- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
<Table>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
----------
Commission File Number 0-25732
ATLAS AIR WORLDWIDE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
13-4146982
(IRS Employer Identification No.)
2000 WESTCHESTER AVE.,
PURCHASE, NY 10577
(Address of principal executive offices) (Zip Code)
(914) 701-8000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of April 30, 2002, Atlas Air Worldwide Holdings, Inc. had 38,251,091
shares of $.01 par value Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations -- Three
Months Ended March 31, 2002 and 2001........................ 2
Condensed Consolidated Balance Sheets -- March 31, 2002 and
December 31, 2001........................................... 3
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 2002 and 2001........................ 4
Notes to Condensed Consolidated Financial Statements........ 5
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 9
Quantitative and Qualitative Disclosures About Market
Item 3. Risk........................................................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES........................................................... 17
</Table>
1
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- --------
Revenues:
Contract services......................................... $108,567 $160,648
Charter services.......................................... 80,864 3,050
Scheduled services........................................ 49,889 --
Other revenue............................................. 6,851 16,614
-------- --------
Total operating revenues............................ 246,171 180,312
Expenses:
Salaries, wages and benefits.............................. 40,402 30,159
Aircraft rentals.......................................... 46,919 31,386
Depreciation and amortization............................. 21,695 20,186
Ground handling and airport fees.......................... 25,592 3,954
Maintenance, materials and repairs........................ 38,192 29,408
Aircraft fuel............................................. 30,918 2,836
Pilot profit sharing settlement........................... -- 22,815
Other operating expenses.................................. 34,779 24,203
-------- --------
Total operating expenses............................ 238,497 164,947
-------- --------
Operating income............................................ 7,674 15,365
Other income (expense):
Interest income........................................... 3,311 7,634
Interest expense.......................................... (25,784) (25,377)
Capitalized interest...................................... 2,457 2,863
Change in fair value of interest rate swap................ 1,368 (2,061)
-------- --------
(18,648) (16,941)
-------- --------
Loss before income taxes and cumulative effect of a change
in accounting principle................................... (10,974) (1,576)
Income tax benefit.......................................... (4,324) (1,583)
-------- --------
(Loss)/income before cumulative effect of a change in
accounting principle...................................... (6,650) 7
Cumulative effect of a change in accounting principle, net
of applicable tax benefit of $933......................... -- (1,589)
-------- --------
Net loss.................................................... $ (6,650) $ (1,582)
======== ========
Other comprehensive (loss)/income (unrealized (loss)/gain
on securities, net of tax).............................. (444) 4
-------- --------
Total comprehensive loss.................................... $ (7,094) $ (1,578)
-------- --------
Loss per share (basic and diluted):
(Loss)/income before cumulative effect of a change in
accounting principle...................................... $ (0.17) $ 0.00
Cumulative effect of a change in accounting principle..... -- (0.04)
-------- --------
Net loss per share........................................ $ (0.17) $ (0.04)
======== ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS,
EXCEPT SHARE DATA)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 144,321 $ 238,693
Short-term investments.................................... 121,871 112,634
Accounts receivable, (net of allowance of $33,455 and
$22,521, respectively).................................. 169,019 168,502
Income taxes receivable................................... 19,009 20,544
Prepaid expenses and other................................ 30,616 30,998
---------- ----------
Total current assets............................... 484,836 571,371
Property and equipment:
Flight equipment.......................................... 1,641,279 1,627,117
Other..................................................... 51,508 51,156
---------- ----------
1,692,787 1,678,273
Less accumulated depreciation............................. (339,201) (317,647)
---------- ----------
Net property and equipment......................... 1,353,586 1,360,626
Other assets:
Debt issuance costs, net of accumulated amortization of
$21,513 and $20,373, respectively....................... 19,476 20,616
Deposits and other........................................ 136,490 132,139
---------- ----------
Total assets....................................... $1,994,388 $2,084,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................. $ 98,287 $ 65,934
Accounts payable and accrued expenses..................... 120,019 172,018
---------- ----------
Total current liabilities.......................... 218,306 237,952
Long-term debt and capital lease obligations, net of current
portion................................................... 906,321 959,052
Other liabilities........................................... 339,411 344,762
Deferred income tax liability............................... 46,731 53,078
Stockholders' equity:
Preferred Stock, $1 par value; 10,000,000 shares
authorized; no shares issued............................ -- --
Common Stock, $0.01 par value; 50,000,000 shares
authorized; 38,230,757 and 38,230,757 shares issued,
