Notes to Unaudited Consolidated Financial Statements
March 31, 2018
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, 2017, which includes additional disclosures and a summary of our significant accounting policies. The December 31, 2017 balance sheet data was derived from that Annual Report. In our opinion, the Financial Statements contain all adjustments, consisting of normal recurring items, necessary to fairly state the financial position of AAWW and its consolidated subsidiaries as of March 31, 2018, the results of operations for the three months ended March 31, 2018 and 2017, comprehensive income (loss) for the three months ended March 31, 2018 and 2017, cash flows for the three months ended March 31, 2018 and 2017, and shareholders’ equity as of and for the three months ended March 31, 2018 and 2017.
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
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 $2.4 million and $0.8 million for the three months ended March 31, 2018 and March 31, 2017, respectively.
Deferred maintenance included within Deferred costs and other assets is as follows:
|
|
Deferred
|
|
|
|
Maintenance
|
|
Balance as of December 31, 2017
|
|
$
|
63,868
|
|
Deferred maintenance costs
|
|
|
6,803
|
|
Amortization of deferred maintenance
|
|
|
(2,358
|
)
|
Balance as of March 31, 2018
|
|
$
|
68,313
|
|
8
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:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Cash and cash equivalents
|
|
$
|
119,294
|
|
|
$
|
280,809
|
|
Restricted cash
|
|
|
11,110
|
|
|
|
11,055
|
|
Total Cash, cash equivalents and restricted cash shown in consolidated statements of cash flows
|
|
$
|
130,404
|
|
|
$
|
291,864
|
|
Accounting Pronouncements Adopted in 2018
In February 2018, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for the reporting of comprehensive income. The guidance permits entities to reclassify to retained earnings the excess tax effects remaining in accumulated other comprehensive income/(loss) after the reduction in the federal corporate income tax rate from 35% to 21% as a result of the U.S. Tax Cuts and Jobs Act of 2017. The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We have early adopted the new guidance effective as of January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
In May 2014, the FASB amended its accounting guidance for revenue recognition. Subsequently, the FASB has issued several clarifications and updates. The fundamental principles of the new standard are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and consideration that a company expects to receive for the services provided. It also requires additional disclosures necessary for the financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the new guidance on January 1, 2018 using the modified retrospective approach, under which the guidance is applied beginning on the date of adoption.
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 financial statements (see Note 4 to our Financial Statements). As a result of adoption, revenue recognized under previous guidance based on flight departure is now recognized over time as the services are performed. In addition, revenue under certain ACMI and CMI contracts, such as revenue related to contracted minimum block hour guarantees, is now recognized in later periods, and some revenue adjustments related to meeting or exceeding on-time performance targets are now recognized in earlier periods. . Revenue under our Dry Leasing contracts is explicitly excluded from the scope of the new guidance as it is covered by accounting guidance for leases.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB amended its accounting guidance for leases. 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 will continue 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. The amended guidance is effective as of the beginning of 2019, with early adoption permitted. While we are still assessing the impact the amended guidance will have on our financial statements, we expect that recognizing the right-of-use asset and related lease liability will impact our balance sheet materially. We plan to adopt the new guidance on its required effective date of January 1, 2019 and the implementation is progressing as expected.
3. Related Parties
DHL Investment and 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 (“DP”), holds a 49% equity interest and a 25% voting interest in Polar. Polar is a variable interest entity that we do not consolidate because we are not the primary beneficiary as the risks associated with the direct costs of operation are with DHL. Under a 20-year blocked space agreement, which began in 2008 (the “BSA”), 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.
9
The following table summarizes our transactions with Polar:
|
|
For the Three Months Ended
|
|
Revenue and Expenses:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Revenue from Polar
|
|
$
|
102,105
|
|
|
$
|
102,228
|
|
Ground handling and airport fees to Polar
|
|
|
636
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable/payable as of:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Receivables from Polar
|
|
$
|
19,603
|
|
|
$
|
9,558
|
|
Payables to Polar
|
|
|
3,101
|
|
|
|
2,751
|
|
|
|
|
|
|
|
|
|
|
Aggregate Carrying Value of Polar Investment as of:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Aggregate Carrying Value of Polar Investment
|
|
$
|
4,870
|
|
|
$
|
4,870
|
|
GATS
We hold a 50% interest in GATS GP (BVI) Ltd. (“GATS”), a joint venture with an unrelated third party. As of March 31, 2018 and December 31, 2017, our investment in GATS was $23.0 million and $22.1 million, respectively. We had Accounts payable to GATS of $0.8 million as of March 31, 2018 and $0.4 million as of December 31, 2017.
