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 subsidiaries lease aircraft, provide contracted airline operations, ground services, aircraft modification and maintenance services and other support services mainly to the air transportation, e-commerce and package delivery industries. The Company's subsidiaries offer 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 Company's airlines, ABX Air, Inc. (“ABX”), Air Transport International, Inc. (“ATI”) and Omni Air International, LLC ("OAI" ) each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. The Company provides air transportation services to a concentrated base of customers. The Company provides a combination of aircraft, crews, maintenance and insurance services for a customer's transportation network through customer "CMI" and "ACMI" agreements and through charter contracts in which aircraft fuel is also included. In addition to its aircraft leasing and airline services, the Company sells aircraft parts, provides aircraft maintenance and modification services, equipment maintenance services and arranges load transfer and package sorting services for customers.
Basis of Presentation
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). 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, 2019 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 air cargo 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. Inter-company balances and transactions are eliminated. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Investments in affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. Under 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. Investments in affiliates in which the Company does not exercise control or have significant influence are reflected at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
On February 1, 2019, the Company acquired a group of companies under common control, referred to as TriFactor. Trifactor resells material handling equipment and provides engineering design solutions for warehousing, retail distribution and e-commerce operations. Revenues and operating expenses include the activities of TriFactor for periods since its acquisition by the Company. The excess purchase price over the estimated fair value of net assets acquired
was recorded as goodwill. The acquisition of TriFactor did not have a significant impact on the Company's financial statements or results of operations.
COVID-19 Uncertainties
In late 2019, an outbreak of a coronavirus, COVID-19, was identified in China and has since spread globally, becoming a pandemic. The pandemic has had an impact on our operations and financial results. Beginning in late February 2020, revenues were negatively impacted when customers began canceling scheduled passenger flights and the Company began to incur additional costs, including expenses to protect employees. Additionally, disruptions to the Company's operations, such as shortages of personnel, shortages of parts, maintenance delays, shortages of transportation and hotel accommodations for flight crews, facility closures and other issues can be caused by the pandemic.
The extent of the impact that the coronavirus pandemic will have on future financial and operational results will depend on developments, including the duration, spread, severity and any recurrence of the COVID-19 virus; the duration and scope of government orders and restrictions; and the extent of the pandemic on overall economic conditions. These are highly uncertain. If the cornavirus pandemic persists or reemerges or expectations of operating cash flows decline significantly, the value of airframes, engines and certain intangible assets could decline significantly for the foreseeable future. If such circumstances occur or appear likely to occur, the Company may need to impair the carrying value of certain recorded assets.
Currently, the pandemic has not had a significant financial impact on the Company's leasing business or its airline operations for customers' freight networks. Management believes that the Company's current cash balances and forecasted cash flows provided from its customer leases and operating agreements, combined with its Senior Credit Agreement, will be sufficient to fund operations, capital spending and scheduled debt payments for at least the next 12 months.
Accounting Standards Updates
Effective January 1, 2019, the Company adopted the FASB's ASU No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year financial statements. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations and consolidated statement of cash flows. The adoption of Topic 842 resulted in the recognition of ROU assets and corresponding lease liabilities as of January 1, 2019 in the amount of $52.6 million for leases classified as operating leases. Topic 842 also applies to the Company's aircraft lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's accounting for its customer lease agreements.
The Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company to carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification, and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease exception policy, permitting it to exclude the recognition requirements for leases with terms of 12 months or less. See Note H for additional information about leases.
In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), with the intent of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments to Nonemployees" ("ASC 505-50") which was previously applied by the Company for warrants granted to Amazon.com, Inc. ("Amazon") as customer incentives. As a result of ASU 2018-07, the Company applied accounting guidance for financial instruments to the unvested warrants conditionally granted to Amazon in conjunction with an investment agreement reached with Amazon on December 22, 2018. Applying ASU 2018-07 as of January 1, 2019, through the modified retrospective approach, resulted in the recognition of $176.9 million for unvested warrant liabilities, $100.1
million for customer incentive assets and cumulative-effect adjustments of $71.4 million, net of tax, to reduce retained earnings for customer incentives that were not probable of being realized.
The adoption of ASU 2018-07 on January 1, 2019 did not have an impact on the accounting for vested warrants.
The Company adopted "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ("ASU 2016-13") on January 1, 2020. Under ASU 2016-13, an entity is required to utilize an “expected credit loss model” on certain financial instruments, including trade receivables. This model requires an entity to estimate expected credit losses over the lifetime of the financial asset including trade receivables that are not past due. Operating lease receivables are not within the scope of Topic 326. The Company's adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements or related disclosures.
NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
The carrying amounts of goodwill, by operating segment, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAM
|
|
ACMI Services
|
|
All Other
|
|
Total
|
Carrying value as of December 31, 2019
|
|
$
|
153,290
|
|
|
$
|
234,571
|
|
|
$
|
8,113
|
|
|
$
|
395,974
|
|
Carrying value as of March 31, 2020
|
|
$
|
153,290
|
|
|
$
|
234,571
|
|
|
$
|
8,113
|
|
|
$
|
395,974
|
|
The Company's acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
|
|
Amortizing
|
|
|
|
|
Certificates
|
|
Intangibles
|
|
Total
|
Carrying value as of December 31, 2019
|
|
$
|
9,000
|
|
|
$
|
122,680
|
|
|
$
|
131,680
|
|
Amortization
|
|
—
|
|
|
(2,859
|
)
|
|
(2,859
|
)
|
Carrying value as of March 31, 2020
|
|
$
|
9,000
|
|
|
$
|
119,821
|
|
|
$
|
128,821
|
|
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and STC intangibles, over 3 to 19 years.
Stock warrants issued to a lessee (see Note C) as an incentive are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligations and amortized against revenues over the duration of related aircraft leases. The Company's lease incentive granted to the lessee was as follows (in thousands):
|
|
|
|
|
|
|
|
Lease
|
|
|
Incentive
|
Carrying value as of December 31, 2019
|
|
$
|
146,678
|
|
Amortization
|
|
(4,857
|
)
|
Carrying value as of March 31, 2020
|
|
$
|
141,821
|
|
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West"). West, through its two airlines, West Atlantic UK and West Atlantic Sweden, 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. In April 2019, West issued additional shares to a new investor in conjunction with a capital investment and purchase agreement which reduced the Company's ownership to approximately 10% and reduced the Company's influence over West. West leases three Boeing 767 aircraft from the Company.
On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates approval of a supplemental type certificate from the FAA in 2020. The Company expects to make contributions equal to its 49% ownership percentage of the program's total costs over the next two years. During the first three months of
2020 and 2019, the Company contributed $3.0 million and $3.8 million to the joint venture, respectively. The Company accounts for its investment in the aircraft conversion joint venture under the equity method of accounting, in which the carrying value of each investment is reduced for the Company's share of the non-consolidated affiliates' operating results.
The carrying value of West and the joint venture totaled $11.2 million and $10.9 million at March 31, 2020 and December 31, 2019, respectively, and are reflected in “Other Assets” in the Company’s consolidated balance sheets. The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded carrying value and the fair value of the investment. The fair value is generally determined using an income approach based on discounted cash flows or using negotiated transaction values.
NOTE C—SIGNIFICANT CUSTOMERS
DHL
The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 11% and 15% of the Company's consolidated revenues from continuing operations for the three month periods ending March 31, 2020 and 2019, respectively. The Company’s balance sheets include accounts receivable with DHL of $5.4 million and $12.7 million as of March 31, 2020 and December 31, 2019, 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. The Company also provides additional air cargo transportation services for DHL through 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
The Company has been providing freighter aircraft and services for cargo handling and logistical support for Amazon.com Services, LLC ("ASI"), successor to Amazon.com Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon") since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases 20 Boeing 767 freighter aircraft to ASI, 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 also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the management of ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became effective on April 1, 2016 and had an original term of five years.
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 the execution of the Investment Agreement and all of which are now fully vested, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the first 7.69 million common shares vesting upon issuance on March 8, 2016, and the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA. The second tranche of warrants, which were issued and vested on March 8, 2018, grants Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants will be issued and vest on September 8, 2020, and 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 is $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 are exercisable in accordance with its terms through March 8, 2021.
On December 22, 2018 the Company announced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years and 4) extend the ATSA by five years through March 2026, with an option to extend for an additional three years. The Company delivered six of the 767-300 aircraft in 2019 and plans to deliver the remainder in 2020. All ten of these aircraft leases will be for ten years.
In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered into another Investment Agreement on December 20, 2018. Pursuant to the 2018 Investment Agreement, Amazon was issued warrants for 14.8 million common shares which could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the 2016 agreements. Warrants for 11.1 million common shares vested as existing leases were extended and six additional aircraft leases were executed and added to the ATSA operations. More of these warrants will vest as four additional aircraft leases were executed. These new warrants will expire if not exercised within seven years from their issuance date. They have an exercise price of $21.53 per share.
Additionally, Amazon will be able to earn incremental warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of the Company, by leasing up to seventeen more cargo aircraft from the Company before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease.
The warrants issuable under these new agreements with Amazon required an increase in the number of authorized common shares of the Company. Management submitted proposals for shareholder consideration at the Company's annual meeting of shareholders on May 9, 2019 calling for an increase in the number of authorized common shares and approval of the warrants as required under the rules of the Nasdaq Global Select Market. Both proposals were approved by shareholders on May 9, 2019.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for financial instruments. Warrant obligations are marked to fair value at the end of each reporting period. The value of warrants is recorded as a customer incentive asset if it is probable of vesting at the time of grant and further changes in the fair value of warrant obligations are recorded to earnings. Upon a warrant vesting event, the customer incentive asset is amortized as a reduction of revenue over the duration of the related revenue contract.
As of March 31, 2020, the Company's liabilities reflected 14.8 million warrants from the 2016 Investment Agreement having a fair value of $129.7 million and 24.7 million warrants from the 2018 Amazon agreements having a fair value of $135.4 million. During the three month periods ended March 31, 2020 and 2019, the re-measurements of all the warrants to fair value resulted in net non-operating gains of $118.0 million and $8.3 million before the effect of income taxes, respectively.