respectively............................................ 382 382
Additional paid-in capital................................ 305,930 305,930
Retained earnings......................................... 178,071 185,114
Deferred Compensation -- Restricted Stock................. (414) (738)
Treasury Stock, at cost; 21,149 and 79,889 shares,
respectively............................................ (394) (1,268)
Accumulated other comprehensive income.................... 44 488
---------- ----------
Total stockholders' equity......................... 483,619 489,908
---------- ----------
Total liabilities and stockholders' equity......... $1,994,388 $2,084,752
========== ==========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- ---------
Operating activities:
Net loss.................................................. $ (6,650) $ (1,582)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 21,695 20,186
Provision for doubtful accounts........................ 10,940 5,246
Amortization of debt issuance costs and lease financing
gains and losses...................................... 1,140 (2,513)
Change in fair value of interest rate swap............. (1,368) 4,583
Disposition of property and equipment.................. -- (14,929)
Loss on joint venture investment....................... 385 --
Deferred income taxes.................................. (6,347) (13,499)
Changes in operating assets and liabilities:
Accounts receivable and other........................ (15,650) 15,574
Deposits and other................................... (5,188) (423)
Accounts payable and accrued expenses................ (48,874) (76,318)
Income tax payable................................... (1,060) (28,359)
-------- ---------
Net cash used in operating activities............. (50,977) (92,034)
Investing activities:
Purchase of property and equipment........................ (14,654) (66,291)
Proceeds from sale of property and equipment.............. -- 53,887
Purchase of investments................................... (15,067) (37,021)
Maturity of investments................................... 5,830 37,573
-------- ---------
Net cash used in investing activities............. (23,891) (11,852)
Financing activities:
Issuance of treasury stock................................ 874 407
Principal payments on long term debt and capital lease
obligations............................................ (20,378) (54,616)
Debt issuance costs and deferred lease costs.............. -- (1,788)
-------- ---------
Net cash used in financing activities............. (19,504) (55,997)
-------- ---------
Net decrease in cash........................................ (94,372) (159,883)
Cash and cash equivalents at beginning of period............ 238,693 493,723
-------- ---------
Cash and cash equivalents at end of period.................. $144,321 $ 333,840
======== =========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Atlas Air Worldwide Holdings, Inc. (AAWH or the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these financial statements contain all
adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flows for the
periods indicated. The Company's 2002 results continue to be adversely impacted
by the current global economic recession, exacerbated by the September 11, 2001
terrorist attacks. These results also reflect the purchase by AAWH of
substantially all of the assets and assumption of certain liabilities of Polar
Air Cargo, Inc. (Polar) on November 1, 2001. Accordingly, the operating results
of Polar are included in the accompanying condensed consolidated financial
statements for the three-month period ended March 31, 2002 but not for the
three-month period ended March 31, 2001. When utilized in this report, all
references to AAWH or the Company include Polar and the Company's other
operating subsidiary, Atlas Air, Inc. (Atlas Air). Results of operations for the
periods presented herein are not necessarily indicative of results of operations
for the entire year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (2001 Form 10-K).
Certain amounts from 2001 have been reclassified to conform with the 2002
presentation.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". These standards revise the rules related to the accounting
for business combinations, goodwill and other intangible assets. SFAS No. 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase accounting method. SFAS No. 142 states that
goodwill is no longer subject to amortization over its useful life. Rather,
goodwill is subject to at least annual assessment for impairment and is to be
written down to its fair value only if the carrying amount is greater than the
fair value. In addition, intangible assets should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Prior to June
30, 2002, the Company will perform the first of the required impairment tests of
assets covered by SFAS No. 142 as of January 1, 2002, and, as such, the Company
has not yet determined what the effect of the tests will be on the results of
operations or financial position of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This standard addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard requires
recognition of the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Management is currently
assessing the impact of this pronouncement, particularly as it relates to leased
aircraft, and does not expect it to have a material impact on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This standard addresses financial accounting
and reporting for the impairment of long-lived assets and of long-lived assets
to be disposed of. This Statement supercedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed of", and
the accounting and reporting provisions of APB Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
5
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). The Company adopted this pronouncement on January 1,
2002. The impact of adopting SFAS No. 144 had no effect on the results of
operations or financial position of the Company.