4. Revenue Recognition
Adoption
We adopted the new revenue recognition guidance using the modified retrospective method and applied it to all customer contracts, excluding Dry Leasing contracts, based on the contract terms in effect as of January 1, 2018. Revenue under our Dry Leasing contracts is explicitly excluded from the scope of the new guidance. We recognized the cumulative effect of initially applying the new revenue recognition guidance as an adjustment to the opening balance of retained earnings as of January 1, 2018 as follows:
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
December 31, 2017
|
|
Adjustments
|
|
January 1, 2018
|
|
Accounts receivable
|
|
$
|
194,478
|
|
$
|
(407
|
)
|
$
|
194,071
|
|
Accrued liabilities
|
|
|
454,843
|
|
|
3,614
|
|
|
458,457
|
|
Deferred taxes
|
|
|
214,694
|
|
|
(895
|
)
|
|
213,799
|
|
Retained earnings
|
|
|
1,271,545
|
|
|
(3,126
|
)
|
|
1,268,419
|
|
The following tables provide disclosure of the impact of adoption of the new revenue recognition guidance on our consolidated statement of operations and balance sheet:
|
|
For the Three Months Ended March 31, 2018
|
|
|
|
As Reported
|
|
|
Amounts without Adoption of New Revenue Recognition Guidance
|
|
|
Effect of Change Inc/(Dec)
|
|
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue
|
|
$
|
590,014
|
|
|
$
|
588,404
|
|
|
$
|
1,610
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
50,251
|
|
|
|
49,562
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
13,436
|
|
|
|
12,515
|
|
|
|
921
|
|
Income tax expense
|
|
|
3,808
|
|
|
|
3,606
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of taxes
|
|
|
9,628
|
|
|
|
8,909
|
|
|
|
719
|
|
10
|
|
As of March 31, 2018
|
|
|
|
As Reported
|
|
|
Amounts without Adoption of New Revenue Recognition Guidance
|
|
|
Effect of Change Inc/(Dec)
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
195,117
|
|
|
$
|
194,408
|
|
|
$
|
709
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
430,146
|
|
|
|
430,358
|
|
|
|
(212
|
)
|
Deferred taxes
|
|
|
217,223
|
|
|
|
217,021
|
|
|
|
202
|
|
Retained earnings
|
|
|
1,279,002
|
|
|
|
1,278,283
|
|
|
|
719
|
|
Deferred Revenue
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
Deferred Revenue liability balances during the three months ended March 31, 2018 were as follows:
|
|
Deferred
|
|
|
|
Revenue
|
|
Balance at beginning of period
|
|
$
|
14,958
|
|
Revenue recognized
|
|
|
(13,351
|
)
|
Amounts collected or invoiced
|
|
|
8,094
|
|
Balance at end of period
|
|
$
|
9,701
|
|
Accounts Receivable
Accounts receivable, net of allowances related to customer contracts, excluding Dry Leasing contracts, was $163.7 million as of March 31, 2018 and $173.2 million as of December 31, 2017.
Performance Obligations and Accounting Policies
ACMI and CMI Services
Our performance obligations under ACMI contracts involve outsourced cargo and passenger aircraft operating services, including the provision of an aircraft, crew, maintenance and insurance. Our performance obligations under CMI contracts also involve outsourced aircraft operating services, including the provision of crew, line maintenance and insurance, but not the aircraft. ACMI and CMI contracts generally provide for the transfer of the benefits from these performance obligations on a combined basis through the operation of the aircraft over time. The time interval between when an aircraft departs the terminal until it arrives at the destination terminal is measured in hours and called a “Block Hour”. Customers assume fuel, demand and price risk. Generally, customers are also responsible for landing, navigation and most other operational fees and costs and, in the case of CMI customers, the provision of the aircraft and heavy and non-heavy maintenance.
When we act as an agent for these costs reimbursed by customers, such reimbursed amounts are recorded as Operating Revenue, net of the related costs, when the costs are incurred. When we are responsible for any of these costs, such reimbursed amounts are recorded as Operating Revenue and the costs are recorded as Operating Expenses as incurred.