Revenues from Amazon comprised approximately 29% and 18% of the Company's consolidated revenues from continuing operations for the three month periods ending March 31, 2020 and 2019, respectively. The Company’s balance sheets include accounts receivable with Amazon of $46.8 million and $50.1 million as of March 31, 2020 and December 31, 2019, respectively.
The Company's earnings in future periods will be impacted by 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 differ from the guidance described above for financial reporting.
DoD
The Company is a provider of cargo and passenger airlift services to the DoD. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the DoD were approximately 30% and 37% of the Company's total revenues from continuing operations for the years ended March 31, 2020 and 2019, respectively. The Company's balance sheets included accounts receivable with the DoD of $59.4 million and $44.5 million as of March 31, 2020 and December 31, 2019, respectively.
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 comparable transactions. The fair value of the Company’s money market funds, convertible note, convertible note hedges and interest rate swaps are based on observable inputs (Level 2) from comparable market transactions.
The fair value of the stock warrant obligations resulting from aircraft leased to Amazon were determined using a Black-Scholes pricing model which considers various assumptions, including the Company’s common stock price, the volatility of the Company’s common stock, the expected dividend yield, exercise price and the risk-free interest rate (Level 2 inputs). The fair value of the stock warrant obligations for unvested stock warrants, conditionally granted to Amazon for the execution of incremental, future aircraft leases, include additional assumptions including the expected exercise prices and the probabilities that future leases will occur (Level 3 inputs).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
Fair Value Measurement Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents—money market
|
$
|
—
|
|
|
$
|
957
|
|
|
$
|
—
|
|
|
$
|
957
|
|
Total Assets
|
$
|
—
|
|
|
$
|
957
|
|
|
$
|
—
|
|
|
$
|
957
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
(19,052
|
)
|
|
$
|
—
|
|
|
$
|
(19,052
|
)
|
Stock warrant obligations
|
—
|
|
|
(227,082
|
)
|
|
(38,022
|
)
|
|
(265,104
|
)
|
Total Liabilities
|
$
|
—
|
|
|
$
|
(246,134
|
)
|
|
$
|
(38,022
|
)
|
|
$
|
(284,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Fair Value Measurement Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents—money market
|
$
|
—
|
|
|
$
|
1,129
|
|
|
$
|
—
|
|
|
$
|
1,129
|
|
Interest rate swap
|
—
|
|
|
111
|
|
|
—
|
|
|
111
|
|
Total Assets
|
$
|
—
|
|
|
$
|
1,240
|
|
|
$
|
—
|
|
|
$
|
1,240
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
(8,237
|
)
|
|
$
|
—
|
|
|
$
|
(8,237
|
)
|
Stock warrant obligation
|
—
|
|
|
(340,767
|
)
|
|
(42,306
|
)
|
|
(383,073
|
)
|
Total Liabilities
|
$
|
—
|
|
|
$
|
(349,004
|
)
|
|
$
|
(42,306
|
)
|
|
$
|
(391,310
|
)
|
As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately $72.4 million less than the carrying value, which was $1,560.6 million at March 31, 2020. As of December 31, 2019, the fair value of the Company’s debt obligations was approximately $2.7 million less than the carrying value, which was $1,484.4 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):
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Flight equipment
|
$
|
2,649,370
|
|
|
$
|
2,598,113
|
|
Ground equipment
|
60,400
|
|
|
59,628
|
|
Leasehold improvements, facilities and office equipment
|
34,173
|
|
|
33,649
|
|
Aircraft modifications and projects in progress
|
297,791
|
|
|
220,827
|
|
|
3,041,734
|
|
|
2,912,217
|
|
Accumulated depreciation
|
(1,206,558
|
)
|
|
(1,146,197
|
)
|
Property and equipment, net
|
$
|
1,835,176
|
|
|
$
|
1,766,020
|
|
CAM owned aircraft with a carrying value of $887.1 million and $889.3 million that were under leases to external customers as of March 31, 2020 and December 31, 2019, respectively.
NOTE F—DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Unsubordinated term loan
|
$
|
622,751
|
|
|
$
|
626,277
|
|
Revolving credit facility
|
217,900
|
|
|
632,900
|
|
Senior notes
|
492,675
|
|
|
—
|
|
Convertible debt
|
215,663
|
|
|
213,461
|
|
Other financing arrangements
|
11,651
|
|
|
11,746
|
|
Total debt obligations
|
1,560,640
|
|
|
1,484,384
|
|
Less: current portion
|
(13,773
|
)
|
|
(14,707
|
)
|
Total long term obligations, net
|
$
|
1,546,867
|
|
|
$
|
1,469,677
|
|
The Company utilizes a syndicated credit agreement ("Senior Credit Agreement") which includes an unsubordinated term loan and a revolving credit facility. In November 2019, the Senior Credit Agreement was amended to increase the maximum revolver capacity from $645.0 million to $750.0 million, combine two terms loans into one loan and reduce the interest rate spread of the LIBOR based financing at various ratios of the Company's debt to its earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"). This amendment also extended the agreement to November 2024 provided certain liquidity measures are maintained during 2024, and added incremental accordion capacity based on debt ratios. In January 2020, the Company chose to lower the maximum revolver capacity to $600.0 million in conjunction with the issuance of senior unsecured notes. As of March 31, 2020, the unused revolving credit facility available to the Company at the trailing twelve month EBITDA level was $297.0 million, and additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants, was limited to $250.0 million.
