Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Commission file number 000-50368
________________________________________________________________
(Exact name of registrant as specified in its charter)
________________________________________________________________
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Delaware | | 26-1631624 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
145 Hunter Drive, Wilmington, OH 45177
(Address of principal executive offices)
937-382-5591
(Registrant’s telephone number, including area code)
________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)
Name of each exchange on which registered: NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________________________________
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | |
Large accelerated filer o | | Accelerated filer x |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
As of August 8, 2016, 59,658,299 shares of the registrant’s common stock, par value $0.01, were outstanding.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
Item 1. | | | |
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Item 2 | | | |
Item 3 | | | |
Item 4 | | | |
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PART II. OTHER INFORMATION |
Item 1 | | | |
Item 1A | | | |
Item 2 | | | |
Item 5 | | | |
Item 6 | | | |
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FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The financial information, including the financial statements, included on the Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 14, 2016.
The Securities and Exchange Commission maintains and Internet site that contains reports, proxy and information statements and other information regarding Air Transport Services Group, Inc. at www.sec.gov. Additionally, our filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC.
FORWARD LOOKING STATEMENTS
Statements contained in this Quarterly report on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). Words such as “projects,” “believes,” “anticipates,” “will,” “estimates,” “plans,” “expects,” “intends” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report and in our 2015 Annual Report filed on Form 10-K with the Securities and Exchange Commission.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
REVENUES | $ | 176,549 |
| | $ | 148,353 |
| | $ | 353,934 |
| | $ | 295,378 |
|
OPERATING EXPENSES | | | | | | | |
Salaries, wages and benefits | 53,647 |
| | 42,036 |
| | 106,066 |
| | 85,715 |
|
Depreciation and amortization | 33,132 |
| | 31,400 |
| | 65,666 |
| | 60,393 |
|
Maintenance, materials and repairs | 26,390 |
| | 23,993 |
| | 53,733 |
| | 46,686 |
|
Fuel | 17,168 |
| | 12,275 |
| | 33,799 |
| | 23,053 |
|
Contracted ground and aviation services | 8,931 |
| | 3,599 |
| | 19,799 |
| | 6,537 |
|
Travel | 4,678 |
| | 4,342 |
| | 9,486 |
| | 8,765 |
|
Rent | 2,579 |
| | 2,447 |
| | 5,206 |
| | 6,654 |
|
Landing and ramp | 2,652 |
| | 2,166 |
| | 6,303 |
| | 4,874 |
|
Insurance | 1,087 |
| | 546 |
| | 2,236 |
| | 1,804 |
|
Other operating expenses | 10,484 |
| | 5,755 |
| | 20,488 |
| | 13,574 |
|
| 160,748 |
| | 128,559 |
| | 322,782 |
| | 258,055 |
|
OPERATING INCOME | 15,801 |
| | 19,794 |
| | 31,152 |
| | 37,323 |
|
OTHER INCOME (EXPENSE) | | | | | | | |
Interest income | 37 |
| | 24 |
| | 61 |
| | 46 |
|
Net gain on financial instruments | 5,558 |
| | 264 |
| | 5,030 |
| | 251 |
|
Interest expense | (2,633 | ) | | (2,839 | ) | | (5,332 | ) | | (5,904 | ) |
| 2,962 |
| | (2,551 | ) | | (241 | ) | | (5,607 | ) |
| | | | | | | |
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 18,763 |
| | 17,243 |
| | 30,911 |
| | 31,716 |
|
INCOME TAX EXPENSE | (7,235 | ) | | (6,673 | ) | | (11,212 | ) | | (12,251 | ) |
EARNINGS FROM CONTINUING OPERATIONS | 11,528 |
| | 10,570 |
| | 19,699 |
| | 19,465 |
|
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES | 47 |
| | 214 |
| | 94 |
| | 428 |
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NET EARNINGS | $ | 11,575 |
| | $ | 10,784 |
| | $ | 19,793 |
| | $ | 19,893 |
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| | | | | | | |
BASIC EARNINGS PER SHARE | | | | | | | |
Continuing operations | $ | 0.18 |
| | $ | 0.16 |
| | $ | 0.31 |
| | $ | 0.30 |
|
Discontinued operations | — |
| | 0.01 |
| | — |
| | 0.01 |
|
TOTAL BASIC EARNINGS PER SHARE | $ | 0.18 |
| | $ | 0.17 |
| | $ | 0.31 |
| | $ | 0.31 |
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DILUTED EARNINGS PER SHARE | | | | | | | |
Continuing operations | $ | 0.12 |
| | $ | 0.16 |
| | $ | 0.25 |
| | $ | 0.30 |
|
Discontinued operations | — |
| | — |
| | — |
| | — |
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TOTAL DILUTED EARNINGS PER SHARE | $ | 0.12 |
| | $ | 0.16 |
| | $ | 0.25 |
| | $ | 0.30 |
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WEIGHTED AVERAGE SHARES | | | | | | | |
Basic | 63,267 |
| | 64,541 |
| | 63,452 |
| | 64,498 |
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Diluted | 66,763 |
| | 65,471 |
| | 65,910 |
| | 65,404 |
|
See notes to condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
NET EARNINGS | $ | 11,575 |
| | $ | 10,784 |
| | $ | 19,793 |
| | $ | 19,893 |
|
OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | |
Defined Benefit Pension | 2,146 |
| | 1,142 |
| | 4,292 |
| | 2,284 |
|
Defined Benefit Post-Retirement | 9 |
| | (40 | ) | | 18 |
| | (80 | ) |
Gains and Losses on Derivatives | — |
| | 2 |
| | — |
| | (4 | ) |
Foreign Currency Translation | 53 |
| | 144 |
| | 310 |
| | (296 | ) |
| | | | | | | |
TOTAL COMPREHENSIVE INCOME, net of tax | $ | 13,783 |
| | $ | 12,032 |
| | $ | 24,413 |
| | $ | 21,797 |
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See notes to condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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| | | | | | | |
| June 30, | | December 31, |
| 2016 | | 2015 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 25,242 |
| | $ | 17,697 |
|
Accounts receivable, net of allowance of $293 in 2016 and $415 in 2015 | 51,510 |
| | 57,986 |
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Inventory | 14,713 |
| | 12,963 |
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Prepaid supplies and other | 12,167 |
| | 12,660 |
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TOTAL CURRENT ASSETS | 103,632 |
| | 101,306 |
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Property and equipment, net | 934,219 |
| | 875,401 |
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Other assets | 75,240 |
| | 26,285 |
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Goodwill and intangibles | 38,589 |
| | 38,729 |
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TOTAL ASSETS | $ | 1,151,680 |
| | $ | 1,041,721 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 40,755 |
| | $ | 44,417 |
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Accrued salaries, wages and benefits | 24,254 |
| | 27,454 |
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Accrued expenses | 8,858 |
| | 8,107 |
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Current portion of debt obligations | 41,637 |
| | 33,740 |
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Unearned revenue | 12,081 |
| | 12,963 |
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TOTAL CURRENT LIABILITIES | 127,585 |
| | 126,681 |
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Long term debt | 323,461 |
| | 283,918 |
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Post-retirement obligations | 104,316 |
| | 108,194 |
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Other liabilities | 61,777 |
| | 61,913 |
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Stock warrants | 57,128 |
| | — |
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Deferred income taxes | 109,358 |
| | 96,858 |
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TOTAL LIABILITIES | 783,625 |
| | 677,564 |
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Commitments and contingencies (Notes B and G) |
| |
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STOCKHOLDERS’ EQUITY: | | | |
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock | — |
| | — |
|
Common stock, par value $0.01 per share; 85,000,000 shares authorized; 63,513,853 and 64,077,140 shares issued and outstanding in 2016 and 2015, respectively | 635 |
| | 641 |
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Additional paid-in capital | 497,750 |
| | 518,259 |
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Accumulated deficit | (35,938 | ) | | (55,731 | ) |
Accumulated other comprehensive loss | (94,392 | ) | | (99,012 | ) |
TOTAL STOCKHOLDERS’ EQUITY | 368,055 |
| | 364,157 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,151,680 |
| | $ | 1,041,721 |
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| | | |
See notes to condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) |
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2016 | | 2015 |
OPERATING ACTIVITIES: | | | |
Net earnings from continuing operations | $ | 19,699 |
| | $ | 19,465 |
|
Net earnings from discontinued operations | 94 |
| | 428 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 66,600 |
| | 60,393 |
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Pension and post-retirement | 6,764 |
| | 3,460 |
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Deferred income taxes | 10,969 |
| | 11,940 |
|
Amortization of stock-based compensation | 1,575 |
| | 1,645 |
|
Amortization of DHL promissory note | — |
| | (1,550 | ) |
Net loss on financial instruments | (5,030 | ) | | (251 | ) |
Changes in assets and liabilities: | | | |
Accounts receivable | 6,376 |
| | 6,977 |
|
Inventory and prepaid supplies | (1,560 | ) | | 1,082 |
|
Accounts payable | (2,552 | ) | | 2,738 |
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Unearned revenue | (3,141 | ) | | 2,354 |
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Accrued expenses, salaries, wages, benefits and other liabilities | (638 | ) | | (5,963 | ) |
Pension and post-retirement assets | (3,881 | ) | | (5,948 | ) |
Other | 2,018 |
| | 430 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES | 97,293 |
| | 97,200 |
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INVESTING ACTIVITIES: | | | |
Capital expenditures | (125,076 | ) | | (76,308 | ) |
Proceeds from property and equipment | — |
| | 1,030 |
|
NET CASH (USED IN) INVESTING ACTIVITIES | (125,076 | ) | | (75,278 | ) |
FINANCING ACTIVITIES: | | | |
Principal payments on long term obligations | (12,623 | ) | | (47,091 | ) |
Proceeds from borrowings | 60,000 |
| | 20,000 |
|
Withholding taxes paid for conversion of employee stock awards | (1,231 | ) | | (614 | ) |
Purchase of common stock | (10,818 | ) | | (2,595 | ) |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 35,328 |
| | (30,300 | ) |
| | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 7,545 |
| | (8,378 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 17,697 |
| | 30,560 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 25,242 |
| | $ | 22,182 |
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| | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
Interest paid, net of amount capitalized | $ | 5,104 |
| | $ | 5,646 |
|
Federal alternative minimum and state income taxes paid | $ | 464 |
| | $ | 501 |
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SUPPLEMENTAL NON-CASH INFORMATION: | | | |
Debt extinguished | $ | — |
| | $ | 1,550 |
|
Accrued capital expenditures | $ | 5,923 |
| | $ | 3,618 |
|
See notes to condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Air Transport Services Group, Inc. is a holding company whose principal subsidiaries include an aircraft leasing company and two independently certificated airlines. The Company provides airline operations, aircraft leases, aircraft maintenance and other support services primarily to the cargo transportation and package delivery industries. Through the Company's subsidiaries, it offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers.
