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ATLAS AIR WORLDWIDE HOLDINGS INC - Quarter Report: 2019 June (Form 10-Q)

 

cover

  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2019  

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

 

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)

 

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 Par Value

 

AAWW

 

The NASDAQ Global Select Market

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer       Accelerated filer      Non-accelerated filer       Smaller reporting company       Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of July 26, 2019, there were 25,854,140 shares of the registrant’s Common Stock outstanding.

Securities registered pursuant to Section 12(b) of the Act:

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

Part I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018 (unaudited)

 

6

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity as of and for the Three and Six Months ended June 30, 2019 and 2018 (unaudited)

 

7

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

36

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

37

 

 

 

 

 

Item 1A.

 

Risk Factors

 

37

 

 

 

 

 

Item 6.

 

Exhibits

 

37

 

 

 

 

 

 

 

Exhibit Index

 

38

 

 

 

 

 

 

 

Signatures

 

39

 

 

 

 


 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atlas Air Worldwide Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,665

 

 

$

221,501

 

Short-term investments

 

 

7,153

 

 

 

15,624

 

Restricted cash

 

 

10,093

 

 

 

11,240

 

Accounts receivable, net of allowance of $1,633 and $1,563, respectively

 

 

265,489

 

 

 

269,320

 

Prepaid expenses and other current assets

 

 

81,900

 

 

 

112,146

 

Total current assets

 

 

475,300

 

 

 

629,831

 

Property and Equipment

 

 

 

 

 

 

 

 

Flight equipment

 

 

5,252,971

 

 

 

5,213,734

 

Ground equipment

 

 

83,250

 

 

 

75,939

 

Less:  accumulated depreciation

 

 

(954,100

)

 

 

(860,354

)

Flight equipment modifications in progress

 

 

128,166

 

 

 

32,916

 

Property and equipment, net

 

 

4,510,287

 

 

 

4,462,235

 

Other Assets

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

538,631

 

 

 

-

 

Deferred costs and other assets

 

 

377,962

 

 

 

345,037

 

Intangible assets, net and goodwill

 

 

83,162

 

 

 

97,689

 

Total Assets

 

$

5,985,342

 

 

$

5,534,792

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

66,441

 

 

$

87,229

 

Accrued liabilities

 

 

485,436

 

 

 

465,669

 

Current portion of long-term debt and finance lease

 

 

268,686

 

 

 

264,835

 

Current portion of long-term operating leases

 

 

146,091

 

 

 

-

 

Total current liabilities

 

 

966,654

 

 

 

817,733

 

Other Liabilities

 

 

 

 

 

 

 

 

Long-term debt and finance lease

 

 

2,125,228

 

 

 

2,205,005

 

Long-term operating leases

 

 

445,821

 

 

 

-

 

Deferred taxes

 

 

195,608

 

 

 

256,970

 

Financial instruments and other liabilities

 

 

124,922

 

 

 

187,120

 

Total other liabilities

 

 

2,891,579

 

 

 

2,649,095

 

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; 100,000,000 shares authorized;

    31,026,500 and 30,582,571 shares issued, 25,854,140 and 25,590,293

    shares outstanding (net of treasury stock), as of June 30, 2019

    and December 31, 2018, respectively

 

 

310

 

 

 

306

 

Additional paid-in-capital

 

 

746,725

 

 

 

736,035

 

Treasury stock, at cost; 5,172,360 and 4,992,278 shares, respectively

 

 

(213,728

)

 

 

(204,501

)

Accumulated other comprehensive loss

 

 

(3,312

)

 

 

(3,832

)

Retained earnings

 

 

1,597,114

 

 

 

1,539,956

 

Total stockholders’ equity

 

 

2,127,109

 

 

 

2,067,964

 

Total Liabilities and Equity

 

$

5,985,342

 

 

$

5,534,792

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

3


 

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$

663,918

 

 

$

666,145

 

 

$

1,343,601

 

 

$

1,256,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

141,450

 

 

 

129,176

 

 

 

286,924

 

 

 

254,258

 

Aircraft fuel

 

 

122,158

 

 

 

129,706

 

 

 

228,479

 

 

 

226,009

 

Maintenance, materials and repairs

 

 

113,471

 

 

 

88,236

 

 

 

217,091

 

 

 

173,115

 

Depreciation and amortization

 

 

63,689

 

 

 

50,834

 

 

 

128,170

 

 

 

100,464

 

Travel

 

 

46,374

 

 

 

42,358

 

 

 

91,403

 

 

 

82,205

 

Aircraft rent

 

 

40,335

 

 

 

40,281

 

 

 

82,223

 

 

 

79,805

 

Navigation fees, landing fees and other rent

 

 

37,982

 

 

 

37,698

 

 

 

78,198

 

 

 

73,295

 

Passenger and ground handling services

 

 

30,525

 

 

 

30,202

 

 

 

62,685

 

 

 

58,264

 

Special charge

 

 

3,269

 

 

 

9,374

 

 

 

3,269

 

 

 

9,374

 

Transaction-related expenses

 

 

734

 

 

 

240

 

 

 

3,261

 

 

 

510

 

Other

 

 

54,961

 

 

 

47,094

 

 

 

106,054

 

 

 

97,345

 

Total Operating Expenses

 

 

654,948

 

 

 

605,199

 

 

 

1,287,757

 

 

 

1,154,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

8,970

 

 

 

60,946

 

 

 

55,844

 

 

 

101,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating  Expenses (Income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(1,278

)

 

 

(1,388

)

 

 

(3,322

)

 

 

(3,112

)

Interest expense

 

 

30,045

 

 

 

29,182

 

 

 

60,398

 

 

 

56,524

 

Capitalized interest

 

 

(627

)

 

 

(1,465

)

 

 

(1,090

)

 

 

(3,215

)

Loss on early extinguishment of debt

 

 

-

 

 

 

-

 

 

 

245

 

 

 

-

 

Unrealized (gain) loss on financial instruments

 

 

(42,300

)

 

 

50,031

 

 

 

4,275

 

 

 

57,771

 

Other (income) expense, net

 

 

945

 

 

 

(7,277

)

 

 

(2,030

)

 

 

(11,752

)

Total Non-operating Expenses (Income)

 

 

(13,215

)

 

 

69,083

 

 

 

58,476

 

 

 

96,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

22,185

 

 

 

(8,137

)

 

 

(2,632

)

 

 

5,299

 

Income tax (benefit) expense

 

 

(64,683

)

 

 

12,986

 

 

 

(59,790

)

 

 

16,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of taxes

 

 

86,868

 

 

 

(21,123

)

 

 

57,158

 

 

 

(11,495

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

-

 

 

 

(27

)

 

 

-

 

 

 

(43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

86,868

 

 

$

(21,150

)

 

$

57,158

 

 

$

(11,538

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.36

 

 

$

(0.83

)

 

$

2.22

 

 

$

(0.45

)

Diluted

 

$

1.61

 

 

$

(0.83

)

 

$

2.21

 

 

$

(0.45

)

Loss per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

-

 

 

$

(0.00

)

 

$

-

 

 

$

(0.00

)

Diluted

 

$

-

 

 

$

(0.00

)

 

$

-

 

 

$

(0.00

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.36

 

 

$

(0.83

)

 

$

2.22

 

 

$

(0.45

)

Diluted

 

$

1.61

 

 

$

(0.83

)

 

$

2.21

 

 

$

(0.45

)

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,851

 

 

 

25,565

 

 

 

25,794

 

 

 

25,501

 

Diluted

 

 

26,953

 

 

 

25,565

 

 

 

25,921

 

 

 

25,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

4


 

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Net Income (Loss)

 

$

86,868

 

 

$

(21,150

)

 

$

57,158

 

 

$

(11,538

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to interest expense

 

 

337

 

 

 

365

 

 

 

681

 

 

 

750

 

Income tax expense

 

 

(80

)

 

 

(120

)

 

 

(161

)

 

 

(177

)

Other comprehensive income

 

 

257

 

 

 

245

 

 

 

520

 

 

 

573

 

Comprehensive Income (Loss)

 

$

87,125

 

 

$

(20,905

)

 

$

57,678

 

 

$

(10,965

)

 

See accompanying Notes to Unaudited Consolidated Financial Statements

5


 

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Operating Activities:

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of taxes

 

$

57,158

 

 

$

(11,495

)

Less: Loss from discontinued operations, net of taxes

 

 

-

 

 

 

(43

)

Net Income (Loss)

 

 

57,158

 

 

 

(11,538

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

157,820

 

 

 

121,606

 

Accretion of debt securities discount

 

 

208

 

 

 

(512

)

Provision for allowance for doubtful accounts

 

 

4

 

 

 

1,179

 

Loss on early extinguishment of debt

 

 

245

 

 

 

-

 

Special charge, net of cash payments

 

 

3,269

 

 

 

9,374

 

Unrealized loss on financial instruments

 

 

4,275

 

 

 

57,771

 

Deferred taxes

 

 

(60,122

)

 

 

16,561

 

Stock-based compensation

 

 

10,025

 

 

 

10,627

 

Changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

26

 

 

 

(27,699

)

Prepaid expenses, current assets and other assets

 

 

(23,835

)

 

 

(10,815

)

Accounts payable and accrued liabilities

 

 

(40,076

)

 

 

9,357

 

Net cash provided by operating activities

 

 

108,997

 

 

 

175,911

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(76,754

)

 

 

(54,791

)

Payments for flight equipment and modifications

 

 

(99,161

)

 

 

(448,388

)

Proceeds from insurance

 

 

38,133

 

 

 

-

 

Proceeds from investments

 

 

9,313

 

 

 

5,399

 

Net cash used for investing activities

 

 

(128,469

)

 

 

(497,780

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from debt issuance

 

 

19,723

 

 

 

305,059

 

Payment of debt issuance costs

 

 

(955

)

 

 

(4,781

)

Payments of debt and finance lease obligations

 

 

(160,091

)

 

 

(115,194

)

Proceeds from revolving credit facility

 

 

50,000

 

 

 

135,000

 

Payment of revolving credit facility

 

 

-

 

 

 

(60,000

)

Customer maintenance reserves and deposits received

 

 

8,039

 

 

 

8,169

 

Purchase of treasury stock

 

 

(9,227

)

 

 

(10,319

)

Net cash provided by (used for) financing activities

 

 

(92,511

)

 

 

257,934

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(111,983

)

 

 

(63,935

)

Cash, cash equivalents and restricted cash at the beginning of period

 

 

232,741

 

 

 

291,864

 

Cash, cash equivalents and restricted cash at the end of period

 

$

120,758

 

 

$

227,929

 

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of flight equipment included in Accounts payable and accrued liabilities

 

$

51,996

 

 

$

66,944

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

6


 

Atlas Air Worldwide Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

 

 

 

As of and for the Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Treasury

 

 

Paid-In

 

 

Accumulated Other

 

 

Retained

 

 

Stockholders'

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Comprehensive Loss

 

 

Earnings

 

 

Equity

 

Balance at March 31, 2019

 

$

310

 

 

$

(213,690

)

 

$

741,652

 

 

$

(3,569

)

 

$

1,510,246

 

 

$

2,034,949

 

Net Income (Loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86,868

 

 

 

86,868

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

257

 

 

 

-

 

 

 

257

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

4,404

 

 

 

-

 

 

 

-

 

 

 

4,404

 

Customer warrant

 

 

-

 

 

 

-

 

 

 

669

 

 

 

-

 

 

 

-

 

 

 

669

 

Purchase of 743 shares of treasury stock

 

 

-

 

 

 

(38

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(38

)

Issuance of 4,385 shares of restricted stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance at June 30, 2019

 

$

310

 

 

$

(213,728

)

 

$

746,725

 

 

$

(3,312

)

 

$

1,597,114

 

 

$

2,127,109

 

 

 

 

As of and for the Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Treasury

 

 

Paid-In

 

 

Accumulated Other

 

 

Retained

 

 

Stockholders'

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Comprehensive Loss

 

 

Earnings

 

 

Equity

 

Balance at March 31, 2018

 

$

305

 

 

$

(203,950

)

 

$

721,577

 

 

$

(4,635

)

 

$

1,279,001

 

 

$

1,792,298

 

Net Income (Loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(21,150

)

 

 

(21,150

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

245

 

 

 

-

 

 

 

245

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

4,781

 

 

 

-

 

 

 

-

 

 

 

4,781

 

Purchase of 1,500 shares of treasury stock

 

 

-

 

 

 

(101

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(101

)

Issuance of 15,863 shares of restricted stock

 

 

1

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

Balance at June 30, 2018

 

$

306

 

 

$

(204,051

)

 

$

726,357

 

 

$

(4,390

)

 

$

1,257,851

 

 

$

1,776,073

 

 

 

 

As of and for the Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Treasury

 

 

Paid-In

 

 

Accumulated Other

 

 

Retained

 

 

Stockholders'

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Comprehensive Loss

 

 

Earnings

 

 

Equity

 

Balance at December 31, 2018

 

$

306

 

 

$

(204,501

)

 

$

736,035

 

 

$

(3,832

)

 

$

1,539,956

 

 

$

2,067,964

 

Net Income (Loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

57,158

 

 

 