The balance of the unsubordinated term loan is net of debt issuance costs of $8.3 million and $8.7 million as of March 31, 2020 and December 31, 2019, respectively. The balance of the Senior Notes is net of debt issuance costs of $7.3 million as of March 31, 2020. Under the terms of the Senior Credit Agreement, interest rates are adjusted at least quarterly based on the Company's 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, Senior Notes and revolving credit facility bear variable interest rates of 2.865%, 4.75% and 2.805%, respectively.
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 115% of the outstanding balance of the term loan and the total funded revolving credit facility. 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 $600.0 million.
The Senior Credit Agreement limits the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any calendar year, provided the Company's total debt to EBITDA ratio is under 3.00 times, after giving effect to the dividend or repurchase. The Senior Credit Agreement contains covenants, including a maximum permitted total debt to EBITDA ratio, a fixed charge covenant ratio requirement, limitations on certain additional indebtedness, and on guarantees of indebtedness. 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.
On January 28, 2020, the Company, through a subsidiary, completed a debt offering of $500.0 million in senior unsecured notes (the “Senior Notes”). The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes will mature on February 1, 2028. The Senior Notes contain customary events of default and certain covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement. The net proceeds of $495.0 million from the Senior Notes were used to pay down the revolving credit facility. The Senior Notes do not require principal payments in 2020.
In September 2017, the Company issued $258.8 million aggregate principal amount of 1.125% Convertible Senior Notes due 2024 ("Convertible Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Convertible Notes bear interest at a rate of 1.125% per year payable semi-annually in arrears on April 15 and October 15, beginning April 15, 2018. The Convertible Notes mature on October 15, 2024, unless repurchased or converted in accordance with their terms prior to such date. The Convertible Notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables. Conversion of the Convertible Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning in any calendar quarter commencing after December 31, 2017 and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon the occurrence of certain fundamental changes, holders of the Convertible Notes can require the Company to repurchase their notes at the cash repurchase price equal to the principal amount of the notes, plus any accrued and unpaid interest.
The Convertible Notes may be settled in cash, the Company’s common shares or a combination of cash and the Company’s common shares, at the Company’s election. The initial conversion rate is 31.3475 common shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $31.90 per common share). If a “make-whole fundamental change” (as defined in the offering circular with the Convertible Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time.
In conjunction with the Convertible Notes, the Company purchased convertible note hedges under privately negotiated transactions for $56.1 million, having the same number of the Company's common shares, 8.1 million shares and same strike price of $31.90, that underlie the Convertible Notes. The convertible note hedges are expected to reduce the potential equity dilution with respect to the Company's common stock, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the Convertible Notes. The Company's current intent and policy is to settle all Note conversions through a combination settlement which satisfies the principal amount of the Convertible Notes outstanding with cash. The Convertible Notes could have a dilutive effect on the computation of earnings per share in accordance with accounting principles to the extent that the average traded market price of the Company’s common shares for a reporting period exceeds the conversion price.
The conversion feature of the Convertible Notes required bifurcation from the principal amount under the applicable accounting guidance. Settlement provisions of the Convertible Notes and the convertible note hedges required cash settlement of these instruments until the Company's shareholders increased the number of authorized shares of common stock to cover the full number of shares underlying the Convertible Notes. As a result, the conversion feature of the Convertible Notes and the convertible note hedges were initially accounted for as liabilities and assets, respectively,
and marked to market at the end of each period. The fair value of the note conversion obligation at issuance was $57.4 million.
On May 10, 2018, the Company's shareholders increased the number of authorized shares of common stock to cover the full number of shares underlying the Convertible Notes. The Company reevaluated the Convertible Notes and convertible note hedges under the applicable accounting guidance including ASC 815, "Derivatives and Hedging," and determined that the instruments, which meet the definition of derivative and are indexed to the Company's own stock, should be classified in shareholder's equity. On May 10, 2018, the fair value of the conversion feature of the Convertible Notes and the convertible note hedges of $51.3 million and $50.6 million, respectively, were reclassified to paid-in capital and are no longer remeasured to fair value.
