Notes to Consolidated Financial Statements
December 31, 2016
1. Basis of Presentation
Our consolidated financial statements include the accounts of the holding company, Atlas Air Worldwide Holdings, Inc.
(AAWW), and its consolidated subsidiaries. AAWW is the parent company of Atlas Air, Inc. (Atlas) and Southern Air Holdings, Inc. (Southern Air). Southern Air was acquired on April 7, 2016 (see Note 4). AAWW
is also the parent company of several subsidiaries related to our dry leasing services (collectively referred to as Titan). AAWW has a 51% equity interest and 75% voting interest in Polar Air Cargo Worldwide, Inc. (Polar). We
record our share of Polars results under the equity method of accounting.
Noncontrolling interests represents the
interest not owned by us and is recorded for consolidated entities in which we own less than 100% of the interest. Intercompany accounts and transactions have been eliminated. We account for investments in entities under the equity method of
accounting when we hold between 20% and 50% ownership in the entity and exercise significant influence or when we are not the primary beneficiary of a variable interest entity. The terms we, us, our, and the
Company mean AAWW and all entities included in its consolidated financial statements.
We provide outsourced
aircraft and aviation operating services throughout the world, serving Africa, Asia, Australia, Europe, the Middle East, North America and South America through: (i) contractual service arrangements, including those through which we provide
aircraft to customers and value-added services, including crew, maintenance and insurance (ACMI), as well as those through which we provide crew, maintenance and insurance, but not the aircraft (CMI); (ii) cargo and passenger
charter services (Charter); and (iii) dry leasing aircraft and engines (Dry Leasing or Dry Lease).
Except for per share data, all dollar amounts are in thousands unless otherwise noted.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and judgments that affect the amounts reported in these financial statements and the related disclosures.
Actual results may differ from those estimates. Estimates are used in determining, among other items, asset lives and residual values, cash flows for impairment analysis, heavy maintenance costs, income tax accounting, business combinations,
intangible assets, warrants, contingent liabilities (including, but not limited to litigation accruals), valuation allowances (including, but not limited to, those related to receivables, expendable parts inventory and deferred taxes), stock-based
compensation and self-insurance employee benefit accruals.
Revenue Recognition
Revenue from ACMI and CMI contracts is typically recognized as the block hours are operated on behalf of a customer during a given month,
as defined contractually, based on flight departure. The time interval between when an aircraft departs the terminal until it arrives at the destination terminal is measured in hours and called a Block Hour. If a customer flies below a
minimum contracted Block Hour guarantee, the contracted minimum revenue amounts are recognized as revenue. We recognize revenue for Charter upon flight departure.
We record Dry Lease rental income on a straight-line basis over the term of the operating lease. In limited cases, leases provide for additional rentals based on usage, which is recorded as revenue as it
is earned under the terms of the lease. Usage is calculated based on hourly usage or number of flights operated, depending on the lease agreement, and is typically reported monthly by the lessee. Rentals received but unearned under the lease
agreements are recorded in deferred revenue and included in Accrued liabilities until earned.
59
Customer maintenance reserves are amounts received under our Dry Leases that are subject to
reimbursement to the lessee upon the completion of qualifying maintenance work on the specific Dry Leased aircraft and are included in Accrued liabilities. We defer revenue recognition until the end of the lease, when we are able to finalize the
amount, if any, to be reimbursed to the customer.
The Company recognizes revenue for management and administrative support
services when the services are provided.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and other cash investments that are highly liquid in nature and have
original maturities of three months or less at acquisition.
Short-term Investments
Short-term investments are primarily comprised of certificates of deposit, current portions of debt securities and money market funds.
Restricted Cash
Cash that is restricted under secured aircraft debt agreements, whereby it can only be used to make principal and interest payments on the related debt secured by those aircraft, is classified as
Restricted cash.
Accounts Receivable
We perform a monthly evaluation of our accounts receivable and establish an allowance for doubtful accounts based on our best estimate of probable credit losses resulting from the inability or
unwillingness of our customers to make required payments. Account balances are charged off against the allowance when we determine that the receivable will not be recovered.
Escrow Deposits and Letters of Credit
We had $5.0 million as
of December 31, 2016 and $3.9 million as of December 31, 2015, for certain deposits required in the normal course of business for various items including, but not limited to, surety and customs bonds, airfield privileges, judicial
deposits, insurance and cash pledged under standby letters of credit related to collateral. These amounts are included in Deposits and other assets.
Expendable Parts
Expendable parts, materials and supplies for
flight equipment are carried at average acquisition costs and are included in Prepaid expenses and other current assets. When used in operations, they are charged to maintenance expense. Allowances for excess and obsolescence for expendable parts
expected to be on hand at the date aircraft are retired from service are provided over the estimated useful lives of the related airframes and engines. These allowances are based on management estimates, which are subject to change as conditions in
the business evolve. The net book value of expendable parts inventory was $24.2 million as of December 31, 2016 and $18.1 million at December 31, 2015, net of allowances for obsolescence of $22.3 million at December 31,
2016 and $19.7 million at December 31, 2015.
Property and Equipment
We record property and equipment at cost and depreciate these assets to their estimated residual values on a straight-line basis over
their estimated useful lives or average remaining fleet lives. We review these assumptions
60
at least annually and adjust depreciation on a prospective basis. Expenditures for major additions, improvements and flight equipment modifications are generally capitalized and depreciated over
the shorter of the estimated life of the improvement, the modified assets remaining life or remaining lease term. Most of our flight equipment is specifically pledged as collateral for our indebtedness. The estimated useful lives of our
property and equipment are as follows:
|
|
|
|
|
Range
|
Flight equipment
|
|
3 to 40 years
|
Computer software and equipment
|
|
3 to 5 years
|
Ground handling equipment and other
|
|
3 to 5 years
|
Depreciation expense related to property and equipment was $141.5 million in 2016,
$122.2 million in 2015 and $114.0 million in 2014.
The net book value of flight equipment on dry lease to customers
was $936.0 million as of December 31, 2016 and $887.9 million as of December 31, 2015. The accumulated depreciation for flight equipment on dry lease to customers was $99.8 million as of December 31, 2016 and
$64.5 million as of December 31, 2015.
Rotable parts are recorded in Property and equipment, net, and are
depreciated over their average remaining fleet lives and written off when they are determined to be beyond economic repair. The net book value of rotable parts inventory was $142.7 million as of December 31, 2016 and $125.6 million as
of December 31, 2015.
