UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K10-K/A
(Amendment No. 1)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 or organization) | (IRS Employer Identification No.) |
| 2000 Westchester Avenue, Purchase, New York | 10577 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (914) (914) 701-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of | Trading Symbol(s) | Name of |
Common Stock, $0.01 Par Value | AAWW | The NASDAQ Global Select Market |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: | ||
None
None
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒x No ☐¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐¨No☒x
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☒xNo ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)submit). Yes☒x No ☐¨
Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form l0-K or any amendment to this Form 10-K. ☐
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☒x 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 ☒xNo
The aggregate market value of the registrant’s Common Stock held by non-affiliates based upon the closing price of Common Stock as reported on The NASDAQ Global Select Market as of June 30, 20172019 was approximately $1,138.0$850.7 million. In determining this figure, the registrant has assumed that all directors, executive officers and persons known to it to beneficially own ten percent or more of such Common Stock are affiliates. This assumption shall not be deemed conclusive for any other purpose. As of February 16, 2018,17, 2020, there were 25,434,788 shares of the registrant’s Common Stock outstanding.
Documents Incorporated by Reference:
Certain portions
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EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the Annual Report on Form 10-K of Atlas Air Worldwide Holdings, Inc., a Delaware corporation (the “Company,” “AAWW,” “we,” “us,” or “our”) for the registrant’s Proxy Statement relating to the 2018 Annual Meeting of Stockholders, to beyear ended December 31, 2019 that was originally filed with the Securities and Exchange Commission are(the “SEC”) on February 24, 2020 (the “Original Filing”) and is being filed to provide the information required by Items 10, 11, 12, 13 and 14 of Part III.
This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above-referenced Items to be incorporated in the Form 10-K by reference into Part III.
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This Annual Report on Form 10-K (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 Atlas Air Worldwide Holdings, Inc. (“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 Item 1A, “Risk Factors.” Many ofa definitive proxy statement if 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-lookingproxy statement to reflect future events or circumstances.
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.
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Overview
AAWW is a holding company with two wholly owned operating subsidiaries, Atlas Air, Inc. (“Atlas”) and, as of April 7, 2016, Southern Air, Inc. (“Southern Air”). It also has a 51% economic interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). In addition, AAWW is the parent company of several wholly owned subsidiaries related to our dry leasing services (collectively referred to as “Titan”). When used in this Report, the terms “we,” “us,” “our” and the “Company” refer to AAWW and all entities in our consolidated financial statements.
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 applications. We provide unique value to our customers by giving them access to highly reliable new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include 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 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 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 U.S. Military Air Mobility Command (“AMC”), brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. The customer pays a fixed charter fee that includes fuel, insurance, landing fees, navigation fees and most other operational fees and costs; and
Dry Leasing, whereby we provide cargo and passenger aircraft and engine leasing solutions. The customer operates, and is responsible for insuring and maintaining, the flight equipment.
We believe that the scale, scope and quality of our outsourced services are unparalleled in our industry. The relative operating cost efficiency of our current 747-8F, 747-400F and 777-200LRF aircraft, including their superior fuel efficiency, range, capacity and loading capabilities, creates a compelling value proposition for our customers and positions us well in the markets we operate. Our growing fleet of 767-300 freighter aircraft, in addition to our 737-400 freighter aircraft, are well-suited for regional and domestic operations.
We are focused on the further enhancement of our market-leading ACMI and CMI services. We are currently the only operator offering 747-8F and 777 aircraft under ACMI and CMI agreements, and we have the flexibility to expand our fleet in response to market conditions. We believe that our current fleet represents one of the most efficient, reliable freighter fleets in the market. Our primary placement for our 747-8F and 747-400F aircraft continues to be long-term ACMI outsourcing contracts with high-credit-quality customers.
During 2017, we continued to expand our CMI and Dry Leasing services with the placement into service of 11 Boeing 767-300 freighter aircraft with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), under agreements which involve, among other things, the leasing and operation of 20 aircraft. Between August 2016 and December 2017, we have placed 12 of these aircraft into service and we expect to be operating all 20 beforefiled no later than 120 days after the end of 2018. In additionour fiscal year. We are filing the Amendment to the contracts above,include Part III information in our Dry Leasing business includes six 777 freighters that are Dry Leased to customers on a long-term basis. Our Dry Leasing portfolio diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.
AAWW was incorporated in Delaware in 2000. Our principal executive offices are located at 2000 Westchester Avenue, Purchase, New York 10577, and our telephone number is (914) 701-8000.
Introduction. 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. Additional information regarding our reportable segments can be found in Note 13 to our consolidated financial statements included in Item 8 of Part II of this Report (the “Financial Statements”).
ACMI. The core of our business is generally providing cargo aircraft outsourcing services to customers on an ACMI and CMI basis, in exchange for guaranteed minimum revenues at predetermined levels of operation for defined periods of time. ACMI and CMI contracts generally provide a predictable annual revenue and cost base by minimizing the risk of fluctuations such as price, fuel and demand risk in the air cargo business. Our revenues and most of our costs under ACMI and CMI contracts are denominated in U.S. dollars, minimizing currency risks associated with international business.
All of our ACMI and CMI contracts provide that the aircraft remain under our exclusive operating control, possession and direction at all times. These contracts further provide that both the contracts and the routes to be operated may be subject to prior and periodic approvals of the U.S. or foreign governments. Revenue from ACMI and CMI contracts is typically recognized as the Block Hours are operated on behalf of a customer during a given month, as defined contractually. If a customer flies below a minimum contracted Block Hour guarantee, the contracted minimum revenue amounts are recognized as revenue. The original length of these contracts generally ranges from two to seven years, although we do offer contracts of shorter or longer duration. In addition, we have also operated short-term ACMI cargo and passenger services and we expect to continue to provide such services.
As a percentage of our operating revenue, ACMI segment revenue represented 45.5% in 2017, 45.4% in 2016 and 43.4% in 2015. As a percentage of our operated Block Hours, ACMI represented 74.9% in 2017, 72.2% in 2016 and 70.9% in 2015.
Charter. Our Charter business primarily provides full planeload cargo and passenger aircraft to customers, including the AMC, brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. Charters are for one or more flights based on a specific origin and destination. Atlas also provides limited airport-to-airport cargo services to select markets, including several cities in South America. In addition, we occasionally earn revenue on subcontracted Charter flights. Atlas typically bears 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.
As a percentage of our operating revenue, Charter segment revenue, which includes fuel and other operational costs, represented 48.0% in 2017, 47.9% in 2016 and 49.9% in 2015. As a percentage of our operated Block Hours, Charter represented 24.3% in 2017, 27.0% in 2016 and 28.2% in 2015.
Dry Leasing. Our Dry Leasing business provides aircraft and engines to customers, including some CMI customers, for compensation that is typically based on a fixed monthly amount (a “Dry Lease”). This business is primarily operated by Titan, which is principally a cargo aircraft dry lessor, but also owns and manages aviation assets such as passenger narrow-body aircraft, engines and related equipment. Titan also markets its expertise in asset management, passenger-to-freighter conversion and other aviation-related technical services. As a percentage of our operating revenue, Dry Leasing segment revenue represented 5.6% in 2017, 5.8% in 2016 and 5.9% in 2015.
Other Revenue. As a percentage of our operating revenue, Other revenue, which includes administrative and management support services and flight simulator training, represented 0.9% in 2017, 0.9% in 2016 and 0.8% in 2015.
DHL Network Operations (USA), Inc. (“DHL”) holds a 49% equity interest and a 25% voting interest in Polar (see Note 3 to our Financial Statements). AAWW owns the remaining 51% equity interest and 75% voting interest. Under a 20-year blocked space agreement that expires in 2027 (the “BSA”), Polar provides air cargo capacity to DHL. Atlas and Polar also have a flight services agreement, whereby Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate with the opportunity for performance premiums that escalate annually. Under the flight services agreement, Atlas provides Polar with crew, maintenance and insurance for the aircraft. Under separate agreements, Atlas and Polar supply administrative, sales and ground support services to one another. Deutsche Post AG ("DP") has guaranteed DHL’s (and Polar’s) obligations under the various agreements described above. AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates. Collectively, these agreements are referred to in this Report as the “DHL Agreements”. The DHL Agreements provide us with a minimum guaranteed annual revenue stream from aircraft that have been placed in service with Polar for DHL and other customers’ freight over the life of the agreements. DHL provides financial support and also assumes the risks and rewards of the operations of Polar.
Combined with Polar, we provide ACMI, CMI, Charter and Dry Leasing services to support DHL’s transpacific-express, North American, intra-Asian, and global networks. In addition, we fly between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other customers. Atlas also provides incremental charter capacity to Polar and DHL from time to time. The following table summarizes the aircraft types and services provided to DHL as of December 31, 2017:
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Amazon
In May 2016, we entered into certain agreements with Amazon, which involve, 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 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 December 2017, we have placed 12 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 11th through 20th 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 11th and 12th aircraft commenced. The warrant will be exercisable in accordance with its terms through 2021. As of December 31, 2017, no portion of the warrant has been exercised.
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 December 31, 2017, no portion of this warrant has vested. Upon vesting, the warrant would become exercisable in accordance with its terms through 2023.
We have regional sales offices in various locations around the world that cover the Americas, Asia Pacific, Europe, Africa and Middle East regions. These offices market our ACMI, CMI and Dry Leasing services to express delivery providers, e-commerce retailers, airlines and freight forwarders. They also market our cargo and passenger Charter services to charter brokers, the U.S. military, freight forwarders, direct shippers and airlines.
Fuel
Historically, aircraft fuel is one of the most significant expenses for us. During 2017, 2016 and 2015, fuel costs represented 17.4%, 16.5%, and 19.6%, respectively, of our total operating expenses. Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues, supply and demand, which we can neither control nor accurately predict.
Our exposure to fluctuations in fuel price is limited to the commercial portion of our Charter business only, but this risk is partially mitigated by using indexed fuel price adjustments for certain commercial charter contracts. The ACMI and Dry Leasing segments have no direct fuel price exposureForm 10-K because our customers are required to pay for aircraft fuel. Similarly, we generally have no fuel price risk for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for price increases and decreases from the contractual rate.
In the past, we have not experienced significant difficulties with respect to fuel availability. Although we do not currently anticipate a significant reduction inexpect to file our definitive proxy statement containing this information before that date. Accordingly, the availabilityreference on the cover of aircraft fuel, a number of factors, such as geopolitical uncertainties in oil-producing nations and shortages of and disruptionsthe Original Filing to refining capacity or transportation of aircraft fuel from refining facilities, make accurate predictions unreliable. For example, hostilities and political turmoil in oil-producing nations could leadthe incorporation by reference to disruptions in oil production and/or to substantially increased oil prices. Any inability to obtain aircraft fuel at competitive prices would materially and adversely affect our results of operation and financial condition.
Employees
Our business depends on highly qualified management, operations and flight personnel. As a percentageportions of our consolidated operating expenses, salaries, wages and benefits accounteddefinitive proxy statement into Part III of the Original Filing has been deleted. Except for approximately 23.8% in 2017, 25.4% in 2016 and 20.7% in 2015. Asthe addition of December 31, 2017, we had 2,870 employees, 1,749 of whom were pilots. We maintain a comprehensive training program for our pilots in compliance with U.S. Federal Aviation Administration (“FAA”) requirements, in which each pilot regularly attends recurrent training programs.
Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar, are represented by the International Brotherhood of Teamsters (the “IBT”). These employees represented approximately 61.7% of our workforce as of December 31, 2017. We have a five-year collective bargaining agreement (“CBA”) with our Atlas pilots, which became amendable in September 2016; and a four-year CBA withPart III information, 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. Pursuantupdate 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 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 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
discussions, 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. While this lawsuit is pending in the Southern District Court of New York, the Companycover page described above and the IBT have reached an interim agreement on a process to proceed with negotiations for afiling of new joint CBA. These negotiations commenced on July 6, 2017 andcertifications, 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 stated that the IBT was 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.
We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act and incur additional administrative expenses associated with union representation of our employees.
Maintenance
Maintenance represented our third-largest operating expense for the year ended December 31, 2017. Primary maintenance activities include scheduled and unscheduled work on airframes and engines. Scheduled maintenance activities encompass those activities specified in our maintenance program approved by the FAA. The costs necessary to adhere to these maintenance programs may increase over time, based on the age of the equipment or due to FAA airworthiness directives (“ADs”).
Under the ADs issued pursuant to the FAA’s Aging Aircraft Program, we are subject to extensive aircraft examinations and may be required to undertake structural modifications to our fleet from time to time to address any problems of corrosion and structural fatigue. The FAA has issued increased inspection and maintenance requirements depending on aircraft type and ADs requiring certain additional aircraft modifications. We believe all aircraft in our fleet are in compliance with all existing ADs. It is possible, however, that additional ADs applicable to the types of aircraft or engines included in our fleet could be issued in the future and that the cost of complying with such ADs could be substantial.
Under our FAA-approved maintenance programs, all Heavy Maintenance is currently performed by third-party service providers that are compensated on a time-and-material basis as we believe they provide the most reliable and efficient means of maintaining our aircraft fleet.
Insurance
We maintain insurance of the types and in amounts deemed adequate and consistent with current industry standards. Principal coverage includes: liability for injury to members of the public, including passengers; injury to crewmembers and ground staff; damage to our property and that of others; and loss of, or damage to, flight equipment, whether on the ground or in flight.
Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general and the insured carrier in particular. Terrorist attacks and other adverse events involving aircraft could result in increases in insurance costs and could affect the price and availability of such coverage. We participate in an insurance pooling arrangement with DHL and its partners. This allows us to obtain aviation hull and liability, war-risk hull and cargo loss, crew, third-party liability insurance and hull deductible coverage at
reduced rates from the commercial insurance providers. If we are no longer included in this arrangement for any reason or if pool members have coverage incidents, we may incur higher insurance costs.
Governmental Regulation
General. Atlas, Polar and Southern Air (the “Airlines”) are subject to regulation by the U.S. Department of Transportation (the “DOT”) and the FAA, among other U.S. and foreign government agencies. The DOT primarily regulates economic issues affecting air service, such as certification, fitness and citizenship, competitive practices, insurance and consumer protection. The DOT has the authority to investigate and institute proceedings to enforce its economic regulations and may assess civil penalties, revoke operating authority or seek criminal sanctions. The Airlines hold DOT-issued certificates of public convenience and necessity plus exemption authority to engage in scheduled air transportation of property and mail in domestic, as well as enumerated international markets, and charter air transportation of property and mail on a worldwide basis. Atlas additionally holds worldwide passenger charter authority.
The DOT conducts periodic evaluations of each air carrier’s fitness and citizenship. In the area of fitness, the DOT seeks to ensure that a carrier has the managerial competence, compliance disposition and financial resources needed to conduct the operations for which it has been certificated. Additionally, each U.S. air carrier must remain a U.S. citizen by (i) being organized under the laws of the United States or a state, territory or possession thereof; (ii) requiring its president and at least two-thirds of its directors and other managing officers to be U.S. citizens; (iii) allowing no more than 25% of its voting stock to be owned or controlled, directly or indirectly, by foreign nationals; and (iv)Amendment does not being otherwise subject to foreign control. The DOT broadly interprets “control” to exist when an individual or entity has the potential to exert substantial influence over airline decisions through affirmative action or the threatened withholding of consents and/or approvals. We believe the DOT will continue to find the Airlines’ fitness and citizenship favorable.
In addition, the Airlines are required to hold valid FAA-issued air carrier certificates and FAA-approved operations specifications authorizing operation in specific regions with specified equipment under specific conditions and are subject to extensive FAA regulation and oversight. The FAA is the U.S. government agency primarily responsible for regulation of flight operations and, in particular, matters affecting air safety, such as airworthiness requirements for aircraft, operating procedures, mandatory equipment and the licensing of pilots, mechanics and dispatchers. The FAA monitors compliance with maintenance, flight operations and safety regulations and performs frequent spot inspections of aircraft, employees and records. The FAA also has the authority to issue ADs and maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and engines, fire retardant and smoke detection devices, increased security precautions, collision and windshear avoidance systems, noise abatement and the mandatory removal and replacement of aircraft parts that have failed or may fail in the future. In addition, the FAA mandates certain record-keeping procedures. The FAA has the authority to modify, temporarily suspend or permanently revoke an air carrier’s authority to provide air transportation or that of its licensed personnel, after providing notice and a hearing, for failure to comply with FAA rules, regulations and directives. The FAA is empowered to assess civil penalties for such failures or institute proceedings for the imposition and collection of monetary fines for the violation of certain FAA regulations and directives. The FAA is also empowered to modify, suspend or revoke an air carrier’s authority on an emergency basis, without providing notice and a hearing, where significant safety issues are involved.
International. Air transportation in international markets (the vast majority of markets in which the Airlines operate) is subject to extensive additional regulation. The ability of the Airlines to operate in other countries is governed by aviation agreements between the United States and the respective countries (in the case of Europe, the European Union (the “EU”)) or, in the absence of such an agreement, by principles of reciprocity. Sometimes, aviation agreements restrict the number of airlines that may operate, their frequency of operation, or the routes over which they may fly. This makes it necessary for the DOT to award route and operating rights to U.S. air carrier applicants through competitive route proceedings. International aviation agreements are periodically subject to renegotiation, and changes in U.S. or foreign governments could result in the alteration or termination of such agreements, diminish the value of existing route authoritiesamend or otherwise affect Atlas and Polar’s international operations. Foreign government authorities also impose substantial licensing and business registration requirements and, in some cases, require the advance filing and/or approval of schedules or rates. Moreover, the DOT and foreign government agencies typically regulate alliances and other commercial arrangements between U.S. and foreign air
carriers, such as the ACMI and CMI arrangements that Atlas maintains. Approval of these arrangements is not guaranteed and may be conditional. In addition, approval during one time period does not guarantee approval in future periods.
A foreign government’s regulation of its own air carriers can also affect our business. For instance, the EU places limits on the ability of EU carriers to use ACMI aircraft operated by airlines of non-EU member states. The regulations have a negative impact on our ACMI business opportunities.
Airport Access. The ability of the Airlines to operate suitable schedules is dependent on their ability to gain access to airports of their choice at commercially desirable times and on acceptable terms. In some cases, this is constrained by the need for the assignment of takeoff and landing “slots” or comparable operational rights. Like other air carriers, the Airlines are subject to such constraints at slot-restricted airports in cities such as Chicago and a variety of foreign locations (e.g., Incheon, Hong Kong, Shanghai and Tokyo). The availability of slots is not assured and the inability of the Airlines or their ACMI carrier customers to obtain additional slots could inhibit efforts to provide expanded services in certain international markets. In addition, nighttime flight restrictions have been imposed or proposed by various airports in Europe, Canada and the U.S. Depending on their severity, these could have an adverse operational impact.
Access to the New York airspace presents an additional challenge. Because of congestion in the New York area, especially at John F. Kennedy International Airport (“JFK”), the FAA imposes hourly limits on JFK operations of those carriers offering scheduled services and potentially could place limits on Charter flights.
As a further means to address congestion, the FAA allows U.S. airports to raise landing fees to defray the costs of airfield facilities under construction or reconstruction. Any landing fee increases implemented would have an impact on airlines generally.
Security. The U.S. Transportation Security Administration (“TSA”) and international regulatory bodies extensively regulate aviation security through rules, regulations and security directives that are designed to prevent unauthorized access to passenger and freighter aircraft and the introduction of prohibited items including firearms and explosives onto an aircraft. Atlas and Polar currently operate pursuant to a TSA-approved risk-based security program that, we believe, adequately maintains the security of all aircraft in the fleet. We utilize the TSA, the intelligence community and the private sector as resources for our aggressive threat-based risk-management program. There can be no assurance, however, that we will remain in compliance with existing orupdate any additional security requirements imposed by TSA or by U.S. Congress without incurring substantial costs, which may have a material adverse effect on our operations. To mitigate any such increase, we are working closely with the Department of Homeland Security and other government agencies to ensure that a risk-based management approach is utilized to target specific “at-risk” cargo. Additionally, foreign governments and regulatory bodies (such as the European Commission) impose their own aviation security requirements and have increasingly tightened such requirements. This may have an adverse impact on our operations, especially to the extent the new requirements may necessitate redundant or costly measures or be in conflict with TSA requirements. We have successfully implemented all European Commission security programs allowing us unimpeded access to European markets.
Environmental. We are subject to various federal, state and local laws relating to the protection of the environment and health and safety matters, including the discharge of pollution, the disposal of materials and chemical wastes, the cleanup of contamination and the regulation of aircraft noise, which are administered by numerous state, local, federal and foreign agencies. For instance, the DOT and the FAA have authority under the Aviation Safety and Noise Abatement Act of 1979 and under the Airport Noise and Capacity Act of 1990 to monitor and regulate aircraft engine noise. We believe that all aircraft in our fleet materially comply with current DOT, FAA and international noise standards.
We are also subject to the regulations in the U.S., by the U.S. Environmental Protection Agency (the “EPA”), and the international jurisdictions in which we operate regarding air quality. We believe that all of our aircraft meet or exceed applicable fuel venting requirements and other air emissions standards.
Various jurisdictions, including the E.U., U.S. and other international governments and bodies have implemented or considered measures to respond to the problem of climate change and greenhouse gas emissions.
Various governments, including the United States, are pursuing measures to regulate climate change and greenhouse gas emissions.
For instance, in October 2013, the International Civil Aviation Organization (“ICAO”) reached a nonbinding agreement to address climate change by developing global market-based measures to assist in achieving carbon-neutral growth. In October 2016, ICAO approved a resolution to adopt a global market-based measure known as the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by the average of 2019 and 2020 emissions. Although various details regarding the implementation of CORSIA still need to be finalized, a pilot phase will run from 2021 to 2023. Starting in 2019, the airlines of participating countries will begin monitoring and reporting fuel burn during international flights. As a result, for each year starting in 2021, covered airlines may need to purchase allowances to offset their assigned share of emissions overages.
Additionally, the EU continues to pursue a parallel track to address climate change through its Emissions Trading Scheme (“ETS”). Following the end of every year, to the extent the ETS applies, each airline must tender the number of carbon emissions allowances (“Allowances”) corresponding to carbon emissions generated by its covered flight activity during the year. If the airline’s flight activity during the year has produced carbon emissions exceeding the number of Allowances that it has been awarded, the airline must acquire Allowances from other airlines in the open market. In recognition of ICAO’s recent adoption of CORSIA, the ETS suspension with respect to flights to and from non-European countries continues through December 31, 2023. However, the ETS remains applicable to intra-European flights.
In the United States, various constituencies have continued to advocate for controls on greenhouse gas emissions. On August 15, 2016, the EPA issued a final rule finding that greenhouse gas emissions from aircraft cause or contribute to air pollution that may reasonably be anticipated to endanger public health and welfare. It is possible that these or other developments could lead to the future regulation of greenhouse gas emissions from aircraft in the U.S.
Other Regulations. Air carriers are also subject to certain provisions of the Communications Act of 1934 because of their extensive use of radio and other communication facilities and are required to obtain an aeronautical radio license from the Federal Communications Commission. Additionally, we are subject to U.S. and foreign antitrust requirements and international trade restrictions imposed by U.S. presidential determination and U.S. government agency regulation, including the Office of Foreign Assets Control of the U.S. Department of the Treasury. We endeavor to comply with such requirements at all times. We are also subject to state and local laws and regulations at locations where we operate and at airports that we serve. Our operations may become subject to additional international, U.S. federal, state and local requirements in the future.
We believe that we are in material compliance with all currently applicable laws and regulations.
Civil Reserve Air Fleet. As part of our Charter business, Atlas and Polar both participate in the U.S. Civil Reserve Air Fleet (“CRAF”) Program, which permits the U.S. Department of Defense to utilize participants’ aircraft during national emergencies when the need for military airlift exceeds the capability of military aircraft. Participation in the CRAF Program could adversely restrict our commercial business in times of national emergency. Under the CRAF Program, contracts with the AMC typically cover a one-year period. We have made a substantial number of our aircraft available for use by the U.S. military in support of their operations and we operate such flights pursuant to cost-based contracts. Atlas bears all direct operating costs for both passenger and cargo aircraft, which include fuel, insurance, overfly, landing and ground handling expenses. The contracted charter rates (per mile) and fuel prices (per gallon) are fixed by the AMC periodically. We receive reimbursements from the AMC each month if the price of fuel paid by us to vendors for the AMC Charter flights exceeds the fixed price. If the price of fuel paid by us is less than the fixed price, then we pay the difference to the AMC.
Airlines may participate in the CRAF Program either alone or through a teaming arrangement. We are a member of the team led by FedEx Corporation (“FedEx”). We pay a commission to the FedEx team, based on the revenues we receive under our AMC contracts. The AMC buys cargo capacity on two bases: a fixed basis, which is awarded both annually and quarterly, and expansion flying, which is awarded on an as-needed basis throughout the
contract term. While the fixed business is predictable, Block Hour levels for expansion flying are difficult to predict and thus are subject to fluctuation.
Future Regulation. The U.S. Congress, the DOT, the FAA, the TSA and other government agencies are currently considering, and in the future may consider, adopting new laws, regulations and policies regarding a wide variety of matters that could affect, directly or indirectly, our operations, ownership and profitability. It is impossible to predict what other matters might be considered in the future and to judge what impact, if any, the implementation of any future proposals or changes might have on our businesses.
Competition
The market for ACMI and CMI services is competitive. We believe that the most important basis for competition in this market is the efficiency and cost-effectiveness of the aircraft assets and the scale, scope and quality of the outsourced operating services provided. Atlas is currently the only provider of ACMI and CMI services with the modern 747-8F and 777 aircraft. Our primary competitors providing ACMI and CMI services for 747-400 and 767 aircraft include the following: Air Atlanta Icelandic; Air Transport Services Group, Inc.; Kalitta Air, LLC; and Western Global Airlines.
The Charter market is competitive, with a number of cargo operators that include AirBridge Cargo Airlines; Cargolux; Kalitta Air, LLC; National Air Cargo; and passenger airlines providing similar services utilizing 747-8Fs and 747-400s. We believe that we offer a superior long-haul aircraft in the 747-8F and 747-400, and we will continue to develop new opportunities in the Charter market for aircraft not otherwise deployed in our ACMI business.
The Dry Leasing business is also competitive. We believe that we have an advantage over other cargo aircraft lessors in this business as a result of our relationships in the cargo market and our insights and expertise as an operator of aircraft. Titan also competes in the passenger aircraft leasing market to develop key customer relationships, enter strategic geographic markets, and/or acquire feedstock aircraft for future freighter conversion. Our primary competitors in the aircraft leasing market include GE Capital Aviation Services; Altavair Air Finance; Aircastle Ltd.; and Air Transport Services Group, Inc.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to those reports, filed with or furnished to the Securities and Exchange Commission (the “SEC”), are available free of charge through our corporate internet website, www.atlasair.com, as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC.
The public may read and copy any materials that we file with SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The information on our website is not, and shall not be deemed to be, part of this Report or incorporated into any other filings we make with the SEC.
You should carefully consider each of the following Risk Factors and all other information in this Report. These Risk Factors are not the only ones facing us. Our operations could also be impaired by additional risks and uncertainties. If any of the following risks and uncertainties develops into actual events, our business, financial condition and results of operations could be materially and adversely affected.
RISKS RELATED TO OUR BUSINESS
Risks Related to Our Business Generally
Deterioration in the airfreight market, global economic conditions or financial markets could adversely affect our business, results of operations, financial condition, liquidity and ability to access capital markets.
Airfreight demand has historically been highly dependent on global economic conditions. If demand for our services, Yields or lease rates deteriorate, it could have a material adverse effect on our business, results of operations and financial condition.
In addition, we may face significant challenges if conditions in the financial markets deteriorate. Our business is capital intensive and growth depends on the availability of capital for new aircraft, among other things. If capital availability deteriorates, we may be unable to raise the capital necessary to finance business growth or other initiatives or to repay our debt when it matures. Our ability to access the capital markets may be restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to react to changing economic and business conditions.
We could be adversely affected if any of our existing aircraft are underutilized or we fail to redeploy or deploy aircraft with customers at favorable rates. We could also be adversely affected from the loss of one or more of our aircraft for an extended period of time.
Our operating revenues depend on our ability to effectively deploy the aircraft in our fleet and maintain high utilization of our aircraft at favorable rates. If we have underutilized aircraft, we would seek to redeploy those aircraft in our other lines of business or sell them. If we are unable to successfully redeploy our existing aircraft at favorable rates or sell them on favorable terms, it could have a material adverse effect on our business, results of operations and financial condition. In addition, if one or more of our aircraft are out of service for an extended period of time, our operating revenues would decrease and we may have difficulty fulfilling our obligations under one or more of our existing contracts. The loss of revenue resulting from any such business interruption, and the cost and potentially long lead time and difficulties in sourcing a replacement aircraft, could have a material adverse effect on our business, results of operations and financial condition.
Our financial condition may suffer if we experience unanticipated costs as a result of ongoing lawsuits and claims related to alleged pricing practices or other legal and regulatory matters.
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 Plc (“British Airways”), KLM, Martinair, Air France, Lufthansa and Singapore Airlines seeking recovery for damages purportedly arising from alleged improper matters related to the use of fuel surcharges and other rate components for air cargo services prior to and during 2006. In response, British Airways, KLM, Martinair, Air France and Lufthansa filed third-party indemnification lawsuits against Polar Air Cargo LLC (“Old Polar”), formerly named Polar Air Cargo, Inc., a consolidated subsidiary, and Polar seeking indemnification in the event the defendants are found to be liable in the main proceedings.
If Old Polar, Polar or the Company were to incur an unfavorable outcome in the litigation described above or in similar litigation, it could have a material adverse effect on our business, results of operations and financial condition.
In addition to the litigation described above, we are subject to a number of Brazilian customs claims, as well as other claims, lawsuits and pending actions which we consider to be routine and incidental to our business (see
Note 14 to our Financial Statements). If we were to receive an adverse ruling or decision on any such claims, it could have an adverse effect on our business, results of operations and financial condition.
Global trade flows are typically seasonal, and our business, including our ACMI customers’ business, experiences seasonal variations.
Global trade flows are typically seasonal in nature, with peak activity occurring during the retail holiday season, which generally begins in September/October and lasts through most of December. Our ACMI and CMI contracts generally have contractual utilization minimums that typically allow our customers to cancel an agreed-upon percentage of the guaranteed hours of aircraft utilization over the course of a year. Our ACMI and CMI customers often exercise those cancellation options early in the first quarter of the year, when the demand for air cargo capacity is historically low following the seasonal holiday peak in the fourth quarter of the previous year. While our revenues typically fluctuate seasonally as described above, a significant proportion of the costs associated with our business, such as debt service, aircraft rent, depreciation and facilities costs, are fixed and cannot easily be reduced to match the seasonal drop in demand. As a result, our net operating results are typically lower in the first quarter and increase as the year progresses.
As a U.S. government contractor, we are subject to a number of procurement and other rules and regulations that affect our business. A violation of these rules and regulations could lead to termination or suspension of our government contracts and could prevent us from entering into contracts with government agencies in the future.
To do business with government agencies, including the AMC, we must comply with, and are affected by, many rules and regulations, including those related to the formation, administration and performance of U.S. government contracts. These rules and regulations, among other things:
require, in some cases, procurement from small businesses;
require disclosure of all cost and pricing data in connection with contract negotiations;
give rise to U.S. government audit rights;
impose accounting rules that dictate how we define certain accounts, define allowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts;
establish specific health, safety and doing-business standards; and
restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
These rules and regulations affect how we do business with our customers and, in some instances, add costs to our business. A violation of these rules and regulations could result in the imposition of fines and penalties or the termination of our contracts. In addition, the violation of certain other generally applicable rules and regulations could result in our suspension or debarment as a government contractor.
Fuel availability and price volatility could adversely affect our business and operations.
The price of aircraft fuel is unpredictable and can be volatile. Our exposure to fluctuations in fuel price is limited to the commercial portion of our Charter business only, but this risk is partially mitigated by using indexed fuel price adjustments for certain commercial charter contracts. Our ACMI and CMI contracts require our customers to pay for aircraft fuel. Regardless, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find less costly alternatives for cargo delivery, such as land and sea carriers. Such actions could have a material adverse effect on our business, results of operations and financial condition.
In the past, we have not experienced significant difficulties with respect to fuel availability. Although we do not currently anticipate a significant reduction in the availability of aircraft fuel, a number of factors, such as geopolitical uncertainties in oil-producing nations and shortages of and disruptions to refining capacity, make
accurate predictions unreliable. Any inability to obtain aircraft fuel at competitive prices could have a material adverse effect on our business, results of operations and financial condition.
We are party to collective bargaining agreements covering pilots of Atlas and Southern Air and a collective bargaining agreement covering our Atlas and Polar flight dispatchers. This could result in higher labor costs and/or result in a work interruption or stoppage.
Pilots of Atlas and Southern Air and flight dispatchers of Atlas and Polar are represented by the IBT. We have a five-year 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. Initial negotiations commenced in January of 2016, nine months prior to the amendable date. Negotiations have continued as governed by a July 6, 2017 framework agreement, which was established to accommodate a joint CBA, and the parties have continued to meet regularly since then. 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. We are subject to risks of increased labor costs associated with having a partially unionized workforce, as well as a greater risk of work interruption or stoppage, which could negatively impact our ability to conduct business. We cannot provide assurance that disputes, including disputes with certified collective bargaining representatives of our employees, will not arise in the future or will result in an agreement on terms satisfactory to us. In addition, the costs associated with resolving such disputes could have a material adverse effect on our business, results of operations and financial condition.
Insurance coverage may become more expensive and difficult to obtain and may not be adequate to insure all of our risks. In addition, if our Dry Lease customers have inadequate insurance coverage or fail to fulfill their indemnification obligations, it could have a material adverse effect on our business, results of operations and financial condition.
Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general, and the insured carrier in particular. Adverse events involving aircraft could result in increased insurance costs and could affect the price and availability of such coverage.
We participate in an insurance pooling arrangement with DHL and its partners. This allows us to obtain aviation hull and liability, war-risk hull and cargo loss, crew, third-party liability and hull deductible coverage at reduced rates from the commercial insurance providers. If we are no longer included in this arrangement for any reason or if pool members have coverage incidents, we may incur higher insurance costs.
There can be no assurance that we will be able to maintain our existing coverage on terms favorable to us, that the premiums for such coverage will not increase substantially or that we will not bear substantial losses and lost revenue from accidents or other adverse events. Substantial claims resulting from an accident in excess of related insurance coverage or a significant increase in our insurance expense could have a material adverse effect on our business, results of operations and financial condition. Additionally, while we carry insurance against the risks inherent to our operations, which we believe are consistent with the insurance arrangements of other participants in our industry, we cannot provide assurance that we are adequately insured against all risks, including coverage for weapons of mass destruction.
Lessees are required under our Dry Leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable. Lessees are also required to maintain public liability, property damage and all-risk hull and war-risk hull insurance on the aircraft at agreed-upon levels. If our lessees’ insurance is not sufficient to cover all types of claims that may be asserted against us or if our lessees fail to fulfill their indemnification obligations, we would be required to pay any amounts in excess of our insurance coverage, which could have a material adverse effect on our business, results of operations and financial condition.
We rely on third parties to provide certain essential services. If these service providers do not deliver the high level of service and support required in our business at commercially reasonable terms, it could have a material adverse effect on our business, results of operations and financial condition.
We rely on third parties to provide certain essential services on our behalf, including maintenance, ground handling and flight attendants. In certain locations, there may be very few sources, or sometimes only a single source, of supply for these services. If we are unable to effectively manage these third parties, they may provide inadequate levels of support or charge commercially unreasonable amounts for their services, which could harm our customer relationships and ability to remain competitive. Any material problems with the quality, timeliness and cost of our contracted services, or an unexpected termination of those services, could have a material adverse effect on our business, results of operations and financial condition.
Some of our aircraft are periodically deployed in potentially dangerous situations, which may result in business interruption or harm to our passengers, employees or contractors and/or damage to our aircraft/cargo.
Some of our aircraft are deployed in potentially dangerous locations and carry hazardous cargo incidental to the services we provide in support of our customers’ activities. Some areas through which our flight routes pass are subject to geopolitical instability, which increases the risk of death or injury to our passengers, employees or contractors, business interruption or a loss of, or damage to, our aircraft and/or its cargo. While we maintain insurance to cover injury to our passengers, employees and contractors as well as the loss/damage of aircraft/cargo, except for limited situations, we do not have insurance against the loss arising from business interruption. It may be difficult to replace lost or substantially damaged aircraft due to the high capital requirements and long delivery lead times for new aircraft or to locate appropriate in-service aircraft available for lease or sale. Any injury to passengers, employees or contractors or loss/damage of aircraft/cargo could have a material adverse effect on our business, results of operations and financial condition.
We could be adversely affected by a failure or disruption of our information technology systems.
We are heavily and increasingly dependent on technology to operate our business. The information technology systems on which we rely could be disrupted due to various events, some of which are beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures, computer viruses, security breaches and cyber attacks. We have taken numerous steps to implement business resiliency and cybersecurity to help reduce the risk of some of these potential disruptions. There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions or failures of these systems. Any substantial or repeated failure of these systems could impact our operations and customer service, result in the loss of important data, loss of revenues, and increased costs, and generally harm our business. Moreover, a failure of certain of our vital systems could limit our ability to operate our flights for an extended period of time, which would have a material adverse effect on our business, results of operations and financial condition.
Our ability to utilize net operating loss carryforwards for U.S. income tax purposes may be limited. In addition, we operate in multiple jurisdictions and may become subject to a wide range of income and other taxes.
As of December 31, 2017, we had $1.2 billion of federal net operating loss carryforwards (“NOLs”) for U.S. income tax purposes, net of unrecognized tax benefits and valuation allowance, which will expire through 2037, if not utilized. Section 382 of the Internal Revenue Code (“Section 382”) imposes an annual limitation on the amount of a corporation’s U.S. federal taxable income that can be offset by NOLs if it experiences an “ownership change”, as defined by Section 382. We experienced ownership changes, as defined by Section 382, in 2004 and 2009. In addition, the acquisition of Southern Air in 2016 constituted an ownership change for that entity.Original Filing. Accordingly, the use of our NOLs generated prior to these ownership changes is subject to an annual limitation. If certain changes in our ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable NOLs, which could have a material adverse effect on our business, results of operations and financial condition.
We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes. If our operations become subject to significant income and other taxes, this could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to Our ACMI Business
We depend on a limited number of significant customers for our ACMI business and the loss of one or more of such customers could materially adversely affect our business, results of operations and financial condition.
Our ACMI business depends on a limited number of customers. We typically enter into long-term ACMI and CMI contracts with our customers. The terms of our existing contracts are generally scheduled to expire on a staggered basis. There is a risk that any one of our significant ACMI or CMI customers may not renew their contracts with us on favorable terms or at all, perhaps due to reasons beyond our control. For example, certain of our airline ACMI customers may not renew their ACMI contracts with us because they decide to exit the dedicated cargo business or as they take delivery of new aircraft in their own fleet. Select customers have the opportunity to terminate their long-term agreements in advance of the expiration date, following notice to allow for remarketing of the aircraft.
Entering into ACMI and CMI contracts with new customers sometimes requires a long sales cycle, and as a result, if our contracts are not renewed, and there is a resulting delay in entering into new contracts, it could have a material adverse effect on our business, results of operations and financial condition.
Our agreements with several ACMI and CMI customers require us to meet certain performance targets, including certain departure/arrival reliability standards. Failure to meet these performance targets could adversely affect our financial results.
Our ability to derive the expected economic benefits from our transactions with certain ACMI and CMI customers depends substantially on our ability to successfully meet strict performance standards and deadlines for aircraft and ground operations. If we do not meet these requirements, we may not be able to achieve the projected revenues and profitability from these contracts, and we could be exposed to certain remedies, including termination of the agreements with Amazon and the BSA with DHL in the most extreme of circumstances, as described below.
Risks Related to the Agreements with Amazon
We may fail to realize the anticipated strategic and financial benefits of our relationship with Amazon.
Realization of the anticipated benefits from the agreements with Amazon is subject to a number of challenges and uncertainties, such as the timing of aircraft deliveries and unforeseen costs. If we fail to realize the expected benefits, it could have a material adverse effect on our business, results of operations and financial condition.
Our agreements with Amazon confer certain termination rights which, if exercised or triggered, may result in our inability to realize the full benefits of the agreements.
The agreements give Amazon the option to terminate in certain circumstances and upon the occurrence of certain events of default, including a change of control or our failure to meet certain performance requirements. In particular, Amazon will have the right to terminate without cause the agreement providing for CMI operations upon providing us at least 180 days’ prior written notice of termination.
Upon termination, Amazon will generally, subject to certain exceptions, retain the warrants that have vested prior to the time of termination and, depending on the circumstances giving rise to the termination, may have the right to accelerated vesting of the remaining warrants upon a change of control of our company. Upon termination, Amazon or we may also have the right to receive a termination fee from the other party depending on the circumstances giving rise to the right of termination.
If Amazon exercises any of these termination rights, it could have a material adverse effect on our business, results of operations and financial condition.
Our future earnings and earnings per share, as reported under generally accepted accounting principles, could be adversely impacted by the warrants granted to Amazon.
The warrants granted to Amazon increase the number of diluted shares reported, which has an effect on our fully diluted earnings per share. Further, the warrants are presented as liabilities in our consolidated balance sheets and are subject to fair value measurement adjustments during the periods that they are outstanding. Accordingly, future fluctuations in the fair value of the warrants could have a material adverse effect on our results of operations.
If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our common stock.
If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership interests of our then-existing stockholders and reduce our earnings per share. In addition, any sales in the public market of any common stock issuable upon the exercise of the warrants by Amazon could adversely affect prevailing market prices of our common stock.
If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, Amazon may become a significant stockholder and may be entitled to appoint a director to our board of directors.
The warrants issued by us to Amazon grant Amazon the right to purchase up to 30%, in the aggregate, of our common stock on a post-issuance basis. If the warrants granted to Amazon are exercised, Amazon may become a significant stockholder of our company. We have entered into a stockholders agreement with Amazon, pursuant to which Amazon’s ability to vote in its discretion will generally be capped at 14.9% with the remainder to be voted in accordance with our board of directors’ recommendation. In addition, under the stockholders agreement, Amazon will be entitled to appoint one director to our board of directors when Amazon owns 10% or more of our common stock. Until such time, Amazon is entitled to designate a non-voting observer to our board of directors.
Risk Related to the BSA with DHL
Our agreements with DHL confer certain termination rights to them which, if exercised or triggered, may result in our inability to realize the full benefits of the BSA with DHL.
The BSA gives DHL the option to terminate the agreements for convenience by giving notice to us before the twelfth or fifteenth anniversary of the agreement’s commencement date, which was October 27, 2008. Further, DHL has a right to terminate the BSA for cause following a specified management resolution process if we default on our performance or we are unable to perform for reasons beyond our control. If DHL exercises any of these termination rights, it could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to Our Charter Business
We derive a significant portion of our revenues from the AMC, and a substantial portion of these revenues have been generated pursuant to expansion flying, as opposed to fixed contract arrangements with the AMC. Revenues from the AMC are volatile and may decline from current levels.
As a percentage of our total operating revenue, revenue derived from the AMC was approximately 23.0% in 2017, 23.7% in 2016 and 23.0% in 2015. Historically, the revenues derived from expansion (or ad-hoc) flights for the AMC significantly exceeded the value of the fixed flight component of our AMC contract.
Revenues from the AMC are typically derived from one-year contracts. Our AMC contract generally runs from October 1 through September 30 of the following year. Changes in national and international political priorities can significantly affect the volume of business from the AMC. Any decrease in U.S. military activity could reduce revenue from the AMC. In addition, our share of the total business from the AMC depends on several factors, including the total fleet size we commit to the CRAF program and the total number of aircraft deployed by our teaming arrangement partners and competitors in the program.
The AMC also holds all carriers to certain on-time performance requirements as a percentage of flights flown and, as a result of AMC demand volatility, it has become more difficult to comply with those requirements. To the extent that we fail to meet those performance requirements or if we fail to pass biannual AMC audits, revenues from our business with the AMC could decline through a suspension or termination of our AMC contract. Our revenues could also decline due to a reduction in the revenue rate we are paid by the AMC, a greater reliance by the AMC on its own fleet or a reduction in our allocation of AMC flying. Any reduction in our AMC flying could also negatively impact our Charter revenue from commercial customers for trips related to one-way AMC missions. We expect revenues and profitability from our business with the AMC to continue to remain volatile as the U.S. military continues to move troops and cargo to and from areas of conflict around the world. If we are unable to effectively deploy any resultant capacity during periods of reduced flying, it could have a material adverse effect on our business, results of operations and financial condition.
Our business with the AMC is sensitive to teaming arrangements which affect our relative share of AMC flying and the associated revenue. If one of our team members reduces its commitments or withdraws from the program, or if other carriers on other teams commit additional aircraft, our share of AMC flying may decline. In addition, any changes made to the commissions that we pay or receive for AMC flying or changes to the contracting mechanism could impact the revenues or profitability of this business.
Each year, the AMC allocates its air capacity requirements to different teams of participating airlines based on a mobilization value point system that is determined by the amount and types of aircraft that each team of airlines pledges to the program. We participate in the program through a teaming arrangement with other airlines, led by FedEx. Our team is one of two major teams participating in the program during our current contract year. Several factors could adversely affect the amount of AMC flying that is allocated to us, including:
changes in the contracting mechanism;
the formation of new competing teaming arrangements;
the withdrawal of any of our team’s current partners, especially FedEx;
a reduction of the number of aircraft pledged by us or other members of our team; or
increased participation of other carriers on other teams.
Any changes that would result in a reduction in our share of, or profitability from, AMC flying could have a material adverse effect on our business, results of operations and financial condition.