The net proceeds from the issuance of the Convertible Notes was approximately $252.3 million, after deducting initial issuance costs. These unamortized issuance costs and discount are being amortized to interest expense through October 2024, using an effective interest rate of approximately 5.15%. The carrying value of the Company's convertible debt is shown below.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Principal value, Convertible Senior Notes, due 2024
|
|
258,750
|
|
|
258,750
|
|
Unamortized issuance costs
|
|
(4,625
|
)
|
|
(4,864
|
)
|
Unamortized discount
|
|
(38,462
|
)
|
|
(40,425
|
)
|
Convertible debt
|
|
215,663
|
|
|
213,461
|
|
In conjunction with the offering of the Convertible Notes, the Company also sold warrants to the convertible note hedge counterparties in separate, privately negotiated warrant transactions at a higher strike price and for the same number of the Company’s common shares, subject to customary anti-dilution adjustments. The amount received for these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. These warrants could result in 8.1 million additional shares of the Company's common stock, if the Company's traded market price exceeds the strike price which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions. The warrants could have a dilutive effect on the computation of earnings per share to the extent that the average traded market price of the Company's common shares for a reporting periods exceed the strike price.
NOTE G—DERIVATIVE INSTRUMENTS
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection from fluctuating interest rates, for at least twenty-five percent of the outstanding balance of the term loan issued in November 2018. Accordingly, the Company entered into additional interest rate swaps in December 2018 and January 2019 having initial values of $150.0 million and $150.0 million, respectively, and forward start dates of December 31, 2018 and June 28, 2019. The table below provides information about the Company’s interest rate swaps (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Expiration Date
|
Stated
Interest
Rate
|
|
Notional
Amount
|
|
Market
Value
(Liability)
|
|
Notional
Amount
|
|
Market
Value
(Liability)
|
May 5, 2021
|
1.090
|
%
|
|
18,750
|
|
|
(130
|
)
|
|
20,625
|
|
|
111
|
|
May 30, 2021
|
1.703
|
%
|
|
18,750
|
|
|
(243
|
)
|
|
20,625
|
|
|
(25
|
)
|
December 31, 2021
|
2.706
|
%
|
|
144,375
|
|
|
(5,889
|
)
|
|
146,250
|
|
|
(3,242
|
)
|
March 31, 2022
|
1.900
|
%
|
|
50,000
|
|
|
(1,617
|
)
|
|
50,000
|
|
|
(408
|
)
|
March 31, 2022
|
1.950
|
%
|
|
75,000
|
|
|
(2,496
|
)
|
|
75,000
|
|
|
(696
|
)
|
March 31, 2023
|
2.425
|
%
|
|
146,250
|
|
|
(8,677
|
)
|
|
148,125
|
|
|
(3,866
|
)
|
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 a net loss on derivatives of $10.9 million and $3.8 million for the three month periods ending March 31, 2020 and 2019, respectively. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.
NOTE H—COMMITMENTS AND CONTINGENCIES
CARES Act
The Company's airline subsidiaries, OAI and ATI, each submitted an application to the Secretary of the Treasury for a grant of funds pursuant to the payroll support program under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). On April 24, 2020, OAI was notified by the U.S. Department of the Treasury that its application for funds under the payroll support program had been approved on a preliminary basis. OAI expects to receive total funding of approximately $67 million to be paid in installments through September 2020. ATI’s application for a grant under the payroll support program remains pending at this time. As a condition to receiving the funds, OAI and ATI must agree to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020; limit, on behalf of themselves and their affiliate air carriers, executive compensation through March 24, 2022; maintain certain air transportation service through March 1, 2022 as may be required by the U.S. Department of Transportation pursuant to its authority under the CARES Act; and maintain certain internal controls and records relating to the CARES Act funds and comply with certain reporting requirements. In addition, the Company may not pay dividends or repurchase its shares through September 30, 2021.
Lease Commitments
The Company leases property, five aircraft, aircraft engines and other types of equipment under operating leases. Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and lease terms ranging from one month to seven years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred and are not material. Equipment leases include ground support and industrial equipment as well as computer hardware with fixed rent payments and terms of one month to five years.
The Company records the initial right-to-use asset and lease liability at the present value of lease payments scheduled during the lease term. For the first three months of 2020 and 2019, non-cash transactions to recognize right-to-use assets and corresponding liabilities for new leases were $12.9 million and $1.1 million, respectively. Unless the rate implicit in the lease is readily determinable, the Company discounts the lease payments using an estimated incremental borrowing rate at the time of lease commencement. The Company estimates the incremental borrowing rate based on the information available at the lease commencement date, including the rate the Company could borrow for a similar amount, over a similar lease term with similar collateral. The Company's weighted-average discount rate for operating leases at March 31, 2020 was 4.06% compared to 4.7% at December 31, 2019. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Although not material, the amount of such options is reflected below in the maturity of operating lease liabilities table. Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average remaining lease term is 4.7 years and 4.6 years as of March 31, 2020 and December 31, 2019, respectively.
For the three month periods ended March 31, 2020 and 2019, cash payments against operating lease liabilities were $3.9 million and $5.2 million, respectively. As of March 31, 2020, the maturities of operating lease liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
Operating Leases
|
Remaining 2020
|
|
$
|
11,682
|
|
2021
|
|
12,054
|
|
2022
|
|
8,336
|
|
2023
|
|
7,608
|
|
2024
|
|
6,398
|
|
2025 and beyond
|
|
6,341
|
|
Total undiscounted cash payments
|
|
52,419
|
|
Less: amount representing interest
|
|
(4,437
|
)
|
Present value of future minimum lease payments
|
|
47,982
|
|
Less: current obligations under leases
|
|
13,340
|
|
Long-term lease obligation
|
|
$
|
34,642
|
|
The Company expects to lease one additional passenger aircraft and additional facilities commencing later in 2020 that are not reflected in the table above.