Capitalized Interest on Flight Equipment Modifications in Progress
Interest on funds used to finance the acquisition of flight equipment up to the date the asset is ready for its intended use is
capitalized and included in the cost of the asset. Included in capitalized interest is the interest paid on the purchase deposit borrowings directly associated with the acquisition of flight equipment. The remainder of capitalized interest recorded
on the acquisition of flight equipment is determined by taking the weighted average cost of funds associated with our other debt and applying it against the amounts paid as purchase deposits.
Goodwill
Goodwill represents the excess of an acquisitions purchase price over the fair value of the identifiable net assets acquired and liabilities assumed. Goodwill is not amortized, but tested for
impairment annually during the fourth quarter of each year, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred.
We may elect to perform a qualitative analysis on the reporting unit that has goodwill to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying
value. If the qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative analysis, we perform a quantitative analysis to
determine whether a goodwill impairment exists. If the goodwills carrying value exceeds its fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.
Fair value is determined using a discounted cash flow analysis based on key assumptions including, but not limited to,
(i) a projection of revenues, expenses and other cash flows; (ii) terminal period revenue growth and cash flows; and (iii) an assumed discount rate.
The total amount of goodwill was $40.4 million, which is included in Intangible assets, net and goodwill, and Prepaid expense and other current assets in the consolidated balance sheets as of
December 31, 2016 (see Notes 4 and 6). During the fourth quarter of 2016, we performed a quantitative analysis and determined that goodwill was not impaired.
61
Impairment of Long-Lived Assets
We record impairment charges on long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted
cash flows estimated to be generated by those assets are less than the associated carrying amount and the net book value of the assets exceeds the associated estimated fair value.
For flight equipment and finite-lived intangibles used in our ACMI and Charter segments, assets are grouped at the operating fleet level
for impairment testing. For flight equipment and finite-lived intangibles used in our Dry Leasing segment, assets are tested on an individual basis for impairment.
For assets classified as held for sale, an impairment is recognized when the fair value less the cost to sell the asset is less than its carrying amount.
In developing estimates for flight equipment and cash flows, we use external appraisals and other industry data for the various equipment
types, anticipated utilization of the assets, revenue generated, associated costs and length of service.
Long-term
Investments
Long-term investments consist of debt securities, including accrued interest, for which management has the
intent and ability to hold to maturity. These investments are classified as
held-to-maturity
and are reported at amortized cost. Interest on debt securities and
accretion of discounts using the effective interest method are included in Interest income.
Variable Interest Entities
and
Off-Balance
Sheet Arrangements
We hold a 50% interest in GATS GP (BVI)
Ltd. (GATS), a joint venture with an unrelated third party. The purpose of the joint venture is to purchase rotable parts and provide repair services for those parts, primarily for our
747-8F
aircraft. The joint venture is a variable interest entity and we have not consolidated GATS because we are not the primary beneficiary as we do not exercise financial control. Our investment in GATS was $22.2 million as of December 31,
2016 and $20.7 million as of December 31, 2015 and our maximum exposure to losses from the entity is limited to our investment, which is composed primarily of rotable inventory parts. GATS does not have any third-party debt obligations. We
had Accounts payable to GATS of $2.4 million as of December 31, 2016 and $2.3 million as of December 31, 2015.
A portion of our operating aircraft are owned or effectively owned and leased through trusts established specifically to purchase, finance and lease aircraft to us. We have not consolidated any aircraft
in the related trusts because we are not the primary beneficiary. Our maximum exposure under these operating leases is the remaining lease payments, which amounts are reflected in the future lease commitments more fully described in Note 10.
Income Taxes
Deferred income taxes are recognized for the tax consequences of reporting items in our income tax returns at different times than the items are reflected in our financial statements. These temporary
differences result in deferred tax assets and liabilities that are calculated by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and
liabilities. If necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and
future tax consequences when determining the amount, if any, of the valuation allowance.
62
We have recorded reserves for income taxes that may become payable in future years. Although
management believes that its positions taken on income tax matters are reasonable, we have nevertheless established tax reserves in recognition that various taxing authorities may challenge certain of the positions taken by us, potentially resulting
in additional liabilities for taxes.
Heavy Maintenance
Except for engines used on our
747-8F
aircraft, we account for heavy maintenance costs for
airframes and engines used in our ACMI and Charter segments using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs.
We account for heavy maintenance costs for airframes and engines used in our Dry Leasing segment and engines used on our
747-8F
aircraft using the deferral method. Under this method, we defer the expense recognition of scheduled heavy maintenance events, which are amortized over the estimated period until the next scheduled heavy
maintenance event is required. As of December 31, 2016 and December 31, 2015, deferred maintenance, net was $19.1 million and zero, respectively, which was included within Deferred costs and other assets. During 2016, we deferred
maintenance costs of $19.6 million and recorded deferred maintenance amortization expense of $0.5 million included in depreciation and amortization expense.
Prepaid Maintenance Deposits
Certain of our aircraft financing
agreements require security deposits to our finance providers to ensure that we perform major maintenance as required. These are substantially refundable to us and are, therefore, accounted for as deposits and included in Prepaid maintenance and in
Deferred costs and other assets. Such amounts were $53.4 million as of December 31, 2016 and $47.2 million at December 31, 2015.
Foreign Currency
While most of our revenues are denominated in U.S.
dollars, our results of operations may be exposed to the effect of fluctuations in the U.S. dollar value of foreign currency-denominated operating revenues and expenses. Our largest exposures come from the Brazilian real. We do not currently have a
foreign currency hedging program related to our foreign currency-denominated transactions. Gains or losses resulting from foreign currency transactions are included within
Non-operating
expenses (income).
Stock-Based Compensation
We have various stock-based compensation plans for certain employees and outside directors, which are described more fully in Note 15. We recognize compensation expense, net of estimated forfeitures, on a
straight-line basis over the vesting period for each award based on the fair value on grant date. We estimate grant date fair value for all option grants using the Black-Scholes-Merton option pricing model. We estimate option and restricted stock
unit forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. As a result, we record stock-based compensation expense only for those awards that are expected to
vest.
Legal and Regulatory Matters
We are party to legal and regulatory proceedings with respect to a variety of matters. We evaluate the likelihood of an unfavorable outcome of these proceedings each quarter. Our judgments are subjective
and are based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel. Due to the inherent uncertainties of the legal and regulatory proceedings in the multiple jurisdictions in which we
operate, our judgments may be different from the actual outcomes.
63
Supplemental Cash Flow Information
Cash interest paid to lenders is calculated on the face amount of our various debt instruments based on the contractual interest rates in
effect during each payment period.