Revenue from ACMI and CMI contracts is typically recognized over time as the services are performed based on Block Hours operated on behalf of a customer during a given month. Revenue for contracts with scheduled rate changes, excluding inflationary adjustments, is recognized over the term of the contract using an estimated average rate per Block Hour, which requires significant judgment to estimate the total number of Block Hours expected. Any revenue adjustments, including those related to minimum contracted Block Hour guarantees and on-time performance targets, are recognized over the applicable measurement period for the adjustment. See Note 5 to our Financial Statements for a discussion of a customer incentive asset.
ACMI and CMI customers are billed monthly based on Block Hours operated on behalf of a customer during a given month, as defined contractually. Payment terms and conditions vary by contract, although terms generally require partial payment for minimum
11
contracted Block Hour guarantees in advance of the services being provided. Since advance paymen
ts are typically made shortly before the services are performed, such payments are not considered significant financing components.
Charter Services
Our performance obligations under Charter contracts involve the provision of cargo and passenger aircraft charter services to customers, including the U.S. Military Air Mobility Command (“AMC”), brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. Our obligations are for one or more flights based on a specific origin and destination. We also provide limited airport-to-airport cargo services to select markets, including several cities in South America. The customer pays a fixed charter fee and we typically bear all direct operating costs for both cargo and passenger charters, which include fuel, insurance, landing and navigation fees, and most other operational fees and costs. When we purchase cargo capacity from our ACMI customers for Charter flights, we are responsible for selling the capacity we purchase. We record revenue related to such purchased capacity as part of Charter revenue and record the related expenses in Navigation fees, landing fees and other rent.
Revenue from Charter contracts is typically recognized over time as the services are performed based on Block Hours operated on behalf of a customer.
Any revenue adjustments related to on-time performance targets with the AMC are recognized over the applicable measurement period for the target,
which requires significant judgment to estimate the total number of Block Hours expected. We generally expense sales commissions when incurred because the amortization period is less than one year. Payment terms and conditions vary by charter contract, although terms generally require payment in advance of the service being provided. Since advance payments are typically made shortly before the services are performed, such payments are not considered significant financing components.
Dry Leasing
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 are all accounted for as operating leases. We record Dry Lease rental income on a straight-line basis over the term of the operating lease. Rentals received but unearned under the lease agreements are recorded in deferred revenue and included in Accrued liabilities until earned.
Customer maintenance reserves are amounts received under our Dry Lease contracts that are subject to reimbursement to the lessee upon the completion of qualifying maintenance work on the specific Dry Leased aircraft 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.
Other Services
Other services include administrative and management support services and flight simulator training. Revenue for these services is recognized when the services are provided.
Estimated revenue expected to be recognized in the future is not presented because our contracts, excluding Dry Leasing contracts, typically involve either a duration or measurement period for revenue recognition of one year or less.
5. 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 20 Boeing 767-300 freighter aircraft for Amazon by Atlas, as well as Dry Leasing by Titan. The Dry Leases will 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 a total of ten years). Between August 2016 and April 2018, we have placed 13 freighter aircraft into service for Amazon and we expect to be operating all 20 before the end of 2018.
In conjunction with these agreements, 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. A portion of the warrant, representing the right to purchase 3.75 million shares, vested immediately upon issuance of the warrant. The remainder of the warrant, representing the right to purchase 3.75 million shares, would vest in increments of 375,000 as the lease and operation of each of the 11
th
through 20
th
aircraft commences. During the fourth quarter of 2017, a portion of the warrant representing the right to purchase 750,000 shares vested as the lease and operation of the 11
th
and 12
th
aircraft commenced. In April 2018, a portion of the warrant representing the right to purchase 375,000 shares vested as the lease and operation of the thirteenth aircraft
12
commenced. The warrant will be exercisable in accordance with its terms through 2021. As of March 31, 2018, no portion of the warrant has been exercise
d.
The agreements also provide 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. This warrant to purchase 3.75 million shares would vest in conjunction with payments by Amazon for additional business with us. As of March 31, 2018, no portion of this warrant has vested. Upon vesting, the warrant would become exercisable in accordance with its terms through 2023.
