ITEM 1. FINANCIAL STATEMENTS
Notes to Unaudited Consolidated Financial Statements
June 30, 2020
1. Basis of Presentation
Our consolidated financial statements include the accounts of the holding company, Atlas Air Worldwide Holdings, Inc. (“AAWW”), and its consolidated subsidiaries. AAWW is the parent company of Atlas Air, Inc. (“Atlas”) and Southern Air Holdings, Inc. (“Southern Air”). AAWW is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as “Titan”). AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (“Polar”). We record our share of Polar’s results under the equity method of accounting.
The terms “we,” “us,” “our,” and the “Company” mean AAWW and all entities included in its consolidated financial statements.
We provide outsourced aircraft and aviation operating services throughout the world, serving Africa, Asia, Australia, Europe, the Middle East, North America and South America through: (i) contractual service arrangements, including those through which we provide aircraft to customers and value-added services, including crew, maintenance and insurance (“ACMI”), as well as those through which we provide crew, maintenance and insurance, but not the aircraft (“CMI”); (ii) cargo and passenger charter services (“Charter”); and (iii) dry leasing aircraft and engines (“Dry Leasing” or “Dry Lease”).
The accompanying unaudited consolidated financial statements and related notes (the “Financial Statements”) have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) requirements for quarterly reports on Form 10-Q, and consequently exclude certain disclosures normally included in audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated. The Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes included in the AAWW Annual Report on Form 10-K for the year ended December 31, 2019, which includes additional disclosures and a summary of our significant accounting policies. The December 31, 2019 balance sheet data was derived from that Annual Report. In our opinion, the Financial Statements contain all adjustments, consisting of normal recurring items, necessary to fairly state the financial position of AAWW and its consolidated subsidiaries as of June 30, 2020, the results of operations for the three and six months ended June 30, 2020 and 2019, comprehensive income for the three and six months ended June 30, 2020 and 2019, cash flows for the six months ended June 30, 2020 and 2019, and stockholders’ equity as of and for the three and six months ended June 30, 2020 and 2019.
Our quarterly results are subject to seasonal and other fluctuations, including fluctuations resulting from the global COVID-19 pandemic (see Note 3 for further discussion), and the operating results for any quarter are therefore not necessarily indicative of results that may be otherwise expected for the entire year.
Except for per share data, all dollar amounts are in thousands unless otherwise noted.
2. Summary of Significant Accounting Policies
Warrant Liability
Common stock warrants that are classified as a liability are marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized (gain) loss on financial instruments. We utilize a Monte Carlo simulation approach to estimate the fair value of the warrant liability, which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility and risk-free interest rate, among others. Our earnings are affected by changes in our common stock price due to the impact those changes have on the fair value of our warrant liability (see Note 5 for further discussion).
Heavy Maintenance
Except for engines used on our 747-8F aircraft, we account for heavy maintenance costs for airframes and engines used in our ACMI and Charter segments using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs.
We account for heavy maintenance costs for airframes and engines used in our Dry Leasing segment and engines used on our 747-8F aircraft using the deferral method. Under this method, we defer the expense recognition of scheduled heavy maintenance events, which are amortized over the estimated period until the next scheduled heavy maintenance event is required. Amortization of deferred maintenance expense included in Depreciation and amortization was $10.3 million and $5.3 million for the three months ended June 30, 2020 and 2019, respectively, and was $18.2 million and $9.7 million for the six months ended June 30, 2020 and 2019, respectively.
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Deferred maintenance included within Deferred costs and other assets is as follows:
Balance as of December 31, 2019
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$
|
184,279
|
|
Deferred maintenance costs
|
|
|
24,307
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|
Amortization of deferred maintenance
|
|
|
(18,237
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)
|
Balance as of June 30, 2020
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$
|
190,349
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|
Recent Accounting Pronouncements Adopted in 2020
In November 2019, the Financial Accounting Standards Board (“FASB”) amended its accounting guidance for share-based payment awards issued to a customer. The amended guidance requires share-based payment awards issued to a customer to be recorded as a reduction of the transaction price in revenue based on the fair value at grant date and to be classified on the balance sheet using accounting guidance for stock-based compensation. The amended guidance was effective for fiscal years beginning after December 15, 2019. Effective January 1, 2020, we adopted the amended guidance and applied the modified retrospective approach to the most current period presented. As a result, $14.6 million, or approximately 60% of our customer warrant liability of $24.3 million related to revenue contracts, which was included in Financial instruments and other liabilities as of December 31, 2019, was reclassified as Additional paid-in-capital within Total stockholders’ equity on January 1, 2020. As a result, these customer warrants are no longer marked-to-market at the end of each reporting period with changes in fair value recorded as an unrealized (gain) loss on financial instruments. The amended guidance did not impact the accounting for the remaining portion of our customer warrant liability related to Dry Lease contracts, which was approximately $9.7 million or approximately 40% of the total customer warrant liability as of December 31, 2019. The new guidance did not impact how we account for the amortization of the customer incentive asset (see Note 5 for further discussion).
In June 2016, the FASB amended its accounting guidance for the measurement of credit losses on financial instruments. The guidance requires entities to utilize an expected credit loss model for certain financial instruments, including most trade receivables, which replaces the incurred credit loss model previously used. Under this new model, we are required to recognize estimated credit losses expected to occur over time using a broad range of information including historical information, current conditions and reasonable and supportable forecasts. Receivables related to lease contracts are not within the scope of this amended guidance. Effective January 1, 2020, we adopted the amended guidance under the modified retrospective approach and it did not have a material impact on our consolidated financial statements and related disclosures (see Note 6).
3. COVID-19 Pandemic
COVID-19
In December 2019, COVID-19 was first reported in China and has since spread to most other regions of the world. In March 2020, COVID-19 was determined to be a global pandemic by the World Health Organization. During the first six months of 2020, this public health crisis disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations by our ACMI customers and lower U.S. Military Air Mobility Command (“AMC”) passenger flying as the military took precautionary measures to limit the movement of personnel. A reduction of available cargo capacity in the market and increased demand for transporting goods due to the COVID-19 pandemic also resulted in increased commercial charter cargo yields, net of fuel, during the first six months of 2020. We have incurred and expect to incur significant additional costs, including premium pay; other operational costs, including costs for continuing to provide a safe working environment for our employees; and higher crew costs related to increased pay rates resulting from our recent interim agreement with our pilots. In addition, the availability of hotels and restaurants; evolving COVID-19-related travel restrictions and health screenings; and cancellations of passenger flights by other airlines globally or airport closures have impacted and could further impact our ability to position employees to operate our aircraft.