The following table summarizes interest and income taxes paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest paid
|
|
$
|
66,306
|
|
|
$
|
75,135
|
|
|
$
|
84,265
|
|
Income taxes paid, net of refunds
|
|
$
|
1,160
|
|
|
$
|
(228
|
)
|
|
$
|
1,181
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported
within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
|
|
$
|
123,890
|
|
|
$
|
425,950
|
|
Restricted cash
|
|
|
14,360
|
|
|
|
12,981
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash shown in consolidated statements of cash flows
|
|
$
|
138,250
|
|
|
$
|
438,931
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (FASB) amended its accounting guidance for statements of cash
flows. Under the amended guidance, restricted cash should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
amounts shown on the statement of cash flows. We early adopted this guidance retrospectively effective December 31, 2016 and its adoption did not have a
material impact on our financial condition, results of operations or cash flows. The amount of restricted cash reclassified to the
end-of-period
amounts in our statement
of cash flows were $13.0 million and $14.3 million as of December 31, 2015 and 2014, respectively. As a result, net cash used for investing activities increased by $1.3 million and decreased by $7.8 million for the years
ended December 31, 2015 and 2014, respectively.
In March 2016, the FASB amended its accounting guidance for share-based
compensation. The amended guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. This amended guidance is effective as of the beginning of 2017, with early adoption permitted. We adopted this guidance on January 1, 2017. Upon adoption of this amended guidance, the excess tax
benefit associated with share-based compensation, which is currently recognized within equity, will be reflected within income tax expense (benefit) in our consolidated statements of operations. Additionally, our consolidated statements of cash
flows will present such excess tax benefit, which is currently presented as a financing activity, as an operating activity. The adoption of this amended guidance is not expected to have a material impact on our financial condition, results of
operations or cash flows.
In February 2016, the FASB amended its accounting guidance for leases. The guidance requires a
lessee to recognize assets and liabilities on the balance sheet arising from leases with terms greater than twelve months. While lessor accounting guidance is relatively unchanged, certain amendments were made to conform with changes made to lessee
accounting and recently released revenue recognition guidance. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense and income recognition in the statement of
operations. It also requires additional quantitative and qualitative disclosures about leasing arrangements. The amended guidance is effective as of the beginning of 2019, with early adoption permitted. While we are still assessing the impact the
amended guidance will have on our
64
financial statements, we expect that recognizing the
right-of-use
asset and related lease liability will
significantly impact our balance sheet. We have developed and are implementing a plan for adopting this amended guidance.
In
May 2014, the FASB amended its accounting guidance for revenue recognition. Subsequently, the FASB has issued several clarifications and updates. The fundamental principles of the new guidance are that companies should recognize revenue in a manner
that reflects the timing of the transfer of services to customers and consideration that a company expects to receive for the services provided. It also requires additional disclosures necessary for the financial statement users to understand the
nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date by one year to the beginning of 2018, with early adoption permitted. We plan to adopt this
guidance on its required effective date. While we are still assessing the methods of adoption and impact the amended guidance will have on our financial statements, we expect that an immaterial amount of revenue currently recognized based on flight
departure will likely be recognized over time as the services are performed. In addition, we expect that revenue related to contracted minimum block hour guarantees under certain ACMI and CMI contracts will likely be recognized in later periods
under the amended guidance. We have developed and are implementing a plan for adopting this amended guidance.
3.
DHL Investment and Polar
DHL Network Operations (USA), Inc. (DHL), a subsidiary of Deutsche Post AG
(DP), holds a 49% equity interest and a 25% voting interest in Polar. Polar is a variable interest entity and we do not consolidate Polar because we are not the primary beneficiary as the risks associated with the direct costs of
operation are with DHL. Under a
20-year
blocked space agreement, which began in 2008 (the BSA), Polar provides air cargo capacity to DHL. Atlas and Polar also have a flight services agreement,
whereby Atlas is compensated by Polar on a per Block Hour basis, subject to a monthly minimum Block Hour guarantee, at a predetermined rate with the opportunity for performance premiums that escalate annually. Under the flight services agreement,
Atlas provides Polar with crew, maintenance and insurance for the aircraft. Under other separate agreements, we provide aircraft to Polar, and Atlas and Polar supply administrative, sales and ground support services to one another. DP has guaranteed
DHLs (and Polars) obligations under the various transaction agreements described above. AAWW has agreed to indemnify DHL for and against various obligations of Polar and its affiliates. Collectively, these agreements are referred to
herein as the DHL Agreements. The DHL Agreements provide us with a minimum guaranteed revenue stream from aircraft that have been dedicated to Polar for DHL and other customers freight over the life of the agreements. DHL provides
financial support and also assumes the risks and rewards of the operations of Polar.
In accordance with the DHL Agreements,
Polar flies for DHLs transpacific express network and DHL provides financial support and assumes the risks and rewards of the operations of Polar. In addition to transpacific routes, Polar also flies between the Asia Pacific region, the Middle
East and Europe on behalf of DHL and other customers.
The BSA established DHLs capacity purchase commitments on Polar
flights. DHL has the right to terminate the
20-year
BSA at the twelfth and fifteenth anniversaries of commencement, which was October 27, 2008. Either party may terminate for cause (as defined) at any
time. With respect to DHL, cause includes Polars inability to meet certain departure and arrival criteria for an extended period of time and upon certain
change-of-control
events, in which case DHL may be entitled to liquidated damages from Polar. Except for any liquidated damages that we could incur as described above,
we do not have any continuing financial exposure to fund debt obligations or operating losses of Polar.
Combined with Polar,
we provide ACMI, CMI, Charter and Dry Leasing services to support DHLs transpacific express, North American and intra-Asian networks. In addition, we fly between the Asia Pacific region, the Middle East and Europe on behalf of DHL and other
customers. Atlas also provides incremental charter capacity to Polar and DHL on an ad hoc basis.
