basic

$ 1.18    $ 0.32   
  

 

 

    

 

 

 

Diluted

$ 1.17    $ 0.32   
  

 

 

    

 

 

 

Diluted shares reflect the potential dilution that could occur from stock options and restricted share units using the treasury stock method. The calculation does not include restricted share units in which performance or market conditions were not satisfied of 0.3 million for the three months ended March 31, 2015 and 0.5 million for the three months ended March 31, 2014.

11. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the components of Accumulated other comprehensive income (loss):

 

     Interest Rate
Derivatives
     Foreign Currency
Translation
     Total  

Balance as of December 31, 2013

   $ (11,375    $ 698       $ (10,677

Net change in fair value

     (251      —           (251

Reclassification to interest expense

     690         —           690   

Translation adjustment

     —           77         77   

Tax effect

     (246      —           (246
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2014

$ (11,182 $ 775    $ (10,407
  

 

 

    

 

 

    

 

 

 
     Interest Rate
Derivatives
     Foreign Currency
Translation
     Total  

Balance as of December 31, 2014

   $ (9,924    $ 352       $ (9,572

Net change in fair value

     —           —           —     

Reclassification to interest expense

     650         —           650   

Translation adjustment

     —           (58      (58

Tax effect

     (248      —           (248
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2015

$ (9,522 $ 294    $ (9,228
  

 

 

    

 

 

    

 

 

 

Interest Rate Derivatives

As of March 31, 2015, there was $15.4 million of unamortized realized loss before taxes remaining in Accumulated other comprehensive income (loss) related to terminated forward-starting interest rate swaps, which had been designated as cash flow hedges to effectively fix the interest rates on two 747-8F financings in 2011 and three 777-200LRF financings in 2014. The net loss is amortized and reclassified into Interest expense over the remaining life of the related debt. Net realized losses reclassified into earnings were $0.7 million for the three months ended March 31, 2015 and 2014. Net realized losses expected to be reclassified into earnings within the next 12 months are $2.5 million as of March 31, 2015.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited Financial Statements appearing in this report and our audited consolidated financial statements and related notes included in our 2014 Annual Report on Form 10-K.

Background

Certain Terms - Glossary

The following represents terms and statistics specific to our business and industry. They are used by management to evaluate and measure operations, results, productivity and efficiency.

 

Block Hour The time interval between when an aircraft departs the terminal until it arrives at the destination terminal.
C Check High-level or “heavy” airframe maintenance checks, which are more intensive in scope than Line Maintenance and are generally performed between 18 and 24 months depending on aircraft type.
D Check High-level or “heavy” airframe maintenance checks, which are the most extensive in scope and are generally performed every six and eight years depending on aircraft type.
Heavy Maintenance Scheduled maintenance activities, which are the most extensive in scope and are primarily based on time intervals, including, but not limited to, C Checks, D Checks and engine overhauls. In addition, unscheduled engine repairs involving the removal of the engine from the aircraft are considered to be heavy maintenance. Heavy maintenance can generally take from one to eight weeks to complete.
Line Maintenance Unscheduled maintenance to rectify events occurring during normal day-to-day operations.
Non-heavy Discrete maintenance activities for the overhaul and repair of specific aircraft
Maintenance components, including landing gear, auxiliary power units and engine thrust reversers.
Yield The average amount a customer pays to fly one tonne of cargo one mile.

Business Overview

We are a leading global provider of outsourced aircraft and aviation operating services, operating the world’s largest fleet of 747 freighters, as well as operating 747 and 767 passenger aircraft and 767 freighters. We also own and dry lease a portfolio of aircraft, including six 777 freighters. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include airlines, express delivery providers, freight forwarders, the U.S. military and charter brokers. We provide global services with operations in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

Our primary service offerings include the following:

 

    ACMI, whereby we provide outsourced cargo and passenger aircraft operating solutions, including the provision of an aircraft, crew, maintenance and insurance, while customers assume fuel, demand and Yield risk. In addition, the customer is responsible for landing, navigation and most other operational fees and costs;

 

    CMI, which is part of our ACMI business segment, whereby we provide outsourced cargo and passenger aircraft operating solutions, including the provision of crew, maintenance and insurance, while customers provide the aircraft and assume fuel, demand and Yield risk. In addition, the customer is responsible for landing, navigation and most other operational fees and costs;

 

    Charter, whereby we provide cargo and passenger aircraft charter services to customers, including the AMC, brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. The customer pays a fixed charter fee that includes fuel, insurance, landing fees, navigation fees and most other operational fees and costs; and

 

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    Dry Leasing, whereby we provide cargo and passenger aircraft and engine leasing solutions. The customer operates, and is responsible for insuring and maintaining, the flight equipment.