3. INVESTMENTS
The Company invests excess cash in various available-for-sale securities as
defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". SFAS No. 115 requires investments in debt and equity securities
classified as available for sale to be measured at fair market value and
unrealized gains and losses recorded as a component of other comprehensive
income. These securities were classified as held to maturity as of March 31,
2002. The following table sets forth the aggregate fair market value, book value
(amortized/accreted cost) and unrealized gains/losses by major security type as
of March 31, 2002 and December 31, 2001 (in thousands):
<Table>
<Caption>
FAIR
MARKET UNREALIZED
SECURITY TYPE VALUE BOOK VALUE GAIN (LOSS)
- ------------- -------- ---------- -----------
MARCH 31, 2002:
Cash and short term investments:
Asset backed securities........................... $ 2,234 $ 2,225 $ 9
Money market funds................................ 27,225 27,225 --
Corporate bonds................................... 37,070 37,120 (50)
Certificates of deposit........................... 4,503 4,503 --
Commercial paper.................................. 31,286 31,277 9
Euro bonds........................................ 12,395 12,347 48
Market auction preferreds......................... 15,500 15,500 --
Municipal bonds................................... 37,150 37,150 --
Corporate notes................................... 13,233 13,177 56
Taxable auction securities........................ 3,000 3,000 --
US Government agencies............................ 9,042 9,022 20
Cash and overnight investments.................... 73,554 73,554 --
-------- -------- ----
Total cash and short term investments..... $266,192 $266,100 $ 92
======== ======== ====
Other investments:
Guaranteed investment contracts (included
in Deposits and other).................. $ 42,554 $ 42,554 $ --
======== ======== ====
DECEMBER 31, 2001:
Cash and short term investments:
Asset backed securities........................... $ 2,266 $ 2,248 $ 18
Money market funds................................ 15,032 15,027 5
Corporate bonds................................... 43,303 43,153 150
Certificates of deposit........................... 4,490 4,490 --
Commercial paper.................................. 35,275 34,982 293
Euro bonds........................................ 14,982 14,888 94
Market auction preferreds......................... 15,513 15,513 --
Municipal bonds................................... 22,025 22,025 --
Corporate notes................................... 18,557 18,398 159
</Table>
6
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
FAIR
MARKET UNREALIZED
SECURITY TYPE VALUE BOOK VALUE GAIN (LOSS)
- ------------- -------- ---------- -----------
Taxable auction securities........................ 3,005 3,005 --
US Government agencies............................ 17,105 17,042 63
Cash and overnight investments.................... 159,774 159,774 --
-------- -------- ----
Total cash and short term investments..... $351,327 $350,545 $782
======== ======== ====
Other investments:
Guaranteed investment contracts (included
in Deposits and other).................. $ 41,100 $ 41,100 $ --
======== ======== ====
</Table>
Accrued interest on investments held at March 31, 2002 was approximately
$2.0 million. Accrued interest on investments held at December 31, 2001 was
approximately $1.9 million. Interest earned on these investments and related
maturities is reinvested in similar securities.
4. COMMITMENTS AND CONTINGENCIES
BOEING PURCHASE AGREEMENT
In June 1997, Atlas Air entered into the Boeing Purchase Agreement to
purchase 10 new Boeing 747-400 freighter aircraft with options for 10 additional
aircraft, all to be powered by GE engines. In February 1999, Atlas Air exercised
options for two additional aircraft that were delivered in 2000, and in October
2000 Atlas Air exercised options for four additional aircraft for delivery in
2002. As a result of Atlas Air being a large purchaser of Boeing 747-400
freighter aircraft, it was able to negotiate from Boeing and GE a significant
discount off the aggregate list price for the 16 Boeing 747-400 freighter
aircraft, four installed engines per aircraft and additional spare engines. In
addition, Atlas Air obtained certain ancillary products and services at
advantageous prices.
During 2001, Atlas Air and Boeing agreed to amend the delivery dates of the
2002 deliveries whereby three aircraft are scheduled for delivery in 2002 and
one aircraft in late 2003. With respect to the three aircraft now scheduled for
delivery in 2002, Atlas Air is currently negotiating with Boeing terms of an
operating lease financing for all three aircraft, and is discussing revised
delivery dates in order to defer delivery as late into the year as possible.
Atlas Air is also pursuing other financing sources for these aircraft. The
inability to secure financing for the Boeing 747-400 deliveries could result in
a default under the Boeing Purchase Agreement, which would permit Boeing to
accelerate payments due under the Boeing Purchase Agreement. Such acceleration
would cause a default in covenants of certain of the Company's indebtedness
which would permit the lenders to accelerate payment of a significant portion of
all indebtedness, which event would have a material adverse effect on the
Company's financial position and results of operations.
The Boeing Purchase Agreement requires that Atlas Air pay pre-delivery
deposits to Boeing prior to the delivery date of each Boeing 747-400 freighter
aircraft in order to secure delivery of the Boeing 747-400 freighter aircraft
and to defray a portion of the manufacturing costs. Based on the current
expected firm aircraft delivery schedule, Atlas Air expects the maximum total
amount of pre-delivery deposits at any time outstanding will be approximately
$204.9 million for the four aircraft to be delivered in 2002 and 2003. Upon each
delivery, Boeing refunds Atlas Air the pre-delivery deposits associated with the
delivered Boeing 747-400 freighter aircraft. In addition, the Boeing Purchase
Agreement provides for a deferral of a portion of the pre-delivery deposits for
which Atlas Air accrues and pays interest quarterly at 6-month LIBOR, plus 2.0%.
As of March 31, 2002, there was $128.7 million of deferred aircraft obligations
included in other liabilities, and the combined interest rate was approximately
4.35%. The Company expects to make additional pre-delivery deposits of
approximately $15.6 million during the remainder of 2002.