65
The following table summarizes the aircraft types, services and number of aircraft provided
to DHL as of December 31, 2016:
|
|
|
|
|
|
|
Aircraft
|
|
Service
|
|
Total
|
|
747-8F
|
|
ACMI
|
|
|
6
|
|
747-400F
|
|
ACMI
|
|
|
7
|
|
777-200LRF
|
|
CMI
|
|
|
5
|
|
767-300
|
|
CMI and Dry Leasing
|
|
|
4
|
|
767-200
|
|
CMI
|
|
|
9
|
|
737-400F
|
|
CMI
|
|
|
5
|
|
757-200F
|
|
Dry Leasing
|
|
|
1
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
The following table summarizes our transactions with Polar:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and Expenses:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenue from Polar
|
|
$
|
407,891
|
|
|
$
|
399,113
|
|
|
$
|
325,053
|
|
Ground handling and airport fees paid to Polar
|
|
$
|
1,667
|
|
|
$
|
2,019
|
|
|
$
|
1,909
|
|
|
|
|
|
Accounts receivable/payable as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
Receivables from Polar
|
|
$
|
8,161
|
|
|
$
|
6,527
|
|
|
|
|
|
Payables to Polar
|
|
$
|
2,019
|
|
|
$
|
4,660
|
|
|
|
|
|
|
|
|
|
Aggregate Carrying Value of Polar Investment as of
December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
$
|
4,870
|
|
|
$
|
4,870
|
|
|
|
|
|
4. Southern Air Acquisition
On January 15, 2016, we entered into an Agreement and Plan of Merger to acquire all the outstanding shares of Southern Air (the
Southern Air Acquisition). Southern Air is the parent company of several subsidiaries, including Southern Air Inc. and Florida West International Airways, Inc. (Florida West). The Southern Air Acquisition provided us with
immediate entry into 777 and 737 aircraft operating platforms, with the potential for developing additional business with existing and new customers of both companies. We believe the platforms provided by these aircraft will augment our ability to
offer customers the broadest array of aircraft and operating services for domestic, regional and international applications. Southern Air currently flies five
777-200LRF
and five
737-400F
aircraft under CMI agreements for DHL.
The Southern Air Acquisition was
completed on April 7, 2016. Total consideration of $105.8 million, net of cash acquired, consisted of the following:
|
|
|
|
|
Fair value of consideration
|
|
|
|
Cash paid, net of $15,615 cash acquired
|
|
$
|
107,498
|
|
Working capital adjustment
|
|
|
(2,106
|
)
|
Other adjustments
|
|
|
372
|
|
|
|
|
|
|
Total consideration
|
|
$
|
105,764
|
|
|
|
|
|
|
66
Tangible and identifiable intangible assets acquired and liabilities assumed were recorded
at fair value as of the acquisition date. During 2016, we made certain measurement-period adjustments, including the finalization of the fair value of Florida West, and working capital and other adjustments that resulted in a net increase to
goodwill of $4.0 million.
The following table summarizes the preliminary amounts recognized for fair values of the
assets acquired and liabilities assumed:
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Accounts receivable, net
|
|
$
|
22,912
|
|
Prepaid expenses and other current assets
|
|
|
2,434
|
|
Property and equipment
|
|
|
6,355
|
|
Intangible assets and goodwill
|
|
|
67,341
|
|
Deferred income taxes, net
|
|
|
36,452
|
|
Other assets
|
|
|
1,498
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
136,992
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
31,228
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
31,228
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
105,764
|
|
|
|
|
|
|
The fair values and useful lives assigned to all intangible assets and goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
|
|
|
Estimated Fair
Value
|
|
Customer relationship
|
|
|
16 years
|
|
|
$
|
26,280
|
|
Trade name
|
|
|
1.5 years
|
|
|
|
700
|
|
Goodwill
|
|
|
Indefinite
|
|
|
|
40,361
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets and goodwill
|
|
|
|
|
|
$
|
67,341
|
|
|
|
|
|
|
|
|
|
|
Customer relationship represents the underlying relationship and agreements with DHL. The trade name
relates to the Southern Air brand. Goodwill is not deductible for tax purposes and is primarily attributable to the expanded market opportunities expected from combining the service offerings of Southern Air with ours, as well as the employee work
force acquired. Southern Airs results of operations and goodwill are reflected in our ACMI segment. Amortization expense related to Southern Airs intangible assets amounted to $1.6 million in 2016.
For 2016, our consolidated results include Southern Airs operating revenue of $79.8 million. For 2016, we incurred
Transaction-related expenses of $17.7 million, primarily related to: certain compensation costs, including employee termination benefits; professional fees; and integration costs associated with the acquisition.
A summary of the employee termination benefit liability, which is expected to be paid by the first quarter of 2018, is as follows:
|
|
|
|
|
|
|
Employee
Termination
Benefits
|
|
Transaction-related expenses
|
|
$
|
3,797
|
|
Cash payments
|
|
|
(2,583
|
)
|
|
|
|
|
|
Liability as of December 31, 2016
|
|
$
|
1,214
|
|
|
|
|
|
|
67
The unaudited pro forma operating revenue for 2016 and 2015 was $1,866.7 million and
$1,912.4 million, respectively. This pro forma information has been calculated as if the acquisition had taken place on January 1, 2015 and is not necessarily indicative of the net sales that actually would have been achieved. This
information includes adjustments to conform with our accounting policies. The earnings of Southern Air were not material and, accordingly, pro forma and actual earnings information have not been presented.
As part of integrating Southern Air, management decided and committed to pursue a plan to sell Florida West. As a result, the financial
results for Florida West are presented as a discontinued operation and the assets and liabilities of Florida West are classified as held for sale, since the date of acquisition through December 31, 2016. The aggregate carrying value of Florida
Wests assets held for sale was insignificant at December 31, 2016 and was included in Prepaid expenses and other current assets. In February 2017, management determined that a sale was no longer likely to occur and committed to a plan to
wind down the Florida West operations. The wind-down of operations is expected to be completed during the first quarter of 2017.
5. Special Charge
During 2016 and 2015, we recognized $10.1 million of impairment losses for six
CF6-80
engines classified as held for sale and $8.3 million for five
CF6-80
engines classified as held for sale, respectively. Depreciation ceased on the engines. Nine engines were traded in during 2016. The carrying value of two
CF6-80
engines
held for sale at December 31, 2016 was $2.8 million and five
CF6-80
engines held for sale at December 31, 2015 was $7.7 million, which were included within Prepaid expenses and other
current assets in the consolidated balance sheets. Two remaining
CF6-80
engines classified as held for sale are expected to be sold during 2017.
During 2015, we recognized a charge of $7.7 million related to the early termination of high-rate operating leases for two
CF6-80
engines.
6. Intangible Assets, Net and Goodwill
The following table presents our Intangible assets, net and goodwill as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Goodwill
|
|
$
|
40,361
|
|
|
$
|
|
|
Fair value adjustments on operating leases
|
|
|
45,531
|
|
|
|
45,531
|
|
Lease intangible
|
|
|
57,203
|
|
|
|
57,203
|
|
Customer relationship
|
|
|
26,280
|
|
|
|
|
|
Trade name
|
|
|
700
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(54,046
|
)
|
|
|
(44,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,029
|
|
|
$
|
58,483
|
|
|
|
|
|
|
|
|
|
|
Goodwill is primarily attributable to the expanded market opportunities expected from combining the
service offerings of Southern Air with ours, as well as the employee work force acquired. Fair value adjustments on operating leases represent the capitalized discount recorded in prior years to adjust the lease commitments for our
747-400
aircraft to fair market value and are amortized on a straight-line basis over the life of the leases. Lease intangibles resulted from the acquisition of various aircraft with
in-place
Dry Leases to customers on a long-term basis and are amortized on a straight-line basis over the life of the leases. Customer relationship represents Southern Airs underlying relationship and
agreements with DHL. The trade name relates to the Southern Air brand.