We look to achieve our growth plans and enhance shareholder value by:

 

    Delivering superior service quality to our valued customers;

 

    Aggressively managing our fleet with a focus on leading-edge aircraft;

 

    Focusing on securing long-term customer contracts;

 

    Driving significant and ongoing productivity improvements;

 

    Selectively pursuing and evaluating future acquisitions and alliances; while

 

    Appropriately managing capital allocation and returning capital to shareholders.

See “Business Overview” and “Business Strategy” in our 2014 Annual Report on Form 10-K for additional information.

Business Developments

Our ACMI results for 2015, compared with 2014, were impacted by the following events:

 

    In February 2014, we began ACMI flying a 747-8F aircraft with BST Logistics (Hong Kong) Company Limited, a business partner of Navitrans International Freight Forwarding Co., Ltd. Service, which was the first 747-8F aircraft in its network.

 

    In April and early May 2014, British Airways returned three 747-8F aircraft. In May and October 2014, the three 747-8F aircraft were placed in ACMI service for DHL, replacing one 747-400F aircraft.

 

    In October 2014, we began ACMI flying one additional 747-400F aircraft for DHL, increasing the number of 747 freighter aircraft in ACMI service for DHL to twelve.

 

    In November 2014, we began ACMI flying a 747-400F aircraft for Etihad Airways, which was the second 747-400F aircraft in its global network.

 

    In March 2015, we began ACMI flying one additional 747-8F aircraft for DHL following its transition from Panalpina Air & Ocean Ltd. The aircraft is initially replacing a 747-400F aircraft.

 

    In the first quarter of 2015, we began CMI flying three additional 767-200 freighters owned by DHL in its North American network. A fourth 767-200 freighter began CMI flying in April 2015.

Charter Block Hours increased during the first quarter of 2015, reflecting stronger commercial cargo demand, which was enhanced by the U.S. West Coast port disruption, and increased cargo and passenger demand from the AMC.

Results of Operations

The following discussion should be read in conjunction with our Financial Statements and other financial information appearing and referred to elsewhere in this report.

 

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Three Months Ended March 31, 2015 and 2014

Operating Statistics

The table below sets forth selected Operating Statistics for the three months ended March 31:

 

     2015      2014      Increase /
(Decrease)
     Percent
Change
 

Block Hours

           

ACMI

     29,460         28,023         1,437         5.1

Charter:

           

Cargo

     8,268         5,899         2,369         40.2

Passenger

     3,221         2,715         506         18.6

Other

     331         236         95         40.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Block Hours

  41,280      36,873      4,407      12.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue Per Block Hour

ACMI

$ 6,417    $ 7,071    $ (654   (9.2 )% 

Charter:

$ 19,161    $ 20,591    $ (1,430   (6.9 )% 

Cargo

$ 19,258    $ 20,293    $ (1,035   (5.1 )% 

Passenger

$ 18,912    $ 21,239    $ (2,327   (11.0 )% 

Charter Fuel

Average fuel cost per gallon

$ 2.34    $ 3.23    $ (0.89   (27.6 )% 

Fuel gallons consumed (000s)

  33,312      25,299      8,013      31.7

Segment Operating Fleet (average aircraft equivalents during the period)

 

  

ACMI*

747-8F Cargo

  8.6      8.7      (0.1

747-400 Cargo

  12.2      12.5      (0.3

747-400 Dreamlifter

  3.1      3.1      —     

767-300 Cargo

  2.0      2.0      —     

767-200 Cargo

  6.4      5.0      1.4   

747-400 Passenger

  1.0      1.0      —     

767-200 Passenger

  1.0      1.0      —     
  

 

 

    

 

 

    

 

 

    