Our ability to continue to service our debt and meet our lease and other obligations as they come due is dependent on our continued ability to generate earnings and cash flows. To mitigate the impact of any continuation or worsening of the COVID-19 pandemic disruptions, we have:
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significantly reduced nonessential employee travel;
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reduced the use of contractors;
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limited ground staff hiring;
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secured vendor pricing discounts for engine overhauls and other maintenance;
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•
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implemented a number of other cost reduction initiatives;
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•
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taken other actions, such as the sale of certain nonessential assets;
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•
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entered into a Payroll Support Program Agreement (the “PSP Agreement”) with the U.S. Department of the Treasury (the “U.S. Treasury”), with respect to payroll support funding (the “Payroll Support Program”) available to cargo air carriers under the CARES Act (see discussion below); and
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•
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begun to defer payment of the employer portion of social security taxes as provided for under the CARES Act through the end of 2020.
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If we are unable to implement these or additional initiatives, or comply with the requirements under the PSP Agreement, it could have a material adverse effect on our financial position, results of operations, and cash flows. We believe the Company will generate sufficient liquidity to satisfy its obligations over the next twelve months.
Payroll Support Program under the CARES Act
As of May 29, 2020 (the “PSP Closing Date”), Atlas and Southern Air (the “PSP Recipients”) entered into a PSP Agreement with the U.S. Treasury. As of the PSP Closing Date, AAWW also entered into a Warrant Agreement (the “Warrant Agreement”) with the U.S. Treasury, and AAWW issued a senior unsecured promissory note to the U.S. Treasury (the “Promissory Note”), with Atlas and Southern Air as guarantors.
In connection with the Payroll Support Program, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP Agreement be used exclusively for the payment of certain employee wages, salaries and benefits of the PSP Recipients. The Payroll Support Program subjects the PSP Recipients and certain of their affiliates to a number of restrictions, including prohibitions against reductions in certain employee salaries, wages and benefits, and certain involuntary terminations and furloughs of employees until September 30, 2020, prohibitions of repurchasing shares in the open market of, or making dividend payments with respect to, our common stock through September 30, 2021, as well as certain limitations on executive compensation until March 24, 2022. Under the PSP Agreement, we must also maintain certain internal controls and records relating to the payroll support funding and we are subject to additional reporting obligations.
Pursuant to the PSP Agreement, the U.S. Treasury provided us with payroll support funding in three installments totaling $406.8 million. The first installment of $203.4 million was received on June 1, 2020, the second installment of $101.7 million was received on June 29, 2020 and the third installment of $101.7 million was received on July 30, 2020.
As compensation for payroll support funding under the PSP Agreement, we issued the Promissory Note to the U.S. Treasury, which provides for our unconditional promise to pay to the U.S. Treasury a total of $142.9 million as of June 30, 2020 and a total of $199.8 million as of July 30, 2020, after all installments were received from the U.S. Treasury.
The Promissory Note bears interest on the outstanding principal amount at a rate of 1.00% per annum until the fifth anniversary of the PSP Closing Date and the applicable Secured Overnight Financing Rate (“SOFR”) plus 2.00% per annum thereafter, and interest accrued thereon will be payable in arrears on the last business day of March and September of each year, beginning on September 30, 2020. The aggregate principal amount outstanding under the Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the Promissory Note, will be due and payable in May 2030. The Promissory Note contains customary representations and warranties, covenants and events of default provisions. Interest expense is recognized using the effective interest method over the term of the Promissory Note.
We may, at any time and from time to time, voluntarily prepay amounts outstanding under the Promissory Note, in whole or in part, without penalty or premium. If certain change of control triggering events occur, we would be required to prepay the aggregate outstanding principal amount of the Promissory Note within 30 days, together with any accrued interest or other amounts owing under the Promissory Note.
As compensation for payroll support funding under the PSP Agreement, we also entered into a Warrant Agreement pursuant to which we granted the U.S. Treasury warrants to acquire shares of our common stock. In connection with the first and second payroll support funding installments from the U.S. Treasury, we issued warrants to acquire up to 447,180 shares of our common stock as of June 30, 2020. As of July 30, 2020, the warrants issued to the U.S. Treasury, after all installments were received, were for up to 625,452 shares of our common stock.
The Warrant Agreement provides the U.S Treasury certain registration rights with respect to each warrant and the underlying common stock. Each warrant is exercisable at an exercise price of $31.95 per share of common stock (which was the closing price of our common stock on the Nasdaq Global Select Market on May 1, 2020) and will expire on the fifth anniversary of the issue date of such warrant. Each warrant may be settled through net share settlement or net cash settlement, at our option. Each warrant includes customary antidilution provisions and is freely transferable with registration rights. The U.S. Treasury is not permitted to vote any shares it acquires upon exercise of each warrant. The grant date fair value, as determined using the Black-Scholes model, of each warrant is recognized as Additional paid-in-capital and was $9.2 million as of June 30, 2020. Each warrant will not be remeasured as long as it continues to meet the conditions for equity classification. As of June 30, 2020, no portion of the warrants has been exercised.
We recognized deferred grant income within Accrued liabilities for the difference between the PSP proceeds received and the amounts recognized for the Promissory Note and the Warrant Agreement for each installment. Grant income is subsequently recognized within Other (income) expense, net in the consolidated statement of operations on a pro-rata basis over the periods that the
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qualifying employee wages, salaries and benefits are paid. For the three and six months ended June 30, 2020, we recognized grant income of $20.2 million. We expect to recognize the remainder of the grant income through the first quarter of 2021.
4. Related Parties
Polar
AAWW has a 51% equity interest and 75% voting interest in Polar. DHL Network Operations (USA), Inc. (“DHL”), a subsidiary of Deutsche Post AG, holds a 49% equity interest and a 25% voting interest in Polar. Polar is a variable interest entity that we do not consolidate because we are not the primary beneficiary as the risks associated with the direct costs of operation are with DHL. Under a 20-year blocked space agreement, which began in 2008, Polar provides air cargo capacity to DHL. Atlas has several agreements with Polar to provide ACMI, CMI, Dry Leasing, administrative, sales and ground support services to one another. We do not have any financial exposure to fund debt obligations or operating losses of Polar, except for any liquidated damages that we could incur under these agreements.