Amortization expense related to intangible assets
amounted to $9.8 million in 2016, $8.9 million in 2015 and $9.4 million in 2014.
68
The estimated future amortization expense of intangible assets as of December 31, 2016
is as follows:
|
|
|
|
|
2017
|
|
$
|
9,914
|
|
2018
|
|
|
9,290
|
|
2019
|
|
|
8,590
|
|
2020
|
|
|
8,416
|
|
2021
|
|
|
8,416
|
|
Thereafter
|
|
|
31,042
|
|
|
|
|
|
|
Total
|
|
$
|
75,668
|
|
|
|
|
|
|
7. Amazon
In May 2016, we entered into certain agreements with Amazon.com, Inc. and its subsidiary, Amazon Fulfillment Services, Inc., (collectively Amazon), which will involve, among other things, CMI
operation of 20 Boeing
767-300
freighter aircraft for Amazon by Atlas, as well as Dry Leasing by Titan. The Dry Leases will have a term of ten years, while the CMI operations will be for seven years (with an
option for Amazon to extend the term to a total of ten years). The first aircraft was placed in service during the third quarter of 2016 and the remainder are expected to be placed in service by the end of 2018.
In conjunction with these agreements, we granted Amazon a warrant providing the right to acquire up to 20% of our
outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, at an exercise price of $37.50 per share. A portion of the warrant, representing the right to purchase 3.75 million shares, vested immediately
upon issuance of the warrant and the remainder of the warrant, representing the right to purchase 3.75 million shares, will vest in increments of 375,000 as the lease and operation of each of the 11
th
through 20
th
aircraft commences. The warrant will be exercisable in accordance with its terms through 2021. As of December 31,
2016, no warrants have been exercised.
The agreements also provide incentives for future growth of the relationship as Amazon
may increase its business with us. In that regard, we granted Amazon a warrant to acquire up to an additional 10% of our outstanding common shares, after giving effect to the issuance of shares pursuant to the warrants, for an exercise price of
$37.50 per share. This warrant to purchase 3.75 million shares will vest in conjunction with payments by Amazon for additional business with us. The warrant will be exercisable in accordance with its terms through 2023.
At a special meeting on September 20, 2016, the Companys shareholders, by a vote of approximately 99.9% of the votes cast,
approved the issuance of warrants to acquire up to 30% of our outstanding common shares. This approval constituted a change in control, as defined under certain of the Companys benefit plans. As a result, we recognized $23.5 million in
expense, including accelerated compensation expense for restricted and performance share and cash awards, during 2016 (see Notes 15 and 16). The share-based portion of the compensation expense was $13.3 million.
The $92.9 million fair value of the vested portion of the warrant issued to Amazon as of May 4, 2016 was recorded as a warrant
liability within Financial instruments and other liabilities (the Amazon Warrant). The initial fair value of the warrant was recognized as a customer incentive asset within Deferred costs and other assets, net and is being amortized as a
reduction of revenue in proportion to the amount of revenue recognized over the terms of the Dry Leases and CMI agreements. During 2016, we amortized $0.5 million of the customer incentive asset. The balance of the customer incentive asset, net
of amortization, was $92.4 million as of December 31, 2016.
The Amazon Warrant liability is
marked-to-market
at the end of each reporting period with changes in fair value recorded in Other
non-operating
expenses. We utilize a
Monte Carlo simulation approach to estimate the
69
fair value of the Amazon Warrant which requires inputs such as our common stock price, the warrant strike price, estimated common stock price volatility and risk-free interest rate, among others.
We recognized a net unrealized loss of $2.9 million on the Amazon Warrant during 2016. The fair value of the Amazon Warrant liability was $95.8 million as of December 31, 2016.
8. Accrued Liabilities
Accrued liabilities
consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Customer maintenance reserves
|
|
$
|
81,830
|
|
|
$
|
70,252
|
|
Salaries, wages and benefits
|
|
|
55,063
|
|
|
|
51,649
|
|
Maintenance
|
|
|
54,495
|
|
|
|
52,070
|
|
U.S. class action settlement
|
|
|
35,000
|
|
|
|
35,000
|
|
Aircraft fuel
|
|
|
16,149
|
|
|
|
12,983
|
|
Deferred revenue
|
|
|
10,298
|
|
|
|
12,702
|
|
Other
|
|
|
68,052
|
|
|
|
58,482
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
320,887
|
|
|
$
|
293,138
|
|
|
|
|
|
|
|
|
|
|
9. Debt
Our debt obligations, as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Ex-Im
Bank guaranteed notes
|
|
$
|
616,892
|
|
|
$
|
689,720
|
|
Term loans and capital lease
|
|
|
1,037,077
|
|
|
|
1,013,265
|
|
Convertible Notes
|
|
|
177,398
|
|
|
|
170,300
|
|
EETC
|
|
|
20,044
|
|
|
|
28,022
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,851,411
|
|
|
|
1,901,307
|
|
Less current portion of debt and capital lease
|
|
|
(184,748
|
)
|
|
|
(161,811
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
1,666,663
|
|
|
$
|
1,739,496
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016 and 2015, we had $92.0 million and $106.8 million, respectively, of
unamortized debt discounts and debt issuance costs, which are presented as a reduction of the carrying amount of outstanding debt.
Many of our financing instruments have cross-default provisions and contain limitations on our ability to, among other things, consummate certain asset sales, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.
Description of our Debt Obligations
Ex-Im
Bank Guaranteed Notes
We have issued various notes guaranteed by the Export-Import Bank of the United States
(Ex-Im
Bank), each secured by a mortgage on a
747-8F
or
777-200LRF
aircraft (the
Ex-Im
Guaranteed Notes). In connection with the issuance of
Ex-Im
Guaranteed Notes, we paid usual and customary commitment and other fees associated with
this type of financing. In addition, there are customary covenants, events of default and certain operating conditions that we must meet for the
Ex-Im
Guaranteed Notes. These notes accrue interest at a fixed
rate with principal and interest payable quarterly.