Total

  34.3      33.3      1.0   

Charter

747-8F Cargo

  0.3      0.2      0.1   

747-400 Cargo

  8.9      8.3      0.6   

747-400 Passenger

  2.0      2.0      —     

767-300 Passenger

  3.0      3.0      —     
  

 

 

    

 

 

    

 

 

    

Total

  14.2      13.5      0.7   

Dry Leasing

777-200 Cargo

  6.0      5.8      0.2   

757-200 Cargo

  1.0      1.0      —     

737-300 Cargo

  1.0      1.0      —     

737-800 Passenger

  1.6      2.0      (0.4
  

 

 

    

 

 

    

 

 

    

Total

  9.6      9.8      (0.2
  

 

 

    

 

 

    

 

 

    

Total Operating Aircraft

  58.1      56.6      1.5   
  

 

 

    

 

 

    

 

 

    

Out-of-service**

  1.0      1.0      —     

 

* ACMI average fleet excludes spare aircraft provided by CMI customers.
** Our out-of-service aircraft are completely unencumbered.

 

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Operating Revenue

The following table compares our Operating Revenue for the three months ended March 31 (in thousands):

 

     2015      2014      Increase /
(Decrease)
    Percent
Change
 

Operating Revenue

          

ACMI

   $ 189,047       $ 198,141       $ (9,094     (4.6 )% 

Charter

     220,138         177,373         42,765        24.1

Dry Leasing

     31,919         24,676         7,243        29.4

Other

     3,741         3,173         568        17.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Revenue

$ 444,845    $ 403,363    $ 41,482      10.3
  

 

 

    

 

 

    

 

 

   

 

 

 

ACMI revenue decreased $9.1 million, or 4.6%, primarily due to reduced Revenue per Block Hour, partially offset by increased flying. ACMI Revenue per Block Hour was $6,417 for the first three months of 2015, compared to $7,071 in 2014, a decrease of $654 per Block Hour, or 9.2%. The decrease in Revenue per Block Hour reflects the impact of higher Revenue per Block Hour in 2014 resulting from customers that flew below their contractual minimums, payments received in 2014 related to a customer’s return of aircraft, and increased CMI flying in 2015. ACMI Block Hours were 29,460 in the first three months of 2015, compared to 28,023 in 2014, an increase of 1,437 Block Hours, or 5.1%. The increase in Block Hours was primarily driven by the start-up of CMI flying three additional 767-200F aircraft and improvements in ACMI aircraft utilization.

Charter revenue increased $42.8 million, or 24.1%, primarily driven by an increase in both cargo and passenger flying, partially offset by a decrease in Revenue per Block Hour. Charter Block Hours were 11,489 in the first three months of 2015 compared with 8,614 in 2014, an increase of 2,875 Block Hours, or 33.4%. The increase in Charter Block Hours was primarily driven by increased commercial cargo demand, which was enhanced by the U.S. West Coast port disruption, and increased cargo and passenger demand from the AMC. Charter Revenue per Block Hour was $19,161 for the first three months of 2015 compared with $20,591 in 2014, a decrease of $1,430 per Block Hour, or 6.9%. This decrease was primarily driven by the impact from lower fuel prices.

Dry Leasing revenue increased $7.2 million, or 29.4%, primarily due to revenue from maintenance payments related to the scheduled return of a 737-800 passenger aircraft in February 2015.

Operating Expenses

The following table compares our Operating Expenses for the three months ended March 31 (in thousands):

 

     2015     2014      Increase /
(Decrease)
    Percent
Change
 

Operating Expenses

         

Salaries, wages and benefits

   $ 88,773      $ 72,855       $ 15,918        21.8

Aircraft fuel

     78,115        81,744         (3,629     (4.4 )% 

Maintenance, materials and repairs

     58,832        59,046         (214     (0.4 )% 

Aircraft rent

     34,261        35,410         (1,149     (3.2 )% 

Depreciation and amortization

     32,030        28,155         3,875        13.8

Navigation fees, landing fees and other rent

     23,503        27,126         (3,623     (13.4 )% 

Travel

     20,813        17,282         3,531        20.4

Passenger and ground handling services

     19,963        19,371         592        3.1

Loss on disposal of aircraft

     1,209        —           1,209        NM   

Special charge

     (568     8,029         (8,597     NM   

Other

     30,944        26,215         4,729        18.0
  

 

 

   

 

 

      

Total Operating Expenses

$ 387,875    $ 375,233   
  

 

 

   

 

 

      

NM represents year-over-year changes are not meaningful.