At the time of vesting, the fair value of the vested portion of the warrant issued to Amazon is recorded as a warrant liability within Financial instruments and other liabilities (the “Amazon Warrant”). This initial fair value of the vested portion of the warrant is also recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of 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. The following table provides a summary of the customer incentive asset:
Balance at December 31, 2017
|
|
$
|
106,538
|
|
Initial value for vested portion of warrant
|
|
|
-
|
|
Amortization of customer incentive asset
|
|
|
(2,596
|
)
|
Balance at March 31, 2018
|
|
$
|
103,942
|
|
We amortized $0.4 million of the customer incentive asset for the three months ended March 31, 2017. There were no impairment losses for the three months ended March 31, 2018 and 2017.
The Amazon Warrant liability is marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized loss (gain) on financial instruments. We utilize a Monte Carlo simulation approach to estimate the fair value of the Amazon Warrant, 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. We recognized a net unrealized loss of $7.7 million and $5.2 million on the Amazon Warrant during the three months ended March 31, 2018 and March 31, 2017, respectively. The fair value of the Amazon Warrant liability was $135.5 million as of March 31, 2018 and $127.8 million as of December 31, 2017.
6. Accrued Liabilities
Accrued liabilities consisted of the following as of:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Maintenance
|
|
$
|
186,008
|
|
|
$
|
156,042
|
|
Customer maintenance reserves
|
|
|
93,280
|
|
|
|
89,037
|
|
Salaries, wages and benefits
|
|
|
43,359
|
|
|
|
65,546
|
|
U.S. class action settlement
|
|
|
-
|
|
|
|
30,000
|
|
Aircraft fuel
|
|
|
15,692
|
|
|
|
22,196
|
|
Deferred revenue
|
|
|
19,214
|
|
|
|
20,986
|
|
Other
|
|
|
72,593
|
|
|
|
71,036
|
|
Accrued liabilities
|
|
$
|
430,146
|
|
|
$
|
454,843
|
|
7. Debt
Term Loan
In March 2018, we borrowed $19.4 million under an unsecured five-year term loan due in February 2023 (the “First 2018 Term Loan”) for GEnx engine performance upgrade kits and overhauls. The First 2018 Term Loan contains customary covenants, events of default and accrues interest at a fixed rate of 3.12%, with principal and interest payable quarterly.
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
13
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 March 31, 2018:
|
|
March 31, 2018
|
|
|
|
2017 Convertible Notes
|
|
|
2015 Convertible Notes
|
|
Remaining life in months
|
|
|
74
|
|
|
|
50
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
289,000
|
|
|
$
|
224,500
|
|
Less: debt discount, net of amortization
|
|
|
(63,098
|
)
|
|
|
(34,326
|
)
|
Less: debt issuance cost, net of amortization
|
|
|
(5,036
|
)
|
|
|
(3,265
|
)
|
Net carrying amount
|
|
$
|
220,866
|
|
|
$
|
186,909
|
|
|
|
|
|
|
|
|
|
|
Equity component
(1)
|
|
$
|
70,140
|
|
|
$
|
52,903
|
|
|
(1)
|
Included in Additional paid-in capital on the consolidated balance sheet as of March 31, 2018.
|
The following table presents the amount of interest expense recognized related to the Convertible Notes:
|
|
For the three months ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Contractual interest coupon
|
|
$
|
2,618
|
|
|
$
|
1,263
|
|
Amortization of debt discount
|
|
|
3,871
|
|
|
|
1,671
|
|
Amortization of debt issuance costs
|
|
|
359
|
|
|
|
173
|
|
Total interest expense recognized
|
|
$
|
6,848
|
|
|
$
|
3,107
|
|
Revolving Credit Facility
In December 2016, we entered into a three-year $150.0 million secured revolving credit facility (the “Revolver”) for general corporate purposes, including financing the acquisition of aircraft prior to obtaining permanent financing for the aircraft. As of March 31, 2018, the outstanding balance on the Revolver was $75.0 million at an interest rate of 4.11% and there was $64.3 million of unused availability under the Revolver, based on the collateral borrowing base.