The following table summarizes our transactions with Polar:
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For the Three Months Ended
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For the Six Months Ended
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Revenue and Expenses:
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June 30, 2020
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June 30, 2019
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June 30, 2020
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June 30, 2019
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Revenue from Polar
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$
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82,858
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$
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99,889
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$
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159,092
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$
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198,356
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Ground handling and airport fees to Polar
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1,067
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545
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1,593
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|
|
1,063
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Accounts receivable/payable as of:
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June 30, 2020
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December 31, 2019
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Receivables from Polar
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$
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26,370
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$
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10,855
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Payables to Polar
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1,841
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2,161
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Aggregate Carrying Value of Polar Investment as of:
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June 30, 2020
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December 31, 2019
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Aggregate Carrying Value of Polar Investment
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$
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4,870
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$
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4,870
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In addition to the amounts in the table above, Atlas recognized revenue of $83.1 million and $23.1 million for the three months ended June 30, 2020 and 2019, respectively, and $110.5 million and $46.4 million for the six months ended June 30, 2020 and 2019, respectively, from flying on behalf of Polar.
Dry Leasing Joint Venture
We hold a 10% interest in a joint venture with an unrelated third party, which we entered into in December 2019, to develop a diversified freighter aircraft dry leasing portfolio. Through Titan, we provide aircraft and lease management services to the joint venture for fees based upon aircraft assets under management, among other things. Our investment in the joint venture is accounted for under the equity method of accounting. Under the joint venture, we have a commitment to provide up to $40.0 million of capital contributions before December 2022. Our investment in the joint venture was $0.5 million and $1.5 million as of June 30, 2020 and December 31, 2019, respectively, and our maximum exposure to losses from the entity is limited to our investment. The joint venture does not currently have any third-party debt obligations and no capital contributions have been made as of June 30, 2020. We had Accounts receivable from the joint venture of $1.3 million as of June 30, 2020 related to the reimbursement of certain expenses by the joint venture. We have recognized no service fee income for the three and six months ended June 30, 2020.
Parts Joint Venture
We hold a 50% interest in a joint venture with an unrelated third party to purchase rotable parts and provide repair services for those parts, primarily for 747-8F aircraft. Our investment in the joint venture is accounted for under the equity method of accounting. As of June 30, 2020 and December 31, 2019, our investment in the joint venture was $18.9 million and $20.0 million, respectively. We had Accounts payable to the joint venture of $1.1 million as of June 30, 2020 and $0.5 million as of December 31, 2019.
5. Amazon
In May 2016, we entered into certain agreements with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively “Amazon”), which involves, among other things, CMI operation of up to 20 Boeing 767-300 freighter aircraft for Amazon by Atlas, as well as Dry Leasing by Titan. The Dry Leases have a term of ten years from the commencement of each agreement, while the CMI operations are for seven years from the commencement of each agreement (with an option for Amazon to extend the term to ten years). Between August 2016 and November 2018, we placed all 20 767-300 freighter aircraft into service for Amazon. In February 2019, the number of 767-300 freighters in CMI and Dry Lease service for Amazon was reduced to 19 with the
11
loss of an aircraft. In September 2019, the number of 767-300 freighters in CMI service for Amazon was reduced to 17 with the early termination of CMI services for two aircraft, which remain under dry lease.
In conjunction with the agreements entered into in May 2016, we granted Amazon a warrant providing the right to acquire up to 20% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, at an exercise price of $37.34 per share, as adjusted (“Warrant A”). As of December 31, 2018, this warrant to purchase 7.5 million shares, as adjusted, had vested in full. Warrant A is exercisable in accordance with its terms through May 2021. As of June 30, 2020, no portion of Warrant A has been exercised.
The agreements entered into in May 2016 also provided incentives for future growth of the relationship as Amazon may increase its business with us. In that regard, we granted Amazon a warrant to acquire up to an additional 10% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $37.34 per share, as adjusted (“Warrant B”). This warrant to purchase 3.77 million shares, as adjusted, will vest in increments of 37,660 shares, as adjusted, each time Amazon has paid $4.2 million of revenue to us, up to a total of $420.0 million, for incremental business beyond the original 20 767-300 freighters. As of June 30, 2020, 225,690 shares, as adjusted, of Warrant B have vested. Upon vesting, Warrant B becomes exercisable in accordance with its terms through May 2023. As of June 30, 2020, no portion of Warrant B has been exercised.
In March 2019, we amended the agreements entered into in 2016 with Amazon, pursuant to which we began providing CMI services using Boeing 737-800 freighter aircraft provided by Amazon. The 737-800 CMI operations are for a term of seven years from the commencement of each agreement (with an option for Amazon to extend the term to ten years). As of June 30, 2020, five 737-800 freighter aircraft entered CMI service. Amazon may, in its sole discretion, place up to 15 additional 737-800 freighter aircraft into service with us by May 31, 2021.
In connection with the amended agreements, we granted Amazon a warrant to acquire up to an additional 9.9% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of $52.67 per share, as adjusted (“Warrant C”). When combined with Warrant A and Warrant B, this would allow Amazon to acquire up to a total of 39.9% (after the issuance) of our outstanding common shares and Amazon would be entitled to vote the shares it owns up to 14.9% of our outstanding common shares, in its discretion. Amazon would be required to vote any shares it owns in excess of 14.9% of our outstanding common shares in accordance with the recommendation of our board of directors. After Warrant B has vested in full, this warrant to purchase 6.66 million shares, as adjusted, would vest in increments of 45,623 shares, as adjusted, each time Amazon has paid $6.9 million of revenue to us, up to a total of $1.0 billion, for incremental business beyond Warrant A and Warrant B. As of June 30, 2020, no portion of Warrant C has vested. Upon vesting, Warrant C would become exercisable in accordance with its terms through March 2026.
In May 2020, the warrants issued to the U.S. Treasury (see Note 3 for further discussion) triggered an antidilution adjustment to certain terms of the Amazon warrants as reflected above.
Upon the vesting of Warrant A in previous years, the fair value of the warrant was recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of Operating Revenue in proportion to the amount of revenue recognized over the terms of the Dry Leases and CMI agreements. Determining the amount of amortization related to the CMI agreements requires significant judgment to estimate the total number of Block Hours expected over the terms of those agreements. The fair value of Warrant A was also initially recorded as a warrant liability within Financial instruments and other liabilities (the “Amazon Warrant”). The Amazon Warrant liability is marked-to-market at the end of each reporting period with changes in fair value recorded in Unrealized (gain) loss on financial instruments.