Risk Related to Our Dry Leasing Business
Any default by our Dry Lease customers, including (but not limited to) failure to make timely payments, failure to maintain insurance or failure to properly maintain our aircraft, could adversely affect our financial results
Our Dry Leasing business depends on the ability of our customers to satisfy their obligations under our leases, which may be affected by factors outside our control, including but not limited to: supply and demand of aircraft; competition; economic conditions; the price and availability of aircraft fuel; government regulations; the availability and cost of financing; failure to maintain insurance; and their overall financial condition and cash flow. Any default by our customers can result in reduced cash flow, termination of the lease and repossession of the related aircraft, any of which could have a material adverse effect on our business, results of operations and financial condition.
Dry Leasing customers are primarily responsible for maintaining our aircraft. Although we require many of our customers to pay us supplemental maintenance revenue, failure of a customer to perform required maintenance during the lease term could result in higher maintenance costs, a decrease in the value of our aircraft, the inability to re-lease aircraft at favorable rates, if at all, or impairment charges, which could have a material adverse effect on our business, results of operations and financial condition.
The market for air cargo services is competitive and if we are unable to compete effectively, we may lose current customers or fail to attract new customers. We could also be adversely affected if a large number of long-haul freighter aircraft or freighter aircraft of different equipment types are introduced into the market.
Each of the markets in which we participate is competitive and fragmented. We offer a broad range of aviation services and our competitors vary by geographic market and type of service and include other international and domestic contract carriers, regional and national ground handling and logistics companies, internal cargo units of major airlines and third-party cargo providers. Competition in the air cargo and transportation market is influenced by several key factors, including quality, price and availability of assets and services. Regulatory requirements to operate in the U.S. domestic air cargo market have been reduced, facilitating the entry into domestic markets by foreign air cargo companies. If we were to lose any major customers and/or fail to attract customers, it could have a material adverse effect on our business, results of operations and financial condition.
Additionally, an increase in the number of aircraft in the freight market could cause Yields and rates to fall and/or could negatively affect our customer base. If either circumstance were to occur, our business, results of operations and financial condition could be materially and adversely affected.
We are subject to extensive governmental regulations and failure to comply with these regulations in the U.S. and abroad, or the adoption of any new laws, policies or regulations or changes to such regulations, may have an adverse effect on our business.
Our operations and our customers’ operations are subject to complex aviation and transportation laws and regulations, including Title 49 of the U.S. Code, under which the DOT and the FAA exercise regulatory authority over air carriers. In addition, our business activities and our customers’ business activities fall within the jurisdiction of various other federal, state, local and foreign authorities, including the U.S. Department of Defense, the TSA, U.S. Customs and Border Protection, the U.S. Treasury Department’s Office of Foreign Assets Control and the U.S. EPA. In addition, other jurisdictions in which we operate have similar regulatory regimes to which we are subjected. These laws and regulations may require us to maintain and comply with the terms of a wide variety of certificates, permits, licenses, noise abatement standards, maintenance and other requirements and our failure to do so could result in substantial fines or other sanctions. These U.S. and foreign aviation regulatory agencies have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with provisions of law or applicable regulations and may impose civil or criminal penalties for violations of applicable rules and regulations. Such fines or sanctions, if imposed, could have a material adverse effect on our mode of conducting business, results of operations and financial condition. In addition, U.S. and foreign governmental authorities may adopt, amend or interpret accounting standards, tax laws, regulations or treaties that could require us to take additional and potentially costly compliance steps or result in our inability to operate some of our aircraft in certain countries, which could have a material adverse effect on our business, results of operations and financial condition.
International aviation is increasingly subject to requirements imposed or proposed by foreign governments. This is especially true in the areas of transportation security, aircraft noise and emissions control, and greenhouse gas emissions. These may be duplicative of, or incompatible with U.S. government requirements, resulting in increased compliance efforts and expense.
Foreign governments also place temporal and other restrictions on the ability of their own airlines to use aircraft operated by other airlines. For example, the European Aviation Safety Agency (“EASA”) requires that the aircraft capacity secured from and operated by non-EU airlines meet internationally set standards and additional EASA requirements. These and other similar regulatory developments could have a material adverse effect on our business, results of operations and financial condition.
Initiatives to address global climate change may adversely affect our business and increase our costs.
To address climate change, governments continue to pursue various means to reduce aviation-related greenhouse gas emissions. Compliance with these or other measures that are ultimately adopted could result in
substantial costs for us. For instance, in October 2013, the ICAO reached a nonbinding agreement to develop global market-based measures to assist in achieving carbon-neutral growth. In October 2016, the ICAO approved the CORSIA, which is designed to offset any annual increases in total carbon emissions from international civil aviation above a baseline level determined by the average of 2019 and 2020 emissions. Although various details regarding the implementation of CORSIA still need to be finalized, a pilot phase will run from 2021 to 2023. Starting in 2019, the airlines of participating countries will begin monitoring and reporting fuel burn during international flights. As a result, for each year starting in 2021, covered airlines may need to purchase allowances to offset their assigned share of emissions overages.
Additionally, the EU continues to pursue a parallel track to address climate change through the EU ETS. Following the end of every year, to the extent the ETS applies, each airline must tender the number of allowances corresponding to carbon emissions generated by its covered flight activity during the year. If the airline’s flight activity during the year has produced carbon emissions exceeding the number of carbon emissions allowances that it has been awarded, the airline must acquire additional allowances from other airlines in the open market. In recognition of ICAO’s recent adoption of CORSIA, the ETS suspension with respect to flights to and from non-European countries continues through December 31, 2023. However, the ETS remains applicable to intra-European flights.
In the U.S., various constituencies have continued to advocate for controls on greenhouse gas emissions. On August 15, 2016, the EPA issued a final rule finding that greenhouse gas emissions from aircraft cause or contribute to air pollution that may reasonably be anticipated to endanger public health and welfare. It is possible that these or other developments could lead to the future regulation of greenhouse gas emissions from aircraft in the U.S.
It is possible that these or similar climate change measures will be imposed in a manner adversely affecting airlines. The costs of complying with potential new environmental laws or regulations could have a material adverse effect on our business, results of operations and financial condition.
The airline industry is subject to numerous security regulations and rules that increase costs. Imposition of more stringent regulations and rules than those that currently exist could materially increase our costs.
The TSA has increased security requirements in response to increased levels of terrorist activity, and has adopted comprehensive new regulations governing air cargo transportation, including all-cargo services, in such areas as cargo screening and security clearances for individuals with access to cargo. Additional measures, including a requirement to screen cargo, have been proposed, which, if adopted, may have an adverse impact on our ability to efficiently process cargo and would increase our costs and those of our customers. The cost of compliance with increasingly stringent regulations could have a material adverse effect on our business, results of operations and financial condition.
RISKS RELATED TO OUR LEASE AND DEBT OBLIGATIONS
Our substantial lease and debt obligations, including aircraft leases and other obligations, could impair our financial condition and adversely affect our ability to raise additional capital to fund our aircraft purchases and conversions, operations or other capital requirements, all of which could limit our financial resources and ability to compete, and may make us vulnerable to adverse economic events.
As of December 31, 2017, we had total debt obligations of approximately $2.4 billion and total aircraft operating leases and other lease obligations of $0.8 billion. These obligations have increased and are expected to increase further as we enter into financing arrangements for 767-300 aircraft purchases and passenger-to-freighter conversions, GEnx engine upgrades and other fleet expansion and capital requirements. We cannot provide assurance that we will be able to obtain such financing arrangements or on terms attractive to us. Our outstanding financial obligations could have negative consequences, including:
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Our ability to service our debt and meet our lease and other obligations as they come due is dependent on our future financial and operating performance. This performance is subject to various factors, including factors beyond our control, such as changes in global and regional economic conditions, changes in our industry, changes in interest or currency exchange rates, the price and availability of aircraft fuel and other costs, including labor and insurance. Accordingly, we cannot provide assurance that we will be able to meet our debt service, lease and other obligations as they become due and our business, results of operations and financial condition could be adversely affected under these circumstances.
Certain of our debt obligations contain a number of restrictive covenants. In addition, many of our debt and lease obligations have cross-default and cross-acceleration provisions.
Restrictive covenants in certain of our debt and lease obligations, under certain circumstances, could impact our ability to:
borrow under certain financing arrangements;
consolidate or merge with or into other companies or sell substantially all our assets;
expand significantly into lines of businesses beyond existing business activities or those which are cargo-related and/or aviation-related and similar businesses; and/or
modify the terms of debt or lease financing arrangements.
In certain circumstances, a covenant default under one of our debt instruments could cause us to be in default of other obligations as well. Any unremedied defaults could lead to an acceleration of the amounts owed and potentially could cause us to lose possession or control of certain aircraft, either of which could have a material adverse effect on our business, results of operations and financial condition.
We may not have the ability to raise the funds necessary to settle conversions of our convertible notes or to repurchase the convertible notes upon either a fundamental change or a make-whole fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the convertible notes.
We issued convertible senior notes in May 2017 and June 2015 (the “Convertible Notes”), which contain conditional conversion features that allow the holders of the Convertible Notes the option to convert if certain trading conditions are met or upon the occurrence of specified corporate events. In the event a conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as current on the balance sheet instead of as noncurrent, which could result in a material reduction of our net working capital.
The holders of the Convertible Notes also may require us to repurchase their Convertible Notes upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes) at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. However, we may not have enough available cash to fund these obligations or be able to obtain financing on favorable terms, or at all, at the time we are required to make repurchases of Convertible Notes surrendered or
Convertible Notes being converted. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the applicable indenture or to pay any cash payable on future conversions of the Convertible Notes as required by the applicable indenture would constitute a default under such indenture, which could result in acceleration of the principal amount of the notes and additional funding obligations by us.
In addition, if a make-whole fundamental change (as defined in the applicable indenture), including specified corporate transactions, occurs prior to the maturity date, under certain circumstances, it would increase the conversion rate. The increase in the conversion rate would be determined based on the date on which the specified corporate transaction becomes effective and the price paid (or deemed to be paid) per share of our common stock in such transaction, but in no event would increase to greater than 16.3713 shares of our common stock for our convertible notes issued in 2017 and 17.8922 shares of common stock for our convertible notes issued in 2015 per $1,000 of principal, subject to adjustment in the same manner as the conversion rates. The increase in the conversion rate for Convertible Notes converted in connection with a make-whole fundamental change may result in us having to pay out additional cash in respect of the Convertible Notes upon conversion, or result in additional dilution to our shareholders if the conversion is settled, at our election, in shares of our common stock.
The Convertible Note hedge and warrant transactions may affect the value of our common stock.
In connection with the Convertible Notes offerings, we entered into Convertible Note hedge transactions with option counterparties. The Convertible Note hedge transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be. We also entered into warrant transactions with the option counterparties. However, the warrant transactions could separately have a dilutive effect on our earnings per share to the extent that the market price per share of our common stock exceeds the applicable strike prices of the warrants. Accordingly, when the Convertible Note hedge transactions and the warrant transactions are taken together, the extent to which the Convertible Note hedge transactions reduce the potential dilution to our common stock (or the cash payments in excess of the principal amount of the notes) upon conversion of the notes is effectively capped by the warrant transactions at the strike price of the warrants.
The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various hedging transactions, including (without limitation) derivatives, with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the notes (and are likely to do so during any observation period related to a conversion of notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
U.S. citizenship requirements may limit common stock voting rights.
Under U.S. federal law and DOT requirements, we must be owned and actually controlled by “citizens of the United States,” a statutorily defined term requiring, among other things, that not more than 25% of our issued and outstanding voting stock be owned and controlled, directly or indirectly, by non-U.S. citizens. The DOT periodically conducts airline citizenship reviews and, if it finds that this requirement is not met, may require adjustment of the voting rights of the airline’s issued shares.
As one means to effect compliance, our certificate of incorporation and by-laws provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “Foreign Stock Record,” results in a suspension of their voting rights. Our by-laws further limit the number of shares of our capital stock that may be registered on the Foreign Stock Record to 25% of our issued and outstanding shares. Registration on the Foreign Stock Record is made in chronological order based on the date we receive a written request for registration. As a result, if a non-U.S. citizen acquires shares of our common stock and does not or is not able to register those shares on our Foreign Stock Record, they may lose their ability to vote those shares.
Provisions in our restated certificate of incorporation and by-laws and Delaware law, and our issuance of warrants to Amazon, might discourage, delay or prevent a change in control of AAWW and, therefore, depress the trading price of our common stock.
Provisions of our restated certificate of incorporation, by-laws and Delaware law may render more difficult or discourage any attempt to acquire our company, even if such acquisition may be believed to be favorable to the interests of our stockholders. These provisions may also discourage bids for our common stock at a premium over market price or adversely affect the market price of our common stock. In addition, the vesting of warrants issued by us to Amazon will generally, subject to certain exceptions, be accelerated upon a change of control of our company, which may discourage attempts to acquire our company.
Our common stock share price is subject to fluctuations in value.
The trading price of our common shares is subject to material fluctuations in response to a variety of factors, including quarterly variations in our operating results, conditions of the airfreight market and global economic conditions or other events and factors that are beyond our control.
In the past, following periods of significant volatility in the overall market and in the market price of a company's securities, securities class action litigation has been instituted against these companies in some circumstances. If this type of litigation were instituted against us following a period of volatility in the market price for our common stock, it could result in substantial costs and a diversion of our management's attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Aircraft
The following tables provide information about AAWW’s aircraft and customer-provided aircraft as of December 31, 2017:
AAWW Aircraft
The following table summarizes AAWW’s aircraft as of December 31, 2017:
Aircraft Type |
| Configuration |
| Owned* |
|
| Leased** |
|
| Total |
|
| Average Age Years |
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ACMI and Charter Segments |
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|
747-8F |
| Freighter |
|
| 10 |
|
|
| - |
|
|
| 10 |
|
|
| 5.1 |
|
747-400 |
| Freighter |
|
| 8 |
|
|
| 15 |
|
|
| 23 |
|
|
| 17.6 |
|
747-400BCF |
| Converted Freighter |
|
| 2 |
|
|
| 1 |
|
|
| 3 |
|
|
| 25.5 |
|
747-400 |
| Passenger |
|
| 2 |
|
|
| - |
|
|
| 2 |
|
|
| 26.7 |
|
767-300ER |
| Passenger |
|
| 4 |
|
|
| - |
|
|
| 4 |
|
|
| 25.1 |
|
767-300ER |
| Converted Freighter |
|
| 2 |
|
|
| - |
|
|
| 2 |
|
|
| 28.8 |
|
Total |
|
|
|
| 28 |
|
|
| 16 |
|
|
| 44 |
|
|
| 16.9 |
|
Dry Leasing Segment |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
777-200LRF |
| Freighter |
|
| 6 |
|
|
| - |
|
|
| 6 |
|
|
| 7.1 |
|
767-300 |
| Converted Freighter*** |
|
| 20 |
|
|
| - |
|
|
| 20 |
|
|
| 21.6 |
|
757-200 |
| Freighter |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 28.4 |
|
737-800 |
| Passenger |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 9.9 |
|
737-300 |
| Freighter |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 25.1 |
|
Total |
|
|
|
| 29 |
|
|
| - |
|
|
| 29 |
|
|
| 18.5 |
|
Total Fleet |
|
|
|
| 57 |
|
|
| 16 |
|
|
| 73 |
|
|
| 17.6 |
|
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|
Lease expirations for our leased aircraft included in the above tables range from February 2020 to June 2032.
Customer-provided Aircraft for CMI Service
The following table summarizes customer-provided aircraft as of December 31, 2017:
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Our principal office is located in Purchase, New York, where we lease approximately 120,000 square feet under a long-term lease, for which the current term expires in 2022. This office includes both operational and administrative support functions, including flight and crew operations, maintenance and engineering, material management, human resources, legal, sales and marketing, finance and information technology. We also lease approximately 37,000 square feet of office space in Florence, Kentucky under a long-term lease, for which the current term expires in 2021. This office includes operational support functions, including flight and crew operations, maintenance and engineering, and material management. In addition, we lease a variety of smaller offices and ramp space at various airport and regional locations generally on a short-term basis.
The information required in response to this Item is set forth in Note 14 to our Financial Statements, and such information is incorporated herein by reference. Such description contains all of the information required with respect hereto.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Since 2006, our common stock has been traded on The NASDAQ Global Select Market under the symbol “AAWW”.
Market Price of Common Stock
The following table sets forth the closing high and low sales prices per share of our common stock for the periods indicated.
|
| High |
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| Low |
| ||
2017 Quarter Ended |
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December 31 |
| $ | 68.25 |
|
| $ | 52.75 |
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September 30 |
| $ | 68.15 |
|
| $ | 54.70 |
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June 30 |
| $ | 59.80 |
|
| $ | 46.05 |
|
March 31 |
| $ | 57.80 |
|
| $ | 50.30 |
|
2016 Quarter Ended |
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|
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December 31 |
| $ | 53.45 |
|
| $ | 41.15 |
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September 30 |
| $ | 43.56 |
|
| $ | 34.62 |
|
June 30 |
| $ | 48.66 |
|
| $ | 38.32 |
|
March 31 |
| $ | 42.96 |
|
| $ | 33.37 |
|
The last reported sale price of our common stock on The NASDAQ Global Select Market on February 16, 2018 was $55.35 per share. As of February 16, 2018, there were approximately 25.4 million shares of our common stock issued and outstanding, and 49 holders of record of our common stock.
See Note 17 to our Financial Statements for a discussion of our stock repurchase program.
Equity Compensation Plans
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding our equity compensation plans as of December 31, 2017.
Dividends
We have never paid a cash dividend with respect to our common stock and we do not anticipate paying a dividend in the foreseeable future. Moreover, certain of our financing arrangements contain financial covenants that could limit our ability to pay cash dividends.
Foreign Ownership Restrictions
Under our by-laws, U.S. federal law and DOT regulations, we must be controlled by U.S. citizens. In this regard, our President and at least two-thirds of our board of directors and officers must be U.S. citizens and not more than 25% of our outstanding voting common stock may be held by non-U.S. citizens. We believe that, during the period covered by this Report, we were in compliance with these requirements.
The following graph compares the performance of AAWW common stock to the Russell 2000 Index and the Dow Jones Transportation Average for the period beginning December 31, 2012 and ending on December 31, 2017. The comparison assumes $100 invested in each of our common stock, the Russell 2000 Index and the Dow Jones Transportation Average and reinvestment of all dividends.
Total Return between 12/31/12 and 12/31/17
Cumulative Return | 12/31/12 |
| 12/31/13 |
| 12/31/14 |
| 12/31/15 |
| 12/31/16 |
| 12/31/17 |
| ||||||
AAWW | $ | 100.00 |
| $ | 92.85 |
| $ | 111.24 |
| $ | 93.28 |
| $ | 117.67 |
| $ | 132.33 |
|
Russell 2000 Index | $ | 100.00 |
| $ | 137.00 |
| $ | 141.84 |
| $ | 133.74 |
| $ | 159.78 |
| $ | 180.76 |
|
Dow Jones Transportation Average | $ | 100.00 |
| $ | 139.46 |
| $ | 172.23 |
| $ | 141.48 |
| $ | 170.42 |
| $ | 199.98 |
|
ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the selected balance sheet data as of December 31, 2017 and 2016 have been derived from our audited Financial Statements included elsewhere in this Report. The selected balance sheet data as of December 31, 2015, 2014 and 2013, and selected statements of operations data for the years ended December 31, 2014 and 2013 have been derived from our audited Financial Statements not included in this Report.
In the following table, all amounts are in thousands, except for per share data.
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||||
Statement of Operations Data: |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
| $ | 2,156,460 |
|
| $ | 1,839,627 |
|
| $ | 1,822,659 |
|
| $ | 1,799,198 |
|
| $ | 1,656,900 |
|
Total operating expenses |
|
| 1,914,486 |
|
|
| 1,671,316 |
|
|
| 1,699,154 |
|
|
| 1,623,226 |
|
|
| 1,470,110 |
|
Operating income |
|
| 241,974 |
|
|
| 168,311 |
|
|
| 123,505 |
|
|
| 175,972 |
|
|
| 186,790 |
|
Income from continuing operations, net of taxes (a) |
|
| 224,338 |
|
|
| 42,625 |
|
|
| 7,286 |
|
|
| 102,227 |
|
|
| 93,989 |
|
Loss from discontinued operations, net of taxes (b) |
|
| (865 | ) |
|
| (1,109 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Net income |
|
| 223,473 |
|
|
| 41,516 |
|
|
| 7,286 |
|
|
| 102,227 |
|
|
| 93,989 |
|
Less: Net income (loss) attributable to noncontrolling interests |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,530 | ) |
|
| 152 |
|
Net income attributable to Common Stockholders |
| $ | 223,473 |
|
| $ | 41,516 |
|
| $ | 7,286 |
|
| $ | 106,757 |
|
| $ | 93,837 |
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 8.89 |
|
| $ | 1.72 |
|
| $ | 0.29 |
|
| $ | 4.08 |
|
| $ | 3.68 |
|
Diluted |
| $ | 8.68 |
|
| $ | 1.70 |
|
| $ | 0.29 |
|
| $ | 4.07 |
|
| $ | 3.67 |
|
Loss per share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.03 | ) |
| $ | (0.04 | ) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
Diluted |
| $ | (0.03 | ) |
| $ | (0.04 | ) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 8.85 |
|
| $ | 1.67 |
|
| $ | 0.29 |
|
| $ | 4.08 |
|
| $ | 3.68 |
|
Diluted |
| $ | 8.64 |
|
| $ | 1.65 |
|
| $ | 0.29 |
|
| $ | 4.07 |
|
| $ | 3.67 |
|
Balance Sheet Data: |
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|
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|
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|
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|
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|
|
|
|
|
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|
Total assets |
| $ | 4,955,462 |
|
| $ | 4,247,379 |
|
| $ | 4,164,403 |
|
| $ | 4,007,277 |
|
| $ | 3,617,371 |
|
Long-term debt (less current portion) |
| $ | 2,008,986 |
|
| $ | 1,666,663 |
|
| $ | 1,739,496 |
|
| $ | 1,736,747 |
|
| $ | 1,499,607 |
|
Total equity |
| $ | 1,789,856 |
|
| $ | 1,517,338 |
|
| $ | 1,454,183 |
|
| $ | 1,417,795 |
|
| $ | 1,322,125 |
|
|
|
|
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussionAmendment should be read in conjunction with the Financial StatementsOriginal Filing and with our filings with the SEC subsequent to the Original Filing.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Amendment contains new certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which are attached hereto. Because no financial statements are included in Item 8the Amendment and the Amendment does not contain or amend any disclosure with respect to Items 307 and 308 of this report.
Business Overview
We are a leading global provider of outsourced aircraftRegulation S-K, paragraphs 3, 4 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 new production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers include 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.
We believe that the following competitive strengths will allow us to capitalize on opportunities that exist in the global airfreight industry:
Market leader with leading-edge technology and differentiated, value-creating solutions
The 747-8F and 777-200LRF aircraft are two5 of the most efficient long-haul wide-body commercial freighters available and we are currently the only operator offering these aircraft under ACMI and CMI agreements. Our operating model deploys our aircraft to drive maximum utilization and value from our fleet. The scale of our fleet enables us tocertifications have aircraft available globally to respond to our customers’ needs, both on a planned and ad hoc basis. We believe this provides us with a commercial advantage over our competitors that operate smaller and less flexible fleets.
Our Dry Leasing business is primarily focused on a portfolio of six 777-200LRF aircraft and our growing fleet of 767-300 freighter aircraft for regional and domestic applications. These aircraft are dry leased to customers on a long-term basis, which further diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.
Stable base of contractual revenue and reduced operational risk
Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk. ACMI and CMI contracts with customers generally range from two to seven years, although some contracts have shorter or longer durations. Dry Leasing contracts with customers generally range from five to twelve years. Under ACMI, CMI and Dry Leasing, our customers assume fuel, demand and price risk resulting in reduced operational risk for AAWW. ACMI, CMI and Dry Leasing contracts typically provide us with a guaranteed minimum level of revenue and target level of profitability.
Focus on asset optimization
By managing the largest fleet of outsourced freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing.
Our mix of aircraft is closely aligned with our customer needs. By providing the broadest array of 747, 777, 767, 757 and 737 aircraft for domestic, regional and international applications, we believe that we are well-suited to meet the current and anticipated requirements of our customers.
We continually evaluate our fleet to ensure that we offer the most efficient and effective mix of aircraft to meet our customers’ needs. Our service model is unique in that we offer a portfolio of operating solutions that complement our freighter aircraft businesses. We believe this allows us to improve the returns we generate from our asset base by allowing us to flexibly redeploy aircraft to meet changing market conditions, ensuring the maximum
utilization of our fleet. Our Charter services complement our ACMI services by allowing us to increase aircraft utilization during open time and to react to changes in demand and Yield in these segments. We have employees situated around the globe who closely monitor demand for commercial charter services in each region, enabling us to redeploy available aircraft quickly. We also endeavor to manage our portfolio to stagger contract terms, which mitigates our remarketing risks and aircraft down time.
Long-term strategic customer relationships and unique innovative service offerings
We combine the global scope and scale of our efficient aircraft fleet with high-quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers. We believe this approach results in customers that are motivated to seek long-term relationships with us. This has historically allowed us to command higher prices than our competitors in several key areas. These long-term relationships help us to build resilience into our business model.
Our customers have access to our innovative solutions, such as inter-operable crews, flight scheduling, fuel-efficiency planning, and maintenance spare coverage, which, we believe, set us apart from other participants in the outsourced aircraft and aviation operating services market. Furthermore, we have access to valuable operating rights to restricted markets such as Brazil, Japan and China. We believe our freighter services allow our customers to effectively expand their capacity and operate dedicated freighter aircraft without simultaneously taking on exposure to fluctuations in the value of owned aircraft and, in the case of our ACMI and CMI contracts, long-term expenses relating to crews and maintenance. Dedicated freighter aircraft enable schedules to be driven by cargo rather than passenger demand (for those customers that typically handle portions of their cargo operations via belly capacity on passenger aircraft), which we believe allows our customers to drive higher contribution from cargo operations.
We are focused on providing safe, secure and reliable services. Atlas, Polar and Southern Air all have successfully completed the International Air Transport Association’s Operational Safety Audit (IOSA), a globally recognized safety and quality standard.
We provide outsourced aircraft and aviation services to some of the world’s premier express delivery providers, e-commerce retailers, airlines and freight forwarders. We will take advantage of opportunities to maintain and expand our relationships with our existing customers, while seeking new customers and new geographic markets.
In 2016, we entered into agreements with Amazon, which involve, among other things, the lease and operation of 20 aircraft. Between August 2016 and December 2017, we have placed 12 of these into service and we expect to be operating all 20 before the end of 2018. Also in 2016, we expanded our relationship with DHL through the acquisition of Southern Air which provided us with immediate entry into the 777 and 737 aircraft operating platforms, with ten aircraft and the potential for developing additional business with existing and new customers.
Experienced management team
Our management team has extensive operating and leadership experience in the airfreight, airline, aircraft leasing and logistics industries at companies such as United Airlines, US Airways, Lufthansa Cargo, GE Capital Aviation Services, Air Canada, Canadian Airlines, Cathay Pacific, Continental Airlines, ICF International, ASTAR Air Cargo and KLM Cargo, as well as the United States Army, Navy, Air Force and Federal Air Marshal Service. Our management team is led by William J. Flynn, who has over 40 years of experience in freight and transportation and has held senior management positions with several transportation companies. Prior to joining AAWW more than ten years ago, Mr. Flynn was President and CEO of GeoLogistics, a global transportation and logistics enterprise.
Our strategy includes the following:
Focus on securing long-term customer contracts
We will continue to focus on securing long-term contracts with customers, including customers in the fast-growing express, Asian and e-commerce markets, which provide us with stable revenue streams and predictable margins. In addition, these agreements limit our direct exposure to fuel and other costs and mitigate the risk of fluctuations in both Yield and demand in the airfreight business, while also improving the overall utilization of our fleet.
Aggressively manage our fleet with a focus on leading-edge aircraft
We continue to actively manage our fleet of leading-edge wide-body freighter aircraft to meet customer demands. Our 747-8F and 777-200LRF freighter aircraft are primarily utilized in our ACMI business, while our 747-400s are utilized in our ACMI and Charter business. We aggressively manage our fleet to ensure that we provide our customers with the most efficient aircraft to meet their needs.
Our Dry Leasing business is primarily focused on a portfolio of six modern, efficient 777-200LRF aircraft and our growing fleet of 767-300 freighter aircraft for regional and domestic applications. We will continue to explore opportunities to invest in additional aircraft, such as the 767-300 freighter aircraft committed to Amazon.
Drive significant and ongoing productivity improvements
We continue to enhance our organization through a cost saving and productivity enhancing initiative called “Continuous Improvement.” We created a separate department to drive the process and to involve all areas of the organization in the effort to reexamine, redesign and improve the way we do business.
Selectively pursue and evaluate future acquisitions and alliances
From time to time, we explore business combinations, such as our acquisition of Southern Air, and alliances with e-commerce providers, such as our agreements with Amazon, other cargo airlines, services providers, dry leasing and other companies to enhance our competitive position, geographic reach and service portfolio.
Appropriately managing capital allocation and delivering value to shareholders
Our commitment to creating, enhancing and delivering value to our shareholders reflects a disciplined and balanced capital allocation strategy. Our focus is on maintaining a strong balance sheet, investing in modern efficient assets, and returning capital to shareholders.
Business Developments
Our ACMI results for 2017, compared with 2016, were positively impacted by increased flying reflecting the Southern Air acquisition, higher utilization and the following events:
In February 2016, we began CMI flying for DHL a 767-300 freighter aircraft, Dry Leased from Titan, in DHL’s North American network,increasing the number of 767 freighter aircraft in CMI service for DHL to 13.
In April 2016, we acquired Southern Air, which currently operates five 777-200LRF and five 737-400F aircraft under CMI agreements for DHL.
Between August 2016 and December 2017, we began CMI flying for Amazon the first 12 of 20 Boeing 767-300 freighter aircraft Dry Leased from Titan and we expect to be operating all 20 by the end of 2018.
During the first quarter of 2017, we began flying a 747-400 freighter for Asiana Cargo on transpacific routes.
During the second quarter of 2017, we began ACMI flying two 747-8F aircraft for Cathay Pacific Cargo to supplement capacity on its existing route network.
During the second quarter of 2017, we began ACMI flying a 747-400 freighter for Suparna Airlines, formerly known as Yangtze River Airlines, on transpacific routes.
During the third quarter of 2017, we entered into an ACMI agreement with Hong Kong Air Cargo to operate up to three 747-400 freighter aircraft. We began flying an aircraft in September 2017 on transpacific routes.
In September 2017, we began ACMI flying a 747-400 freighter for DHL Global Forwarding on routes between the United States, Europe, and Asia.
During 2017, both ACMI and Charter results were negatively impacted by Hurricanes Irma and Harvey and work slowdowns and service interruptions for which the Company was granted a preliminary injunction in November 2017 (See Note 14 to our Financial Statements).
Charter results for 2017 also reflected higher Yields and increased demand for commercial cargo and increased cargo and passenger demand from the AMC, partially offset by lower rates from the AMC.
During 2017, we entered into six operating leases for 747-400 freighter aircraft to meet increased customer demand in our ACMI and Charter businesses. Two aircraft entered service in 2017 and the other four will enter service throughout 2018.
In February 2016, we began Dry Leasing one 767-300 converted freighter aircraft to DHL on a long-term basis. As described above, between August 2016 and December 2017, we began Dry Leasing 12 767-300 converted freighter aircraft to Amazon on a long-term basis.
The following discussion should be read in conjunction with our Financial Statements and other financial information appearing and referred to elsewhere in this report.
Years Ended December 31, 2017 and 2016
Operating Statistics
The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated:been omitted.
Segment Operating Fleet |
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
| |||
ACMI* |
|
|
|
|
|
|
|
|
|
|
|
|
747-8F Cargo |
|
| 8.2 |
|
|
| 8.1 |
|
|
| 0.1 |
|
747-400 Cargo |
|
| 14.8 |
|
|
| 13.1 |
|
|
| 1.7 |
|
747-400 Dreamlifter |
|
| 3.0 |
|
|
| 2.8 |
|
|
| 0.2 |
|
777-200 Cargo |
|
| 5.0 |
|
|
| 3.7 |
|
|
| 1.3 |
|
767-300 Cargo |
|
| 10.4 |
|
|
| 4.3 |
|
|
| 6.1 |
|
767-200 Cargo |
|
| 9.0 |
|
|
| 9.0 |
|
|
| - |
|
737-400 Cargo |
|
| 5.0 |
|
|
| 3.7 |
|
|
| 1.3 |
|
747-400 Passenger |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
767-200 Passenger |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
Total |
|
| 57.4 |
|
|
| 46.7 |
|
|
| 10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter |
|
|
|
|
|
|
|
|
|
|
|
|
747-8F Cargo |
|
| 1.8 |
|
|
| 1.9 |
|
|
| (0.1 | ) |
747-400 Cargo |
|
| 9.7 |
|
|
| 9.6 |
|
|
| 0.1 |
|
747-400 Passenger |
|
| 2.0 |
|
|
| 2.0 |
|
|
| - |
|
767-300 Passenger |
|
| 4.7 |
|
|
| 3.6 |
|
|
| 1.1 |
|
Total |
|
| 18.2 |
|
|
| 17.1 |
|
|
| 1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dry Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
777-200 Cargo |
|
| 6.0 |
|
|
| 6.0 |
|
|
| - |
|
767-300 Cargo |
|
| 7.5 |
|
|
| 2.3 |
|
|
| 5.2 |
|
757-200 Cargo |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
737-300 Cargo |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
737-800 Passenger |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
Total |
|
| 16.5 |
|
|
| 11.3 |
|
|
| 5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Aircraft Dry Leased to CMI customers |
|
| (7.5 | ) |
|
| (2.3 | ) |
|
| (5.2 | ) |
Total Operating Average Aircraft Equivalents |
|
| 84.6 |
|
|
| 72.8 |
|
|
| 11.8 |
|
|
|
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors
Our Board currently consists of ten Directors. Each Director is elected annually to a one-year term that expires at the next annual meeting. Our By-laws provide for no fewer than one nor more than eleven Directors, with the exact number to be fixed by our Board of Directors. All of the Directors currently on our Board were elected by the shareholders at the 2019 Annual Meeting, except for Mr. Dietrich who joined the Board in January 2020.
The biography for each Director sets forth his or her name, age, principal occupation and directorships and the year in which the Director first became a member of the Board and includes specific experience, qualifications, attributes and skills that lead the Board to conclude that the Director should serve on the Board. The Board believes that each of the nominees for election to the Board brings strong skills, background, experience, and industry expertise to the boardroom, giving the Board as a group the appropriate balance of skills needed to exercise its oversight responsibilities and composition that aligns with our long-term strategy.
The Board further believes that diversity with respect to gender, ethnicity, background, professional experiences and perspectives are important elements in the Board selection process. To underscore its commitment to Board diversity, the Nominating and Governance Committee charter provides that such diversity (including gender and ethnicity) should be a factor in assessing the Board’s core competencies as a whole. Both the Nominating and Governance Committee and the full Board will therefore consider attributes such as race, gender, cultural background and professional experience when reviewing candidates for the Board and in assessing the Board’s overall composition.
Director Skills and Experience
Our Board selected Director Nominees based on their diverse skills, qualifications, backgrounds and expertise, which the Board believes will contribute to the effective oversight of the Company. The chart below depicts the current skills, qualifications, and expertise represented on our Board.
| Bernlohr | Bolden | Dietrich | Flynn | Griffin | Hallett | Lute | McNabb | Stamps | Wulff | |
| Capital Structure | ✓ | ✓ | ✓ | ✓ | ✓ | |||||
| Civil & Governmental Aviation | ✓ | ✓ | ✓ | ✓ | ✓ | |||||
| Corporate Governance | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |
| Current / Previous Senior Executive Experience | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||
| Cybersecurity & Information Technology | ✓ | ✓ | ✓ | ✓ | ||||||
| Finance, Accounting & Risk Management | ✓ | ✓ | ✓ | ✓ | ||||||
| Global Operations | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |
| International Trade | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Legal, Regulatory & Government Affairs | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||
| Mergers & Acquisitions | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Military Affairs | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Public-Company Board Experience | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |
| Sales & Marketing | ✓ | ✓ | ✓ | |||||||
| Strategic Planning | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |
| Supply Chain & Procurement | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Transportation & Security | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| 3 |
We view each of the skillsets discussed in the above chart to be essential to the effective oversight of the Company, as discussed further below.
Block Hours |
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Total Block Hours** |
|
| 252,802 |
|
|
| 210,444 |
|
|
| 42,358 |
|
|
| 20.1 | % |
|
|
The following table compares our Operating Revenue (in thousands):
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Operating Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 988,741 |
|
| $ | 834,997 |
|
| $ | 153,744 |
|
|
| 18.4 | % |
Charter |
|
| 1,034,562 |
|
|
| 881,991 |
|
|
| 152,571 |
|
|
| 17.3 | % |
Dry Leasing |
|
| 119,820 |
|
|
| 105,795 |
|
|
| 14,025 |
|
|
| 13.3 | % |
Customer incentive asset amortization |
|
| (5,261 | ) |
|
| (537 | ) |
|
| (4,724 | ) |
| NM |
| |
Other |
|
| 18,598 |
|
|
| 17,381 |
|
|
| 1,217 |
|
|
| 7.0 | % |
Total Operating Revenue |
| $ | 2,156,460 |
|
| $ | 1,839,627 |
|
| $ | 316,833 |
|
|
| 17.2 | % |
NM represents year-over-year changes that are not meaningful.
ACMI
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
ACMI Block Hours |
|
| 189,248 |
|
|
| 151,919 |
|
|
| 37,329 |
|
|
| 24.6 | % |
ACMI Revenue Per Block Hour |
| $ | 5,225 |
|
| $ | 5,496 |
|
| $ | (272 | ) |
|
| (4.9 | )% |
ACMI revenue increased $153.7 million, or 18.4%, primarily due to increased flying. The increaseCivil & Governmental Aviation: Background and experience in Block Hours reflects the impact from the Southern Air acquisition, the start-up of 767 flying for Amazon and 747 flying for several new customers, as well as higher aircraft utilization. Revenue per Block Hour decreased primarily due to the impact of 777-200 and 737-400 CMI flying from the Southern Air acquisition and increased 767 and 747-400 CMI flying.
Charter
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Charter Block Hours: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo |
|
| 42,625 |
|
|
| 40,376 |
|
|
| 2,249 |
|
|
| 5.6 | % |
Passenger |
|
| 18,912 |
|
|
| 16,403 |
|
|
| 2,509 |
|
|
| 15.3 | % |
Total |
|
| 61,537 |
|
|
| 56,779 |
|
|
| 4,758 |
|
|
| 8.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter Revenue Per Block Hour: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo |
| $ | 17,015 |
|
| $ | 14,861 |
|
| $ | 2,155 |
|
|
| 14.5 | % |
Passenger |
| $ | 16,354 |
|
| $ | 17,191 |
|
| $ | (837 | ) |
|
| (4.9 | )% |
Charter |
| $ | 16,812 |
|
| $ | 15,534 |
|
| $ | 1,278 |
|
|
| 8.2 | % |
Charter revenue increased $152.6 million, or 17.3%, primarily due to higher Revenue per Block Hour and increased flying. Revenue per Block Hour increased primarily due to higher Yields for commercial cargo, higher fuel pricesaviation and the impact of Charter capacity purchased from our ACMI customers that had no associated Charter Block Hours, partially offset by lower rates fromgovernmental regulation on the AMC. The increaseindustry to help the Board deepen its understanding of the markets in Charter Block Hours was primarily driven by increased commercial cargo demand and increased cargo and passenger demand from the AMC.
Dry Leasing
Dry Leasing revenue increased $14.0 million, or 13.3%, primarily due to the placement of 767-300 converted freighter aircraft, partially offset by lower maintenance payments received related to the scheduled return of an aircraft during 2016. There were no aircraft returned during 2017.
The following table compares our Operating Expenses (in thousands):
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
| $ | 456,075 |
|
| $ | 424,332 |
|
| $ | 31,743 |
|
|
| 7.5 | % |
Aircraft fuel |
|
| 333,046 |
|
|
| 275,113 |
|
|
| 57,933 |
|
|
| 21.1 | % |
Maintenance, materials and repairs |
|
| 273,676 |
|
|
| 206,106 |
|
|
| 67,570 |
|
|
| 32.8 | % |
Depreciation and amortization |
|
| 166,713 |
|
|
| 148,876 |
|
|
| 17,837 |
|
|
| 12.0 | % |
Travel |
|
| 144,699 |
|
|
| 127,748 |
|
|
| 16,951 |
|
|
| 13.3 | % |
Aircraft rent |
|
| 142,945 |
|
|
| 146,110 |
|
|
| (3,165 | ) |
|
| (2.2 | )% |
Navigation fees, landing fees and other rent |
|
| 116,318 |
|
|
| 78,441 |
|
|
| 37,877 |
|
|
| 48.3 | % |
Passenger and ground handling services |
|
| 107,787 |
|
|
| 89,657 |
|
|
| 18,130 |
|
|
| 20.2 | % |
Loss (gain) on disposal of aircraft |
|
| (31 | ) |
|
| (11 | ) |
|
| 20 |
|
| NM |
| |
Special charge |
|
| 106 |
|
|
| 10,140 |
|
|
| (10,034 | ) |
| NM |
| |
Transaction-related expenses |
|
| 4,509 |
|
|
| 22,071 |
|
|
| (17,562 | ) |
| NM |
| |
Other |
|
| 168,643 |
|
|
| 142,733 |
|
|
| 25,910 |
|
|
| 18.2 | % |
Total Operating Expenses |
| $ | 1,914,486 |
|
| $ | 1,671,316 |
|
|
|
|
|
|
|
|
|
Salaries, wages
Aircraft fuel increased $57.9 million, or 21.1%, primarily due to higher fuel consumption reflecting the increase in Charter Block Hours operated and a higher 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 2017 and 2016 were:
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Average fuel cost per gallon |
| $ | 1.89 |
|
| $ | 1.68 |
|
| $ | 0.21 |
|
|
| 12.5 | % |
Fuel gallons consumed (000s) |
|
| 176,093 |
|
|
| 163,862 |
|
|
| 12,231 |
|
|
| 7.5 | % |
| • | Military Affairs: Experience in military matters to help the Board understand and oversee the development of our business and relationship with the AMC, USTRANSCOM and other government related operations |
Maintenance, materials and repairs increased by $67.6 million, or 32.8%, primarily reflecting $41.9 million of higher Line Maintenance expense due to increased flying and additional repairs performed, the Southern Air acquisition, and $25.1 million of higher Heavy Maintenance expense. The higher Line Maintenance primarily reflected increases of $16.7 million for 767 aircraft, $14.7 million for 747-400 aircraft, $7.0 million for 747-8F aircraft and $2.9 million for 777 aircraft. Heavy Maintenance expense on 747-400 aircraft increased $22.4 million primarily due to an increase in the number of D Checks, engine overhauls and additional repairs performed. Heavy Maintenance expense on 767 aircraft increased $4.5 million primarily due to an increase in the number of C Checks. Heavy Maintenance expense on 747-8F aircraft decreased $3.0 million primarily due to a decrease in unscheduled engine repairs, partially offset by an increase in the number of C Checks. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2017 and 2016 were:
| 4 |
Heavy Maintenance Events |
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
| |||
747-8F C Checks |
|
| 6 |
|
|
| 4 |
|
|
| 2 |
|
747-400 C Checks |
|
| 9 |
|
|
| 9 |
|
|
| - |
|
767 C Checks |
|
| 4 |
|
|
| 1 |
|
|
| 3 |
|
747-400 D Checks |
|
| 7 |
|
|
| 4 |
|
|
| 3 |
|
CF6-80 engine overhauls |
|
| 5 |
|
|
| 3 |
|
|
| 2 |
|
DepreciationStrategic Planning: Experience and amortization increased $17.8 million, or 12.0%, primarily duebackground in strategic planning to additional aircraft operating in 2017help the Board define and an increase in the amortization of deferred maintenance costs related to 747-8F engine overhauls (see Note 2 toprioritize our Financial Statements).
Travel increased $17.0 million, or 13.3%, primarily due to the impact of the Southern Air acquisitiondirection, communicate our message and increased flying, partially offset by lower rates for crewmember travel.
Aircraft rent decreased $3.2 million, or 2.2%, primarily due to the amendment and extension ofensure organizational alignment that reflects a lease for a 747-400 freighter aircraft to a lower monthly lease rate (see Note 9 to our Financial Statements) and a reduction in the number of spare engines leased.
Navigation fees, landing fees and other rent increased $37.9 million, or 48.3%, primarily due to an increase in purchased capacity and increased flying.
Passenger and ground handling services increased $18.1 million, or 20.2%, primarily due to increased Charter flying.
Special charge in 2016 primarily represented a $10.1 million loss on engines held for sale (see Note 5 to our Financial Statements). We may sell additional flight equipment, which could result in additional charges in future periods.
Transaction-related expenses in 2017 related to the Southern Air acquisition, which primarily included professional fees and integration costs. Transaction-related expenses in 2016 related to the Southern Air acquisition and our transaction with Amazon and primarily included: compensation costs, including employee termination benefits; professional fees; and integration costs (see Notes 4 and 7 to our Financial Statements).
Other increased $25.9 million, or 18.2%, primarily due to increased commission expense on higher revenue from the AMC, the impact of the Southern Air acquisition and other growth initiatives, and higher legal and professional fees related to our preliminary injunction to stop the aforementioned labor-related operational disruptions. Partially offsetting these items was an accrual for legal matters in 2016.