Purchase Commitments
The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. As of March 31, 2020, the Company had 12 aircraft that were in or awaiting the modification process. As of March 31, 2020, the Company had placed non-refundable deposits of $15.0 million to purchase ten more Boeing 767-300 passenger aircraft through 2021. As of March 31, 2020, the Company's commitments to acquire and convert aircraft totaled $302.2 million through 2021.
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 addition to the foregoing matters, the Company is also a party to legal proceedings in various federal and state jurisdictions from time to time 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 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.
Employees Under Collective Bargaining Agreements
As of March 31, 2020, the flight crewmember employees of ABX, ATI and OAI and flight attendant employees of ATI and OAI were represented by the labor unions listed below:
|
|
|
|
Airline
|
Labor Agreement Unit
|
Percentage of
the Company’s
Employees
|
ABX
|
International Brotherhood of Teamsters
|
5.1%
|
ATI
|
Air Line Pilots Association
|
8.3%
|
OAI
|
International Brotherhood of Teamsters
|
7.0%
|
ATI
|
Association of Flight Attendants
|
0.9%
|
OAI
|
Association of Flight Attendants
|
7.1%
|
NOTE I—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 crewmembers, 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 obligations. 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.
ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.
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 March 31,
|
|
Pension Plans
|
|
Post-Retirement Healthcare Plan
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
27
|
|
Interest cost
|
6,970
|
|
|
7,825
|
|
|
23
|
|
|
37
|
|
Expected return on plan assets
|
(11,168
|
)
|
|
(9,477
|
)
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
941
|
|
|
3,882
|
|
|
31
|
|
|
43
|
|
Net periodic benefit (income) loss
|
$
|
(3,257
|
)
|
|
$
|
2,230
|
|
|
$
|
89
|
|
|
$
|
107
|
|
During the three month period ending March 31, 2020, the Company contributed $1.3 million to the pension plans. The Company expects to contribute an additional $9.6 million during the remainder of 2020.
NOTE J—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 taxes recorded through March 31, 2020 have been estimated utilizing a 24% rate based upon year-to-date income and projected results for the full year. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items, have an impact on the effective rate during a period.
During 2020, the Company recorded discrete tax items for the conversion of employee stock awards and gains and losses on warrant revaluations which were not subject to tax. As a result of these differences in which expenses and benefits for tax purposes are different than required by generally accepted accounting principles, the Company's effective tax rate for the first three months of 2020 was 5.0%. The final effective tax rate for the year 2020 will depend on the actual amount of pre-tax book results by the Company for the full year, the additional conversions of employee stock awards, stock warrant valuations, executive compensation and other items.
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 2023 or later. The Company may, however, be required to pay some federal tax due to loss carryforward usage limitations and certain state and local income taxes before then.
NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following items by components for the three month periods ending March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension
|
|
Defined Benefit Post-Retirement
|
|
Foreign Currency Translation
|
|
Total
|
Balance as of January 1, 2019
|
|
(89,042
|
)
|
|
(841
|
)
|
|
(1,479
|
)
|
|
(91,362
|
)
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Amounts reclassified from accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Actuarial costs (reclassified to salaries, wages and benefits)
|
|
3,882
|
|
|
43
|
|
|
—
|
|
|
3,925
|
|
Income Tax (Expense) or Benefit
|
|
(931
|
)
|
|
(10
|
)
|
|
2
|
|
|
(939
|
)
|
Other comprehensive income (loss), net of tax
|
|
2,951
|
|
|
33
|
|
|
(5
|
)
|
|
2,979
|
|
Balance as of March 31, 2019
|
|
(86,091
|
)
|
|
(808
|
)
|
|
(1,484
|
)
|
|
(88,383
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2020
|
|
$
|
(61,152
|
)
|
|
$
|
(702
|
)
|
|
$
|
(12
|
)
|
|
$
|
(61,866
|
)
|
Amounts reclassified from accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Actuarial costs (reclassified to salaries, wages and benefits)
|
|
941
|
|
|
31
|
|
|
—
|
|
|
972
|
|
Income Tax Expense
|
|
(215
|
)
|
|
(7
|
)
|
|
—
|
|
|
(222
|
)
|
Other comprehensive income, net of tax
|
|
726
|
|
|
24
|
|
|
—
|
|
|
750
|
|
Balance as of March 31, 2020
|
|
(60,426
|
)
|
|
(678
|
)
|
|
(12
|
)
|
|
(61,116
|
)
|
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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Number of
Awards
|
|
Weighted
average
grant-date
fair value
|
|
Number of
Awards
|
|
Weighted
average
grant-date
fair value
|
Outstanding at beginning of period
|
963,832
|
|
|
$
|
17.67
|
|
|
969,928
|
|
|
$
|
15.89
|
|
Granted
|
435,254
|
|
|
18.86
|
|
|
276,496
|
|
|
23.24
|
|
Converted
|
(128,463
|
)
|
|
19.06
|
|
|
(130,764
|
)
|
|
16.74
|
|
Expired
|
(1,000
|
)
|
|
19.40
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at end of period
|
1,269,623
|
|
|
$
|
17.94
|
|
|
1,115,660
|
|
|
$
|
17.61
|
|
Vested
|
353,023
|
|
|
$
|
8.25
|
|
|
337,060
|
|
|
$
|
8.04
|
|
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 2020 was $18.39, 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 2020 was $20.41. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 0.7% and a volatility of 35.0% based on volatility over three years using daily stock prices.