8. Income Taxes
The effective income tax expense rates of 28.3% and 94.0% for the three months ended March 31, 2018 and 2017, respectively differed from the U.S. statutory rate primarily due to nondeductible changes in the value of the Amazon Warrant liability (see Note 5 to our Financial Statements). The effective tax rate for the three months ended March 31, 2018 also reflects the reduced federal corporate income tax rate from 35% to 21% as a result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017. To a lesser extent, the effective income tax rates for both periods were impacted by excess tax benefits associated with share-based compensation, which reduced income tax expense in our consolidated statement of operations. We continue to analyze the different aspects of the U.S. Tax Cuts and Jobs Act of 2017 which could potentially affect the provisional estimates that were recorded at December 31, 2017, including reassessing our intent to invest unremitted earnings of foreign subsidiaries outside the U.S. We may repatriate these earnings to the extent the associated taxes are not significant. For interim accounting purposes, we recognize income taxes using an estimated annual effective tax rate.
We participate in an aircraft leasing incentive program in Singapore that entitles us to a reduced tax rate of 10.0% on our Singapore Dry Leasing income. Our participation is set to expire on July 31, 2018, at which time we expect it to be renewed at a further reduced tax rate of 8.0%. Should the program not be renewed, the tax rate would revert to 17.0%. Either result will have a material impact on our 2018 results.
The U.S. Internal Revenue Service is currently examining the 2015 tax year. It is reasonably possible that the balance of our unrecognized tax benefits could significantly decrease within the next twelve months. Due to the uncertainty related to the potential outcome of this examination, we cannot estimate a range of reasonably possible adjustments to our unrecognized tax benefits.
14
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 (“PTCs”) 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 the Amazon Warrant 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.
The following table summarizes the carrying value, estimated fair value and classification of our financial instruments as of:
|
|
March 31, 2018
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,294
|
|
|
$
|
119,294
|
|
|
$
|
119,294
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term investments
|
|
|
17,127
|
|
|
|
17,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,127
|
|
Restricted cash
|
|
|
11,110
|
|
|
|
11,110
|
|
|
|
11,110
|
|
|
|
-
|
|
|
|
-
|
|
Long-term investments and accrued interest
|
|
|
10,680
|
|
|
|
12,571
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,571
|
|
|
|
$
|
158,211
|
|
|
$
|
160,102
|
|
|
$
|
130,404
|
|
|
$
|
-
|
|
|
$
|
29,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and notes
|
|
$
|
1,863,095
|
|
|
$
|
1,837,612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,837,612
|
|
Convertible notes
(1)
|
|
|
407,775
|
|
|
|
602,958
|
|
|
|
602,958
|
|
|
|
-
|
|
|
|
-
|
|
Amazon Warrant
|
|
|
135,495
|
|
|
|
135,495
|
|
|
|
-
|
|
|
|
135,495
|
|
|
|
-
|
|
|
|
$
|
2,406,365
|
|
|
$
|
2,576,065
|
|
|
$
|
602,958
|
|
|
$
|
135,495
|
|
|
$
|
1,837,612
|
|
15
|
|
December 31, 2017
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
280,809
|
|
|
$
|
280,809
|
|
|
$
|
280,809
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term investments
|
|
|
13,604
|
|
|
|
13,604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,604
|
|
Restricted cash
|
|
|
11,055
|
|
|
|
11,055
|
|
|
|
11,055
|
|
|
|
-
|
|
|
|
-
|
|
Long-term investments and accrued interest
|
|
|
15,371
|
|
|
|
18,074
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,074
|
|
|
|
$
|
320,839
|
|
|
$
|
323,542
|
|
|
$
|
291,864
|
|
|
$
|
-
|
|
|
$
|
31,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and notes
|
|
$
|
1,791,918
|
|
|
$
|
1,844,445
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,844,445
|
|
Convertible notes
(1)
|
|
|
403,544
|
|
|
|
602,846
|
|
|
|
602,846
|
|
|
|
-
|
|
|
|
-
|
|
Amazon Warrant
|
|
|
127,755
|
|
|
|
127,755
|
|
|
|
-
|
|
|
|
127,755
|
|
|
|
-
|
|
|
|
$
|
2,323,217
|
|
|
$
|
2,575,046
|
|
|
$
|
602,846
|
|
|
$
|
127,755
|
|
|
$
|
1,844,445
|
|
(1) Carrying value is net of debt discounts and debt issuance costs. Hedge transactions associated with the Convertible Notes are reflected in additional paid-in-capital (see Note 7 to our Financial Statements).