The Company's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the Company's airlines as well as to non-affiliated airlines and other lessees. The airlines, ABX Air, Inc. (“ABX”) and Air Transport International, Inc. (“ATI”), each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. ATI provides passenger transportation, primarily to the U.S. Military, using "combi" aircraft, which are certified to carry passengers as well as cargo on the main deck.
The Company serves a base of concentrated customers who typically have a diverse line of international cargo traffic. The Company provides aircraft and airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance and insurance ("ACMI") services. In addition to its airline operations and aircraft leasing services, the Company sells aircraft parts, provides aircraft and equipment maintenance services, and operates mail and package sorting facilities.
Basis of Presentation
The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with the financial statements reflected in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of management, but actual results could differ materially from those estimates.
The accompanying condensed consolidated financial statements include the accounts of Air Transport Services Group, Inc. and its wholly-owned subsidiaries. Investments in an affiliate in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. Using the equity method, the Company’s share of the nonconsolidated affiliate's income or loss is recognized in the consolidated statement of earnings and cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment. Inter-company balances and transactions are eliminated.
New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, "Improvements to Employee Share-Based Payment Accounting," (“ASU 2016-09”) which addresses several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-9 is effective for annual reporting periods beginning after December 15, 2016 and earlier adoption is permitted. The new standard requires that an entity recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Under the previous standard, excess tax benefits are recognized in additional paid-in capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the income statement.
The Company elected to early adopt this standard in the quarter ended March 31, 2016. The impact of the early adoption resulted in the Company recording a tax benefit of $0.7 million within income tax expense for the three months ended March 31, 2016 related to the excess tax benefit on stock incentive awards that settled during the quarter ended March 31, 2016. The tax benefit for the six months ended June 30, 2016 was $0.7 million. Prior to adoption of ASU 2016-09, this amount would have been recorded as an increase of additional paid-in capital. The tax benefit for the six months ended June 30, 2015 would have been $0.4 million.
The Company accounts for forfeitures as they occur. Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. The Company applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, prospectively. Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are classified as a financing activity in the statement of cash flows. The Company has applied the effect of this change on prior period statements of cash flows retrospectively. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the quarter ended March 31, 2016. This increased the diluted weighted average common shares outstanding by 152,512 shares.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 with earlier adoption permitted for reporting periods beginning after December 15, 2016. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect the standard is expected to have on the Company's consolidated financial position, results of operations or cash flows and related disclosures.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The amendments in ASU 2015-03 are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. As a result of the adoption of ASU 2015-03, the amounts of debt issuance costs were reclassified on the Company's balance sheets from other assets to long term debt.
In July 2015, FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). ASU 2015-11 more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards ("IFRS"). The amendment in ASU 2015-11 is for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendment should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the impact of adopting ASU 2015-11 to be material to the Company's financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which will require the recognition of right to-use-assets and lease liabilities for leases previously classified as operating leases by lessees. The standard will take effect for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early application will be permitted for all entities. In addition, the FASB has decided to require a lessee to apply a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (the date of initial application). The modified
retrospective approach would not require any transition accounting for leases that expired before the date of initial application. The FASB decided to not permit a full retrospective transition approach. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.
In January 2016, the FASB issued an Exposure Draft of a proposed ASU, "Compensation - Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The proposed ASU would require an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost would be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If adopted, the proposed standard would impact the Operating Income subtotal as reported in the Company's Consolidated Statement of Operations by excluding interest expense and investment returns components of retiree benefit expenses.
NOTE B—SIGNIFICANT CUSTOMERS
DHL
The Company's largest customer is DHL Network Operations (USA), Inc. and its affiliates ("DHL"). The Company has had long-term contracts with DHL since August 2003. Revenues from continuing operations performed for DHL were approximately 37% and 36% of the Company's consolidated revenues from continuing operations for the three and six month periods ended June 30, 2016, respectively, compared to 48% and 50% for the corresponding periods of 2015. The Company’s balance sheets include accounts receivable with DHL of $5.9 million and $9.8 million as of June 30, 2016 and December 31, 2015, respectively.
The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate crew, maintenance and insurance (“CMI”) agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases or owns. The Company also provides Boeing 767 and Boeing 757 air cargo transportation services for DHL through additional ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated from the ACMI agreements are typically based on hours flown. The Company also provides ground equipment, such as power units, air starts and related maintenance services to DHL under separate agreements.
Amazon
During September 2015, the Company began to operate a trial air network for Amazon Fulfillment Services, Inc. (“AFS”), a subsidiary of Amazon.com, Inc. (“Amazon”). The network grew to five freighter aircraft through first quarter of 2016 and included services for cargo handling and logistical support. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with AFS pursuant to which CAM will lease 20 Boeing 767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. The ATSA, which has a term of five years, also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the performance of hub and gateway services by the Company's subsidiary LGSTX, Services Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that will be leased and operated under the ATSA. The Boeing 767-300 aircraft are being converted to freighter aircraft. The ATSA became effective on April 1, 2016.
Revenues from continuing operations performed for AFS comprised approximately 22% and 20% of the Company's consolidated revenues from continuing operations for the three and six month periods ending June 30, 2016, respectively. The Company’s balance sheets include accounts receivable with AFS of $9.3 million and $10.5 million as of June 30, 2016 and December 31, 2015, respectively.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches, which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon execution of the Investment Agreement, grants Amazon the right to purchase approximately 12.81 million ATSG common shares, with the right to purchase 7.69
million common shares vesting upon issuance on March 8, 2016 and the right to purchase the remaining 5.12 million common shares vesting as the Company delivers additional aircraft leased under the ATSA, or as the Company achieves specified revenue targets in connection with the ATSA. The second tranche of warrants grants Amazon a right to purchase approximately 1.59 million ATSG common shares, and will be issued on March 8, 2018. The third tranche of warrants will be issued on September 8, 2020. The third tranche of warrants will grant Amazon the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. The exercise price of the warrants will be $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants will be exercisable in accordance with its terms through March 8, 2021. The Company anticipates making available the common shares required for the underlying warrants through a combination of share repurchases and the issuance of additional shares.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. The fair value of the warrants issued to Amazon as of March 8, 2016 was determined to be $4.89 per share using a Black-Scholes pricing model which considers the Company’s common stock price and various assumptions, such as the volatility of the Company’s common stock, the expected dividend yield, and the risk-free interest rate. The fair value of the 7.69 million vested warrants issued to Amazon was recorded as a lease incentive asset and is amortized against revenues over the duration of the aircraft leases. In March 2016, the value of these warrants was recorded in additional paid in capital, except for the fair value of 0.28 million warrants, which was recorded in liabilities because the Company did not have enough authorized shares to settle these warrants. On May 12, 2016, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company at the annual meeting of stockholders to increase the number of authorized common shares and to approve the warrants in full as required under the rules of the Nasdaq Global Select Market. The stockholders' approval enabled features of the warrants that require the vested warrants of the first tranche and the warrants of the second and third tranches to be classified as financial derivatives as of May 12, 2016. Accordingly, the fair value of those warrants was measured and classified in liabilities on that date. As of June 30, 2016, the warrants classified as liabilities were remeasured to fair value, resulting in a non-operating gain of $5.9 million before the effect of taxes. As of June 30, 2016, the Company's liabilities reflected 9.83 million warrants having a fair value of $5.81 per share using a Black-Scholes pricing model.
The Company's earnings in future periods will be impacted by the number of warrants granted, the re-measurements of warrant fair value, amortizations of the lease incentive asset and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will likely differ from the guidance described above for financial reporting.
U.S. Military
A substantial portion of the Company's revenues is also derived from the U.S. Military. The U.S. Military awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the U.S. Military were approximately 13% and 14% of the Company's total revenues from continuing operations for the three and six month periods ended June 30, 2016, respectively, compared to 18% and17% for the corresponding periods of 2015. The Company's balance sheets included accounts receivable with the U.S. Military of $12.0 million and $9.7 million as of June 30, 2016 and December 31, 2015, respectively.
NOTE C—GOODWILL, INTANGIBLES AND OTHER ASSETS
The Company has one reporting unit that has goodwill, CAM. The carrying amounts of goodwill are as follows (in thousands):
|
| | | | |
| | CAM |
Carrying value as of December 31, 2015 | | $ | 34,395 |
|
Carrying value as of June 30, 2016 | | $ | 34,395 |
|
The Company's intangible assets by reportable segment are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Customer | | Airline | | |
| | Relationships | | Certificates | | Total |
| | ACMI Services | | |
Carrying value as of December 31, 2015 | | $ | 1,334 |
| | $ | 3,000 |
| | $ | 4,334 |
|
Amortization | | (140 | ) | | — |
| | (140 | ) |
Carrying value as of June 30, 2016 | | $ | 1,194 |
| | $ | 3,000 |
| | $ | 4,194 |
|
The customer relationship intangible amortizes through 2020. The airline certificates have an indefinite life and therefore are not amortized.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West"). West, through its two airlines, Atlantic Airlines Ltd. and West Atlantic Sweden AB, operates a fleet of aircraft on behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767 aircraft from the Company. The Company’s carrying value of West was $11.1 million and $13.1 million at June 30, 2016 and December 31, 2015, respectively. The carrying value is reflected in “Other Assets” in the Company’s consolidated balance sheets.