As described in Note 2, we adopted the new accounting guidance for share-based payment awards issued to a customer as of January 1, 2020. Under the amended guidance, approximately 60% of the Amazon Warrant liability related to the CMI agreements as of January 1, 2020 was reclassified to Additional paid-in-capital and will no longer be marked-to-market at the end of each reporting period. The amended guidance does not impact the accounting for the remaining portion of the Amazon Warrant liability related to Dry Lease contracts. We recognized net unrealized losses of $30.7 million and $29.7 million on the Amazon Warrant liability during the three and six months ended June 30, 2020, respectively. We recognized a net unrealized gain of $42.3 million and a net unrealized loss of $4.3 million on the Amazon Warrant during the three and six months ended June 30, 2019, respectively. The fair value of the Amazon Warrant liability was $39.5 million as of June 30, 2020 and $24.3 million as of December 31, 2019.
When it becomes probable that an increment of either Warrant B or C will vest and the related revenue begins to be recognized, the grant date fair value of such portion is recognized as a customer incentive asset within Deferred costs and other assets, net and is amortized as a reduction of Operating Revenue in proportion to the amount of related revenue recognized. The grant date fair value of such increment is also recorded as Additional paid-in-capital. At the time of vesting, any amounts recorded in Additional paid-in-capital related to Dry Lease contracts would be reclassified to the Amazon Warrant liability.
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We amortized $9.5 million and $6.9 million of the customer incentive asset as a reduction of Operating Revenue for the three months ended June 30, 2020 and 2019, respectively. We amortized $18.6 million and $13.2 million of the customer incentive asset for the six months ended June 30, 2020 and 2019, respectively
Customer incentive asset included within Deferred costs and other assets is as follows:
Balance at December 31, 2019
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$
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152,534
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Initial value for estimate of vested or expected to vest warrants
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5,186
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Amortization of customer incentive asset
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(18,556
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)
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Balance at June 30, 2020
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$
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139,164
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6. Supplemental Financial Information
Accounts Receivable
Accounts receivable, net of allowance for expected credit losses related to customer contracts, excluding Dry Leasing contracts, was $189.5 million as of June 30, 2020 and $247.5 million as of December 31, 2019.
Allowance for expected credit losses, included within Accounts receivable, is as follows:
Balance as of December 31, 2019
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$
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1,822
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Bad debt recovery
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(6
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)
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Amounts written off, net of recoveries
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(930
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)
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Balance as of June 30, 2020
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$
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886
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Accrued Liabilities
Accrued liabilities consisted of the following as of:
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June 30, 2020
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December 31, 2019
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Maintenance
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$
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161,975
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|
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$
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136,315
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Deferred grant income
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132,877
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-
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Customer maintenance reserves
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96,131
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110,355
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Salaries, wages and benefits
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88,180
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75,719
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Deferred revenue
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38,437
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26,357
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Aircraft fuel
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34,726
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28,821
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Other
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100,927
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|
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104,158
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Accrued liabilities
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$
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653,253
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|
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$
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481,725
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Revenue Contract Liability
Deferred revenue for customer contracts, excluding Dry Leasing contracts, represents amounts collected from, or invoiced to, customers in advance of revenue recognition. The balance of Deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue.
Significant changes in our Revenue contract liability balances during the six months ended June 30, 2020 were as follows:
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Deferred Revenue
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Balance as of December 31, 2019
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$
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19,234
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Revenue recognized
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(95,027
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)
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Amounts collected or invoiced
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108,556
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Balance as of June 30, 2020
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$
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32,763
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Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total shown in the consolidated statements of cash flows:
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June 30, 2020
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December 31, 2019
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Cash and cash equivalents
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$
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726,402
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|
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$
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103,029
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Restricted cash
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12,776
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10,401
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Total Cash, cash equivalents and restricted cash shown in Consolidated Statements of Cash Flows
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$
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739,178
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$
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113,430
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7. Assets Held For Sale and Other Income
As of December 31, 2019, we had two 737-400 passenger aircraft previously used for training purposes, certain spare CF6-80 engines and three aircraft in our Dry Leasing portfolio classified as held for sale. During the six months ended June 30, 2020, we received net proceeds of $44.1 million from the completion of the sales of some of the spare CF6-80 engines and two aircraft in our Dry Leasing portfolio, and recognized a net gain of $6.7 million. During the three and six months ended June 30, 2020, we recognized an impairment loss of $15.9 million related to fair value adjustments for assets held for sale, within Special charge in the consolidated statement of operations. The carrying value of the assets held for sale as of June 30, 2020 and December 31, 2019 was $99.0 million and $155.9 million, respectively, which was included within Prepaid expense, held for sale and other current assets in the consolidated balance sheets. Sales of the remaining aircraft and engines held for sale are expected to be completed in 2020.
During the three and six months ended June 30, 2020, we recognized refunds of $31.5 million and $32.9 million, respectively, related to aircraft rent paid in previous years within Other (income) expense, net.
8. Debt
Term Loans
In February 2020, we refinanced two secured term loans that were originally due later in 2020, with two new term loans. One term loan is for 126 months in the amount of $82.0 million at a fixed interest rate of 3.27% with a final payment of $12.5 million due in July 2030 (the “First 2020 Term Loan”). The other term loan is for 130 months in the amount of $82.0 million at a fixed interest rate of 3.28% with a final payment of $12.5 million due in November 2030 (the “Second 2020 Term Loan”). The First and Second 2020 Term Loans are each secured by a mortgage against a 777-200LRF aircraft and subject to usual and customary fees, covenants and events of default, with principal and interest payable quarterly.
In April 2020, we borrowed $14.6 million at a fixed interest rate of 1.15% under an unsecured five-year term loan due in April 2025 for GEnx engine performance upgrade kits and overhauls (the “Third 2020 Term Loan”). The Third 2020 Term Loan is subject to customary fees, covenants and events of default, with principal and interest payable quarterly.
Promissory Note
See Note 3 for a discussion of the Promissory Note we issued to the U.S. Treasury during the three months ended June 30, 2020.