Gross unrealized gains on our long-term investments and accrued interest were $1.9 million at March 31, 2018 and $2.7 million at December 31, 2017.
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 charges, 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.
The following table sets forth Operating Revenue and Direct Contribution for our reportable segments reconciled to Operating Income and Income from continuing operations before income taxes:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
266,380
|
|
|
$
|
200,694
|
|
Charter
|
|
|
285,197
|
|
|
|
243,898
|
|
Dry Leasing
|
|
|
36,392
|
|
|
|
26,757
|
|
Customer incentive asset amortization
|
|
|
(2,596
|
)
|
|
|
(445
|
)
|
Other
|
|
|
4,641
|
|
|
|
4,490
|
|
Total Operating Revenue
|
|
$
|
590,014
|
|
|
$
|
475,394
|
|
16
|
|
For the Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017 *
|
|
Direct Contribution:
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
40,872
|
|
|
$
|
35,580
|
|
Charter
|
|
|
34,278
|
|
|
|
16,833
|
|
Dry Leasing
|
|
|
11,359
|
|
|
|
9,723
|
|
Total Direct Contribution for Reportable Segments
|
|
|
86,509
|
|
|
|
62,136
|
|
|
|
|
|
|
|
|
|
|
Unallocated income and expenses, net
|
|
|
(65,063
|
)
|
|
|
(55,474
|
)
|
Unrealized loss on financial instruments
|
|
|
(7,740
|
)
|
|
|
(5,213
|
)
|
Transaction-related expenses
|
|
|
(270
|
)
|
|
|
(915
|
)
|
Gain (loss) on disposal of aircraft
|
|
|
-
|
|
|
|
54
|
|
Income (loss) from continuing operations before income taxes
|
|
|
13,436
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
Add back (subtract):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(1,724
|
)
|
|
|
(1,256
|
)
|
Interest expense
|
|
|
27,342
|
|
|
|
21,524
|
|
Capitalized interest
|
|
|
(1,750
|
)
|
|
|
(1,780
|
)
|
Unrealized loss on financial instruments
|
|
|
7,740
|
|
|
|
5,213
|
|
Other income
|
|
|
(4,475
|
)
|
|
|
(253
|
)
|
Operating Income
|
|
$
|
40,569
|
|
|
$
|
24,036
|
|
* The direct contribution amounts for the ACMI and Charter segments and the unallocated income and expenses, net above have been revised to reflect immaterial adjustments. The Company does not believe the impact to the previously issued consolidated financial statements was material.
The following table disaggregates our Charter segment revenue by customer and service type, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors:
|
For the Three Months Ended
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
Cargo
|
|
|
Passenger
|
|
|
Total
|
|
|
|
Cargo
|
|
|
Passenger
|
|
|
Total
|
|
Commercial customers
|
|
$
|
131,173
|
|
|
$
|
2,046
|
|
|
$
|
133,219
|
|
|
|
$
|
108,979
|
|
|
$
|
2,975
|
|
|
$
|
111,954
|
|
AMC
|
|
|
74,428
|
|
|
|
77,550
|
|
|
|
151,978
|
|
|
|
|
58,269
|
|
|
|
73,675
|
|
|
|
131,944
|
|
Total Charter Revenue
|
|
$
|
205,601
|
|
|
$
|
79,596
|
|
|
$
|
285,197
|
|
|
|
$
|
167,248
|
|
|
$
|
76,650
|
|
|
$
|
243,898
|
|
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 AMC, Polar and DHL (see above and Note 3 to our Financial Statements for further discussion regarding the AMC and Polar). No other customer accounted for more than 10.0% of our Total Operating Revenue. Revenue from DHL was $67.0 million for the three months ended March 31, 2018 and $54.9 million for the three months ended March 31, 2017. We have not experienced any credit issues with either of these customers.
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 to this process, once a seniority list is presented to us by the unions, it triggers an agreed-upon time frame 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
17
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 mediati
on 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 pre-mediation investigation on the IBT’s Atlas application in June 2016, which is currently pending (along with the IBT’s Southern Air application). Due to a lack of meaningful progress in such merger discussi
ons, in February 2017, we 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 gran
ted the Company’s motion to compel arbitration. The Company and the IBT have scheduled the Atlas and Southern arbitrations during the second half of 2018. Also, the Company and the IBT have an interim agreement in place which provides a process for proce
eding with negotiations for a new joint CBA pending the outcome of the arbitrations. These negotiations commenced on July 6, 2017 and the parties have continued to meet regularly since then and bargain for a new joint CBA.