The Company's lease incentive is as follows (in thousands):
|
| | | | |
| | Lease |
| | Incentive |
Carrying value as of December 31, 2015 | | $ | — |
|
Warrants granted March 2016 (see Note B) | | 37,586 |
|
Amortization | | — |
|
Carrying value as of March 31, 2016 | | 37,586 |
|
Warrants granted May 2016 (see Note B) | | 13,758 |
|
Amortization | | (934 | ) |
Carrying value as of June 30, 2016 | | $ | 50,410 |
|
The lease incentive began to amortize in April 2016, with the commencement of certain aircraft leases, over the duration of the related leases.
NOTE D—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance sheets at fair values based on market values from identical or comparable transactions. The fair value of the Company’s money market funds and interest rate swaps is based on observable inputs (Level 2) from comparable market transactions. The use of significant unobservable inputs (Level 3) was not necessary in determining the fair value of the Company’s financial assets and liabilities.
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
As of June 30, 2016 | Fair Value Measurement Using | | Total |
| Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Cash equivalents—money market | $ | — |
| | $ | 12,932 |
| | $ | — |
| | $ | 12,932 |
|
Total Assets | $ | — |
| | $ | 12,932 |
| | $ | — |
| | $ | 12,932 |
|
Liabilities | | | | | | | |
Interest rate swap | $ | — |
| | $ | (815 | ) | | $ | — |
| | $ | (815 | ) |
Stock warrants (see note B) | $ | — |
| | $ | (57,128 | ) | | $ | — |
| | $ | (57,128 | ) |
Total Liabilities | $ | — |
| | $ | (57,943 | ) | | $ | — |
| | $ | (57,943 | ) |
|
| | | | | | | | | | | | | | | |
As of December 31, 2015 | Fair Value Measurement Using | | Total |
| Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Cash equivalents—money market | $ | — |
| | $ | 8,711 |
| | $ | — |
| | $ | 8,711 |
|
Total Assets | $ | — |
| | $ | 8,711 |
| | $ | — |
| | $ | 8,711 |
|
Liabilities | | | | | | | |
Interest rate swap | $ | — |
| | $ | (499 | ) | | $ | — |
| | $ | (499 | ) |
Total Liabilities | $ | — |
| | $ | (499 | ) | | $ | — |
| | $ | (499 | ) |
As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed and variable rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately $0.8 million more than the carrying value, which was $365.1 million at June 30, 2016. As of December 31, 2015, the fair value of the Company’s debt obligations was approximately $1.3 million more than the carrying value, which was $317.7 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.
NOTE E—PROPERTY AND EQUIPMENT
The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Flight equipment | $ | 1,415,283 |
| | $ | 1,372,099 |
|
Ground equipment | 37,923 |
| | 36,593 |
|
Leasehold improvements, facilities and office equipment | 26,347 |
| | 25,327 |
|
Aircraft modifications and projects in progress | 122,615 |
| | 52,717 |
|
| 1,602,168 |
| | 1,486,736 |
|
Accumulated depreciation | (667,949 | ) | | (611,335 | ) |
Property and equipment, net | $ | 934,219 |
| | $ | 875,401 |
|
CAM owned aircraft with a carrying value of $411.2 million and $369.2 million that were under leases to external customers as of June 30, 2016 and December 31, 2015, respectively.
NOTE F—DEBT OBLIGATIONS
Long term obligations consisted of the following (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2016 | | 2015 |
Unsubordinated term loan | $ | 93,067 |
| | $ | 100,708 |
|
Revolving credit facility | 240,000 |
| | 180,000 |
|
Aircraft loans | 32,031 |
| | 36,950 |
|
Total long term obligations | 365,098 |
| | 317,658 |
|
Less: current portion | (41,637 | ) | | (33,865 | ) |
Total long term obligations, net | $ | 323,461 |
| | $ | 283,793 |
|
The Company executed a syndicated credit agreement ("Senior Credit Agreement") in May 2011 which includes an unsubordinated term loan and a revolving credit facility. On May 31, 2016, the Company executed an amendment to the Senior Credit Agreement (the "Sixth Credit Amendment"). The Sixth Credit Amendment extended the maturity of the term loan and revolving credit facility to May 30, 2021, increased the capacity of the Revolving credit facility by $100.0 million to $425.0 million and increased the accordion feature such that the Company can now draw up to an additional $100.0 million, subject to the lenders' consent. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 150% of the outstanding balance of the term loan and the maximum capacity of the revolving credit facility or 175% of the outstanding balance of the term loan and the total funded revolving credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment, which was $425.0 million. The revolving credit facility has permitted additional indebtedness of $150.0 million. Each year, through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent.
The balances of the unsubordinated term loan are net of debt issuance costs of $0.7 million and $0.5 million for the periods ending June 30, 2016 and December 31, 2015, respectively. The Senior Credit Agreement provides for the issuance of letters of credit on the Company's behalf. As of June 30, 2016, the unused revolving credit facility totaled $176.5 million, net of draws of $240.0 million and outstanding letters of credit of $8.5 million. Under the terms of the Senior Credit Agreement, interest rates are adjusted quarterly based on the Company's earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"), its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current debt-to-EBITDA ratio, the LIBOR-based financing for the unsubordinated term loan and revolving credit facility bear a variable interest rate of 2.22% and 2.22%, respectively. The aircraft loans are collateralized by six aircraft, and amortize monthly with a balloon payment of approximately 20% with maturities between 2016 and early 2018. The interest rates for the aircraft loans range from 6.74% to 7.36% per annum payable monthly.
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. The Senior Credit Agreement contains covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt-to-EBITDA ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default, including unspecified events that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement. The Senior Credit Agreement limits the amount of dividends the Company can pay and the amount of common stock it can repurchase to $75.0 million during any calendar year, provided the Company's total debt-to-EBITDA ratio is under 2.75 times, after giving effect to the dividend or repurchase.
NOTE G—COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases portions of the air park in Wilmington, Ohio, under lease agreements with a regional port authority, the terms of which expire in May of 2019 and June of 2036 with options to extend the leases. The leased facilities include corporate offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component repair shop at the air park. ABX also has the non-exclusive right to use the airport, which includes one active runway, taxi ways and ramp space. Additionally, the Company leases certain equipment and airport facilities, office space, and maintenance facilities at locations outside of the airpark in Wilmington.
Purchase Commitments
The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767 passenger aircraft into a standard freighter configuration. The conversion primarily consists of the installation of a standard cargo door and loading system. At June 30, 2016, the Company owned eight Boeing 767-300 aircraft that were in or awaiting induction into the freighter modification process. The Company is committed to the purchase of additional aircraft and to induct six more aircraft into the freighter modification process during the remainder of 2016 and twelve aircraft during 2017. As of June 30, 2016, the Company's commitments to complete the conversions of aircraft it owns or has the contracts to purchase totaled $290.5 million. Additionally, the Company could incur a cancellation fee for part kits for any aircraft that is not inducted into conversion at IAI. The Company expects to complete the modification of five Boeing 767-300 aircraft during the remainder of 2016.
Guarantees and Indemnifications
Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or one or more other parties that are considered reasonable and customary (e.g. use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease or agreement.
Other
In September 2015, the Company entered into a joint venture agreement to establish an express cargo airline serving multiple destinations within the People's Republic of China (including Hong Kong, Macau and Taiwan) and surrounding countries. The airline will be based in Tianjin, China with registered capital of 400 million RMB (US$63 million). It will be established pending the receipt of required governmental approvals and plans to commence flight operations by mid 2017. The Company may offer the new airline aircraft leases to build its fleet. The Company expects to contribute $16 million to the joint venture through 2017.
The Company is currently a party to legal proceedings, including FAA enforcement actions, in various federal and state jurisdictions arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, the Company believes that its ultimate liability, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to the Company's financial condition or results of operations.
Employees Under Collective Bargaining Agreements
As of June 30, 2016, the flight crewmember employees of ABX and ATI were represented by the labor unions listed below:
|
| | |
Airline | Labor Agreement Unit | Percentage of the Company’s Employees |
ABX | International Brotherhood of Teamsters | 8.9% |
ATI | Air Line Pilots Association | 6.6% |
NOTE H—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Defined Benefit and Post-retirement Healthcare Plans
ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit pension plan for a major portion of its other ABX employees that meet minimum eligibility requirements. ABX also sponsors non-qualified defined benefit pension plans for certain employees. These non-qualified plans are unfunded. Employees are no longer accruing benefits under any of the defined benefit pension plans. ABX also sponsors a post-retirement healthcare plan for its ABX employees, which is unfunded. Benefits for covered individuals terminate upon reaching age 65 under the post-retirement healthcare plans.
The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long-term nature of these benefit payouts increases the sensitivity of certain estimates of our post-retirement costs. The assumptions considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts are discount rates and expected long-term investment returns on plan assets. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our results of operations. The Company's net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for both continuing and discontinued operations are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Pension Plans | | Post-Retirement Healthcare Plan | | Pension Plans | | Post-Retirement Healthcare Plan |
| 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
Service cost | $ | — |
| | $ | — |
| | $ | 31 |
| | $ | 44 |
| | $ | — |
| | $ | — |
| | 62 |
| | 88 |
|
Interest cost | 8,968 |
| | 8,646 |
| | 42 |
| | 48 |
| | 17,936 |
| | 17,292 |
| | 84 |
| | 96 |
|
Expected return on plan assets | (10,264 | ) | | (11,020 | ) | | — |
| | — |
| | (20,528 | ) | | (22,040 | ) | | — |
| | — |
|
Amortization of prior service cost | — |
| | — |
| | (26 | ) | | (136 | ) | | — |
| | — |
| | (52 | ) | | (272 | ) |
Amortization of net (gain) loss | 3,368 |
| | 1,793 |
| | 40 |
| | 73 |
| | 6,736 |
| | 3,586 |
| | 80 |
| | 146 |
|
Net periodic benefit cost (gain) | $ | 2,072 |
| | $ | (581 | ) | | $ | 87 |
| | $ | 29 |
| | $ | 4,144 |
| | $ | (1,162 | ) | | $ | 174 |
| | $ | 58 |
|
During the three and six month periods ended June 30, 2016, the Company contributed $0.3 million and $1.0 million to the pension plans, respectively. The Company expects to contribute an additional $5.3 million during the remainder of 2016.