70
The following table summarizes the terms and principal balances for each note guaranteed by
Ex-Im
Bank as of December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Face
Value
|
|
|
Collateral
Type
|
|
|
Original
Term
|
|
|
Fixed
Interest
Rate
|
|
|
2016
|
|
|
2015
|
|
2014
Ex-Im
Guaranteed Note
|
|
|
2014
|
|
|
$
|
140.6
|
|
|
|
747-8F
|
|
|
|
134 months
|
|
|
|
2.67
|
%
|
|
$
|
107.3
|
|
|
$
|
118.7
|
|
First 2013
Ex-Im
Guaranteed Note
|
|
|
2013
|
|
|
|
143.0
|
|
|
|
747-8F
|
|
|
|
144 months
|
|
|
|
1.83
|
%
|
|
|
104.5
|
|
|
|
115.7
|
|
Second 2013
Ex-Im
Guaranteed Note
|
|
|
2013
|
|
|
|
88.0
|
|
|
|
777-200LRF
|
|
|
|
90 months
|
|
|
|
1.84
|
%
|
|
|
51.4
|
|
|
|
62.9
|
|
First 2012
Ex-Im
Guaranteed Note
|
|
|
2012
|
|
|
|
142.0
|
|
|
|
747-8F
|
|
|
|
144 months
|
|
|
|
2.02
|
%
|
|
|
92.7
|
|
|
|
104.1
|
|
Second 2012
Ex-Im
Guaranteed Note
|
|
|
2012
|
|
|
|
142.7
|
|
|
|
747-8F
|
|
|
|
144 months
|
|
|
|
1.73
|
%
|
|
|
95.8
|
|
|
|
107.2
|
|
Third 2012
Ex-Im
Guaranteed Note
|
|
|
2012
|
|
|
|
142.8
|
|
|
|
747-8F
|
|
|
|
144 months
|
|
|
|
1.56
|
%
|
|
|
95.4
|
|
|
|
106.9
|
|
Fourth 2012
Ex-Im
Guaranteed Note
|
|
|
2012
|
|
|
|
143.2
|
|
|
|
747-8F
|
|
|
|
144 months
|
|
|
|
1.48
|
%
|
|
|
98.4
|
|
|
|
109.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
645.5
|
|
|
$
|
725.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans and Capital Lease
We have entered into various term loans to finance the acquisition of aircraft. Each term loan requires payment of principal and interest
quarterly in arrears. Funds available under each term loan agreement are subject to usual and customary fees, and funds drawn under the loan agreements typically bear interest at a fixed rate based on LIBOR, plus a margin. Each facility is
guaranteed by us and subject to customary covenants and events of default.
In February 2016, we borrowed $14.8 million
related to the purchase and conversion of a
767-300BDSF
aircraft under an eight-year term loan with a final payment of $3.8 million due in February 2024 (the First 2016 Term Loan) secured by a
mortgage against the aircraft.
In June 2016, we borrowed $70.0 million under a five-year term loan with a final payment
of $30.2 million due in June 2021 (the Second 2016 Term Loan). The Second 2016 Term Loan is secured by a mortgage against six spare GEnx engines.
In September 2016, we entered into a capital lease, with an option and the intention to purchase, for a
767-300
passenger aircraft which expires in February 2017.
In December 2016, we borrowed $18.7 million under an unsecured five-year term loan due in October 2021 (the Third
2016 Term Loan) for GEnx engine performance upgrade kits and overhauls.
In October 2015, we refinanced two higher-rate
term loans, in the aggregate amount of $195.2 million, with a new lower-rate term loan (the First 2015 Term Loan) secured by a mortgage against two
747-8F
aircraft.
In November 2015, we borrowed $125.0 million under a term loan (the Second 2015 Term Loan) secured by a mortgage against
a
747-8F
aircraft. The Second 2015 Term Loan is cross-collateralized and cross-defaulted with the First 2015 Term Loan.
In December 2015, we borrowed $23.3 million related to the purchase and conversion of a
767-300BDSF
aircraft under a term loan (the Third 2015 Term
Loan) secured by a mortgage against the aircraft.
71
The following table summarizes the terms and principal balances for each term loan
outstanding and the present value of the future minimum lease payments as of December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Face
Value
|
|
|
Collateral
Type
|
|
Original
Term
|
|
Interest
Rate
Type
|
|
Interest
Rate at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Capital Lease
|
|
|
2016
|
|
|
$
|
10.8
|
|
|
767-300
|
|
5 months
|
|
Fixed
|
|
|
|
|
|
|
|
|
|
$
|
10.8
|
|
|
$
|
|
|
First 2016 Term Loan
|
|
|
2016
|
|
|
|
14.8
|
|
|
767-300
|
|
96 months
|
|
Fixed
|
|
|
3.19%
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
Second 2016 Term Loan
|
|
|
2016
|
|
|
|
70.0
|
|
|
GEnx engines
|
|
60 months
|
|
Fixed
|
|
|
3.12%
|
|
|
|
|
|
|
|
66.1
|
|
|
|
|
|
Third 2016 Term Loan
|
|
|
2016
|
|
|
|
18.7
|
|
|
None
|
|
60 months
|
|
Fixed
|
|
|
2.13%
|
|
|
|
|
|
|
|
18.7
|
|
|
|
|
|
First 2015 Term Loan
|
|
|
2015
|
|
|
|
195.2
|
|
|
Two
747-8F
|
|
97 months
|
|
Fixed
|
|
|
3.53%
|
|
|
|
3.53%
|
|
|
|
177.2
|
|
|
|
191.7
|
|
Second 2015 Term Loan
|
|
|
2015
|
|
|
|
125.0
|
|
|
747-8F
|
|
144 months
|
|
Fixed
|
|
|
3.96%
|
|
|
|
3.96%
|
|
|
|
118.9
|
|
|
|
125.0
|
|
Third 2015 Term Loan
|
|
|
2015
|
|
|
|
23.3
|
|
|
767-300
|
|
96 months
|
|
Fixed
|
|
|
3.72%
|
|
|
|
3.72%
|
|
|
|
21.4
|
|
|
|
23.3
|
|
First 2014 Term Loan
|
|
|
2014
|
|
|
|
115.0
|
|
|
777-200LRF
|
|
114 months
|
|
Fixed
|
|
|
4.48%
|
|
|
|
4.48%
|
|
|
|
94.2
|
|
|
|
101.7
|
|
Second 2014 Term Loan
|
|
|
2014
|
|
|
|
30.8
|
|
|
777-200LRF
|
|
114 months
|
|
Fixed
|
|
|
7.30%
|
|
|
|
7.30%
|
|
|
|
23.1
|
|
|
|
25.7
|
|
Third 2014 Term Loan
|
|
|
2014
|
|
|
|
115.0
|
|
|
777-200LRF
|
|
118 months
|
|
Fixed
|
|
|
4.57%
|
|
|
|
4.57%
|
|
|
|
94.2
|
|
|
|
101.4
|
|
Fourth 2014 Term Loan
|
|
|
2014
|
|
|
|
29.0
|