57,158

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

520

 

 

 

-

 

 

 

520

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

10,025

 

 

 

-

 

 

 

-

 

 

 

10,025

 

Customer warrant

 

 

-

 

 

 

-

 

 

 

669

 

 

 

-

 

 

 

-

 

 

 

669

 

Purchase of 180,082 shares of treasury stock

 

 

-

 

 

 

(9,227

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,227

)

Issuance of 443,929 shares of restricted stock

 

 

4

 

 

 

-

 

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

-

 

Balance at June 30, 2019

 

$

310

 

 

$

(213,728

)

 

$

746,725

 

 

$

(3,312

)

 

$

1,597,114

 

 

$

2,127,109

 

 

 

 

As of and for the Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Treasury

 

 

Paid-In

 

 

Accumulated Other

 

 

Retained

 

 

Stockholders'

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Comprehensive Loss

 

 

Earnings

 

 

Equity

 

Balance at December 31, 2017

 

$

301

 

 

$

(193,732

)

 

$

715,735

 

 

$

(3,993

)

 

$

1,271,545

 

 

$

1,789,856

 

Net Income (Loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,538

)

 

 

(11,538

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

573

 

 

 

-

 

 

 

573

 

Cumulative effect of change in accounting principle

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,126

)

 

 

(3,126

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

10,627

 

 

 

-

 

 

 

-

 

 

 

10,627

 

Purchase of 173,002 shares of treasury stock

 

 

-

 

 

 

(10,319

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10,319

)

Issuance of 455,589 shares of restricted stock

 

 

5

 

 

 

-

 

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

-

 

Reclassification of tax effect on other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(970

)

 

 

970

 

 

 

-

 

Balance at June 30, 2018

 

$

306

 

 

$

(204,051

)

 

$

726,357

 

 

$

(4,390

)

 

$

1,257,851

 

 

$

1,776,073

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

7


 

Atlas Air Worldwide Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

June 30, 2019

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 Atlas Air, Inc. (“Atlas”) and Southern Air Holdings, Inc. (“Southern Air”).  AAWW is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as “Titan”).  AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”).  We record our share of Polar’s results under the equity method of accounting.

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, but not 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”).  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, 2018, which includes additional disclosures and a summary of our significant accounting policies.  The December 31, 2018 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 June 30, 2019, the results of operations for the three and six months ended June 30, 2019 and 2018, comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018, cash flows for the six months ended June 30, 2019 and 2018, and shareholders’ equity as of and for the three and six months ended June 30, 2019 and 2018.

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.

2. Summary of Significant Accounting Policies

 

Warrant Liability

Common stock warrants classified as a liability are marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized (gain) loss on financial instruments.  We utilize a Monte Carlo simulation approach to estimate the fair value of the warrant liability, which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility and risk-free interest rate, among others.  Our earnings are affected by changes in our common stock price due to the impact those changes have on the fair value of our warrant liability (see Note 4 to our Financial Statements).

Heavy Maintenance

Except for engines used on our 747-8F aircraft, we account for heavy maintenance costs for airframes and engines used in our ACMI and Charter segments using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs.

We account for heavy maintenance costs for airframes and engines used in our Dry Leasing segment and engines used on our 747-8F aircraft using the deferral method.  Under this method, we defer the expense recognition of scheduled heavy maintenance events, which are amortized over the estimated period until the next scheduled heavy maintenance event is required.  Amortization of deferred maintenance expense included in Depreciation and amortization was $5.3 million and $2.9 million for the three months ended June 30, 2019 and 2018, respectively and was $9.7 million and $5.3 million for the six months ended June 30, 2019 and 2018, respectively.

8


 

Deferred maintenance included within Deferred costs and other assets is as follows:

  

 

 

Deferred

 

 

 

Maintenance

 

Balance as of December 31, 2018

 

$

103,647

 

Deferred maintenance costs

 

 

57,915

 

Amortization of deferred maintenance

 

 

(9,690

)

Balance as of June 30, 2019

 

$

151,872

 

 

Recent Accounting Pronouncements Adopted in 2019

 

In February 2016, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for leases.  Subsequently, the FASB issued several clarifications and updates.  The guidance requires a lessee to recognize assets and liabilities on the balance sheet arising from leases with terms greater than 12 months.  While lessor accounting guidance is relatively unchanged, certain amendments were made to conform with changes made to lessee accounting and the amended revenue recognition guidance.  The new guidance continues to classify leases as either finance or operating, with classification affecting the presentation and pattern of expense and income recognition, in the statement of operations.  It also requires additional quantitative and qualitative disclosures about leasing arrangements.  We adopted the new guidance on January 1, 2019 using the modified retrospective approach, which was applied beginning on the adoption date.  Comparative information has not been restated and continues to be reported under the accounting guidance in effect for those periods.  The adoption did not have a material effect on our consolidated statements of operations or cash flows. We recognized operating lease right-of-use assets, net of pre-existing deferred rent and operating lease intangibles, and operating lease liabilities on our consolidated balance sheets of approximately $596.9 million and $650.0 million, respectively, on the adoption date (see Note 7 to our Financial Statements).

3. Related Parties

Polar

AAWW has a 51% equity interest and 75% voting interest in Polar.  DHL Network Operations (USA), Inc. (“DHL”), a subsidiary of Deutsche Post AG, 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.  Under a 20-year blocked space agreement, which began in 2008, Polar provides air cargo capacity to DHL.  Atlas has several agreements with Polar to provide ACMI, CMI, Dry Leasing, 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

 

 

For the Six Months Ended

 

Revenue and Expenses:

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Revenue from Polar

 

$

99,889

 

 

$

103,625

 

 

$

198,356

 

 

$

205,730

 

Ground handling and airport fees to Polar

 

 

545

 

 

 

743

 

 

 

1,063

 

 

 

1,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable/payable as of:

 

June 30, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Receivables from Polar

 

$

11,008

 

 

$

16,349

 

 

 

 

 

 

 

 

 

Payables to Polar

 

 

4,166

 

 

 

2,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Carrying Value of Polar Investment as of:

 

June 30, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Aggregate Carrying Value of Polar Investment

 

$

4,870

 

 

$

4,870

 

 

 

 

 

 

 

 

 

 

In addition to the amounts in the table above, Atlas recognized revenue of $23.1 million and $24.4 million for the three months ended June 30, 2019 and 2018, respectively, and $46.4 million and $36.6 million for the six months ended June 30, 2019 and 2018, respectively, from flying on behalf of Polar.

GATS

We hold a 50% interest in GATS GP (BVI) Ltd. (“GATS”), a joint venture with an unrelated third party.  As of June 30, 2019 and December 31, 2018, our investment in GATS was $21.4 million and $22.3 million, respectively.  We had Accounts payable to GATS of $0.7 million as of June 30, 2019 and $0.5 million as of December 31, 2018.

9


 

4. Amazon

In May 2016, we entered into certain agreements with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), which involves, among other things, CMI operation of up to 20 Boeing 767-300 freighter aircraft for Amazon by Atlas, as well as Dry Leasing by Titan.  The Dry Leases have a term of ten years from the commencement of each agreement, while the CMI operations are for seven years from the commencement of each agreement (with an option for Amazon to extend the term to ten years).  Between August 2016 and November 2018, we placed all 20 767-300 freighter aircraft into service for Amazon.  In February 2019, the number of 767-300 freighters in service for Amazon was reduced to 19 with the loss of an aircraft.

In conjunction with the agreements entered into in May 2016, we granted Amazon a warrant providing the right to acquire up to 20% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, at an exercise price of $37.50 per share (“Warrant A”).  As of December 31, 2018, this warrant to purchase 7.5 million shares had vested in full.  Warrant A is exercisable in accordance with its terms through 2021.  As of June 30, 2019, no portion of Warrant A has been exercised.

 

The agreements entered into in May 2016 also provided incentives for future growth of the relationship as Amazon may increase its business with us.  In that regard, we granted Amazon a warrant to acquire up to an additional 10% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $37.50 per share (“Warrant B”).  This warrant to purchase 3.75 million shares will vest in increments of 37,500 shares each time Amazon has paid $4.2 million of revenue to us, up to a total of $420.0 million, for incremental business beyond the original 20 767-300 freighters.  As of June 30, 2019, no portion of Warrant B has vested.  Upon vesting, Warrant B would become exercisable in accordance with its terms through May 2023.

 

In March 2019, we amended the agreements entered into in 2016 with Amazon, pursuant to which we will provide CMI services using Boeing 737-800 freighter aircraft provided by Amazon.  The 737-800 CMI operations will be for a term of seven years from the commencement of each agreement (with an option for Amazon to extend the term to ten years).  The first three of five 737-800 freighter aircraft entered service during the second quarter of 2019 and the remaining two are expected to enter service during the second half of 2019.  Amazon may, in its sole discretion, place up to 15 additional 737-800 freighter aircraft into service with us by May 31, 2021.

 

In connection with the amended agreements, we granted Amazon a warrant to acquire up to an additional 9.9% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $52.90 per share (“Warrant C”).  When combined with Warrant A and Warrant B, this would allow Amazon to acquire up to a total of 39.9% (after the issuance) of our outstanding common shares and Amazon would be entitled to vote the shares it owns up to 14.9% of our outstanding common shares, in its discretion.  Amazon would be required to vote any shares it owns in excess of 14.9% of our outstanding common shares in accordance with the recommendation of our board of directors.  After Warrant B has vested in full, this warrant to purchase 6.6 million shares would vest in increments of 45,428 shares each time Amazon has paid $6.9 million of revenue to us, up to a total of $1.0 billion, for incremental business beyond Warrant A and Warrant B.  As of June 30, 2019, no portion of Warrant C has vested.  Upon vesting, Warrant C would become exercisable in accordance with its terms through March 2026.

At the time of vesting, the fair value of the vested portion of the warrants issued to Amazon is recorded as a warrant liability within Financial instruments and other liabilities (the “Amazon Warrant”).  The initial fair value of the vested portion of Warrant A was recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of Operating Revenue in proportion to the amount of revenue recognized over the terms of the Dry Leases and CMI agreements.  Determining the amount of amortization related to the CMI agreements requires significant judgment to estimate the total number of Block Hours expected over the terms of those agreements.  

When it becomes probable that an increment of either Warrant B or C will vest and the related revenue begins to be recognized, the fair value of such portion is recorded as Additional paid-in-capital. The initial fair value of such increment is also recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of Operating Revenue in proportion to the amount of related revenue recognized. At the time of vesting, the amount recorded in Additional paid-in-capital would be reclassified to the Amazon Warrant liability.

The following table provides a summary of the customer incentive asset:

 

Balance at December 31, 2018

 

$

184,720

 

Initial value for estimate of vested or expected to vest warrants

 

 

669

 

Amortization of customer incentive asset

 

 

(13,222

)

Balance at June 30, 2019

 

$

172,167

 

 

10


 

We amortized $6.9 million and $3.3 million of the customer incentive asset for the three months ended June 30, 2019 and 2018, respectively.  We amortized $13.2 million and $5.9 million of the customer incentive asset for the six months ended June 30, 2019 and 2018, respectively.  There were no impairment losses for the six months ended June 30, 2019 and 2018.  

The Amazon Warrant liability is marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized (gain) loss on financial instruments.  We recognized a net unrealized gain of $42.3 million and a net unrealized loss of $4.3 million on the Amazon Warrant during the three and six months ended June 30, 2019, respectively. We recognized net unrealized losses of $50.0 million and $57.8 million on the Amazon Warrant during the three and six months ended June 30, 2018, respectively. The fair value of the Amazon Warrant liability was $103.3 million as of June 30, 2019 and $99.0 million as of December 31, 2018.

5. Supplemental Balance Sheet and Cash Flow Information

Accounts Receivable

Accounts receivable, net of allowance related to customer contracts, excluding Dry Leasing contracts, was $204.2 million as of June 30, 2019 and $227.1 million as of December 31, 2018.

 

Accrued Liabilities

Accrued liabilities consisted of the following as of: 

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Maintenance

 

$

140,865

 

 

$

133,337

 

Customer maintenance reserves

 

 

112,459

 

 

 

104,454

 

Salaries, wages and benefits

 

 

48,247

 

 

 

82,809

 

Aircraft fuel

 

 

40,890

 

 

 

32,641

 

Deferred revenue

 

 

26,108

 

 

 

26,584

 

Other

 

 

116,867

 

 

 

85,844

 

Accrued liabilities

 

$

485,436

 

 

$

465,669

 

Revenue Contract Liability

Deferred revenue for customer contracts, excluding Dry Leasing contracts, represents amounts collected from, or invoiced to, customers in advance of revenue recognition.  The balance of Deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue.

Significant changes in our Revenue contract liability balances during the six months ended June 30, 2019 were as follows:

 

Balance as of December 31, 2018

 

$

13,007

 

Revenue recognized

 

 

(63,467

)

Amounts collected or invoiced

 

 

66,438

 

Balance as of June 30, 2019

 

$

15,978

 

Supplemental Cash Flow Information

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total shown in the consolidated statements of cash flows:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

$

110,665

 

 

$

221,501

 

Restricted cash

 

 

10,093

 

 

 

11,240

 

Total Cash, cash equivalents and restricted cash shown in Consolidated Statements of Cash Flows

 

$

120,758

 

 

$

232,741

 

 

 


11


 

6. Debt

Term Loans

In March 2019, we borrowed $19.7 million under an unsecured five-year term loan due in March 2024 (the “First 2019 Term Loan”) for GEnx engine performance upgrade kits and overhauls.  The First 2019 Term Loan contains customary covenants, events of default and accrues interest at a fixed rate of 2.73%, with principal and interest payable quarterly.