7
ATLAS AIR WORLDWIDE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EARNINGS PER SHARE
Basic earnings per share were computed by dividing net loss before
cumulative effect of a change in accounting principle by the weighted average
number of shares of common stock outstanding during the period. In addition,
diluted earnings per share amounts include potential common shares including
restricted stock and options granted under the Company's annual and long-term
incentive plans. The number of diluted shares is calculated using the treasury
stock method, which excludes anti-dilutive shares from the calculation. Basic
and diluted loss per share were calculated as follows (amounts in thousands):
<Table>
<Caption>
FISCAL QUARTERS ENDED
MARCH 31,
---------------------
2002 2001
--------- ---------
EARNINGS ATTRIBUTABLE TO COMMON STOCKHOLDERS
(BASIC AND DILUTED)
Net (loss)/income before cumulative effect of a change in
accounting principle................................... $(6,650) $ 7
Cumulative effect of a change in accounting principle..... -- (1,589)
------- -------
Net loss.................................................. $(6,650) $(1,582)
======= =======
SHARES
Weighted average shares outstanding for Basic EPS......... 38,208 38,125
Employee options and shares............................... -- --
------- -------
Weighted average shares outstanding for Diluted EPS....... 38,208 38,125
======= =======
</Table>
For the three months ended March 31, 2002 and 2001, approximately 3,969,000
and 3,017,000 employee stock options, respectively, were not included in
calculating diluted earnings per share, because inclusion of such shares would
have had an anti-dilutive effect.
6. SUBSEQUENT EVENT
On April 26, 2002, the Company announced that it had selected Ernst &
Young, LLP as its new independent auditor. That firm has replaced Arthur
Andersen, LLP, which had served as the Company's independent auditor since 1994.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING STATISTICS
<Table>
<Caption>
QUARTER ENDED
MARCH 31,
----------------
2002* 2001
------- ------
Block Hours:
Atlas..................................................... 23,189 28,776
ACMI services.......................................... 67% 89%
Hub services........................................... 12% --
Charter services and other services.................... 21% 11%
Polar..................................................... 9,596 --
Scheduled service...................................... 56% --
Charter services and other services.................... 34% --
ACMI services.......................................... 10% --
Scheduled Service
Revenue Ton Miles (000's)................................. 202,756 --
Available Ton Miles (000's)............................... 328,869 --
Load Factor............................................... 61.70% --
Yield per RTM (cents)..................................... 24.99 --
Revenue per ATM (cents)................................... 15.4 --
Operating Aircraft at end of period**
Atlas.................................................. 31 37
Polar.................................................. 12 --
------- ------
Total operating aircraft............................. 43 37
</Table>
- ---------------
* 2002 operating statistics include Polar whereas 2001 statistics do not.
** Operating aircraft do not include grounded and held for sale B747-200's.
RESULTS OF OPERATIONS
AAWH's net loss for the first quarter of 2002 was $6.7 million or $(0.17)
per basic share compared to a net loss of $1.6 million or $(0.04) per share in
the same period of 2001. Operating income decreased to $7.7 million from $15.4
million in the first quarter of 2001. The Company's 2002 results continue to be
adversely impacted by the current global economic recession, exacerbated by the
September 11, 2001 terrorist attacks. These results also reflect the purchase by
AAWH of substantially all of the assets and assumption of certain liabilities of
Polar Air Cargo, Inc. on November 1, 2001. Accordingly, Polar's results of
operations are included in AAWH's first quarter of 2002, but not in the first
quarter of 2001.
The cargo operations of our airline customers are seasonal in nature, with
peak activity typically occurring in the second half of the year, and with a
significant decline occurring in the first quarter. This decline in cargo
traffic is largely due to the decrease in shipping that occurs following the
December and January holiday seasons associated with the celebration of
Christmas and the Chinese New Year. Certain customers have, in the past, elected
to use that period of the year to exercise their contractual options to cancel a
limited number (generally not more than 5% per year) of guaranteed hours with
us, and are expected to continue to do so in the future. As a result, our
revenues typically decline in the first quarter of the year as our contractual
aircraft utilization level temporarily decreases. We seek to schedule, to the
extent possible, our major aircraft maintenance activities during this period to
take advantage of any unutilized aircraft time.
9
OPERATING REVENUES
Total operating revenues for the quarter ended March 31, 2002 increased to
$246.2 million from $180.3 million for the same period in 2001, or approximately
37%. Total block hours for the first quarter of 2002 were 32,785 compared to
28,776 for the same period in 2001, an increase of approximately 18%. These
results all reflect the inclusion of Polar Air Cargo, which was acquired on
November 1, 2001.
The operating revenue mix has changed substantially in the first quarter of
2002 as compared to the first quarter of 2001. Contract services revenue for the
quarter ended March 31, 2002 declined 32.4% to $108.6 million as compared to
$160.6 million last year. This revenue decline is due largely to the expiration
of ACMI contracts during the past year which have not been renewed. Charter
service revenues for the first quarter of 2002 increased $77.8 million from last
year largely due to the US Military (AMC) charter flight activity resulting from
the United States response to the September 11, 2001 terrorist attacks. AMC
charter flight revenue totaled $62.9 million for the first quarter 2002.