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) (in thousands):
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Non-operating Expenses (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | (6,009 | ) |
| $ | (5,532 | ) |
| $ | 477 |
|
|
| 8.6 | % |
Interest expense |
|
| 99,687 |
|
|
| 84,650 |
|
|
| 15,037 |
|
|
| 17.8 | % |
Capitalized interest |
|
| (7,389 | ) |
|
| (3,313 | ) |
|
| 4,076 |
|
|
| 123.0 | % |
Loss on early extinguishment of debt |
|
| 167 |
|
|
| 132 |
|
|
| 35 |
|
|
| 26.5 | % |
Unrealized loss on financial instruments |
|
| 12,533 |
|
|
| 2,888 |
|
|
| (9,645 | ) |
| NM |
| |
Other (income) expense |
|
| (387 | ) |
|
| 70 |
|
|
| 457 |
|
| NM |
| |
Interest expense increased $15.0 million, or 17.8%, primarily due to the issuance of the 2017 Convertible Notes and the financing of 767-300 aircraft purchases and conversions.
Capitalized interest increased $4.1 million, primarily due to an increase in the number of 767-300 aircraft undergoing passenger-to-freighter conversion.
Unrealized loss on financial instruments represents the change in fair value of the Amazon Warrant (see Note 7 to our Financial Statements) primarily due to changes in our common stock price.
Income taxes. Our effective income tax rates were a benefit of 56.5% for 2017 and an expense of 52.3% for 2016. The effective income tax rate benefit for 2017 differed from the U.S. statutory rate primarily due to the enactment on December 22, 2017 of the U.S. Tax Cuts and Jobs Act, which among other things, reduces the U.S.
federal corporate income tax rate from 35.0% to 21.0% resulting in a net income tax benefit of $130.0 million related to the revaluation of our U.S. net deferred tax liability (see Note 11 to our Financial Statements). To a lesser extent, the 2017 effective tax rate was impacted by nondeductible changes in the value of the Amazon Warrant liability (see Note 7 to our Financial Statements). The effective income tax expense rate for 2016 differed from the U.S. federal statutory rate primarily due to nondeductible expenses resulting from a change in control, as defined under certainshared vision of the Company’s benefit plans, relatedrole, values and priorities
We expect the U.S. Tax Cutsstrategy and Jobs Act to favorably impact our effective income tax rates in future periods, primarily due to the reduction in the U.S. federal corporate income tax rate from 35.0% to 21.0%.
Segments
We use an economic performance metric (“Direct Contribution”) representing 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 Contribution shows the profitability of each segment after allocation of direct operating and ownership costs. We operate our service offerings through the following reportable segments: ACMI, Charter and Dry Leasing. The following table compares the Direct Contribution for our reportable segments (see Note 13key issues most impactful to our Financial Statements for the reconciliation to Operating income) (in thousands):
|
| 2017 |
|
| 2016 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Direct Contribution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 231,271 |
|
| $ | 200,563 |
|
| $ | 30,708 |
|
|
| 15.3 | % |
Charter |
|
| 151,388 |
|
|
| 133,727 |
|
|
| 17,661 |
|
|
| 13.2 | % |
Dry Leasing |
|
| 39,939 |
|
|
| 33,114 |
|
|
| 6,825 |
|
|
| 20.6 | % |
Total Direct Contribution |
| $ | 422,598 |
|
| $ | 367,404 |
|
| $ | 55,194 |
|
|
| 15.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated income and expenses, net |
| $ | 261,942 |
|
| $ | 242,768 |
|
| $ | 19,174 |
|
|
| 7.9 | % |
ACMI Segment
ACMI Direct Contribution increased $30.7 million, or 15.3%, primarily due to increased flying, the Southern Air acquisition and lower costs related to crew training. Partially offsetting these items were higher Heavy and Line Maintenance costs and the amortization of deferred maintenance costs. In addition, ACMI Direct Contribution was negatively impacted by the aforementioned labor-related operational disruptions.
Charter Segment
Charter Direct Contribution increased $17.7 million, or 13.2%, primarily due to higher Yields and increased demand for commercial cargo and increased cargo and passenger demand from the AMC. Partially offsetting these items were higher Heavy Maintenance costs and lower rates from the AMC.
Dry Leasing Segment
Dry Leasing Direct Contribution increased $6.8 million, or 20.6%, primarily due to the placement of 767-300 converted freighter aircraft and lower interest expense due to the scheduled repayment of debt related to Dry Leased 777-200LRF aircraft. Partially offsetting these items were maintenance payments received related to the scheduled return of an aircraft during 2016. There were no aircraft returned during 2017.
Unallocated income and expenses, net
Unallocated income and expenses, net increased $19.2 million, or 7.9%, primarily due to higher costs in 2017 due to the Southern Air acquisition, unallocated interest expense, growth initiatives, amortization of the Amazon customer incentive asset, and legal and professional fees related to our preliminary injunction to stop the aforementioned labor-related operational disruptions. Partially offsetting these items were costs resulting from a 2016 change in control, as defined under certain benefit plans, related to the Amazon transaction (see Note 7 to our Financial Statements) and a 2016 accrual for legal matters.
Years Ended December 31, 2016 and 2015
Operating Statistics
The following tables compare our Segment Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated:
Segment Operating Fleet |
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
| |||
ACMI* |
|
|
|
|
|
|
|
|
|
|
|
|
747-8F Cargo |
|
| 8.1 |
|
|
| 8.9 |
|
|
| (0.8 | ) |
747-400 Cargo |
|
| 13.1 |
|
|
| 12.6 |
|
|
| 0.5 |
|
747-400 Dreamlifter |
|
| 2.8 |
|
|
| 3.0 |
|
|
| (0.2 | ) |
777-200 Cargo |
|
| 3.7 |
|
|
| - |
|
|
| 3.7 |
|
767-300 Cargo |
|
| 4.3 |
|
|
| 2.1 |
|
|
| 2.2 |
|
767-200 Cargo |
|
| 9.0 |
|
|
| 8.3 |
|
|
| 0.7 |
|
737-400 Cargo |
|
| 3.7 |
|
|
| - |
|
|
| 3.7 |
|
747-400 Passenger |
|
| 1.0 |
|
|
| 1.2 |
|
|
| (0.2 | ) |
767-200 Passenger |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
Total |
|
| 46.7 |
|
|
| 37.1 |
|
|
| 9.6 |
|
Charter |
|
|
|
|
|
|
|
|
|
|
|
|
747-8F Cargo |
|
| 1.9 |
|
|
| 0.2 |
|
|
| 1.7 |
|
747-400 Cargo |
|
| 9.6 |
|
|
| 9.4 |
|
|
| 0.2 |
|
747-400 Passenger |
|
| 2.0 |
|
|
| 1.8 |
|
|
| 0.2 |
|
767-300 Passenger |
|
| 3.6 |
|
|
| 2.9 |
|
|
| 0.7 |
|
Total |
|
| 17.1 |
|
|
| 14.3 |
|
|
| 2.8 |
|
Dry Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
777-200 Cargo |
|
| 6.0 |
|
|
| 6.0 |
|
|
| - |
|
767-300 Cargo |
|
| 2.3 |
|
|
| - |
|
|
| 2.3 |
|
757-200 Cargo |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
737-300 Cargo |
|
| 1.0 |
|
|
| 1.0 |
|
|
| - |
|
737-800 Passenger |
|
| 1.0 |
|
|
| 1.2 |
|
|
| (0.2 | ) |
Total |
|
| 11.3 |
|
|
| 9.2 |
|
|
| 2.1 |
|
Less: Aircraft Dry Leased to CMI customers |
|
| (2.3 | ) |
|
| - |
|
|
| (2.3 | ) |
Total Operating Average Aircraft Equivalents |
|
| 72.8 |
|
|
| 60.6 |
|
|
| 12.2 |
|
Out-of-service |
|
| - |
|
|
| 0.4 |
|
|
| (0.4 | ) |
|
|
Block Hours |
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Total Block Hours** |
|
| 210,444 |
|
|
| 178,060 |
|
|
| 32,384 |
|
|
| 18.2 | % |
|
|
The following table compares our Operating Revenue (in thousands):
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Operating Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 834,997 |
|
| $ | 791,442 |
|
| $ | 43,555 |
|
|
| 5.5 | % |
Charter |
|
| 881,991 |
|
|
| 908,753 |
|
|
| (26,762 | ) |
|
| (2.9 | )% |
Dry Leasing |
|
| 105,795 |
|
|
| 107,218 |
|
|
| (1,423 | ) |
|
| (1.3 | )% |
Customer incentive asset amortization |
|
| (537 | ) |
|
| - |
|
|
| (537 | ) |
| NM |
| |
Other |
|
| 17,381 |
|
|
| 15,246 |
|
|
| 2,135 |
|
|
| 14.0 | % |
Total Operating Revenue |
| $ | 1,839,627 |
|
| $ | 1,822,659 |
|
| $ | 16,968 |
|
|
| 0.9 | % |
ACMI
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
ACMI Block Hours |
|
| 151,919 |
|
|
| 126,206 |
|
|
| 25,713 |
|
|
| 20.4 | % |
ACMI Revenue Per Block Hour |
| $ | 5,496 |
|
| $ | 6,271 |
|
| $ | (775 | ) |
|
| (12.4 | )% |
ACMI revenue increased $43.6 million, or 5.5%, primarily due to increased flying, partially offset by reduced Revenue per Block Hour. The increase in Block Hours reflects the impact from the Southern Air acquisition and increased 767 CMI flying, partially offset by the temporary redeployment of 747-8F aircraft to the Charter segment. The decrease in Revenue per Block Hour primarily reflects the 777-200 and 737-400 CMI flying from the Southern Air acquisition, increased 767 CMI flying and the temporary redeployment of 747-8F aircraft to Charter in 2016.
Charter
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Charter Block Hours: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo |
|
| 40,376 |
|
|
| 35,463 |
|
|
| 4,913 |
|
|
| 13.9 | % |
Passenger |
|
| 16,403 |
|
|
| 14,776 |
|
|
| 1,627 |
|
|
| 11.0 | % |
Total |
|
| 56,779 |
|
|
| 50,239 |
|
|
| 6,540 |
|
|
| 13.0 | % |
Charter Revenue Per Block Hour: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo |
| $ | 14,861 |
|
| $ | 17,655 |
|
| $ | (2,794 | ) |
|
| (15.8 | )% |
Passenger |
| $ | 17,191 |
|
| $ | 19,130 |
|
| $ | (1,939 | ) |
|
| (10.1 | )% |
Total |
| $ | 15,534 |
|
| $ | 18,089 |
|
| $ | (2,555 | ) |
|
| (14.1 | )% |
Charter revenue decreased $26.8 million, or 2.9%, primarily due to a decrease in Revenue per Block Hour, partially offset by an increase in Block Hours. The decrease in Revenue per Block Hour was primarily driven by a reduction in fuel prices in 2016 and the impact of higher rates resulting from the U.S. West Coast port disruption in 2015, partially offset by the temporary redeployment of 747-8F aircraft from the ACMI segment. The increase in Charter Block Hours was primarily driven by an increase in cargo and passenger demand from the AMC.
Dry Leasing
Dry Leasing revenue decreased $1.4 million, or 1.3%, primarily due to lower revenue from maintenance payments received in 2016 related to the scheduled return of aircraft. Revenue from maintenance payments is based on the maintenance condition of the aircraft at the end of the lease. Partially offsetting this decrease was revenue from the placement of two 767-300 converted freighter aircraft with DHL in December 2015 and February 2016, and one 767-300 converted freighter aircraft with Amazon in August 2016.
The following table compares our Operating Expenses (in thousands):
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
| $ | 424,332 |
|
| $ | 351,372 |
|
| $ | 72,960 |
|
|
| 20.8 | % |
Aircraft fuel |
|
| 275,113 |
|
|
| 333,390 |
|
|
| (58,277 | ) |
|
| (17.5 | )% |
Maintenance, materials and repairs |
|
| 206,106 |
|
|
| 202,337 |
|
|
| 3,769 |
|
|
| 1.9 | % |
Depreciation and amortization |
|
| 148,876 |
|
|
| 128,740 |
|
|
| 20,136 |
|
|
| 15.6 | % |
Aircraft rent |
|
| 146,110 |
|
|
| 145,031 |
|
|
| 1,079 |
|
|
| 0.7 | % |
Travel |
|
| 127,748 |
|
|
| 102,755 |
|
|
| 24,993 |
|
|
| 24.3 | % |
Passenger and ground handling services |
|
| 89,657 |
|
|
| 83,185 |
|
|
| 6,472 |
|
|
| 7.8 | % |
Navigation fees, landing fees and other rent |
|
| 78,441 |
|
|
| 99,345 |
|
|
| (20,904 | ) |
|
| (21.0 | )% |
Loss (gain) on disposal of aircraft |
|
| (11 | ) |
|
| 1,538 |
|
|
| (1,549 | ) |
| NM |
| |
Special charge |
|
| 10,140 |
|
|
| 17,388 |
|
|
| (7,248 | ) |
|
| (41.7 | )% |
Transaction-related expenses |
|
| 22,071 |
|
|
| - |
|
|
| 22,071 |
|
| NM |
| |
Other |
|
| 142,733 |
|
|
| 234,073 |
|
|
| (91,340 | ) |
|
| (39.0 | )% |
Total Operating Expenses |
| $ | 1,671,316 |
|
| $ | 1,699,154 |
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits increased $73.0 million, or 20.8%, primarily driven by $23.5 million of expense for a change in control, as defined under certain benefit plans, related to the Amazon transaction (see Note 7 to our Financial Statements), the impact of the Southern Air acquisition, increased flying and increased crewmember costs related to Amazon and other fleet growth initiatives.
Aircraft fuel decreased $58.3 million, or 17.5%, primarily due to fuel price decreases, partially offset by increased fuel consumption. Fuel consumption increased primarily reflecting the increase in Charter Block Hours operated. We do not incur fuel expense in our ACMI or Dry Leasing businesses as the cost of fuel is borne by the customer. Average fuel cost per gallon and fuel consumption for 2016 and 2015 were:
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Average fuel cost per gallon |
| $ | 1.68 |
|
| $ | 2.27 |
|
| $ | (0.59 | ) |
|
| (26.0 | )% |
Fuel gallons consumed (000s) |
|
| 163,862 |
|
|
| 147,081 |
|
|
| 16,781 |
|
|
| 11.4 | % |
Maintenance, materials and repairs increased by $3.8 million, or 1.9%, primarily reflecting increases of $7.1 million for 777-200 aircraft, $5.1 million for 767 aircraft and $2.3 million for 747-8F aircraft, partially offset by a decrease of $12.6 million for 747-400 aircraft. Heavy Maintenance expense on 747-400 aircraft decreased $10.2 million primarily due to a decrease in the number of engine overhauls, partially offset by an increase in the number of C Checks. Heavy Maintenance expense on 747-8F aircraft decreased $5.9 million primarily due to a decrease in unscheduled engine repairs. Line Maintenance increased by $7.7 million on 747-8F aircraft, $5.0 million on 767 aircraft and $4.1 million on 747-400 aircraft due to increased flying and additional repairs performed. Line maintenance also increased $4.6 million on 777-200 aircraft related to the Southern Air acquisition. Non-heavy Maintenance on 747-400 aircraft decreased $6.4 million as a result of fewer events. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2016 and 2015 were:
Heavy Maintenance Events |
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
| |||
747-8F C Checks |
|
| 4 |
|
|
| 4 |
|
|
| - |
|
747-400 C Checks |
|
| 9 |
|
|
| 5 |
|
|
| 4 |
|
747-400 D Checks |
|
| 4 |
|
|
| 4 |
|
|
| - |
|
767 C Checks |
|
| 1 |
|
|
| 1 |
|
|
| - |
|
CF6-80 engine overhauls |
|
| 3 |
|
|
| 10 |
|
|
| (7 | ) |
Depreciation and amortization increased $20.1 million, or 15.6%, primarily due to additional aircraft operating in 2016.
Travel increased $25.0 million, or 24.3%, primarily due to the impact of the Southern Air acquisition, increased flying and higher rates related to crewmember travel.
Passenger and ground handling services increased $6.5 million, or 7.8%, primarily due to increased flying.
Navigation fees, landing fees and other rent decreased $20.9 million, or 21.0%, primarily due to a reduction in purchased capacity from the subcontracting of certain Charter flights.
Special charge in 2016 represents a $10.1 million impairment loss on engines held for sale (see Note 5 to our Financial Statements). We may sell additional flight equipment, which could result in additional charges in future periods. Special charge in 2015 resulted from an $8.3 million impairment loss on engines held for sale and a $7.7 million charge for the early termination of high-rate operating leases for two engines.
Transaction-related expenses in 2016 relate to the Southern Air acquisition and Amazon transaction, which primarily include: certain compensation costs, including employee termination benefits; professional fees; and integration costs (see Notes 4 and 7 to our Financial Statements).
Other decreased $91.3 million, or 39.0%, primarily due to the settlement of the U.S. class action litigation and related legal fees in 2015 (see Note 14 to our Financial Statements), partially offset by an accrual for legal matters and the Southern Air acquisition in 2016.
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) (in thousands):
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Non-operating Expenses (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | (5,532 | ) |
| $ | (12,554 | ) |
| $ | (7,022 | ) |
|
| (55.9 | )% |
Interest expense |
|
| 84,650 |
|
|
| 96,756 |
|
|
| (12,106 | ) |
|
| (12.5 | )% |
Capitalized interest |
|
| (3,313 | ) |
|
| (1,027 | ) |
|
| 2,286 |
|
| NM |
| |
Loss on early extinguishment of debt |
|
| 132 |
|
|
| 69,728 |
|
|
| (69,596 | ) |
| NM |
| |
Unrealized loss on financial instruments |
|
| 2,888 |
|
|
| - |
|
|
| (2,888 | ) |
| NM |
| |
Gain on investments |
|
| - |
|
|
| (13,439 | ) |
|
| (13,439 | ) |
| NM |
| |
Other expense |
|
| 70 |
|
|
| 1,261 |
|
|
| (1,191 | ) |
| NM |
| |
Interest income decreased $7.0 million, or 55.9%, primarily due to a decrease in PTCs.
Interest expense decreased $12.1 million, or 12.5%, primarily due to a decrease in interest rates resulting from the refinancing of higher-rate EETCs with lower-rate Convertible Notes in 2015 and a reduction in our average debt balances, reflecting payments of debt.
Loss on early extinguishment of debt was related to the refinancing of five EETCs with lower-rate Convertible Notes during the third quarter of 2015.
Unrealized loss on financial instruments represents the change in fair value of the Amazon Warrant during 2016 (see Note 7 to our Financial Statements).
Gain on investments was related to the early redemption of certain PTC investments resulting from the refinancing of five EETCs with lower-rate Convertible Notes during the third quarter of 2015.
Income taxes. Our effective income tax rates were an expense of 52.3% in 2016 and a benefit of 142.3% for 2015. The effective income tax rate for 2016 differed from the U.S. statutory rate primarily due to a nondeductible customer incentive and to nondeductible compensation expenses resulting from a change in control, as defined under certain of the Company’s benefit plans, both related to the Amazon transaction (see Note 7 to our Financial Statements). The effective income tax rate for 2015 differed from the U.S. federal statutory rate primarily due to income tax benefits related to extraterritorial income (“ETI”). The effective rates for both periods were impacted by our assertion to indefinitely reinvest the net earnings of foreign subsidiaries outside the U.S. (see Note 11 to our Financial Statements).
Segments
The following table compares the Direct Contribution for our reportable segments (see Note 13 to our Financial Statements for the reconciliation to Operating income) (in thousands):
|
| 2016 |
|
| 2015 |
|
| Inc/(Dec) |
|
| % Change |
| ||||
Direct Contribution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 200,563 |
|
| $ | 185,615 |
|
| $ | 14,948 |
|
|
| 8.1 | % |
Charter |
|
| 133,727 |
|
|
| 124,808 |
|
|
| 8,919 |
|
|
| 7.1 | % |
Dry Leasing |
|
| 33,114 |
|
|
| 42,023 |
|
|
| (8,909 | ) |
|
| (21.2 | )% |
Total Direct Contribution |
| $ | 367,404 |
|
| $ | 352,446 |
|
| $ | 14,958 |
|
|
| 4.2 | % |
Unallocated income and expenses, net |
| $ | 242,768 |
|
| $ | 294,451 |
|
| $ | (51,683 | ) |
|
| (17.6 | )% |
ACMI Segment
ACMI Direct Contribution increased $14.9 million, or 8.1%, primarily due to the Southern Air acquisition and lower Heavy Maintenance expense. Partially offsetting these items were the temporary redeployment of 747-8F aircraft to the Charter segment, increases in crewmember costs related to Amazon and other fleet growth initiatives, and higher rates related to crewmember travel.
Charter Segment
Charter Direct Contribution increased $8.9 million or 7.1%, primarily due to an increase in passenger and cargo demand from the AMC and the temporary redeployment of 747-8F aircraft from the ACMI segment. Partially offsetting these increases was the impact of the U.S. West Coast port disruption in 2015.
Dry Leasing Segment
Dry Leasing Direct Contribution decreased $8.9 million, or 21.2%, primarily due to lower revenue from maintenance payments to us in 2016 related to the scheduled return of aircraft. Partially offsetting this decrease was contribution related to the placement of two 767-300 converted freighter aircraft with DHL in December 2015 and February 2016, and one 767-300 converted freighter aircraft with Amazon in August 2016.
Unallocated income and expenses, net
Unallocated income and expenses, net decreased $51.7 million, or 17.6%, primarily due to the settlement of the U.S. class action litigation and related legal fees in 2015. Partially offsetting these items were $23.5 million of compensation expenses for a change in control, as defined under certain benefit plans, related to the Amazon transaction (see Note 7 to our Financial Statements) and the impact of the Southern Air acquisition in 2016.
Reconciliation of GAAP to non-GAAP Financial Measures
To supplement our Financial Statements presented in accordance with accounting principles generally accepted in the United States of America (“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 and Adjusted Diluted EPS from continuing operations, net of taxes, 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, 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. In addition, management’s incentive compensation is determined, in part, by using Adjusted Income from continuing operations, net of taxes. 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.
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):
|
|
| 2017 |
|
|
| 2016 |
|
| Percent Change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of taxes |
|
| $ | 224,338 |
|
|
| $ | 42,625 |
|
|
| 426.3 | % |
Impact from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Tax Cuts and Jobs Act bonus (a) |
|
|
| 3,684 |
|
|
|
| - |
|
|
|
|
|
Loss (gain) on disposal of aircraft |
|
|
| (31 | ) |
|
|
| (11 | ) |
|
|
|
|
Special charge |
|
|
| 106 |
|
|
|
| 10,140 |
|
|
|
|
|
Costs associated with transactions (b) |
|
|
| 4,772 |
|
|
|
| 45,598 |
|
|
|
|
|
Accrual for legal matters and professional fees |
|
|
| 4,129 |
|
|
|
| 6,465 |
|
|
|
|
|
Noncash expenses and income, net (c) |
|
|
| 17,934 |
|
|
|
| 8,111 |
|
|
|
|
|
Charges associated with refinancing debt |
|
|
| 167 |
|
|
|
| 132 |
|
|
|
|
|
Unrealized loss on financial instruments |
|
|
| 12,533 |
|
|
|
| 2,888 |
|
|
|
|
|
Income tax effect of reconciling items (d) |
|
|
| (3,962 | ) |
|
|
| (1,651 | ) |
|
|
|
|
Income tax effect of U.S. Tax Cuts and Jobs Act (e) |
|
|
| (129,977 | ) |
|
|
| - |
|
|
|
|
|
Adjusted income from continuing operations, net of taxes |
|
| $ | 133,693 |
|
|
| $ | 114,297 |
|
|
| 17.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
| 25,854 |
|
|
|
| 25,120 |
|
|
|
|
|
Add: dilutive warrant |
|
|
| 1,293 |
|
|
|
| 299 |
|
|
|
|
|
effect of convertible notes hedges (f) |
|
|
| (27 | ) |
|
|
| - |
|
|
|
|
|
Adjusted weighted average diluted shares outstanding |
|
|
| 27,120 |
|
|
|
| 25,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted EPS from continuing operations, net of taxes |
|
| $ | 4.93 |
|
|
| $ | 4.50 |
|
|
| 9.6 | % |
|
|
| 2016 |
|
|
| 2015 |
|
| Percent Change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of taxes |
|
| $ | 42,625 |
|
|
| $ | 7,286 |
|
|
| 485.0 | % |
Impact from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of aircraft |
|
|
| (11 | ) |
|
|
| 1,538 |
|
|
|
|
|
Special charge |
|
|
| 10,140 |
|
|
|
| 17,958 |
|
|
|
|
|
Costs associated with transactions (b) |
|
|
| 45,598 |
|
|
|
| - |
|
|
|
|
|
Accrual for legal matters and professional fees |
|
|
| 6,465 |
|
|
|
| 104,380 |
|
|
|
|
|
Noncash expenses and income, net (c) |
|
|
| 8,111 |
|
|
|
| 4,480 |
|
|
|
|
|
Charges associated with refinancing debt |
|
|
| 132 |
|
|
|
| 73,411 |
|
|
|
|
|
Gain on investment |
|
|
| - |
|
|
|
| (13,439 | ) |
|
|
|
|
Unrealized loss on financial instruments |
|
|
| 2,888 |
|
|
|
| - |
|
|
|
|
|
Income tax effect of reconciling items (d) |
|
|
| (1,651 | ) |
|
|
| (66,300 | ) |
|
|
|
|
ETI tax benefit |
|
|
| - |
|
|
|
| (4,008 | ) |
|
|
|
|
Adjusted income from continuing operations, net of taxes |
|
| $ | 114,297 |
|
|
| $ | 125,306 |
|
|
| (8.8 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
| 25,120 |
|
|
|
| 25,018 |
|
|
|
|
|
Add: dilutive warrant |
|
|
| 299 |
|
|
|
| - |
|
|
|
|
|
Adjusted weighted average diluted shares outstanding |
|
|
| 25,419 |
|
|
|
| 25,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted EPS from continuing operations, net of taxes |
|
| $ | 4.50 |
|
|
| $ | 5.01 |
|
|
| (10.2 | )% |
|
|
|
|
|
Other Public Company Directorships: Previous Public Company Directorships (last 5 years): Republic Services, Inc. Other Activities: President and CEO of AMTRAK (the National Railroad Passenger Corporation) | Background: Mr. Flynn has been the Chairman of our Board of Directors since August 2019. He served as our Chief Executive Officer from June 2006 to Prior to |
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|
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|
Liquidity and Capital Resources
The most significant liquidity events during 2017 were as follows:
Debt Transactions
In May 2017, we issued $289.0 million of 2017 Convertible Notes with a cash coupon of 1.875%. In May 2017, we used the majority of the proceeds to repay $150.0 million then outstanding under a $150.0 million secured revolving credit facility.
In June 2017, we borrowed $18.7 million related to GEnx engine performance upgrade kits and overhauls under an unsecured term loan at a fixed interest rate of 2.17%.
During the second and third quarter of 2017, we borrowed an aggregate of $140.1 million through seven separate term loans related to the purchase and passenger-to-freighter conversion of 767-300 aircraft at fixed rates ranging from 3.02% to 3.62%.
In September 2017, we entered into a private placement debt facility for a total of $145.8 million for the purchase and passenger-to-freighter conversion of six 767-300 aircraft dry leased to Amazon. In October 2017, we borrowed $72.6 million for the first three aircraft under the facility. In December 2017, we borrowed $73.2 million for the remaining three aircraft under the facility. The weighted average fixed interest rate for the debt facility was 3.16%.
In November 2017, we borrowed $26.9 million related to GEnx engine performance upgrade kits and overhauls under an unsecured term loan at a fixed interest rate of 2.38%.
Operating Activities. For 2017, Net cash provided by operating activities was $331.7 million, which primarily reflected $223.5 million of Net Income, noncash adjustments of $197.5 million for Depreciation and amortization, $22.3 million for Stock-based compensation and $12.5 million for Unrealized loss on financial instruments, and a $58.5 million increase in Accounts payable and accrued liabilities. Partially offsetting these items was a noncash adjustment of $81.3 million for deferred taxes, a $67.3 million increase in Prepaid expenses, current assets, and other assets, and a $33.2 million increase in Accounts receivable. For 2016, Net cash provided by operating activities was $232.2 million, which primarily reflected $41.5 million of Net Income, noncash adjustments of $168.7 million for Depreciation and amortization, $47.4 million for deferred taxes and $32.7 million for Stock-based compensation, and a $23.0 million decrease in Accounts receivable. Partially offsetting these items were a $64.1 million decrease in Accounts payable and accrued liabilities and a $29.5 million increase in Prepaid expenses, current assets and other assets.
Investing Activities. For 2017, Net cash used for investing activities was $541.6 million, consisting primarily of $458.5 million of payments for flight equipment and modifications, and $87.6 million of core capital expenditures, excluding flight equipment. Payments for flight equipment and modifications during 2017 were primarily related to the purchase of 767-300 passenger aircraft and related freighter conversion costs, spare engines and GEnx engine performance upgrade kits. All capital expenditures for 2017 were funded through working capital and the financings discussed above. For 2016, Net cash used for investing activities was $457.4 million, consisting primarily of $317.0 million of purchase deposits and payments for flight equipment, $105.4 million related to the Southern Air acquisition, and $46.7 million of core capital expenditures, excluding flight equipment. Partially offsetting these investing activities were $11.7 million of proceeds from investments.
Financing Activities. For 2017, Net cash provided by financing activities was $363.5 million, which primarily reflected proceeds from debt issuance of $620.6 million, $38.1 million from the sale of convertible note warrants and $25.8 million of customer maintenance reserves and deposits received, partially offset by $207.1 million of payments on debt obligations, $70.1 million for the purchase of convertible note hedges and $18.5 million ofcustomer maintenance reserves paid. For 2016, Net cash used for financing activities was $75.5 million, which primarily reflected $179.2 million of payments on debtobligations, partially offset by $103.5 million of proceeds from debt issuance and $15.1 million of customer maintenance reserves and deposits received.
We consider Cash and cash equivalents, Short-term investments, Restricted cash and Net cash provided by operating activities to be sufficient to meet our debt and lease obligations, to fund core capital expenditures for 2018, and to pay amounts due related to the settlement of the U.S. class action litigation. Core capital expenditures for 2018 are expected to range between $100.0 to $110.0 million, which excludes flight equipment and capitalized interest. Our payments remaining for flight equipment purchase and passenger-to-freighter conversion commitments to be made during 2018 are expected to be approximately $86.3 million. We expect to finance the acquisition and conversion of this flight equipment with working capital prior to obtaining permanent financing for the converted aircraft.
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 a yet to be determined amount of debt and/or equity securities over the subsequent three years, depending on market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets.
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. Due to the U.S. Tax Cuts and Jobs Act, we may repatriate the unremitted earnings of our foreign subsidiaries to the extent taxes are insignificant.
Contractual Obligations
The table below provides details of our balances outstanding under credit agreements and future cash contractual obligations as of December 31, 2017 (in millions):
|
| Total |
|
| Payments Due by Period |
| ||||||||||||||||||||||
|
| Obligations |
|
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| Thereafter |
| |||||||
Debt and capital lease (1) |
| $ | 2,378.8 |
|
| $ | 230.5 |
|
| $ | 230.5 |
|
| $ | 343.6 |
|
| $ | 238.2 |
|
| $ | 426.8 |
|
| $ | 909.2 |
|
Interest on debt (2) |
|
| 350.5 |
|
|
| 74.8 |
|
|
| 67.1 |
|
|
| 59.2 |
|
|
| 47.2 |
|
|
| 37.4 |
|
|
| 64.8 |
|
Aircraft and engine operating leases |
|
| 821.0 |
|
|
| 138.2 |
|
|
| 154.5 |
|
|
| 149.2 |
|
|
| 158.0 |
|
|
| 111.1 |
|
|
| 110.0 |
|
Other operating leases |
|
| 25.9 |
|
|
| 7.0 |
|
|
| 6.5 |
|
|
| 5.9 |
|
|
| 4.7 |
|
|
| 1.8 |
|
|
| - |
|
Flight equipment purchase and conversion commitments (3) |
|
| 86.2 |
|
|
| 86.2 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Legal settlement obligation |
|
| 30.0 |
|
|
| 30.0 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total Contractual Obligations |
| $ | 3,692.4 |
|
| $ | 566.7 |
|
| $ | 458.6 |
|
| $ | 557.9 |
|
| $ | 448.1 |
|
| $ | 577.1 |
|
| $ | 1,084.0 |
|
|
|
|
|
|
|
We maintain a noncurrent liability for unrecognized income tax benefits. To date, we have not resolved the ultimate cash settlement of this liability. As a result, we are not in a position to estimate with reasonable certainty the date upon which this liability would be payable.
Description of Our Debt Obligations
See Note 9 to our Financial Statements for a description of our debt obligations.
Off-Balance Sheet Arrangements
Sixteen of our seventy-three aircraft are leased (this excludes aircraft provided by CMI customers). One is a capital lease and five are leased through trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities. All fixed price options reflect a fair market value purchase option, and as such, we are not the primary beneficiary of the leasing entities. We are generally not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and the leases do not include a residual value guarantee, fixed-price purchase option or similar feature that would obligate us to absorb decreases in value or entitle us to participate in increases in the value of the aircraft. We have not consolidated any of the aircraft-leasing trusts because we are not the primary beneficiary. In addition, we reviewed the other ten Atlas aircraft that are under operating leases but not financed through a trust and determined that none of them would be consolidated upon the application of accounting for consolidations. Our maximum
exposure under all operating leases is the remaining lease payments, which amounts are reflected in the future lease commitments above and described in Note 10 to our Financial Statements.
In March 2017, we amended and extended an operating lease for a 747-400 freighter aircraft to June 2032 at a lower monthly lease payment. As a result of the extension, we determined that the lease qualifies as a capital lease. See Note 9 to our Financial Statements.
Critical Accounting Policies and Estimates
General Discussion of Critical Accounting Policies and Estimates
An appreciation of our critical accounting policies and estimates is important to understand our financial results. Our Financial Statements are prepared in conformity with GAAP. Our critical policies require management to make estimates and judgments that affect the amounts reported. Actual results may differ significantly from those estimates. The following is a brief description of our current critical accounting policies involving significant management judgment:
Accounting for Long-Lived Assets
We record our property and equipment at cost, and once assets are placed in service, we depreciate them on a straight-line basis over their estimated useful lives to their estimated residual values over periods not to exceed forty years for flight equipment (from date of original manufacture) and three to five years for ground equipment.
We record finite-lived intangible assets acquired at fair value and amortize them over their estimated useful lives. The estimated useful lives are based on estimates of the period during which the assets are expected to generate revenue.
We record impairment charges on long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount and the net book value of the assets exceeds their estimated fair value. In making these determinations, we use certain assumptions, including, but not limited to: (i) estimated fair value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, revenue generated, associated costs, length of service and estimated residual values. To conduct impairment testing, we group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. For flight equipment used in our ACMI and Charter segments, assets are grouped at the operating fleet level. For flight equipment used in our Dry Leasing segment, assets are grouped on an individual basis.
For assets classified as held for sale, an impairment is recognized when the fair value less the cost to sell the asset is less than its carrying amount. Fair value is primarily determined using external appraisals.
In developing these estimates for flight equipment, we use industry data for the equipment types and our anticipated utilization of the assets.
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. This method can result in expense volatility between quarterly and annual periods, depending on the number and type of heavy maintenance events performed.
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.
Deferred income taxes are recognized for the tax consequences of reporting items in our income tax returns at different times than the items are reflected in our financial statements. These temporary differences result in deferred tax assets and liabilities that are calculated by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. If necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount, if any, of the valuation allowance.
We have recorded reserves for income taxes that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, we have nevertheless established tax reserves in recognition that various taxing authorities may challenge certain of the positions taken by us, potentially resulting in additional liabilities for taxes.
In accordance with recently issued SEC guidance to address the accounting for income tax reform, and based on our interpretation of the U.S. Tax Cuts and Jobs Act, we have recorded provisional income tax benefits in connection with the remeasurement of our U.S. net deferred tax liability. We have not recorded any provisional amount in connection with the one-time deemed repatriation tax on unremitted foreign earnings (see Note 11 to our Financial Statements). The ultimate impact of the U.S. Tax Cuts and Jobs Act may differ from the provisional amounts reflected in our consolidated financial statements due to additional regulatory guidance that may be issued, changes in interpretations and assumptions, additional analysis, and actions we may take as a result. We expect to update these provisional amounts as the analysis is finalized within the one-year measurement period.
Goodwill
Goodwill represents the excess of an acquisition’s purchase price over the fair value of the identifiable net assets acquired and liabilities assumed. Goodwill is not amortized, but tested for impairment annually during the fourth quarter of each year, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. We may elect to perform a qualitative analysis on the reporting unit that has goodwill to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. Under the qualitative approach, we consider various market factors to determine whether events and circumstances have affected the fair value of the reporting unit. If we determine that it is more likely than not that the reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative analysis, we perform a quantitative analysis to determine whether any goodwill impairment exists.
Fair value is determined using a discounted cash flow analysis based on key assumptions including, but not limited to, (i) a projection of revenues, expenses and other cash flows; (ii) terminal period revenue growth and cash flows; and (iii) an assumed discount rate. If the goodwill’s carrying value exceeds its fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.
Legal and Regulatory Matters
We are party to legal and regulatory proceedings with respect to a variety of matters in multiple jurisdictions. We evaluate the likelihood of an unfavorable outcome of these proceedings each quarter. Our judgments are subjective and are based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel.
Recent Accounting Pronouncements
See Note 2 to our Financial Statements for a discussion of recent accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently do not hedge against foreign currency fluctuations or aircraft fuel. The potential loss arising from adverse changes to the price and availability of aircraft fuel and interest rates is discussed below. The
sensitivity analyses presented herein do not consider the effects that such adverse changes might have on our overall financial performance, nor do they consider additional actions we may take to mitigate our exposure to such changes.
Aircraft Fuel. Our results of operations are affected by changes in the price and availability of aircraft fuel. Our exposure to fluctuations in fuel price is limited to the commercial portion of our Charter business only, but this risk is partially mitigated by using indexed fuel price adjustments for certain commercial charter contracts. The ACMI and Dry Leasing segments have no direct fuel price exposure because the related contracts require our customers to pay for aircraft fuel. Similarly, we generally have no fuel price risk for AMC charters because the price is set under our contract with the AMC, and we receive or make payments to adjust for price increases and decreases from the contractual rate.
Variable Interest Rates. Our earnings are affected by changes in interest rates due to the impact those changes have on interest expense from variable rate debt instruments and on interest income generated from our cash and investment balances. As of December 31, 2017, approximately $83.5 million of our debt at face value had variable interest rates. If interest rates would have increased or decreased by a hypothetical 20% in the underlying rate as of December 31, 2017, our annual interest expense would have changed in 2017 by approximately $0.7 million.
Foreign Currency. We have limited exposure to market risk from changes in foreign currency exchange rates, interest rates and equity prices that could affect our results of operations and financial condition. Our largest exposure comes from the Brazilian real.
Stock Price. Our earnings are affected by changes in our common stock price due to the impact those changes have on the fair value of our liability for warrants issued to Amazon (See Note 7 to our Financial Statements for a description of the warrants). As of December 31, 2017, our warrant liability was $127.8 million. If our stock price would have increased or decreased resulting in a hypothetical 20% change in the fair value of the warrant liability as of December 31, 2017, we would have recognized an additional unrealized loss or gain of approximately $25.8 million in 2017.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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| Board Skills and Qualifications: Capital Structure; Civil and Governmental Aviation; Corporate Governance; Finance, Accounting and Risk Management; Global Operations; International Trade; Legal, Regulatory and Government Affairs; Mergers and Acquisitions; Military Affairs; Current/Previous Senior Executive Experience; Supply Chain and Procurement; Public-Company Board Experience; Sales and Marketing; Strategic Planning; Transportation and Security |
| 5 |
Duncan J. McNabb
Lead Independent Director Committees: Other Public Company Directorships: AAR Corp. Previous Public Company Directorships (last 5 years): None Other Activities: Chairman of the Airlift/Tanker Association Chairman of Government Security Committee of AT Kearney Public Sector & Defense Services Co-Founder and Managing Partner of Ares Mobility Solutions, Inc. Director of Elbit Systems of America | Background: General Duncan J. McNabb, Retired, U.S. Air Force, served as Commander of the United States Air Mobility Command from 2005 to 2007 and Commander of the United States Transportation Command (USTRANSCOM) from 2008 until his retirement from the Air Force in December 2011. USTRANSCOM is the single manager for air, land, and sea transportation for the Department of Defense (DOD). He also served as DOD’s Distribution Process Owner, overseeing DOD’s end-to-end supply chain, transportation, and distribution to our armed forces worldwide. Mr. McNabb commanded more than $56 billion in strategic transportation assets, over 150,000 service personnel and a worldwide command-and-control network. A graduate of the United States Air Force Academy and Air Force pilot, he flew more than 5,600 hours in transport and rotary aircraft, including the C-17. Mr. McNabb has held command and staff positions at squadron, group, wing, major command and DOD levels. During his over 37-year military career, Mr. McNabb also served as the Air Force Deputy Chief of Staff for Plans and Programs with responsibility for all Air Force programs and over $500 billion in funding over the Air Force’s Five-Year Defense Plan (FYDP). He later served as Director of Logistics on the Joint Staff and was responsible for operational logistics and strategic mobility support to the Chairman of the Joint Chiefs and the Secretary of Defense. Before his final command at USTRANSCOM, Mr. McNabb served as the 33rd Vice Chief of Staff of the Air Force. | |
| Board Skills and Qualifications: Civil and Governmental Aviation; Corporate Governance; Cybersecurity and Information Technology; Global Operations; International Trade; Legal, Regulatory and Government Affairs; Military Affairs; Supply Chain and Procurement; Public-Company Board Experience; Strategic Planning; Transportation and Security |
| 6 |
Timothy J. Bernlohr
Independent Director Committees: Other Public Company Directorships: International Seaways, Inc. Skyline Champion Corporation Previous Directorships (last 5 years): Chemtura Corporation The Cash Store Financial Services, Inc. Overseas Shipholding Group, Inc. Rock-Tenn Company | Background: Mr. Bernlohr is the founder and managing member of TJB Management Consulting, LLC, which specializes in providing project-specific consulting services to businesses in transformation, including restructurings, interim executive management and strategic planning services (TJB Management Consulting is a privately held business). Mr. Bernlohr founded the consultancy in 2005. Mr. Bernlohr was President and Chief Executive Officer of RBX Industries, Inc., which was a nationally recognized leader in the design, manufacture, and marketing of rubber and plastic materials to the automotive, construction, and industrial markets, until it was sold in 2005. Prior to joining RBX in 1997, Mr. Bernlohr spent 16 years in the International and Industry Products divisions of Armstrong World Industries, where he served in a variety of management positions. | |
| Board Skills and Qualifications: Capital Structure; Corporate Governance; Finance, Accounting and Risk Management; Legal, Regulatory and Government Affairs; Mergers and Acquisitions; Current/Previous Senior Executive Experience; Supply Chain and Procurement; Sales and Marketing; Strategic Planning; Transportation and Security |
| 7 |
Charles F. Bolden, Jr.