|
|
777-200LRF
|
|
118 months
|
|
Fixed
|
|
|
7.29%
|
|
|
|
7.29%
|
|
|
|
22.2
|
|
|
|
24.6
|
|
Fifth 2014 Term Loan
|
|
|
2014
|
|
|
|
115.0
|
|
|
777-200LRF
|
|
116 months
|
|
Fixed
|
|
|
4.51%
|
|
|
|
4.51%
|
|
|
|
95.5
|
|
|
|
102.9
|
|
Sixth 2014 Term Loan
|
|
|
2014
|
|
|
|
27.2
|
|
|
777-200LRF
|
|
116 months
|
|
Fixed
|
|
|
7.35%
|
|
|
|
7.35%
|
|
|
|
21.3
|
|
|
|
23.6
|
|
First 2013 Term Loan
|
|
|
2013
|
|
|
|
119.5
|
|
|
777-200LRF
|
|
89 months
|
|
Variable
|
|
|
3.70%
|
|
|
|
3.12%
|
|
|
|
91.0
|
|
|
|
98.0
|
|
Second 2013 Term Loan
|
|
|
2013
|
|
|
|
110.0
|
|
|
777-200LRF
|
|
88 months
|
|
Fixed
|
|
|
4.18%
|
|
|
|
4.18%
|
|
|
|
85.1
|
|
|
|
93.1
|
|
First 2012 Term Loan
|
|
|
2012
|
|
|
|
35.7
|
|
|
Four
767-300
|
|
60 months
|
|
Fixed
|
|
|
6.91%
|
|
|
|
6.91%
|
|
|
|
|
|
|
|
8.9
|
|
Third 2012 Term Loan
|
|
|
2012
|
|
|
|
26.0
|
|
|
737-800
|
|
84 months
|
|
Fixed
|
|
|
4.27%
|
|
|
|
4.27%
|
|
|
|
11.2
|
|
|
|
14.8
|
|
First 2011 Term Loan
|
|
|
2011
|
|
|
|
120.3
|
|
|
747-8F
|
|
144 months
|
|
Fixed
|
|
|
6.16%
|
|
|
|
6.16%
|
|
|
|
88.6
|
|
|
|
95.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,053.3
|
|
|
$
|
1,030.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
In June 2015, we issued $224.5 million aggregate principal amount of convertible senior notes (the Convertible Notes) in an underwritten public offering. The Convertible Notes are senior
unsecured obligations and accrue interest payable semiannually on June 1 and December 1 of each year at a fixed rate of 2.25%. The Convertible Notes will mature on June 1, 2022, unless earlier converted or repurchased pursuant to
their terms.
During 2015, we used proceeds from the issuance of the Convertible Notes to refinance higher-rate equipment
notes funded by enhanced equipment trust certificates (EETCs) related to five
747-400
freighter aircraft owned by us in the aggregate amount of $187.8 million. The EETCs had an average cash
coupon of 8.1%. In connection with the refinancing, we recognized a $66.7 million loss on early extinguishment of debt, of which $34.0 million was related to debt extinguishment costs paid to the EETC equipment note holders and
$32.7 million was related to the
write-off
of the debt discount associated with the EETCs. The debt extinguishment costs paid are reflected as a financing activity in the consolidated statements of cash
flows. As a result of this refinancing, we recognized a $13.4 million Gain on investments from the early redemption of certain investments related to EETCs in 2015 (see Note 12).
72
Each $1,000 of principal of the Convertible Notes will initially be convertible into 13.5036
shares of our common stock, which is equal to an initial conversion price of $74.05 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid
interest, except in certain limited circumstances. Upon the occurrence of a make-whole fundamental change, we will, in certain circumstances, increase the conversion rate by a number of additional shares of our common stock for
Convertible Notes converted in connection with such make-whole fundamental change. Additionally, if we undergo a fundamental change, a holder will have the option to require us to repurchase all or a portion of its
Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest through, but excluding, the fundamental change repurchase date.
In connection with the offering of the Convertible Notes, we entered into convertible note hedge transactions whereby we have the option
to purchase initially (subject to adjustment for certain specified events) a total of 3,031,558 shares of our common stock at a price of $74.05 per share. The total cost of the convertible note hedge transactions was $52.9 million. In addition,
we sold warrants to the option counterparties whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of 3,031,558 shares of our common stock at a price of $95.01. We
received $36.3 million in cash proceeds from the sale of these warrants in 2015.
Taken together, the purchase of the
convertible note hedges and the sale of warrants are intended to offset any economic dilution from the conversion of the Convertible Notes when the stock price is below $95.01 per share and to effectively increase the overall conversion price from
$74.05 to $95.01 per share. However, for purposes of the computation of diluted earnings per share in accordance with GAAP, dilution will occur when the average share price of our common stock for a given period exceeds the conversion price of the
Convertible Notes, which initially is equal to $74.05 per share. The $16.6 million net cost incurred in connection with the convertible note hedges and warrants was recorded as a reduction to additional
paid-in
capital, net of tax, in the consolidated balance sheet.
On or after
September 1, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes.
Upon conversion, the Convertible Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash
and shares of our common stock. Our current intent and policy is to settle conversions with a combination of cash and shares of common stock with the principal amount of the Convertible Notes paid in cash.