Convertible Notes
In May 2017, we issued $289.0 million aggregate principal amount of 1.875% convertible senior notes that mature on June 1, 2024 (the “2017 Convertible Notes”) in an underwritten public offering. In June 2015, we issued $224.5 million aggregate principal amount of 2.25% convertible senior notes that mature on June 1, 2022 (the “2015 Convertible Notes”) in an underwritten public offering. The 2017 Convertible Notes and the 2015 Convertible Notes (collectively, the “Convertible Notes”) are senior unsecured obligations and accrue interest payable semiannually on June 1 and December 1 of each year. The Convertible Notes are due on their respective maturity dates, unless earlier converted or repurchased pursuant to their respective terms.
14
The Convertible Notes consisted of the following as of June 30, 2020:
|
|
2017 Convertible Notes
|
|
|
2015 Convertible Notes
|
|
Remaining life in months
|
|
|
47
|
|
|
|
23
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
289,000
|
|
|
$
|
224,500
|
|
Less: debt discount, net of amortization
|
|
|
(42,795
|
)
|
|
|
(16,934
|
)
|
Less: debt issuance cost, net of amortization
|
|
|
(3,318
|
)
|
|
|
(1,569
|
)
|
Net carrying amount
|
|
$
|
242,887
|
|
|
$
|
205,997
|
|
|
|
|
|
|
|
|
|
|
Equity component (1)
|
|
$
|
70,140
|
|
|
$
|
52,903
|
|
|
(1)
|
Included in Additional paid-in-capital on the consolidated balance sheet as of June 30, 2020.
|
The following table presents the amount of interest expense recognized related to the Convertible Notes:
|
|
For the Three Months Ended
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Contractual interest coupon
|
|
$
|
2,618
|
|
|
$
|
2,618
|
|
|
|
$
|
5,235
|
|
|
$
|
5,235
|
|
Amortization of debt discount
|
|
|
4,457
|
|
|
|
4,186
|
|
|
|
|
8,845
|
|
|
|
8,308
|
|
Amortization of debt issuance costs
|
|
|
391
|
|
|
|
375
|
|
|
|
|
777
|
|
|
|
747
|
|
Total interest expense recognized
|
|
$
|
7,466
|
|
|
$
|
7,179
|
|
|
|
$
|
14,857
|
|
|
$
|
14,290
|
|
Revolving Credit Facility
We have a $200.0 million secured revolving credit facility that matures in December 2022 (the “Revolver”). As of June 30, 2020, there was $175.0 million outstanding and we had $16.2 million of unused availability, based on the collateral borrowing base. In July 2020, our unused availability, based on the collateral borrowing base, increased to $25.0 million. [In August 2020, we repaid $175.0 million and had $200.0 million of unused availability.]
9. Income Taxes
The effective income tax expense for the three and six months ended June 30, 2020 differed from tax at the U.S. statutory rate primarily due to $6.7 million and $6.5 million of nondeductible changes in the fair value of a customer warrant liability, respectively (see Note 5 for further discussion).
The effective income tax benefit for the three and six months ended June 30, 2019 differed from tax at the U.S. statutory rate primarily due to $59.8 million of tax benefits related to the favorable completion of an IRS examination of our 2015 income tax return and, for the three months ended June 30, 2019, $9.3 million of nontaxable changes in the fair value of a customer warrant liability (see Note 5 for further discussion). For interim accounting purposes, we recognize income taxes using an estimated annual effective tax rate. When finalized, the complete operational merger of Atlas and Southern Air (see Note 12 for further discussion) would result in a material increase to our deferred tax liability.
10. Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Inputs used to measure fair value are classified in the following hierarchy:
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
Level 2
|
Other inputs that are observable directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, or inactive quoted prices for identical assets or liabilities in inactive markets;
|
|
Level 3
|
Unobservable inputs reflecting assumptions about the inputs used in pricing the asset or liability.
|
We endeavor to utilize the best available information to measure fair value.
The carrying value of Cash and cash equivalents, Short-term investments and Restricted cash is based on cost, which approximates fair value.
15
Term loans and notes consist of term loans, notes guaranteed by the Export-Import Bank of the United States, the Promissory Note issued to the U.S. Treasury and equipment enhanced trust certificates. The fair values of these debt instruments and the Revolver are based on a discounted cash flow analysis using current borrowing rates for instruments with similar terms.
The fair value of our Convertible Notes is based on unadjusted quoted market prices for these securities.
The fair value of a customer warrant liability and certain long-term performance-based restricted shares are based on a Monte Carlo simulation which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility, and risk-free interest rate, among others.
The following table summarizes the carrying value, estimated fair value and classification of our financial instruments as of:
|
|
June 30, 2020
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
726,402
|
|
|
$
|
726,402
|
|
|
$
|
726,402
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Restricted cash
|
|
|
12,776
|
|
|
|
12,776
|
|
|
|
12,776
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
739,178
|
|
|
$
|
739,178
|
|
|
$
|
739,178
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and notes
|
|
$
|
1,850,350
|
|
|
$
|
1,886,041
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,886,041
|
|
Revolver
|
|
|
175,000
|
|
|
|
170,057
|
|
|
|
-
|
|
|
|
-
|
|
|
|
170,057
|
|
Convertible notes (1)
|
|
|
448,883
|
|
|
|
479,134
|
|
|
|
479,134
|
|
|
|
-
|
|
|
|
-
|
|
Customer warrant
|
|
|
39,539
|
|
|
|
39,539
|
|
|
|
-
|
|
|
|
39,539
|
|
|
|
-
|
|
|
|
$
|
2,513,772
|
|
|
$
|
2,574,771
|
|
|
$
|
479,134
|
|
|
$
|
39,539
|
|
|
$
|
2,056,098
|
|
|
|
December 31, 2019
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,029
|
|
|
$
|
103,029
|
|
|
$
|
103,029
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term investments
|
|
|
879
|
|
|
|
879
|
|
|
|
-
|
|
|
|
-
|
|
|
|
879
|
|
Restricted cash
|
|
|
10,401
|
|
|
|
10,401
|
|
|
|
10,401
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
114,309
|
|
|
$
|
114,309
|
|
|
$
|
113,430
|
|
|
$
|
-
|
|
|
$
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and notes
|
|
$
|
1,800,911
|
|
|
$
|
1,885,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,885,750
|
|
Revolver
|
|
|
100,000
|
|
|
|
103,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103,575
|
|
Convertible notes (1)
|
|
|
439,261
|
|
|
|
450,668
|
|
|
|
450,668
|
|
|
|
-
|
|
|
|
-
|
|
Customer warrant
|
|
|
24,345
|
|
|
|
24,345
|
|
|
|
-
|
|
|
|
24,345
|
|
|
|
-
|
|
|
|
$
|
2,364,517
|
|
|
$
|
2,464,338
|
|
|
$
|
450,668
|
|
|
$
|
24,345
|
|
|
$
|
1,989,325
|
|
(1) Carrying value is net of debt discounts and debt issuance costs (see Note 8).