NOTE I—INCOME TAXES
The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Income tax expense recorded through June 30, 2016 has been estimated utilizing a 38.5% rate based upon year-to-date income and projected results for the full year. Additionally, the Company recorded a discrete tax benefit of $0.7 million related to the conversion of employee stock awards during the first quarter of 2016. The final effective tax rate applied to 2016 will depend on the actual amount of non-deductible items, pre-tax book income generated by the Company for the full year and taxes related to the stock warrants granted to Amazon.
The Company has operating loss carryforwards for U.S. federal income tax purposes. Management expects to utilize the loss carryforwards to offset federal income tax liabilities in the future. Due to the Company's deferred tax assets, including its loss carryforwards, management does not expect to pay federal income taxes until 2019 or later. The Company may, however, be required to pay alternative minimum taxes and certain state and local income taxes before then.
NOTE J—DERIVATIVE INSTRUMENTS
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection from fluctuating interest rates, for at least fifty percent of the outstanding balance of the term loan. Accordingly, the Company entered into interest rate swaps. The Company entered into a new interest rate swap in February of 2016 having an initial notional value of $48.8 million and a forward start date of May 9, 2016. Under this swap, the Company will pay a fixed rate of 1.09% and receive a floating rate that resets monthly based on LIBOR. The interest rate swaps are described in the table below (in thousands):
|
| | | | | | | | | | | | | | |
| | | June 30, 2016 | | December 31, 2015 |
Expiration Date | Stated Interest Rate | | Notional Amount | | Market Value (Liability) | | Notional Amount | | Market Value (Liability) |
May 9, 2016 | 2.020 | % | | — |
| | — |
| | 50,625 |
| | (247 | ) |
June 30, 2017 | 1.183 | % | | 46,875 |
| | (298 | ) | | 50,625 |
| | (252 | ) |
May 5, 2021 | 1.090 | % | | 46,875 |
| | (517 | ) | | — |
| | — |
|
The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future fluctuations in LIBOR interest rates on derivatives held by the Company will result in the recording of unrealized gains and losses into the statement of operations. The Company recorded net effects on derivatives of a $0.3 million loss and a $0.3 million gain for the six month periods ended June 30, 2016 and 2015, respectively. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.
NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following components for the three and six month periods ending June 30, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Defined Benefit Pension | | Defined Benefit Post-Retirement | | Gains and Losses on Derivative | | Foreign Currency Translation | | Total |
Balance as of March 31, 2015 | | (80,049 | ) | | (670 | ) | | (2 | ) | | (1,499 | ) | | (82,220 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | 224 |
| | 224 |
|
Amounts reclassified from accumulated other comprehensive income: | | | | | | | | | | |
Actuarial costs (reclassified to salaries, wages and benefits) | | 1,793 |
| | 73 |
| | — |
| | — |
| | 1,866 |
|
Negative prior service cost (reclassified to salaries, wages and benefits) | | — |
| | (136 | ) | | — |
| | — |
| | (136 | ) |
Hedging gain (reclassified to interest expense) | | — |
| | — |
| | (41 | ) | | — |
| | (41 | ) |
Income Tax (Expense) or Benefit | | (651 | ) | | 23 |
| | 43 |
| | (80 | ) | | (665 | ) |
Other comprehensive income (loss), net of tax | | 1,142 |
| | (40 | ) | | 2 |
| | 144 |
| | 1,248 |
|
Balance as of June 30, 2015 | | (78,907 | ) | | (710 | ) | | — |
| | (1,355 | ) | | (80,972 | ) |
| | | | | | | | | | |
Balance as of December 31, 2014 | | (81,191 | ) | | (630 | ) | | 4 |
| | (1,059 | ) | | (82,876 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | (453 | ) | | (453 | ) |
Amounts reclassified from accumulated other comprehensive income: | | | | | | | | | | |
Actuarial costs (reclassified to salaries, wages and benefits) | | 3,586 |
| | 146 |
| | — |
| | — |
| | 3,732 |
|
Negative prior service cost (reclassified to salaries, wages and benefits) | | — |
| | (272 | ) | | — |
| | — |
| | (272 | ) |
Hedging gain (reclassified to interest expense) | | — |
| | — |
| | (50 | ) | | — |
| | (50 | ) |
Income Tax (Expense) or Benefit | | (1,302 | ) | | 46 |
| | 46 |
| | 157 |
| | (1,053 | ) |
Other comprehensive income (loss), net of tax | | 2,284 |
| | (80 | ) | | (4 | ) | | (296 | ) | | 1,904 |
|
Balance as of June 30, 2015 | | (78,907 | ) | | (710 | ) | | — |
| | (1,355 | ) | | (80,972 | ) |
|
| | | | | | | | | | | | | | | |
| | Defined Benefit Pension | | Defined Benefit Post-Retirement | | Gains and Losses on Derivative | | Foreign Currency Translation | | Total |
Balance as of March 31, 2016 | | (95,156 | ) | | (306 | ) | | — |
| | (1,138 | ) | | (96,600 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | 80 |
| | 80 |
|
Amounts reclassified from accumulated other comprehensive income: | | | | | | | | | | |
Actuarial costs (reclassified to salaries, wages and benefits) | | 3,368 |
| | 40 |
| | — |
| | — |
| | 3,408 |
|
Negative prior service cost (reclassified to salaries, wages and benefits) | | — |
| | (26 | ) | | — |
| | — |
| | (26 | ) |
Income Tax (Expense) or Benefit | | (1,222 | ) | | (5 | ) | | — |
| | (27 | ) | | (1,254 | ) |
Other comprehensive income (loss), net of tax | | 2,146 |
| | 9 |
| | — |
| | 53 |
| | 2,208 |
|
Balance as of June 30, 2016 | | (93,010 | ) | | (297 | ) | | — |
| | (1,085 | ) | | (94,392 | ) |
| | | | | | | | | | |
Balance as of December 31, 2015 | | (97,302 | ) | | (315 | ) | | — |
| | (1,395 | ) | | (99,012 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | 472 |
| | 472 |
|
Amounts reclassified from accumulated other comprehensive income: | | | | | | | | | | |
Actuarial costs (reclassified to salaries, wages and benefits) | | 6,736 |
| | 80 |
| | — |
| | — |
| | 6,816 |
|
Negative prior service cost (reclassified to salaries, wages and benefits) | | — |
| | (52 | ) | | — |
| | — |
| | (52 | ) |
Income Tax (Expense) or Benefit | | (2,444 | ) | | (10 | ) | | — |
| | (162 | ) | | (2,616 | ) |
Other comprehensive income (loss), net of tax | | 4,292 |
| | 18 |
| | — |
| | 310 |
| | 4,620 |
|
Balance as of June 30, 2016 | | (93,010 | ) | | (297 | ) | | — |
| | (1,085 | ) | | (94,392 | ) |
NOTE L—STOCK-BASED COMPENSATION
The Company's Board of Directors has granted stock incentive awards to certain employees and board members pursuant to a long term incentive plan which was approved by the Company's stockholders in May 2005 and in May 2015. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units with market conditions and non-vested restricted stock. The restrictions on the non-vested restricted stock awards lapse at the end of a specified service period, which is typically approximately three years from the date of grant. Restrictions could lapse sooner upon a business combination, death, disability or after an employee qualifies for retirement. The non-vested stock units will be converted into a number of shares of Company stock depending on performance and market conditions at the end of a specified service period, lasting approximately three years. The performance condition awards will be converted into a number of shares of Company stock based on the Company's average return on invested capital during the service period. Similarly, the market condition awards will be converted into a number of shares depending on the appreciation of the Company's stock compared to the NASDAQ Transportation Index. Board members were granted time-based awards with vesting periods of approximately six or twelve months. The Company expects to settle all of the stock unit awards by issuing new shares of stock. The table below summarizes award activity.
|
| | | | | | | | | | | | | |
| Six Months Ended |
| June 30, 2016 | | June 30, 2015 |
| Number of Awards | | Weighted average grant-date fair value | | Number of Awards | | Weighted average grant-date fair value |
Outstanding at beginning of period | 1,157,659 |
| | $ | 7.52 |
| | 1,406,550 |
| | $ | 6.21 |
|
Granted | 294,060 |
| | 15.43 |
| | 390,200 |
| | 9.61 |
|
Converted | (160,500 | ) | | 7.20 |
| | (263,791 | ) | | 6.42 |
|
Expired | — |
| | — |
| | (1,600 | ) | | 10.11 |
|
Forfeited | (9,200 | ) | | 10.23 |
| | — |
| | — |
|
Outstanding at end of period | 1,282,019 |
| | $ | 9.36 |
| | 1,531,359 |
| | $ | 7.04 |
|
Vested | 338,919 |
| | $ | 6.12 |
| | 329,059 |
| | $ | 5.61 |
|
The average grant-date fair value of each performance condition award, non-vested restricted stock award and time-based award granted by the Company in 2016 was $14.39, the fair value of the Company’s stock on the date of grant. The average grant-date fair value of each market condition award granted in 2016 was $19.65. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.1% and a volatility of 36.9% based on volatility over three years using daily stock prices.