For the three month periods ended March 31, 2020 and 2019, the Company recorded expense of $1.8 million and $1.5 million, respectively, for stock incentive awards. At March 31, 2020, there was $13.5 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of 1.8 years. As of March 31, 2020, none of the awards were convertible, 353,023 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 1,570,298 additional outstanding shares of the Company’s common stock depending on service, performance and market results through December 31, 2022.
NOTE M—COMMON STOCK AND EARNINGS PER SHARE
Earnings per Share
The calculation of basic and diluted earnings per common share are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ending March 31,
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
Earnings from continuing operations - basic
|
$
|
133,733
|
|
|
$
|
22,634
|
|
Gain from stock warrants revaluation, net of tax
|
(76,361
|
)
|
|
(7,653
|
)
|
Earnings from continuing operations - diluted
|
$
|
57,372
|
|
|
$
|
14,981
|
|
|
|
|
|
Denominator:
|
|
|
|
Weighted-average shares outstanding for basic earnings per share
|
59,040
|
|
|
58,838
|
|
Common equivalent shares:
|
|
|
|
Effect of stock-based compensation awards and warrants
|
8,907
|
|
|
1,599
|
|
Weighted-average shares outstanding assuming dilution
|
67,947
|
|
|
60,437
|
|
Basic earnings per share from continuing operations
|
$
|
2.27
|
|
|
$
|
0.38
|
|
Diluted earnings per share from continuing operations
|
$
|
0.84
|
|
|
0.25
|
|
The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock warrants recorded as a liability (see Note D), if such warrants have an anti-dilutive effect on earnings per share. The dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during the period and comparing that amount with the number of corresponding warrants outstanding.
The underlying warrants recorded as a liability as of March 31, 2020 and 2019 would have resulted in 39.5 million and 39.5 million additional shares of the Company's common stock, respectively, if the warrants were settled by tendering cash.
The number of equivalent shares that were not included in weighted average shares outstanding assuming dilution because their effect would have been anti-dilutive, were 9.2 million for the three month period ended March 31, 2019.
NOTE N—SEGMENT AND REVENUE INFORMATION
The Company operates in two reportable segments. The CAM segment consists of the Company's aircraft leasing operations. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and passenger service agreements that the Company has with its customers. The Company's aircraft maintenance services, aircraft modification services, ground services and other services, are not large enough to constitute reportable segments and are combined in All other. Intersegment revenues are valued at arms-length market rates.
The Company's segment information from continuing operations is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ending
|
|
March 31,
|
|
2020
|
|
2019
|
Total revenues:
|
|
|
|
CAM
|
$
|
74,163
|
|
|
$
|
70,350
|
|
ACMI Services
|
284,165
|
|
|
257,956
|
|
All other
|
80,036
|
|
|
67,362
|
|
Eliminate inter-segment revenues
|
(49,087
|
)
|
|
(47,485
|
)
|
Total
|
$
|
389,277
|
|
|
$
|
348,183
|
|
Customer revenues:
|
|
|
|
CAM
|
$
|
46,736
|
|
|
$
|
41,609
|
|
ACMI Services
|
284,161
|
|
|
257,953
|
|
All other
|
58,380
|
|
|
48,621
|
|
Total
|
$
|
389,277
|
|
|
$
|
348,183
|
|
ACMI Services revenues are generated from airline service agreements and are typically based on hours flown, cycles operated, the number of aircraft operated and crew resources provided during a month. ACMI Services revenues are recognized over time using the invoice practical expedient as flight hours are performed for the customer. Certain agreements include provisions for incentive payments based upon on-time reliability. These incentives are measured on a monthly basis and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain other flight expenses. When functioning as the customers' agent for arranging such services, the Company records amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter agreements, the Company's airline is obligated to provide full services for one or more flights having specific origins and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all flight services, the related costs are recorded in operating expenses. Any sales commissions paid for charter agreements are generally expensed when incurred because the amortization period is less than one year. ACMI Services are invoiced monthly or more frequently. (There are no customer rewards programs associated with services offered by the Company nor does the Company sell passenger tickets or issue freight bills.)