11. 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 called Direct Contribution, which shows the profitability of each segment after allocation of direct operating and ownership costs. Direct Contribution includes Income (loss) from continuing operations before income taxes and excludes the following: Special charges, Transaction-related expenses, nonrecurring items, Gain (losses) 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, other non-operating costs and Payroll Support Program grant income.
16
The following table sets forth Operating Revenue and Direct Contribution for our reportable segments reconciled to Operating Income and Income (loss) before income taxes:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
291,951
|
|
|
$
|
307,278
|
|
|
$
|
570,695
|
|
|
$
|
613,845
|
|
Charter
|
|
|
497,547
|
|
|
|
315,679
|
|
|
|
825,176
|
|
|
|
620,793
|
|
Dry Leasing
|
|
|
40,906
|
|
|
|
43,535
|
|
|
|
82,832
|
|
|
|
113,481
|
|
Customer incentive asset amortization
|
|
|
(9,534
|
)
|
|
|
(6,936
|
)
|
|
|
(18,556
|
)
|
|
|
(13,222
|
)
|
Other
|
|
|
4,383
|
|
|
|
4,362
|
|
|
|
8,608
|
|
|
|
8,704
|
|
Total Operating Revenue
|
|
$
|
825,253
|
|
|
$
|
663,918
|
|
|
$
|
1,468,755
|
|
|
$
|
1,343,601
|
|
Direct Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
14,495
|
|
|
$
|
40,640
|
|
|
$
|
66,802
|
|
|
$
|
80,647
|
|
Charter
|
|
|
185,969
|
|
|
|
14,084
|
|
|
|
236,750
|
|
|
|
43,217
|
|
Dry Leasing
|
|
|
9,721
|
|
|
|
11,091
|
|
|
|
20,420
|
|
|
|
46,618
|
|
Total Direct Contribution for Reportable Segments
|
|
|
210,185
|
|
|
|
65,815
|
|
|
|
323,972
|
|
|
|
170,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses and (income), net
|
|
|
(50,308
|
)
|
|
|
(81,927
|
)
|
|
|
(139,029
|
)
|
|
|
(162,064
|
)
|
Loss on early extinguishment of debt
|
|
|
(74
|
)
|
|
|
-
|
|
|
|
(74
|
)
|
|
|
(245
|
)
|
Unrealized gain (loss) on financial instruments
|
|
|
(30,671
|
)
|
|
|
42,300
|
|
|
|
(29,747
|
)
|
|
|
(4,275
|
)
|
Special charge
|
|
|
(15,934
|
)
|
|
|
(3,269
|
)
|
|
|
(15,934
|
)
|
|
|
(3,269
|
)
|
Transaction-related expenses
|
|
|
(1,275
|
)
|
|
|
(734
|
)
|
|
|
(1,796
|
)
|
|
|
(3,261
|
)
|
Gain (loss) on disposal of aircraft
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
6,715
|
|
|
|
-
|
|
Income (loss) before income taxes
|
|
|
111,921
|
|
|
|
22,185
|
|
|
|
144,107
|
|
|
|
(2,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back (subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(224
|
)
|
|
|
(1,278
|
)
|
|
|
(704
|
)
|
|
|
(3,322
|
)
|
Interest expense
|
|
|
28,950
|
|
|
|
30,045
|
|
|
|
58,225
|
|
|
|
60,398
|
|
Capitalized interest
|
|
|
(132
|
)
|
|
|
(627
|
)
|
|
|
(325
|
)
|
|
|
(1,090
|
)
|
Loss on early extinguishment of debt
|
|
|
74
|
|
|
|
-
|
|
|
|
74
|
|
|
|
245
|
|
Unrealized (gain) loss on financial instruments
|
|
|
30,671
|
|
|
|
(42,300
|
)
|
|
|
29,747
|
|
|
|
4,275
|
|
Other (income) expense, net
|
|
|
(50,598
|
)
|
|
|
945
|
|
|
|
(49,392
|
)
|
|
|
(2,030
|
)
|
Operating Income
|
|
$
|
120,662
|
|
|
$
|
8,970
|
|
|
$
|
181,732
|
|
|
$
|
55,844
|
|
The following table disaggregates our Charter segment revenue by customer and service type:
|
For the Three Months Ended
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
Cargo
|
|
|
Passenger
|
|
|
Total
|
|
|
Cargo
|
|
|
Passenger
|
|
|
Total
|
|
Commercial customers
|
|
$
|
394,062
|
|
|
$
|
17
|
|
|
$
|
394,079
|
|
|
$
|
133,178
|
|
|
$
|
3,054
|
|
|
$
|
136,232
|
|
AMC
|
|
|
49,762
|
|
|
|
53,706
|
|
|
|
103,468
|
|
|
|
92,017
|
|
|
|
87,430
|
|
|
|
179,447
|
|
Total Charter Revenue
|
|
$
|
443,824
|
|
|
$
|
53,723
|
|
|
$
|
497,547
|
|
|
$
|
225,195
|
|
|
$
|
90,484
|
|
|
$
|
315,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
Cargo
|
|
|
Passenger
|
|
|
Total
|
|
|
Cargo
|
|
|
Passenger
|
|
|
Total
|
|
Commercial customers
|
|
$
|
568,551
|
|
|
$
|
3,122
|
|
|
$
|
571,673
|
|
|
$
|
282,082
|
|
|
$
|
10,661
|
|
|
$
|
292,743
|
|
AMC
|
|
|
112,236
|
|
|
|
141,267
|
|
|
|
253,503
|
|
|
|
149,463
|
|
|
|
178,587
|
|
|
|
328,050
|
|
Total Charter Revenue
|
|
$
|
680,787
|
|
|
$
|
144,389
|
|
|
$
|
825,176
|
|
|
$
|
431,545
|
|
|
$
|
189,248
|
|
|
$
|
620,793
|
|
Given the nature of our business and international flying, geographic information for revenue, long-lived assets and total assets is not presented because it is impracticable to do so.