Independent Director Committees: Other Public Company Directorships: None Previous Public Company Directorships (last 5 years): None Other Activities: Director of Blue Cross/Blue Shield of South Carolina Member of the Advisory Committees of the UAE Space Agency and the Kingdom of Saudi Arabia Space Commission | Background: Major General Charles F. Bolden, Jr., Retired, U.S. Marine Corps, served as the 12th Administrator of the National Aeronautics and Space Administration (NASA) from July 2009 to January 2017. As Administrator, he led a nationwide NASA team to advance the missions and goals of the U.S. space program. General Bolden’s 34-year career with the U.S. Marine Corps also included 14 years as a member of NASA’s Astronaut Office. After joining the Office in 1980, General Bolden traveled to orbit four times aboard the space shuttle between 1986 and 1994, commanding two of the missions and piloting two others. His flights included deployment of the Hubble Space Telescope and the first joint U.S.-Russian shuttle mission, which featured a cosmonaut as a member of his crew. General Bolden left NASA in 1994 and returned to the operating forces of the Marine Corps. His final duty was as Commanding General of the 3rd Marine Aircraft Wing, Miramar, Calif. |
| |
|
| ||
| Board Skills and Qualifications: Civil and Governmental Aviation; Corporate Governance; Cybersecurity and Information Technology; Global Operations; Military Affairs; Public-Company Board Experience; Strategic Planning; Transportation and Security |
| 8 |
John W. Dietrich
President and CEO Other Public Company Directorships: None Previous Public Company Directorships (last 5 years): None Other Activities: Chairman of the National Defense Transportation Association Director of Airlines for America Director of the National Air Carrier Association | Background: Mr. Dietrich became our President and Chief Executive Officer in January 2020. He was also elected to our Board of Directors at such time. Prior to January 2020, he served as our President and Chief Operating Officer from July 2019 and our Executive Vice President and Chief Operating Officer from September 2006. During the period of March 2003 to September 2006, Mr. Dietrich held a number of senior executive positions in the Company, including Senior Vice President, General Counsel, Chief Human Resources Officer, Corporate Secretary, head of the Corporate Communications function, and President of Atlas Air, Inc. Mr. Dietrich joined Atlas in 1999 as Associate General Counsel. Prior to joining us, he was a litigation attorney at United Airlines from 1992 to 1999, where he focused on employment and commercial litigation issues. He also serves as Chairman of the National Defense Transportation Association, a director of Airlines for America, and a director of the National Air Carrier Association. Mr. Dietrich earned a Bachelor’s of Science degree from Southern Illinois University and received his Juris Doctorate, cum laude, from the University of Illinois at Chicago John Marshall Law School. He is a member of the New York, Illinois and Colorado Bars. |
| |
|
| ||
| Board Skills and Qualifications: Capital Structure; Civil and Governmental Aviation; Corporate Governance; Current/Previous Senior Executive Experience; Global Operations; International Trade; Legal Regulatory and Government Affairs; Mergers and Acquisitions; Military Affairs; Strategic Planning; Supply Chain and Procurement; Transportation and Security |
| 9 |
Bobby J. Griffin
Independent Director Committees: Other Public Company Directorships: Hanesbrands Inc. United Rentals, Inc. WESCO International, Inc. Previous Public Company Directorships (last 5 years): None | Background and Experience: Mr. Griffin served as President – International Operations for Ryder System, Inc., a global provider of transportation, logistics and supply chain management solutions from 2005 to 2007. Beginning in 1986, Mr. Griffin served in various other management positions with Ryder, including as Executive Vice President – International Operations from 2003 to 2005 and Executive Vice President – Global Supply Chain Operations from 2001 to 2003. Prior to Ryder, Mr. Griffin was an executive at ATE Management and Service Company, Inc., which was acquired by Ryder in 1986. |
| |
| Board Skills and Qualifications: Corporate Governance; Current/Previous Senior Executive Experience; Global Operations; International Trade; Mergers and Acquisitions; Public-Company Board Experience; Supply Chain and Procurement; Strategic Planning; Transportation and Security |
| 10 |
Independent Director Committees: Other Public Company Directorships: None Previous Public Company Directorships (last 5 years): None Other Activities: Of Counsel, U.S. Chamber of Current member of the Customs Oversight Advisory Committee Former director of GAS Government Solutions, Inc. Former director of Rolls Royce-North America | Background: Ms. Hallett has been of counsel at the U.S. Chamber of Commerce since 2003 and served as a member of the U.S. Chamber Foundation Board of Directors from 2003 to 2015. From 1995 to 2003, Ms. Hallett was President and Chief Executive Officer of the Air Transport Association of America (ATA), the nation’s oldest and largest airline trade association, now known as the Airlines for America (A4A). Prior to joining the ATA, Ms. Hallett served as senior government relations advisor with Collier, Shannon, Rill & Scott from 1993 to 1995. From 2003 to 2004, she was chair of Homeland Security at Carmen Group, Inc., where she helped develop the homeland security practice for the | |
| Board Skills and |
| 11 |
Jane H. Lute
Independent Director Committees: Other Public Company Directorships: Marsh & McLennan Companies, Inc. Union Pacific Corporation Previous Public Company Directorships (last 5 years): None Other Activities: Director of Atlantic Council and the Center for Internet Security |
|
|
|
|
|
|
| |
Board Skills and Qualifications: Cybersecurity and Information Technology; Corporate Governance; Global Operations; Legal, Regulatory and Government Affairs; Military Affairs; Current/Previous Senior Executive Experience; Public-Company Board Experience |
|
| 12 |
Sheila A. Stamps
Independent Director Committees: Other Public Company Directorships: CIT Group, Inc. and its wholly-owned subsidiary, CIT Bank N.A. Previous Public Company Directorships (last 5 years): None Other Activities: Director of IES Abroad Former Commissioner and Audit Committee Chair of the New York State Insurance Fund Member of the Board Advisory Services Faculty of the National Association of Corporate Directors (NACD) NACD Board Leadership Fellow | Background and Experience: Ms. Stamps, has a diversity of strategic and financial experience including governance oversight of aviation businesses. She previously served as Executive Vice President at DBI, LLC, a private mortgage investment company, from 2011 to 2012. She served from 2008 to 2011 as Director of Pension Investments and Cash Management at New York State Common Retirement Fund, and from 2004 to 2005 as a Fellow at the Weatherhead Center for International Affairs at Harvard University. Prior to this, Ms. Stamps served as a Managing Director and Head of Relationship Management, Financial Institutions at Bank of America. From 1982 to 2003, she held a number of executive positions both domestic and international with Bank One Corporation (now JPMorgan), including Managing Director and Head of European Asset-Backed Securitization and a member of the EMEA Strategic Operating Committee. Ms. Stamps holds an MBA from the University of Chicago and a CERT Certificate in Cybersecurity from Carnegie Mellon. | |
| Board Skills and Qualifications: Capital Structure; Corporate Governance; Cybersecurity and Information Technology; Finance, Accounting and Risk Management; Mergers and Acquisitions; Regulatory and Government Affairs; Sales and Marketing; Strategic Planning; Current/Previous Senior Executive Experience; Public-Company Board Experience |
| 13 |
John K. Wulff
Independent Director Committees: Other Public Company Directorships: Celanese Corporation Previous Public Company Directorships (last 5 years): Chemtura Corporation Moody’s Corporation Sunoco, Inc. Other Activities: Former Financial Accounting Standards Board member | Background and Experience: Mr. Wulff is the former Chairman of the board of directors of Hercules Incorporated, a specialty chemicals company, a position he held from July 2003 until Ashland Inc.’s acquisition of Hercules in November 2008. Mr. Wulff was previously Chief Financial Officer of Union Carbide Corporation, a chemical and polymers company, from 1996 to 2001. During his 14 years at Union Carbide, he also served as Vice President and Principal Accounting Officer from January 1989 to December 1995, and Controller from July 1987 to January 1989. Mr. Wulff was also a partner of KPMG LLP and predecessor firms from 1977 to 1987.
| |
| Board Skills and Qualifications: Finance, Accounting and Risk Management; Current/Previous Senior Executive Experience; Governmental and Regulatory; Capital Structure; Corporate Governance; Global Operations; Mergers and Acquisitions; Public- Company Board Experience; Strategic Planning |
| 14 |
60
Report of Independent Registered Public Accounting FirmExecutive Officers
To the Board of Directors and Stockholders of Atlas Air Worldwide Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Atlas Air Worldwide Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2017, including the related notes, and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”)John W. Dietrich. We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2018
We have served as the Company’s auditor since 2007.
Atlas Air Worldwide Holdings, Inc.
(in thousands, except share data)
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 280,809 |
|
| $ | 123,890 |
|
Short-term investments |
|
| 13,604 |
|
|
| 4,313 |
|
Restricted cash |
|
| 11,055 |
|
|
| 14,360 |
|
Accounts receivable, net of allowance of $1,494 and $997, respectively |
|
| 194,478 |
|
|
| 166,486 |
|
Prepaid maintenance |
|
| 13,346 |
|
|
| 4,418 |
|
Prepaid expenses and other current assets |
|
| 74,294 |
|
|
| 44,603 |
|
Total current assets |
|
| 587,586 |
|
|
| 358,070 |
|
Property and Equipment |
|
|
|
|
|
|
|
|
Flight equipment |
|
| 4,447,097 |
|
|
| 3,886,714 |
|
Ground equipment |
|
| 70,951 |
|
|
| 68,688 |
|
Less: accumulated depreciation |
|
| (701,249 | ) |
|
| (568,946 | ) |
Flight equipment modifications in progress |
|
| 186,302 |
|
|
| 154,226 |
|
Property and equipment, net |
|
| 4,003,101 |
|
|
| 3,540,682 |
|
Other Assets |
|
|
|
|
|
|
|
|
Long-term investments and accrued interest |
|
| 15,371 |
|
|
| 27,951 |
|
Deferred costs and other assets |
|
| 242,919 |
|
|
| 204,647 |
|
Intangible assets, net and goodwill |
|
| 106,485 |
|
|
| 116,029 |
|
Total Assets |
| $ | 4,955,462 |
|
| $ | 4,247,379 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 65,740 |
|
| $ | 59,543 |
|
Accrued liabilities |
|
| 454,843 |
|
|
| 320,887 |
|
Current portion of long-term debt and capital lease |
|
| 218,013 |
|
|
| 184,748 |
|
Total current liabilities |
|
| 738,596 |
|
|
| 565,178 |
|
Other Liabilities |
|
|
|
|
|
|
|
|
Long-term debt and capital lease |
|
| 2,008,986 |
|
|
| 1,666,663 |
|
Deferred taxes |
|
| 214,694 |
|
|
| 298,165 |
|
Financial instruments and other liabilities |
|
| 203,330 |
|
|
| 200,035 |
|
Total other liabilities |
|
| 2,427,010 |
|
|
| 2,164,863 |
|
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; 30,104,648 and 29,633,605 shares issued, 25,292,454 and 25,017,242 shares outstanding (net of treasury stock), as of December 31, 2017 and December 31, 2016, respectively |
|
| 301 |
|
|
| 296 |
|
Additional paid-in-capital |
|
| 715,735 |
|
|
| 657,082 |
|
Treasury stock, at cost; 4,812,194 and 4,616,363 shares, respectively |
|
| (193,732 | ) |
|
| (183,119 | ) |
Accumulated other comprehensive loss |
|
| (3,993 | ) |
|
| (4,993 | ) |
Retained earnings |
|
| 1,271,545 |
|
|
| 1,048,072 |
|
Total stockholders’ equity |
|
| 1,789,856 |
|
|
| 1,517,338 |
|
Total Liabilities and Equity |
| $ | 4,955,462 |
|
| $ | 4,247,379 |
|
See accompanying Notes to Consolidated Financial Statements
Atlas Air Worldwide Holdings, Inc.Consolidated Statements of Operations(in thousands, except per share data)
|
| For the Years Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue |
| $ | 2,156,460 |
|
| $ | 1,839,627 |
|
| $ | 1,822,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
|
| 456,075 |
|
|
| 424,332 |
|
|
| 351,372 |
|
Aircraft fuel |
|
| 333,046 |
|
|
| 275,113 |
|
|
| 333,390 |
|
Maintenance, materials and repairs |
|
| 273,676 |
|
|
| 206,106 |
|
|
| 202,337 |
|
Depreciation and amortization |
|
| 166,713 |
|
|
| 148,876 |
|
|
| 128,740 |
|
Travel |
|
| 144,699 |
|
|
| 127,748 |
|
|
| 102,755 |
|
Aircraft rent |
|
| 142,945 |
|
|
| 146,110 |
|
|
| 145,031 |
|
Navigation fees, landing fees and other rent |
|
| 116,318 |
|
|
| 78,441 |
|
|
| 99,345 |
|
Passenger and ground handling services |
|
| 107,787 |
|
|
| 89,657 |
|
|
| 83,185 |
|
Loss (gain) on disposal of aircraft |
|
| (31 | ) |
|
| (11 | ) |
|
| 1,538 |
|
Special charge |
|
| 106 |
|
|
| 10,140 |
|
|
| 17,388 |
|
Transaction-related expenses |
|
| 4,509 |
|
|
| 22,071 |
|
|
| - |
|
Other |
|
| 168,643 |
|
|
| 142,733 |
|
|
| 234,073 |
|
Total Operating Expenses |
|
| 1,914,486 |
|
|
| 1,671,316 |
|
|
| 1,699,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
| 241,974 |
|
|
| 168,311 |
|
|
| 123,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Expenses (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| (6,009 | ) |
|
| (5,532 | ) |
|
| (12,554 | ) |
Interest expense |
|
| 99,687 |
|
|
| 84,650 |
|
|
| 96,756 |
|
Capitalized interest |
|
| (7,389 | ) |
|
| (3,313 | ) |
|
| (1,027 | ) |
Loss on early extinguishment of debt |
|
| 167 |
|
|
| 132 |
|
|
| 69,728 |
|
Unrealized loss on financial instruments |
|
| 12,533 |
|
|
| 2,888 |
|
|
| - |
|
Gain on investments |
|
| - |
|
|
| - |
|
|
| (13,439 | ) |
Other (income) expense |
|
| (387 | ) |
|
| 70 |
|
|
| 1,261 |
|
Total Non-operating Expenses (Income) |
|
| 98,602 |
|
|
| 78,895 |
|
|
| 140,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
| 143,372 |
|
|
| 89,416 |
|
|
| (17,220 | ) |
Income tax (benefit) expense |
|
| (80,966 | ) |
|
| 46,791 |
|
|
| (24,506 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of taxes |
|
| 224,338 |
|
|
| 42,625 |
|
|
| 7,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
| (865 | ) |
|
| (1,109 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 223,473 |
|
| $ | 41,516 |
|
| $ | 7,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 8.89 |
|
| $ | 1.72 |
|
| $ | 0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | 8.68 |
|
| $ | 1.70 |
|
| $ | 0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.03 | ) |
| $ | (0.04 | ) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | (0.03 | ) |
| $ | (0.04 | ) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 8.85 |
|
| $ | 1.67 |
|
| $ | 0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | 8.64 |
|
| $ | 1.65 |
|
| $ | 0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 25,241 |
|
|
| 24,843 |
|
|
| 24,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
| 25,854 |
|
|
| 25,120 |
|
|
| 25,018 |
|
See accompanying Notes to Consolidated Financial Statements
Atlas Air Worldwide Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
|
| For the Years Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Net Income |
| $ | 223,473 |
|
| $ | 41,516 |
|
| $ | 7,286 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to interest expense |
|
| 1,621 |
|
|
| 1,770 |
|
|
| 6,129 |
|
Income tax expense |
|
| (621 | ) |
|
| (700 | ) |
|
| (2,277 | ) |
Foreign currency translation: |
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
| - |
|
|
| - |
|
|
| (343 | ) |
Other comprehensive income |
|
| 1,000 |
|
|
| 1,070 |
|
|
| 3,509 |
|
Comprehensive Income |
| $ | 224,473 |
|
| $ | 42,586 |
|
| $ | 10,795 |
|
See accompanying Notes to Consolidated Financial Statements
Atlas Air Worldwide Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
| For the Years Ended December 31, |
|
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of taxes |
| $ | 224,338 |
|
| $ | 42,625 |
|
| $ | 7,286 |
|
|
Less: Loss from discontinued operations, net of taxes |
|
| (865 | ) |
|
| (1,109 | ) |
|
| - |
|
|
Net Income |
|
| 223,473 |
|
|
| 41,516 |
|
|
| 7,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile Net Income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 197,463 |
|
|
| 168,721 |
|
|
| 147,604 |
|
|
Accretion of debt securities discount |
|
| (1,172 | ) |
|
| (1,277 | ) |
|
| (4,651 | ) |
|
Provision for allowance for doubtful accounts |
|
| 198 |
|
|
| 508 |
|
|
| 171 |
|
|
Special charge, net of cash payments |
|
| 106 |
|
|
| 10,140 |
|
|
| 16,351 |
|
|
Loss on early extinguishment of debt |
|
| 167 |
|
|
| 132 |
|
|
| 69,728 |
|
|
Unrealized loss on financial instruments |
|
| 12,533 |
|
|
| 2,888 |
|
|
| - |
|
|
Loss (gain) on disposal of aircraft |
|
| (31 | ) |
|
| (11 | ) |
|
| 1,538 |
|
|
Deferred taxes |
|
| (81,330 | ) |
|
| 47,381 |
|
|
| (25,898 | ) |
|
Stock-based compensation |
|
| 22,319 |
|
|
| 32,724 |
|
|
| 16,181 |
|
|
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (33,201 | ) |
|
| 22,974 |
|
|
| 2,016 |
|
|
Prepaid expenses, current assets and other assets |
|
| (67,341 | ) |
|
| (29,455 | ) |
|
| 23,171 |
|
|
Accounts payable and accrued liabilities |
|
| 58,535 |
|
|
| (64,059 | ) |
|
| 119,390 |
|
|
Net cash provided by operating activities |
|
| 331,719 |
|
|
| 232,182 |
|
|
| 372,887 |
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (87,555 | ) |
|
| (46,717 | ) |
|
| (45,040 | ) |
|
Payments for flight equipment and modifications |
|
| (458,464 | ) |
|
| (316,993 | ) |
|
| (227,048 | ) |
|
Acquisition of business, net of cash acquired |
|
| - |
|
|
| (105,392 | ) |
|
| - |
|
|
Proceeds from investments |
|
| 4,462 |
|
|
| 11,714 |
|
|
| 80,302 |
|
|
Proceeds from disposal of aircraft |
|
| - |
|
|
| - |
|
|
| 25,441 |
|
|
Net cash used for investing activities |
|
| (541,557 | ) |
|
| (457,388 | ) |
|
| (166,345 | ) |
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issuance |
|
| 620,568 |
|
|
| 103,492 |
|
|
| 568,033 |
|
|
Payment of debt issuance costs |
|
| (14,664 | ) |
|
| (4,034 | ) |
|
| (14,509 | ) |
|
Payments of debt |
|
| (207,093 | ) |
|
| (179,153 | ) |
|
| (568,923 | ) |
|
Proceeds from revolving credit facility |
|
| 150,000 |
|
|
| - |
|
|
| - |
|
|
Payment of revolving credit facility |
|
| (150,000 | ) |
|
| - |
|
|
| - |
|
|
Customer maintenance reserves and deposits received |
|
| 25,784 |
|
|
| 15,105 |
|
|
| 16,148 |
|
|
Customer maintenance reserves paid |
|
| (18,538 | ) |
|
| - |
|
|
| (3,801 | ) |
|
Proceeds from sale of convertible note warrants |
|
| 38,148 |
|
|
| - |
|
|
| 36,290 |
|
|
Payments for convertible note hedges |
|
| (70,140 | ) |
|
| - |
|
|
| (52,903 | ) |
|
Proceeds from stock option exercises |
|
| - |
|
|
| - |
|
|
| 1,193 |
|
|
Purchase of treasury stock |
|
| (10,613 | ) |
|
| (11,275 | ) |
|
| (26,522 | ) |
|
Excess tax benefit from stock-based compensation |
|
| - |
|
|
| 390 |
|
|
| 555 |
|
|
Payment of debt extinguishment costs |
|
| - |
|
|
| - |
|
|
| (36,054 | ) |
|
Net cash provided by (used for) financing activities |
|
| 363,452 |
|
|
| (75,475 | ) |
|
| (80,493 | ) |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| 153,614 |
|
|
| (300,681 | ) |
|
| 126,049 |
|
|
Cash, cash equivalents and restricted cash at the beginning of period |
|
| 138,250 |
|
|
| 438,931 |
|
|
| 312,882 |
|
|
Cash, cash equivalents and restricted cash at the end of period |
| $ | 291,864 |
|
| $ | 138,250 |
|
| $ | 438,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of flight equipment included in Accounts payable and accrued liabilities |
| $ | 68,732 |
|
| $ | 14,345 |
|
| $ | 33,294 |
|
|
Acquisition of flight equipment under capital lease |
| $ | 30,419 |
|
| $ | 10,800 |
|
| $ | - |
|
|
See accompanying Notes to Consolidated Financial Statements
Atlas Air Worldwide Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
| ||
|
| Common |
|
| Treasury |
|
| Paid-In |
|
| Comprehensive |
|
| Retained |
|
| Total |
| ||||||
|
| Stock |
|
| Stock |
|
| Capital |
|
| Loss |
|
| Earnings |
|
| Equity |
| ||||||
Balance at December 31, 2014 |
| $ | 286 |
|
| $ | (145,322 | ) |
| $ | 573,133 |
|
| $ | (9,572 | ) |
| $ | 999,270 |
|
| $ | 1,417,795 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,286 |
|
|
| 7,286 |
|
Other comprehensive income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,509 |
|
|
| - |
|
|
| 3,509 |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 16,181 |
|
|
| - |
|
|
| - |
|
|
| 16,181 |
|
Purchase of 565,352 shares of treasury stock |
|
| - |
|
|
| (26,522 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (26,522 | ) |
Exercise of 25,373 employee stock options |
|
| - |
|
|
| - |
|
|
| 1,193 |
|
|
| - |
|
|
| - |
|
|
| 1,193 |
|
Issuance of 368,912 shares of restricted stock |
|
| 4 |
|
|
| - |
|
|
| (4 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Equity component of convertible notes, net of tax |
|
| - |
|
|
| - |
|
|
| 32,234 |
|
|
| - |
|
|
| - |
|
|
| 32,234 |
|
Purchase of convertible note hedges, net of tax |
|
| - |
|
|
| - |
|
|
| (33,837 | ) |
|
| - |
|
|
| - |
|
|
| (33,837 | ) |
Issuance of warrants |
|
| - |
|
|
| - |
|
|
| 36,290 |
|
|
| - |
|
|
| - |
|
|
| 36,290 |
|
Tax benefit (expense) on restricted stock |
|
| - |
|
|
| - |
|
|
| 54 |
|
|
| - |
|
|
| - |
|
|
| 54 |
|
Balance at December 31, 2015 |
| $ | 290 |
|
| $ | (171,844 | ) |
| $ | 625,244 |
|
| $ | (6,063 | ) |
| $ | 1,006,556 |
|
| $ | 1,454,183 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 41,516 |
|
|
| 41,516 |
|
Other comprehensive income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,070 |
|
|
| - |
|
|
| 1,070 |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 32,724 |
|
|
| - |
|
|
| - |
|
|
| 32,724 |
|
Purchase of 297,569 shares of treasury stock |
|
| - |
|
|
| (11,275 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (11,275 | ) |
Issuance of 678,160 shares of restricted stock |
|
| 6 |
|
|
| - |
|
|
| (6 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Tax benefit (expense) on restricted stock |
|
| - |
|
|
| - |
|
|
| (880 | ) |
|
| - |
|
|
| - |
|
|
| (880 | ) |
Balance at December 31, 2016 |
| $ | 296 |
|
| $ | (183,119 | ) |
| $ | 657,082 |
|
| $ | (4,993 | ) |
| $ | 1,048,072 |
|
| $ | 1,517,338 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 223,473 |
|
|
| 223,473 |
|
Other comprehensive income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,000 |
|
|
| - |
|
|
| 1,000 |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 22,319 |
|
|
| - |
|
|
| - |
|
|
| 22,319 |
|
Purchase of 195,831 shares of treasury stock |
|
| - |
|
|
| (10,613 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (10,613 | ) |
Issuance of 471,043 shares of restricted stock |
|
| 5 |
|
|
| - |
|
|
| (5 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Equity component of convertible notes, net of tax |
|
| - |
|
|
| - |
|
|
| 43,256 |
|
|
| - |
|
|
| - |
|
|
| 43,256 |
|
Purchase of convertible note hedges, net of tax |
|
| - |
|
|
| - |
|
|
| (45,065 | ) |
|
| - |
|
|
| - |
|
|
| (45,065 | ) |
Issuance of warrants |
|
| - |
|
|
| - |
|
|
| 38,148 |
|
|
| - |
|
|
| - |
|
|
| 38,148 |
|
Balance at December 31, 2017 |
| $ | 301 |
|
| $ | (193,732 | ) |
| $ | 715,735 |
|
| $ | (3,993 | ) |
| $ | 1,271,545 |
|
| $ | 1,789,856 |
|
See accompanying Notes to Consolidated Financial Statements
Atlas Air Worldwide Holdings, Inc.Notes to Consolidated Financial StatementsDecember 31, 2017
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”). Southern Air was acquired on April 7, 2016 (see Note 4). 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.
Intercompany accounts and transactions have been eliminated. We account for investments in entities under the equity method of accounting when we hold between 20% and 50% ownership in the entity and exercise significant influence or when we are not the primary beneficiary of a variable interest entity. 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”).
Except for per share data, all dollar amounts are in thousands unless otherwise noted.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and judgments that affect the amounts reported in these financial statements and the related disclosures. Actual results may differ from those estimates. Estimates are used in determining, among other items, asset lives and residual values, cash flows for impairment analysis, heavy maintenance costs, income tax accounting, business combinations, intangible assets, warrants, contingent liabilities (including, but not limited to litigation accruals), valuation allowances (including, but not limited to, those related to receivables, expendable parts inventory and deferred taxes), stock-based compensation and self-insurance employee benefit accruals.
Revenue Recognition
Revenue from ACMI and CMI contracts is typically recognized as the block hours are operated on behalf of a customer during a given month, as defined contractually, based on flight departure. 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”. If a customer flies below a minimum contracted Block Hour guarantee, the contracted minimum revenue amounts are recognized as revenue. We recognize revenue for Charter upon flight departure.
We record Dry Lease rental income on a straight-line basis over the term of the operating lease. In limited cases, leases provide for additional rentals based on usage, which is recorded as revenue as it is earned under the terms of the lease. Usage is calculated based on hourly usage or number of flights operated, depending on the lease agreement, and is typically reported monthly by the lessee. 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 Leases 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 until the end of the lease, when we are able to finalize the amount, if any, to be reimbursed to the customer.
The Company recognizes revenue for management and administrative support services when the services are provided.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and other cash investments that are highly liquid in nature and have original maturities of three months or less at acquisition.
Short-term Investments
Short-term investments are primarily comprised of certificates of deposit, current portions of debt securities and money market funds.
Restricted Cash
Cash that is restricted under secured aircraft debt agreements, whereby it can only be used to make principal and interest payments on the related debt secured by those aircraft, is classified as Restricted cash.
Accounts Receivable
We perform a monthly evaluation of our accounts receivable and establish an allowance for doubtful accounts based on our best estimate of probable credit losses resulting from the inability or unwillingness of our customers to make required payments. Account balances are charged off against the allowance when we determine that the receivable will not be recovered.
Escrow Deposits and Letters of Credit
We had $5.1 million as of December 31, 2017 and $5.0 million as of December 31, 2016, for certain deposits required in the normal course of business for various items including, but not limited to, surety and customs bonds, airfield privileges, judicial deposits, insurance and cash pledged under standby letters of credit related to collateral. These amounts are included in Deferred costs and other assets.
Expendable Parts
Expendable parts, materials and supplies for flight equipment are carried at average acquisition costs and are included in Prepaid expenses and other current assets. When used in operations, they are charged to maintenance expense. Allowances for excess and obsolescence for expendable parts expected to be on hand at the date aircraft are retired from service are provided over the estimated useful lives of the related airframes and engines. These allowances are based on management estimates, which are subject to change as conditions in the business evolve. The net book value of expendable parts inventory was $34.7 million as of December 31, 2017 and $24.2 million at December 31, 2016, net of allowances for obsolescence of $27.8 million at December 31, 2017 and $22.3 million at December 31, 2016.
Property and Equipment
We record property and equipment at cost and depreciate these assets to their estimated residual values on a straight-line basis over their estimated useful lives or average remaining fleet lives. We review these assumptions at least annually and adjust depreciation on a prospective basis. Expenditures for major additions, improvements and flight equipment modifications are generally capitalized and depreciated over the shorter of the estimated life of the improvement, the modified assets’ remaining life or remaining lease term. Most of our flight equipment is specifically pledged as collateral for our indebtedness.
The estimated useful lives of our property and equipment are as follows:
| ||
|
| |
|
| |
|
|
Depreciation expense related to property and equipment was $153.1 million in 2017, $141.5 million in 2016 and $122.2 million in 2015.
The net book value of flight equipment on dry lease to customers was $1,270.7 million as of December 31, 2017 and $936.0 million as of December 31, 2016. The accumulated depreciation for flight equipment on dry lease to customers was $152.7 million as of December 31, 2017 and $99.8 million as of December 31, 2016.
Rotable parts are recorded in Property and equipment, net, and are depreciated over their average remaining fleet lives and written off when they are determined to be beyond economic repair. The net book value of rotable parts inventory was $184.8 million as of December 31, 2017 and $142.7 million as of December 31, 2016.
Capitalized Interest on Flight Equipment Modifications in Progress
Interest on funds used to finance the acquisition of flight equipment up to the date the asset is ready for its intended use is capitalized and included in the cost of the asset. Included in capitalized interest is the interest paid on the purchase deposit borrowings directly associated with the acquisition of flight equipment. The remainder of capitalized interest recorded on the acquisition of flight equipment is determined by taking the weighted average cost of funds associated with our other debt and applying it against the amounts paid as purchase deposits.
Goodwill
Goodwill represents the excess of an acquisition’s purchase price over the fair value of the identifiable net assets acquired and liabilities assumed. Goodwill is not amortized, but tested for impairment annually during the fourth quarter of each year, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. Goodwill is not deductible for tax purposes.
We may elect to perform a qualitative analysis on the reporting unit that has goodwill to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. If the qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative analysis, we perform a quantitative analysis to determine whether a goodwill impairment exists. If the goodwill’s carrying value exceeds its implied fair value calculated using the quantitative approach, an impairment charge is recorded for the difference.
Fair value is determined using a discounted cash flow analysis based on key assumptions including, but not limited to, (i) a projection of revenues, expenses and other cash flows; (ii) terminal period revenue growth and cash flows; and (iii) an assumed discount rate.
The total amount of goodwill was $40.4 million, which is included in Intangible assets, net and goodwill in the consolidated balance sheets as of December 31, 2017 and 2016 (see Notes 4 and 6). During the fourth quarter of 2017, we performed a qualitative analysis and determined that goodwill was not impaired.
Impairment of Long-Lived Assets
We record impairment charges on long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the associated carrying amount and the net book value of the assets exceeds the associated estimated fair value.
For flight equipment and finite-lived intangibles used in our ACMI and Charter segments, assets are grouped at the operating fleet level for impairment testing. For flight equipment and finite-lived intangibles used in our Dry Leasing segment, assets are tested on an individual basis for impairment.
For assets classified as held for sale, an impairment is recognized when the fair value less the cost to sell the asset is less than its carrying amount.
In developing estimates for flight equipment and cash flows, we use external appraisals and other industry data for the various equipment types, anticipated utilization of the assets, revenue generated, associated costs and length of service.
Long-term Investments
Long-term investments consist of debt securities, including accrued interest, for which management has the intent and ability to hold to maturity. These investments are classified as held-to-maturity and are reported at amortized cost. Interest on debt securities and accretion of discounts using the effective interest method are included in Interest income.
Variable Interest Entities and Off-Balance Sheet Arrangements
We hold a 50% interest in GATS GP (BVI) Ltd. (“GATS”), a joint venture with an unrelated third party. The purpose of the joint venture is to purchase rotable parts and provide repair services for those parts, primarily for our 747-8F aircraft. The joint venture is a variable interest entity and we have not consolidated GATS because we are not the primary beneficiary as we do not exercise financial control. Our investment in GATS was $22.1 million as of December 31, 2017 and $22.2 million as of December 31, 2016 and our maximum exposure to losses from the entity is limited to our investment, which is composed primarily of rotable inventory parts. GATS does not have any third-party debt obligations. We had Accounts payable to GATS of $0.4 million as of December 31, 2017 and $2.4 million as of December 31, 2016.
A portion of our operating aircraft are owned or effectively owned and leased through trusts established specifically to purchase, finance and lease aircraft to us. We have not consolidated any aircraft in the related trusts because we are not the primary beneficiary. Our maximum exposure under these operating leases is the remaining lease payments, which amounts are reflected in the future lease commitments more fully described in Note 10.
Income Taxes
Deferred income taxes are recognized for the tax consequences of reporting items in our income tax returns at different times than the items are reflected in our financial statements. These temporary differences result in deferred tax assets and liabilities that are calculated by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. If necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount, if any, of the valuation allowance.
We have recorded reserves for income taxes that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, we have nevertheless established tax reserves in recognition that various taxing authorities may challenge certain of the positions taken by us, potentially resulting in additional liabilities for taxes.
In accordance with recently issued SEC guidance to address the accounting for income tax reform, and based on our interpretation of the U.S. Tax Cuts and Jobs Act, we have recorded provisional income tax benefits in connection with the remeasurement of our U.S. net deferred tax liability. We have not recorded any provisional amount in connection with the one-time deemed repatriation tax on unremitted foreign earnings (see Note 11). The ultimate impact of the U.S. Tax Cuts and Jobs Act may differ from the provisional amounts reflected in our consolidated financial statements due to additional regulatory guidance that may be issued, changes in interpretations and assumptions, additional analysis, and actions we may take as a result. We expect to update these provisional amounts as the analysis is finalized within the one-year measurement period.
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 is included in Depreciation and amortization. The following table provides a summary of Deferred maintenance included within Deferred costs and other assets as of December 31:
|
| 2017 |
| 2016 |
| ||
Beginning balance, net |
| $ | 19,100 |
| $ | - |
|
Deferred maintenance costs |
|
| 50,675 |
|
| 19,644 |
|
Amortization of deferred maintenance |
|
| (5,907 | ) |
| (544 | ) |
Ending balance, net |
| $ | 63,868 |
| $ | 19,100 |
|
Prepaid Maintenance Deposits
Certain of our aircraft financing agreements require security deposits to our finance providers to ensure that we perform major maintenance as required. These are substantially refundable to us and are, therefore, accounted for as deposits and included in Prepaid maintenance and in Deferred costs and other assets. Such amounts were $37.3 million as of December 31, 2017 and $53.4 million at December 31, 2016.
Foreign Currency
While most of our revenues are denominated in U.S. dollars, our results of operations may be exposed to the effect of fluctuations in the U.S. dollar value of foreign currency-denominated operating revenues and expenses. Our largest exposures come from the Brazilian real. We do not currently have a foreign currency hedging program related to our foreign currency-denominated transactions. Gains or losses resulting from foreign currency transactions are included within Non-operating Expenses (Income).
Stock-Based Compensation
We have various stock-based compensation plans for certain employees and outside directors, which are described more fully in Note 15. We recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period for each award based on the fair value on grant date. We estimate option and restricted stock unit forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. As a result, we record stock-based compensation expense only for those awards that are expected to vest.
Legal and Regulatory Matters
We are party to legal and regulatory proceedings with respect to a variety of matters. We evaluate the likelihood of an unfavorable outcome of these proceedings each quarter. Our judgments are subjective and are based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel. Due to the inherent uncertainties of the legal and regulatory proceedings in the multiple jurisdictions in which we operate, our judgments may be different from the actual outcomes.
Supplemental Cash Flow Information
Cash interest paid to lenders is calculated on the face amount of our various debt instruments based on the contractual interest rates in effect during each payment period.
The following table summarizes interest and income taxes paid:
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Interest paid |
| $ | 73,872 |
|
| $ | 66,306 |
|
| $ | 75,135 |
|
Income taxes paid, net of refunds |
| $ | 563 |
|
| $ | 1,160 |
|
| $ | (228 | ) |
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:
|
| 2017 |
|
| 2016 |
| ||
Cash and cash equivalents |
| $ | 280,809 |
|
| $ | 123,890 |
|
Restricted cash |
|
| 11,055 |
|
|
| 14,360 |
|
Total Cash, cash equivalents and restricted cash shown in consolidated statements of cash flows |
| $ | 291,864 |
|
| $ | 138,250 |
|
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for share-based compensation. The amended guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this amended guidance on January 1, 2017 on a prospective basis. As a result, we recognized $1.9 million of excess tax benefits during the year ended December 31, 2017 as a reduction of income tax expense in our consolidated statements of operations. Excess tax benefits were previously recognized within equity. Additionally, our consolidated statements of cash flows present such excess tax benefits, which were previously presented as a financing activity, as an operating activity.
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.
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 guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and consideration that a company expects to receive for the services provided. It also requires additional disclosures necessary for the financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The two permitted transition methods under the guidance are the full retrospective approach, under which the guidance is applied to all periods presented, or the modified retrospective approach, under which the guidance is applied only to the most current period presented. We adopted this amended guidance on January 1, 2018 using the modified retrospective approach and we do not believe it will have a material effect on our financial statements. As a result of adoption, revenue recognized under previous guidance based on flight departure will be 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, will
be recognized in later periods, and some revenue adjustments related to meeting or exceeding on-time performance targets will be recognized in earlier periods.
3. DHL Investment and 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 and we do not consolidate Polar 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 and Polar also have a flight services agreement, whereby Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate with the opportunity for performance premiums that escalate annually. Under the flight services agreement, Atlas provides Polar with crew, maintenance and insurance for the aircraft. Under other separate agreements, we provide aircraft to Polar, and Atlas and Polar supply administrative, sales and ground support services to one another. DP has guaranteed DHL’s (and Polar’s) obligations under the various transaction agreements described above. AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates. Collectively, these agreements are referred to herein as the “DHL Agreements”. The DHL Agreements provide us with a minimum guaranteed revenue stream from aircraft that have been dedicated to Polar for DHL and other customers’ freight over the life of the agreements. DHL provides financial support and also assumes the risks and rewards of the operations of Polar.
In accordance with the DHL Agreements, Polar flies for DHL’s transpacific express network and DHL provides financial support and assumes the risks and rewards of the operations of Polar. In addition to transpacific routes, Polar also flies between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other customers.
The BSA established DHL’s capacity purchase commitments on Polar flights. DHL has the right to terminate the 20-year BSA at the twelfth and fifteenth anniversaries of commencement, which was October 27, 2008. Either party may terminate for cause (as defined) at any time. With respect to DHL, “cause” includes Polar’s inability to meet certain departure and arrival criteria for an extended period of time and upon certain change-of-control events, in which case DHL may be entitled to liquidated damages from Polar. Except for any liquidated damages that we could incur as described above, we do not have any continuing financial exposure to fund debt obligations or operating losses of Polar.
Combined with Polar, we provide ACMI, CMI, Charter and Dry Leasing services to support DHL’s transpacific express, North American, intra-Asian, and global networks. In addition, we fly between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other customers. Atlas also provides incremental charter capacity to Polar and DHL from time to time.
The following table summarizes the aircraft types, services and number of aircraft provided to DHL as of December 31, 2017:
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
| |||||
The following table summarizes our transactions with Polar:
Revenue and Expenses: |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Revenue from Polar |
| $ | 420,564 |
|
| $ | 407,891 |
|
| $ | 399,113 |
|
Ground handling and airport fees to Polar |
|
| 2,746 |
|
|
| 1,667 |
|
|
| 2,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable/payable as of December 31: |
| 2017 |
|
| 2016 |
|
|
|
|
| ||
Receivables from Polar |
| $ | 9,558 |
|
| $ | 8,161 |
|
|
|
|
|
Payables to Polar |
|
| 2,751 |
|
|
| 2,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Carrying Value of Polar Investment as of December 31: |
| 2017 |
|
| 2016 |
|
|
|
|
| ||
Aggregate Carrying Value of Polar Investment |
| $ | 4,870 |
|
| $ | 4,870 |
|
|
|
|
|
4. Southern Air Acquisition
On April 7, 2016, we completed the acquisition of Southern Air and its subsidiaries, including Southern Air Inc. and Florida West International Airways, Inc. (“Florida West”). The acquisition of Southern Air provided us with immediate entry into 777 and 737 aircraft operating platforms, with the potential for developing additional business with existing and new customers. We believe this augments our ability to offer the broadest array of aircraft and services for domestic, regional and international operations. Southern Air currently flies five 777-200LRF and five 737-400F aircraft under CMI agreements for DHL.
Total consideration for Southern Air was $105.8 million, net of cash acquired, and consisted of the following:
Fair value of consideration |
|
|
|
|
Cash paid, net of $15,615 cash acquired |
| $ | 107,498 |
|
Working capital adjustment |
|
| (2,106 | ) |
Other adjustments |
|
| 372 |
|
Total consideration |
| $ | 105,764 |
|
Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the acquisition date.
The following table summarizes the amounts recognized for fair values of the assets acquired and liabilities assumed:
|
| Estimated Fair Value |
| |
Accounts receivable, net |
| $ | 22,912 |
|
Prepaid expenses and other current assets |
|
| 2,434 |
|
Property and equipment |
|
| 6,355 |
|
Intangible assets and goodwill |
|
| 67,341 |
|
Deferred income taxes, net |
|
| 36,452 |
|
Other assets |
|
| 1,498 |
|
Total assets acquired |
| $ | 136,992 |
|
Accounts payable and accrued liabilities |
| $ | 31,228 |
|
Total liabilities assumed |
|
| 31,228 |
|
Net assets acquired |
| $ | 105,764 |
|
The fair values and initial useful lives assigned to all intangible assets and goodwill are as follows:
|
| Estimated Useful Lives |
| Estimated Fair Value |
| |
Customer relationship |
| 16 years |
| $ | 26,280 |
|
Trade name |
| 1.5 years |
|
| 700 |
|
Goodwill |
| Indefinite |
|
| 40,361 |
|
Total intangible assets and goodwill |
|
|
| $ | 67,341 |
|
Customer relationship represents the underlying relationship and agreements with DHL. The trade name relates to the Southern Air brand. Goodwill is primarily attributable to the expanded market opportunities expected from combining the service offerings of Southern Air with ours, as well as the employee work force acquired. Southern Air’s results of operations and goodwill are reflected in our ACMI segment. Amortization expense related to Southern Air’s intangible assets amounted to $2.0 million in 2017 and $1.6 million in 2016.
For 2016, our consolidated results include Southern Air’s operating revenue of $79.8 million. We incurred Transaction-related expenses of $4.5 million in 2017, primarily related to professional fees and integration costs, and $17.7 million in 2016, primarily related to: certain compensation costs, including employee termination benefits; professional fees; and integration costs associated with the acquisition.
The unaudited pro forma operating revenue for 2016 and 2015 was $1,866.7 million and $1,912.4 million, respectively. This pro forma information has been calculated as if the acquisition had taken place on January 1, 2015 and is not necessarily indicative of the net sales that actually would have been achieved. This information includes adjustments to conform with our accounting policies. The earnings of Southern Air were not material and, accordingly, pro forma and actual earnings information have not been presented.
As part of integrating Southern Air, management decided and committed to pursue a plan to sell Florida West. As a result, the financial results for Florida West are presented as a discontinued operation and the assets and liabilities of Florida West were classified as held for sale, since the date of acquisition through December 31, 2016. The aggregate carrying value of Florida West’s assets held for sale was insignificant at December 31, 2016 and was included in Prepaid expenses and other current assets. In February 2017, management determined that a sale was no longer likely to occur and committed to a plan to wind down the Florida West operations. The wind-down of operations was completed in March 2017.
A summary of the employee termination benefit liabilities, which are expected to be paid by the first quarter of 2018, is as follows:
|
| 2017 |
|
| 2016 |
| ||
Beginning balance |
| $ | 1,214 |
|
| $ | 3,797 |
|
Wind-down expenses |
|
| 1,990 |
|
|
| - |
|
Cash payments |
|
| (3,133 | ) |
|
| (2,583 | ) |
Ending balance |
| $ | 71 |
|
| $ | 1,214 |
|
5. Special Charge
During 2016 and 2015, we recognized $10.1 million of impairment losses for six CF6-80 engines classified as held for sale and $8.3 million for five CF6-80 engines classified as held for sale, respectively. Depreciation ceased on the engines. Nine engines were traded in during 2016 and one engine was traded in during 2017. The carrying value of the remaining CF6-80 engine held for sale at December 31, 2017 was $1.3 million, and of the two CF6-80 engines held for sale at December 31, 2016 was $2.8 million, which was included within Prepaid expenses and other current assets in the consolidated balance sheets. The remaining CF6-80 engine classified as held for sale is under contract to be traded in during the first quarter of 2018.
During 2015, we recognized a charge of $7.7 million related to the early termination of high-cost operating leases for two CF6-80 engines.
6. Intangible Assets, Net and Goodwill
The following table presents our Intangible assets, net and goodwill as of December 31:
|
| 2017 |
|
| 2016 |
| ||
Goodwill |
| $ | 40,361 |
|
| $ | 40,361 |
|
Fair value adjustments on operating leases |
|
| 45,531 |
|
|
| 45,531 |
|
Lease intangible |
|
| 54,891 |
|
|
| 57,203 |
|
Customer relationship |
|
| 26,280 |
|
|
| 26,280 |
|
Trade name |
|
| 700 |
|
|
| 700 |
|
Less: accumulated amortization |
|
| (61,278 | ) |
|
| (54,046 | ) |
|
| $ | 106,485 |
|
| $ | 116,029 |
|
Goodwill is primarily attributable to the expanded market opportunities expected from combining the service offerings of Southern Air with ours, as well as the employee work force acquired. Fair value adjustments on operating leases represent the capitalized discount recorded in prior years to adjust the lease commitments for our 747-400 aircraft to fair market value and are amortized on a straight-line basis over the life of the leases. Lease intangibles resulted from the acquisition of various aircraft with in-place Dry Leases to customers on a long-term basis and are amortized on a straight-line basis over the life of the leases. Customer relationship represents Southern Air’s underlying relationship and agreements with DHL. The trade name relates to the Southern Air brand.
Amortization expense related to intangible assets amounted to $9.5 million in 2017, $9.8 million in 2016 and $8.9 million in 2015.
The estimated future amortization expense of intangible assets as of December 31, 2017 is as follows:
2018 |
| $ | 8,792 |
|
2019 |
|
| 8,094 |
|
2020 |
|
| 8,047 |
|
2021 |
|
| 8,547 |
|
2022 |
|
| 8,862 |
|
Thereafter |
|
| 23,782 |
|
Total |
| $ | 66,124 |
|
7. Amazon
In May 2016, we entered into certain agreements with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), which involve, 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 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 December 2017, we have placed 12 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 11th through 20th 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 11th and 12th aircraft commenced. The warrant will be
exercisable in accordance with its terms through 2021. As of December 31, 2017, no portion of the warrant has been exercised.
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 December 31, 2017, no portion of this warrant has vested. Upon vesting, the warrant would become exercisable in accordance with its terms through 2023.
At a special meeting on September 20, 2016, the Company’s shareholders, by a vote of approximately 99.9% of the votes cast, approved the issuance of warrants to acquire up to 30% of our outstanding common shares. This approval constituted a change in control, as defined under certain of the Company’s benefit plans. As a result, we recognized $23.5 million in expense, including accelerated compensation expense for restricted and performance share and cash awards, during 2016. The share-based portion of the compensation expense was $13.3 million.
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. The following table provides a summary of the customer incentive asset as of December 31:
|
| 2017 |
|
| 2016 |
| ||
Beginning balance |
| $ | 92,351 |
|
| $ | - |
|
Initial value for vested portion of warrant |
|
| 19,448 |
|
|
| 92,888 |
|
Amortization of customer incentive asset |
|
| (5,261 | ) |
|
| (537 | ) |
Ending balance |
| $ | 106,538 |
|
| $ | 92,351 |
|
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 $12.5 million and $2.9 million on the Amazon Warrant during 2017 and 2016, respectively. The fair value of the Amazon Warrant liability was $127.8 million as of December 31, 2017 and $95.8 million as of December 31, 2016.