Salaries, wages and benefits increased $15.9 million, or 21.8%, primarily driven by increases to crewmember and ground staff costs due to higher Block Hours, key initiatives and increased profitability.

 

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Aircraft fuel decreased $3.6 million, or 4.4%, primarily due to fuel price decreases, partially offset by increased fuel consumption. The average fuel price per gallon for the Charter business was $2.34 for 2015, compared with $3.23 in 2014, a decrease of 27.6%. Fuel consumption increased by 8.0 million gallons, or 31.7%, reflecting the increase in Charter Block Hours operated. We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer.

Maintenance, materials and repairs were relatively unchanged, reflecting a decrease of $4.9 million for 747-400 aircraft, partially offset by an increase of $4.5 million for 747-8F aircraft. Heavy maintenance on 747-400 aircraft decreased $10.0 million due to a decrease in the number of C and D Checks, and the number of engine overhauls, partially offset by an increase of $4.5 million in Non-heavy maintenance. Heavy Maintenance expense on 747-8F aircraft increased $3.9 million due to an increase in unscheduled engine repairs and an increase in the number of C Checks. Line Maintenance expense on 747-400 aircraft and 747-8F aircraft increased $1.2 million primarily due to increased flying in 2015. Heavy airframe maintenance events and engine overhauls for the three months ended March 31 were:

 

Heavy Maintenance Events

   2015    2014    Increase /
(Decrease)

747-8F C Checks

   1       1

747-400 C Checks

   1    5    (4)

747-400 D Checks

   2    3    (1)

CF6-80 engine overhauls

   4    5    (1)

Depreciation and amortization increased $3.9 million, or 13.8%, primarily due to increased scrapping of rotable parts related to our engine and spare parts purchase program, which avoids more expensive repairs.

Navigation fees, landing fees and other rent decreased $3.6 million, or 13.4%, primarily due to a reduction in purchased capacity from the subcontracting of certain Charter flights.

Travel increased $3.5 million, or 20.4%, primarily due to increased flying and higher rates related to crewmember travel to higher cost locations.

Loss on disposal of aircraft in 2015 resulted from the sale of used unserviceable spare engine component parts and the sale of a 737-800 passenger aircraft.

Special charge in 2014 represents a $5.1 million reserve related to a GSS receivable for a loan made to its 51% U.K. shareholder, a $2.3 million expense recorded for termination benefits for certain GSS employees and a $0.6 million adjustment related to the early termination of operating leases for two 747-400BCF aircraft (see Note 4 to our Financial Statements).

Other increased $4.7 million, or 18.0%, primarily due to increased commission expense on higher revenue from the AMC and increased professional fees to support key initiatives.

Non-operating Expenses (Income)

The following table compares our Non-operating Expenses (Income) for the three months ended March 31 (in thousands):

 

     2015      2014      Increase /
(Decrease)
     Percent
Change
 

Non-operating Expenses (Income)

           

Interest income

   $ (4,488    $ (4,727    $ (239      (5.1 )% 

Interest expense

     24,548         26,452         (1,904      (7.2 )% 

Capitalized interest

     (26      (312      (286      (91.7 )% 

Other expense (income), net

     675         152         523         NM   

Interest expense decreased $1.9 million, or 7.2%, primarily due to a decrease in our average debt balances, reflecting payments of debt.

Income taxes. Our effective income tax rates were 19.4% for the three months ended March 31, 2015 and 38.7% for the three months ended March 31, 2014. The effective income tax rate for the first quarter of 2015 differed from the U.S. federal statutory rate primarily due to an income tax benefit of $4.0 million, net of reserves, related to ETI (see Note 6 to our Financial Statements).

 

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Segments

The following table compares the Direct Contribution of our reportable segments (see Note 8 to our Financial Statements for the reconciliation to Operating income) for the three months ended March 31 (in thousands):

 

     2015      2014      Increase /
(Decrease)
     Percent
Change
 

Direct Contribution:

           

ACMI

   $ 39,847       $ 45,564       $ (5,717      (12.5 )% 

Charter

     30,419         (4,117      34,536         NM   

Dry Leasing

     15,525         8,171         7,354         90.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Direct Contribution

$ 85,791    $ 49,618    $ 36,173      72.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Unallocated income and expenses, net

$ 48,889    $ 35,024    $ 13,865      39.6
  

 

 

    

 

 

    

 

 

    

 

 

 

ACMI Segment

ACMI Direct Contribution decreased $5.7 million, or 12.5%, primarily due to the impact of customers that flew below their contractual minimums in 2014.