In March 2019, we received $41.1 million in proceeds from insurance related to the loss of a 767-300 freighter aircraft and used $20.7 million of the proceeds to repay two term loans related to the aircraft.  In connection with the repayment, we recognized a $0.2 million loss on early of extinguishment of debt.  During the six months ended June 30, 2019, we also recognized a net insurance recovery of $3.4 million resulting from the excess of insurance proceeds over the carrying amount of the aircraft and other related costs within Other income, net.  

 

Convertible Notes

In May 2017, we issued $289.0 million aggregate principal amount of 1.875% convertible senior notes that mature on June 1, 2024 (the “2017 Convertible Notes”) in an underwritten public offering.  In June 2015, we issued $224.5 million aggregate principal amount of 2.25% convertible senior notes that mature on June 1, 2022 (the “2015 Convertible Notes”) in an underwritten public offering.  The 2017 Convertible Notes and the 2015 Convertible Notes (collectively, the “Convertible Notes”) are senior unsecured obligations and accrue interest payable semiannually on June 1 and December 1 of each year.  The Convertible Notes are due on their respective maturity dates, unless earlier converted or repurchased pursuant to their respective terms.

The Convertible Notes consisted of the following as of June 30, 2019:

 

 

 

2017 Convertible Notes

 

 

2015 Convertible Notes

 

Remaining life in months

 

 

59

 

 

 

35

 

Liability component:

 

 

 

 

 

 

 

 

Gross proceeds

 

$

289,000

 

 

$

224,500

 

Less: debt discount, net of amortization

 

 

(52,174

)

 

 

(24,974

)

Less: debt issuance cost, net of amortization

 

 

(4,085

)

 

 

(2,342

)

Net carrying amount

 

$

232,741

 

 

$

197,184

 

 

 

 

 

 

 

 

 

 

Equity component (1)

 

$

70,140

 

 

$

52,903

 

 

 

(1)

Included in Additional paid-in capital on the consolidated balance sheet as of June 30, 2019.

The following table presents the amount of interest expense recognized related to the Convertible Notes:

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Contractual interest coupon

 

$

2,618

 

 

$

2,618

 

 

$

5,235

 

 

$

5,235

 

Amortization of debt discount

 

 

4,186

 

 

 

3,932

 

 

 

8,308

 

 

 

7,804

 

Amortization of debt issuance costs

 

 

375

 

 

 

363

 

 

 

747

 

 

 

722

 

Total interest expense recognized

 

$

7,179

 

 

$

6,913

 

 

$

14,290

 

 

$

13,761

 

Revolving Credit Facility

In December 2018, we amended and extended our previous three-year $150.0 million secured revolving credit facility into a new four-year $200.0 million secured revolving credit facility (the “Revolver”). As of June 30, 2019, there was $50.0 million outstanding and we had $93.5 million of unused availability under the Revolver, based on the collateral borrowing base.

12


 

7. Leases and Guarantees

Adoption

We adopted the new lease accounting guidance using the modified retrospective method and applied it to all leases based on the contract terms in effect as of January 1, 2019.  For existing contracts, we carried forward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.    

 

Although our performance obligations under ACMI contracts include the provision of aircraft to customers, we do not separate any potential aircraft lease components from the nonlease components of these contracts as the provision of the crew, maintenance and insurance components are, in the aggregate, the predominant components.  Such contracts are accounted for in their entirety under the amended guidance for revenue recognition.

 

Lessee

As of June 30, 2019, we lease 21 aircraft, of which 20 are operating leases.  Lease expirations for our leased aircraft range from March 2020 to June 2032.  In addition, we lease a variety of office space, airport station locations, warehouse space, vehicles and equipment, with lease expirations ranging from July 2019 to April 2025.  We also incur variable rental costs for aircraft, engines, ground equipment and storage space based on usage of the underlying equipment or property.  For leases with terms greater than 12 months, including renewal options when appropriate, we record the related right-of-use asset and lease liability as the present value of fixed lease payments over the lease term.  Since our leases do not typically provide a readily determinable discount rate, we use our incremental borrowing rate to discount lease payments to present value.

 

The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

 

Classification on the Consolidated Balance Sheets

 

June 30, 2019

 

Assets

 

 

 

 

 

Operating lease right-of-use assets

Operating lease right-of-use assets

 

$

538,631

 

Finance lease assets

Property and equipment, net

 

 

30,419

 

Less: Accumulated amortization on finance lease assets

Property and equipment, net

 

 

(4,508

)

Total lease assets

 

 

$

564,542

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Operating lease liabilities

Current portion of long-term operating leases

 

$

146,091

 

Finance lease liabilities

Current portion of long-term debt and finance lease

 

 

680

 

Noncurrent

 

 

 

 

 

Operating lease liabilities

Long-term operating leases

 

 

445,821

 

Finance lease liabilities

Long-term debt and finance lease

 

 

29,998

 

Total lease liabilities

 

 

$

622,590

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term in years

 

 

 

 

Operating Leases

 

 

4.23

 

Finance Leases

 

 

13.00

 

Weighted Average Discount Rate

 

 

 

 

Operating Leases

 

 

4.59

%

Finance Leases

 

 

17.46

%

 

 


13


 

The following table presents information related to lease costs for finance and operating leases:

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2019

 

Operating lease costs (1)

 

$

40,156

 

 

$

80,081

 

Variable operating lease costs (1)

 

 

3,985

 

 

 

9,297

 

Finance lease costs:

 

 

 

 

 

 

 

 

Amortization of leased assets

 

 

499

 

 

 

997

 

Interest on lease liabilities

 

 

1,340

 

 

 

2,673

 

Total lease cost

 

$

45,980

 

 

$

93,048

 

 

(1)

Expenses are classified within Aircraft rent and Navigation fees, landing fees and other rent on the consolidated statement of operations.  Short-term lease contracts are not material.

 

The table below presents supplemental cash flow information related to leases as follows:

 

 

 

 

For the Six Months Ended

 

 

 

 

 

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows for operating leases

 

 

 

$

79,828

 

Operating cash flows for finance lease

 

 

 

 

2,673

 

Financing cash flows for finance lease

 

 

 

 

327

 

As of June 30, 2019, maturities of lease liabilities for the periods indicated were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

Finance

 

 

 

 

 

 

 

Leases

 

 

Lease

 

 

Total

 

2019

 

$

88,008

 

 

$

3,000

 

 

$

91,008

 

2020

 

 

160,931

 

 

 

6,000

 

 

 

166,931

 

2021

 

 

167,204

 

 

 

6,000

 

 

 

173,204

 

2022

 

 

116,603

 

 

 

6,000

 

 

 

122,603

 

2023

 

 

62,773

 

 

 

6,000

 

 

 

68,773

 

Thereafter

 

 

54,760

 

 

 

50,500

 

 

 

105,260

 

Total minimum rental payments

 

 

650,279

 

 

 

77,500

 

 

 

727,779

 

Less: imputed interest

 

 

58,367

 

 

 

46,822

 

 

 

105,189

 

Total

 

$

591,912

 

 

$

30,678

 

 

$

622,590

 

 

As of June 30, 2019, the Company’s obligations for operating leases that have not yet commenced are immaterial.

 

As of December 31, 2018, our minimum annual rental commitments for the periods indicated under operating leases with initial or remaining terms of more than one year were as follows:

 

 

 

Operating

 

 

 

Leases

 

2019

 

$

166,516

 

2020

 

 

159,383

 

2021

 

 

166,056

 

2022

 

 

115,591

 

2023

 

 

61,755

 

Thereafter

 

 

53,430

 

Total

 

$

722,731

 

Lessor

Our performance obligations under Dry Lease contracts involve the provision of aircraft and engines to customers for compensation that is typically based on a fixed monthly amount and all are accounted for as operating leases.  We record Dry Lease rental income on a straight-line basis over the term of the operating lease.  Dry Lease rental income subject to adjustment based on an index is recognized on a straight-line basis over each adjustment period.  Our Dry Leases do not contain purchase options, renewal options or residual guarantees.  In addition, our Dry Leases typically do not contain early termination options.  If they do, there are typically substantial termination penalties.  Rentals received but unearned under the lease agreements are recorded in deferred revenue and included in Accrued liabilities until earned.  

14


 

To manage our residual value risk, we require lessees to perform maintenance on the Dry Leased asset and they may also be required to make maintenance payments to us during or at the end of the lease term.  When an aircraft is returned at the end of lease, if we choose not to re-lease or sell the returned aircraft, we typically have the ability to operate the aircraft in our ACMI and Charter segments.

Customer maintenance reserves are amounts received during the lease term that are subject to reimbursement to the lessee upon the completion of qualifying maintenance work on the specific Dry Leased asset and are included in Accrued liabilities.  We defer revenue recognition for customer maintenance reserves until the end of the lease, when we are able to finalize the amount, if any, to be reimbursed to the lessee.

End of lease maintenance payments are amounts received upon return of the Dry Leased asset based on the utilization of the asset during the lease term.  Such payments made to us are recognized as revenue at the end of the lease.

As of June 30, 2019, our contractual amount of minimum receipts, excluding taxes, for the periods indicated under Dry Leases reflecting the terms that were in effect were as follows:

 

2019

 

$

86,864

 

2020

 

 

166,056

 

2021

 

 

145,174

 

2022

 

 

137,636

 

2023

 

 

104,008

 

Thereafter

 

 

246,466

 

Total minimum lease receipts

 

$

886,204

 

As of December 31, 2018, our contractual amount of minimum receipts, excluding taxes, for the periods indicated under Dry Leases reflecting the terms that were in effect were as follows:

 

 

Dry Lease

 

 

 

Income

 

2019

 

$

180,366

 

2020

 

 

169,202

 

2021

 

 

148,413

 

2022

 

 

140,876

 

2023

 

 

107,248

 

Thereafter

 

 

257,248

 

Total minimum lease receipts

 

$

1,003,353

 

The net book value of flight equipment on Dry Lease to customers was $1,656.2 million as of June 30, 2019 and $1,717.5 million as of December 31, 2018.  The accumulated depreciation for flight equipment on Dry Lease to customers was $268.2 million as of June 30, 2019 and $232.4 million as of December 31, 2018.  See Note 10 to our Financial Statements for disclosure of our Dry Leasing segment revenue.

Guarantees and Indemnifications

In the ordinary course of business, we enter into numerous leasing and financing arrangements for real estate, equipment, aircraft and engines that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities. In both leasing and financing transactions, we typically indemnify the lessors and any financing parties against tort liabilities that arise out of the use, occupancy, manufacture, design, operation or maintenance of the leased premises or financed aircraft, regardless of whether these liabilities relate to the negligence of the indemnified parties. Currently, we believe that any future payments required under many of these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles).  However, payments under certain tax indemnities related to certain of our financing arrangements, if applicable, could be material, and would not be covered by insurance, although we believe that these payments are not probable.  Certain leased premises, such as maintenance and storage facilities, typically include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premises.  We also provide standard indemnification agreements to officers and directors in the ordinary course of business.

Financings and Guarantees

Our financing arrangements typically contain a withholding tax provision that requires us to pay additional amounts to the applicable lender or other financing party, if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.  These increased costs and withholding tax provisions continue for the entire term of the applicable

15


 

transaction and there is no limitation on the maximum additional amount we could be required to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.

8. Income Taxes

During the three months ended June 30, 2019, the Internal Revenue Service (“IRS”) completed its examination of our 2015 income tax return without adjustment.  As a result, we recognized $54.6 million of previously unrecognized income tax benefits and reduced our valuation allowance by recording a $5.2 million income tax benefit.

The effective income tax benefit for the three and six months ended June 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefits related to the favorable completion of the IRS’s examination of our 2015 income tax return, and to a lesser extent for the three months ended June 30, 2019, $9.3 million of nontaxable changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements).

The effective income tax expense for the three and six months ended June 30, 2018 differed from tax at the U.S. statutory rate primarily due to $16.1 million and $17.8 million of nondeductible changes in the fair value of the customer warrant liability, respectively (see Note 4 to our Financial Statements).

9. 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, maturing within five years, 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 and 1999.

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

The fair value of our Convertible Notes is based on unadjusted quoted market prices for these securities.

The fair value of a customer warrant liability and certain long-term performance-based restricted shares are based on a Monte Carlo simulation which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility, and risk-free interest rate, among others.