For the six month periods ended June 30, 2016 and 2015, the Company recorded expense of $1.6 million and $1.6 million, respectively, for stock incentive awards. At June 30, 2016, there was $5.1 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of 1.5 years. As of June 30, 2016, none of the awards were convertible, 338,919 units of the Board members time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards could result in a maximum number of 1,544,219 additional outstanding shares of the Company’s common stock depending on service, performance and market results through December 31, 2018.
NOTE M—COMMON STOCK AND EARNINGS PER SHARE
Earnings per Share
The calculation of basic and diluted earnings per common share follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Numerator: | | | | | | | |
Earnings from continuing operations - basic | $ | 11,528 |
| | $ | 10,570 |
| | $ | 19,699 |
| | $ | 19,465 |
|
Gain from stock warrants, net of tax | (3,664 | ) | | — |
| | (3,405 | ) | | — |
|
Earnings from continuing operations - diluted | $ | 7,864 |
| | $ | 10,570 |
| | $ | 16,294 |
| | $ | 19,465 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares outstanding - basic | 63,267 |
| | 64,541 |
| | 63,452 |
| | 64,498 |
|
Common equivalent shares: | | | | | | | |
Effect of stock-based compensation awards | 861 |
| | 930 |
| | 835 |
| | 906 |
|
Effect of stock warrants | 2,635 |
| | — |
| | 1,623 |
| | — |
|
Weighted-average shares outstanding - diluted | 66,763 |
| | 65,471 |
| | 65,910 |
| | 65,404 |
|
| | | | | | | |
Basic earnings per share from continuing operations | $ | 0.18 |
| | $ | 0.16 |
| | $ | 0.31 |
| | $ | 0.30 |
|
Diluted earnings per share from continuing operations | $ | 0.12 |
| | $ | 0.16 |
| | $ | 0.25 |
| | $ | 0.30 |
|
The determination of diluted earnings per share in accordance with GAAP requires the inclusion, in the numerator, of the fair value re-measurement of the stock warrants recorded as a liability. The dilutive effect of the stock warrants on the weighted-average shares outstanding was calculated using the treasury stock method. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants by the average stock price during the period and comparing that amount with the number of warrants outstanding. The assumed proceeds are determined by multiplying the number of shares underlying the warrants by the strike price. The number of equivalent shares that were not included in weighted average shares outstanding assuming dilution, because their effect would have been anti-dilutive, was none and none at June 30, 2016 and 2015, respectively. The underlying warrants as of June 30, 2016, could result in 9.8 million additional outstanding shares of the Company’s common stock if the warrants are settled by tendering cash.
Purchase of Common Stock
The Company's Board of Directors has authorized management to repurchase outstanding common stock of the Company from time to time on the open market or in privately negotiated transactions. The authorization does not require the Company to repurchase a specific number of shares and the Company may terminate the repurchase program at any time. Upon the retirement of common stock repurchased, the excess purchase price over the par value for retired shares of common stock is recorded to additional paid-in-capital.
On July 5, 2016 the Company purchased 3,825,554 shares of the Company's common stock from its largest shareholder, Red Mountain Partners, L.P., a fund that is affiliated with Red Mountain Capital Partners, LLC (“Red Mountain”), a related party, for an aggregate purchase price of $50.0 million. The purchase price was previously negotiated based on the closing price of the shares on June 20, 2016. The purchase price of $13.07 per share represents a large block discount of 2.5% and 6.2%, respectively, from the volume-weighted average prices of $13.41 for the 10 trading days and $13.93 for the 60 trading days prior to June 20, 2016.
NOTE N—SEGMENT INFORMATION
The Company operates in two reportable segments. The CAM segment consists of the Company's aircraft leasing operations and its segment earnings include an allocation of interest expense. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI and charter service agreements that the Company has with other customers. Due to the similarities among the Company's airline operations, the airline operations are aggregated into a single reportable segment, ACMI Services. The Company's other activities, which include contracts with the U.S. Postal Service ("USPS"), the sale of aircraft parts and maintenance services, hub management services, facility and ground equipment maintenance services and management services for workers' compensation, while managed separately, are not large enough to constitute reportable segments and are combined in “All other” with inter-segment profit eliminations. Inter-segment revenues are valued at arms-length market rates. Cash, cash equivalents and deferred tax assets are reflected in Assets - All other below.
The Company's segment information from continuing operations is presented below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ending | | Six Months Ending |
| June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Total revenues: | | | | | | | |
CAM | $ | 47,439 |
| | $ | 45,632 |
| | $ | 99,165 |
| | $ | 88,486 |
|
ACMI Services | 114,145 |
| | 103,892 |
| | 229,101 |
| | 209,360 |
|
All other | 57,253 |
| | 32,179 |
| | 112,264 |
| | 67,785 |
|
Eliminate inter-segment revenues | (42,288 | ) | | (33,350 | ) | | (86,596 | ) | | (70,253 | ) |
Total | $ | 176,549 |
| | $ | 148,353 |
| | $ | 353,934 |
| | $ | 295,378 |
|
Customer revenues: | | | | | | | |
CAM | $ | 29,387 |
| | $ | 24,660 |
| | $ | 58,148 |
| | $ | 44,541 |
|
ACMI Services | 114,145 |
| | 103,892 |
| | 229,101 |
| | 209,360 |
|
All other | 33,017 |
| | 19,801 |
| | 66,685 |
| | 41,477 |
|
Total | $ | 176,549 |
| | $ | 148,353 |
| | $ | 353,934 |
| | $ | 295,378 |
|
Depreciation and amortization expense: | | | | | | | |
CAM | $ | 22,607 |
| | $ | 22,356 |
| | $ | 45,337 |
| | $ | 43,266 |
|
ACMI Services | 10,228 |
| | 9,027 |
| | 19,772 |
| | 17,118 |
|
All other | 297 |
| | 17 |
| | 557 |
| | 9 |
|
Total | $ | 33,132 |
| | $ | 31,400 |
| | $ | 65,666 |
| | $ | 60,393 |
|
Segment earnings (loss): | | | | | | | |
CAM | $ | 16,229 |
| | $ | 14,441 |
| | $ | 35,739 |
| | $ | 28,879 |
|
ACMI Services | (7,130 | ) | | 1,126 |
| | (17,486 | ) | | (1,445 | ) |
All other | 4,130 |
| | 1,840 |
| | 7,998 |
| | 4,916 |
|
Net unallocated interest expense | (24 | ) | | (428 | ) | | (370 | ) | | (885 | ) |
Net gain (loss) on financial instruments | 5,558 |
| | 264 |
| | 5,030 |
| | 251 |
|
Pre-tax earnings from continuing operations | $ | 18,763 |
| | $ | 17,243 |
| | $ | 30,911 |
| | $ | 31,716 |
|
The Company's assets are presented below by segment (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2016 | | 2015 |
Assets: | | | |
CAM | $ | 906,849 |
| | $ | 804,776 |
|
ACMI Services | 158,183 |
| | 154,852 |
|
All other | 86,648 |
| | 82,093 |
|
Total | $ | 1,151,680 |
| | $ | 1,041,721 |
|
Interest expense allocated to CAM was $2.6 million and $4.9 million for the three and six month periods ending June 30, 2016, respectively, compared to $2.4 million and $5.0 million for the corresponding periods of 2015, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations of Air Transport Services Group, Inc., and its subsidiaries. Air Transport Services Group, Inc. and its subsidiaries may hereinafter individually and collectively be referred to as "the Company", "we", "our" or "us" from time to time. The following discussion and analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") contained in this report and our Annual Report on Form 10-K for the year ended December 31, 2015.
INTRODUCTION
The Company leases aircraft, provides air cargo lift and performs aircraft maintenance and other support services primarily to the air cargo transportation and package delivery industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. The Company's principal subsidiaries include two independently certificated airlines, ABX Air, Inc. (“ABX”) and Air Transport International, Inc. (“ATI”), and an aircraft leasing company, Cargo Aircraft Management, Inc. (“CAM”).
The Company has two reportable segments: CAM, which leases Boeing 767 and Boeing 757 aircraft and aircraft engines, and ACMI Services, which primarily includes the cargo transportation operations of the Company's two airlines. The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance and insurance ("ACMI"). The Company's other business operations, which primarily provide support services to the transportation industry, include aircraft maintenance, aircraft parts sales, ground and material handling equipment maintenance and mail handling services. These operations do not constitute reportable segments due to their size.
UPDATE
DHL
The Company's largest customer is DHL Network Operations (USA), Inc. and its affiliates ("DHL"). The Company has had long-term contracts with DHL since August 2003. DHL accounted for 36% of the Company's consolidated revenues for the first six months of 2016 compared with 50% of the Company's consolidated revenues in the corresponding period in 2015. As of June 30, 2016, the Company, through CAM, leased 16 Boeing 767 aircraft to DHL; 14 of those were being operated by the Company's airlines for DHL under a separate crew, maintenance and insurance (“CMI”) agreement. Additionally, the airlines operated five CAM-owned Boeing aircraft and one DHL-leased aircraft under other operating arrangements with DHL.
Amazon
During September 2015, the Company began to operate a trial air network for Amazon Fulfillment Services, Inc. (“AFS”), a subsidiary of Amazon.com, Inc. (“Amazon”). The network grew to five Boeing 767 freighter aircraft through the first quarter of 2016 and included services for cargo handling and logistical support. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with AFS pursuant to which CAM will lease 20 Boeing 767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. As of June 30, 2016, the Company, through CAM, leased eight Boeing 767-200 freighter aircraft to AFS. The ATSA, which has a term of five years, also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the performance of hub and gateway services by the Company's subsidiary, LGSTX Services, Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that will be leased and operated under the ATSA. The Boeing 767-300 aircraft are being converted to freighter aircraft. The ATSA became effective on April 1, 2016.