Scheduled service revenues were $49.9 million in the first quarter of 2002, due
to the acquisition of Polar in November 2001.
Other revenues for the quarter ended March 31, 2002 declined 59% to $6.9
million as compared to $16.6 million for the same period last year, partially
offset by the inclusion of Polar's other revenues in the first quarter of 2002.
In the first quarter of 2001, the Company recorded a one-time charge of
approximately $1.6 million, net of applicable tax benefit of approximately $.9
million, associated with the recording of the fair value of an interest rate
swap in accordance with the adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." In addition, as a result of SFAS No.133
adoption, the Company recorded a non-cash, pre-tax charge of $2.1 million for
changes in the fair value of its derivative instrument.
OPERATING EXPENSES
Principal operating expenses include salaries, wages, and benefits;
aircraft rents; fuel cost for non-ACMI activities such as scheduled services and
charter flights; maintenance; ground handling and airport fees; depreciation and
amortization; and other expenses. Total operating expenses for the quarter ended
March 31, 2002 increased to $238.5 million from $164.9 million for the same
period in 2001, or approximately 45%. These expenses increased largely due to
the acquisition of Polar in November 2001, as well as expenses related to the
U.S. Military (AMC) charter flight activities as described above.
Salaries, wages and benefits increased to $40.4 million in the first
quarter of 2002 compared to $30.2 million in 2001, primarily due to the addition
of Polar's 650 employees. Atlas Air's salaries, wages and benefits without the
effect of Polar actually decreased 11% from the first quarter of 2001 to the
first quarter of 2002 due to the reduction in workforce and pilot furloughs in
the second quarter of 2001.
In the first quarter of 2001, the Company recognized an expense of $22.8
million related to a profit sharing settlement, which restored profit sharing
payments to pilots and flight crew members retroactive to April 1999. The
settlement includes 2001 amounts.
Aircraft rents were $46.9 million in the first quarter of 2002 compared to
$31.4 million in the same period of 2001, or an increase of approximately 49%.
The increase is due to the inclusion of Polar's fleet, which is primarily
financed through operating leases.
Aircraft fuel expense increased to $30.9 million for the first quarter of
2002 from $2.8 million for the first quarter of 2001. This was primarily due to
the increase in scheduled service provided by Polar and US Military charter
activity. Fuel consumption increased from 2.6 million gallons in the first
quarter of 2001 to 52.7 million gallons in the first quarter of 2002. This
expense is expected to increase to the extent that scheduled service and charter
activities continue to grow.
Maintenance, materials and repair cost increased approximately 30% to $38.2
million for the first quarter of 2002 from $29.4 million for the first quarter
of 2001. This was due to the addition of Polar's fleet in November, 2001, as
well as higher engine maintenance costs incurred on the B747-400 aircraft at
Atlas Air in 2002.
10
Ground handling and airport fees increased to $25.6 million in the first
quarter of 2002, compared to $4.0 million in the first quarter of 2001, due to
the increase in scheduled service provided by Polar and an increase in AMC
charter flying. This expense is expected to increase to the extent that
scheduled service and charter activities continue to grow.
Depreciation and amortization expense increased to $21.7 million in the
first quarter of 2002 from $20.2 million in the same period of 2001, or
approximately 7% due to additional capital expenditures during the quarter and
the addition of Polar assets.
Other operating expenses include insurances costs, pilot travel, training
and meal expenses, as well as travel expenses for non-crew members and other
miscellaneous operating costs. Other operating expenses increased to $34.8
million in the first quarter of 2002 from $24.2 million in the same period of
2001, or approximately 44%, due to additional personnel and other expenses
related to the Polar operations. Atlas Air's other operating expenses decreased
approximately $2 million in the first quarter 2002 as compared to 2001, due to
the reduction in workforce and pilot furloughs in the second quarter of 2001.
OTHER INCOME (EXPENSE)
Interest income for the first quarter of 2002 was $3.3 million compared to
$7.6 million for the same period of 2001, primarily due to decreases in the
amount of funds available for investing. Interest expense increased to $25.8
million for the first quarter of 2002 from $25.4 million for the first quarter
of 2001, or approximately 2% due to interest expense on Polar's debt. The change
in fair value of the interest rate swap from December 31, 2001 to March 31, 2002
was a $1.4 million increase, as compared to a decrease of $2.1 million for the
first quarter of 2001.
INCOME TAXES
Pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes,"
we have recorded a tax benefit based on tax rates in effect during the period.
Accordingly, we recorded a tax benefit at the rate of 37.0% during the first
quarter of both 2002 and 2001. Due to significant capital costs, which are
depreciated at an accelerated rate for tax purposes, a significant portion of
our tax provision in these periods is deferred. Income tax expense for the first
quarter of 2001 was positively affected through our qualification for the newly
enacted Extraterritorial Income Exclusion (EIE) tax regime. EIE allows us to
exclude 30% of our aircraft leasing income from taxable income where the leased
aircraft are used predominately outside the United States. The income exclusion
is effective for our qualifying revenue beginning on October 1, 2000, and the
estimated cumulative effect of this credit was recorded in the first quarter of
2001.