16


 

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

 

 

 

June 30, 2019

 

 

 

Carrying Value

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,665

 

 

$

110,665

 

 

$

110,665

 

 

$

-

 

 

$

-

 

Short-term investments

 

 

7,153

 

 

 

7,153

 

 

 

-

 

 

 

-

 

 

 

7,153

 

Restricted cash

 

 

10,093

 

 

 

10,093

 

 

 

10,093

 

 

 

-

 

 

 

-

 

 

 

$

127,911

 

 

$

127,911

 

 

$

120,758

 

 

$

-

 

 

$

7,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loans and notes

 

$

1,913,989

 

 

$

2,022,448

 

 

$

-

 

 

$

-

 

 

$

2,022,448

 

Revolver

 

 

50,000

 

 

 

50,408

 

 

 

-

 

 

 

-

 

 

 

50,408

 

Convertible notes (1)

 

 

429,925

 

 

 

512,942

 

 

 

512,942

 

 

 

-

 

 

 

-

 

Customer warrant

 

 

103,275

 

 

 

103,275

 

 

 

-

 

 

 

103,275

 

 

 

-

 

 

 

$

2,497,189

 

 

$

2,689,073

 

 

$

512,942

 

 

$

103,275

 

 

$

2,072,856

 

 

 

 

December 31, 2018

 

 

 

Carrying Value

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

221,501

 

 

$

221,501

 

 

$

221,501

 

 

$

-

 

 

$

-

 

Short-term investments

 

 

15,624

 

 

 

15,624

 

 

 

-

 

 

 

-

 

 

 

15,624

 

Restricted cash

 

 

11,240

 

 

 

11,240

 

 

 

11,240

 

 

 

-

 

 

 

-

 

Long-term investments and accrued interest

 

 

635

 

 

 

1,138

 

 

 

-

 

 

 

-

 

 

 

1,138

 

 

 

$

249,000

 

 

$

249,503

 

 

$

232,741

 

 

$

-

 

 

$

16,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loans and notes

 

$

2,048,972

 

 

$

1,976,373

 

 

$

-

 

 

$

-

 

 

$

1,976,373

 

Convertible notes (1)

 

 

420,868

 

 

 

490,070

 

 

 

490,070

 

 

 

-

 

 

 

-

 

Customer warrant

 

 

99,000

 

 

 

99,000

 

 

 

-

 

 

 

99,000

 

 

 

-

 

 

 

$

2,568,840

 

 

$

2,565,443

 

 

$

490,070

 

 

$

99,000

 

 

$

1,976,373

 

 

(1) Carrying value is net of debt discounts and debt issuance costs (see Note 6 to our Financial Statements).

 

Gross unrealized gains on our long-term investments and accrued interest were $0.5 million at December 31, 2018.

10. Segment Reporting

Our business is organized into three operating segments based on our service offerings: ACMI, Charter and Dry Leasing.  All segments are directly or indirectly engaged in the business of air transportation services but have different commercial and economic characteristics.  Each operating segment is separately reviewed by our chief operating decision maker to assess operating results and make resource allocation decisions.  We do not aggregate our operating segments and, therefore, our operating segments are our reportable segments.

We use an economic performance metric (“Direct Contribution”) that shows the profitability of each segment after allocation of direct operating and ownership costs.  Direct Contribution represents Income (loss) from continuing operations before income taxes excluding the following: Special charge, Transaction-related expenses, nonrecurring items, Losses (gains) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized losses (gains) on financial instruments, Gains on investments and Unallocated income and expenses, net.  Direct operating and ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, interest expense on the portion of debt used for financing aircraft, interest income on debt securities and aircraft depreciation.  Unallocated income and expenses, net include corporate overhead, nonaircraft depreciation, noncash expenses and income, interest expense on the portion of debt used for general corporate purposes, interest income on nondebt securities, capitalized interest, foreign exchange gains and losses, other revenue and other non-operating costs, including certain contract start-up costs.

17


 

The following table sets forth Operating Revenue and Direct Contribution for our reportable segments reconciled to Operating Income and Income (loss) from continuing operations before income taxes:

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACMI

 

$

307,278

 

 

$

277,795

 

 

$

613,845

 

 

$

544,175

 

Charter

 

 

315,679

 

 

 

346,778

 

 

 

620,793

 

 

 

631,975

 

Dry Leasing

 

 

43,535

 

 

 

39,958

 

 

 

113,481

 

 

 

76,350

 

Customer incentive asset amortization

 

 

(6,936

)

 

 

(3,290

)

 

 

(13,222

)

 

 

(5,886

)

Other

 

 

4,362

 

 

 

4,904

 

 

 

8,704

 

 

 

9,545

 

Total Operating Revenue

 

$

663,918

 

 

$

666,145

 

 

$

1,343,601

 

 

$

1,256,159

 

 

Direct Contribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACMI

 

$

40,640

 

 

$

52,707

 

 

$

80,647

 

 

$

93,579

 

Charter

 

 

14,084

 

 

 

51,090

 

 

 

43,217

 

 

 

85,368

 

Dry Leasing

 

 

11,091

 

 

 

12,191

 

 

 

46,618

 

 

 

23,550

 

Total Direct Contribution for Reportable Segments

 

 

65,815

 

 

 

115,988

 

 

 

170,482

 

 

 

202,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated income and expenses, net

 

 

(81,927

)

 

 

(64,480

)

 

 

(162,064

)

 

 

(129,543

)

Loss on early extinguishment of debt

 

 

-

 

 

 

-

 

 

 

(245

)

 

 

-

 

Unrealized gain (loss) on financial instruments

 

 

42,300

 

 

 

(50,031

)

 

 

(4,275

)

 

 

(57,771

)

Special charge

 

 

(3,269

)

 

 

(9,374

)

 

 

(3,269

)

 

 

(9,374

)

Transaction-related expenses

 

 

(734

)

 

 

(240

)

 

 

(3,261

)

 

 

(510

)

Income (loss) from continuing operations before income taxes

 

 

22,185

 

 

 

(8,137

)

 

 

(2,632

)

 

 

5,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add back (subtract):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(1,278

)

 

 

(1,388

)

 

 

(3,322

)

 

 

(3,112

)

Interest expense

 

 

30,045

 

 

 

29,182

 

 

 

60,398

 

 

 

56,524

 

Capitalized interest

 

 

(627

)

 

 

(1,465

)

 

 

(1,090

)

 

 

(3,215

)

Loss on early extinguishment of debt

 

 

-

 

 

 

-

 

 

 

245

 

 

 

-

 

Unrealized (gain) loss on financial instruments

 

 

(42,300

)

 

 

50,031

 

 

 

4,275

 

 

 

57,771

 

Other (income) expense, net

 

 

945

 

 

 

(7,277

)

 

 

(2,030

)

 

 

(11,752

)

Operating Income

 

$

8,970

 

 

$

60,946

 

 

$

55,844

 

 

$

101,515

 

 

The following table disaggregates our Charter segment revenue by customer and service type:

 

 

For the Three Months Ended

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Cargo

 

 

Passenger

 

 

Total

 

 

 

Cargo

 

 

Passenger

 

 

Total

 

Commercial customers

 

$

133,178

 

 

$

3,054

 

 

$

136,232

 

 

 

$

151,578

 

 

$

544

 

 

$

152,122

 

AMC

 

 

92,017

 

 

 

87,430

 

 

 

179,447

 

 

 

 

104,448

 

 

 

90,208

 

 

 

194,656

 

Total Charter Revenue

 

$

225,195

 

 

$

90,484

 

 

$

315,679

 

 

 

$

256,026

 

 

$

90,752

 

 

$

346,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Cargo

 

 

Passenger

 

 

Total

 

 

 

Cargo

 

 

Passenger

 

 

Total

 

Commercial customers

 

$

282,082

 

 

$

10,661

 

 

$

292,743

 

 

 

$

282,751

 

 

$

2,590

 

 

$

285,341

 

AMC

 

 

149,463

 

 

 

178,587

 

 

 

328,050

 

 

 

 

178,876

 

 

 

167,758

 

 

 

346,634

 

Total Charter Revenue

 

$

431,545

 

 

$

189,248

 

 

$

620,793

 

 

 

$

461,627

 

 

$

170,348

 

 

$

631,975

 

Given the nature of our business and international flying, geographic information for revenue, long-lived assets and total assets is not presented because it is impracticable to do so.

We are exposed to a concentration of revenue from the U.S. Military Air Mobility Command (“AMC”), Polar and DHL (see above and Note 3 to our Financial Statements for further discussion regarding Polar).  No other customer accounted for more than 10.0% of our Total Operating Revenue.  Revenue from DHL was $87.4 million for the three months ended June 30, 2019 and $84.8 million for the three months ended June 30, 2018. Revenue from DHL was $177.1 million for the six months ended June 30, 2019 and $151.8 million for the six months ended June 30, 2018. We have not experienced any credit issues with these customers.

18


 

11. Labor and Legal Proceedings

Labor

Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the “IBT”).  We have a five-year collective bargaining agreement (“CBA”) with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with the Southern Air pilots, which became amendable in November 2016. We also have a five-year CBA with our Atlas and Polar dispatchers, which was extended in April 2017 for an additional four years, making the CBA amendable in November 2021.

After we completed the acquisition of Southern Air in April 2016, we informed the IBT of our intention to pursue (and we have been pursuing) a complete operational merger of Atlas and Southern Air.  Pursuant to the merger provisions in both the Atlas and Southern Air CBAs, joint negotiations for a single CBA for Atlas and Southern Air should commence promptly.  Further, once a seniority list is presented to us by the union, it triggers an agreed-upon timeframe to negotiate a new joint CBA with any unresolved issues submitted to binding arbitration.  After the merger process began, the IBT filed an application for mediation with the National Mediation Board (“NMB”) on behalf of the Atlas pilots, and subsequently the IBT filed a similar application on behalf of Southern Air pilots.  We have opposed both mediation applications as they are not in accordance with the merger provisions in the parties’ existing CBAs.  The Atlas and Southern Air CBAs have a defined and streamlined process for negotiating a joint CBA when a merger occurs, as in the case with the Atlas and Southern Air merger.  The NMB conducted a premediation investigation on the IBT’s Atlas application in June 2016, which is currently pending (along with the IBT’s Southern Air application).  Due to the IBT’s refusal to adhere to the merger provisions of the respective CBAs, in February 2017, the Company filed a lawsuit against the IBT to compel arbitration on the issue of whether the merger provisions in Atlas and Southern Air's CBAs apply to the bargaining process.  On March 13, 2018, the Southern District Court of New York (“NY District Court”) granted the Company’s motion to compel arbitration on this issue.  The IBT appealed the NY District Court’s decision, which is currently pending.  

The Company and the IBT conducted the Atlas and Southern Air arbitrations for this issue in October 2018.  On June 12, 2019, Southern Air prevailed in its management grievance arbitration against the IBT. The arbitrator’s decision ordered the IBT to promptly proceed with contractually required negotiations for a new Joint CBA (“JCBA”) in connection with Atlas and Southern Air’s merger. The Company expects to receive the Atlas arbitration decision in the third quarter of 2019. The Company and the IBT continue to move the process forward and bargain in good faith for a new JCBA, pursuant to an interim framework agreement until the Atlas arbitration decision is issued.

In August 2018, the Southern Air pilots ratified an agreement between Southern Air and the IBT for interim enhancements to the Southern Air pilots’ CBA. The agreement enhances the wages and work rules of the Southern Air pilots and provides similar terms and conditions of employment to those provided to Atlas pilots in the Atlas CBA.  The Southern Air pilot agreement became effective in September 2018.

In late November 2017, the U.S. District Court for the District of Columbia (“DC District Court”) granted the Company’s request to issue a preliminary injunction to stop an illegal work slowdown and require the IBT to meet its obligations under the Railway Labor Act. Specifically, the DC District Court ordered the IBT to stop “authorizing, encouraging, permitting, calling, engaging in, or continuing” any illegal pilot slowdown activities, which were intended to gain leverage in pilot contract negotiations with the Company.  In addition, the Court ordered the IBT to take affirmative action to prevent and to refrain from continuing any form of interference with the Company’s operations or any other concerted refusal to perform normal pilot operations consistent with its status quo obligations under the Railway Labor Act.  In December 2017, the IBT appealed the District Court’s decision to the U.S. Court of Appeals for the District of Columbia Circuit (“Court of Appeals”).  On July 5, 2019, the Court of Appeals, in a unanimous three judge panel, affirmed the DC District Court’s ruling and denied the IBT’s appeal. Therefore, the preliminary injunction remains in full force and effect.

We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act and may incur additional administrative expenses associated with union representation of our employees.

Matters Related to Alleged Pricing Practices

In the Netherlands, Stichting Cartel Compensation, successor in interest to claims of various shippers, has filed suit in the district court in Amsterdam against British Airways, KLM, Martinair, Air France, Lufthansa and Singapore Airlines seeking recovery for damages purportedly arising from allegedly unlawful pricing practices of such defendants.  In response, British Airways, KLM, Martinair, Air France and Lufthansa filed third-party indemnification lawsuits against Polar Air Cargo, LLC (“Old Polar”), a consolidated subsidiary of the Company, and Polar, seeking indemnification in the event the defendants are found to be liable in the main proceedings.  Another defendant, Thai Airways, filed a similar indemnification claim.  Activities in the case have focused on various procedural issues, some of which are awaiting court determination.  The Netherlands proceedings are likely to be affected by a

19


 

decision readopted by the European Commission in March 2017, finding EU competition law violations by British Airways, KLM, Martinair, Air France and Lufthansa, among others, but not Old Polar or Polar.  We are unable to reasonably predict the outcome of the litigation.  If the Company, Old Polar or Polar were to incur an unfavorable outcome, such outcome may have a material adverse impact on our business, financial condition, results of operations or cash flows.  We are unable to reasonably estimate a range of possible loss for this matter at this time.