We are exposed to a concentration of revenue from the AMC, Polar and DHL (see above and Note 4 to our Financial Statements for further discussion regarding Polar). No other customer accounted for more than 10.0% of our Total Operating Revenue. Revenue from DHL was $151.9 million for the three months ended June 30, 2020 and $87.4 million for the three months ended June 30, 2019. Revenue from DHL was $250.2 million for the six months ended June 30, 2020 and $177.1 million for the six months ended June 30, 2019. We have not experienced any credit issues with these customers.
17
12. Labor and Legal Proceedings
Labor
Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the “IBT”). We have a five-year collective bargaining agreement (“CBA”) with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with the Southern Air pilots, which became amendable in November 2016. We also have a five-year CBA with our Atlas and Polar dispatchers, which was extended in April 2017 for an additional four years, making the CBA amendable in November 2021.
After we completed the acquisition of Southern Air in April 2016, we informed the IBT of our intention to pursue (and we have been pursuing) a complete operational merger of Atlas and Southern Air. The Atlas and Southern Air CBAs both have a defined and streamlined process for negotiating a joint CBA (“JCBA”) when a merger occurs, as in the case with the Atlas and Southern Air merger. Pursuant to the merger provisions in both CBAs, joint negotiations for a single CBA for Atlas and Southern Air should commence promptly. Further, once an integrated seniority list (“ISL”) of Atlas and Southern Air pilots is presented to the Company by the union, it triggers a nine month agreed-upon timeframe to negotiate a new JCBA with any unresolved issues promptly submitted to binding arbitration.
The IBT has refused to follow the merger provisions in the Atlas and Southern Air CBAs. This has resulted in significant litigation, arbitrations and delay. As more fully stated below, the Company has prevailed in all of the merger related proceedings.
After the merger process began, the IBT also 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 NMB conducted a premediation investigation on the IBT’s Atlas application in June 2016, which has remained pending (along with the IBT’s Southern Air application) since 2016.
Due to the IBT’s refusal to adhere to the merger provisions of the respective CBAs, in February 2017, the Company filed a lawsuit against the IBT to compel arbitration on the issue of whether the merger provisions in Atlas and Southern Air's CBAs apply to the bargaining process. On March 13, 2018, the U.S. District Court for the Southern District of New York (“NY District Court”) ruled in the Company’s favor and ordered arbitration of this issue. The IBT appealed the NY District Court’s decision, and on November 21, 2019, the U.S. Court of Appeals for the Second Circuit Court issued its decision in the Company’s favor affirming the NY District Court’s decision.
The Company and the IBT conducted the Atlas and Southern Air arbitrations for this issue in October 2018. The Company prevailed in both the Atlas and Southern Air management grievance arbitrations against the IBT, with decisions rendered on June 12, 2019 and August 26, 2019, respectively. Both arbitrators ruled that the IBT violated the CBAs by refusing to follow merger provisions in the parties’ respective CBAs, which require formulation of a JCBA covering the combined pilot group. The arbitrators each ordered the IBT to promptly comply with the CBAs by submitting an ISL to the Company within 45 days of each arbitration decision, respectively. The IBT failed to comply with both deadlines for submitting the ISL, which passed on July 27, 2019 for Southern Air, and on October 10, 2019 for Atlas. As a result, on October 25, 2019, the Company filed an action in the U.S. District Court for the District of Columbia (“DC District Court”) to enforce the Atlas and Southern Air arbitration decisions. On March 31, 2020, the DC District Court ruled in the Company’s favor, enforcing the arbitration decisions and directing the IBT to produce the ISL by May 15, 2020.
The IBT subsequently requested additional time from the Company to complete the ISL and the parties agreed to a joint stipulation. As a result, on April 24, 2020, the DC District Court issued an order modifying its March 31st order, providing that the nine-month timeframe to bargain for a new JCBA will be triggered on May 15, 2020 and that the IBT must produce the ISL by March 31, 2021. Any remaining open issues will then be determined by binding interest arbitration pursuant to the merger provisions in the CBAs. On April 28, 2020, the IBT and Local 2750 filed a Notice of Appeal of the DC District Court’s March 31st order, which remains in place pending appeal.
In connection with its opposition to application of the merger provisions, the IBT commenced lawsuits in the DC District Court seeking to vacate both arbitration awards. On January 28, 2020, the DC District Court ruled in the Company’s favor, granting its motions to dismiss both of the IBT’s lawsuits. On April 28, 2020, the IBT and Local 2750 filed a Notice of Appeal of the DC District Court’s January 28th orders, which remains in place pending appeal.
The Company and the IBT continue to meet virtually to move the process forward and bargain in good faith for a new JCBA. Substantive progress has been made with tentative agreements for more than half of the articles in a new JCBA. Despite repeated requests from the Company, the IBT has yet to provide the Company with a comprehensive economic proposal.
18
In late September 2019, the Atlas pilots represented by the IBT formed a new local union, IBT Local 2750 to represent them. The Southern Air pilots continue to be represented by IBT Local 1224. The Company continues to work with both Local 2750 and Local 1224 leadership groups.
On May 7, 2020, the Company announced that Atlas and Southern Air reached an agreement with IBT Locals 2750 and 1224, which provides for a ten percent pay increase for all pilots, effective as of May 1, 2020. This pay increase provides interim additional compensation to our pilots until a new JCBA is reached.
In late November 2017, the DC District Court granted the Company’s request to issue a preliminary injunction to stop an illegal work slowdown and require the IBT to meet its obligations under the Railway Labor Act. Specifically, the DC District Court ordered the IBT to stop “authorizing, encouraging, permitting, calling, engaging in, or continuing” any illegal pilot slowdown activities, which were intended to gain leverage in pilot contract negotiations with the Company. In addition, the Court ordered the IBT to take affirmative action to prevent and to refrain from continuing any form of interference with the Company’s operations or any other concerted refusal to perform normal pilot operations consistent with its status quo obligations under the Railway Labor Act. In December 2017, the IBT appealed the District Court’s decision to the U.S. Court of Appeals for the District of Columbia Circuit (“Court of Appeals”). On July 5, 2019, the Court of Appeals, in a unanimous three judge panel, affirmed the DC District Court’s ruling and denied the IBT’s appeal.
On May 22,, 2020, the IBT filed a motion to dismiss the Company’s action for a preliminary injunction, asserting the Company’s claim for injunctive relief was mooted by the DC District Court’s March 31, 2020 decision in a separate case enforcing the management grievance arbitration awards in the Company’s favor. The Company filed an opposition to the IBT’s motion on June 22, 2020, and the IBT’s reply was filed on July 3, 2020. The preliminary injunction remains in full force and effect pending the court’s decision.