LIQUIDITY AND CAPITAL RESOURCES
Our balance sheet reflected cash and cash equivalents and short-term
investments of $266.2 million and $351.3 million at March 31, 2002 and December
31, 2001, respectively. At March 31, 2002 we had working capital of $266.5
million compared to $333.4 million at December 31, 2001. The decrease in our
working capital is largely a result of cash flows used by operating activities
during the quarter ended March 31, 2002, combined with cash payments made for
capital expenditures and debt repayments.
Cash used in operations for the quarter ended March 31, 2002 was $51.0
million, compared to $92.0 million used in operations for the first quarter of
2001. Cash used in operations for the quarter ended March 31, 2002 was primarily
attributable to our net loss for the quarter adjusted for non-cash charges, and
decreases in our deferred tax liability, income taxes payable, accounts payable
and accrued expenses, as well as increases in accounts receivable and deposits
and other assets.
Cash used in investing activities for the quarter ended March 31, 2002 was
$23.9 million, compared to $11.9 million for the first quarter of 2001. For the
quarter ended March 31, 2002, cash used in investing activities was comprised of
purchases of property and equipment of $14.7 million, and investment purchases
offset by maturities of short-term and long-term investments, of $9.2 million.
Short and long-term investment purchases primarily consist of commercial paper,
market auction preferreds, corporate notes, corporate bonds,
11
and U.S. government securities, and are all classified as held-to-maturity. For
the quarter ended March 31, 2001, cash used in investing activities was
comprised of purchases of property and equipment, net of proceeds from the sale
of equipment, of $12.4 million offset by maturities of short-term and long-term
investments, net of purchases, of $0.5 million. Property and equipment purchases
in 2001 were comprised primarily of initial costs associated with the four new
Boeing 747-400s expected to be delivered in 2002 and 2003, and other capital
improvement costs, including those associated with our headquarters in Purchase,
NY.
In June 1997, Atlas Air entered into the Boeing Purchase Agreement to
purchase 10 new Boeing 747-400 freighter aircraft with options for 10 additional
aircraft, all to be powered by GE engines. In February 1999, Atlas Air exercised
options for two additional aircraft that were delivered in 2000, and in October
2000 Atlas Air exercised options for four additional aircraft for delivery in
2002. As a result of Atlas Air being a large purchaser of Boeing 747-400
freighter aircraft, it was able to negotiate from Boeing and GE a significant
discount off the aggregate list price for the 16 Boeing 747-400 freighter
aircraft, four installed engines per aircraft and additional spare engines. In
addition, Atlas Air obtained certain ancillary products and services at
advantageous prices.
During 2001, Atlas Air and Boeing agreed to amend the delivery dates of the
2002 deliveries whereby three aircraft are scheduled for delivery in 2002 and
one aircraft in late 2003. With respect to the three aircraft now scheduled for
delivery in 2002, Atlas Air is currently negotiating with Boeing terms of an
operating lease financing for all three aircraft, and is discussing revised
delivery dates in order to defer delivery as late into the year as possible.
Atlas Air is also pursuing other financing sources for these aircraft. The
inability to secure financing for the Boeing 747-400 deliveries could result in
a default under the Boeing Purchase Agreement, which would permit Boeing to
accelerate payments due under the Boeing Purchase Agreement. Such acceleration
would cause a default in covenants of certain of the Company's indebtedness
which would permit the lenders to accelerate payment of a significant portion of
all indebtedness, which event would have a material adverse effect on the
Company's financial position and results of operations.
The Boeing Purchase Agreement requires that Atlas Air pay pre-delivery
deposits to Boeing prior to the delivery date of each Boeing 747-400 freighter
aircraft in order to secure delivery of the Boeing 747-400 freighter aircraft
and to defray a portion of the manufacturing costs. Based on the current
expected firm aircraft delivery schedule, Atlas Air expects the maximum total
amount of pre-delivery deposits at any time outstanding will be approximately
$204.9 million for the four aircraft to be delivered in 2002 and 2003. Upon each
delivery, Boeing refunds Atlas Air the pre-delivery deposits associated with the
delivered Boeing 747-400 freighter aircraft. In addition, the Boeing Purchase
Agreement provides for a deferral of a portion of the pre-delivery deposits for
which Atlas Air accrues and pays interest quarterly at 6-month LIBOR, plus 2.0%.
As of March 31, 2002, there was $128.7 million of deferred aircraft obligations
included in other liabilities, and the combined interest rate was approximately
4.35%. The Company expects to make additional pre-delivery deposits of
approximately $15.6 million during the remainder of 2002.