In September 2017, the Company requested the U.S. District Court for the District of Columbia (the “Court”) to issue a preliminary injunction to require the IBT to meet its obligations under the Railway Labor Act of 1926 (the “Railway Labor Act”) and stop the intentional and illegal work slowdowns and service interruptions. In its filing, the Company states that the IBT is engaging in unlawful, concerted work slowdowns to gain leverage in pilot contract negotiations with the Company. The Company sought to have the Court compel the IBT to stop the illegal work actions and return to normal operations. The hearing was completed in early November 2017.
In late November 2017, the Court granted the Company’s request to issue a preliminary injunction to require the IBT to meet its obligations under the Railway Labor Act and 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 Court’s decision to the U.S. Court of Appeals for the District of Columbia Circuit. Pending the outcome of the appeal, the preliminary injunction remains in effect. We believe the IBT’s appeal will be unsuccessful and expect the preliminary injunction to remain in 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 the 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. The case is in its early stages, and various procedural issues are awaiting court determination. The Netherlands proceedings are likely to be affected by a 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 $9.2 million in aggregate based on March 31, 2018 exchange rates.
In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. Furthermore, we may seek appropriate indemnity from the shipper in each claim as may be feasible. In the pending claim for one of the cases, we have received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. As required to defend such
18
claims, we have made deposits pending resolution of these matters. The balance was $4.7 million as of March 31, 2018 and $5.1 million as of December 31, 2017, and is included in Deferred c
osts and other assets.
We are currently defending these and other Brazilian customs claims and the ultimate disposition of these claims, either individually or in the aggregate, is not expected to materially affect our financial condition, results of operations or cash flows.
Other
We have certain other contingencies incident to the ordinary course of business. Management does not expect that the ultimate disposition of such other contingencies 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
|
|
Numerator:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Income from continuing operations, net of taxes
|
|
$
|
9,628
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic EPS weighted average shares outstanding
|
|
|
25,436
|
|
|
|
25,162
|
|
Effect of dilutive stock options and restricted stock
|
|
|
520
|
|
|
|
582
|
|
Diluted EPS weighted average shares outstanding
|
|
|
25,956
|
|
|
|
25,744
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.00
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
(0.03
|
)
|
Anti-dilutive shares related to warrants that were out of the money and excluded were 7.8 million for the three months ended March 31, 2018 and 3.0 million for the three months ended March 31, 2017. 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 in which performance or market conditions were not satisfied of 6.9 million for the three months ended March 31, 2018 and 7.6 million for the three months ended March 31, 2017.
19
13. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of Accumulated other comprehensive income (loss):
|
|
Interest Rate
|
|
|
Foreign
Currency
|
|
|
|
Derivatives
|
|
|
Translation
|
|
Balance as of December 31, 2016
|
|
$
|
(5,002
|
)
|
|
$
|
9
|
|
Reclassification to interest expense
|
|
|
418
|
|
|
|
-
|
|
Tax effect
|
|
|
(162
|
)
|
|
|
-
|
|
Balance as of March 31, 2017
|
|
$
|
(4,746
|
)
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
(4,002
|
)
|
|
$
|
9
|
|
Reclassification to interest expense
|
|
|
385
|
|
|
|
-
|
|
Tax effect
|
|
|
(57
|
)
|
|
|
-
|
|
Reclassification of taxes
|
|
|
(970
|
)
|
|
|
-
|
|
Balance as of March 31, 2018
|
|
$
|
(4,644
|
)
|
|
$
|
9
|
|
Interest Rate Derivatives
As of March 31, 2018, there was $6.1 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 $0.4 million for both the three months ended March 31, 2018 and 2017. Net realized losses expected to be reclassified into earnings within the next 12 months are $1.4 million as of March 31, 2018.
14. Subsequent Events
In May 2018, we borrowed $83.5 million related to the purchase of a 777-200 aircraft under a ten-year term loan due in May 2028 (the “Second 2018 Term Loan”). The Second 2018 Term Loan, which is secured by a mortgage against the aircraft, contains customary covenants, as well as events of default, and accrues interest at a fixed rate of 4.63%, with principal and interest payable quarterly.
20