8. Accrued Liabilities
Accrued liabilities consisted of the following as of December 31:
|
| 2017 |
|
| 2016 |
| ||
Maintenance |
| $ | 156,042 |
|
| $ | 54,495 |
|
Customer maintenance reserves |
|
| 89,037 |
|
|
| 81,830 |
|
Salaries, wages and benefits |
|
| 65,546 |
|
|
| 55,063 |
|
U.S. class action settlement |
|
| 30,000 |
|
|
| 35,000 |
|
Aircraft fuel |
|
| 22,196 |
|
|
| 16,149 |
|
Deferred revenue |
|
| 20,986 |
|
|
| 10,298 |
|
Other |
|
| 71,036 |
|
|
| 68,052 |
|
Accrued liabilities |
| $ | 454,843 |
|
| $ | 320,887 |
|
Our debt obligations, as of December 31:
|
| 2017 |
|
| 2016 |
| ||||||||||
| Range of Maturity Dates | Interest Rates (1) |
|
| Balance |
|
| Interest Rates (1) |
|
| Balance |
| ||||
Ex-Im Guaranteed Notes | 2021 to 2025 | 1.89% |
|
| $ | 564,184 |
|
| 1.89% |
|
| $ | 645,537 |
| ||
Term loans and capital leases | 2020 to 2032 | 4.16% |
|
|
| 1,145,116 |
|
| 4.34% |
|
|
| 1,053,273 |
| ||
Private Placement Facility | 2025 to 2026 | 3.17% |
|
|
| 144,539 |
|
| - |
|
|
| - |
| ||
Convertible Notes | 2022 to 2024 | 2.04% |
|
|
| 513,500 |
|
| 2.25% |
|
|
| 224,500 |
| ||
EETC | 2019 | 7.52% |
|
|
| 11,480 |
|
| 7.52% |
|
|
| 20,084 |
| ||
Total principal amount of debt and capital leases |
|
|
|
|
|
| 2,378,819 |
|
|
|
|
|
|
| 1,943,394 |
|
Less: unamortized debt discount and issuance costs |
|
|
|
|
|
| (151,820 | ) |
|
|
|
|
|
| (91,983 | ) |
Total debt |
|
|
|
|
|
| 2,226,999 |
|
|
|
|
|
|
| 1,851,411 |
|
Less current portion of debt and capital leases |
|
|
|
|
|
| (218,013 | ) |
|
|
|
|
|
| (184,748 | ) |
Long-term debt |
|
|
|
|
| $ | 2,008,986 |
|
|
|
|
|
| $ | 1,666,663 |
|
|
|
Many of our financing instruments have cross-default provisions and contain limitations on our ability to, among other things, consummate certain asset sales, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.
Description of our Debt Obligations
Ex-Im Guaranteed Notes
We have issued various notes guaranteed by the Export-Import Bank of the United States (“Ex-Im Bank”), each secured by a mortgage on a 747-8F or 777-200LRF aircraft (the “Ex-Im Guaranteed Notes”). In connection with the issuance of Ex-Im Guaranteed Notes, we paid usual and customary commitment and other fees associated with this type of financing. In addition, there are customary covenants, events of default and certain operating conditions that we must meet for the Ex-Im Guaranteed Notes. These notes accrue interest at a fixed rate with principal and interest payable quarterly.
Term Loans and Capital Leases
We have entered into various term loans to finance the purchase of aircraft, passenger-to-freighter conversion of aircraft, and for GEnx engine performance upgrade kits and overhauls. Each term loan requires payment of principal and interest quarterly in arrears. Funds available under each term loan are subject to usual and customary fees, and funds drawn typically bear interest at a fixed rate based on LIBOR, plus a margin. Each facility is guaranteed by us and subject to customary covenants and events of default.
The following table summarizes the terms for each term loan entered into during 2017 (in millions):
| Issue |
| Face |
|
| Collateral |
| Original |
| Fixed Interest |
| ||
| Date |
| Value |
|
| Type |
| Term |
| Rate |
| ||
First 2017 Term Loan | April 2017 |
| $ | 20.1 |
|
| 767-300 |
| 91 months |
| 3.02% |
| |
Second 2017 Term Loan | April 2017 |
|
| 21.3 |
|
| 767-300 |
| 91 months |
| 3.16% |
| |
Third 2017 Term Loan | May 2017 |
|
| 21.5 |
|
| 767-300 |
| 91 months |
| 3.16% |
| |
Fourth 2017 Term Loan | June 2017 |
|
| 21.3 |
|
| 767-300 |
| 91 months |
| 3.09% |
| |
Fifth 2017 Term Loan | June 2017 |
|
| 21.7 |
|
| 767-300 |
| 91 months |
| 3.11% |
| |
Sixth 2017 Term Loan | June 2017 |
|
| 21.7 |
|
| 767-300 |
| 91 months |
| 3.11% |
| |
Seventh 2017 Term Loan | June 2017 |
|
| 18.7 |
|
| None |
| 58 months |
| 2.17% |
| |
Eighth 2017 Term Loan | July 2017 |
|
| 12.5 |
|
| 767-300 |
| 60 months |
| 3.62% |
| |
Ninth 2017 Term Loan | Nov 2017 |
|
| 26.9 |
|
| None |
| 60 months |
| 2.38% |
| |
Total |
|
| $ | 185.7 |
|
|
|
|
|
|
|
|
|
In March 2017, we amended and extended a lease for a 747-400 freighter aircraft to June 2032 at a lower monthly lease payment. As a result of the extension, we determined that the lease qualifies as a capital lease. The present value of the future minimum lease payments was $32.4 million.
Private Placement Facility
In September 2017, we entered into a debt facility for a total of $145.8 million through private placement to finance the purchase and passenger-to-freighter conversion of six 767-300 freighter aircraft dry leased to Amazon (the “Private Placement Facility”). The Private Placement Facility consists of six separate loans (the “Private Placement Loans”). Each Private Placement Loan is comprised of an equipment note and an equipment term loan, both secured by the cash flows from a 767-300 freighter aircraft dry lease and the underlying aircraft. The equipment notes require payment of principal and interest at a fixed interest rate. The equipment term loans accrue interest, at a fixed rate, which is added to the principal balance outstanding until each equipment note is paid in full. Subsequently, the equipment term loans require payment of principal and interest over the remaining term of the loans. The Private Placement Loans are cross-collateralized, but not cross-defaulted, with each other and, except for certain specified events, are not cross-defaulted with other debt facilities of the Company.
In connection with entry into the Private Placement Facility, we have agreed to pay usual and customary commitment and other fees associated with this type of financing. The Private Placement Facility is guaranteed by us and subject to customary covenants and events of default.
The following table summarizes the terms for each financing entered into during 2017 under the Private Placement Facility (in millions):
| Issue |
| Face |
|
| Collateral |
| Original |
| Fixed Interest |
| ||
| Date |
| Value |
|
| Type |
| Term |
| Rate |
| ||
First 2017 Equipment Note | Oct 2017 |
| $ | 21.2 |
|
| Dry Lease and 767-300 |
| 87 months |
| 2.93% |
| |
First 2017 Equipment Term Loan | Oct 2017 |
|
| 2.6 |
|
| Dry Lease and 767-300 |
| 103 months |
| 4.75% |
| |
Second 2017 Equipment Note | Oct 2017 |
|
| 21.4 |
|
| Dry Lease and 767-300 |
| 88 months |
| 2.93% |
| |
Second 2017 Equipment Term Loan | Oct 2017 |
|
| 3.2 |
|
| Dry Lease and 767-300 |
| 107 months |
| 4.75% |
| |
Third 2017 Equipment Note | Oct 2017 |
|
| 21.2 |
|
| Dry Lease and 767-300 |
| 87 months |
| 2.93% |
| |
Third 2017 Equipment Term Loan | Oct 2017 |
|
| 3.0 |
|
| Dry Lease and 767-300 |
| 105 months |
| 4.75% |
| |
Fourth 2017 Equipment Note | Dec 2017 |
|
| 21.2 |
|
| Dry Lease and 767-300 |
| 88 months |
| 2.93% |
| |
Fourth 2017 Equipment Term Loan | Dec 2017 |
|
| 2.9 |
|
| Dry Lease and 767-300 |
| 104 months |
| 4.87% |
| |
Fifth 2017 Equipment Note | Dec 2017 |
|
| 21.4 |
|
| Dry Lease and 767-300 |
| 89 months |
| 2.93% |
| |
Fifth 2017 Equipment Term Loan | Dec 2017 |
|
| 3.2 |
|
| Dry Lease and 767-300 |
| 107 months |
| 4.87% |
| |
Sixth 2017 Equipment Note | Dec 2017 |
|
| 21.4 |
|
| Dry Lease and 767-300 |
| 88 months |
| 2.93% |
| |
Sixth 2017 Equipment Term Loan | Dec 2017 |
|
| 3.1 |
|
| Dry Lease and 767-300 |
| 106 months |
| 4.94% |
| |
Total |
|
| $ | 145.8 |
|
|
|
|
|
|
|
|
|
Convertible Notes
In May 2017, we issued $289.0 million aggregate principal amount of 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 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 following table lists certain key terms for the Convertible Notes:
|
| 2017 Convertible Note |
|
| 2015 Convertible Note |
| ||
Fixed interest rate |
|
| 1.88 | % |
|
| 2.25 | % |
Earliest conversion date |
| September 1, 2023 |
|
| September 1, 2021 |
| ||
Initial conversion price per share |
| $ | 61.08 |
|
| $ | 74.05 |
|
Conversion rate (shares for each $1,000 of principal) |
|
| 16.3713 |
|
|
| 13.5036 |
|
We used the majority of the net proceeds from the 2017 Convertible Notes in May 2017 to repay $150.0 million then outstanding under our revolving credit facility and to fund the cost of the convertible note hedges described below.
During 2015, we used the majority of the proceeds from the 2015 Convertible Notes to refinance higher-rate equipment notes funded by enhanced equipment trust certificates (“EETCs”) related to five 747-400 freighter aircraft owned by us in the aggregate amount of $187.8 million. The EETCs had an average cash coupon of 8.1%. In connection with the refinancing, we recognized a $66.7 million loss on early extinguishment of debt, of which $34.0 million was related to debt extinguishment costs paid to the EETC equipment note holders and $32.7 million was related to the write-off of the debt discount associated with the EETCs. The debt extinguishment costs paid are reflected as a financing activity in the consolidated statements of cash flows. As a result of this refinancing, we recognized a $13.4 million Gain on investments from the early redemption of certain investments related to EETCs in 2015 (see Note 12).
The Convertible Notes will initially be convertible into shares of our common stock based on the respective conversion rates, which are equal to the respective initial conversion prices per share. The conversion rates will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest, except in certain limited circumstances. Upon the occurrence of a “make-whole fundamental change,” we will, in certain circumstances, increase the conversion rates by a number of additional shares of our common stock for the Convertible Notes converted in connection with such “make-whole fundamental change”. Additionally, if we undergo a “fundamental change,” holders will have the option to require us to repurchase all or a portion of their Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest through, but excluding, the fundamental change repurchase date.
In connection with the offerings of the Convertible Notes, we entered into convertible note hedge transactions whereby we have the option to purchase a certain number of shares of our common stock at a fixed price per share. In addition, we sold warrants to the option counterparties whereby the holders of the warrants have the option to purchase a certain number of shares of our common stock at a fixed price per share.
The following table summarizes the convertible note hedges and related warrants:
|
| 2017 Convertible Note |
|
| 2015 Convertible Note |
| ||
Convertible Note Hedges: |
|
|
|
|
|
|
|
|
Number of shares (1) |
|
| 4,731,306 |
|
|
| 3,031,558 |
|
Initial price per share |
| $ | 61.08 |
|
| $ | 74.05 |
|
Cost of hedge |
| $ | 70,140 |
|
| $ | 52,903 |
|
|
|
|
|
|
|
|
|
|
Convertible Note Warrants: |
|
|
|
|
|
|
|
|
Number of shares (1) |
|
| 4,731,306 |
|
|
| 3,031,558 |
|
Initial price per share |
| $ | 92.20 |
|
| $ | 95.01 |
|
Proceeds from sale of warrants |
| $ | 38,148 |
|
| $ | 36,290 |
|
(1) Subject to adjustment for certain specified events |
|
|
|
|
|
|
|
|
Taken together, the purchases of the convertible note hedges and the sales of the warrants are intended to offset any economic dilution from the conversion of each of the Convertible Notes when the stock price is below the exercise price of the respective warrants and to effectively increase the overall conversion prices from $61.08 to $92.20 per share for the 2017 Convertible Notes and from $74.05 to $95.01 per share for the 2015 Convertible
Notes. However, for purposes of the computation of diluted earnings per share in accordance with GAAP, dilution typically occurs when the average share price of our common stock for a given period exceeds the conversion price. The net cost incurred in connection with the convertible note hedges and warrants was recorded as a reduction to additional paid-in capital, net of tax, in the consolidated balance sheets.
On or after the earliest conversion date until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes. Upon conversion, each of the Convertible Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. Our current intent and policy is to settle conversions with a combination of cash and shares of common stock with the principal amounts of the Convertible Notes paid in cash.
Holders may only convert their Convertible Notes at their option at any time prior to the earliest conversion dates, under the following circumstances:
during any calendar quarter (and only during such calendar quarter) if, for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock for such trading day is equal to or greater than 130% of the conversion price on such trading day;
during the five consecutive business day period immediately following any five consecutive trading day period (the “measurement period”) in which, for each trading day of the measurement period, the trading price per $1,000 principal amount of the convertible notes for such trading day was less than 98% of the product of the last reported sale price of our common stock for such trading day and the conversion rate on such trading day; or
upon the occurrence of specified corporate events.
We separately account for the liability and equity components of convertible notes. The carrying amount of the liability component is determined by measuring the fair value of a similar liability that does not have an associated conversion feature, assuming our nonconvertible unsecured debt borrowing rate. The carrying value of the equity component, the conversion option, which is recognized as additional paid-in-capital, net of tax, creates a debt discount on the convertible notes. The debt discount is determined by deducting the relative fair value of the liability component from the proceeds of the convertible notes and is amortized to interest expense using an effective interest rate of 6.14% and 6.44% over the term of the 2017 Convertible Notes and the 2015 Convertible Notes, respectively. The equity components will not be remeasured as long as they continue to meet the conditions for equity classification.
The debt issuance costs related to the issuance of the Convertible Notes were allocated to the liability and equity components based on their relative values, as determined above. Total debt issuance costs for the 2017 Convertible Notes were $7.5 million, of which $5.7 million was allocated to the liability component and $1.8 million was allocated to the equity component. Total debt issuance costs for the 2015 Convertible Notes were $6.8 million, of which $5.2 million was allocated to the liability component and $1.6 million was allocated to the equity component. The debt issuance costs allocated to the liability components are amortized to interest expense using the effective interest method over the term of each of the Convertible Notes.
The convertible notes consisted of the following as of December 31:
|
| 2017 |
|
| 2016 |
| ||||||
|
| 2017 Convertible Notes |
|
| 2015 Convertible Notes |
|
| 2015 Convertible Notes |
| |||
Remaining life in months |
|
| 77 |
|
|
| 53 |
|
|
| 65 |
|
Liability component: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds |
| $ | 289,000 |
|
| $ | 224,500 |
|
| $ | 224,500 |
|
Less: debt discount, net of amortization |
|
| (65,187 | ) |
|
| (36,108 | ) |
|
| (42,956 | ) |
Less: debt issuance cost, net of amortization |
|
| (5,216 | ) |
|
| (3,445 | ) |
|
| (4,146 | ) |
Net carrying amount |
| $ | 218,597 |
|
| $ | 184,947 |
|
| $ | 177,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity component (1) |
| $ | 70,140 |
|
| $ | 52,903 |
|
| $ | 52,903 |
|
|
|
The following table presents the amount of interest expense recognized related to the 2017 Convertible Notes and the 2015 Convertible Notes:
|
| For the Year Ended |
| |||||
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||
Contractual interest coupon |
| $ | 8,348 |
|
| $ | 5,051 |
|
Amortization of debt discount |
|
| 11,801 |
|
|
| 6,421 |
|
Amortization of debt issuance costs |
|
| 1,132 |
|
|
| 677 |
|
Total interest expense recognized |
| $ | 21,281 |
|
| $ | 12,149 |
|
EETC
In 1999, we issued an EETC secured by a 747-400F aircraft in the amount of $109.9 million which matures in February 2019 with fixed interest rates on the underlying equipment notes ranging from 6.88% to 8.77% and an effective interest rate of 7.52%.
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 and conversion of 767 aircraft prior to obtaining permanent financing for the converted aircraft. The Revolver is secured by mortgages against nine 747-400 and five 767-300 aircraft, and related engines. Amounts outstanding under the Revolver are subject to borrowing base calculations, collateral coverage and fixed charge ratios. The Revolver accrues interest monthly at LIBOR plus a margin of 2.25% per annum on the amounts outstanding and 0.4% on the undrawn portion. In connection with entry into the Revolver, we paid usual and customary fees. There were no amounts outstanding at December 31, 2017 and 2016, and we had $139.3 million of unused availability under the Revolver as of December 31, 2017.
Future Cash Payments for Debt and Capital Leases
The following table summarizes the cash required to be paid by year and the carrying value of our debt reflecting the terms that were in effect as of December 31, 2017:
2018 |
| $ | 230,464 |
|
2019 |
|
| 230,537 |
|
2020 |
|
| 343,624 |
|
2021 |
|
| 238,223 |
|
2022 |
|
| 426,789 |
|
Thereafter |
|
| 909,182 |
|
Total debt cash payments |
|
| 2,378,819 |
|
Less: unamortized debt discount and issuance costs |
|
| (151,820 | ) |
Debt |
| $ | 2,226,999 |
|
10. Commitments
Leveraged Lease Structure
In three separate transactions in 1998, 1999 and 2000, we issued EETCs to finance the acquisition of five 747-400F aircraft as leveraged leases. In a leveraged lease, the owner trustee is the owner of record for the aircraft. Wells Fargo Bank Northwest, National Association (“Wells Fargo”) serves as the owner trustee with respect to the leveraged leases in each of our EETC transactions. As the owner trustee of the aircraft, Wells Fargo serves as the lessor of the aircraft under the EETC lease between us and the owner trustee. Wells Fargo also serves as trustee for the beneficial owner of the aircraft, the owner participant. The original owner participant for each aircraft invested (on an equity basis) approximately 20% of the original cost of the aircraft. The remaining approximately 80% of the aircraft cost was financed with debt issued by the owner trustee on a nonrecourse basis in the form of equipment notes.
The equipment notes were generally issued in three series, for each aircraft, designated as Series A, B and C equipment notes. The loans evidenced by the equipment notes were funded by the public offering of EETCs. Like the equipment notes, the EETCs were issued in three series, with each EETC transaction designated as Series A, B and C EETCs. Each series of EETCs was issued by the trustee for separate Atlas pass-through trusts with the same designation as the series of EETCs issued (“PTCs”). Each of these pass-through trustees is also the holder and beneficial owner of the equipment notes bearing the same series designation.
These leasing entities meet the criteria for variable interest entities. We have not consolidated any of the aircraft-leasing trusts because we are not the primary beneficiary. We account for these leases as operating leases and have included them in our minimum annual rental commitments below.
Operating Leases
The following table summarizes rental expenses in:
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Aircraft and engines |
| $ | 142,945 |
|
| $ | 146,110 |
|
| $ | 145,031 |
|
Purchased capacity, office, vehicles and other |
| $ | 46,817 |
|
| $ | 23,727 |
|
| $ | 44,228 |
|
As of December 31, 2017, 15 of our 73 aircraft were under operating leases, with lease term expiration dates ranging from 2020 to 2025 and an average remaining lease term of 5.1 years. Certain of our operating leases contain renewal options and escalations. In addition, we lease engines under short-term lease agreements on an as-needed basis. We record rent expense on a straight-line basis over the lease term.
The following table summarizes our minimum annual rental commitments as of the periods indicated under non-cancelable aircraft, engine, real estate and other operating leases with initial or remaining terms of more than one year, reflecting the terms that were in effect as of December 31, 2017:
|
| Aircraft and Engine |
|
| Other |
|
|
|
|
| ||
|
| Operating |
|
| Operating |
|
|
|
|
| ||
|
| Leases |
|
| Leases |
|
| Total |
| |||
2018 |
| $ | 138,223 |
|
| $ | 7,003 |
|
| $ | 145,226 |
|
2019 |
|
| 154,461 |
|
|
| 6,466 |
|
|
| 160,927 |
|
2020 |
|
| 149,214 |
|
|
| 5,908 |
|
|
| 155,122 |
|
2021 |
|
| 157,985 |
|
|
| 4,680 |
|
|
| 162,665 |
|
2022 |
|
| 111,064 |
|
|
| 1,843 |
|
|
| 112,907 |
|
Thereafter |
|
| 109,993 |
|
|
| 27 |
|
|
| 110,020 |
|
Total minimum rental payments |
| $ | 820,940 |
|
| $ | 25,927 |
|
| $ | 846,867 |
|
In addition to the aircraft we Dry Lease to customers, Polar subleases aircraft from us that are leased from a third party and are included in the table above under aircraft operating leases.
The following table summarizes the contractual amount of minimum income under Dry Leases and the non-cancelable aircraft subleases, reflecting the terms that were in effect as of December 31, 2017:
|
| Dry Lease |
|
| Sublease |
|
|
|
|
| ||
|
| Income |
|
| Income |
|
| Total |
| |||
2018 |
| $ | 139,663 |
|
| $ | 52,800 |
|
| $ | 192,463 |
|
2019 |
|
| 127,597 |
|
|
| - |
|
|
| 127,597 |
|
2020 |
|
| 117,222 |
|
|
| - |
|
|
| 117,222 |
|
2021 |
|
| 98,668 |
|
|
| - |
|
|
| 98,668 |
|
2022 |
|
| 95,424 |
|
|
| - |
|
|
| 95,424 |
|
Thereafter |
|
| 219,033 |
|
|
| - |
|
|
| 219,033 |
|
Total minimum lease receipts |
| $ | 797,607 |
|
| $ | 52,800 |
|
| $ | 850,407 |
|
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 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.
11. Income Taxes
The United States enacted the U.S. Tax Cuts and Jobs Act on December 22, 2017. The U.S. Tax Cuts and Jobs Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% beginning in 2018, requires companies to pay a one-time deemed repatriation tax on unremitted foreign earnings, repeals the corporate alternative minimum tax, provides full expensing of new and used assets, creates new sources of taxable income and deductions related to foreign operations, repeals or modifies certain deductions and credits, and modifies the use of federal net operating loss carryforwards (“NOLs”).
On December 22, 2017, the SEC issued guidance which allows us to record provisional amounts during a measurement period not to extend beyond one year following enactment. As a result of that guidance, and based on our interpretation of the U.S. Tax Cuts and Jobs Act, we have recorded provisional income tax benefits of $130.0 million in connection with the remeasurement of our U.S. net deferred tax liability. We have not recorded any provisional amount in connection with the one-time deemed repatriation tax on unremitted foreign earnings. The ultimate impact of the U.S. Tax Cuts and Jobs Act may differ from the amounts reflected in these financial statements due to additional regulatory guidance that may be issued, changes in interpretations and assumptions, additional analysis, and actions the Company may take as a result. The Company expects to update these provisional amounts as the analysis is finalized within the one-year measurement period.
A reconciliation of the provision (benefit) for income taxes applying the statutory federal income tax rate of 35.0% for each of the years ended December 31, is as follows:
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | (133 | ) |
| $ | (376 | ) |
| $ | 52 |
|
State and local |
|
| (99 | ) |
|
| (298 | ) |
|
| 48 |
|
Foreign |
|
| 596 |
|
|
| 84 |
|
|
| 1,292 |
|
Total current expense |
|
| 364 |
|
|
| (590 | ) |
|
| 1,392 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| (87,185 | ) |
|
| 46,391 |
|
|
| (24,425 | ) |
State and local |
|
| 1,868 |
|
|
| (1,436 | ) |
|
| (3,531 | ) |
Foreign |
|
| 3,987 |
|
|
| 2,426 |
|
|
| 2,058 |
|
Total deferred expense (benefit) |
|
| (81,330 | ) |
|
| 47,381 |
|
|
| (25,898 | ) |
Total income tax expense (benefit) |
| $ | (80,966 | ) |
| $ | 46,791 |
|
| $ | (24,506 | ) |
The domestic and foreign earnings before income taxes are as follows:
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Domestic |
| $ | 104,321 |
|
| $ | 61,006 |
|
| $ | (57,825 | ) |
Foreign |
|
| 39,051 |
|
|
| 28,410 |
|
|
| 40,605 |
|
Income (loss) before income taxes |
| $ | 143,372 |
|
| $ | 89,416 |
|
| $ | (17,220 | ) |
A reconciliation of differences between the U.S. federal statutory income tax rate and the effective income tax rates is presented as a percent of expense (benefit) as follows:
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
U.S. federal statutory income tax rate |
|
| 35.0 | % |
|
| 35.0 | % |
|
| (35.0 | %) |
State and local taxes based on income, net of federal benefit |
|
| 0.3 | % |
|
| 1.10 | % |
|
| (2.0 | %) |
Change in deferred foreign and state tax rates |
|
| 0.6 | % |
|
| (2.2 | %) |
|
| (12.0 | %) |
Nondeductible customer incentive related to Amazon |
|
| 5.0 | % |
|
| 10.9 | % |
|
| 0.0 | % |
Nondeductible compensation expenses related to Amazon |
|
| — |
|
|
| 13.0 | % |
|
| 0.0 | % |
Other nondeductible expenses |
|
| 1.4 | % |
|
| 4.3 | % |
|
| 10.2 | % |
Extraterritorial income tax benefit |
|
| — |
|
|
| — |
|
|
| (23.3 | %) |
Tax incentives and additional deductions |
|
| (0.6 | %) |
|
| (0.9 | %) |
|
| (4.9 | %) |
Favorable resolution of income tax issues |
|
| — |
|
|
| — |
|
|
| (13.8 | %) |
Tax effect of foreign operations |
|
| (7.7 | %) |
|
| (9.4 | %) |
|
| (66.4 | %) |
Impact of U.S. Tax Cuts and Jobs Act |
|
| (90.7 | %) |
|
| — |
|
|
| — |
|
Other |
|
| 0.2 | % |
|
| 0.5 | % |
|
| 4.9 | % |
Effective income tax rate |
|
| (56.5 | %) |
|
| 52.3 | % |
|
| (142.3 | %) |
The effective income tax rate for the year ended December 31, 2017 differed from the U.S. statutory rate primarily due to the revaluation of our U.S. net deferred tax liability as a result of the U.S. Tax Cuts and Jobs Act, and to a lesser extent, nondeductible changes in the value of the Amazon Warrant liability (see Note 7). In 2016, we recorded a nondeductible customer incentive and nondeductible compensation expenses resulting from a change in control, as defined under certain of the Company’s benefit plans, both related to the Amazon transaction (see Note 7). We also generated non-recurring tax benefits from extraterritorial income (“ETI”) in 2015, which reduced our income tax rate in proportion to our income or loss in that year.
Prior to the U.S. Tax Cuts and Jobs Act, we indefinitely reinvested outside of the U.S. the net earnings of our foreign Dry Leasing subsidiaries. Historically, we have not provided for U.S. taxes on the unremitted earnings of foreign subsidiaries that have not been previously taxed because we intended to invest such unremitted earnings indefinitely outside of the U.S. As a result of the U.S. Tax Cuts and Jobs Act, we are assessing our intent to invest such unremitted earnings outside the U.S. It is impracticable to provide for U.S. taxes on these unremitted earnings under the U.S. Tax Cuts and Jobs Act without regulatory guidance and additional analysis. We may repatriate the earnings of our foreign subsidiaries to the extent the associated taxes are insignificant.
Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The net noncurrent deferred tax asset (liability) was comprised of the following as of December 31:
|
| Assets (Liabilities) |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards and credits |
| $ | 345,245 |
|
| $ | 454,749 |
|
Accrued compensation |
|
| 11,514 |
|
|
| 17,036 |
|
Accrued legal settlements |
|
| 6,596 |
|
|
| 25,442 |
|
Aircraft leases |
|
| 17,323 |
|
|
| 16,109 |
|
Goodwill and other intangibles |
|
| 7,267 |
|
|
| 15,798 |
|
Interest rate derivatives |
|
| 1,532 |
|
|
| 3,124 |
|
Long-term debt |
|
| 1,923 |
|
|
| 3,409 |
|
Obsolescence reserve |
|
| 5,734 |
|
|
| 7,804 |
|
Stock-based compensation |
|
| 3,296 |
|
|
| 6,731 |
|
Other |
|
| 977 |
|
|
| 685 |
|
Total deferred tax assets |
|
| 401,407 |
|
|
| 550,887 |
|
Valuation allowance |
|
| (30,869 | ) |
|
| (49,396 | ) |
Net deferred tax assets |
| $ | 370,538 |
|
| $ | 501,491 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets |
| $ | (562,210 | ) |
| $ | (778,905 | ) |
Accrued expenses |
|
| - |
|
|
| (10 | ) |
Acquisition of EETC debt |
|
| (1,247 | ) |
|
| (4,079 | ) |
Incentive related to Amazon |
|
| (6,709 | ) |
|
| (6,829 | ) |
Deferred maintenance |
|
| (14,151 | ) |
|
| (8,614 | ) |
Total deferred tax liabilities |
| $ | (584,317 | ) |
| $ | (798,437 | ) |
|
|
|
|
|
|
|
|
|
Deferred taxes included within following balance sheet line items: |
|
|
|
|
|
|
|
|
Deferred taxes |
| $ | (214,694 | ) |
| $ | (298,165 | ) |
Deferred costs and other assets |
|
| 915 |
|
|
| 1,219 |
|
Net deferred tax assets (liabilities) |
| $ | (213,779 | ) |
| $ | (296,946 | ) |
As of December 31, 2017 and 2016, we had U.S. NOLs, net of unrecognized tax benefits and valuation allowances, of approximately $1.2 billion and $1.0 billion, respectively, which will expire through 2037, if not utilized. The increase in NOLs during 2017 resulted primarily from accelerated tax depreciation. We had alternative minimum tax credits of $4.5 million and $4.7 million as of December 31, 2017 and 2016, respectively, with no expiration date. Pursuant to the U.S. Tax Cuts and Jobs Act, these credits are refundable on our income tax returns from 2018 through 2021. Additionally, we had foreign NOLs for Hong Kong and Singapore of approximately $465.3 million and $463.5 million as of December 31, 2017 and 2016, respectively, with no expiration date.
We participate in an aircraft leasing incentive program in Singapore which 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 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.
Section 382 of the Internal Revenue Code (the “Code”) imposes an annual limitation on the amount of a corporation’s U.S. federal taxable income that can be offset by NOLs if it experiences an “ownership change”, as defined. We experienced ownership changes, as defined, in 2004 and 2009. In addition, the acquisition of Southern Air in 2016 (see Note 4) constituted an ownership change for that entity. Accordingly, the use of NOLs generated prior to these ownership changes is subject to an annual limitation. If certain changes in our ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable NOLs.
On each reporting date, management assesses whether we are more likely than not to realize some or all of our deferred tax assets. After our assessment, we maintained a valuation allowance of $30.9 million and $49.4 million against our deferred tax assets as of December 31, 2017 and 2016, respectively. The valuation allowance decreased by $18.5 million during the year ended December 31, 2017 primarily due to the change in the federal income tax
rate under the U.S. Tax Cuts and Jobs Act and by $1.3 million during the year ended December 31, 2016. The valuation allowance is attributable to a limitation on NOL utilization resulting from the ownership change under Section 382. Due to this limitation, we expect a portion of our NOLs generated in 2004 and prior years to eventually expire unused.
A reconciliation of the beginning and ending unrecognized income tax benefits is as follows:
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Beginning balance |
| $ | 113,892 |
|
| $ | 112,555 |
|
| $ | 109,993 |
|
Additions for tax positions related to the current year |
|
| 1,366 |
|
|
| 1,587 |
|
|
| 551 |
|
Additions for tax positions related to prior years |
|
| 40 |
|
|
| - |
|
|
| 5,503 |
|
Reductions for tax positions related to prior years |
|
| (43,581 | ) |
|
| (250 | ) |
|
| (3,492 | ) |
Ending balance |
| $ | 71,717 |
|
| $ | 113,892 |
|
| $ | 112,555 |
|
The decrease in unrecognized income tax benefits during 2017 for tax positions related to prior years is due to the change in the federal income tax rate under the U.S. Tax Cuts and Jobs Act.
If recognized, all of the unrecognized income tax benefits would favorably impact the effective income tax rate. We will maintain a liability for unrecognized income tax benefits until these uncertain positions are resolved or until the expiration of the applicable statute of limitations, if earlier.
Our policy is to record tax-related interest expense and penalties, if applicable, as a component of income tax expense. We recorded no interest benefit in 2017 or 2016. The cumulative liability for tax-related interest was $0.1 million as of December 31, 2017 and $0.1 million as of December 31, 2016. We have not recorded any liability for income tax-related penalties, and the tax authorities historically have not assessed any.
For U.S. federal income tax purposes, the 2012 through 2017 income tax years remain subject to examination. The Company is currently undergoing a federal income tax examination for the tax year ending 2015 as well as income tax examinations in Illinois and New Jersey. The Company files income tax returns in multiple foreign jurisdictions, primarily in Singapore and Hong Kong. The 2012 through 2017 Singapore income tax years and 2010 through 2017 Hong Kong income tax years are subject to examination. The Company is currently undergoing income tax examinations in Hong Kong for the periods 2010 through 2016.
12. 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:
|
|
|
|
|
|
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 PTCs related to EETCs issued by Atlas in 1998, 1999 and 2000. Interest on debt securities and accretion of discounts using the effective interest method are included in Interest income.
Term loans and notes consist of term loans, Ex-Im Guaranteed Notes, the Private Placement Facility, 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 is 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:
|
| 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 |
|
|
| December 31, 2016 |
| |||||||||||||||||
|
| Carrying Value |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 123,890 |
|
| $ | 123,890 |
|
| $ | 123,890 |
|
| $ | - |
|
| $ | - |
|
Short-term investments |
|
| 4,313 |
|
|
| 4,313 |
|
|
| - |
|
|
| - |
|
|
| 4,313 |
|
Restricted cash |
|
| 14,360 |
|
|
| 14,360 |
|
|
| 14,360 |
|
|
| - |
|
|
| - |
|
Long-term investments and accrued interest |
|
| 27,951 |
|
|
| 33,161 |
|
|
| - |
|
|
| - |
|
|
| 33,161 |
|
|
| $ | 170,514 |
|
| $ | 175,724 |
|
| $ | 138,250 |
|
| $ | - |
|
| $ | 37,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and notes |
| $ | 1,674,013 |
|
| $ | 1,739,744 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,739,744 |
|
Convertible notes (1) |
|
| 177,398 |
|
|
| 228,429 |
|
|
| 228,429 |
|
|
| - |
|
|
| - |
|
Amazon Warrant |
|
| 95,775 |
|
|
| 95,775 |
|
|
| - |
|
|
| 95,775 |
|
|
| - |
|
|
| $ | 1,947,186 |
|
| $ | 2,063,948 |
|
| $ | 228,429 |
|
| $ | 95,775 |
|
| $ | 1,739,744 |
|
(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 9).
Gross unrealized gains on our long-term investments and accrued interest were $2.7 million at December 31, 2017 and $5.2 million at December 31, 2016.
Our Long-term investments include investments in PTCs related to EETCs. During 2015, we repaid EETCs related to five 747-400 freighter aircraft owned by us using proceeds from the Convertible Notes (see Note 9). Following the refinancing, we recognized a $13.4 million Gain on investments resulting from the early redemption
of certain PTCs, of which $5.7 million was related to the receipt of debt redemption premiums and $7.7 million was related to the recognition of deferred income on the PTCs purchased at a discount that have been repaid. The early redemption of PTCs does not impact our ability or intent to hold the remainder of our PTC investments to maturity.
13. 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.
Management allocates the costs attributable to aircraft operation and ownership among the various segments based on the aircraft type and activity levels in each segment. Depreciation and amortization expense, aircraft rent, maintenance expense, and other aircraft-related expenses are allocated to segments based upon aircraft utilization because certain individual aircraft are utilized across segments interchangeably. Other allocation methods are standard activity-based methods that are commonly used in the industry.
The ACMI segment provides aircraft, crew, maintenance and insurance services to customers. Also included in the ACMI segment is CMI, whereby we provide crew, maintenance and insurance services but not the aircraft. Under ACMI and CMI contracts, customers generally guarantee a monthly level of operation at a predetermined rate for a defined period of time. The customer bears the commercial revenue risk and the obligation for other direct operating costs, including fuel.
The Charter segment provides full-planeload air cargo and passenger aircraft charters to customers, including the U.S. Military Air Mobility Command (the “AMC”), brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter customers. Charter customers generally pay a fixed charter fee and we bear the direct operating costs.
The Dry Leasing segment provides for the leasing of aircraft and engines to customers.
Other represents revenue for services that are not allocated to any segment, including administrative and management support services and flight simulator training.
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 Years Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Operating Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 988,741 |
|
| $ | 834,997 |
|
| $ | 791,442 |
|
Charter |
|
| 1,034,562 |
|
|
| 881,991 |
|
|
| 908,753 |
|
Dry Leasing |
|
| 119,820 |
|
|
| 105,795 |
|
|
| 107,218 |
|
Customer incentive asset amortization |
|
| (5,261 | ) |
|
| (537 | ) |
|
| - |
|
Other |
|
| 18,598 |
|
|
| 17,381 |
|
|
| 15,246 |
|
Total Operating Revenue |
| $ | 2,156,460 |
|
| $ | 1,839,627 |
|
| $ | 1,822,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Contribution: |
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 231,271 |
|
| $ | 200,563 |
|
| $ | 185,615 |
|
Charter |
|
| 151,388 |
|
|
| 133,727 |
|
|
| 124,808 |
|
Dry Leasing |
|
| 39,939 |
|
|
| 33,114 |
|
|
| 42,023 |
|
Total Direct Contribution for Reportable Segments |
|
| 422,598 |
|
|
| 367,404 |
|
|
| 352,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated income and expenses, net |
|
| (261,942 | ) |
|
| (242,768 | ) |
|
| (294,451 | ) |
Loss on early extinguishment of debt |
|
| (167 | ) |
|
| (132 | ) |
|
| (69,728 | ) |
Unrealized loss on financial instruments |
|
| (12,533 | ) |
|
| (2,888 | ) |
|
| - |
|
Gain on investments |
|
| - |
|
|
| - |
|
|
| 13,439 |
|
Special charge |
|
| (106 | ) |
|
| (10,140 | ) |
|
| (17,388 | ) |
Transaction-related expenses |
|
| (4,509 | ) |
|
| (22,071 | ) |
|
| - |
|
Gain (loss) on disposal of aircraft |
|
| 31 |
|
|
| 11 |
|
|
| (1,538 | ) |
Income (loss) from continuing operations before income taxes |
|
| 143,372 |
|
|
| 89,416 |
|
|
| (17,220 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back (subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| (6,009 | ) |
|
| (5,532 | ) |
|
| (12,554 | ) |
Interest expense |
|
| 99,687 |
|
|
| 84,650 |
|
|
| 96,756 |
|
Capitalized interest |
|
| (7,389 | ) |
|
| (3,313 | ) |
|
| (1,027 | ) |
Loss on early extinguishment of debt |
|
| 167 |
|
|
| 132 |
|
|
| 69,728 |
|
Unrealized loss on financial instruments |
|
| 12,533 |
|
|
| 2,888 |
|
|
| - |
|
Gain on investments |
|
| - |
|
|
| - |
|
|
| (13,439 | ) |
Other (income) expense |
|
| (387 | ) |
|
| 70 |
|
|
| 1,261 |
|
Operating Income |
| $ | 241,974 |
|
| $ | 168,311 |
|
| $ | 123,505 |
|
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 Note 3 for further discussion regarding Polar). No other customer accounted for more than 10.0% of our Total Operating Revenue. Revenue from the AMC was $496.3 million for 2017, $436.1 million for 2016 and $418.3 million 2015. Revenue from DHL was $262.6 million for 2017, $195.1 million for 2016 and $113.0 million for 2015. We have not experienced any credit issues with either of these customers.
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
ACMI |
| $ | 71,097 |
|
| $ | 61,630 |
|
| $ | 62,253 |
|
Charter |
|
| 36,539 |
|
|
| 37,239 |
|
|
| 27,294 |
|
Dry Leasing |
|
| 47,426 |
|
|
| 40,164 |
|
|
| 31,326 |
|
Unallocated |
|
| 11,651 |
|
|
| 9,843 |
|
|
| 7,867 |
|
Total Depreciation and Amortization |
| $ | 166,713 |
|
| $ | 148,876 |
|
| $ | 128,740 |
|
14. 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 Mr. Dietrich, age 55, 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 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 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 discussions, 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. While this lawsuit is pending in the Southern District Court of New York, the Company and the IBT have reached an interim agreement on a process to proceed with negotiations for a new joint CBA. 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.
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
The Company and Polar Air Cargo, LLC (“Old Polar”), a consolidated subsidiary, were named defendants, along with a number of other cargo carriers, in several class actions in the U.S. arising from allegations about the pricing practices of Old Polar and a number of air cargo carriers. These actions were all centralized in the U.S. District Court for the Eastern District of New York. Polar was later joined as an additional defendant. The consolidated complaint alleged, among other things, that the defendants, including the Company and Old Polar, manipulated the market price for air cargo services sold domestically and abroad through the use of surcharges, in violation of U.S., state, and European Union antitrust laws. The suit sought treble damages and attorneys’ fees.
On January 7, 2016, the Company, Old Polar, and Polar entered into a settlement agreement to settle all claims by participating class members against the Company, Old Polar and Polar. The Company, Polar, and Old Polar deny
any wrongdoing, and there is no admission of any wrongdoing in the settlement agreement. Pursuant to the settlement agreement, which was approved by the U.S. District Court for the Eastern District of New York, the Company, Old Polar and Polar have made installment payments over three years to settle the plaintiffs’ claims, with the last payment of $30.0 million in January 2018.
In the United Kingdom, several groups of named claimants have brought suit against British Airways in connection with the same alleged pricing practices at issue in the proceedings described above and are seeking damages allegedly arising from that conduct. British Airways has filed claims in the lawsuit against Old Polar and a number of air cargo carriers for contribution should British Airways be found liable to claimants. Old Polar’s formal statement of defense was filed on March 2, 2015. On October 14, 2015, the U.K. Court of Appeal released decisions favorable to the defendant and contributory defendants on two matters under appeal. Permission was sought to appeal the U.K. Court of Appeal's decisions to the U.K. Supreme Court and was denied. In December 2015, certain claimants settled with British Airways removing a significant portion of the claim against British Airways and therefore reducing the potential contribution required by the other airlines, including Old Polar. On December 16, 2015, the European General Court released decisions annulling decisions that the European Commission made against the majority of the air cargo carriers. The European Commission did not appeal the General Court decision but has, in early 2017, reissued a revised decision to which Old Polar is, again, not an addressee. On April 13, 2017, Old Polar and claimants represented by Hausfeld & Co. LLP (the “Hausfeld Claimants”) entered into a bilateral settlement agreement in relation to the English proceedings (the “Settlement Agreement”). The Settlement Agreement contains a mechanism by which the Hausfeld Claimants will release Old Polar and remove from the English proceedings all claims for damages alleged by the Hausfeld Claimants to be attributable to air cargo purchases from Old Polar (and each of Old Polar’s parents, subsidiaries, affiliates, predecessors, successors, agents and assignees). The amount of the settlement, which is tax deductible and was previously accrued for, was paid during the second quarter of 2017 and did not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Old Polar remains a contributory defendant in the proceedings and, as such, may be subject to certain continuing evidentiary obligations.
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 the same pricing practices at issue in the proceedings described above. In response, British Airways, KLM, Martinair, Air France and Lufthansa filed third-party indemnification lawsuits against Old Polar and Polar seeking indemnification in the event the defendants are found to be liable in the main proceedings. The Netherlands proceedings are ongoing and, like the U.K. proceedings, are likely to be affected by the European Commission’s revised decision. We are unable to reasonably predict the outcome of the litigation. If the Company, Old Polar or Polar were to incur an unfavorable outcome in connection with this proceeding, such outcome may have a material adverse effect 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 December 31, 2017 exchange rates.
In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. Furthermore, we may seek appropriate indemnity from the shipper in each claim as may be feasible. In the pending claim for one of the cases, we have received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. As required to defend such claims, we have made deposits pending resolution of these matters. The balance was $5.1 million as of December 31, 2017 and $5.0 million as of December 31, 2016, 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.
As of December 31, 2017, the Company had an accrual of $30.0 million, which was paid in January 2018, related to the U.S. class action settlement that was recorded in 2015.
Other
We have certain other contingencies incident to the ordinary course of business. Management does not expect the ultimate disposition of such other contingencies to materially affect our financial condition, results of operations or cash flows.
15. Stock-Based and Long-term Incentive Compensation Plans
In 2007, our stockholders approved a Long-Term Incentive Plan (the “2007 Plan”). An aggregate of 0.6 million shares of common stock was reserved for issuance to participants under the 2007 Plan. The 2007 Plan provided for stock awards of up to approximately 2.8 million shares of AAWW’s common stock to employees in various forms, including cash awards and performance cash awards. Stock awards included nonqualified options, incentive stock options, share appreciation rights, restricted shares, restricted share units, performance shares and performance units, dividend equivalents and other share-based awards. In 2016, the stockholders approved a revised Long-Term Incentive Plan (the “2016 Plan”), which replaced the 2007 Plan. An aggregate of 0.8 million shares of common stock was reserved for issuance to participants under the 2016 Plan. No new awards have been made under the 2007 Plan since the adoption of the 2016 Plan in May 2016. The portion of the 2016 Plan and the 2007 Plan applicable to employees is administered by the compensation committee of the board of directors, which also establishes the terms of the awards. Awards outstanding under the 2007 Plan will continue to be governed by the terms of that plan and agreements under which they were granted. The 2016 Plan limits the terms of awards to ten years and prohibits the granting of awards more than ten years after the effective date of the 2016 Plan.