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 $5.3 million in aggregate based on June 30, 2019 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.  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.  In the other case, we received an administrative decision in favor of the Brazil customs authorities and we are in the process of appealing this decision to the Brazil courts.  As required to defend such claims, we have made deposits pending resolution of these matters.  The balance was $4.2 million as of June 30, 2019 and $4.1 million as of December 31, 2018, and is included in Deferred costs 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

In addition to the matters described in this note, we have certain other contingencies incident to the ordinary course of business.  Unless disclosed otherwise, management does not expect that the ultimate disposition of such other contingencies or matters will materially affect our financial condition, results of operations or cash flows.

12. Earnings Per Share

Basic earnings per share (“EPS”) represents income (loss) divided by the weighted average number of common shares outstanding during the measurement period.  Diluted EPS represents income (loss) 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 using the treasury stock method.  The calculations of basic and diluted EPS were as follows:

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

Numerator:

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Income (loss) from continuing operations, net of taxes

 

$

86,868

 

 

$

(21,123

)

 

$

57,158

 

 

$

(11,495

)

Less: Unrealized gain on financial instruments, net of tax

 

 

(43,379

)

 

 

-

 

 

 

-

 

 

 

-

 

Diluted income from continuing operations, net of tax

 

$

43,489

 

 

$

(21,123

)

 

$

57,158

 

 

$

(11,495

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS weighted average shares outstanding

 

 

25,851

 

 

 

25,565

 

 

 

25,794

 

 

 

25,501

 

Effect of dilutive warrant

 

 

1,089

 

 

 

-

 

 

 

-

 

 

 

-

 

Effect of dilutive restricted stock

 

 

13

 

 

 

-

 

 

 

127

 

 

 

-

 

Diluted EPS weighted average shares outstanding

 

 

26,953

 

 

 

25,565

 

 

 

25,921

 

 

 

25,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.36

 

 

$

(0.83

)

 

$

2.22

 

 

$

(0.45

)

Diluted

 

$

1.61

 

 

$

(0.83

)

 

$

2.21

 

 

$

(0.45

)

Loss per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

-

 

 

$

(0.00

)

 

$

-

 

 

$

(0.00

)

Diluted

 

$

-

 

 

$

(0.00

)

 

$

-

 

 

$

(0.00

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.36

 

 

$

(0.83

)

 

$

2.22

 

 

$

(0.45

)

Diluted

 

$

1.61

 

 

$

(0.83

)

 

$

2.21

 

 

$

(0.45

)

 

20


 

Antidilutive shares related to warrants issued in connection with our Convertible Notes that were out of the money and excluded were 7.8 million for the three and six months ended June 30, 2019 and 3.0 million for the three and six months ended June 30, 2018. Antidilutive shares related to warrants issued to a customer and restricted share units that were excluded from the calculation of diluted EPS due to losses incurred were 3.3 million for the three months ended June 30, 2018 and 2.7 million for the six months ended June 30, 2018.  Diluted shares reflect the potential dilution that could occur from restricted shares using the treasury stock method.  The calculation of EPS does not include restricted share units and warrants issued to a customer in which performance or market conditions were not satisfied of 10.6 million for the three and six months ended June 30, 2019 and 5.8 million for the three and six months ended June 30, 2018.

13. Accumulated Other Comprehensive Income (Loss)

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

 

 

 

Interest Rate

 

 

Foreign Currency

 

 

 

 

 

 

 

Derivatives

 

 

Translation

 

 

Total

 

Balance as of December 31, 2017

 

$

(4,002

)

 

$

9

 

 

$

(3,993

)

Reclassification to interest expense

 

 

750

 

 

 

-

 

 

 

750

 

Tax effect

 

 

(177

)

 

 

-

 

 

 

(177

)

Reclassification of taxes

 

 

(970

)

 

 

-

 

 

 

(970

)

Balance as of June 30, 2018

 

$

(4,399

)

 

$

9

 

 

$

(4,390

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

(3,841

)

 

$

9

 

 

$

(3,832

)

Reclassification to interest expense

 

 

681

 

 

 

-

 

 

 

681

 

Tax effect

 

 

(161

)

 

 

-

 

 

 

(161

)

Balance as of June 30, 2019

 

$

(3,321

)

 

$

9

 

 

$

(3,312

)

Interest Rate Derivatives

As of June 30, 2019, there was $4.3 million of unamortized net 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 $0.3 million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively. Net realized losses reclassified into earnings were $0.7 million and $0.8 million for the six months ended June 30, 2019 and 2018, respectively. Net realized losses expected to be reclassified into earnings within the next 12 months are $1.3 million as of June 30, 2019.

 

 

 

21


 

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 Financial Statements appearing in this report and our audited consolidated financial statements and related notes included in our 2018 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

 

“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

 

“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 that are extensive in scope and are primarily based on time or usage intervals, which include, but are 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.

 

 

 

Line Maintenance

 

Maintenance events occurring during normal day-to-day operations.

 

 

 

Non-heavy

Maintenance

 

Discrete maintenance activities for the overhaul and repair of specific aircraft 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.  We operate the world’s largest fleet of 747 freighters and provide customers a broad array of 747, 777, 767, 757 and 737 aircraft for domestic, regional and international cargo and passenger operations.  We provide unique value to our customers by giving them access to highly reliable modern 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 express delivery providers, e-commerce retailers, airlines, 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 price risk.  In addition, customers are generally 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, generally including the provision of crew, Line Maintenance and insurance, but not the aircraft.  Customers assume fuel, demand and price risk, and are responsible for providing the aircraft (which they may lease from us) and generally responsible for Heavy and Non-Heavy Maintenance, 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 generally pays a fixed charter fee that includes fuel, insurance, landing fees, navigation fees and most other operational fees and costs; and

 

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.

22


 

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

 

Delivering superior service quality to our valued customers;

 

Focusing on securing attractive long-term customer contracts;

 

Managing our fleet with a focus on modern, efficient aircraft;

 

Driving significant ongoing productivity improvements;

 

Selectively pursuing and evaluating future acquisitions and alliances; while

 

Appropriately managing capital allocation and delivering value to shareholders.

See “Business Overview” and “Business Strategy” in our 2018 Annual Report on Form 10-K for additional information.

Business Developments

 

Charter results for the first half of 2019, compared with 2018, were negatively impacted by a decrease in commercial cargo volumes and Yields related to the impact of tariffs and global trade tensions, and a decrease in AMC cargo and passenger flying.

 

During the first half of 2019, both ACMI and Charter results were negatively impacted by labor-related service disruptions (See Note 11 to our Financial Statements).

 

Our ACMI results for the first half of 2019, compared with 2018, were positively impacted by increased flying from the following:

 

Between August 2016 and November 2018, we began CMI flying 20 Boeing 767-300 freighter aircraft for Amazon that are Dry Leased from Titan.  During the first half of 2019, there were an average of 19.3 aircraft equivalents operating for Amazon compared to an average of 12.8 aircraft equivalents operating in 2018.  

 

In September 2018, we began flying a second 747-400 freighter for Asiana Cargo on transpacific routes.  

 

In May 2018, we began flying a second 747-400 freighter for DHL Global Forwarding on routes between the United States, Europe, and Asia.  

 

In February 2018, we signed long-term CMI and Dry Lease contracts with DHL for two 777-200 freighter aircraft.  The first of the two aircraft was previously in CMI service with us and the second aircraft began CMI and Dry Lease service in July of 2018.

 

In July 2018, we began ACMI flying a 747-400 freighter for Industria de Diseño Textil, S.A. (“Inditex”) on routes between the United States, Europe, and Asia.

 

In October 2018, we began flying a 747-400 freighter for SF Express on transpacific routes.

 

In January 2019, we entered into an agreement to operate three incremental 747-400 freighters for Nippon Cargo Airlines on transpacific routes.  One aircraft entered service in April 2019 and the other two are expected to enter service during the third quarter of 2019.

 

In March 2019, we entered into agreements with Amazon, which include CMI operation of five 737-800 freighter aircraft in 2019 and up to 15 additional aircraft by May 2021.  The first three aircraft entered service during the second quarter of 2019 and the next two are expected to enter service during the second half of 2019.

 

 

In June 2019, we entered into a CMI agreement with DHL to operate two incremental 777-200 freighter aircraft on key global routes, both of which entered service near the end of the second quarter of 2019.

 

 

In June 2019, we began flying a third 747-400 freighter for Asiana Cargo on transpacific routes following its return from DHL.

 

In February 2018, we acquired a 777-200 freighter aircraft and Dry Leased it to DHL on a long-term basis, as described above.  We completed the acquisition of a second 777-200 freighter aircraft and placed it into service with DHL in July 2018.  As described above, during the first half of 2019, there were an average of 19.3 aircraft equivalents Dry Leased to Amazon compared to an average of 12.8 aircraft equivalents in 2018.  

23


 

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.

Three Months Ended June 30, 2019 and 2018

Operating Statistics

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated for the three months ended June 30:

 

Segment Operating Fleet*

 

2019

 

 

2018

 

 

Inc/(Dec)

 

ACMI

 

 

 

 

 

 

 

 

 

 

 

 

747-8F Cargo

 

 

8.2

 

 

 

9.0

 

 

 

(0.8

)

747-400 Cargo

 

 

18.4

 

 

 

16.2

 

 

 

2.2

 

747-400 Dreamlifter

 

 

3.6

 

 

 

3.1

 

 

 

0.5

 

777-200 Cargo

 

 

6.4

 

 

 

5.0

 

 

 

1.4

 

767-300 Cargo

 

 

25.0

 

 

 

19.3

 

 

 

5.7

 

767-200 Cargo

 

 

9.0

 

 

 

9.0

 

 

 

-

 

767-200 Passenger

 

 

1.0

 

 

 

1.0

 

 

 

-

 

737-800 Cargo

 

 

1.8

 

 

 

-

 

 

 

1.8

 

737-400 Cargo

 

 

5.0

 

 

 

5.0

 

 

 

-

 

Total

 

 

78.4

 

 

 

67.6

 

 

 

10.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charter

 

 

 

 

 

 

 

 

 

 

 

 

747-8F Cargo

 

 

1.6

 

 

 

1.0

 

 

 

0.6

 

747-400 Cargo

 

 

15.2

 

 

 

12.6

 

 

 

2.6

 

747-400 Passenger

 

 

4.0

 

 

 

2.0

 

 

 

2.0

 

767-300 Cargo

 

 

-

 

 

 

0.5

 

 

 

(0.5

)

767-300 Passenger

 

 

4.9

 

 

 

4.0

 

 

 

0.9

 

Total

 

 

25.7

 

 

 

20.1

 

 

 

5.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry Leasing

 

 

 

 

 

 

 

 

 

 

 

 

777-200 Cargo

 

 

7.0

 

 

 

7.0

 

 

 

-

 

767-300 Cargo

 

 

21.0

 

 

 

15.6

 

 

 

5.4

 

757-200 Cargo

 

 

1.0

 

 

 

1.0

 

 

 

-

 

737-300 Cargo

 

 

1.0

 

 

 

1.0

 

 

 

-

 

737-800 Passenger

 

 

1.0

 

 

 

1.0

 

 

 

-

 

Total

 

 

31.0

 

 

 

25.6

 

 

 

5.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Aircraft Dry Leased to CMI customers

 

 

(23.0

)

 

 

(16.6

)

 

 

(6.4

)

Total Operating Average Aircraft Equivalents

 

 

112.1

 

 

 

96.7

 

 

 

15.4

 

 

 

*

ACMI average fleet excludes spare aircraft provided by CMI customers and Dry Leasing average fleet excludes aircraft awaiting placement.

 

Block Hours

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Total Block Hours**

 

 

80,282

 

 

 

72,660

 

 

 

7,622

 

 

 

10.5

%

 

 

**

Includes ACMI, Charter and other Block Hours.

24


 

Operating Revenue

The following table compares our Operating Revenue for the three months ended June 30 (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Operating Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACMI

 

$

307,278

 

 

$

277,795

 

 

$

29,483

 

 

 

10.6

%

Charter

 

 

315,679

 

 

 

346,778

 

 

 

(31,099

)

 

 

(9.0

)%

Dry Leasing

 

 

43,535

 

 

 

39,958

 

 

 

3,577

 

 

 

9.0

%

Customer incentive asset amortization

 

 

(6,936

)

 

 

(3,290

)

 

 

3,646

 

 

NM

 

Other

 

 

4,362

 

 

 

4,904

 

 

 

(542

)

 

 

(11.1

)%

Total Operating Revenue

 

$

663,918

 

 

$

666,145

 

 

 

 

 

 

 

 

 

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

ACMI

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

ACMI Block Hours

 

 

61,942

 

 

 

53,230

 

 

 

8,712

 

 

 

16.4

%

ACMI Revenue Per Block Hour

 

$

4,961

 

 

$

5,219

 

 

$

(258

)

 

 

(4.9

)%

 

ACMI revenue increased $29.5 million, or 10.6%, primarily due to increased flying, partially offset by a decrease in Revenue per Block Hour.  The increase in Block Hours was primarily driven by increased 767 and 737 flying, the start-up of 747-400 flying for new customers and incremental 777-200 flying.  Revenue per Block Hour decreased primarily due to increased smaller-gauge 767 and 737 CMI flying.  In addition, ACMI revenue was negatively impacted by labor-related service disruptions.  