Cash used in financing activities for the quarter ended March 31, 2002 was
$19.5 million, compared to $56.0 million used in financing activities for the
first quarter of 2001. For the quarter ended March 31, 2002, cash used in
financing activities consisted primarily of principal payments on long-term debt
and capital lease obligations of $20.4 million, offset by proceeds from the
issuance of treasury stock of $0.9 million. For the quarter ended March 31,
2001, cash used in financing activities consisted primarily of principal
payments on long-term debt and capital lease obligations of $54.6 million and
debt issuance and deferred lease costs of $1.8 million, offset by proceeds from
the issuance of treasury stock of $0.4 million.
The Company is highly leveraged and has significant amounts of long-term
financial obligations (consisting of long-term debt and long-term lease
obligations) coming due over the next several years. At March 31, 2002,
outstanding long-term debt totaled approximately $1.0 billion and long-term
lease obligations were approximately $3.0 billion. The Company believes that
current cash balances and cash flow generated from operations are sufficient to
meet its anticipated liquidity needs for the next twelve months. To the extent
that operating cash flow and cash on hand prove insufficient to fund planned
operating activities, to service our debt and to meet our lease obligations, we
would be required to sell assets, obtain additional financing or
12
engage in refinancings to meet any such deficiency. There can be no assurance
that any such refinancing or that any such sale of assets or additional
financing would be effected on terms favorable to the Company.
The following table summarizes our financial obligations for principal
payments under existing debt agreements and our lease obligations to be paid,
for the remainder of 2002 and thereafter (in thousands):
<Table>
<Caption>
APRIL 1 -
DECEMBER 31, 2003 AND 2005 AND
2002 2004 2006 THEREAFTER
------------ -------- -------- ----------
Enhanced Equipment
Trust Certificates..................... $ 1,862 $ 22,284 $ 16,702 $ 137,362
AFL III Term Loan...................... 18,255 108,182 86,712 --
Aircraft Credit Facility............... -- 47,675 20,432 --
Senior Notes........................... -- -- 284,475 152,853
Other.................................. 24,464 49,683 23,291 9,401
Operating lease payments............... 116,354 417,829 374,397 2,174,381
Capital lease payments................. 958 3,197 1,460 --
</Table>
Excluded from the above table are aircraft pre-delivery deposits for the
four Boeing 747-400 aircraft, which at March 31, 2002 totaled $204.9 million, of
which $76.2 million has been in cash and $128.7 million has been in the form of
deferred payments. We expect to finance the deferred obligation at the time we
take delivery of the Boeing 747-400 aircraft.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. The Company has
prepared the accompanying financial statements in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates under
different assumptions or conditions. The Company has identified the following
critical accounting policies utilized in the preparation of these financial
statements.
REVENUE RECOGNITION
Under our ACMI contracts and charter services, revenue is recognized in the
financial statements for the actual block hours operated on behalf of a customer
during a calendar month, unless the actual block hours are less than the minimum
guaranteed hours under the contract, in which case revenue is recognized for
minimum guaranteed hours. Some contracts have a provision that allow customers
to make up the shortfall in the minimum guaranteed hours over specified future
months (measurement period). Under those contracts, revenue is recognized for
the actual block hours flown and recognition of the shortfall in minimum
guaranteed hours is deferred until either the shortfall has not been made up at
the end of the measurement period or there is a fair degree of certainty during
the measurement period that the cumulative shortfall will not be made up. Under
scheduled service, revenue is recognized upon completion of the particular
flight segment.
PLANNED MAJOR MAINTENANCE ACTIVITIES
A significant portion of scheduled and unscheduled maintenance is
contracted with three maintenance providers under long-term agreements pursuant
to which monthly reserve payments are made to the providers based on
flight-hours and such amounts are charged to expense currently. Other
maintenance and repairs are charged to expense as incurred, except for
significant B747-200 airframe overhauls which are capitalized and charged to
expense on a flight-hour basis and certain other major maintenance events which
are capitalized and amortized over the corresponding life.
13
ACCOUNTS RECEIVABLE
We are required to estimate the collectibility of our trade receivables. A
considerable amount of judgment is required in assessing the ultimate
realization of these receivables, including the current credit-worthiness of
each customer. Significant changes in required reserves have been recorded in
recent periods and may occur in the future due to the current market
environment.
OUTLOOK
The Company's business has changed significantly over the past year. ACMI
contract revenues have declined as the global economic downturn has made
renewing maturing contracts, or finding replacement customers, very difficult.
Offsetting this decline are the inclusion of Polar's scheduled service revenues,
greatly increased charter revenues, including U.S. Military charters, at both
Atlas Air and Polar, and the launch of all inclusive ACMI products such as
Fractional ACMI, Partial ACMI and the Atlas Air Partnership Program.
Given its nature, the Company cannot assess the likelihood that U.S.
Military charter activity will continue at the level achieved since September
11, 2001. As described above, non-ACMI flying has also become a more prominent
revenue source, resulting in higher direct operating costs, including fuel
costs, ground handling, airport fees and other expenses. These non-ACMI services
are priced in such a way as to compensate the Company for these additional
costs.