Revenues from continuing operations performed for AFS comprised approximately 20% of the Company's consolidated revenues from continuing operations for the six month period ended June 30, 2016.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches, which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon execution of the Investment Agreement, grants Amazon the right to purchase approximately 12.81 million ATSG common shares, with the right to purchase 7.69 million common shares vesting upon issuance on March 8, 2016 and the right to purchase the remaining 5.12 million common shares vesting as the Company delivers additional aircraft leased under the ATSA, or as the Company achieves specified revenue targets in connection with the ATSA. The second tranche of warrants, which will grant Amazon a right to purchase approximately 1.59 million ATSG common shares, will be issued on March 8, 2018. The third tranche of warrants will be issued on September 8, 2020. The third tranche of warrants will grant Amazon the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement, and after giving effect to the warrants granted. The exercise price of the warrants will be $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants will be exercisable in accordance with its terms through March 8, 2021.
Our accounting for the warrants has been determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. The fair value of the warrants granted to Amazon is recorded as a lease incentive asset and is amortized against revenues over the duration of the aircraft leases. The corresponding value of those warrants is classified as liabilities and remeasured to fair value at the end of each reporting period with the resultant gain or loss recorded to non-operating results. The Company's earnings in future periods will be impacted by the number of warrants granted, the fair value re-measurement of warrants at the end of each period, lease incentive amortizations and the related income tax effects. Subsequent to June 30, 2016, recent appreciation in the market price for ATSG common shares indicates that a re-measurement of the warrants' fair value would result in a loss. For income tax calculations, the value and timing of related tax deductions will likely differ from the guidance described above for financial reporting. For additional information about the accounting for the warrants, see Note B to the accompanying unaudited condensed consolidated financial statements.
U.S. Military
Revenues from services performed for the U.S. Military were approximately 14% and 17% of the Company's total revenues from continuing operations for the six month periods ending June 30, 2016 and 2015, respectively.
Fleet Summary 2016
At June 30, 2016, the Company's combined operating fleet of owned freighter aircraft consisted of 36 Boeing 767-200 aircraft, 12 Boeing 767-300 aircraft, four Boeing 757-200 aircraft and four Boeing 757 "combi" aircraft. The Boeing 757 combi aircraft are capable of simultaneously carrying passengers and cargo containers on the main flight deck. At June 30, 2016, the Company owned eight Boeing 767-300 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.
Aircraft fleet activity during the first six months of 2016 is summarized below:
- ABX returned one Boeing 767-200 freighter to CAM, which was leased to an external lessee.
- CAM completed the modification of one Boeing 767-300 freighter aircraft and began to lease that aircraft, which is being operated by ABX, under a multi-year lease to an external customer.
- External lessees returned three Boeing 767-200 freighter aircraft to CAM, which were subsequently leased to ABX and ATI.
- ABX and ATI returned seven Boeing 767-200 freighter aircraft to CAM, which were all leased to an external lessee under multi-year leases. ABX and ATI were separately contracted to continue operating the aircraft for the lessee.
- Another external lessee returned one Boeing 767-200 freighter aircraft to CAM, and that aircraft is being operated by ABX, under a multi-year lease to an external customer.
- Another external lessee returned one Boeing 767-200 freighter aircraft to CAM and that aircraft is now being prepped for other leasing.
- CAM purchased four Boeing 767-300 passenger aircraft during the first quarter and three Boeing 767-300 passenger aircraft during the second quarter, all of which will be modified to standard freighter configuration.
The Company’s cargo aircraft fleet is summarized below as of June 30, 2016 ($'s in thousands):
|
| | | | | | | | | | | | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| ACMI Services | | CAM | | Total | | ACMI Services | | CAM | | Total |
In-service aircraft | | | | | | | | | | | |
Aircraft owned | | | | | | | | | | | |
Boeing 767-200 | 8 |
| | 27 |
| | 35 |
| | 13 |
| | 23 |
| | 36 |
|
Boeing 767-300 | 4 |
| | 8 |
| | 12 |
| | 4 |
| | 7 |
| | 11 |
|
Boeing 757-200 | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 4 |
|
Boeing 757-200 Combi | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 4 |
|
Total | 20 |
| | 35 |
| | 55 |
| | 25 |
| | 30 |
| | 55 |
|
Operating lease | | | | | | | | | | | |
Boeing 757-200 | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
Total | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
Other aircraft | | | | | | | | | | | |
Owned Boeing 767-200s staging for lease | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
Owned Boeing 767-300 for freighter modification | — |
| | 8 |
| | 8 |
| | — |
| | 2 |
| | 2 |
|
As of June 30, 2016, ACMI Services leased 20 of its in-service aircraft internally from CAM. As of June 30, 2016, nine of CAM's 27 Boeing 767-200 aircraft and five of CAM's eight Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, eight of CAM's 27 Boeing 767-200 aircraft were leased to AFS and operated by ABX or ATI. CAM leased the other ten Boeing 767-200 aircraft and three Boeing 767-300 aircraft to external customers, including two Boeing 767-200 aircraft to DHL that are being operated by another airline. The carrying value of the total in-service fleet as of June 30, 2016 was $707.9 million compared to $742.6 million as of December 31, 2015. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM.
RESULTS OF OPERATIONS
Summary
External customer revenues from continuing operations increased by $28.2 million to $176.5 million and increased by $58.6 million to $353.9 million for the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Excluding directly reimbursed ACMI revenues, customer revenues increased by $18.2 million and $43.1 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Increased customer revenues were driven by increased external aircraft leases and operations for AFS during 2016 compared to 2015 and partially offset lower Airline services revenues for DHL.
The consolidated net earnings from continuing operations were $11.5 million and $19.7 million for the three and six month periods ended June 30, 2016, respectively, compared to $10.6 million and $19.5 million for the corresponding periods of 2015. The consolidated net earnings from continuing operations includes gains of $3.7 million and $3.4 million after taxes, for the three and six month periods ended June 30, 2016, respectively, for the fair value re-measurement of warrants granted to Amazon earlier this year. The pre-tax earnings from continuing operations were $18.8 million and $30.9 million for the three and six month periods ended June 30, 2016, respectively, compared to $17.2 million and $31.7 million for the corresponding periods of 2015. Pre-tax earnings during the first six months of 2016 included a $1.2 million charge for the Company's share of capitalized debt issuance costs that were charged off when West Atlantic AB, a non-consolidated affiliate, restructured its debt. Pre-tax earnings also included $2.2 million and $4.4 million for the three and six months ended June 30, 2016, respectively, for the non-service components of retiree benefit costs. Pre-tax earnings also included net gains of $5.6 and $5.0 million for the three and six months
ended June 30, 2016, respectively due to the re-measurement of financial instrument fair values, primarily the warrants granted to Amazon. Adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation to the comparable GAAP metric follows) were $16.3 million and $32.5 million for the three and six month periods ended June 30, 2016, respectively, compared to $16.7 million and $30.9 million for the corresponding periods in 2015. Adjusted pre-tax earnings from continuing operations for the first half of 2016 improved compared to 2015 due to additional aircraft lease revenues, increased aircraft maintenance revenues, new cargo handling revenues and better ACMI Services aircraft utilization, partially offset by higher aircraft maintenance, personnel expenses, depreciation and ramp-up costs to support the expanding customer networks.
A summary of our revenues and pre-tax earnings from continuing operations is shown below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ending | | Six Months Ending |
| June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues from Continuing Operations: | | | | | | | |
CAM | | | | | | | |
Aircraft leasing and related services | $ | 48,373 |
| | $ | 45,632 |
| | $ | 100,099 |
| | $ | 88,486 |
|
Lease amortization against revenue | (934 | ) | | — |
| | (934 | ) | | — |
|
Total CAM | 47,439 |
| | 45,632 |
| | 99,165 |
| | 88,486 |
|
ACMI Services | | | | | | |
|
Airline services | 98,187 |
| | 97,897 |
| | 199,840 |
| | 195,592 |
|
Reimbursable | 15,958 |
| | 5,995 |
| | 29,261 |
| | 13,768 |
|
Total ACMI Services | 114,145 |
| | 103,892 |
| | 229,101 |
| | 209,360 |
|
Other Activities | 57,253 |
| | 32,179 |
| | 112,264 |
| | 67,785 |
|
Total Revenues | 218,837 |
| | 181,703 |
| | 440,530 |
| | 365,631 |
|
Eliminate internal revenues | (42,288 | ) | | (33,350 | ) | | (86,596 | ) | | (70,253 | ) |
Customer Revenues | $ | 176,549 |
| | $ | 148,353 |
| | $ | 353,934 |
| | $ | 295,378 |
|
| | | | | | | |
| | | | | | | |
Pre-Tax Earnings from Continuing Operations: | | | | | | | |
CAM, inclusive of interest expense | $ | 16,229 |
| | $ | 14,441 |
| | $ | 35,739 |
| | $ | 28,879 |
|
ACMI Services | (7,130 | ) | | 1,126 |
| | (17,486 | ) | | (1,445 | ) |
Other Activities | 4,130 |
| | 1,840 |
| | 7,998 |
| | 4,916 |
|
Net unallocated interest expense | (24 | ) | | (428 | ) | | (370 | ) | | (885 | ) |
Net gain on financial instrument re-measurements | 5,558 |
| | 264 |
| | 5,030 |
| | 251 |
|
Pre-Tax Earnings from Continuing Operations | 18,763 |
| | 17,243 |
| | 30,911 |
| | 31,716 |
|
Add non-service components of retiree benefit costs, net | 2,203 |
| | (260 | ) | | 4,406 |
| | (520 | ) |
Add debt issuance costs from non-consolidating affiliate | — |
| | — |
| | 1,229 |
| | — |
|
Add lease incentive amortization | 934 |
| | — |
| | 934 |
| | — |
|
Less net gain on financial instruments | (5,558 | ) | | (264 | ) | | (5,030 | ) | | (251 | ) |
Adjusted Pre-Tax Earnings from Continuing Operations | $ | 16,342 |
| | $ | 16,719 |
| | $ | 32,450 |
| | $ | 30,945 |
|
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding non-service components of retiree benefit costs, gains and losses for the fair value re-measurement of financial instruments, lease incentive amortizations and the charge off of debt issuance costs from the non-consolidated affiliate during the first quarter of 2016. We exclude these items from adjusted pre-tax earnings because they are distinctly different in their predictability or not closely related to our on-going operating activities. Management uses adjusted pre-tax earnings to compare the performance of core operating results between periods. Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.