Charter

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Charter Block Hours:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cargo

 

 

12,888

 

 

 

13,887

 

 

 

(999

)

 

 

(7.2

)%

Passenger

 

 

4,773

 

 

 

5,094

 

 

 

(321

)

 

 

(6.3

)%

Total

 

 

17,661

 

 

 

18,981

 

 

 

(1,320

)

 

 

(7.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charter Revenue Per Block Hour:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cargo

 

$

17,473

 

 

$

18,436

 

 

$

(963

)

 

 

(5.2

%)

Passenger

 

$

18,957

 

 

$

17,815

 

 

$

1,142

 

 

 

6.4

%

Charter

 

$

17,874

 

 

$

18,270

 

 

$

(396

)

 

 

(2.2

%)

 

Charter revenue decreased $31.1 million, or 9.0%, primarily due to decreased flying and a decrease in Revenue per Block Hour. The decrease in Charter Block Hours was primarily driven by decreased cargo and passenger demand from the AMC and lower cargo demand from commercial customers.  Revenue per Block Hour decreased primarily due to lower commercial cargo Yields (excluding fuel), partially offset by an increase in rates for the AMC.  The lower commercial cargo demand and Yields reflected the impact of tariffs and global trade tensions.  In addition, Charter revenue was negatively impacted by labor-related service disruptions.

Dry Leasing

Dry Leasing revenue increased $3.6 million, or 9.0%, primarily due to the placement of 767-300 converted freighter aircraft throughout 2018, as well as one 777-200 freighter aircraft in July 2018, partially offset by the scheduled return of a 777-200 freighter aircraft in March 2019 that is awaiting placement with a customer.

25


 

Operating Expenses

The following table compares our Operating Expenses for the three months ended June 30 (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

141,450

 

 

$

129,176

 

 

$

12,274

 

 

 

9.5

%

Aircraft fuel

 

 

122,158

 

 

 

129,706

 

 

 

(7,548

)

 

 

(5.8

)%

Maintenance, materials and repairs

 

 

113,471

 

 

 

88,236

 

 

 

25,235

 

 

 

28.6

%

Depreciation and amortization

 

 

63,689

 

 

 

50,834

 

 

 

12,855

 

 

 

25.3

%

Travel

 

 

46,374

 

 

 

42,358

 

 

 

4,016

 

 

 

9.5

%

Aircraft rent

 

 

40,335

 

 

 

40,281

 

 

 

54

 

 

 

0.1

%

Navigation fees, landing fees and other rent

 

 

37,982

 

 

 

37,698

 

 

 

284

 

 

 

0.8

%

Passenger and ground handling services

 

 

30,525

 

 

 

30,202

 

 

 

323

 

 

 

1.1

%

Special charge

 

 

3,269

 

 

 

9,374

 

 

 

(6,105

)

 

NM

 

Transaction-related expenses

 

 

734

 

 

 

240

 

 

 

494

 

 

NM

 

Other

 

 

54,961

 

 

 

47,094

 

 

 

7,867

 

 

 

16.7

%

Total Operating Expenses

 

$

654,948

 

 

$

605,199

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits increased $12.3 million, or 9.5%, primarily due to increased flying and higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 11 to our Financial Statements).

Aircraft fuel decreased $7.5 million, or 5.8%, primarily due to a decrease in consumption related to decreased Charter flying and a decrease in the average fuel cost per gallon.  We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer.  Average fuel cost per gallon and fuel consumption for the three months ended June 30 were:

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Average fuel cost per gallon

 

$

2.37

 

 

$

2.42

 

 

$

(0.05

)

 

 

(2.1

)%

Fuel gallons consumed (000s)

 

 

51,596

 

 

 

53,508

 

 

 

(1,912

)

 

 

(3.6

)%

 

Maintenance, materials and repairs increased by $25.2 million, or 28.6%, primarily reflecting $15.9 million of increased Heavy Maintenance expense, $7.1 million of increased Line Maintenance expense due to increased flying and additional repairs performed, and $2.3 million of increased Non-heavy Maintenance expense.  Heavy Maintenance expense on 747-400 aircraft increased $17.2 million primarily due to an increase in the number of C Checks, engine overhauls and additional repairs performed.  Heavy Maintenance expense on 747-8F aircraft decreased $2.6 million primarily due to a decrease in the number of C Checks, partially offset by an increase in the number of D Checks.  The higher Line Maintenance primarily reflected increases of $5.6 million for 767 aircraft and $2.9 million for 747-400 aircraft.  Non-heavy Maintenance reflected increases of $1.8 million for 747-400 aircraft.  Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the three months ended June 30 were:

 

Heavy Maintenance Events

 

2019

 

 

2018

 

 

Inc/(Dec)

 

747-8F C Checks

 

 

-

 

 

 

3

 

 

 

(3

)

747-400 C Checks

 

 

6

 

 

 

3

 

 

 

3

 

767 C Checks

 

 

1

 

 

 

1

 

 

 

-

 

747-8F D Checks

 

 

1

 

 

 

-

 

 

 

1

 

747-400 D Checks

 

 

1

 

 

 

1

 

 

 

-

 

CF6-80 engine overhauls

 

 

4

 

 

 

3

 

 

 

1

 

 

Depreciation and amortization increased $12.9 million, or 25.3%, primarily due to additional aircraft that began operating in 2018, an increase in the scrapping of rotable parts and an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements).

Travel increased $4.0 million, or 9.5%, primarily due to increased flying.

26


 

Special charge in 2019 primarily represents a $2.5 million impairment loss on an engine trade in as part of our engine acquisition program. Special charge in 2018 represents a $9.4 million impairment loss on engines held for sale.  We may sell additional flight equipment, which could result in additional charges in future periods.

Other increased $7.9 million, or 16.7%, primarily due to start-up and other costs to meet fleet growth initiatives.

Non-operating Expenses (Income)

The following table compares our Non-operating Expenses (Income) for the three months ended June 30 (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Non-operating Expenses (Income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(1,278

)

 

$

(1,388

)

 

$

(110

)

 

 

(7.9

)%

Interest expense

 

 

30,045

 

 

 

29,182

 

 

 

863

 

 

 

3.0

%

Capitalized interest

 

 

(627

)

 

 

(1,465

)

 

 

(838

)

 

 

(57.2

)%

Unrealized (gain) loss on financial instruments

 

 

(42,300

)

 

 

50,031

 

 

 

(92,331

)

 

 

(184.5

)%

Other (income) expense, net

 

 

945

 

 

 

(7,277

)

 

 

(8,222

)

 

 

(113.0

)%

Unrealized (gain) loss on financial instruments represents the change in fair value of a customer warrant liability (see Note 4 to our Financial Statements) primarily due to changes in our common stock price.

 

Other (income) expense, net decreased $8.2 million, or 113.0% primarily due to a refund of $8.6 million in 2018 for aircraft rent paid in previous years.

Income taxes.  The income tax benefit for the three months ended June 30, 2019 differed from tax at the U.S. statutory rate due to $59.8 million of tax benefits related to the favorable completion of the Internal Revenue Service’s examination of our 2015 income tax return, and to a lesser extent, $9.3 million of nontaxable changes in the fair value of the customer warrant liability.  The income tax expense for the three months ended June 30, 2018 differed from tax at the U.S. statutory rate primarily due to $16.1 million of nondeductible changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements).  

Segments

The following table compares the Direct Contribution for our reportable segments for the three months ended June 30 (see Note 10 to our Financial Statements for the reconciliation to Operating income) (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Direct Contribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACMI

 

$

40,640

 

 

$

52,707

 

 

$

(12,067

)

 

 

(22.9

)%

Charter

 

 

14,084

 

 

 

51,090

 

 

 

(37,006

)

 

 

(72.4

)%

Dry Leasing

 

 

11,091

 

 

 

12,191

 

 

 

(1,100

)

 

 

(9.0

)%

Total Direct Contribution

 

$

65,815

 

 

$

115,988

 

 

$

(50,173

)

 

 

(43.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated income and expenses, net

 

$

81,927

 

 

$

64,480

 

 

$

17,447

 

 

 

27.1

%

ACMI Segment

ACMI Direct Contribution decreased $12.1 million, or 22.9%, primarily due to higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 11 to our Financial Statements), additional Heavy Maintenance expense and increased amortization of deferred maintenance costs.  In addition, ACMI Direct Contribution was impacted by start-up costs for customer growth initiatives and by labor-related service disruptions.  Partially offsetting these items was an increase in contribution from additional flying.  

Charter Segment

Charter Direct Contribution decreased $37.0 million, or 72.4%, primarily due to a decrease in commercial cargo Yields and volumes related to the impact of tariffs and global trade tensions, a decrease in AMC cargo and passenger flying, and additional Heavy Maintenance expense. In addition, Charter Direct Contribution was negatively impacted by labor-related service disruptions.

27


 

Dry Leasing Segment

Dry Leasing Direct Contribution decreased $1.1 million, or 9.0%, primarily due to the scheduled return of a 777-200 freighter aircraft in March 2019, partially offset by the placement of additional aircraft.

Unallocated income and expenses, net

Unallocated income and expenses, net increased $17.4 million, or 27.1%, primarily due to a refund of aircraft rent paid in previous years recognized during the second quarter of 2018, fleet growth initiatives and increased amortization of a customer incentive asset.

Six Months Ended June 30, 2019 and 2018

Operating Statistics

The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated for the six months ended June 30:

Segment Operating Fleet*

 

2019

 

 

2018

 

 

Inc/(Dec)

 

ACMI

 

 

 

 

 

 

 

 

 

 

 

 

747-8F Cargo

 

 

8.6

 

 

 

9.0

 

 

 

(0.4

)

747-400 Cargo

 

 

18.0

 

 

 

16.0

 

 

 

2.0

 

747-400 Dreamlifter

 

 

3.6

 

 

 

3.1

 

 

 

0.5

 

777-200 Cargo

 

 

6.2

 

 

 

5.0

 

 

 

1.2

 

767-300 Cargo

 

 

25.3

 

 

 

18.3

 

 

 

7.0

 

767-200 Cargo

 

 

9.0

 

 

 

9.0

 

 

 

-

 

767-200 Passenger

 

 

1.0

 

 

 

1.0

 

 

 

-

 

737-800 Cargo

 

 

0.9

 

 

 

-

 

 

 

0.9

 

737-400 Cargo

 

 

5.0

 

 

 

5.0

 

 

 

-

 

747-400 Passenger

 

 

-

 

 

 

0.5

 

 

 

(0.5

)

Total

 

 

77.6

 

 

 

66.9

 

 

 

10.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charter

 

 

 

 

 

 

 

 

 

 

 

 

747-8F Cargo

 

 

1.3

 

 

 

1.0

 

 

 

0.3

 

747-400 Cargo

 

 

15.1

 

 

 

12.2

 

 

 

2.9

 

747-400 Passenger

 

 

4.0

 

 

 

2.0

 

 

 

2.0

 

767-300 Cargo

 

 

-

 

 

 

0.4

 

 

 

(0.4

)

767-300 Passenger

 

 

4.9

 

 

 

4.0

 

 

 

0.9

 

Total

 

 

25.3

 

 

 

19.6

 

 

 

5.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry Leasing

 

 

 

 

 

 

 

 

 

 

 

 

777-200 Cargo

 

 

7.5

 

 

 

6.7

 

 

 

0.8

 

767-300 Cargo

 

 

21.3

 

 

 

14.8

 

 

 

6.5

 

757-200 Cargo

 

 

1.0

 

 

 

1.0

 

 

 

-

 

737-300 Cargo

 

 

1.0

 

 

 

1.0

 

 

 

-

 

737-800 Passenger

 

 

1.0

 

 

 

1.0

 

 

 

-

 

Total

 

 

31.8

 

 

 

24.5

 

 

 

7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Aircraft Dry Leased to CMI customers

 

 

(23.3

)

 

 

(15.5

)

 

 

(7.8

)

Total Operating Average Aircraft Equivalents

 

 

111.4

 

 

 

95.5

 

 

 

15.9

 

 

*

ACMI average fleet excludes spare aircraft provided by CMI customers and Dry Leasing average fleet excludes aircraft awaiting placement.

Block Hours

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Total Block Hours**

 

 

157,342

 

 

 

139,155

 

 

 

18,187

 

 

 

13.1

%

 

**

Includes ACMI, Charter and other Block Hours.