As of December 31, 2017, the 2016 Plan had a total of 0.5 million shares of common stock available for future award grants to management and members of the board of directors. Including the impact of the change in control as defined under the benefit plan in 2016 (see Note 7), our compensation expense for both plans was $20.9 million in 2017, $30.9 million in 2016 and $15.0 million in 2015. Income tax benefits recognized for share-based compensation arrangements were $5.3 million in 2017, $8.7 million in 2016 and $5.7 million in 2015.
Nonqualified Stock Options
Nonqualified stock options, which have not been granted since 2007, vest over a three- or four-year period and expire seven to ten years from the date of grant. While nonqualified stock options may be granted at any price, they have never been granted with an exercise price less than the fair market value of the stock on the date of grant.
A summary of our options as of December 31, 2017 and changes during the year then ended is presented below:
|
| Number of Options |
|
| Weighted- Average Exercise Price |
|
| Weighted- Average Remaining Contractual Term (in years) |
|
| Aggregate Intrinsic Value (in thousands) |
| ||||
Outstanding as of December 31, 2016 |
|
| 4,500 |
|
| $ | 58.89 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited, net of adjustments |
|
| (4,500 | ) |
|
| 58.89 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
The total intrinsic value of options exercised in 2016 and 2015 was nominal and the cash received was zero and $1.2 million, respectively. No options were exercised in 2017.
Restricted Share Awards
Restricted shares granted vest and are expensed over one-, three- or four- year periods. Restricted share awards have been granted in both shares and units. As of December 31, 2017, a total of 3.8 million restricted shares have been granted under the 2007 and 2016 Plans. All shares were valued at their fair market value on the date of issuance. Unrecognized compensation cost as of December 31, 2017 is $20.4 million and will be recognized over the remaining weighted average life of 2.1 years.
A summary of our restricted shares as of December 31, 2017 and changes during the year then ended are presented below:
|
|
|
|
|
| Weighted- Average |
| |
Restricted Share Awards |
| Number of Shares |
|
| Grant-Date Fair Value |
| ||
Unvested as of December 31, 2016 |
|
| 730,146 |
|
| $ | 39.89 |
|
Granted |
|
| 327,303 |
|
|
| 54.40 |
|
Vested |
|
| (266,896 | ) |
|
| 38.29 |
|
Forfeited |
|
| (18,396 | ) |
|
| 54.74 |
|
Unvested as of December 31, 2017 |
|
| 772,157 |
|
| $ | 44.95 |
|
The total fair value of shares vested on various vesting dates was $14.8 million in 2017, $19.8 million in 2016 and $13.7 million in 2015. Weighted average grant date fair value was $36.10 in 2016 and $47.10 in 2015.
Performance Share and Performance Cash Awards
Performance share and performance cash awards granted are expensed over three years, which generally is the requisite service period. Awards generally become vested if (1) we achieve certain specified performance levels compared with predetermined performance thresholds during a three-year period starting in the grant year and ending on December 31 three years later, and (2) the employee remains employed by us through the determination date which can be no later than four months following the end of the Performance Period. Full or partial vesting may occur for certain employee terminations. As a result of a change in control as defined under the benefit plan (see Note 7), the performance levels are deemed to be achieved for all performance share and performance cash awards outstanding as of December 31, 2016.
Performance share awards have been granted to employees in shares and units. All performance share and performance cash awards are valued at their fair market value on the date of issuance. The estimated compensation expense recognized for performance share and performance cash awards are net of estimated forfeitures. We assess the performance levels in the first quarter of each year for the prior year. We review the results, adjust the estimated performance level and record any change to compensation cost. As of December 31, 2017, a total of 1.8 million performance shares have been granted. Unrecognized compensation cost as of December 31, 2017 is $5.8 million and will be recognized over the remaining weighted average life of 1.4 years. For the performance cash awards, we had accruals of $13.8 million as of December 31, 2017 and $13.1 million as of December 31, 2016 in Other liabilities. Including the impact of the change in control as defined under the benefit plan in 2016, we recognized compensation expense associated with the performance cash awards totaling $7.1 million in 2017, $13.9 million in 2016 and $1.6 million in 2015.
A summary of our performance shares as of December 31, 2017 and changes during the year then ended are presented below:
|
|
|
|
|
| Weighted- Average |
| |
Performance Share Awards |
| Number of Shares |
|
| Grant-Date Fair Value |
| ||
Unvested as of December 31, 2016 |
|
| 576,166 |
|
| $ | 27.30 |
|
Granted |
|
| 97,205 |
|
|
| 54.20 |
|
Vested |
|
| (201,324 | ) |
|
| 32.07 |
|
Forfeited |
|
| (17,971 | ) |
|
| 43.03 |
|
Unvested as of December 31, 2017 |
|
| 454,076 |
|
| $ | 43.63 |
|
The total fair value of shares vested on various vesting dates in 2017 was $10.6 million, $5.8 million in 2016 and $3.7 in 2015. Weighted average grant date fair value was $37.21 in 2016 and $47.48 in 2015.
16. Profit Sharing, Incentive and Retirement Plans
Profit Sharing and Incentive Plans
We have an annual incentive compensation program for management employees. The program provides for payments to eligible employees based upon our financial performance, service performance and attainment of individual performance goals, among other things. In addition, our profit sharing plan allows IBT-represented Atlas crewmembers to receive payments from the plan based upon Atlas’ financial performance. The profit sharing plan is subject to a minimum financial performance threshold. For both plans, we had accruals of $26.9 million as of December 31, 2017 and $22.1 million as of December 31, 2016 in Accrued liabilities. Including the impact of the change in control as defined under the benefit plan in 2016 (see Note 7), we recognized compensation expense associated with both plans totaling $26.9 million in 2017, $21.8 million in 2016 and $28.5 million in 2015.
401(k) and 401(m) Plans
Participants in our retirement plan may contribute a portion of their annual compensation to a 401(k) plan on a pretax basis, subject to aggregate limits under the Code. In addition to 401(k) contributions, participants may contribute a portion of their eligible compensation to a 401(m) plan on an after-tax basis. On behalf of participants in the plan who make elective compensation deferrals, we provide a matching contribution subject to certain limitations. Employee contributions in the plan are vested at all times and our matching contributions are subject to a three-year cliff vesting provision, except for employees who are represented by a collective bargaining agreement and are subject to a three-year graded vesting provision. We recognized compensation expense associated with the plan matching contributions totaling $10.9 million in 2017, $10.5 million in 2016 and $9.5 million in 2015.
17. Stock Repurchases
We record the repurchase of our shares of common stock at cost based on the settlement date of the transaction. These shares are classified as treasury stock, which is a reduction to stockholders’ equity. Treasury shares are included in authorized and issued shares but excluded from outstanding shares.
In 2008, we established a stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock. In November 2013, we announced an increase of $51.0 million to our stock repurchase program. As of December 31, 2017, we had repurchased a total of 3,307,911 shares of our common stock for approximately $126.0 million under this program, resulting in $25.0 million of available authorization remaining. Purchases may be made at our discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase programs or a combination of these methods. The actual timing and amount of our repurchases will depend on Company and market conditions.
In addition, we repurchased 195,831 and 297,569 shares of common stock from management, in connection with the vesting of equity awards to pay the statutory tax withholdings of employees, at an average price of $54.20 per share in 2017 and $37.89 per share in 2016, and held the shares as treasury shares.
18. Earnings Per Share
Basic earnings per share (“EPS”) represents income divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represents income 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 Years Ended December 31, |
| |||||||||
Numerator: | 2017 |
|
| 2016 |
|
| 2015 |
| |||
Income from continuing operations, net of taxes | $ | 224,338 |
|
| $ | 42,625 |
|
| $ | 7,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
Basic EPS weighted average shares outstanding |
| 25,241 |
|
|
| 24,843 |
|
|
| 24,833 |
|
Effect of dilutive convertible notes |
| 27 |
|
|
| - |
|
|
| - |
|
Effect of dilutive stock options and restricted stock |
| 586 |
|
|
| 277 |
|
|
| 185 |
|
Diluted EPS weighted average shares outstanding |
| 25,854 |
|
|
| 25,120 |
|
|
| 25,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 8.89 |
|
| $ | 1.72 |
|
| $ | 0.29 |
|
Diluted | $ | 8.68 |
|
| $ | 1.70 |
|
| $ | 0.29 |
|
Loss per share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | (0.03 | ) |
| $ | (0.04 | ) |
| $ | - |
|
Diluted | $ | (0.03 | ) |
| $ | (0.04 | ) |
| $ | - |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 8.85 |
|
| $ | 1.67 |
|
| $ | 0.29 |
|
Diluted | $ | 8.64 |
|
| $ | 1.65 |
|
| $ | 0.29 |
|
Anti-dilutive shares related to warrants and stock options that were out of the money and excluded for 2017 were 7.8 million, 2016 were 3.3 million and 2015 were 3.0 million. Diluted shares reflect the potential dilution that could occur from stock options and 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 6.8 million in 2017, 7.5 million in 2016 and 0.3 million in 2015.
19. 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, 2015 |
| $ | (6,072 | ) |
| $ | 9 |
|
| $ | (6,063 | ) |
Reclassification to interest expense |
|
| 1,770 |
|
|
| - |
|
|
| 1,770 |
|
Tax effect |
|
| (700 | ) |
|
| - |
|
|
| (700 | ) |
Balance as of December 31, 2016 |
|
| (5,002 | ) |
|
| 9 |
|
|
| (4,993 | ) |
Reclassification to interest expense |
|
| 1,621 |
|
|
| - |
|
|
| 1,621 |
|
Tax effect |
|
| (621 | ) |
|
| - |
|
|
| (621 | ) |
Balance as of December 31, 2017 |
| $ | (4,002 | ) |
| $ | 9 |
|
| $ | (3,993 | ) |
As of December 31, 2017, there was $6.5 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 $1.6 million and $1.8 million for 2017 and 2016, respectively. Net realized losses expected to be reclassified into earnings within the next 12 months are $1.5 million as of December 31, 2017.
20. Selected Quarterly Financial Information (unaudited)
The following tables summarize the 2017 and 2016 quarterly results:
|
| First |
|
| Second |
|
| Third |
|
| Fourth |
| ||||
2017* |
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
| ||||
Total Operating Revenue |
| $ | 475,394 |
|
| $ | 517,366 |
|
| $ | 535,748 |
|
| $ | 627,952 |
|
Operating Income |
|
| 24,036 |
|
|
| 58,478 |
|
|
| 52,712 |
|
|
| 106,748 |
|
Income (Loss) from continuing operations, net of taxes |
|
| 35 |
|
|
| 39,044 |
|
|
| (24,195 | ) |
|
| 209,454 |
|
Income (Loss) from discontinued operations, net of taxes |
|
| (787 | ) |
|
| (105 | ) |
|
| 33 |
|
|
| (6 | ) |
Net Income (Loss) |
| $ | (752 | ) |
| $ | 38,939 |
|
| $ | (24,162 | ) |
| $ | 209,448 |
|
Earnings (Loss) per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.00 |
|
| $ | 1.55 |
|
| $ | (0.96 | ) |
| $ | 8.28 |
|
Diluted** |
| $ | 0.00 |
|
| $ | 0.92 |
|
| $ | (0.96 | ) |
| $ | 6.71 |
|
Loss per share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.03 | ) |
| $ | (0.00 | ) |
| $ | 0.00 |
|
| $ | (0.00 | ) |
Diluted |
| $ | (0.03 | ) |
| $ | (0.00 | ) |
| $ | 0.00 |
|
| $ | (0.00 | ) |
Earnings (Loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.03 | ) |
| $ | 1.54 |
|
| $ | (0.96 | ) |
| $ | 8.28 |
|
Diluted** |
| $ | (0.03 | ) |
| $ | 0.92 |
|
| $ | (0.96 | ) |
| $ | 6.71 |
|
|
| First |
|
| Second |
|
| Third |
|
| Fourth |
| ||||
2016*** |
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
| ||||
Total Operating Revenue |
| $ | 418,615 |
|
| $ | 443,272 |
|
| $ | 448,015 |
|
| $ | 529,725 |
|
Operating Income |
|
| 20,057 |
|
|
| 20,824 |
|
|
| 25,998 |
|
|
| 101,432 |
|
Income (Loss) from continuing operations, net of taxes |
|
| 471 |
|
|
| 20,919 |
|
|
| (7,501 | ) |
|
| 28,736 |
|
Loss from discontinued operations, net of taxes |
|
| - |
|
|
| (345 | ) |
|
| (445 | ) |
|
| (319 | ) |
Net Income (Loss) |
| $ | 471 |
|
| $ | 20,574 |
|
| $ | (7,946 | ) |
| $ | 28,417 |
|
Earnings (Loss) per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.02 |
|
| $ | 0.84 |
|
| $ | (0.30 | ) |
| $ | 1.15 |
|
Diluted**** |
| $ | 0.02 |
|
| $ | (0.26 | ) |
| $ | (0.30 | ) |
| $ | 1.12 |
|
Loss per share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | - |
|
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.01 | ) |
Diluted |
| $ | - |
|
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.01 | ) |
Earnings (Loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.02 |
|
| $ | 0.83 |
|
| $ | (0.32 | ) |
| $ | 1.14 |
|
Diluted**** |
| $ | 0.02 |
|
| $ | (0.28 | ) |
| $ | (0.32 | ) |
| $ | 1.11 |
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|
|
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (“Principal Executive Officer”)in January 2020. He was also elected to our Board of Directors at such time. Prior to January 2020, he served as our President and Chief Operating Officer from July 2019 and our Executive Vice President and Chief Financial Officer (“Principal Financial Officer”), of the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. Based on this evaluation, our Principal Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on the assessment, management concluded that, as of December 31, 2017, our internal control over financial reporting is effective. Our internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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 quarter ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The required information is incorporated by reference from our Proxy Statement to be filed with respect to our 2018 Annual Meeting of Stockholders. Information concerning the executive officers is included below. We have adopted a code of conduct that applies to all of our employees, along with a Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer and members of the board of directors (the “Code of Ethics”). The Code of Ethics is monitored by our Audit Committee, and includes certain provisions regarding disclosure of violations and waivers of, and amendments to, the Code of Ethics by covered parties. A copy of the Code of Ethics is available on our website at www.atlasair.com.
The following is a list of the names, ages and background of our current executive officers:
William J. Flynn. Mr. Flynn, age 64, has been our President and Chief Executive Officer since June 2006. Mr. Flynn has over a 40 year career in international supply chain management and freight transportation. Prior to joining us, Mr. Flynn served as President and Chief Executive Officer of GeoLogistics Corporation since 2002 where he led a successful turnaround of the company’s profitability and the sale of the company in September 2005. Prior to his tenure at GeoLogistics, Mr. Flynn served as a Senior Vice President at CSX Transportation, one of the largest Class 1 railroads operating in the U. S., from 2000 to 2002. Mr. Flynn spent over 20 years with Sea-Land Service, Inc., a global provider of container shipping services. He served in roles of increasing responsibility in the U.S., Latin America and Asia. Mr. Flynn ultimately served as head of the company’s operations in Asia. Mr. Flynn is also a director of Republic Services, Inc. During the previous five years, he served as a director of Horizon Lines, Inc. Mr. Flynn holds a Bachelors degree in Latin American studies from the University of Rhode Island and a Masters degree in the same field from the University of Arizona.
John W. Dietrich. Mr. Dietrich, age 53, has been Executive Vice President and Chief Operating Officer sincefrom September 2006. In addition, he was named President and Chief Operating Officer of Atlas Air, Inc. effectivefrom October 2014. Prior2014 to December 2019. During the period from March 2003 to September 2006, Mr. Dietrich washeld a number of senior executive positions in the Company, including Senior Vice President, General Counsel, and Chief Human Resources Officer, from February 2004. He was named Vice PresidentCorporate Secretary and General Counsel in March 2003, where he was also responsible for our Human Resources andhead of the Corporate Communications functions.function. Mr. Dietrich joined Atlas in 1999 as Associate General Counsel. Prior to joining us, he was a litigation attorney at United Airlines from 1992 to 1999, where he provided legal counsel to all levels of management, particularly on employment and commercial litigation issues. He also serves as a director onChairman of the National Defense Transportation Association and a director of the National Air Courier Association. Mr. Dietrich earned a Bachelors of Science degree from Southern Illinois University and received his Juris Doctorate, cum laude, from the University of Illinois at Chicago John Marshall Law School. He is a member of the New York, Illinois and Colorado Bars.
James Forbes. Mr. Forbes, age 62, was elected our Executive Vice President and Chief Operating Officer in January 2020. He also serves as Executive Vice president and Chief Operating Officer of Atlas Air, Inc. and Southern Air, Inc. Prior to January 2020, he was Senior Vice President and Chief Operating Officer of Southern Air, Inc. from April 2016. Mr. Forbes has over 30 years of aviation operating experience, including more than 20 years with the Company. He joined us in 1997 as Senior Director of Ground Operations, where he helped construct the global infrastructure upon which we have grown. He became Vice President, Worldwide Ground Operations in 2001, overseeing station operations for all of Atlas Air, Inc. and Polar Air Cargo, Inc. In 2008, Mr. Forbes was named Senior Vice President for System Performance and Quality at Polar, where he led the transformation of an all-cargo network into a leading on-time express operation that supports DHL’s worldwide air network. He held that position until April 2016 when he was transferred to Southern Air to lead that company’s operations.
Adam R. Kokas. Mr. Kokas, age 46,48, has been Executive Vice President since January 2014 and General Counsel and Secretary since October 2006 and2006. He also served as our Chief Human Resources Officer sincefrom November 2007.2007 to March 2018. Prior to January 2014, he was Senior Vice President from October 2006. Mr. Kokas joined us from Ropes & Gray LLP, where he was a partner in their Corporate Department, focusing on general corporate, securities, transactions and business law matters. Prior to joining Ropes & Gray, Mr. Kokas was a partner at Kelley Drye & Warren LLP, where he joined as an associate in 2001. At both Kelley Drye and Ropes & Gray, Mr. Kokas represented us in a variety of matters, including corporate finance and merger and acquisition transactions, corporate governance matters, strategic alliances, securities matters, and other general corporate issues. Mr. Kokas earned a Bachelor of Arts degree from Rutgers University and is a cum laude graduate of the Boston University School of Law, where he was an Edward M. Hennessey scholar. Mr. Kokas is a member of the New York and New Jersey Bars. Mr. Kokas has also been the Chairman of the Board of the Cargo Airline Association (a non-profit trade organization) since June 2011.
Michael T. Steen. Mr. Steen, age 51,53, has been Executive Vice President and Chief Commercial Officer since November 2010. In addition, he was named President and Chief Executive Officer of Titan Aviation Holdings, Inc. effective October 2014. Prior to November 2010, he was our Senior Vice President and Chief Marketing Officer from April 2007. Mr. Steen joined us from Exel plc where he served as Senior Vice President of Sales and Marketing. Mr. Steen led the sales and marketing activities for Exel Freight’s management and technology sector. Following Exel’s acquisition by Deutsche Post World Net, he held senior-level positions with the merged company
in global supply chain logistics. Prior to joining Exel, he served in a variety of roles with KLM Cargo over 11 years, including Vice President of the Americas, Head of Global Sales and Marketing for the Logistics Unit and Director of Sales for EMEA. Mr. Steen is a Director for CHC Helicopter since May 2017 and is the Vice Chairman for IATA’s Cargo Committee. Mr. Steen earned a degree in economic science from Katrinelund in Gothenburg, Sweden, and is an alumnus of the Advanced Executive Program at the Kellogg School of Management at Northwestern University.
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Spencer Schwartz.Mr. Schwartz, age 51,53, has been Executive Vice President since January 2014 and Chief Financial Officer since June 2010. Prior to January 2014, he was Senior Vice President from June 2010. Prior to June 2010, he was our Vice President and Corporate Controller from November 2008. Mr. Schwartz joined us from MasterCard Incorporated, where he was employed for over 12 years and served as Group Head of Global Risk Management; Senior Vice President and Business Financial Officer; Senior Vice President, Corporate Controller and Chief Accounting Officer; and Vice President of Taxation. Prior to joining MasterCard, Mr. Schwartz held financial positions of increasing responsibility with Price Waterhouse LLP (now PricewaterhouseCoopers LLP) and Carl Zeiss, Inc. Mr. Schwartz earned a BachelorsBachelor's degree in Accounting from The Pennsylvania State University and a MastersMaster's degree in Business Administration, with a concentration in management, with honors, from New York University’s Leonard N. Stern School of Business. He is a certified public accountant.
Keith H. Mayer. Mr. Mayer, age 52,55, has been Senior Vice President and Chief Accounting Officer since January 2018 and Corporate Controller since November 2010. Prior to January 2018, he was Vice President since November 2010. Mr. Mayer joined us fromPepsiCo, Inc. (“PepsiCo”). In his most recent role at PepsiCo, he served as Chief Financial Officer of an international coffee partnership between PepsiCo and Starbucks Corporation. Mr. Mayer also served PepsiCo in a variety of roles since 1999, including Director of External Reporting, Assistant Controller for PepsiCo International, Senior Group Manager of Financial Accounting for Frito-Lay North America, and Group Manager of Technical Accounting. Prior to joining PepsiCo, Mr. Mayer held financial positions of increasing responsibility with Coopers & Lybrand LLP (now PricewaterhouseCoopers LLP). Mr. Mayer earned a BachelorsBachelor's degree in Accounting from the University of Bridgeport where he graduated magna cum laude. He is a certified public accountant.
Executive Officers are elected by our boardBoard of directors,Directors, and their terms of office continue until the next annual meeting of the boardBoard of directorsDirectors or until their successors are elected and have qualified. There are no family relationships among our Directors or Executive Officers.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires certain of our executive officers.officers, as well as our Directors and persons who own more than 10% of a registered class of AAWW’s equity securities, to file reports of ownership and changes in ownership with the SEC. Based solely on our review of the reporting forms received by us or written representations from reporting persons, we believe that during the last fiscal year all executive officers and Directors complied with their filing requirements under Section 16(a) for all reportable transactions during the year.
Code of Ethics Applicable to the Chief Executive Officer, Senior Financial Officers and Members of the Board of Directors
We have a long-standing commitment to conduct our business with the highest ethical principles. We have adopted a Code of Ethics applicable to the Chief Executive Officer, Senior Financial Officers and Members of the Board of Directors that includes certain provisions regarding disclosure of violations and waivers of, and amendments to, the Code of Ethics by covered parties. The Code of Ethics is monitored by our Audit Committee, which reviews the Code of Ethics annually. Any person who wishes to obtain a copy of our Code of Ethics may do so by writing to the Office of the Secretary, Atlas Air Worldwide Holdings, Inc., 2000 Westchester Avenue, Purchase, NY 10577. A copy of the Code of Ethics is available in the “About Us – Structure and Governance” section of our website at www.atlasairworldwide.com.
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Audit Committee
The Audit Committee of the Board of Directors currently consists of five outside Directors: Messrs. Bernlohr (Chairman), Bolden, McNabb and Wulff and Ms. Stamps, each of whom is an independent Director within the meaning of the applicable rules and regulations of the SEC and NASDAQ (see also “Director Independence” below). The Board has determined that Messrs. Bernlohr and Wulff and Ms. Stamps are “audit committee financial experts” as defined under applicable SEC rules.
The Audit Committee’s primary function, as set forth in its written charter (available on our website at www.atlasairworldwide.com in the “About Us – Structure and Governance” section) is to assist the Board in overseeing the:
The Audit Committee is also responsible for appointing the independent registered public accounting firm, approving, in advance, audit and permitted non-audit services in accordance with the Committee's pre-approval policy (see also "Pre-approval Policies and Procedures" below" and overseeing the Company’s Code of Ethics as described above and related party transactions. The Audit Committee held four in-person meetings and four telephonic meetings in 2019.
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ITEM 11. EXECUTIVE COMPENSATIONCOMPENSATION.
Compensation Committee
Duties and Responsibilities
The Board’s Compensation Committee assists the Board in discharging and performing its duties regarding the compensation of our executives, including our Named Executive Officers ("NEOs"), executive succession planning, and other matters. The Compensation Committee is also the administrator of our long-term incentive award and annual bonus plans.
The Compensation Committee is also responsible for:
Processes and Procedures
Following approval of the annual budget, either before or during the first quarter of each year, the Committee establishes the minimum financial performance objective required before any annual incentive award payment may be made, as well as the year’s objectives for financial, on-time customer service reliability and individual performance goals and objectives for senior executives. All are taken into account in setting the performance range for each such executive and ultimately in determining the amount of each such executive’s annual award payment, if any. The Compensation Committee establishes these criteria, with the advice of the independent compensation consultant and outside counsel, as appropriate, after reviewing information submitted to the Compensation Committee by the CEO and General Counsel (at the request of the Compensation Committee). Our CEO and General Counsel also provide information to the Committee regarding annual and long-term incentive plans that the Compensation Committee considers, with the advice of the independent compensation consultant and outside counsel, in its determination of awards under those plans.
The Compensation Committee is incorporatedrequired by referenceits charter to meet at least four times annually. During 2019, the Compensation Committee held four in-person meetings and six telephonic meetings and acted once by written consent. In 2019, the Compensation Committee consisted of four outside Directors, Ms. Hallett (Chair), Mr. Wulff, Mr. Griffin and Ms. Lute, each of whom is an independent Director within the meaning of applicable SEC and NASDAQ rules.
Compensation Determination Process
The Compensation Committee has primary responsibility for determining and approving, on an annual basis, the compensation of our CEO and other executive officers. The Compensation Committee receives information and advice from its independent compensation consultant, independent legal counsel, as well as from our Proxy Statementhuman resources, finance and legal departments and management to assist in compensation determinations.
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| • | Pay Governance provides advice and analysis to the Compensation Committee on the design, structure and level of executive and director compensation, and, when requested by the Compensation Committee, attends meetings of the Compensation Committee and participates in executive sessions without members of management present. The independent compensation consultant reports directly to the Compensation Committee, and the Compensation Committee reviews, on an annual basis, the independent compensation consultant’s performance and provides the independent compensation consultant with direct feedback on its performance. |
The Committee’s Risk Assessment of Our Compensation Policies
The Compensation Committee is aware of the need to routinely assess the Company’s compensation policies and practices as they relate to the Company’s risk management and whether the structure and administration of the Company’s compensation and incentive programs could promote imprudent in excessive risk-taking. With the support of Pay Governance, the Compensation Committee considered the structure and administration of our compensation program and determined that our program is appropriately balanced and does not promote imprudent or excessive risk-taking. Significant factors contributing to their conclusion included:
| • | Extent of oversight. The Compensation Committee, with support supplied from members of management, regularly reviews the performance of our compensation plans. |
| • | Governance. Oversight roles are clearly defined throughout the Company to ensure that pay plans are aligned with business goals and risk tolerances, stress tested under realistic assumptions, and balanced between corporate standards and business-unit autonomy. |
| • | Risk profile and balance within the incentive structure. Our plans are designed by the Compensation Committee to appropriately balance fixed and variable pay, cash and equity, short- and long-term incentives, and corporate, business-unit and individual performance goals. |
| • | Plan design. Our plans are designed to avoid such features as overly steep incentive slopes, unreasonable goals or thresholds that may incentivize unnecessary risk-taking, uncapped payouts, rigidly formulaic awards, undue focus on any one element of compensation, and misaligned timing of payouts and we maintain risk mitigating features including the Compensation Committee’s retained discretion with respect to assessing awards, clawbacks, and shareholding requirements. |
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| • | Performance metrics. Performance metrics reflect risk and use of capital, quality and sustainability of results and do not provide an incentive to management to seek short-term results that encourage high-risk strategies designed to exact short-term results at the expense of long-term performance and value. Starting with long-term incentive awards issued in 2018, such awards contain a direct shareholder-return metric, as described in more detail in the Compensation Discussion and Analysis section. In addition, beginning with awards granted in 2020, to further align our interests with those of our shareholders, we added a Liquidity performance metric to our Annual Incentive Plan (based on cash, cash equivalents, restricted cash, and unused availability under our revolving credit agreement) to ensure that the Company maintains an adequate and appropriate level of liquidity. |
| • | Individual performance. Annual incentive awards are determined, in part, based on the Compensation Committee’s evaluation of individual performance and contributions. Further, the Compensation Committee may exercise a certain amount of discretion in approving final award payouts, which mitigates the potential for inappropriate risk-taking that can result from a strict application of formulaic compensation arrangements. |
| • | Clawback policy. The Compensation Committee has adopted a clawback policy, pursuant to which, the Company may seek to recoup certain incentive-based compensation in the event the Company is required to restate its publicly reported financial statements due to material noncompliance with any financial reporting requirement under the securities laws as a result of misconduct. |
Compensation Overview
Notwithstanding a challenging airfreight environment in 2019, our results reflected a fourth-quarter peak season that included a pickup in customer demand and improved yields compared with the middle of the year. They also reflected our team coming together to deliver the high-quality services that our customers appreciate.
We flew our highest block hours ever, and we delivered record operating revenue.
On a reported basis, our full-year results reflected a loss from continuing operations, net of taxes, which included a noncash special charge of $638.4 million ($503.1 million after tax), partially offset by an unrealized gain on financial instruments of $75.1 million.
On an adjusted basis, we generated earnings that were among the best in company history.
Both our reported and adjusted results reflected the impact on global airfreight and economic conditions of tariffs, trade tensions and geopolitical unrest in certain South American countries, together with certain labor-related service disruptions. These market factors resulted in lower commercial cargo yields and lower utilization of our 747-400 ACMI and Charter aircraft. As a result, and in accordance with U.S. accounting standards, we recorded a noncash special charge for the write-down of our 747-400 freighter fleet, as well as the disposition of certain nonessential Dry Leasing aircraft and engines.
In 2019, we continued to execute on strategic initiatives to enrich our business mix, expand our customer base, generate cost savings through operating efficiencies and other continuous improvement initiatives, and enhance our portfolio of assets and services. Our results reflected the leadership of our ACMI and Charter businesses, the annuity-like contribution of our Dry Leasing business, progress in our efficiency and productivity initiatives, and the introduction of 11 aircraft to our operating fleet during the year in response to customer demand for our services.
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Positioned for 2020 and Beyond
Though these are extraordinary times, with the future uncertainty caused by the novel coronavirus, we believe Atlas Air Worldwide is well-positioned for continued success in 2020 and beyond.
We have driven substantial growth in our business over the past several years, establishing a solid platform from which to capitalize on our achievements and our future opportunities.
Airfreight serves the global community by keeping necessary goods flowing at very important times of need. Airfreight is also a vital element in a modern, global economy, fostering international trade, providing efficient access to markets, and contributing to global economic development.
As history has taught us through other crises, airfreight plays a key role in not only delivering relief supplies in times of need, but also in facilitating the movement of goods as the global supply chain rebalances. In fact, airfreight typically rebounds more quickly during periods of economic recovery.
In the near term, we are currently accommodating special charter demand, and we are well-prepared for the anticipated surge of volumes once business and economic conditions recover.
Looking ahead, we have a strong core of long-term customers and will continue to play an important role in their operating networks, especially as they navigate challenging times.
We have a strategic focus on faster-growing global airfreight markets, and will continue to leverage our significant commercial charter business to capitalize on demand.
Together with the exceptional teamwork of our employees and the guidance of our Board of Directors, Atlas Air Worldwide remains innovative, adaptive and forward-looking – leading the outsourced aviation sector, driving ahead with our strategic initiatives, serving the needs of the global community and delivering value to our customers and shareholders.
2019 Executive Leadership Changes
Fiscal 2019 was a period of change for us as we announced that William J. Flynn would retire from his role as our President and Chief Executive Officer. Mr. Flynn stepped down as President of the Company effective as of June 30, 2019; and, effective as of January 1, 2020 (the “Transition Date”), he retired from his position as Chief Executive Officer. Upon his retirement, Mr. Flynn also no longer served as an executive, officer or employee of any of our subsidiaries or affiliates. In connection with Mr. Flynn’s retirement, the Board appointed John W. Dietrich, our then-current Executive Vice President and Chief Operating Officer, to serve as our President and Chief Operating Officer effective as of July 1, 2019; and, effective as of the Transition Date, Mr. Dietrich began serving as our President and Chief Executive Officer (collectively, the “Leadership Transition”). Mr. Dietrich has over 30 years of experience in the aviation and air cargo industries, including more than 20 years with the Company. During his tenure with the Company, Mr. Dietrich has served as our Chief Operating Officer, General Counsel, Corporate Secretary, Chief Communications Officer, and Chief Human Resources Officer.
After stepping down as President of the Company, Mr. Flynn continued to serve as a Director, and was appointed the Chairman of the Board on August 22, 2019 following the passing of our prior Board Chairman, Robert F. Agnew.
In addition, in October 2019 we announced that effective January 1, 2020, James A. Forbes would succeed Mr. Dietrich and be promoted to Executive Vice President and Chief Operating Officer. Mr. Forbes has been employed with the Company for over 20 years and brings exceptional qualifications to his new role. Prior to being promoted, Mr. Forbes was Senior Vice President, Chief Operating Officer for our airline Southern Air and was responsible for all aspects of the day-to-day Southern Air operation, including flight, ground and technical operations, as well as safety, performance and customer satisfaction. He also previously held executive positions in operations for our airlines Atlas Air and Polar Air Cargo.
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William J. Flynn Transition Agreement
In connection with his retirement, Mr. Flynn entered into a transition agreement with the Company (the “Transition Agreement”), effective as of July 1, 2019, which restated the existing entitlements he would receive upon his retirement pursuant to his employment agreement and other Company benefit plans and programs in which he participated at the time of his retirement. The Compensation Committee did not amend Mr. Flynn’s compensation package in 2019 as it related to his retirement. Such package had been approved years prior to the announcement of his retirement.
In the Transition Agreement, Mr. Flynn reaffirmed the two-year post-termination non-solicitation and one-year post-termination non-competition provisions in his employment agreement. The Transition Agreement also contains customary restrictive covenants related to trade secrets, confidential information, company property, and non-disparagement, and required that Mr. Flynn execute a general release of claims on his last day of employment.
John W. Dietrich Employment Agreement
On July 1, 2019, we entered into an employment agreement with Mr. Dietrich pursuant to which he became our President and remained our Chief Operating Officer through December 31, 2019. As noted above, as of January 1, 2020 Mr. Dietrich became our President and Chief Executive Officer. In negotiating such arrangements the Compensation Committee received information, analysis and advice from Pay Governance and independent legal counsel. In developing the compensation arrangement for Mr. Dietrich, the Compensation Committee and Board considered the same executive compensation objectives and competitive positioning used for our other executives and also took this as an opportunity to reset his compensation levels to that of a new Chief Executive Officer. Given his breadth of experience in the aviation industry and at our Company, his business acumen, and his experience in many elements of the business, among other things, Mr. Dietrich’s compensation package was set at a level that is approximately 75% of the compensation that Mr. Flynn was eligible to receive prior to his retirement. The key compensation elements of Mr. Dietrich’s employment agreement are described in the section entitled “Employment Agreements—John W. Dietrich.” Mr. Dietrich did not receive a one-time cash payment or inducement equity awards in connection with his promotion.
The Compensation Committee and independent Directors believe that the compensation arrangement provided to Mr. Dietrich is reflective of the talent and experience he brings us, is competitive and represents an appropriate mix of annual and long-term incentives with a substantial portion of such compensation tied to the attainment of performance goals and stock price appreciation as a result of the Total Shareholder Return ("TSR") modifier in our long-term incentive program, and as a result directly links pay and performance. A description of the material terms of Mr. Dietrich’s employment agreement, including payments and benefits to be provided to Mr. Dietrich in the event his employment is terminated by us without “cause” or by Mr. Dietrich for “good reason” is set forth in the “Employment Agreement” section below.
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Direct Link between Compensation and Business Strategy
Our compensation programs are designed to drive achievement of our business strategies and provide competitive opportunities, principally dependent on the successful achievement of performance goals closely tied to Company performance, as exemplified by the features set forth below.
| Annual Incentives | ||||||
| Company Performance Metric | NEO Performance Metric | |||||
| Company Financial Performance – Adjusted Net Income* (and for 2020 Liquidity) | ➨ | Adjusted Net Income Liquidity (for 2020) | ||||
| Customer On-Time Performance – Stringent standards specified under customer contracts | ➨ | Customer On-Time Reliability | ||||
| Company Business Plan and Strategic Initiatives | ➨ | Individual Performance Objectives (based heavily on annually set corporate strategic objectives) | ||||
| Long-Term Incentives – PSUs and Performance Cash | ||||||
| EBITDA Growth | ➨ | EBITDA Growth | ||||
| Return on Invested Capital | ➨ | Return on Invested Capital | ||||
| TSR | ➨ | Comparative TSR | ||||
| * | We use Adjusted Net Income (“ANI”) to measure our financial results. ANI excludes certain noncash income and expenses and items impacting year-over-year comparisons of our results, providing useful information in evaluating our annual financial results. In addition, as a result of warrant accounting, our diluted shares outstanding fluctuate as a function of our share price throughout the year, making an absolute metric such as ANI more useful for our investors and analysts than a per-share metric. |
Our compensation program continues to evolve as we focus on ensuring that executive pay is well aligned with Company performance. In order to further coordinate our compensation program with Company and shareholder interests, and to take into consideration the potential impact that tariffs, trade tensions, geopolitical unrest, labor related service disruptions, and costs associated with COVID-19 may continue to have on Company performance, for the 2020 program year the Compensation Committee, with advice from its independent compensation consultant, approved the addition of Liquidity as an additional Company financial performance metric under our Annual Incentive Plan to ensure that the Company maintains an adequate and appropriate level of liquidity. As we continue to enhance and refine our compensation programs, we, together with the members of our Compensation Committee, look forward to continuing our open dialogue with our shareholders during our shareholder engagement process on these and other matters.
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Say on Pay & Shareholder Engagement 2019 Say on Pay Results. Our 2019 Say on Pay vote received the support of approximately 92% of our shareholders, which was viewed positively by our Compensation Committee and management. Shareholder Engagement. Routine and consistent investor outreach is fundamental to our commitment to engagement, communication, and transparency with our shareholders. Throughout the year, we proactively maintain relationships with our largest institutional shareholders, which represent over two-thirds of our outstanding shares, and make efforts to be in contact with as many shareholders as possible, to solicit feedback and ensure our Board and management have insight into the issues that are most important to our shareholders so that we can better understand our shareholders’ perspectives and consider ideas for improvements to, among other things, our corporate governance, sustainability and executive compensation practices. During all shareholder outreach meetings, AAWW sought input on proactively developed proposed changes to our pay program and practices. Enhancements to Address Shareholder Feedback. We received many supportive and positive comments on the Company’s direction (both from a business growth and governance perspective), the pay program changes that have been implemented in recent years, and our Board and committee rotation/refreshment and outlook. The tables below highlight the executive compensation changes made in response to specific shareholder feedback as part of our Compensation Committee’s robust efforts to be responsive to items of importance to our shareholders.
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How We Incorporate Pay-for-Performance into Our Compensation Programs
Our Compensation Committee believes that our compensation practices have played a key role in our steady operating and financial results during transformative growth periods such as those experienced from 2016 through 2018, and the more challenging times experienced generally in the global freight industry in 2019. Our compensation programs are designed to drive achievement of our business strategies and provide competitive opportunities, principally dependent on the successful achievement of performance goals closely tied to Company performance. The performance metrics within the executive compensation program are designed to drive the achievement of key business, financial, on-time customer, and operational annual and long-term results, in addition to individual contributions.
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The Compensation Committee achieves its pay-for-performance goals by:
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Primary Components of NEO Compensation
The below table summarizes the three primary components of our NEOs’ compensation:
| Elements of Pay | Form | Links to Performance | Purposes | |
| Base Salary | Cash | Fixed annual compensation | ■ Reviewed at least annually to consider changes in responsibility, experience, market competitiveness, and contributions to Company success | |
| Annual Incentives | Cash | Adjusted Net Income Liquidity (for 2020) On-time customer reliability metrics Individual performance objectives | ■ Derived from our annual operating plan (Adjusted Net Income) Close alignment with shareholder interests ■ Strictly performance-based against measureable metrics ■ No payout if performance is below threshold | |
| Long-Term Incentives | Performance Share Units (PSUs) and Performance Cash Awards | Growth in Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA growth”) Return on Invested Capital (“ROIC”) Relative TSR | ■ Links NEO and long-term shareholder interests ■ Serves as a key retention tool and a strong long-term performance driver ■ Performance-based against measureable metrics; no payout guaranteed (all metrics) ■ Close alignment to shareholder returns via a relative metric (TSR) ■ Specifically responsive to shareholder feedback | |
| Restricted Stock Units (“RSUs”) | Alignment with shareholder returns | ■ Multiyear long-term retention ■ Value tied to share price |
Significant Portion of CEO Compensation Opportunity Performance-Based and/or At-Risk
We design our CEO’s compensation opportunity to be largely performance-based and at-risk. 69% of the maximum total CEO compensation opportunity in 2019 was designed to be based on attainment of performance metrics, including approximately 48.0% in the form of long-term multiyear opportunities and 21% in annual incentive opportunity. An additional 20.0% of compensation opportunity was granted in the form of RSUs with three-year vesting, resulting in 89% (at maximum levels) of CEO compensation opportunity being at risk.
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Our CEO’s bonus opportunity has not been increased since 2010. Additionally, in response to shareholder feedback his long-term incentive opportunity was reduced to a 3.75 multiple of salary in 2014 and has not been increased since. In addition, in developing the compensation package of our new CEO, Mr. Dietrich, which became effective as of January 1, 2020, we set the total value of his compensation at a level that is approximately 75% of the compensation Mr. Flynn was eligible to receive prior to his retirement.
The addition of a comparative TSR modifier and other changes to performance-based long-term incentive awards results in significant compensation opportunity structured to be performance-based, as set forth below. The following charts illustrate our CEO’s total compensation opportunity in 2019, as well as the 2019 long-term incentive opportunity for our CEO (at target levels):
| 2019 Total CEO Compensation Opportunity | Long-Term Incentive Opportunity |
Performance-Based |
* Consists of 25% PSUs and 25% performance cash. |
For overall LTI opportunity structure for all our NEOs, please see pages [45-50].
Best Practices and Risk Mitigation
The Compensation Committee is required by its charter to meet at least four times annually. During 2019, the Compensation Committee held four in-person meetings and six telephonic meetings and acted once by written consent. In 2019, the Compensation Committee consisted of four outside Directors, Ms. Hallett (Chair), Mr. Wulff, Mr. Griffin and Ms. Lute, each of whom is an independent Director within the meaning of applicable SEC and NASDAQ rules.
Through our compensation program design and related policies, we pursue the alignment of interests of our executives with those of our shareholders over a multiyear long-term basis and encourage thoughtful and appropriate business risk-taking.
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The following table sets forth several of our compensation and corporate governance practices, which were primarily enacted in response to shareholder feedback and which reflect market best practices.
What We Do ✓ | ü | Maintain robust stock ownership guidelines applicable to our executive officers and outside directors | |||
| ü | Annually review our compensation programs to avoid encouraging excessively risky behavior | ||||
| ü | Conduct annual “say-on-pay” votes | ||||
| ü | Seek input from shareholders on our executive compensation program twice a year | ||||
| ü | “Clawback” of annual incentive compensation to discourage imprudent risk taking. | ||||
| ü | Strict “Double Trigger” equity vesting for all NEO LTI Awards | ||||
| ü | Include a comparative total shareholder return modifier to performance LTI Awards to further align payout with our stock price performance | ||||
| ü | A significant portion of NEO compensation is variable and tied to our financial performance, the performance of our stock price, or both | ||||
| ü | Management and the Compensation Committee regularly evaluate share utilization levels by reviewing the cost and dilutive impact of equity compensation |
What We Don’t Do × | × | No excise tax gross-ups for change in control payments | |||
| × | No significant perquisites. We do not provide for items such as personal use of airplanes, Company-provided autos, and/or auto allowances or club dues | ||||
| × | No hedging or pledging shares. Strict prohibition on hedging and monetizing transactions involving Company securities and from engaging in certain speculative transactions in respect of Company securities. No waivers, preclearance or exceptions permitted | ||||
| × | No adjustments for shareholder buybacks |
Discussion of Our Compensation Program
Components of Compensation
Three primary components for our NEOs’ compensation include (1) Base Salary, (2) Annual Incentives and (3) Long-Term Incentives. See “Primary Components of NEO Composition” below for additional details on our compensation components.
1. Base Salary
Purpose: Compensate executives for their leadership, management responsibility, experience, sustained high level of performance, and contribution to our success.
Process for setting salaries: The amount of any senior executive salary increase is determined by the Compensation Committee, in consideration of a number of factors, including but not limited to the nature and responsibilities of the position; level of performance of the individual; expertise of the individual; advice of the Compensation Committee’s independent compensation consultant, including survey data; and recommendations of the CEO (except regarding his own salary) and the General Counsel (except regarding his own salary).
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Salary levels for NEOs are generally reviewed annually by the CEO and the Compensation Committee as part of the performance review process. Mr. Dietrich’s annual base salary increased from $715,000 to $775,000 as of July 1, 2019 to account for his increased roles and responsibilities upon becoming the Company’s President and Chief Operating Officer in connection with the Leadership Transition. The base salary of all other NEOs were not increased in 2019.