Charter Segment

Charter Direct Contribution increased $34.5 million, primarily due to an increase in cargo and passenger revenue, as well as higher cargo aircraft utilization driven by increased demand. In addition, Charter Direct Contribution benefited from lower fuel costs and a reduction in Heavy maintenance expense.

Dry Leasing Segment

Dry Leasing Direct Contribution increased $7.4 million, or 90.0%, primarily due to revenue from maintenance payments related to the scheduled return of a 737-800 passenger aircraft in February 2015.

Unallocated income and expenses, net

Unallocated income and expenses, net increased $13.9 million, or 39.6%, primarily due to the timing of incentive compensation driven by higher anticipated earnings in 2015.

Reconciliation of GAAP to non-GAAP Financial Measures

To supplement our Financial Statements presented in accordance with GAAP, we present certain non-GAAP financial measures to assist in the evaluation of our business performance. These non-GAAP financial measures include Adjusted Net Income Attributable to Common Stockholders and adjusted diluted earnings per share (“Adjusted Diluted EPS”), which exclude certain items that impact year-over-year comparisons of our results. These non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

We use these non-GAAP financial measures in assessing the performance of our ongoing operations and in planning and forecasting future periods. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our business results and assessing our prospects for future performance.

 

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The following is a reconciliation of Net Income Attributable to Common Stockholders and Diluted EPS to the corresponding non-GAAP financial measures (in thousands, except per share data):

 

     For the Three Months Ended  
     March 31, 2015      March 31, 2014      Percent Change  

Net Income Attributable to Common Stockholders

   $ 29,232       $ 7,944         268.0

After-tax impact from:

        

ETI tax benefit

     (4,008      —        

Special charge (a)

     (411      3,382      

Loss on disposal of aircraft

     884         —        
  

 

 

    

 

 

    

 

 

 

Adjusted Net Income Attributable to Common Stockholders

$ 25,697    $ 11,326      126.9
  

 

 

    

 

 

    

 

 

 
     For the Three Months Ended  
     March 31, 2015      March 31, 2014      Percent Change  

Diluted EPS

   $ 1.17       $ 0.32         265.6

After-tax impact from:

        

ETI tax benefit

     (0.16      —        

Special charge (a)

     (0.02      0.13      

Loss on disposal of aircraft

     0.04         —        
  

 

 

    

 

 

    

 

 

 

Adjusted Diluted EPS

$ 1.03    $ 0.45      128.9
  

 

 

    

 

 

    

 

 

 

 

a) Included in Special charge in 2014 were employee termination benefits, a loan reserve and tax adjustments related to GSS, and an adjustment to lease termination costs for two 747-400BCFs.

Liquidity and Capital Resources

Operating Activities. Net cash provided by operating activities for the first quarter of 2015 was $90.6 million, compared with $41.3 million for the first quarter of 2014. The increase primarily reflects higher earnings and changes in the timing of working capital.

Investing Activities. Net cash used for investing activities was $0.5 million for the first quarter of 2015, consisting primarily of $14.9 million of purchase deposits and delivery payments for flight equipment, and $10.4 million of core capital expenditures, excluding flight equipment. Partially offsetting these investing activities was $24.3 million of proceeds from disposal of aircraft. All capital expenditures for the first quarter of 2015 were funded through working capital. Net cash used for investing activities was $488.1 million for the first quarter of 2014, consisting primarily of $478.7 million of purchase deposits and delivery payments for flight equipment, a $6.0 million increase in restricted cash and $4.1 million of core capital expenditures, excluding flight equipment. Purchase deposits and delivery payments for flight equipment in 2014 were primarily related to the purchase of three 777-200LRF aircraft.