The Company's revenues for customer contracts for airframe maintenance and aircraft modification services that do not have an alternative use and for which the Company has an enforceable right to payment are generally recognized over time based on the percentage of costs completed. Services for airframe maintenance and aircraft modifications typically have project durations lasting a few weeks to a few months. Other revenues for aircraft part sales, component repairs and line service are recognized at a point in time typically when the parts are delivered to the customer and the services are completed. For airframe maintenance, aircraft modifications and aircraft component repairs, contracts include assurance warranties that are not sold separately.
The Company records revenues and estimated earnings over time for its airframe maintenance and aircraft modification contracts using the costs to costs input method. For such services, the Company estimates the earnings
on a contract as the difference between the expected revenue and estimated costs to complete a contract and recognizes revenues and earnings based on the proportion of costs incurred compared to the total estimated costs. Unexpected or abnormal costs that are not reflected in the price of a contract are excluded from calculations of progress toward contract obligations. The Company's estimates consider the timing and extent of the services, including the amount and rates of labor, materials and other resources required to perform the services. These production costs are specifically planned and monitored for regulatory compliance. The expenditure of these costs closely reflect the progress made toward completion of an airframe maintenance and aircraft modification project. The Company recognizes adjustments in estimated earnings on a contract under the cumulative catch-up method in which the impact of the adjustment on estimated earnings of a contract is recognized in the period the adjustment is identified.
The Company's ground services revenues include load transfer and sorting services, facility and equipment maintenance services. These revenues are recognized as the services are performed for the customer over time. Revenues from related facility and equipment maintenance services are recognized over time and at a point in time depending on the nature of the customer contracts.
The Company's external customer revenues from other activities for the three month periods ended March 31, 2020 and 2019 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
Aircraft maintenance, modifications and part sales
|
|
$
|
33,835
|
|
|
$
|
33,981
|
|
Ground services
|
|
14,609
|
|
|
13,938
|
|
Other, including aviation fuel sales
|
|
9,936
|
|
|
702
|
|
Total customer revenues
|
|
$
|
58,380
|
|
|
$
|
48,621
|
|
CAM's aircraft lease revenues are recognized as operating leases on a straight-line basis over the term of the applicable lease agreements. Customer payments for leased aircraft and equipment are typically paid monthly in advance. CAM's leases do not contain residual guarantees. Approximately 11% of CAM's leases to external customers contain purchase options at projected market values. As of March 31, 2020, minimum future payments from external customers for leased aircraft and equipment were scheduled to be $143.6 million for the remainder of 2020, $182.8 million, $156.6 million, $114.7 million, and $80.1 million, respectively, for each of the next four years ending December 31, 2024 and $195.5 million thereafter. As of December 31, 2019, minimum future payments from external customers for leased aircraft and equipment were scheduled to be $186.8 million, $178.2 million, $152.0 million, $110.1 million and $75.5 million, respectively, for each of the next 5 years ending December 31, 2024 and $186.2 million thereafter.
For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. During the three month periods ending March 31, 2020 and 2019, the Company recognized $2.7 million and $2.7 million of non lease revenue that was reported in deferred revenue at the beginning of the respective year. Deferred revenue was $4.0 million and $3.0 million at March 31, 2020 and December 31, 2019, respectively, for contracts with customers.
The Company's other segment information from continuing operations is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ending
|
|
March 31,
|
|
2020
|
|
2019
|
Depreciation and amortization expense:
|
|
|
|
CAM
|
$
|
43,047
|
|
|
$
|
38,795
|
|
ACMI Services
|
25,312
|
|
|
23,095
|
|
All other
|
983
|
|
|
747
|
|
Total
|
$
|
69,342
|
|
|
$
|
62,637
|
|
Interest expense
|
|
|
|
CAM
|
10,255
|
|
|
9,965
|
|
ACMI Services
|
5,301
|
|
|
6,549
|
|
Segment earnings (loss):
|
|
|
|
CAM
|
$
|
15,820
|
|
|
$
|
16,174
|
|
ACMI Services
|
18,378
|
|
|
12,310
|
|
All other
|
53
|
|
|
1,903
|
|
Net unallocated interest expense
|
(655
|
)
|
|
(780
|
)
|
Net gain on financial instruments
|
107,044
|
|
|
4,500
|
|
Transaction fees
|
—
|
|
|
(373
|
)
|
Other non-service components of retiree benefit costs, net
|
2,898
|
|
|
(2,351
|
)
|
Loss from non-consolidated affiliate
|
(2,764
|
)
|
|
(3,816
|
)
|
Pre-tax earnings from continuing operations
|
$
|
140,774
|
|
|
$
|
27,567
|
|
The Company's assets are presented below by segment (in thousands). Cash and cash equivalents are reflected in Assets - All other.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Assets:
|
|
|
|
CAM
|
$
|
1,918,286
|
|
|
$
|
1,857,687
|
|
ACMI Services
|
882,941
|
|
|
830,620
|
|
Discontinued operations
|
2,027
|
|
|
1,499
|
|
All other
|
116,786
|
|
|
130,372
|
|
Total
|
$
|
2,920,040
|
|
|
$
|
2,820,178
|
|
During the first three months of 2020, the Company had capital expenditures for property and equipment of $25.9 million and $116.1 million for the ACMI Services and CAM, respectively.