28


 

Operating Revenue

The following table compares our Operating Revenue for the six months ended June 30 (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Operating Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACMI

 

$

613,845

 

 

$

544,175

 

 

$

69,670

 

 

 

12.8

%

Charter

 

 

620,793

 

 

 

631,975

 

 

 

(11,182

)

 

 

(1.8

)%

Dry Leasing

 

 

113,481

 

 

 

76,350

 

 

 

37,131

 

 

 

48.6

%

Customer incentive asset amortization

 

 

(13,222

)

 

 

(5,886

)

 

 

7,336

 

 

NM

 

Other

 

 

8,704

 

 

 

9,545

 

 

 

(841

)

 

 

(8.8

)%

Total Operating Revenue

 

$

1,343,601

 

 

$

1,256,159

 

 

 

 

 

 

 

 

 

ACMI

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

ACMI Block Hours

 

 

121,722

 

 

 

103,092

 

 

 

18,630

 

 

 

18.1

%

ACMI Revenue Per Block Hour

 

$

5,043

 

 

$

5,279

 

 

$

(236

)

 

 

(4.5

)%

 

ACMI revenue increased $69.7 million, or 12.8%, primarily due to increased flying, partially offset by a decrease in Revenue per Block Hour.  The increase in Block Hours was primarily driven by increased 767 and 737 flying, the start-up of 747-400 flying for new customers and incremental 777-200 flying.  Revenue per Block Hour decreased primarily due to increased smaller-gauge 767 and 737 CMI flying.  In addition, ACMI revenue was negatively impacted by labor-related service disruptions.

Charter

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Charter Block Hours:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cargo

 

 

24,367

 

 

 

25,278

 

 

 

(911

)

 

 

(3.6

)%

Passenger

 

 

9,954

 

 

 

9,763

 

 

 

191

 

 

 

2.0

%

Total

 

 

34,321

 

 

 

35,041

 

 

 

(720

)

 

 

(2.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charter Revenue Per Block Hour:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cargo

 

$

17,710

 

 

$

18,262

 

 

$

(552

)

 

 

(3.0

%)

Passenger

 

$

19,012

 

 

$

17,448

 

 

$

1,564

 

 

 

9.0

%

Charter

 

$

18,088

 

 

$

18,035

 

 

$

53

 

 

 

0.3

%

 

Charter revenue decreased $11.2 million, or 1.8%, primarily due to a decrease in flying, partially offset by an increase in Revenue per Block Hour.  The decrease in Charter Block Hours was primarily driven by decreased cargo demand from the AMC during the second quarter of 2019 and the late cancellation of certain cargo flights by the AMC during the first quarter of 2019. Partially offsetting these decreases was an increase in cargo flying for commercial customers and passenger flying for the AMC during the first half of 2019. Revenue per Block Hour increased primarily due to higher Yields (excluding fuel) on passenger flying, primarily driven by an increase in rates for the AMC and the expansion of our flying for sports teams and other VIP charter customers.  Partially offsetting these increases was a decrease in Yields for commercial customers reflecting the impact of tariffs and global trade tensions. In addition, Charter revenue was negatively impacted by labor-related service disruptions.

Dry Leasing

Dry Leasing revenue increased $37.1 million, or 48.6%, primarily due to $22.3 million of revenue from maintenance payments related to the scheduled return of a 777-200 freighter aircraft in March 2019 and the placement of incremental aircraft.  The additional aircraft included the placement of 767-300 converted freighter aircraft throughout 2018, as well as one 777-200 freighter aircraft in February 2018 and a second 777-200 freighter aircraft in July 2018.

 

29


 

Operating Expenses

The following table compares our Operating Expenses for the six months ended June 30 (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

286,924

 

 

$

254,258

 

 

$

32,666

 

 

 

12.8

%

Aircraft fuel

 

 

228,479

 

 

 

226,009

 

 

 

2,470

 

 

 

1.1

%

Maintenance, materials and repairs

 

 

217,091

 

 

 

173,115

 

 

 

43,976

 

 

 

25.4

%

Depreciation and amortization

 

 

128,170

 

 

 

100,464

 

 

 

27,706

 

 

 

27.6

%

Travel

 

 

91,403

 

 

 

82,205

 

 

 

9,198

 

 

 

11.2

%

Aircraft rent

 

 

82,223

 

 

 

79,805

 

 

 

2,418

 

 

 

3.0

%

Navigation fees, landing fees and other rent

 

 

78,198

 

 

 

73,295

 

 

 

4,903

 

 

 

6.7

%

Passenger and ground handling services

 

 

62,685

 

 

 

58,264

 

 

 

4,421

 

 

 

7.6

%

Special charge

 

 

3,269

 

 

 

9,374

 

 

 

(6,105

)

 

NM

 

Transaction-related expenses

 

 

3,261

 

 

 

510

 

 

 

2,751

 

 

NM

 

Other

 

 

106,054

 

 

 

97,345

 

 

 

8,709

 

 

 

8.9

%

Total Operating Expenses

 

$

1,287,757

 

 

$

1,154,644

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits increased $32.7 million, or 12.8%, primarily due to increased flying, higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 11 to our Financial Statements) and fleet growth initiatives.

Aircraft fuel increased $2.5 million, or 1.1%, due to an increase in consumption related to increased flying.  We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer.  Average fuel cost per gallon and fuel consumption for the six months ended June 30 were:

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Average fuel cost per gallon

 

$

2.30

 

 

$

2.30

 

 

$

-

 

 

-

 

Fuel gallons consumed (000s)

 

 

99,468

 

 

 

98,458

 

 

 

1,010

 

 

 

1.0

%

 

Maintenance, materials and repairs increased by $44.0 million, or 25.4%, primarily reflecting $21.6 million of increased Line Maintenance expense due to increased flying and additional repairs performed, $14.8 million of increased Heavy Maintenance expense and $7.5 million of increased Non-heavy Maintenance expense.  The higher Line Maintenance primarily reflected increases of $12.8 million for 767 aircraft and $9.5 million for 747-400 aircraft, partially offset by a decrease of $1.2 million for 747-8F aircraft.  Heavy Maintenance expense on 747-400 aircraft increased $10.1 million primarily due to an increase in the number of C Checks and additional repairs performed, partially offset by a decrease in the number of D Checks.  Heavy Maintenance expense on 767 aircraft increased $3.9 million primarily due to an increase in the number of C Checks and additional repairs performed.  Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for the six months ended June 30 were:

 

Heavy Maintenance Events

 

2019

 

 

2018

 

 

Inc/(Dec)

 

747-8F C Checks

 

 

2

 

 

 

3

 

 

 

(1

)

747-400 C Checks

 

 

11

 

 

 

7

 

 

 

4

 

767 C Checks

 

 

2

 

 

 

1

 

 

 

1

 

747-8F D Checks

 

 

1

 

 

 

-

 

 

 

1

 

747-400 D Checks

 

 

1

 

 

 

2

 

 

 

(1

)

CF6-80 engine overhauls

 

 

9

 

 

 

9

 

 

 

-

 

 

Depreciation and amortization increased $27.7 million, or 27.6%, primarily due to additional aircraft that began operating in 2018, an increase in the scrapping of rotable parts and an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 to our Financial Statements).

Travel increased $9.2 million, or 11.2%, primarily due to increased flying.

Aircraft rent increased $2.4 million, or 3.0%, primarily due to additional operating leases for 747-400 freighter aircraft that began during the second half of 2018 to meet increased customer demand.

30


 

Navigation fees, landing fees and other rent increased $4.9 million, or 6.7%, primarily due to increased flying, partially offset by a decrease in purchased capacity, which is a component of other rent.

Passenger and ground handling services increased $4.4 million, or 7.6%, primarily due to higher costs from flying to more expensive locations.

Special charge in 2019 primarily represents a $2.5 million impairment loss on an engine trade in as part of our engine acquisition program. Special charge in 2018 represents a $9.4 million impairment loss on engines held for sale.  We may sell additional flight equipment, which could result in additional charges in future periods.

Transaction-related expenses in 2019 primarily relate to professional fees for a customer transaction with warrants (see Note 4 to our Financial Statements).  Transaction-related expenses in 2018 were for the integration of Southern Air, which primarily included professional fees and integration costs.

Other increased $8.7 million, or 8.9%, primarily due to start-up and other costs to meet fleet growth initiatives.

Non-operating Expenses (Income)

The following table compares our Non-operating Expenses (Income) for the six months ended June 30 (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Non-operating (Income) Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(3,322

)

 

$

(3,112

)

 

$

210

 

 

 

6.7

%

Interest expense

 

 

60,398

 

 

 

56,524

 

 

 

3,874

 

 

 

6.9

%

Capitalized interest

 

 

(1,090

)

 

 

(3,215

)

 

 

(2,125

)

 

 

(66.1

)%

Loss on early extinguishment of debt

 

 

245

 

 

 

-

 

 

 

245

 

 

NM

 

Unrealized (gain) loss on financial instruments

 

 

4,275

 

 

 

57,771

 

 

 

(53,496

)

 

 

(92.6

)%

Other (income) expense, net

 

 

(2,030

)

 

 

(11,752

)

 

 

(9,722

)

 

 

(82.7

)%

Interest expense increased $3.9 million, or 6.9%, primarily due to the 2018 financing of 767-300 aircraft purchases and conversions and purchases of two 777-200 aircraft in 2018.

Unrealized (gain) loss on financial instruments represents the change in fair value of a customer warrant liability (see Note 4 to our Financial Statements) primarily due to changes in our common stock price.

Other (income) expense, net decreased primarily due to a refund of $12.4 million in 2018 for aircraft rent paid in previous years, partially offset by a net insurance recovery.

 

Income taxes.  The income tax benefit for the six months ended June 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefits related to the favorable completion of the Internal Revenue Service’s examination of our 2015 income tax return.  The income tax expense for the six months ended June 30, 2018 differed from tax at the U.S. statutory rate primarily due to $17.8 million of nondeductible changes in the fair value of the customer warrant liability (see Note 4 to our Financial Statements).

Segments

The following table compares the Direct Contribution for our reportable segments for the six months ended June 30 (see Note 11 to our Financial Statements for the reconciliation to Operating income) (in thousands):

 

 

 

2019

 

 

2018

 

 

Inc/(Dec)

 

 

% Change

 

Direct Contribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACMI

 

$

80,647

 

 

$

93,579

 

 

$

(12,932

)

 

 

(13.8

)%

Charter

 

 

43,217

 

 

 

85,368

 

 

 

(42,151

)

 

 

(49.4

)%

Dry Leasing

 

 

46,618

 

 

 

23,550

 

 

 

23,068

 

 

 

98.0

%

   Total Direct Contribution

 

$

170,482

 

 

$

202,497

 

 

$

(32,015

)

 

 

(15.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated income and expenses, net

 

$

162,064

 

 

$

129,543

 

 

$

32,521

 

 

 

25.1

%

31


 

ACMI Segment

ACMI Direct Contribution decreased $12.9 million, or 13.8%, primarily due to higher crew costs, including enhanced wages and work rules resulting from our interim agreement with the Southern Air pilots (see Note 11 to our Financial Statements), additional Heavy Maintenance expense and increased amortization of deferred maintenance costs.  In addition, ACMI Direct Contribution was impacted by start-up costs to meet customer growth initiatives and by labor-related service disruptions.  Partially offsetting these items was an increase in contribution from additional flying.

Charter Segment

Charter Direct Contribution decreased $42.2 million, or 49.4%, primarily due to a decrease in AMC cargo and passenger flying, a decrease in commercial cargo Yields related to the impact of tariffs and global trade tensions, and additional Heavy Maintenance expense. In addition, Charter Direct Contribution was negatively impacted by labor-related service disruptions.

Dry Leasing Segment

Dry Leasing Direct Contribution increased $23.1 million, or 98.0%, primarily due to revenue from maintenance payments related to the scheduled return of a 777-200 freighter aircraft in March 2019 and the placement of additional aircraft.  

Unallocated income and expenses, net

Unallocated income and expenses, net increased $32.5 million, or 25.1%, primarily due to a refund of aircraft rent paid in previous years recognized during the second quarter of 2018, fleet growth initiatives and increased amortization of a customer incentive asset.  

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 income from continuing operations, net of taxes, Adjusted Diluted EPS from continuing operations, net of taxes and Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), which exclude certain noncash income and expenses, and items impacting 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 Income from continuing operations, net of taxes and Diluted EPS from continuing operations, net of taxes which are the most directly comparable 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.  These adjusted measures provide a more comparable basis to analyze operating results and earnings and are measures commonly used by shareholders to measure our performance.  In addition, management’s incentive compensation is determined, in part, by using Adjusted income from continuing operations, net of taxes and Adjusted EBITDA. We believe that these adjusted measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provide meaningful supplemental information to assist investors and analysts in understanding our business results and assessing our prospects for future performance.