Financing Activities. Net cash used for financing activities was $52.3 million for the first quarter of 2015, which primarily reflected $50.8 million of payments on debt obligations and $6.1 million related to the purchase of treasury stock, partially offset by $4.1 million of customer maintenance reserves received. Net cash provided by financing activities was $404.7 million for the first quarter of 2014, which primarily reflected the proceeds from debt issuance of $572.6 million and $4.2 million of customer maintenance reserves received, partially offset by $151.7 million of payments on debt obligations, $17.0 million of debt issuance costs and $2.4 million related to the purchase of treasury stock. The proceeds from debt issuance and payments of debt obligations reflect the refinancing of a $103.6 million bridge loan with a long-term note.

We consider Cash and cash equivalents, Short-term investments, Restricted cash and Net cash provided by operating activities to be sufficient to meet our debt and lease obligations, to fund capital expenditures for the remainder of 2015 and to repurchase shares of our stock. Core capital expenditures for the remainder of 2015 are expected to be between $30.0 to $35.0 million, which excludes flight equipment and capitalized interest.

We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. To that end, we filed a shelf registration statement with the SEC in 2012 that enables us to sell a yet to be determined amount of debt and/or equity securities over the subsequent three years, depending on market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets.

 

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We do not expect to pay any significant U.S. federal income tax until 2020 or later. Our business operations are subject to income tax in several foreign jurisdictions. We do not expect to pay any significant cash income taxes in foreign jurisdictions for at least several years. We currently do not intend to repatriate cash from certain foreign subsidiaries that is indefinitely reinvested outside the U.S. Any repatriation of cash from these subsidiaries or certain changes in U.S. tax laws could result in additional tax expense.

Contractual Obligations and Debt Agreements

There were no new debt obligations during the three months ended March 31, 2015. See our 2014 Annual Report on Form 10-K for a tabular disclosure of our contractual obligations as of December 31, 2014 and a description of our debt obligations and amendments thereto.

Off-Balance Sheet Arrangements

There were no material changes in our off-balance sheet arrangements during the three months ended March 31, 2015.

Recent Accounting Pronouncements

See Note 2 to our Financial Statements for a discussion of recent accounting pronouncements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”), as well as other reports, releases and written and oral communications issued or made from time to time by or on behalf of AAWW, contain statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements are based on management’s beliefs, plans, expectations and assumptions, and on information currently available to management. Generally, the words “will,” “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “project,” “estimate” and similar expressions used in this Report that do not relate to historical facts are intended to identify forward-looking statements.

The forward-looking statements in this Report are not representations or guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2014. Many of such factors are beyond AAWW’s control and are difficult to predict. As a result, AAWW’s future actions, financial position, results of operations and the market price for shares of AAWW’s common stock could differ materially from those expressed in any forward-looking statements. Readers are therefore cautioned not to place undue reliance on forward-looking statements. AAWW does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, AAWW, whether as a result of new information, future events or otherwise, except as required by law.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For additional discussion of our exposure to market risk, refer to Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” included in our 2014 Annual Report on Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2015. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

With respect to the fiscal quarter ended March 31, 2015, the information required in response to this Item is set forth in Note 9 to our Financial Statements and such information is incorporated herein by reference. Such description contains all of the information required with respect hereto.

 

ITEM 1A. RISK FACTORS

For additional risk factors that may cause actual results to differ materially from those anticipated, please refer to our 2014 Annual Report on Form 10-K.

 

ITEM 6. EXHIBITS

 

  a. Exhibits

See accompanying Exhibit Index included after the signature page of this report for a list of exhibits filed or furnished with this report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Atlas Air Worldwide Holdings, Inc.

Dated: April 30, 2015

/s/ William J. Flynn

William J. Flynn
President and Chief Executive Officer

Dated: April 30, 2015

/s/ Spencer Schwartz

Spencer Schwartz
Executive Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number
   Description
  10    Atlas Air, Inc. 401(k) Restoration and Voluntary Deferral Plan Restated Effective as of February 11, 2011, as Further Amended Effective January 1, 2015.
  31.1    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer, furnished herewith.
  31.2    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer, furnished herewith.
  32.1    Section 1350 Certifications, furnished herewith.
101.INS    XBRL Instance Document. *
101.SCH    XBRL Taxonomy Extension Schema Document. *
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document. *
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document. *
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document. *

 

 

* Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, (v) Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2015 and 2014 and (vi) Notes to Unaudited Consolidated Financial Statements. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

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