We are subject to risks of work interruption or stoppage as permitted by the Railway Labor Act and may incur additional administrative expenses associated with union representation of our employees.
Matters Related to Alleged Pricing Practices
In the Netherlands, Stichting Cartel Compensation, successor in interest to claims of various shippers, has filed suit in the district court in Amsterdam against British Airways, KLM, Martinair, Air France, Lufthansa and Singapore Airlines seeking recovery for damages purportedly arising from allegedly unlawful pricing practices of such defendants. In response, British Airways, KLM, Martinair, Air France and Lufthansa filed third-party indemnification lawsuits against Polar Air Cargo, LLC (“Old Polar”), a consolidated subsidiary of the Company, and Polar, seeking indemnification in the event the defendants are found to be liable in the main proceedings. Another defendant, Thai Airways, filed a similar indemnification claim. Activities in the case have focused on various procedural issues, some of which are awaiting court determination. The Netherlands proceedings are likely to be affected by a decision readopted by the European Commission in March 2017, finding EU competition law violations by British Airways, KLM, Martinair, Air France and Lufthansa, among others, but not Old Polar or Polar. If the Company, Old Polar or Polar were to incur an unfavorable outcome, such outcome may have a material adverse impact on our business, financial condition, results of operations or cash flows. We are unable to reasonably estimate a range of possible loss for this matter at this time.
Brazilian Customs Claim
Old Polar was cited for two alleged customs violations in Sao Paulo, Brazil, relating to shipments of goods dating back to 1999 and 2000. Each claim asserts that goods listed on the flight manifest of two separate Old Polar scheduled service flights were not on board the aircraft upon arrival and therefore were improperly brought into Brazil. The two claims, which also seek unpaid customs duties, taxes and penalties from the date of the alleged infraction, are approximately $3.8 million in aggregate based on June 30, 2020 exchange rates.
In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error when considering the type and amount of goods allegedly missing, among other things. In the pending claim for one of the cases, we have received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. In the other case, we received an administrative decision in favor of the Brazil customs authorities and we are in the process of appealing this decision to the Brazil courts. As required to defend such claims, we have made deposits pending resolution of these matters. The balance was $3.1 million as of June 30, 2020 and $4.1 million as of December 31, 2019, 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.
19
Other
In addition to the matters described in this note, we have certain other contingencies incident to the ordinary course of business. Unless disclosed otherwise, management does not expect that the ultimate disposition of such other contingencies or matters will materially affect our financial condition, results of operations or cash flows.
13. Earnings Per Share
Basic earnings per share (“EPS”) represents income (loss) divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represents income (loss) divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period using the treasury stock method. The calculations of basic and diluted EPS were as follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
Numerator:
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
Net Income
|
|
$
|
78,912
|
|
|
$
|
86,868
|
|
|
$
|
102,265
|
|
|
$
|
57,158
|
|
|
Less: Unrealized gain on financial instruments, net of tax
|
|
|
-
|
|
|
|
(43,379
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Diluted Net income
|
|
$
|
78,912
|
|
|
$
|
43,489
|
|
|
$
|
102,265
|
|
|
$
|
57,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS weighted average shares outstanding
|
|
|
26,129
|
|
|
|
25,851
|
|
|
|
26,048
|
|
|
|
25,794
|
|
|
Effect of dilutive warrants
|
|
|
9
|
|
|
|
1,089
|
|
|
|
4
|
|
|
|
-
|
|
|
Effect of dilutive restricted stock
|
|
|
44
|
|
|
|
13
|
|
|
|
22
|
|
|
|
127
|
|
|
Diluted EPS weighted average shares outstanding
|
|
|
26,182
|
|
|
|
26,953
|
|
|
|
26,074
|
|
|
|
25,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.02
|
|
|
$
|
3.36
|
|
|
$
|
3.93
|
|
|
$
|
2.22
|
|
|
Diluted
|
|
$
|
3.01
|
|
|
$
|
1.61
|
|
|
$
|
3.92
|
|
|
$
|
2.21
|
|
|
Antidilutive shares related to warrants issued in connection with our Convertible Notes and warrants issued to a customer that were out of the money and excluded from the calculation of diluted EPS were 15.5 million for the three and six months ended June 30, 2020, respectively and 7.8 million for the three and six months ended June 30, 2019. Diluted shares reflect the potential dilution that could occur from restricted shares using the treasury stock method. The calculation of EPS does not include restricted share units and customer warrants in which performance or market conditions were not satisfied of 10.5 million for the three and six months ended June 30, 2020 and 10.6 million for the three and six months ended June 30, 2019.
14. 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, 2018
|
|
$
|
(3,841
|
)
|
|
$
|
9
|
|
|
$
|
(3,832
|
)
|
Reclassification to interest expense
|
|
|
681
|
|
|
|
-
|
|
|
|
681
|
|
Tax effect
|
|
|
(161
|
)
|
|
|
-
|
|
|
|
(161
|
)
|
Balance as of June 30, 2019
|
|
$
|
(3,321
|
)
|
|
$
|
9
|
|
|
$
|
(3,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
(2,827
|
)
|
|
$
|
9
|
|
|
$
|
(2,818
|
)
|
Reclassification to interest expense
|
|
|
604
|
|
|
|
-
|
|
|
|
604
|
|
Tax effect
|
|
|
(133
|
)
|
|
|
-
|
|
|
|
(133
|
)
|
Balance as of June 30, 2020
|
|
$
|
(2,356
|
)
|
|
$
|
9
|
|
|
$
|
(2,347
|
)
|
Interest Rate Derivatives
As of June 30, 2020, there was $3.1 million of unamortized net realized loss before taxes remaining in Accumulated other comprehensive income (loss) related to terminated forward-starting interest rate swaps, which had been designated as cash flow hedges to effectively fix the interest rates on two 747-8F financings in 2011 and three 777-200LRF financings in 2014. The net loss is amortized and reclassified into Interest expense over the remaining life of the related debt. Net realized losses reclassified into earnings were both $0.3 million for the three months ended June 30, 2020 and 2019. Net realized losses reclassified into earnings were $0.6 million and $0.7 million for the six months ended June 30, 2020 and 2019, respectively. Net realized losses expected to be reclassified into earnings within the next 12 months are $1.1 million as of June 30, 2020.
20