Performance-Based Compensation: Annual and Long-Term Incentive Compensation
| The Compensation Committee takes a holistic approach to incentive compensation, using a combination of related short- and long-term performance-based incentives to encourage achievement of the Company’s annual, as well as longer-term, strategic goals. This approach has evolved as we consider and take into account the feedback we receive during our extensive shareholder engagement process. |
At-Risk Philosophy:
The Compensation Committee believes that a significant portion of a senior executive’s compensation should be “at-risk,” based upon the Company’s financial and operating performance. Performance-based compensation aligns senior executive compensation with our goals for corporate financial and operating performance and encourages a high level of individual performance. For 2019, 89% of our CEO’s maximum total direct compensation opportunity (base salary and maximum payout opportunity of annual and long-term incentive awards granted in 2019) was performance-based. A significant portion of our CEO’s compensation is considered “at-risk” due to recent changes that we have made to our performance-based long-term incentive awards, which are described further below, including the addition of a Comparative TSR modifier.
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2. Annual Incentive Program
Annual cash incentive compensation awards to our executives are made under our AIP. The AIP is a sub-plan and part of the Company’s 2018 Incentive Plan, as may be amended from time to time (the “2018 Plan”), which has been approved by shareholders. Bonuses are payable based on the achievement of the ANI, on-time customer reliability, and individual business objectives as further described below. As a preliminary matter, the Company must generate a threshold level of ANI for any award to become payable under the AIP. We believe that having an annual “at risk” compensation element gives all employees, including our NEOs, a financial stake in the achievement of our business objectives and motivates them to use their best efforts to ensure that we achieve those objectives.
Each of our executives is assigned a minimum threshold, target bonus opportunity and a maximum bonus opportunity. The 2019 bonus opportunity range for each executive is set forth in the table below:
| Executive | Range of Bonus | |
| Mr. Flynn | 75 – 100 – 200% | |
| Mr. Dietrich* | 71.4 – 95.2 – 190% | |
| Mr. Steen | 67.5 – 90 – 180% | |
| Mr. Kokas | 63.75 – 85 – 170% | |
| Mr. Schwartz | 63.75 – 85 – 170% |
* Mr. Dietrich’s range of bonus opportunity reflects his increased AIP bonus opportunity due to his promotion to our President as of July 1, 2019, at which time his target bonus increased from 90% of his then current base salary to 100% of his then current base salary. Accordingly, the amounts above reflect the weighted average of Mr. Dietrich's bonus opportunity at the threshold, target and maximum levels for the year taking into account the increased opportunity due to his promotion.
How We Set Our AIP Incentive Metrics:
We base a significant portion of our executives’ compensation on the Company’s financial and operating performance to align senior executive compensation with our goals for corporate financial as well as operating performance and to encourage a high level of individual performance. The annual metrics upon which our incentive plans are structured are designed to drive, on an integrated basis, the achievement of key business, financial, on-time customer reliability, and operational annual results, as well as to recognize the individual contributions of our executives towards these goals. For awards granted in 2020, in addition to the metrics described below, we added a new Liquidity performance metric (based on cash, cash equivalents, restricted cash, and unused availability under our revolving credit agreement) to further align our compensation program with our shareholders’ interests of maintaining an adequate and appropriate level of liquidity.
In designing the annual incentive awards for our executives, the Compensation Committee considers the Board-approved annual budget, as well as short- and long-term strategic goals, and then designs the annual targets, including adjusted net income, around the Board-approved budget and strategic plan, which is consistent with the earnings framework that we provide publicly in our related earnings release. As described below, each of our AIP metrics is set at a challenging, rigorous level, which results in payouts only for strong performance.
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Alignment Between Our Performance, Our Strategy and Our AIP Incentive Metrics:
Set forth below are the metrics used under our AIP performance incentive plans in 2019 to provide appropriate rewards for prudent risk-taking, key financial performance and objective results in support of our business strategy. In addition, we believe that our performance metrics align and underscore the link between incentive compensation and the successful execution of our business strategy, and reflect our ongoing commitment to a pay-for-performance compensation philosophy.
| 2019 Annual Incentives | |||
| Company Financial Performance Metrics | Weighting | Link to Company | |
| Adjusted Net Income* | 60% | • | Aligned with the creation of shareholder value and the achievement of objective relevant financial performance targets. |
| On-time customer reliability | 20% | • | Objective, measurable goals that provide an incentive to management to meet or exceed challenging standards set by our customers in the applicable service agreements (maintaining superior on-time customer reliability is essential to differentiating AAWW from its competitors and strengthening long-term customer relationships). |
| Individual Performance Metrics | |||
| Individual performance objectives | 20% | • | Tied directly to the annual and long-term goals set in our board-approved annual operating budget and long-term strategic plan, including continuous improvement and cost savings, diversifying our business, and enhancing our financial results. |
| * | We use Adjusted Net Income (ANI) to measure our financial results. ANI excludes certain noncash income and expenses and items impacting year-over-year comparisons of our results, providing useful information in evaluating our annual financial results. In addition, as a result of warrant accounting, our diluted shares outstanding fluctuate as a function of our share price throughout the year, making an absolute metric, such as ANI, more useful for our investors and analysts than a per-share metric. |
Note: Detailed quantitative Company financial performance goals for our incentive compensation plans are disclosed for the completed 2019 fiscal year. Due to the potential for competitive harm, 2019 goals will be disclosed in next year’s Proxy Statement.
2019 AIP Payout
In 2019, we continued to leverage our core competencies and market leadership. Accordingly, our results reflected a strong fourth-quarter peak air cargo and charter passenger season despite the challenging global economic, aviation and airfreight-industry conditions. Despite the headwinds faced by the Company and the broader global airfreight industry and the Company’s labor challenges and disruptions, the formulaic result of our ANI, customer reliability, and achievement of individual performance objectives would have translated into an AIP payout of 1.52x of target to our NEOs. However, after considering the entirety of the results and the extent to which these challenges were being felt by our shareholders, the Compensation Committee exercised its authority to reduce the final payout factor under the AIP from 1.52x to 1.20x of target for our NEOs. Actual bonus amounts paid to Messrs. Flynn, Dietrich, Kokas, Schwartz, and Steen under the AIP are included in the Summary Compensation Table for Fiscal 2019 under the “Non-Equity Incentive Plan Compensation” column.
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Adjusted Net Income – Objective Metric. The most heavily weighted performance factor in the 2019 AIP is ANI. For purposes of the AIP, the ANI performance range was (1) a threshold amount of $159.0 million, (2) $212.0 million for the target amount, and (3) $233.2 million representing maximum achievement. Our ANI achievement resulted in a 1.2x target performance factor.
Our ANI target setting under the AIP is designed to be rigorous. In 2019, the AIP’s ANI target of $212.0 million: • represented an approximate 4% increase over the Company’s actual ANI of $204.3 million in 2018 and • represented an approximate 24% increase over the Company’s 2018 AIP’s ANI target of $170.5 million. |
| * | ANI is a non-GAAP measure. A reconciliation to the most directly comparable GAAP measure may be found on page 43 of our 2019 Annual Report on Form 10-K, included with our Annual Report to Shareholders. |
On-Time Customer Reliability – Objective Metric. An additional objective performance metric that was used to determine 2019 AIP payments was our on-time customer reliability. Our 2019 on-time customer reliability goals are objective, measurable goals that are set to meet or exceed challenging standards set forth in our ACMI, CMI and AMC/Military customer contracts. In 2019, our weighted overall on-time performance was achieved at 1.61x of target despite the Company’s labor challenges and disruptions. While such goals are customer-specific and proprietary, they are all very aggressive and denote a high level of on-time performance. On-time performance is key to our Company’s success and our NEOs each have a role in ensuring that such performance metrics are met.
2019 Individual Performance Objectives. Individual annual performance objectives for our NEOs are reviewed with and approved by the Compensation Committee typically when the Company’s operating plan is being reviewed and approved by the Board of Directors. These individual performance objectives are based in large part on our annual business plan and our long-term strategic plan, including continuous improvement and cost savings, diversifying our business, and enhancing our financial results, among others.
Our Compensation Committee reviewed each NEO’s 2019 accomplishments in detail and certified that each of our NEOs achieved their individual performance objectives at the maximum level.
2019 individual performance objectives for our NEOs included the following, among others:
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| Executive / Company Objectives | Select 2019 Accomplishments | |
Mr. Flynn Execute the Company’s Strategic Plan; Drive Improved Service Quality | ✔ Enhanced key customer commitments, including extended 747, 777 and 767 contracts with DHL and placed two B747-8F aircraft with Qantas ✔ Entered Titan Dry Leasing Joint Venture with Bain Capital Credit to develop a diversified freighter aircraft leasing portfolio ✔ Added 11 aircraft, expanded into 47 new stations, and generated record number of block hours ✔ Expanded ACMI and CMI operations with new and existing customers | |
Mr. Dietrich Execute Strategic Growth Plan with respect to 777 and 737 Platforms for DHL and Amazon; Implement Long-Term Labor Strategy | ✔ Successfully expanded Amazon relationship by integrating Southern Air, operating five 737-800 aircraft ✔ Expanded CMI operations by onboarding five additional aircraft and took delivery of two incremental 777s for DHL ✔ Further advanced the merger between Atlas Air and Southern Air ✔ Launched AtlasAir5YPilots.com informational website for pilots, focused on labor relations and contract negotiations and enhanced pilot recruiting efforts |
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Mr. Steen Execute Strategic Plan; Expand Global e-Commerce Footprint; Work to Recover Increased Crew Costs | ✔ Entered into an agreement with Bain Capital Credit to form a strategic Joint Venture to develop a diversified freighter aircraft leasing portfolio ✔ Expanded market leading ACMI/CMI business, including two 747-8F’s with Qantas and five 747-400F’s with NCA ✔ Increased 2019 commercial charter revenues significantly from 2018 revenues ✔ Strengthened brand presence in all trade media through executive interviews and media engagements, performance reports and targeted advertising | |
Mr. Kokas Execute Strategic Plan; Enhance Stakeholder Value | ✔ Provided key support for DHL fleet renewal negotiations, including extending 747-400F, 777F and B767 aircraft services ✔ Provided ongoing legal counsel with respect to labor negotiations and other labor matters, as well as legal/contractual issues arising under the collective bargaining agreement ✔ Supported expanded Amazon relationship ✔ Negotiated and supported customer expansion and renewals, as well as multiple sale, purchases and engine leases across the fleet | |
Mr. Schwartz Enhance Stakeholder Value; Execute Strategic Plan | ✔ Supported customer expansion/renewal analyses and negotiations, including the expanded Amazon relationship with Southern Air ✔ Implemented continuous improvement initiatives that led to meaningful unbudgeted savings across the organization ✔ Recognized numerous tax benefits that resulted in significant savings ✔ Maintained proactive communication outreach and arranged financing on very favorable terms |
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3. Long-Term Incentive Compensation
During 2019, the Compensation Committee made long-term incentive grants to our NEOs in the form of performance share units, performance-based cash awards, and time-based restricted stock units.
Long-Term Incentive Awards
The total long-term incentive grant in a given year is based on a multiple calculated as a percentage of base salary. For the CEO, the multiple is based on his actual base salary and for the other NEOs and other executives, the multiple is based on an average base salary for all executives at a particular level (for example Executive Vice President, Senior Vice President or Vice President). The multiple is converted into an aggregate LTI plan award opportunity dollar amount, and for 2019 awards, which, consistent with prior years, is then converted into a target number of RSUs, PSUs and performance cash awards using the average closing price of the Company’s common stock for the 20 trading days ending on February 27, 2019, trailing the grant date.
Assuming achievement at maximum performance opportunity, including maximum achievement of the comparative TSR metric, the performance share units and performance cash units together would pay at approximately 70% of the value of the overall award grant.
| Long-term performance incentives are directly linked to Company long-term strategic initiatives that are intended to enhance shareholder long-term interests and are consistent with the key long-term metrics favored by a majority of our shareholders – currently, EBITDA growth, Average ROIC and a Comparative TSR metric. |
For 2019, the LTI award consisted of performance share units and performance cash awards, both of which are subject to a three-year performance period, and restricted stock units that vest ratably over a three-year period, all as more fully described below. The weighting mix of the LTI components were as follows:
Award mix at time of grant: (1) Time-vesting Restricted Stock Units 50%, (2) Performance Stock Units 25% (target level) and (3) Performance Cash 25% (target level).
At a possible future maximum payout of our performance-based LTI: (1) Time-vesting Restricted Stock Units 30%, (2) Performance Stock Units 35% and (3) Performance Cash 35%.
| LTI Mix at Target | LTI Mix at Maximum Opportunity |
 |  |
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How We Set Our LTI Incentive Metrics:
In designing the long-term incentive awards for our executives, the Compensation Committee considers the Board-approved business plan, as well as long-term strategic goals, and designs the long-term incentive targets, including Average ROIC and EBITDA growth. We believe that most of our executives’ total compensation should be at-risk and that a significant portion of their total compensation should be equity-based, which provides a strong alignment between the senior executives’ compensation and our shareholders’ interests.
Our long-term business strategy contemplates initiatives that enhance our organizational and operating capabilities, generate additional operating efficiencies, broaden our portfolio of assets and services, and diversify our business mix.
Link Between Our Performance, Our Strategy and Our LTI Incentive Metrics:
Set forth below are the metrics used under our long-term performance incentives in 2019 to provide appropriate rewards for prudent risk-taking, key financial performance and objective results in support of our business strategy. In addition, we believe that our performance metrics align and underscore the link between incentive compensation and the successful execution of our business strategy, and reflect our ongoing commitment to a pay-for-performance compensation philosophy.
| Long-Term Incentives | ||
| Performance Metrics | Weighting | Rationale |
| EBITDA growth | 50% | • Encourages management to pursue long-term profit potential and cash flow opportunities and is consistent with achievement of the Company’s long-term strategic goals • Used for companies in industries like ours that require significant upfront financial investments. EBITDA growth is an appropriate measure of underlying profit potential and an indicator of operating cash flow |
| Average ROIC | 50% | • Drives growth and profitability through the efficient use of our capital and encourages prudent risk-taking • Used because the Company’s strategic plan involves a significant investment program in its aircraft fleet, and the ability of the Company to manage its balance sheet to generate returns is an important measure to investors |
| Relative TSR modifier | +/− 20% adjustment based on relative performance against comparator group | • Implemented as a direct result of shareholder feedback • Adds relative metric to our LTI (Company three-year share performance compared to S&P SmallCap 600 Index companies) • Further aligns compensation with shareholder returns and value • No upward modification in the event the absolute total shareholder return is negative even if the Comparative TSR performance achieved would have provided for an upward adjustment |
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We have not disclosed the 2019 specific EBITDA growth and Average ROIC targets for the three-year performance period because they represent confidential, commercially sensitive information that we do not disclose to the public and that could cause competitive harm if known in the marketplace.
Both EBITDA growth and Average ROIC targets, as well as the factors that influence these measures, such as revenue and efforts to control costs, are inherently competitive and, if disclosed, would provide valuable insight into areas of focus for the Company. The Compensation Committee sets the EBITDA growth and Average ROIC goals at a level that it believes would be challenging but possible for the Company to achieve. In the interest of providing as much disclosure as appropriate to aid shareholders in assessing the rigor of our LTI metrics, below is a detailed description of our LTI goal-setting process. In addition, we have included, and will continue to include, the threshold, target and maximum level, as well as the actual performance level of each LTI metric for completed performance periods.
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Additional Information on Long-term Incentive Goal Setting: The performance LTI grant has three separate goals for both the EBITDA Growth and Average ROIC metrics – Threshold, Target, and Maximum. The Threshold values are set at levels the Compensation Committee believes are reasonably achievable, to motivate and support retention objectives. The Target values are set at levels that are expected to be difficult, but attainable. The Maximum levels require outstanding performance resulting from stronger than forecasted market growth and stretch by management to capitalize on that growth. Threshold levels for both the EBITDA Growth and Average ROIC metric of the 2019 grant were set at the Threshold levels of the 2018 grant. The performance goals for the 2019 – 2021 performance period were established during the first quarter of 2019. When establishing the performance goals for the 2019 grant, the Compensation Committee took into account the Federal Reserve’s real GDP growth outlook, commentary from the Organization for Economic Cooperation and Development (OECD), and freight-tonne kilometer (FTK) forecasts from the International Air Transport Association (IATA). The Compensation Committee used those inputs as a primary set of guidelines when establishing the goals, which are further described below. OECD is an intergovernmental economic organization with 35 member countries that was founded to stimulate world trade and economic progress, and IATA is a global organization of airlines. Since we are an airline with global reach, these entities’ forecasts provide a reasonable and balanced prediction of macroeconomic trends against which to measure our performance and these forecasts are considered by AAWW (and often shareholders) when considering potential long term performance. EBITDA Growth: • Threshold – Set at a level consistent with the OECD outlook and in excess of the Federal Reserve outlook • Target – Set in excess of the IATA FTK, Federal Reserve, and OECD outlooks • Maximum – Growth well beyond industry and economist projections Average ROIC: • Threshold – Slightly above Atlas’ weighted average cost of capital • Target – Meaningfully above Atlas’ weighted average cost of capital • Maximum – Significantly above Atlas’ weighted average cost of capital TSR Modifier: • We adopted the S&P Small Cap index as our TSR modifier comparator group, which is comprised of 600 companies with market caps between $450 million and $2.1 billion, reflecting their distinctive risk and return characteristic. |
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Our long-term incentive performance metrics relate to key Company long-term strategies and provide substantial payouts only upon achievement of exceptional performance.
At the end of the three-year period, the awards vest based on a performance matrix ranging from no vesting if the Company’s performance is in the bottom quintile of both EBITDA growth and Average ROIC metrics to 2x target vesting if performance on both metrics is in the top quintile. Target vesting (100% of the award) is achieved if the Company’s performance is at the target level. Performance LTI awards are further subject to a comparative total shareholder return (“Comparative TSR”) modifier, based on AAWW share price performance during the three-year performance period relative to the component companies of the S&P 600 SmallCap Index. The Comparative TSR modifier will be applied to the vesting percentage determined based on the achievement of the EBITDA growth and Average ROIC metrics and could increase or decrease that vesting percentage by up to 20%. However, no upward modification will be made in the event the absolute total shareholder return is negative, even if the Comparative TSR performance achieved would have provided for an upward adjustment.
Payout of 2017-2019 Performance LTI Awards. In the first quarter of 2020, the Compensation Committee reviewed AAWW’s performance over the three-year performance period ended December 31, 2019 for grants made in 2017. The performance metrics for these awards were EBITDA growth, which is based on a three-year average, and three-year Average ROIC applied on an absolute basis. Performance LTI payouts for the 2017-2019 performance period were made in early 2020 for our NEOs. 2017-2019 Performance LTIs were paid at 159% of target level, based on the specific calculations that resulted in our achievement of Average ROIC at 117% of target level and EBITDA growth at the maximum level. The table set forth below shows the threshold, target, max as well as actual performance levels of each performance metric.
| Threshold | Target | Max | Actual | |
| EBITDA Growth | > 3.5% | > 4% | > 8% | 10.76% |
| Average ROIC | > 6% | > 7% | > 9% | 7.34% |
Performance-Based Share Units
Performance share units, or PSUs, are paid in shares of Common Stock upon vesting. Key characteristics of the PSUs granted in 2019 are as follows:
Cash-Based Long-Term Incentive Awards
Cash-based long-term incentive awards are paid at the end of a three-year performance period. Key characteristics of the cash-based long-term incentive awards are as follows:
| • | Pays only if the Company achieves, over a three-year period, rigorous preset comparative financial targets. |
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Restricted Stock Units
Restricted stock units, or RSUs, are paid in shares of Common Stock and have the following key characteristics:
RSUs are designed to attract and retain executives by providing them with (1) stock ownership during the applicable vesting period, and (2) a strong incentive to remain with the Company until at least the applicable vesting period ends. In addition, our stock ownership guidelines, as described below, encourage continued alignment between NEOs and other executives and our shareholders.
Peer Group
Carefully Analyzed Peer Group to Aid Our Compensation Decisions
Our Compensation Committee, together with its independent compensation consultant, periodically reviews relevant competitive market pay data for executives in our industry and similar industries. The Compensation Committee identifies a core group of companies, used to periodically assess the Company’s compensation levels and practices, as one factor in the compensation-setting process. Our Compensation Committee has worked closely with its independent compensation consultant over recent years to refine our peer group. The refined group, which was used for comparator purposes when making 2019 compensation decisions, appears below. We did not change our peer group in 2019.
The Compensation Committee believes that identification of peers using a broad industry sector code is inadequate and does not establish similarity of operations and business models, nor adequately represent past, current and future competitors for managerial talent, factors the Compensation Committee considers in the selection of companies for these purposes.
Given the global nature and structure of our business, we believe it is critical to recruit and retain executives with a breadth of experience in global markets. A significant portion of our revenue is derived from companies and business activity based outside of the United States, including those of our unconsolidated subsidiary, Polar, which is operated by our leadership team. In 2019, we operated almost 65,000 flights, serving 400 destinations in 90 countries.
AAWW's 2019 revenue was approximately $2.74 billion, which when combined for peer comparison purposes with its airline subsidiary Polar's revenue of approximately $820 million, totals approximately $3.6 billion. Because AAWW controls the voting interests of Polar and many of AAWW’s NEOs serve in executive positions at Polar for the benefit of both AAWW (as majority owner of Polar) and Polar, we believe including Polar’s revenues with AAWW’s for purposes of peer group comparisons is appropriate.
| • | AAWW holds a 75% voting interest and 51% economic interest in Polar. |
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For 2019, our peer group includes companies that are, in comparison to AAWW:
Other factors considered by the Compensation Committee in making 2019 peer group decisions included the following, among others:
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As a secondary source and broader group, the Compensation Committee may also refer to the S & P SmallCap 600 or S & P Composite 1500 Indices as additional reference points.
Our 2019 peer group is comprised of the following companies:
| Company | Description | Revenue for FY2019 | ||||
| AAR Corp. | Provider of aviation services to the worldwide commercial aerospace and government/defense industries | $ | 2,052 | |||
| Aerojet Rocketdyne Holdings, Inc. | Aerospace and defense manufacturer | $ | 1,982 | |||
| Air Transport Services Group, Inc. | Provider of air cargo transportation and related services | $ | 1,452 | |||
| Barnes Group Inc. | Aerospace and industrial manufacturer | $ | 1,491 | |||
| BWX Technologies, Inc. | Supplier of nuclear components and products | $ | 1,895 | |||
| Cubic Corp. | Provider of diversified systems and services to the transportation and defense markets | $ | 1,497 | |||
| Curtiss-Wright Corp. | Engineered, technologically advanced products and services | $ | 2,488 | |||
| GATX Corporation | Railcar leasing | $ | 1,394 | |||
| Hawaiian Holdings Inc. | Parent company of Hawaiian Airlines, Inc. | $ | 2,832 | |||
| Hexcel Incorporated | Manufacturer of advanced composite materials | $ | 2,356 | |||
| Moog Inc. | Supplier of motion control and electronic solutions | $ | 2,905 | |||
| Park-Ohio Holdings Corp. | Industrial supply chain logistics and diversified manufacturing industries | $ | 1,618 | |||
| Teledyne Technologies, Inc. | Provider of enabling technologies for industrial growth markets | $ | 3,164 | |||
| Triumph Group Inc. | Manufacturer of aerospace structures, systems and components | $ | 3,365 | |||
| Werner Enterprises, Inc. | Freight carrier and transportation and logistics company | $ | 2,464 | |||
| Wesco Aircraft Holdings, Inc. | Distributor and producer of supply chain management services to the aerospace industry | $ | 1,697 | |||
| Median Revenue of Peers* | $ | 2,017 | ||||
| Atlas Air Worldwide Holdings, Inc. | $ | 3,661 | ||||
| * | Esterline Technologies Corp. was acquired by TransDigm Group Inc. in March 2019 and Genesee Wyoming Inc. was acquired by Brookfield Infrastructure and GIC in December 2019. These companies are no longer part of our peer group. In addition, Wesco Aircraft Holdings, Inc. was acquired by an affiliate of Platinum Equity in January 2020, accordingly it will no longer be included in our peer group when the data is no longer available. |
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Other Elements of Compensation
Limited Other Benefits and Limited Perquisites
We provide our executives with common benefits, which include health insurance (including certain limited retiree health benefits), severance benefits commensurate with position, 401(k) plan participation, and a retirement restoration program. The Compensation Committee believes that perquisites should be limited and not broad-based. Such perquisites are limited principally to financial counseling and limited travel-related benefits, including limited tax reimbursement payments related thereto. Details concerning these perquisites can be found in the footnotes to the “2019 Summary Compensation Table” below.
Retirement Plans
In addition to the Company’s 401(k) plan, the Company maintains the 401(k) Restoration and Voluntary Deferral Plan (the “Retirement Restoration Plan”) for employees holding the title of Executive Vice President or higher. This plan is a nonqualified deferred compensation plan intended to make eligible employees whole for compensation limits imposed under our 401(k) plan. Under the retirement restoration plan, a participant is eligible to make elective deferrals and to receive employer credits equal to 5% of eligible compensation in excess of the limits described in Sections 401(a)(17) and 402(g) of the Code. Initial employer credits vest upon the third anniversary of the executive’s initial eligibility for the plan, and all employer credits after such anniversary are fully vested. Deferrals and employer credits are credited with notional earnings equal to the prime interest rate until distributed on the earliest of (i) the participant becoming disabled, (ii) the participant’s separation from service (including retirement and death), or (iii) a change in control of the Company.
Under our Benefits Program for Senior Executives, employees holding the rank of Executive Vice President or above would become retirement-eligible on or after (i) attaining age 55 and completing 10 years of service and (ii) giving no less than three months’’ advance written notice of such proposed retirement to the then-current CEO, or in the event of the CEO’s retirement such notice must be given to the Chairman of the Board of Directors. Of our NEOs, Mr. Flynn and Mr. Dietrich were the only ones who were retirement-eligible in 2019.
Additional Compensation Policies
Executive Stock Ownership
In support of the Board philosophy that performance and equity incentives provide the best incentives for our NEOs and other members of management and promote increases in shareholder value, the Board monitors compliance with Stock Ownership Guidelines (the “Guidelines”) covering all Directors, NEOs, and certain other executives. Such guidelines include both stock ownership and recommended stock holding periods as described below. The Guidelines require executives to achieve certain levels of share ownership over a five-year period based on the lesser of a percentage of annual base salary or a fixed number of shares.
Current target share ownership levels for the Directors and the NEOs under the Guidelines are generally based on the lesser of: (i) 4x annual base cash retainer, or 7,500 shares, for independent Directors, (ii) 6x base salary, or 120,000 shares, for the CEO, (iii) 3.5x base salary, or 40,000 shares, for the Chief Executive Officer of Titan (currently, Mr. Steen), and (iv) 3x base salary, or 30,000 shares, for other Executive Vice Presidents.
In 2019, all of our Directors and NEOs were in full compliance with the requisite Common Stock ownership levels set forth in the Guidelines.
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Tax Considerations
Section 162(m) of the Code, as in effect for 2017, restricts the deductibility for federal income tax purposes of the compensation paid to the CEO and each of the other NEOs who was an executive officer at the end of the applicable fiscal year (other than our Chief Financial Officer) for such fiscal year to the extent that such compensation for such executive exceeds one million dollars and does not qualify as “qualified performance-based compensation” as defined under Section 162(m) of the Code. The Compensation Committee historically considered available opportunities to deduct compensation paid to NEOs for U.S. federal income tax purposes. The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, eliminated the exception for “performance-based” compensation and expanded the number of executives to which the 162(m) limit may apply. As a result, except to the extent provided in limited transition relief, compensation over one million dollars paid to any named executive officer will no longer be deductible under Section 162(m) of the Code. The Compensation Committee reserves the right to provide compensation to our executives that is not deductible, including but not limited to when necessary to comply with contractual commitments, or to maintain the flexibility needed to attract talent, promote retention, or recognize and reward desired performance.
Equity Grant Practices
The Compensation Committee generally grants equity awards to NEOs in the first quarter of each year. The Compensation Committee does not have any programs, plans or practices of timing these awards in coordination with the release of material nonpublic information. In fact, such awards are granted a week or more following the filing of the Company’s 10-K and the related issuance of its earnings release. We have never backdated, repriced, or spring-loaded any of our equity awards.
Anti-Hedging Policy
Under our insider trading policy, our NEOs are prohibited from engaging in hedging or other monetization transactions involving our securities, including through the use of financial instruments. In addition, our NEOs may not act on investment decisions with respect to Company securities, except during applicable trading window periods. To our knowledge, all of our senior officers, including our NEOs, are currently in compliance with our anti-hedging policy.
Clawback Policy
We have maintained our compensation clawback policy to enhance the alignment of our compensation program features with best practices and consistent with feedback received from our shareholders. Our clawback policy permits us to seek to recover certain amounts of annual cash incentive compensation awarded to any executive officers if payment of such compensation was based on the achievement of financial results that were subsequently the subject of a substantial restatement of our financial statements due to material noncompliance and the executive officer’s intentional misconduct that contributed to a higher amount of cash incentive compensation received.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee during 2019 (Ms. Hallett, Mr. Griffin, Ms. Lute and Mr. Wulff) has ever been an officer or employee of the Company or had any relationship requiring disclosure by the Company under Item 404 of Regulation S-K. None of our executive officers served as a member of the board of directors or the compensation committee of any entity that had one or more of its executive officers serving as a member of the Board or Compensation Committee.
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Compensation Committee Report
In managing the Company, our entire Board of Directors seeks to achieve long-term, sustainable performance and to create value through a well-reasoned, long-term strategic plan; prudent risk management; effective corporate governance practices and executive compensation programs; and well-functioning talent and succession planning.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section with senior management. Based on this review, the Compensation Committee recommends to the Board of Directors that the Compensation Discussion and Analysis section be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
| THE COMPENSATION COMMITTEE | |
| Carol B. Hallett, Chair Bobby J. Griffin Jane H. Lute John K. Wulff |
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Compensation of Named Executive Officers
2019 Summary Compensation Table
As described in the Compensation Discussion and Analysis “Overview” section of this Report, based on our extensive shareholder outreach over the last several years, we have made numerous changes to our compensation programs, while maintaining and enhancing our pay-for-performance philosophy and ensuring that these programs do not promote excessive risk taking. Please read the Compensation Discussion and Analysis “Overview”, along with the remainder of the Compensation Discussion and Analysis section above and the material presented below.
The following table provides information concerning compensation for our NEOs during fiscal year 2019:
Name and | Year | Salary | Bonus | Stock | Option | Non-Equity | All Other | Total | ||||||||||||||||
| William J. Flynn | 2019 | 1,135,044 | — | 3,181,591 | — | 2,904,798 | 807,408 | 8,028,841 | ||||||||||||||||
| President and Chief | 2018 | 1,135,040 | — | 3,345,266 | — | 2,215,514 | 216,839 | 6,912,659 | ||||||||||||||||
| Executive Officer | 2017 | 1,035,040 | — | 2,973,791 | — | 1,821,639 | 194,974 | 6,025,444 | ||||||||||||||||
| John W. Dietrich | 2019 | 745,029 | — | 1,818,582 | — | 1,727,588 | 237,305 | 4,528,504 | ||||||||||||||||
| Chief Operating Officer | 2018 | 708,777 | — | 1,912,169 | — | 2,358,609 | 214,530 | 5,194,085 | ||||||||||||||||
| 2017 | 665,026 | — | 1,689,468 | — | 1,053,383 | 188,711 | 3,596,588 | |||||||||||||||||
| Michael T. Steen | 2019 | 675,026 | — | 1,818,582 | — | 1,605,488 | 214,093 | 4,313,189 | ||||||||||||||||
| Chief Commercial Officer | 2018 | 665,651 | — | 1,912,169 | — | 2,288,337 | 189,456 | 5,055,613 | ||||||||||||||||
| 2017 | 600,023 | — | 1,689,468 | — | 950,421 | 177,755 | 3,417,667 | |||||||||||||||||
| Adam R. Kokas | 2019 | 625,024 | — | 1,609,475 | — | 1,358,009 | 183,364 | 3,775,872 | ||||||||||||||||
| General Counsel | 2018 | 614,024 | — | 1,692,251 | — | 2,037,347 | 171,375 | 4,514,997 | ||||||||||||||||
| 2017 | 537,021 | — | 1,388,821 | — | 803,369 | 164,280 | 2,893,491 | |||||||||||||||||
| Spencer Schwartz | 2019 | 625,024 | — | 1,609,475 | — | 1,358,009 | 212,708 | 3,805,216 | ||||||||||||||||
| Chief Financial Officer | 2018 | 612,524 | — | 1,692,251 | — | 2,037,347 | 180,584 | 4,522,706 | ||||||||||||||||
| 2017 | 525,020 | — | 1,388,821 | — | 785,417 | 177,415 | 2,876,673 | |||||||||||||||||
Pro Forma Summary Compensation Table (excluding Mr. Flynn’s retirement entitlements and including Mr. Dietrich’s anticipated 2020 compensation)*
(*) The following table sets forth (a) Mr. Dietrich’s fiscal year 2019 compensation as set forth in the Summary Compensation Table and a projection of his 2020 compensation as our President and Chief Executive Officer and (b) an estimate of Mr. Flynn’s fiscal year 2019 and 2020 compensation had he not retired as of December 31, 2019. With respect to performance share units, performance-based long-term incentive cash awards, and bonus under our AIP, fiscal 2019 payments are calculated consistent with the Summary Compensation Table above and fiscal 2020 payments assume target level performance.
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Name and | Year | Salary | Bonus | Stock | Option | Non-Equity | All Other | Total | ||||||||||||||||
| William J. Flynn | 2020 | 1,135,044 | — | 3,224,098 | — | 2,200,000 | 269,181 | 6,828,323 | ||||||||||||||||
| 2019 | 1,135,044 | — | 3,181,591 | — | 2,904,798 | 269,181 | 7,490,614 | |||||||||||||||||
| John W. Dietrich | 2020 | 850,000 | — | 2,414,528 | — | 1,458,750 | 237,305 | 4,960,583 | ||||||||||||||||
| 2019 | 745,029 | — | 1,818,582 | — | 1,727,588 | 237,305 | 4,528,504 | |||||||||||||||||
Summary Compensation Table Notes
Column (c) – Salary
The amount of Mr. Dietrich’s 2019 salary takes into account his increase in base salary from $715,000 to $775,000 as of July 1, 2019 in connection with the Leadership Transition.
Column (e) – Stock Awards
The amounts included reflect the grant date fair value of stock awards, computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures and with performance awards valued based on the probable outcome of performance conditions. For more information about the assumptions used in valuing these awards, see Note 14 in our Annual Report on Form 10-K and footnote (5) to the Grants of Plan-Based Awards table below. Stock awards for 2019 reflect the aggregate grant date fair value of (i) time-based restricted stock units that vest ratably over three years and (ii) performance share units for the three-year performance period ending December 31, 2021 (see pages 36-37 for a discussion of the methodology followed by the Compensation Committee to determine the number of performance share units awarded) assuming target level performance. Performance share units are settled in shares of Common Stock at 0% to 240% of target based upon AAWW’s EBITDA growth and Average ROIC performance relative to internal targets and Comparative TSR over such three-year performance period. Assuming that the performance share units are paid at the maximum level, including the maximum impact of the TSR modifier, the aggregate dollar values of restricted stock unit and performance share unit awards for 2019 (based on the closing price of our Common Stock on the date of grant) would be $2,556,000 for Mr. Flynn, $1,461,000 for Mr. Dietrich and Mr. Steen and $1,293,000 for Mr. Schwartz and Mr. Kokas.
Column (g) – Non-Equity Incentive Plan Compensation
Reflects cash payments made under the AIP Program, a sub-plan of our 2018 Incentive Plan, as well as the value of the NEOs’ performance-based long-term incentive cash awards for the 2017-2019 performance period. The performance goals for the cash-based long-term incentive awards granted in 2017 for the 2017-2019 performance, were paid at 159% of target.
Column (i) – All Other Compensation
“All Other Compensation” includes Company matching contributions under our 401(k) plan. For 2019, these amounts totaled $12,500 for Messrs. Flynn, Dietrich and Schwartz and $9,500 for Messrs. Kokas and Steen.
We provide a limited number of perquisites and other personal benefits to our senior executives. We believe these benefits are reasonable, competitive and consistent with our overall executive compensation program and philosophy and with comparable programs maintained by the companies with which we compete for executive talent. The costs of these benefits constitute only a small percentage of each NEO’s total compensation. For 2019, these personal benefits included financial counseling and tax-preparation fees ($22,480 for Mr. Flynn and $21,930 for Messrs. Dietrich, Kokas, Schwartz and Steen) and limited travel-related expenses ($11,882 for Mr. Flynn, $10,576 for Mr. Dietrich, $116 for Mr. Kokas, $13,608 for Mr. Schwartz and $9,394 for Mr. Steen). Reimbursement of taxes owed for these benefits for 2019 totaled $36,697 for Mr. Flynn, $30,211 for Mr. Dietrich, $20,489 for Mr. Kokas, $33,028 for Mr. Schwartz and $20,323 for Mr. Steen. These amounts are included in the “All Other Compensation” column.
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As described above in the section entitled “Other Elements of Compensation – Retirement Plans,” our NEOs are entitled to receive employer credit under the Retirement Restoration Plan. The portion of account balances attributable to such employer credit made under the Retirement Restoration Plan to each of our NEOs during 2019 totaled $145,682 for Mr. Dietrich, $118,916 for Mr. Kokas, $118,916 for Mr. Schwartz and $138,668 for Mr. Steen. These amounts are included in the “All Other Compensation” column. See “Nonqualified Deferred Compensation” below for additional information about the Retirement Restoration Plan.
With respect to Mr. Flynn, his “All Other Compensation” also includes the following entitlements each of which were previously disclosed and were paid or accrued in connection with his retirement pursuant to the terms and conditions of his Transition Agreement: (i) full value of his Retirement Restoration Plan, which includes his 2019 employer credit ($450,919); and (ii) accrued but unused vacation pay ($87,308).
The “All Other Compensation” column also includes de minimis amounts for group term life insurance and long-term disability insurance.
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2019 Grants of Plan-Based Awards
The grants set forth in the following table were made pursuant to (i) our 2018 Incentive Plan, as amended and restated, and related award agreements and (ii) our AIP, each of which is described in more detail in the section entitled “Compensation Discussion and Analysis” above.
Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards(4) | All Other Stock Awards: Number of Shares of | All Other Option Awards: Number of Securities | Exercise or Base Price of | Grant Date Fair Value of Stock and | ||||||||||||
Name (a) | Grant Date (b) | Threshold ($) (c) | Target ($) (d) | Maximum ($) (e) | Threshold (#) (f) | Target (#) (g) | Maximum (#) (h) | Stock or Units (#) (i) | Underlying Options (#) (j) | Option Awards ($) (k) | Option Awards (5) ($) (l) | ||||||
| William J. Flynn | |||||||||||||||||
| AIP(1) | 851,250 | 1,135,000 | 2,270,000 | — | — | — | — | — | — | — | |||||||
| LTIP-LTC(2) | 2/27/19 | — | 1,065,000 | 2,556,000 | — | — | — | — | — | — | — | ||||||
| LTIP-PSUs(3) | 2/27/19 | — | — | — | — | 19,445 | 46,668 | — | — | — | 1,060,530 | ||||||
| LTIP-RSUs(4) | 2/27/19 | — | — | — | — | — | — | 38,890 | — | — | 2,121,060 | ||||||
| John W. Dietrich | |||||||||||||||||
| AIP(1) | 531,937 | 709,250 | 1,418,500 | — | — | — | — | — | — | — | |||||||
| LTIP-LTC(2) | 2/27/19 | — | 608,750 | 1,461,000 | — | — | — | — | — | — | — | ||||||
| LTIP-PSUs(3) | 2/27/19 | — | — | — | — | 11,115 | 26,676 | — | — | — | 606,212 | ||||||
| LTIP-RSUs(4) | 2/27/19 | — | — | — | — | — | — | 22,229 | — | — | 1,212,370 | ||||||
| Michael T. Steen | |||||||||||||||||
| AIP(1) | 455,625 | 607,500 | 1,215,000 | — | — | — | — | — | — | — | |||||||
| LTIP-LTC(2) | 2/27/19 | — | 608,750 | 1,461,000 | — | — | — | — | — | — | — | ||||||
| LTIP-PSUs(3) | 2/27/19 | — | — | — | — | 11,115 | 26,676 | — | — | — | 606,212 | ||||||
| LTIP-RSUs(4) | 2/27/19 | — | — | — | — | — | — | 22,229 | — | — | 1,212,370 | ||||||
| Adam R. Kokas | |||||||||||||||||
| AIP(1) | 398,438 | 531,250 | 1,062,500 | �� | — | — | — | — | — | — | |||||||
| LTIP-LTC(2) | 2/27/19 | — | 538,750 | 1,293,000 | — | — | — | — | — | — | — | ||||||
| LTIP-PSUs(3) | 2/27/19 | — | — | — | — | 9,837 | 23,609 | — | — | — | 536,510 | ||||||
| LTIP-RSUs(4) | 2/27/19 | — | — | — | — | — | — | 19,673 | — | — | 1,072,965 | ||||||
| Spencer Schwartz | |||||||||||||||||
| AIP(1) | 398,438 | 531,250 | 1,062,500 | — | — | — | — | — | — | — | |||||||
| LTIP-LTC(2) | 2/27/19 | — | 538,750 | 1,293,000 | — | — | — | — | — | — | — | ||||||
| LTIP-PSUs(3) | 2/27/19 | — | — | — | — | 9,837 | 23,609 | — | — | — | 536,510 | ||||||
| LTIP-RSUs(4) | 2/27/19 | — | — | — | — | — | — | 19,763 | — | — | 1,072,965 | ||||||
| (1) | Represents the range of potential cash payouts under the AIP for 2019. The actual AIP payouts for 2019 are included in the Summary Compensation Table above. |
| (2) | Represents the grant (under the 2018 Incentive Plan) of performance cash awards that vest only if certain pre-established performance criteria for the period beginning on January 1, 2019 and ending December 31, 2021 are achieved. |
| (3) | Represents the grant (under the 2018 Incentive Plan) of performance-based long-term stock awards that vest only if certain pre-established performance criteria for the period beginning on January 1, 2019 and ending December 31, 2021 are achieved. |
| (4) | Represents award of time-based restricted stock units that vest ratably over a three-year period. |
| (5) | The fair value of the restricted stock units and performance share units shown in the table is based on the closing market price of our Common Stock as of the date of the particular award, computed in accordance with GAAP, excluding the effect of estimated forfeitures and with performance awards valued based on the probable outcome of performance conditions. See footnote (e) to the Summary Compensation table for the assumptions used in valuing these awards and for the grant date fair value of awards if maximum levels of performance were achieved. |
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2019 Outstanding Equity Awards
The table below shows outstanding equity awards for our NEOs as of December 31, 2019. Market values reflect the closing price of our common stock on the NASDAQ Global Market on December 31, 2019, which was $27.57 per share.
Name (a) | Number of Securities Underlying Unexercised Options Exercisable (#) (b) | Number of Securities Underlying Unexercised Options Unexercisable (#) (c) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) | Option Exercise Price ($) (e) | Option Expiration Date (f) | Number of Shares or Units of Stock That Have Not Vested (#) (g) | Market Value of Shares or Units of Stock That Have Not Vested ($) (h) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (i) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (j) | ||||||||||||||||||||||
| — | — | — | — | — | 18,289 | (3) | 504,228 | 18,289 | (2) | 504,228 | |||||||||||||||||||||
| William J. | — | — | — | — | — | 24,555 | (5) | 676,981 | 18,416 | (4) | 507,729 | ||||||||||||||||||||
| Flynn | — | — | — | — | — | 38,890 | (7) | 1,072,197 | 19,445 | (6) | 536,099 | ||||||||||||||||||||
| — | — | — | — | — | 7,254 | (1) | 199,993 | — | — | ||||||||||||||||||||||
| John W. | — | — | — | — | — | 10,391 | (3) | 286,480 | 10,390 | (2) | 286,452 | ||||||||||||||||||||
| Dietrich | — | — | — | — | — | 14,036 | (5) | 386,973 | 10,527 | (4) | 290,229 | ||||||||||||||||||||
| — | — | — | — | — | 22,229 | (7) | 612,854 | 11,115 | (6) | 306,441 | |||||||||||||||||||||
| — | — | — | — | — | 7,254 | (1) | 199,993 | — | — | ||||||||||||||||||||||
| Michael T. | — | — | — | — | — | 10,391 | (3) | 286,480 | 10,390 | (2) | 286,452 | ||||||||||||||||||||
| Steen | — | — | — | — | — | 14,036 | (5) | 386,973 | 10,527 | (4) | 290,229 | ||||||||||||||||||||
| — | — | — | — | — | 22,229 | (7) | 612,854 | 11,115 | (6) | 306,441 | |||||||||||||||||||||
| — | — | — | — | — | 5,963 | (1) | 164,400 | — | — | ||||||||||||||||||||||
| Adam R. | — | — | — | — | — | 8,542 | (3) | 235,503 | 8,541 | (2) | 235,475 | ||||||||||||||||||||
| Kokas | — | — | — | — | — | 12,422 | (5) | 342,475 | 9,316 | (4) | 256,842 | ||||||||||||||||||||
| — | — | — | — | — | 19,673 | (7) | 542,385 | 9,837 | (6) | 271,206 | |||||||||||||||||||||
| — | — | — | — | — | 5,963 | (1) | 164,400 | — | — | ||||||||||||||||||||||
| Spencer | — | — | — | — | — | 8,542 | (3) | 235,503 | 8,541 | (2) | 235,475 | ||||||||||||||||||||
| Schwartz | — | — | — | — | — | 12,422 | (5) | 342,475 | 9,316 | (4) | 256,842 | ||||||||||||||||||||
| — | — | — | — | — | 19,673 | (7) | 542,385 | 9,837 | (6) | 271,206 | |||||||||||||||||||||
| (1) | Restricted stock units awarded on February 11, 2016 vest 25% ratably on each anniversary date of grant, with remaining outstanding vesting date of February 11, 2020, and would fully vest upon certain terminations of employment, as described in more detail in the section entitled “Potential Payments Upon Termination or Change of Control – Payments Upon a Change of Control and Termination of Employment – Long-Term Incentive Awards.” |
| (2) | Performance share units awarded on March 9, 2017 vest on attainment of certain pre-established performance criteria during the three-year performance period ended December 31, 2019. The amounts reflect target level performance. |
| (3) | Restricted stock units awarded on March 9, 2017 vest 25% ratably on each anniversary date of grant, with remaining outstanding vesting dates of March 9, 2020, and 2021. |
| (4) | Performance share units awarded on March 8, 2018 vest on attainment of certain pre-established performance criteria during the three-year performance period ended December 31, 2020. The amounts reflect target level performance. |
| (5) | Restricted stock units awarded on March 8, 2018 vest 33.3% ratably on each anniversary date of grant, with remaining outstanding vesting dates of March 8, 2020, and 2021. |
| (6) | Performance share units awarded on February 27, 2019 vest on attainment of certain pre-established performance criteria during the three-year performance period ended December 31, 2021. The amounts reflect target level performance. |
| (7) | Restricted stock units awarded on February 27, 2019 vest 33.3% ratably on each anniversary date of grant, with remaining outstanding vesting dates of February 27, 2020, 2021, and 2022. |
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2019 Stock Vestings
The following table sets forth information relating to stock vesting during fiscal 2019 for each of our NEOs:
| Stock Awards | ||||||||
Name (a) | Number of Shares | Value Realized | ||||||
| William J. Flynn | 21,422 | 1,050,556 | ||||||
| John W. Dietrich | 54,344 | 2,777,330 | ||||||
| Michael T. Steen | 54,344 | 2,777,330 | ||||||
| Adam R. Kokas | 45,614 | 2,332,409 | ||||||
| Spencer Schwartz | 45,614 | 2,332,409 | ||||||
| (1) | The value is calculated based on the closing market price of our Common Stock as of the vesting date of the applicable award. |
Nonqualified Deferred Compensation
As described above in the section entitled “Other Elements of Compensation – Retirement Plans,” our NEOs are entitled to receive an annual employer contribution under the Retirement Restoration Plan.