32


 

 

The following is a reconciliation of Income from continuing operations, net of taxes and Diluted EPS from continuing operations, net of taxes to the corresponding non-GAAP financial measures (in thousands, except per share data):

 

 

 

 

For the Three Months Ended

 

 

 

 

June 30, 2019

 

 

 

June 30, 2018

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of taxes

 

 

$

86,868

 

 

 

$

(21,123

)

 

NM

 

Impact from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special charge

 

 

 

3,269

 

 

 

 

9,374

 

 

 

 

 

Costs associated with transactions (a)

 

 

 

734

 

 

 

 

240

 

 

 

 

 

Leadership transition costs

 

 

 

541

 

 

 

 

-

 

 

 

 

 

Certain contract start-up costs (b)

 

 

 

1,694

 

 

 

 

-

 

 

 

 

 

Accrual for legal matters and professional fees

 

 

 

121

 

 

 

 

345

 

 

 

 

 

Noncash expenses and income, net (c)

 

 

 

11,515

 

 

 

 

7,455

 

 

 

 

 

Unrealized (gain) loss on financial instruments

 

 

 

(42,300

)

 

 

 

50,031

 

 

 

 

 

Income tax effect of reconciling items

 

 

 

(3,652

)

 

 

 

3,403

 

 

 

 

 

Special tax item (d)

 

 

 

(54,272

)

 

 

 

-

 

 

 

 

 

Adjusted income from continuing operations, net of taxes

 

 

$

4,518

 

 

 

$

49,725

 

 

 

(90.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

26,953

 

 

 

 

25,565

 

 

 

 

 

Add: dilutive warrant (e)

 

 

 

-

 

 

 

 

2,264

 

 

 

 

 

   dilutive convertible notes

 

 

 

-

 

 

 

 

450

 

 

 

 

 

   effect of convertible notes hedges (f)

 

 

 

-

 

 

 

 

(450

)

 

 

 

 

   dilutive restricted stock

 

 

 

-

 

 

 

 

572

 

 

 

 

 

Adjusted weighted average diluted shares outstanding

 

 

 

26,953

 

 

 

 

28,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Diluted EPS from continuing operations, net of taxes

 

 

$

0.17

 

 

 

$

1.75

 

 

 

(90.3

)%

 

 

 

 

For the Six Months Ended

 

 

 

 

June 30, 2019

 

 

 

June 30, 2018

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of taxes

 

 

$

57,158

 

 

 

$

(11,495

)

 

NM

 

Impact from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special charge

 

 

 

3,269

 

 

 

 

9,374

 

 

 

 

 

Costs associated with transactions (a)

 

 

 

3,261

 

 

 

 

510

 

 

 

 

 

Leadership transition costs

 

 

 

541

 

 

 

 

-

 

 

 

 

 

Certain contract start-up costs (b)

 

 

 

2,063

 

 

 

 

-

 

 

 

 

 

Accrual for legal matters and professional fees

 

 

 

162

 

 

 

 

563

 

 

 

 

 

Noncash expenses and income, net (c)

 

 

 

22,269

 

 

 

 

14,130

 

 

 

 

 

Loss on early extinguishment of debt

 

 

 

245

 

 

 

 

-

 

 

 

 

 

Unrealized loss on financial instruments

 

 

 

4,275

 

 

 

 

57,771

 

 

 

 

 

Net insurance recovery

 

 

 

(3,449

)

 

 

 

-

 

 

 

 

 

Income tax effect of reconciling items

 

 

 

(3,681

)

 

 

 

2,656

 

 

 

 

 

Special tax item (d)

 

 

 

(54,272

)

 

 

 

-

 

 

 

 

 

Adjusted income from continuing operations, net of taxes

 

 

$

31,841

 

 

 

$

73,509

 

 

 

(56.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

25,921

 

 

 

 

25,501

 

 

 

 

 

Add: dilutive warrant (e)

 

 

 

1,516

 

 

 

 

1,958

 

 

 

 

 

   dilutive convertible notes

 

 

 

-

 

 

 

 

225

 

 

 

 

 

   effect of convertible notes hedges (f)

 

 

 

-

 

 

 

 

(225

)

 

 

 

 

   dilutive restricted stock

 

 

 

-

 

 

 

 

547

 

 

 

 

 

Adjusted weighted average diluted shares outstanding

 

 

 

27,437

 

 

 

 

28,006

 

 

 

 

 

Adjusted Diluted EPS from continuing operations, net of taxes

 

 

$

1.16

 

 

 

$

2.62

 

 

 

(55.7

)%

 

33


 

 

 

 

For the Three Months Ended

 

 

 

 

June 30, 2019

 

 

 

June 30, 2018

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of taxes

 

 

$

86,868

 

 

 

$

(21,123

)

 

NM

 

Income tax (benefit) expense

 

 

 

(64,683

)

 

 

 

12,986

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

22,185

 

 

 

 

(8,137

)

 

 

 

 

Special charge

 

 

 

3,269

 

 

 

 

9,374

 

 

 

 

 

Costs associated with transactions (a)

 

 

 

734

 

 

 

 

240

 

 

 

 

 

Leadership transition costs

 

 

 

541

 

 

 

 

-

 

 

 

 

 

Certain contract start-up costs (b)

 

 

 

1,694

 

 

 

 

-

 

 

 

 

 

Accrual for legal matters and professional fees

 

 

 

121

 

 

 

 

345

 

 

 

 

 

Noncash expenses and income, net (c)

 

 

 

11,515

 

 

 

 

7,455

 

 

 

 

 

Unrealized (gain) loss on financial instruments

 

 

 

(42,300

)

 

 

 

50,031

 

 

 

 

 

Adjusted pretax income

 

 

 

(2,241

)

 

 

 

59,308

 

 

 

 

 

Interest (income) expense, net

 

 

 

24,034

 

 

 

 

22,637

 

 

 

 

 

Other non-operating expenses (income), net

 

 

 

945

 

 

 

 

(7,277

)

 

 

 

 

Adjusted operating income

 

 

 

22,738

 

 

 

 

74,668

 

 

 

 

 

Depreciation and amortization

 

 

 

63,689

 

 

 

 

50,834

 

 

 

 

 

Adjusted EBITDA

 

 

$

86,427

 

 

 

$

125,502

 

 

 

(31.1

)%

 

 

 

 

For the Six Months Ended

 

 

 

 

June 30, 2019

 

 

 

June 30, 2018

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of taxes

 

 

$

57,158

 

 

 

$

(11,495

)

 

NM

 

Income tax (benefit) expense

 

 

 

(59,790

)

 

 

 

16,794

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

(2,632

)

 

 

 

5,299

 

 

 

 

 

Special charge

 

 

 

3,269

 

 

 

 

9,374

 

 

 

 

 

Costs associated with transactions (a)

 

 

 

3,261

 

 

 

 

510

 

 

 

 

 

Leadership transition costs

 

 

 

541

 

 

 

 

-

 

 

 

 

 

Certain contract start-up costs (b)

 

 

 

2,063

 

 

 

 

-

 

 

 

 

 

Accrual for legal matters and professional fees

 

 

 

162

 

 

 

 

563

 

 

 

 

 

Noncash expenses and income, net (c)

 

 

 

22,269

 

 

 

 

14,130

 

 

 

 

 

Loss on early extinguishment of debt

 

 

 

245

 

 

 

 

-

 

 

 

 

 

Net insurance recovery

 

 

 

(3,449

)

 

 

 

-

 

 

 

 

 

Unrealized loss on financial instruments

 

 

 

4,275

 

 

 

 

57,771

 

 

 

 

 

Adjusted pretax income

 

 

 

30,004

 

 

 

 

87,647

 

 

 

 

 

Interest (income) expense, net

 

 

 

47,885

 

 

 

 

42,899

 

 

 

 

 

Other non-operating expenses (income)

 

 

 

1,419

 

 

 

 

(11,752

)

 

 

 

 

Adjusted operating income

 

 

 

79,308

 

 

 

 

118,794

 

 

 

 

 

Depreciation and amortization

 

 

 

128,170

 

 

 

 

100,464

 

 

 

 

 

Adjusted EBITDA

 

 

$

207,478

 

 

 

$

219,258

 

 

 

(5.4

)%

 

(a)

Costs associated with transactions in 2019 primarily relate to a customer transaction with warrants (see Note 4 to our Financial Statements) and other costs associated with our acquisition of Southern Air. Costs associated with transactions in 2018 primarily related to costs associated with our acquisition of Southern Air.

 

(b)

Certain contract start-up costs represent unique training aircraft costs required for a new customer contract (see Note 4 to our Financial Statements).

 

(c)

Noncash expenses and income, net in 2019 and 2018 primarily related to amortization of debt discount on the convertible notes (see Note 6 to our Financial Statements), and amortization of the customer incentive asset related to customer warrants (see Note 4 to our Financial Statements).  

 

(d)

Special tax item represents income tax benefits from the completion of the 2015 IRS examination that are not related to ongoing operations (see Note 8 to our Financial Statements).

(e)   Dilutive warrants represent potentially dilutive common shares related to warrants issued to a customer (see Note 4 to our Financial Statements).  These shares are excluded from Diluted EPS from continuing operations, net of taxes prepared in accordance with GAAP when they would have been antidilutive.

(f)   Economic benefit from the convertible notes hedges in offsetting dilution from the convertible notes.

34


 

Liquidity and Capital Resources

The most significant liquidity events during the first half of 2019 were as follows:

Debt Transactions

In March 2019, we borrowed $19.7 million related to GEnx engine performance upgrade kits and overhauls under an unsecured five-year term loan at a fixed interest rate of 2.73%.

 

Operating Activities. Net cash provided by operating activities was $109.0 million for the first half of 2019, which primarily reflected Net Income of $57.2 million, noncash adjustments of $157.8 million for Depreciation and amortization, $60.0 million for Deferred taxes and $4.3 million for Unrealized loss on financial instruments, and a $40.1 million decrease in Accounts payable and accrued liabilities, and a $23.8 million increase in Prepaid expenses, current assets and other assets.  Net cash provided by operating activities was $175.9 million for the first half of 2018, which primarily reflected a $11.5 million Net Loss, noncash adjustments of $121.6 million for Depreciation and amortization and $57.8 million for Unrealized loss on financial instruments, and a $9.4 million increase in Accounts payable and accrued liabilities.  Partially offsetting these items was a $27.7 million increase in Accounts receivable.

Investing Activities. Net cash used for investing activities was $128.5 million for the first half of 2019, consisting primarily of $99.2 million of payments for flight equipment and modifications and $76.8 million of core capital expenditures, excluding flight equipment, partially offset by $38.1 million of proceeds from insurance.  Payments for flight equipment and modifications during the first half of 2019 were primarily related to 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits.  All capital expenditures for 2019 were funded through working capital and the financing discussed above.  Net cash used for investing activities was $497.8 million for the first half of 2018, consisting primarily of $448.4 million of payments for flight equipment and modifications and $54.8 million of core capital expenditures, excluding flight equipment. Payments for flight equipment and modifications during the first half of 2018 were primarily related to the purchase of 777-200 aircraft, 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits.

Financing Activities. Net cash used for financing activities was $92.5 million for the first half of 2019, which primarily reflected $160.1 million of payments on debt, including a $20.7 million repayment of two term loans, and $9.2 million related to the purchase of treasury stock, partially offset by $50.0 million of proceeds from our revolving credit facility and $19.7 million from debt issuance.  Net cash provided by financing activities was $257.9 million for the first half of 2018, which primarily reflected $305.1 million of proceeds from debt issuance and $135.0 million of proceeds from revolving credit facility, partially offset by $115.2 million of payments on debt, $60.0 million of payment of revolving credit facility and $10.3 million related to the purchase of treasury stock.

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 and to fund core capital expenditures for 2019.  Core capital expenditures for the remainder of 2019 are expected to range between $60.0 to $70.0 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 May 2017 that enables us to sell debt and/or equity securities on a registered basis 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.

We do not expect to pay any significant U.S. federal income tax in this or the next decade.  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 may repatriate the unremitted earnings of our foreign subsidiaries to the extent taxes are insignificant.

Contractual Obligations and Debt Agreements

See Notes 6 and 7 to our Financial Statements for a description of our new debt and lease obligations.  See our 2018 Annual Report on Form 10-K for a tabular disclosure of our contractual obligations as of December 31, 2018 and a description of our other debt obligations and amendments thereto.

Off-Balance Sheet Arrangements

See Note 7 to our Financial Statements for a discussion of our adoption of the new leasing guidance.

35


 

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, 2018.  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.  Such forward-looking statements speak only as of the date of this report.  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 and expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk during the six months ended June 30, 2019.  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 2018 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) and 15d - 15(e) under the Exchange Act) as of June 30, 2019.  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.

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) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

36


 

PART II — OTHER INFORMATION

With respect to the fiscal quarter ended June 30, 2019, the information required in response to this Item is set forth in Note 11 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

 

There have been no material changes in our risk factors from those disclosed in our 2018 Annual Report on Form 10-K.

ITEM 6. EXHIBITS

 

a.

Exhibits

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

 

37


 

EXHIBIT INDEX

 

Exhibit

Number

 

Description

 

 

 

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

 

 

 

32.1

 

Section 1350 Certifications.

 

 

 

101.INS

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 June 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, (v) Consolidated Statements of Stockholders’ Equity as of and for the three and six months ended June 30, 2019 and 2018 and (vi) Notes to the Unaudited Consolidated Financial Statements.

 

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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:  August 1, 2019

 

/s/  William J. Flynn

 

 

William J. Flynn

 

 

Chief Executive Officer

 

 

 

Dated:  August 1, 2019

 

/s/  Spencer Schwartz

 

 

Spencer Schwartz

 

 

Executive Vice President and Chief Financial Officer

 

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