ACMI Reimbursable revenues shown above include revenues related to fuel, landing fees, navigation fees, aircraft rent and certain other operating costs that are directly reimbursed to the airlines by their customers. Effective April 1, 2015, the cost of engine and airframe maintenance for all CAM-owned Boeing 767-200 aircraft operated for DHL is the responsibility of the airlines. For all periods presented above, airline services revenues include compensation for maintenance provided by the airlines on aircraft operated for DHL.
CAM Segment
CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the Company's airlines. Aircraft leases normally cover a term of five to eight years. In a typical leasing agreement, customers pay rent and maintenance deposits on a monthly basis.
As of June 30, 2016, CAM had a fleet of 56 cargo aircraft in service condition, 20 of them leased internally to the Company's airlines, 35 leased to external customers and one that was being staged for lease. A Boeing 767-300 passenger aircraft CAM had purchased in 2015 completed its modification to a freighter configuration and was leased to an external customer in February 2016 under a long-term contract. CAM has added two aircraft to its operating fleet since April 1, 2015.
CAM's revenues grew $1.8 million and $10.7 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015, primarily as a result of additional aircraft leases to external customers. As of June 30, 2016 and 2015, CAM had 35 and 29 aircraft under lease to external customers, respectively. Revenues from external customers totaled $29.4 million and $58.1 million for the three and six month periods ended June 30, 2016, respectively, compared to $24.7 million and $44.5 million for the corresponding periods of 2015. CAM's revenues from the Company's airlines totaled $18.1 million and $41.0 for the three and six month periods ended June 30, 2016, respectively, compared to $21.0 and $43.9 for the corresponding periods in 2015.
CAM's pre-tax earnings, inclusive of an interest expense allocation, grew by $1.8 million and $6.9 million during the three and six month periods ended June 30, 2016 to $16.2 million and $35.7 million, respectively, compared to the corresponding periods of 2015. Increased earnings reflect additional external lease revenues and lower interest expense, offset by higher depreciation expense for additional Boeing 767-300 aircraft, and increased expenses to place and support the larger fleet of Boeing aircraft.
As of June 30, 2016, one Boeing 767-300 passenger aircraft that CAM had purchased in 2015 was being modified from passenger to freighter configuration. Additionally, during the first six months of 2016, CAM purchased seven more Boeing 767-300 passenger aircraft, three during the second quarter, which are scheduled to begin freighter configuration.
CAM's agreement to lease 20 Boeing 767 freighter aircraft to AFS includes 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Leases for six of these aircraft began in April 2016, two more were executed during the remainder of the second quarter, and seven more aircraft leases are expected to be executed by the end of 2016. To fulfill the 20 aircraft requirement for AFS, CAM plans to add five more Boeing 767-300 freighter aircraft to its fleet by mid-2017. The remaining aircraft commitment for AFS will be filled through expiring aircraft leases presently with external CAM lessees, as well as aircraft currently being utilized by the Company's airlines for charter operations and other customer services. CAM's operating results will be negatively impacted by the amortization of the value of warrants issued to Amazon as a lease incentive. CAM's operating results will depend on our ability to provide freighter aircraft to AFS on an agreed schedule and within planned costs, as well as the value of warrant amortization.
ACMI Services Segment
The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance and insurance ("ACMI"). Our customers are usually responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for the U.S. Military, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of June 30, 2016, ACMI Services included 43 in-service aircraft, including 20 leased internally from CAM, one DHL-supplied aircraft operated by ATI, 14 CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the restated CMI agreement, and eight CAM-owned freighter aircraft which are under lease to AFS and operated by ATI and ABX under the ATSA.
Revenues from ACMI Services increased $10.3 million and $19.7 million during the three and six month periods ended June 30, 2016 to $114.1 million and $229.1 million, respectively, compared to the corresponding periods of 2015. Airline services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain operating expenses, decreased $0.3 million and increased $4.2 million for the three and six month periods
ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Flat revenues for the second quarter of 2016 compared to 2015 reflect the change in the airlines' portion of our revenues for Amazon beginning April 1, 2016. Beginning April 1, 2016 in conjunction with the long-term leases executed between Amazon and CAM, the related lease revenues are reflected under CAM. Improved revenues for the first half of 2016 compared to 2015 were driven by better fleet utilization and reflect a 12% increase in billable block hours.
ACMI Services incurred pre-tax losses of $7.1 million and $17.5 million during the three and six month periods ended June 30, 2016, respectively, compared to pre-tax earnings of $1.1 million and pre-tax losses of $1.4 million for the corresponding periods of 2015. Larger pre-tax losses in 2016 compared to 2015 were primarily a result of more scheduled airframe maintenance events during the first and second quarter of 2016, increased personnel costs including non-cash pension expenses and flight crew training to ramp up for the expanding CMI operations for customers.
Scheduled airframe maintenance expense increased $3.0 million and $7.5 million during the three and six month periods ended June 30, 2016, respectively compared to 2015. Airframe maintenance expense varies by quarter depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for maintenance. Pension expense for ACMI Services, including the non-service component, increased $2.4 million and $4.8 million as actuarially determined for the three and six month periods ended June 30, 2016. The airlines incurred $2.6 million of costs during the second quarter of 2016 related to flight crew training for expanding customer networks. Operating results for ACMI Services were also impacted by increased depreciation expense for two additional Boeing 767-300 aircraft in operation, start up costs for additional aircraft for AFS, and reductions in CMI revenues for DHL compared to 2015.
During 2016, we expect ACMI Services to be negatively impacted by higher expenses for start-up costs related to the AFS network, pension as actuarially determined, and aircraft maintenance expenses due to the schedule of heavy maintenance checks. Achieving profitability in ACMI Services will depend on a number of factors, including revenue levels for airline services, crewmember training costs, crewmember productivity, employee benefits, aircraft maintenance schedules and the number of aircraft we operate.
Other Activities
The Company sells aircraft parts and provides aircraft maintenance and modification services primarily through its aircraft maintenance and repair business, Airborne Maintenance and Engineering Services, Inc. ("AMES"). The Company provides package sorting and support services to the U.S. Postal Service (“USPS”) at five USPS facilities and similar services to AFS. The Company also leases and maintains ground support equipment and provides facility maintenance services. Other activities also include the management of workers' compensation claims under an agreement with DHL.
External customer revenues from all other activities were $33.0 million and $66.7 million for the three and six month periods ended June 30, 2016, respectively, compared to $19.8 million and $41.5 million for the corresponding periods in 2015. Revenues from our mail and package handling services increased $9.8 million and $21.9 million during the three and six month periods ended June 30, 2016, respectively, compared to 2015, reflecting higher contractual costs and increased mail volumes at the USPS facilities we operate, as well as cargo handling and logistical support for the AFS U.S. network during 2016. Revenues from AMES increased $3.6 million during the three and six month periods ended June 30, 2016. Revenues from aircraft maintenance can vary among periods due to the timing of scheduled maintenance events and the completion level of work during a period.
The pre-tax earnings from other activities increased by $2.3 million and $3.1 million during the three and six month periods ended June 30, 2016 to $4.1 million and $8.0 million, respectively, compared to the corresponding periods in 2015, reflecting increased aircraft maintenance services and mail and cargo handling services during 2016.
Discontinued Operations
Pre-tax earnings related to the former sorting operations were $0.1 million and $0.7 million for the first six months of 2016 and 2015, respectively. The results of discontinued operations primarily reflect the effects of defined benefit pension plans for former employees that supported sort operations under a hub service agreement with DHL.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $11.6 million and $20.4 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015, driven by higher headcount for flight operations, maintenance services and package handling services. Through June 30, 2016, the number of employees increased over 17% compared to June 30, 2015. We have added employees to support the AFS network, additional aircraft maintenance contracts and increased volumes for the USPS. Pension expense, including the non-service components of retiree benefit costs increased due to lower interest rates resulting in lower returns on plan assets.
Depreciation and amortization expense increased $1.7 million and $5.3 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. The increase reflects incremental depreciation expense for three Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since February 2015, as well as additional capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion and capital spending plans.
Maintenance, materials and repairs expense increased by $2.4 million and $7.0 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. The increase stemmed primarily from additional airframe checks during the first and second quarters of 2016 compared to 2015 and related component repairs, driven by increased block hours flown. Aircraft maintenance expenses can vary among periods due to the number of scheduled airframe maintenance checks and the scope of the checks that are performed.
Fuel expense increased by $4.9 million and $10.7 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. The average price per gallon of aviation fuel decreased about 33% and 27% for the first and second quarters of 2016, respectively, compared to 2015. Fuel expense includes the cost of fuel to operate U.S. Military charters, reimbursable fuel billed to DHL, AFS and other ACMI customers, as well as fuel used to position aircraft for service and for maintenance purposes. The decrease in the average price per gallon of fuel was offset by a higher level of customer-reimbursed fuel which increased $8.7 million and $15.2 million for the three and six month periods ended June 30, 2016, respectively, compared to 2015.
Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling and other airport services. Contracted ground and aviation services increased $5.3 million and $13.3 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015 due to additional volumes of mail and packages processed for the USPS and Amazon customers.
Travel expense increased by $0.3 million and $0.7 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. The increase reflects the higher level of employee headcount in airline operations during the first and second quarters of 2016 compared to 2015.
Rent expense increased by $0.1 million and decreased by $1.4 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Rent expense decreased during the first half of 2016 primarily due to the purchase of one Boeing 767-300 aircraft in February 2015 and the return of two Boeing 767-200 aircraft which were previously leased from an external provider through January 2015.