The table below sets forth the amount of employer contributions made under the Retirement Restoration Plan to each of our NEOs during 2019. Each Executive Officer is 100% vested in his aggregate account balance.
Name (a) | Executive Contributions in Last Fiscal Year (b)($) | Registrant Contributions in Last Fiscal Year (c)($)(1) | Aggregate Earnings in Last Fiscal Year (d)($) | Aggregate Withdrawals/ Distributions (e)($) | Aggregate Balance at Last Fiscal Year End (f)($) | |||||
| William J. Flynn | — | 167,393 | 12,857 | — | 450,919 | |||||
| John W. Dietrich | — | 145,682 | 12,826 | — | 428,532 | |||||
| Michael T. Steen | — | 138,668 | 12,057 | — | 404,562 | |||||
| Adam R. Kokas | — | 118,916 | 10,830 | — | 357,750 | |||||
| Spencer Schwartz | — | 118,916 | 10,710 | — | 355,113 |
| (1) | The amounts reported in this column for each NEO are reflected in the “All Other Compensation” column of the Summary Compensation Table. |
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Employment Agreements
William J. Flynn. Pursuant to Mr. Flynn’s employment agreement, dated April 21, 2006 and as amended on December 31, 2008 and July 1, 2011 (the “Flynn Employment Agreement”), if he is terminated by the Company for “cause,” (as defined in the Flynn Employment Agreement) or if he resigns other than for “good reason,” (as defined in the Flynn Employment Agreement) he would be entitled to receive salary earned up to the date of such termination or resignation and would not be eligible to receive any severance payments in connection with such termination or resignation. If Mr. Flynn is terminated by the Company without cause, or if he resigns for good reason (as discussed in the section entitled “Payments Upon a Change in Control and Termination of Employment” below), he would be entitled to receive (i) an amount equal to two times his then-current annual base salary (one-third of which would be payable on the first day of the seventh month following termination of employment (the “Payment Commencement Date”), with the balance payable in accordance with Atlas’ normal pay schedule beginning on the Payment Commencement Date and continuing for one year thereafter); (ii) accrued but unused vacation pay; (iii) all vested rights and benefits pursuant to other Company plans and programs; (iv) continued health and welfare benefits coverage for 12 months (provided that such coverage will cease if Mr. Flynn receives comparable coverage from subsequent employment); and (v) a cash payment under our AIP equal to the lesser of (a) the amount he would have received if he had been employed by Atlas on the last day of such year (assuming for such purpose that 50% of any individual bonus objectives had been achieved) or (b) his target bonus percentage. Substantially equivalent compensation and benefits would be payable in the event of Mr. Flynn’s permanent disability (as defined in the Flynn Employment Agreement) or his death. If, within 12 months immediately following a change in control (as defined in the Flynn Employment Agreement and discussed in the section entitled “Payments Upon a Change in Control and Termination of Employment” below), Mr. Flynn’s employment is terminated without cause or if he resigns for good reason, Mr. Flynn would be entitled to the same compensation and benefits as described above, except that the amount of the payment to which he would be entitled would be increased from two to three times his then-current annual base salary (one-fourth of which would be payable on the Payment Commencement Date, with the balance payable in accordance with Atlas’ normal pay schedule beginning on the Payment Commencement Date and continuing for 18 months thereafter). Moreover, if, the Company terminates Mr. Flynn’s employment without cause or he resigns for good reason, and a change in control occurs within six months following such termination or resignation, then, in addition to the payment described above, Mr. Flynn would be entitled to an additional amount equal to 12 months of his then-current monthly base salary.
Under the terms of the Flynn Employment Agreement, Mr. Flynn is prevented from soliciting or interfering with any of our contracts, client relationships, independent contractors, suppliers, customers, employees, or Directors for a period of two years following termination of his employment with us. Additionally, for a period of one year following termination of his employment, Mr. Flynn may not accept employment with, or give advice to, any air cargo carrier carrying on a business substantially similar to Atlas.
As described in the section entitled “2019 Executive Leadership Transitions” herein, in connection with the Leadership Transition Mr. Flynn entered into a Transition Agreement that memorialized the existing terms and conditions of his transition from his role as the Company’s President and CEO and restated his entitlements under the Company’s benefit plans and incentive programs. Pursuant to the Company’s AIP, applicable long-term incentive plan and underlying award agreements, Mr. Flynn’s outstanding time-based RSUs vested in full upon his retirement and were settled in shares of Common Stock as soon as practicable following his Transition Date and his outstanding PSUs and long-term performance-based cash incentive awards do not accelerate and will remain outstanding and will vest in accordance with their respective terms and be paid based on actual Company performance upon completion of the relevant performance cycles. Mr. Flynn was also entitled to payment of his full account balance under the Company’s Retirement Restoration Plan, which is reflected in the 2019 Summary Compensation Table. Mr. Flynn also reaffirmed his obligations regarding the release requirement and restrictive covenants set forth in the Flynn Employment Agreement.
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John W. Dietrich. In connection with the Leadership Transition, Mr. Dietrich entered into a new employment agreement with Atlas Air (the “Dietrich Agreement”), effective as of July 1, 2019. Pursuant to the Dietrich Agreement, Mr. Dietrich will receive an annual base salary of $775,000 through the end of 2019 and, effective as of the Transition Date, an annual base salary of $850,000. In addition, as of July 1, 2019, Mr. Dietrich’s target bonus opportunity increased to 100% of his annual base salary, with his annual bonus for 2019 calculated based on his previous salary and target bonus percentage for the first half of the year and his new annual base salary and target bonus opportunity from July 1, 2019 through the end of the year. There were no changes made to his target long-term incentive award for the 2019 calendar year. Beginning in 2020, he is eligible for a long-term incentive award with a target value of 375% of his then-current base salary.
Pursuant to the Dietrich Agreement, Mr. Dietrich will be entitled to severance benefits in connection with certain terminations of employment that are generally consistent with the entitlements under his prior employment agreement. In the event Mr. Dietrich’s employment is terminated by the Company without “cause,” by Mr. Dietrich for “good reason,” or due to death or “disability” (each as defined in the Dietrich Agreement), subject to him executing a general release of claims, Mr. Dietrich will be entitled to a lump sum payment equal to twenty-four months of his then current base salary. Due to his tenure with the Company, Mr. Dietrich will also be eligible to participate in the Company’s health plans until he becomes eligible for Medicare or is eligible to be covered by the health plan of a subsequent employer. In the event Mr. Dietrich’s employment is terminated by the Company without “cause” or by Mr. Dietrich for “good reason” within 12 months following a “change in control” of the Company (as defined in the Dietrich Agreement), Mr. Dietrich will be entitled to receive a lump sum payment equal to thirty-six months of his then current base salary. If, within the six-month period immediately following a termination by the Company without “cause” or by Mr. Dietrich for “good reason,” a “change in control” of the Company occurs, then, in addition to the severance equal to twenty-four months of base salary described above, Mr. Dietrich will receive an additional lump sum payment equal to twelve months of his then-current base salary.
The Dietrich Agreement additionally provides that Mr. Dietrich will be subject to perpetual confidentiality provisions, as well as two-year post-termination non-solicitation and one-year post-termination non-competition provisions. The Dietrich Agreement superseded the prior employment agreement by and between Mr. Dietrich and Atlas Air that was amended and restated effective September 15, 2006 and was further amended at year-end 2008 and in 2011.
Aside from Mr. Flynn’s Employment Agreement and Transition Agreement and the Dietrich Agreement, none of our other NEOs are party to an employment agreement.
Executive Retention Agreements
Each of our NEOs was considered by the Board as a candidate to succeed Mr. Flynn as CEO of the Company given their respective skills and experience, as well as the multiple roles each holds with the Company and certain of its subsidiaries and/or affiliated entities. For example, Mr. Kokas also serves as Executive Vice President, General Counsel and Assistant Secretary of Polar, of which AAWW is the majority owner; Mr. Schwartz is a director of Polar; and Mr. Steen also holds the position of Chief Executive Officer of Titan. Each NEO has been a long-standing senior executive of AAWW and due to their extensive knowledge of the Company and the business, Messrs. Kokas, Schwartz and Steen each received a retention bonus opportunity (each, a “Retention Opportunity”) to help promote business continuity and to ensure that each remains focused on and committed to the successful implementation of the Company's long-term business strategy. The Committee believed that there was a compelling need to ensure that the members of the senior leadership team, each of whom has in-depth knowledge of the Company, remained intact to continue to work with our new CEO in executing our business plan and refreshed long-term strategy during an especially challenging time. The retention bonus opportunity, which is subject to continued employment, provides that each NEO would become entitled to receive $500,000 as of December 31, 2020 and $1,000,000 as of December 31, 2021. Each would also be eligible to receive any unpaid portion of the retention bonus upon a termination by the Company without “cause,” by the executive for “good reason,” or upon the executive’s death or “disability” (in each case as such term is defined in the applicable award agreement). None of our NEOs received a one-time equity grant in connection with the Leadership Transition.
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Potential Payments Upon Termination or Change in Control
Our AIP for Senior Executives, long-term incentive plans and related award agreements, the Dietrich Agreement, the Flynn Employment Agreement and Transition Agreement with Mr. Flynn, and the Benefits Program for Senior Executives (the “Benefits Program”) provide for payments and benefits to our executive officers upon certain terminations of employment, including retirement, and upon a change of control of the Company.
For purposes of these plans and arrangements, a “change in control” of the Company generally includes (i) the acquisition by any person or group of more than 50% of the total fair market value or total voting power of the Common Stock, (ii) the acquisition by any person or group, during any twelve-month period of ownership, of stock possessing 30% or more of the total voting power of the Company, (iii) the replacement of a majority of the membership of the Company’s Board of Directors during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Company’s then Board of Directors, (iv) the acquisition by a person or group during any twelve-month period of assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all assets of the Company, or (v) the consummation of a complete liquidation or dissolution of the Company.
Based on our extensive shareholder outreach and related feedback, equity and other long-term incentive award agreements under our long-term incentive plan are subject to “double-trigger” provisions that require a change in control to be accompanied by a qualifying termination of employment in order for any such award to vest on an accelerated basis.
Payments Upon Termination of Employment or Retirement (Without a Change in Control)
Severance Entitlements
Mr. Steen, Mr. Schwartz and Mr. Kokas participate in the Benefits Program for Senior Executives (the “Benefits Program”) as do Mr. Flynn and Mr. Dietrich to the extent severance benefits and related matters are not specifically covered in their respective employment agreements. The Benefits Program provides for the following severance payments and benefits in the event the executive is terminated by the Company without “cause” (as defined below), due to disability, or the executive resigns for “good reason” (as defined below), in the absence of a change in control of the Company: (i) 24 months’ continued base salary; (ii) provided that COBRA continuation coverage is timely elected, twelve months of reimbursement of the portion of COBRA premiums attributable to employer cost-share on an after-tax basis, provided that any such reimbursement will cease if the executive obtains comparable coverage in connection with subsequent employment or becomes eligible for Medicare coverage; and (iii) an annual bonus payment under the AIP for the year of termination, as described below. If an executive dies while receiving severance payments, his or her personal representative will be entitled to receive such unpaid severance payments. All severance payments are subject to the executive executing and not revoking a timely release of claims.
If an executive has attained age fifty-five and completed ten years of service with the Company or a related employer and such executive’s employment is terminated (i) without cause, (ii) due to executive’s permanent disability, (iii) by the executive for good reason, or (iv) due to executive’s “retirement” (as defined below), the executive and his or her eligible dependents, if any, will continue to be eligible to participate in the Company’s health insurance plans until such executive is Medicare eligible.
With respect to the Benefits Program and the AIP, “retirement” means a termination of an executive’s employment by the executive on or after such executive (i) attains age fifty-five and has completed ten years of service with the Company or a related employer, and (ii) has given not less than three months’ advanced written notice of such proposed retirement to the then current Chief Executive Officer of the Company or, in the event of a proposed retirement of the then current Chief Executive Officer such notice (for purposes of the AIP, six months’ advance written notice) must be given to the Chairman of our Board of Directors; provided, however, that if such executive is terminated for cause after providing such advanced written notice, such termination will not be considered a retirement.
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With respect to our employment, incentive and benefits plans and agreements (other than the Flynn Employment Agreement and Dietrich Agreement), “good reason” generally means (i) a material reduction in the executive’s annual base salary, percentage target bonus opportunity under the AIP, or target long-term incentive award opportunity (or, for purposes of certain such plans and arrangements, following a change in control, a reduction of such compensation in the aggregate), in each case as then in effect, or other material benefits provided to officers of the Company, except where such reduction is part of a general reduction in salary or benefits by the Company, (ii) a material reduction in the executive’s title or job responsibilities, or (iii) following a change in control of the Company, an attempted relocation of the executive to a position that is located greater than forty miles from the location of such executive’s most recent principal location of employment with the Company; provided, however, that the executive will be treated as having resigned due to good reason only if he or she provides the Company with a notice of termination within ninety days of the initial existence of one of the conditions described above, following which the Company shall have thirty days from the receipt of the notice of termination to cure the event specified in the notice of termination and, if the Company fails to so cure the event, the Executive must terminate his or her employment not later than thirty days following the end of such cure period.
In addition, “cause” means (i) an executive’s refusal or failure (other than during periods of illness or disability) to perform his material duties and responsibilities, (ii) the executive’s conviction or plea of guilty or nolo contendere in respect of any felony, other than a motor vehicle offense, (iii) the commission of any act which causes material injury to the reputation, business or business relationships of the Company or any of its subsidiaries including, without limitation, any breach of written policies of the Company with respect to trading in securities, (iv) any other act of fraud, including, without limitation, misappropriation, theft or embezzlement, or (v) a violation of any applicable material policy of the Company or any of its subsidiaries, including, without limitation, a violation of the laws against workplace discrimination.
Mr. Flynn’s and Mr. Dietrich’s severance benefits under their individual employment agreements in the event of certain terminations in the absence of a change in control of the Company are described above under the section entitled “Employment Agreements.”
Annual Incentive Program for Senior Executives
In the event a participant’s employment is terminated during a program year by the Company without cause, due to death, disability, retirement, or the participant resigns for good reason, he or she shall be entitled to receive a bonus under the AIP in an amount equal to, (A) in the event such termination occurs after June 30 of the applicable program year, the lesser of (1) the amount he or she would have received if he or she were employed on the last day of such program year based upon actual company performance measured pursuant to the Plan (and assuming for such purpose that his or her individual business objectives have been achieved at target), or (2) his or her target bonus (such lesser amount, the “Full Termination Bonus Amount”) or (B) in the event the termination occurs prior to July 1 of the applicable program year, the Full Termination Bonus Amount multiplied by a fraction, the numerator of which is the number of days from the commencement of the program year until such termination and the denominator of which is 365.
Long-Term Incentive Awards
In the event an executive’s employment is terminated by the Company without cause, due to death or disability, or due to the executive’s resignation for good reason, in each case in the absence of a change in control of the Company, a pro-rata portion of our executive’ outstanding PSUs and performance-based long-term incentive cash awards would vest, based on the portion of the performance period elapsed prior to such termination, with all applicable performance goals determined at the end of the performance period based on actual Company performance. Our executive’s outstanding RSUs would immediately vest upon such executive’s termination by the Company without cause, due to death or disability, or due to the executive’s resignation for good reason.
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Nonqualified Deferred Compensation
As described above in the section entitled “Other Elements of Compensation – Retirement Plans,” our NEOs are entitled to receive an annual employer credit under our Retirement Restoration Plan. Each of our executive officers is fully vested in his account balance under the Retirement Restoration Plan. All account balances under the plan would become immediately payable upon an executive’s separation from service (within the meaning of Section 409A of the Internal Revenue Code), death, or disability (as defined in the Retirement Restoration Plan).
Executive Retention Agreements
As described above in the section entitled “Employment Agreements—Executive Retention Agreements,” each of Messrs. Kokas, Schwartz, and Steen were granted a Retention Opportunity, any unpaid portion of which would be payable upon a termination by the Company without cause, by the executive for good reason, or upon the executive’s death or disability.
Payments Upon a Change in Control (Without Termination of Employment)
Annual Incentive Program for Senior Executives
In the event of a change in control of the Company, a participant would remain eligible to receive a bonus under our AIP following the completion of the program year in which the change in control occurs, based on the greater of target level performance and actual performance determined at the end of the performance period.
Long-Term Incentive Awards
In the event of a change in control of the Company, immediately following such change in control, unless the award is assumed or substituted, all outstanding PSUs and performance-based long-term incentive cash awards would become payable and deemed satisfied based on achievement at the maximum performance levels, other than any applicable Comparative TSR modifier, which would be deemed satisfied based upon actual performance as of the date of the change in control. If, however, a performance-based award is assumed or substituted by the acquirer in a transaction, then such award would become payable at the levels described above subject to the participant’s continued employment through the applicable performance period or in the event of certain terminations of employment prior to the end of the applicable performance period pursuant to the terms set forth in the applicable award agreement , as described in the section entitled “Payments Upon Termination of Employment (With a Change in Control) – Long-Term Incentive Awards” below.
All outstanding RSUs would immediately vest in connection with the change in control if the awards are not assumed or substituted by the acquiror in the transaction. If, however, the awards are assumed or substituted by the acquiror in the transaction, then the awards would remain outstanding subject to the executive officer’s continued employment, and would immediately vest in the event of certain terminations of employment following the change in control, as described in the section entitled “Payments Upon Termination of Employment (With a Change in Control) – Long-Term Incentive Awards” below.
Nonqualified Deferred Compensation
As noted above, each executive’s vested account balance under the Retirement Restoration Plan would become immediately payable in the event of a change in control.
Payments Upon Termination of Employment (With a Change in Control)
Severance Entitlements
As noted above, each of Messrs. Kokas, Schwartz and Steen participate in the Benefits Program, which provides for the severance payments and benefits described in the section entitled “Payments Upon Termination of Employment or Retirement (Without a Change in Control)” above. If, within the twelve-month period immediately following a change in control of the Company, an executive’s employment is terminated for reasons other than cause or if he resigns for good reason, and subject to his timely execution of a general release of claims, then such executive will be entitled to the severance benefits described above, except that such severance payments will be in the form of a single lump-sum payment in an amount equal to thirty-six months of the executive’s then-current annual base salary.
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If, within the six-month period immediately following an executive’s termination of employment by the Company without cause or by the executive for good reason, a change in control of the company occurs, then, in addition to the severance payments described in the section entitled “Payments Upon Termination of Employment or Retirement (Without a Change in Control) – Severance Entitlements” above, and subject to the executive satisfying the aforementioned release requirements, the Executive will be entitled to receive a lump-sum payment equal to twelve months of his then-current base salary.
None of our NEOs are entitled to any tax gross-up payments in the event the executive is subject to the “golden parachute” excise tax under Section 4999 of the Internal Revenue Code. Receipt of the separation payments and benefits described above is conditioned upon the applicable executive complying with the terms and conditions of a restrictive covenant agreement.
Mr. Flynn’s and Mr. Dietrich’s severance benefits under their individual employment agreements in the event of certain terminations following a change in control are described under the section entitled “Employment Agreements” above.
Annual Incentive Plan for Senior Executives
In the event that a participant’s employment is terminated during a program year in which a change in control occurs (i) following such change in control by reason of (A) an involuntary termination by the Company without cause, (B) the participant’s resignation for good reason, (C) retirement, (D) death or disability; or, (ii) within six months prior to such change in control, by the Company without cause or by the participant for change in control good reason, such participant is entitled to receive a non-prorated AIP bonus payment calculated based on the greater of (A) target level performance and (B) the Company’s actual performance determined at the end of the performance period pursuant to the terms of the plan.
Long-Term Incentive Awards
In the event of an executive’s termination by the Company without cause, due to death or disability, or the executive’s resignation for good reason, in each case following a change in control of the Company, all outstanding performance-based long-term incentive awards that were not substituted or assumed by the acquiror in connection with the transaction would immediately vest, with any applicable performance goals deemed satisfied at maximum performance levels, other than any applicable Comparative TSR modifier, which would be deemed satisfied based upon actual performance as of the date of the change in control.
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Post-Termination and Change in Control Table
The table below sets forth the estimated dollar value of the payments and other benefits our NEOs would receive in the event of his termination of employment or a change in control that are in addition to amounts previously earned and accrued by the executive, in each case assuming that such termination is without cause and such termination or change in control occurred on December 31, 2019.
These estimates were valued based on the closing price of our Common Stock as quoted on the NASDAQ Global Market on December 31, 2019, which was $27.57 per share. The actual amounts to be paid can only be determined at the time of such events.
These estimates assume that the NEO (a) executes a release of claims, (b) does not violate the executive’s noncompetition or nonsolicitation agreements or any other restrictive covenants with us following termination, (c) does not receive medical and life insurance coverage from another employer within twelve months of the termination of his employment, (d) does not have any unused vacation time, and (e) does not incur legal fees requiring reimbursement from us.
These estimates exclude payments under our AIP for Senior Executives that each NEO became entitled to as of December 31, 2019.
| Name | Payments on | Payments on | Payments on | Payments in | Payments in | ||||||||||
| William J. Flynn | $ | 8,201,462 | $ | 8,201,462 | $ | 5,931,462 | $ | — | $ | 13,779,821 | |||||
| John W. Dietrich | 4,779,758 | 4,779,758 | 1,011,374 | — | 9,079,383 | ||||||||||
| Michael T. Steen | 5,561,541 | 4,211,541 | — | — | 9,686,383 | ||||||||||
| Adam R. Kokas | 5,110,861 | 3,860,861 | — | — | 8,788,815 | ||||||||||
| Spencer Schwartz | 5,110,861 | 3,860,861 | — | — | 8,788,815 | ||||||||||
| (1) | Represents (a) salary continuation for twenty-four months at the NEO’s then- current base salary, (b) in the case of Mr. Dietrich, the estimated cost of reimbursement of the portion of COBRA health and welfare continuation coverage premiums attributable to employer cost-share on an after-tax basis, until he would become Medicare eligible or, in the case of the other NEOs, for 12 months, (c) prorated vesting of outstanding PSUs and performance-based long-term incentive cash awards calculated based on the portion of the performance period elapsed prior to December 31, 2019 and assuming target level performance, (d) full vesting of all outstanding RSUs, and (e) payment of full amount of the Retention Bonus. Note, because Mr. Flynn is Medicare eligible he would not receive continued COBRA coverage. |
| (2) | Represents (a) two times Mr. Flynn's and Mr. Dietrich's annual base salary, (b) in the case of Mr. Dietrich, the estimated cost of reimbursement of the portion of COBRA health and welfare continuation coverage premiums attributable to employer cost-share on an after-tax basis until he would become Medicare eligible or, in the case of the other NEOS, for 12 months, (c) prorated vesting of outstanding PSUs and performance-based long-term incentive cash awards calculated based on the portion of the performance period elapsed prior to December 31, 2019 and assuming target level performance, (d) full vesting of all outstanding RSUs, and (e) payment of the full amount of the Retention Bonus. Note that because Mr. Flynn is Medicare eligible, he would not receive continued COBRA coverage. |
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| (3) | Mr. Dietrich is entitled to receive reimbursement of the portion of his COBRA health and welfare continuation coverage premiums attributable to employer cost-share on an after-tax basis until he becomes Medicare eligible. Mr. Flynn is entitled to (i) full vesting of his outstanding RSU awards and (ii) full vesting of his outstanding PSUs and performance-based long-term incentive cash awards based on actual performance, which will be paid in the normal course following the end of the applicable performance period, in each case pursuant to the terms of his Transition Agreement as more fully described in the section entitled “Employment Agreements.” Of our NEOs, only Messrs. Flynn and Dietrich are retirement eligible and Mr. Flynn is Medicare eligible. |
| (4) | Because our equity awards have a “double-trigger” vesting requirements, full vesting would only occur upon certain terminations of the NEO’s employment subsequent to the change in control or such awards are not assumed or substituted for equity of a comparable value in connection with such change in control. |
| (5) | Represents (a) thirty-six months of the NEO’s annual base salary payable in a lump sum, (b) the estimated cost of 12 months of reimbursement of the portion of COBRA health and welfare continuation coverage premiums attributable to employer cost-share on an after-tax basis, (c) full vesting of all outstanding performance-based long-term incentive awards with any applicable performance goals (including any applicable Comparative TSR modifier) deemed satisfied at maximum performance levels, (d) full vesting of all outstanding RSUs, and (e) payment of the full amount of the Retention Bonus. The amounts in this column do not reflect any reductions for federal excise tax levied on certain excess termination payments under Section 4999 of the Code. |
Pay Ratio
Pursuant to Item 402(u) of Regulation S-K and Section 953(b) of the Dodd-Frank Act (together with any SEC guidance issued thereunder, the “pay ratio rules”), presented below is the ratio of annual total compensation of our CEO to the annual total compensation to our median employee (excluding our CEO).
Median Employee
Our median employee is a First Officer pilot flying one of our Boeing 747-400 freighter aircraft.
Company crew member (pilot) salaries are determined under a collective bargaining agreement. Seniority, performance, job skills and rank are some of the factors that go into determining crew member compensation.
Pay Ratio
The 2019 annual total compensation as determined in accordance with the applicable pay ratio rules for our CEO was $8,028,841. The 2019 annual total compensation as determined under the pay ratio rules for our median employee was $106,763. The ratio of our CEO’s annual total compensation to our median employee’s total compensation for fiscal year 2019 is 75 to 1.
We understand that the CEO pay ratio is intended to provide greater transparency to annual CEO pay and how it compares to the pay of the median employee. As such, we are providing a supplemental ratio that compares the CEO’s regular annual pay, excluding the amounts received in connection with his retirement as of December 31, 2019 (see the “2019 Executive Leadership Transitions” section), as set forth in the Pro Forma Summary Compensation Table appearing above, to the pay of the median-paid employee as we believe that this supplemental ratio reflects a more representative comparison. The resulting supplemental CEO pay ratio is 70 to 1.
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Measurement Process
The ratio is calculated in a manner consistent with the pay ratio rules. In identifying our median employee, we calculated the annual total compensation of each of our employees and our consolidated subsidiaries for the 12-month period that ended on December 31, 2019. Total compensation for these purposes included base wages or salary, any applicable bonuses or profit sharing plan payouts and any other taxable elements of compensation and was calculated using IRS Form W-2 data supplemented with internal payroll and HR records. We did not apply any cost-of-living adjustments as part of the calculation.
We selected the median employee based on approximately 3,565 full-time, part-time and temporary workers who were employed as of December 31, 2019, which number excludes all employees located outside of the United States (133 individuals; 43 in Hong Kong, 10 in the United Kingdom, 11 in the United Arab Emirates, 16 in Germany, 4 in South Korea, 1 in Luxembourg, 15 in Japan, 7 in Australia, 4 in the Netherlands, 5 in Chile, 5 in Brazil, 1 in Belgium, 1 in Peru, 4 in the People’s Republic of China, 1 in Taiwan, and 5 in Singapore). These persons were excluded pursuant to the de minimis exemption provided under the pay ratio rules. For full-time and part-time employees who were hired in 2019 but did not work the full year, we annualized their compensation but did not make any full-time equivalent adjustments. With respect to temporary employees, we used their actual wages earned. We did not include independent contractors in our determination.
This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules. Because the SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by other companies—including companies in our peer group—may not be comparable to the pay ratio reported above. Other companies may have different employment and compensation practices, different geographic breadth, perform different types of work, and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios. This information is being provided for compliance purposes.
Neither the Compensation Committee nor management of the company used the pay ratio measure in making compensation decisions. The detailed process through which our Compensation Committee determines our executive compensation, including our CEO’s compensation, is detailed set forth above and in our Compensation and Discussion and Analysis section.
Compensation of Outside Directors
The compensation of our nonemployee Directors is reviewed by the Compensation Committee on a periodic basis. In 2019, the Compensation Committee reviewed the compensation amounts for nonemployee directors in tandem with Pay Governance, the Compensation Committee’s independent consultant. Based on such review, the Committee determined that the compensatory arrangements currently in place for the nonemployee Directors are reasonably aligned with Company size and that no changes to such arrangements would be made.
Compensation for our nonemployee Directors consists of the following:
Cash Retainer
| • | Each of our nonemployee Directors receives a $95,000 annual cash retainer, payable quarterly in advance. |
Equity Compensation – Restricted Stock Units
| • | On the date of our annual meeting of shareholders, each of our nonemployee Directors receives an annual grant of restricted stock units for a number of shares having a value of $110,000 (calculated based on the closing price of our Common Stock on the date of grant). |
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| • | The RSUs generally vest and are automatically converted into common shares on the one-year anniversary of the date of grant. |
Chairman / Lead Independent Director Positions
| • | The Chairman of the Board receives $150,000 annually; and |
| • | The Lead Independent Director receives $50,000 annually. |
Meeting Fees
| • | Directors do not receive regular meeting fees. However, if more than six meetings of the Board or any Committee occur (determined independently) in any given year, meeting fees are paid at the rate of $1,500 per meeting (with the Chairman of the Board or the Committee Chair being paid at the rate of $3,000 for any such meeting). |
Medical, Dental and Vision Care Insurance
| • | Optional medical, dental and vision care coverage had been made available to certain nonemployee Directors and their eligible dependents on terms and at a premium cost similar to that charged to Company employees. Eligibility for this benefit has ended, but remains in effect for nonemployee Directors whose original participation began in or before 2011. |
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2019 Total Compensation of Nonemployee Directors
The following table shows (i) the cash amount paid to each nonemployee Director for his or her service as a nonemployee Director in 2019, and (ii) the grant date fair value of restricted stock units awarded to each nonemployee Director in 2019, calculated in accordance with the accounting guidance on share-based payments. Mr. Flynn did not receive any additional compensation for his service as a Director in 2019.
Name (a) | Fees Paid in Cash | Stock Awards | Total | ||||||||
| Robert F. Agnew (2) | 189,750 | 110,027 | 299,777 | ||||||||
| Timothy J. Bernlohr | 125,500 | 110,027 | 235,527 | ||||||||
| Charles F. Bolden, Jr. | 102,500 | 110,027 | 212,527 | ||||||||
| Bobby Griffin | 105,500 | 110,027 | 215,527 | ||||||||
| Carol B. Hallett | 126,500 | 110,027 | 236,527 | ||||||||
| Jane H. Lute | 105,500 | 110,027 | 215,527 | ||||||||
| Duncan McNabb | 132,000 | 110,027 | 242,027 | ||||||||
| Sheila A. Stamps | 102,500 | 110,027 | 212,527 | ||||||||
| John K. Wulff | 108,500 | 110,027 | 218,527 | ||||||||
| (1) | These units vest on the one-year anniversary of the grant date. The grant date fair value was $38.92 per share. |
| (2) | Mr. Agnew, our former Chairman, passed away on August 19, 2019. |
Nonemployee Directors’ Outstanding Equity Awards at Fiscal Year-End 2019
The table below shows outstanding equity awards for our nonemployee Directors as of December 31, 2019. Market values reflect the closing price of our Common Stock on the NASDAQ Global Market on December 31, 2019, which was $27.57 per share.
| Name | Grant Date | Number of Shares or | Market Value of | ||||
| Timothy J. Bernlohr | 5/22/2019 | 2,827 | 77,940 | ||||
| Charles F. Bolden, Jr. | 5/22/2019 | 2,827 | 77,940 | ||||
| Bobby Griffin | 5/22/2019 | 2,827 | 77,940 | ||||
| Carol B. Hallett | 5/22/2019 | 2,827 | 77,940 | ||||
| Jane H. Lute | 5/22/2019 | 2,827 | 77,940 | ||||
| Duncan McNabb | 5/22/2019 | 2,827 | 77,940 | ||||
| Sheila A. Stamps | 5/22/2019 | 2,827 | 77,940 | ||||
| John K. Wulff | 5/22/2019 | 2,827 | 77,940 | ||||
The grant date fair value of units granted on May 22, 2019 was $38.92 per share.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSMATTERS.
Stock Ownership
The requiredfollowing table sets forth, as of April 20, 2020, information regarding beneficial ownership of our Common Stock by:
Unless otherwise indicated, each shareholder has sole voting and dispositive power with respect to the shares of Common Stock beneficially owned by that shareholder. The number of shares of Common Stock beneficially owned is determined under rules issued by the SEC. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days of April 20 , 2020, through the exercise of any stock option or other right. The inclusion in the following table of those shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner. The number of shares of our 2018 Annual MeetingCommon Stock issued and outstanding as of Stockholders.April 20, 2020 was 26,126,559. Except as otherwise indicated in the table below, addresses of named beneficial owners are c/o Atlas Air Worldwide Holdings, Inc., 2000 Westchester Avenue, Purchase, NY 10577.
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Beneficial Ownership Table
| Name and Address of Beneficial Owner | Number of shares Beneficially Owned | Percentage of Outstanding Shares Beneficially Owned | |||
| 5% Shareholders: | |||||
BlackRock, Inc.(a) 55 East 52nd Street New York, NY 10055 | 3,819,320 | 14.7% | |||
The Vanguard Group(b) 100 Vanguard Boulevard Malvern, PA 19355 | 2,842,615 | 11.0% | |||
Dimensional Fund Advisors LP)(c) Building One 6300 Bee Cave Road Austin, TX 78746 | 2,165,080 | 8.3% | |||
Towle & Co.(d) 1610 Des Peres Road Suite 250 St. Louis, MO 63131 | 1,644,476 | 6.3% | |||
Donald Smith & Co., Inc.(e) 157 West 57th Street New York, NY 10019 | 1,337,684 | 5.2% | |||
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| Name of Beneficial Owner | Number of shares Beneficially Owned | Percentage of Outstanding Shares Beneficially Owned | |||
| Directors: | |||||
| Timothy J. Bernlohr (f) | 40,189 | * | |||
| Charles F. Bolden, Jr. (f) | 9,878 | * | |||
| Bobby J. Griffin (f) | 9,187 | * | |||
| William J. Flynn | 96,979 | * | |||
| Carol B. Hallett (g) | 38,909 | * | |||
| Jane H. Lute (f) (g) | 4,447 | * | |||
| Duncan J. McNabb (f) | 19,227 | * | |||
| Sheila A. Stamps (f) (g) | 4,447 | * | |||
| John K. Wulff (f) (g) | 31,687 | * | |||
| Director and NEO: | |||||
| John W. Dietrich | 82,138 | * | |||
| Other NEOs: | |||||
| Michael T. Steen | 155,825 | * | |||
| Adam R. Kokas | 77,799 | * | |||
| Spencer Schwartz | 42,636 | * | |||
| All Directors and executive officers as a group (15 persons, including the persons listed above) | 629,465 | (2.4%) | |||
| * | Represents less than 1% of the outstanding shares of Common Stock. |
| (a) | This information is based on a Schedule 13G/A filed with the SEC on February 4, 2020. As set forth in this filing, BlackRock, Inc. has sole voting power over 3,774,660 shares and sole dispositive power with regard to 3,819,320 shares. We have not made any independent determination as to the beneficial ownership of this shareholder and are not restricted in any determination we may make by reason of inclusion of such shareholder or their shares in this table. |
| (b) | This information is based on Schedule 13G/A filed with the SEC on February 12, 2020. As set forth in this filing, The Vanguard Group has sole voting power over 21,948 shares, sole dispositive power with regard to 2,822,256 shares, shared voting power over 678 shares and shared dispositive power over 20,359 shares. We have not made any independent determination as to the beneficial ownership of this shareholder and are not restricted in any determination we may make by reason of inclusion of such shareholder or their shares in this table. |
| (c) | This information is based on Schedule 13G/A filed with the SEC on February 12, 2020. As set forth in this filing, Dimensional Fund Advisors LP has sole voting power over 2,092,180 shares and sole dispositive power with regard to 2,165,080 shares. We have not made any independent determination as to the beneficial ownership of this shareholder and are not restricted in any determination we make by reason of inclusion of such shareholder or their shares in this table. |
| (d) | This information is based on Schedule 13G filed with the SEC on February 14, 2020. As set forth in this filing, Towle & Co. has sole voting power over 1,118,856 shares and sole dispositive power with regard to 1,644,476 shares. We have not made any independent determination as to the beneficial ownership of this shareholder and are not restricted in any determination we may make by reason of inclusion of such shareholder or their shares in this table. |
| 65 |
| (e) | This information is based on Schedule 13G filed with the SEC on February 10, 2020. As set forth in this filing, Donald Smith & Co., Inc. has sole voting power over 1,325,100 shares and sole dispositive power with regard to 1,330,700 shares. In addition, DSCO Value Fund, L.P., an affiliated fund, has sole voting power and sole dispositive power over 6,984 shares. We have not made any independent determination as to the beneficial ownership of this shareholder and are not restricted in any determination we may make by reason of inclusion of such shareholder or their shares in this table. |
| (f) | Includes shares credited under the Company’s Non-Employee Director Restricted Stock Unit Deferral Program and that are payable on termination of Board service or on the occurrence of certain other specified events: 4,447 for Mr. Bernlohr; 6,708 for Mr. Bolden; 6,708 for Mr. Griffin; 2,223 for Ms. Lute; 6,708 for Mr. McNabb; 1,620 for Ms. Stamps; and 4,447 for Mr. Wulff. |
| (g) | Includes shares issuable on vesting of restricted stock units in May 2020: 2,827 for Ms. Hallett; 1,413 for Ms. Lute; 2,827 for Ms. Stamps; and 2,261 for Mr. Wulff. |
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance under our equity compensation plans at December 31, 2017:2019:
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
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| Weighted- average exercise price of outstanding options, warrants and rights |
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| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||||
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| (a) | (b) | (c) | ||||||||||||
Equity compensation plans approved by security holders |
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| 1,226,233 |
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| $ | - |
| (1) |
| 459,310 |
| 787,655 | $ | - | (1) | 942,260 | |||||||
Total |
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| 1,226,233 |
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| - |
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| 459,310 |
| 787,655 | - | 942,260 | |||||||||
| (1) | Includes |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Party Transactions
Our Code of Conduct Applicable to our Chief Executive Officer, Senior Financial Officers and Members of the Board of Directors (the “Code of Ethics”), which is available on our website at www.atlasairworldwide.com under the “About Us – Structure and Governance” section, provides that such officers and Directors should follow the guidelines outlined in our Employee Handbook and Code of Conduct and communicate any potential or actual conflicts of interest (however immaterial) to the Chairman of the Board, the Chairman of the Audit Committee of the Board of Directors, and the General Counsel so that an objective, third-party review can be made of the matter. Pursuant to our Audit Committee Charter, which is also available on our website at www.atlasairworldwide.com, the Audit Committee reviews reports and disclosures of insider and affiliated party transactions and/or conflicts of interest or potential conflicts of interest involving corporate officers and members of the Board of Directors. The Audit Committee, when appropriate, will also review and approve any involvement of corporate officers and members of the Board of Directors in matters that might constitute a conflict of interest or that may otherwise be required information is incorporated by reference from our Proxy Statement to be filed with respect to our 2018disclosed as a related person transaction under SEC regulations. Since January 1, 2019, there have been no related person transactions. Our Nominating and Governance Committee separately determines Director Independence as summarized in “Director Independence” below.
Director Independence
The Nominating and Governance Committee has determined that all Directors other than Mr. Flynn and Mr. Dietrich are independent under Company standards and SEC and NASDAQ rules. The Nominating and Governance Committee classifies the following Directors nominated for election at the Annual Meeting as independent: Ms. Hallett, Lute and Stamps and Messrs. Bernlohr, Bolden, Griffin, McNabb and Wulff.
Our Nominating and Governance Committee Charter includes categorical standards to assist the Nominating and Governance Committee in making its determination of Stockholders.Director independence within the meaning of the rules of the SEC and the Marketplace Rules of NASDAQ. The Nominating and Governance Committee will not consider a Director to be independent if, among other things, he or she:
| • | Is or has a family member who is a current partner of the Company’s independent registered public accounting firm or was or has a family member who was a partner or employee of the Company’s independent registered public accounting firm who worked on the Company’s audit at any time during the last three years. |
Pursuant to the Nominating and Governance Committee Charter and as further required by NASDAQ rules, the Nominating and Governance Committee made a subjective determination as to each nonemployee Director that no relationship exists which, in the opinion of the Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities as a Director. As part of such determination, the Nominating and Governance Committee examined, among other things, whether there were any transactions or relationships between AAWW and an organization of which a nonemployee Director or Director Nominee has been a partner, shareholder, or officer within the last fiscal year. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that a Director is independent.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The required information is incorporated by reference from our Proxy Statement to be filed with respect to our 2018 Annual Meeting of Stockholders.SERVICES.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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Report ofFees to Independent Registered Public Accounting Firm
Consolidated Balance Sheets as
Services provided to us by PwC for each of December 31, 2017 and 2016
Consolidated Statements of Operations for the last two fiscal years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts (inare described below (dollars in thousands):
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For the Year ended December 31, 2017 |
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| $ | 997 |
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| $ | 1,247 |
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| $ | 508 |
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| $ | (758 | ) |
| $ | 997 |
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For the Year ended December 31, 2015 |
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Allowance for doubtful accounts |
| $ | 1,658 |
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| $ | (582 | ) |
| $ | 1,247 |
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All other schedules have been omitted because they are not applicable, not required or the information is included elsewhere in the Financial Statements or Notes thereto.
3. Exhibits: (see accompanying Exhibit Index of this Report for a list of exhibits filed or furnished with or incorporated by reference in this Report).
| 2019 | 2018 | |||||||
| Audit Fees | $ | 2,909 | $ | 2,406 | ||||
| Audit-Related Fees | 63 | 106 | ||||||
| Tax Fees | 2,088 | 1,668 | ||||||
| Total | $ | 5,060 | $ | 4,180 | ||||
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| • | Tax Fees consist of tax services, including tax compliance, tax advice, and tax planning. | |
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Pre-Approval Policies and Procedures
The Audit Committee preapproves audit and permissible non-audit services provided by the independent registered public accounting firm in accordance with the Committee’s preapproval policy. These services may include audit services, audit-related services, tax services, and other services. Necessary approvals required between Audit Committee meetings must be pre-approved by the Audit Committee Chairman, or such other Audit Committee member who has been delegated this authority by the Audit Committee Chairman. For any such approvals between meetings, a description is provided to the Audit Committee for discussion at its next regularly scheduled meeting. The Audit Committee has concluded that the provision of the non-audit services described above are compatible with maintaining the independence of PwC. The Audit Committee has met with management and PwC to review and approve the overall plan and scope of the audit for the current year.
| 68 |
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (b) Exhibits 31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer, furnished herewith 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer, furnished herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on February 22, 2018.April 28, 2020.
ATLAS AIR WORLDWIDE HOLDINGS, INC. | |||
(Registrant) | |||
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| By: |
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John W. Dietrich | |||
| President and Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on February 22, 2018April 28, 2020 on behalf of the Registrant and in the capacities indicated.
Signature | Capacity | |
* | Chairman of the Board | |
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| /s/ John W. Dietrich | President, Chief Executive Officer and Director | |
| (Principal Executive Officer) | |
/s/ Spencer Schwartz | Executive Vice President and Chief Financial Officer | |
Spencer Schwartz | (Principal Financial Officer) | |
/s/ Keith H. Mayer | Senior Vice President, Chief Accounting Officer | |
Keith H. Mayer | and Corporate Controller | |
(Principal Accounting Officer) | ||
* Timothy J. Bernlohr | Director | |
Timothy J. Bernlohr | ||
* Charles F. Bolden, Jr. | Director | |
Charles F. Bolden, Jr. | ||
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* Bobby J. Griffin | Director | |
Bobby J. Griffin | ||
* Carol B. Hallett | Director | |
Carol B. Hallett | ||
* | Director | |
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* Duncan J. McNabb | Director | |
Duncan J. McNabb | ||
* Sheila A. Stamps | Director | |
| Sheila A. Stamps | ||
| * John K. Wulff | Director | |
John K. Wulff |
*By: | /s/ | |
for each of the persons indicated |
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105