The Company expects future labor costs to increase. Atlas Air has been in
negotiations with the Airline Pilots Association (ALPA) since April 2000 for a
first collective bargaining agreement covering the Atlas Air pilots and flight
engineers. On January 25, 2002, the parties reached a tentative agreement on all
open issues. This tentative agreement was not ratified, and the parties
recommenced meetings in March 2002. In April 2002, ALPA presented the Company
with a limited number of issues to be resolved. Management continues to believe
that a contract can be reached with ALPA without a disruption of its operations.
While a final agreement is expected to result in increased labor costs due to
wage and benefit improvements, the Company does not believe that entering into
such agreement will materially diminish any productivity advantages it may
presently enjoy. Polar crew members are covered by a collective bargaining
agreement with ALPA, which was to become amendable on November 30, 2002. In
April 2002, the parties agreed to extend the amendability date to May 31, 2003.
As part of this agreement, ALPA agreed to certain work rule changes that are
expected to improve the Company's level of productivity, and the Company agreed
to implement a 1% wage increase in March 2002 (retroactive to December 2001), as
well as additional 1% wage increase to become effective in September 2002 and
March 2003.
The global economic slowdown that commenced in 2001 has resulted in a very
difficult global cargo market. In 2001, world cargo shipments fell approximately
10% and, in effect, returned to 1999 levels. The result has been the
underutilization of the Company's fleet of Boeing 747 cargo aircraft, including
six Boeing 747-200 aircraft being held for sale. A return to profitability on an
annual basis is dependent in large part upon a recovery in world cargo demand,
which, in turn, is dependent upon a sustained global economic recovery. Although
the Company expects losses to continue in the near term given current demand
levels, it further expects near term losses to be offset by activity associated
with the traditional year-end peak in cargo demand, as well as improvements in
demand characteristics associated with an emerging global economic recovery.
FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Form 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 2lE of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, levels of activity,
performance or achievements or industry results, to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements represent
the Company's expectations and beliefs concerning future events, based on
information available to the Company at the date of this report. Some
14
factors that could significantly impact net income, revenues, expenses, and
block hours include, without limitation, the adverse impact of the September 11,
2001, terrorist attacks on the economy in general; the demand for air cargo; the
ability to reduce operating costs and conserve financial resources, taking into
account increased costs incurred or to be incurred as a consequence of the
attacks; the higher costs associated with new airline security directives and
any other increased regulation of air carriers; the significantly higher costs
of aircraft insurance coverage for future claims caused by acts of war,
terrorism, sabotage, hijacking and other similar perils, and the extent to which
such insurance will continue to be available; the ability to raise financing in
light of the September 11, 2001, events; the price of jet fuel; actions of the
U.S., foreign and local governments; the economic environment of the airline
industry and the economic environment in general. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe",
"confident", or "continue" or the negative thereof or variations thereon or
similar terminology. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations are disclosed under
"Risk Factors" and elsewhere in the 2001 Form 10-K.
To the extent that any of the statements contained herein relating to our
expectations, assumptions and other Company matters are forward-looking, they
are made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on current expectations
that involve a number of uncertainties and risks that could cause actual results
to differ materially from those projected in the forward-looking statements,
including, but not limited to, risks associated with:
- worldwide business and economic conditions;
- product demand and the rate of growth in the air cargo industry;
- the impact of competitors and competitive aircraft and aircraft financing
availability;
- the ability to attract and retain new and existing customers;
- normalized aircraft operating costs and reliability;
- management of growth and complying with FAA policies;
- the continued productivity of our workforce;
- dependence on key personnel; and
- other regulatory requirements.
As a result of the foregoing and other factors, no assurance can be given
as to our future results and achievements. Neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our results of operations are impacted by changes in the price of aircraft
fuel. Aircraft fuel accounted for 6.5% of our operating expenses for the full
year 2001, and 13% of our operating expense for the first quarter of 2002. We
expect this expense to continue to grow as our charter service and scheduled
service activities comprise a larger portion of our business mix.
Based on estimates covering our projected 2002 fuel consumption, a 10%
average increase in the price per gallon of aircraft fuel consumed over the next
nine months would increase our fuel expense by approximately $10.8 million.
The Company may engage in future fuel hedging activities or enter into
aircraft fuel purchase commitments in order to manage the price risk and
utilization of its fuel costs.
15
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 3 -- Legal Proceedings in Part I of the Company's Annual Report on
Form 10-K for the year ended December 31,2001.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None.
(B) Reports filed on Form 8-K
The Company filed no Current Reports on Form 8-K during the quarter ended
March 31, 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLAS AIR WORLDWIDE HOLDINGS, INC.
(REGISTRANT)
By: /s/ DOUGLAS A. CARTY
----------------------------------
Douglas A. Carty
Senior Vice President and
Chief Financial Officer
Date: May 15, 2002
17