Landing and ramp expense, which includes the cost of deicing chemicals, increased by $0.5 million and $1.4 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Landing and ramp fees can vary based on the flight schedules and the airports that are used in a period.
Insurance expense increased by $0.5 million and $0.4 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Aircraft fleet insurance has increased due to additional aircraft operations during the second quarter of 2016 compared to 2015.
Other operating expenses increased by $4.7 million and $6.9 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Other operating expenses include
professional fees, employee training, utilities, the cost of parts sold to customers and gains on the disposition of equipment. Other operating expenses during the first quarter of 2016 included a $1.2 million charge for the Company's share of capitalized debt issuance costs that were written off when West Atlantic AB, a non-consolidated affiliate, restructured its debt. Other operating expenses also increased due to additional sales of aircraft parts during the first half of 2016 compared to 2015.
Interest expense decreased by $0.2 million and $0.6 million during the three and six month periods ended June 30, 2016, respectively, compared to the corresponding periods of 2015. Interest expense decreased due to more capitalized interest during 2016 compared to 2015.
The Company recorded net pre-tax gains of $5.6 million and $5.0 million on financial instruments during the three and six month periods ended June 30, 2016, respectively, compared to $0.3 million and $0.3 million during the comparable 2015 periods. The 2016 gains are primarily a result of remeasuring, as of June 30, 2016, the fair value of the stock warrants granted to Amazon in March of 2016. A decline in the fair value of the warrants between May 12, 2016, which was the previous re-measurement date, and June 30, 2016, corresponded to a decline in the traded price of the Company's shares and resulted in the non-cash gain. Management believes that non-cash gains and losses, as a result of quarterly re-measurements of the warrants as prescribed by accounting guidance, may vary widely among quarters.
The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Income taxes recorded through June 30, 2016 have been estimated utilizing a 38.5% rate based upon year-to-date income and projected results for the full year. The final effective tax rate applied to 2016 will depend on the actual amount of non-deductible items, pre-tax book income generated by the Company for the full year and taxes related to the stock warrants granted to Amazon.
The effective tax rate from continuing operations for the three and six month periods ended June 30, 2016 was 38.6% and 36.3%, respectively. The effective tax rate from continuing operations for the three and six month periods ended June 30, 2015 were 38.7% and 38.6%, respectively. The effective tax rate decreased during the first six months of 2016 compared to the corresponding period of 2015, due to the recognition of a discrete tax benefit of $0.7 million related to the conversion of employee stock awards during the first quarter of 2016.
As of December 31, 2015, the Company had operating loss carryforwards for U.S. federal income tax purposes of approximately $78.9 million, which will begin to expire in 2025 if not utilized before then. We expect to utilize the loss carryforwards to offset federal income tax liabilities in the future. As a result, we do not expect to pay federal income taxes until 2019 or later. However, the Company may be required to pay alternative minimum taxes and certain state and local income taxes before then. The Company's taxable income earned from international flights is primarily sourced to the United States under international aviation agreements and treaties. If we begin to operate in countries without such agreements, the Company could incur additional foreign income taxes.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $97.3 million and $97.2 million for the first six months of 2016 and 2015, respectively. Operating cash flows during the second quarter of 2015 included additional customer payments related to aircraft maintenance provided in previous periods. The cash flows generated from operating activities during the first half of 2016 reflect additional aircraft leases and improved fleet utilization. Cash outlays for pension contributions for the first six months of 2016 were $1.0 million compared to $0.9 million for the corresponding period of 2015.
Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were $125.1 million and $76.3 million for the first six months of 2016 and 2015, respectively. Capital expenditures in 2016 included $95.6 million for the acquisition of seven Boeing 767-300 aircraft, freighter modification costs and next generation navigation modifications; $11.2 million for required heavy maintenance; and $18.3 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures during 2015 included the acquisition of two Boeing 767-300 aircraft and next
generation navigation and communication modifications; $31.0 million for required heavy maintenance; and $14.5 million for other equipment, including purchases of aircraft engines and rotables.
Net cash provided by financing activities was $35.3 million for the first six months of 2016 compared to $30.3 million net cash used in financing activities during the corresponding period of 2015. During the first six months of 2016, we drew $60.0 million from the revolving credit facility under the Senior Credit Agreement to fund capital spending and we made debt principal payments of $12.6 million. Our borrowing activities were necessary to acquire and modify aircraft for deployment into air cargo markets. During the first six months of 2016, we spent $10.8 million to buy 819,991 shares of the Company's common stock in the open market, pursuant to a share repurchase plan authorized in 2014 and amended in May 2016 by the Board of Directors to repurchase up to $100 million of the Company's common stock.
Commitments
We estimate that capital expenditures for 2016 will total $315 million, of which $80 million will be for aircraft maintenance and other equipment and $235 million will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance the capital expenditures from current cash balances, future operating cash flow and the Senior Credit Agreement. The Company outsources a significant portion of the aircraft freighter modification process to a non-affiliated third party. The modification primarily consists of the installation of a standard cargo door and loading system. For additional information about the Company's aircraft modification obligations, see Note G of the accompanying financial statements.
In September 2015, we entered into a joint venture agreement to establish an express cargo airline serving multiple destinations within the People's Republic of China (including Hong Kong, Macau and Taiwan) and surrounding countries. The airline will be based in Tianjin, China with registered capital of 400 million RMB (US$63 million). It will be established pending the receipt of required governmental approvals and plans to commence flight operations by mid 2017. We expect to contribute $16 million to the joint venture over the coming months. We plan to offer the new airline aircraft leases to build its fleet.
Liquidity
The Company has a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term loan of $93.1 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn $240.0 million, net of repayments, as of June 30, 2016. The revolving credit facility has a capacity of $425.0 million, permitted additional indebtedness of $150.0 million, and an accordion feature whereby the Company can draw up to an additional $100.0 million subject to the lenders' consent. The Senior Credit Agreement is collateralized by the Company's fleet of Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. Under the amended terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 150% of the outstanding balances of the term loan and the maximum capacity of the revolving credit facility or 175% of the outstanding balance of the term loan and the total funded revolving credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment of $425 million. From May 5, 2016, and each year thereafter through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent.
Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt-to-EBITDA ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.
Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding debt level to EBITDA (earnings before interest, taxes, depreciation and amortization expenses). At the Company's current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving credit facility both bear a variable interest rate of 2.22%.
At June 30, 2016, the Company had $25.2 million of cash balances. The Company had $176.5 million available under the revolving credit facility, net of outstanding letters of credit which totaled $8.5 million. As specified under
the terms of ABX's CMI agreement with DHL, the unsecured note payable to DHL extinguished without payment at March 31, 2015. We believe that the Company's current cash balances and forecasted cash flows provided from its operating agreements, combined with its Senior Credit Agreement, will be sufficient to meet our cash requirements for at least the next 12 months. We periodically review our liquidity position and may decide to raise additional funds on an opportunistic basis from a variety of additional sources, including through issuances of equity or debt in public or private offerings.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2016, we were not involved in any material unconsolidated SPE transactions.
Certain of our operating leases and agreements contain indemnification obligations to the lessor or one or more other parties that are considered usual and customary (e.g. use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after the expiration of the respective lease or agreement. No amounts have been recognized in our financial statements for the underlying fair value of guarantees and indemnifications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as certain disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. In certain cases, there are alternative policies or estimation techniques which could be selected. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.
For information regarding recently issued accounting pronouncements and the expected impact on our annual statements, see Note A "SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES" in the accompanying notes to the Condensed Consolidated Financial Statements included in Part II, Item 1 of this Form 10-Q.
Notes B and C in the accompanying notes to the Condensed Consolidated Financial Statements describe our accounting policies for stock warrants and lease incentives. The fair value of the warrants granted to Amazon is determined using a Black-Scholes pricing model and considering the Company’s common stock price and various assumptions, such as the volatility of the Company’s common stock, the expected dividend yield, and the risk-free interest rate. The Company's operating results in future periods will be impacted by the number of warrants granted, the re-measurements of warrants, intangible amortizations and the related income tax effects. There have been no other material changes to our critical accounting policies and estimates from the information provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates included in our Annual Report on Form 10-K for the year ended December 31, 2015.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk for changes in interest rates and changes in the price of jet fuel. The risk associated with jet fuel, however, is largely mitigated by reimbursement through the agreements with our customers.
No significant changes have occurred to the market risks the Company faces since information about those risks was disclosed in item 7A of the Company's 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2016.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2016, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no changes in internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently a party to legal proceedings, including FAA enforcement actions, in various federal and state jurisdictions arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, we believe that the Company's ultimate liability, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.
ITEM 1A. RISK FACTORS
The Company faces risks that could adversely affect its condition or results of operations. Many of these risks are disclosed in Item 1A of the Company's 2015 Annual Report on form 10-K, filed with the Securities and Exchange Commission on March 14, 2016. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In May 2016, the Board amended the Company's common stock repurchase program increasing the amount that management may repurchase from $50.0 million to $100.0 million of outstanding common stock. The Board's authorization does not require the Company to repurchase a specific number of shares and the Board may terminate the repurchase program at any time. Repurchases may be made from time to time on the open market or in privately negotiated transactions. All of the repurchases done by the Company during the second quarter of 2016 were in the open market. There is no expiration date for the repurchase program. The following table summarizes the Company's repurchases of its common stock during the second quarter of 2016:
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program |
April 1, 2016 through April 30, 2016 | | 257,429 |
| | $ | 14.82 |
| | 257,429 |
| | $ | 32,762,012 |
|
May 1, 2016 through May 31, 2016 | | 168,500 |
| | $ | 13.49 |
| | 168,500 |
| | $ | 80,488,295 |
|
June 1, 2016 through June 30, 2016 | | 124,400 |
| | $ | 13.26 |
| | 124,400 |
| | $ | 78,838,271 |
|
Total for the quarter | | 550,329 |
| | $ | 14.06 |
| | 550,329 |
| |