Holders may convert their Convertible Notes at their option at any time prior to September 1, 2021, only under the following
circumstances:
|
|
|
during any calendar quarter (and only during such calendar quarter) if, for each of at least 20 trading days (whether or not consecutive) during the 30
consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock for such trading day is equal to or greater than 130% of the conversion
price on such trading day;
|
|
|
|
during the five consecutive business day period immediately following any five consecutive trading day period (the measurement period) in
which, for each trading day of the measurement period, the trading price per $1,000 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock for such trading
day and the conversion rate on such trading day; or
|
|
|
|
upon the occurrence of specified corporate events.
|
We separately account for the liability and equity components of the Convertible Notes. The carrying amount of the liability component was determined by measuring the fair value of a similar liability
that does not
73
have an associated conversion feature, assuming our nonconvertible unsecured debt borrowing rate. The carrying value of the equity component, the conversion option, which is recognized as
additional
paid-in-capital,
net of tax, creates a debt discount on the Convertible Notes. The debt discount was determined by deducting the relative fair value of the
liability component from the proceeds of the Convertible Notes and is amortized to interest expense using an effective interest rate of 6.44% over the term of the Convertible Notes. As of December 31, 2016, the remaining life of the Convertible
Notes is 5.4 years. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
The Convertible Notes consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
224,500
|
|
|
$
|
224,500
|
|
Less: debt discount, net of amortization
|
|
|
(42,956
|
)
|
|
|
(49,377
|
)
|
Less: debt issuance cost, net of amortization
|
|
|
(4,146
|
)
|
|
|
(4,823
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
177,398
|
|
|
$
|
170,300
|
|
|
|
|
|
|
|
|
|
|
Equity component (1)
|
|
$
|
52,903
|
|
|
$
|
52,903
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Additional
paid-in
capital on the consolidated balance sheet as of December 31, 2016 and 2015.
|
The debt issuance costs related to the issuance of the Convertible Notes were allocated to the liability and
equity components based on their relative values, as determined above. Total debt issuance costs were $6.8 million, of which $5.2 million was allocated to the liability component and $1.6 million was allocated to the equity component.
The debt issuance costs allocated to the liability component are amortized to interest expense using the effective interest method over the term of the Convertible Notes.
The following table presents the amount of interest expense recognized related to the Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Contractual interest coupon
|
|
$
|
5,051
|
|
|
$
|
2,919
|
|
Amortization of debt discount
|
|
|
6,421
|
|
|
|
3,526
|
|
Amortization of debt issuance costs
|
|
|
677
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
Total interest expense recognized
|
|
$
|
12,149
|
|
|
$
|
6,825
|
|
|
|
|
|
|
|
|
|
|
EETC
In 1999, we issued an EETC secured by a
747-400F
aircraft in the amount of $109.9 million for an original term of 20 years with interest rates on the
underlying equipment notes ranging from 6.88% to 8.77% and an effective interest rate of 7.52%. The balance outstanding on the leveraged lease was $20.0 million and $28.0 million as of December 31, 2016 and 2015, respectively.
Revolving Credit Facility
In December 2016, we entered into a three-year $150.0 million secured revolving credit facility (the Revolver) for general corporate purposes, including financing the acquisition and
conversion of 767 aircraft prior to obtaining permanent financing for the converted aircraft. The Revolver is secured by mortgages against nine
747-400
and five
767-300
aircraft, and related engines. Amounts outstanding under the Revolver are subject to borrowing base calculations, collateral coverage and fixed charge ratios. The Revolver accrues interest monthly at LIBOR plus a margin of 2.25% per annum on the
amounts outstanding and 0.4% on the undrawn
74
portion. In connection with entry into the Revolver, we paid usual and customary fees. There were no amounts outstanding and we had $150.0 million of unused availability under the Revolver
as of December 31, 2016. In January 2017, we drew down $100.0 million under the Revolver.
Future Cash
Payments for Debt and Capital Lease
The following table summarizes the cash required to be paid by year and the
carrying value of our debt reflecting the terms that were in effect as of December 31, 2016:
|
|
|
|
|
2017
|
|
$
|
194,169
|
|
2018
|
|
|
190,529
|
|
2019
|
|
|
189,358
|
|
2020
|
|
|
297,435
|
|
2021
|
|
|
190,682
|
|
Thereafter
|
|
|
881,221
|
|
|
|
|
|
|
Total debt cash payments
|
|
|
1,943,394
|
|
Less: unamortized debt discount and debt issuance costs
|
|
|
(91,983
|
)
|
|
|
|
|
|
Debt
|
|
$
|
1,851,411
|
|
|
|
|
|
|
10. Commitments
Leveraged Lease Structure
In three separate transactions in 1998,
1999 and 2000, we issued EETCs to finance the acquisition of five
747-400F
aircraft as leveraged leases. In a leveraged lease, the owner trustee is the owner of record for the aircraft. Wells Fargo Bank
Northwest, National Association (Wells Fargo) serves as the owner trustee with respect to the leveraged leases in each of our EETC transactions. As the owner trustee of the aircraft, Wells Fargo serves as the lessor of the aircraft under
the EETC lease between us and the owner trustee. Wells Fargo also serves as trustee for the beneficial owner of the aircraft, the owner participant. The original owner participant for each aircraft invested (on an equity basis) approximately 20% of
the original cost of the aircraft. The remaining approximately 80% of the aircraft cost was financed with debt issued by the owner trustee on a nonrecourse basis in the form of equipment notes.
The equipment notes were generally issued in three series, for each aircraft, designated as Series A, B and C equipment notes. The loans
evidenced by the equipment notes were funded by the public offering of EETCs. Like the equipment notes, the EETCs were issued in three series, for each EETC transaction designated as Series A, B and C EETCs. Each series of EETCs was issued by the
trustee for separate Atlas pass-through trusts with the same designation as the series of EETCs issued (PTCs). Each of these pass-through trustees is also the holder and beneficial owner of the equipment notes bearing the same series
designation.
These leasing entities meet the criteria for variable interest entities. We have not consolidated any of the
aircraft-leasing trusts because we are not the primary beneficiary. We account for these leases as operating leases and have included them in our minimum annual rental commitments below.
Operating Leases
The following table summarizes rental expenses in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Aircraft and engines
|
|
$
|
146,110
|
|
|
$
|
145,031
|
|
|
$
|
140,390
|
|
Purchased capacity, office, vehicles and other
|
|
$
|
23,727
|
|
|
$
|
44,228
|
|
|
$
|
68,855
|
|
75
As of December 31, 2016, fifteen of our
sixty-one
operating aircraft were leased, all, except for one, of which were operating leases, with initial lease term expiration dates ranging from 2017 to 2025, with an average remaining lease term of 5.7
years. Certain of our operating leases contain renewal options and escalations. In addition, we lease engines under short-term lease agreements on an
as-needed
basis. We record rent expense on a straight-line
basis over the lease term.
The following table summarizes our minimum annual rental commitments as of the periods indicated
under
non-cancelable
aircraft, engine, real estate and other operating leases with initial or remaining terms of more than one year, reflecting the terms that were in effect as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and Engine
Operating Leases
|
|
|
Other
Operating
Leases
|
|
|
Total
|
|
2017
|
|
$
|
131,002
|
|
|
$
|
5,848
|
|
|
$
|
136,850
|
|
2018
|
|
|
130,955
|
|
|
|
5,875
|
|
|
|
136,830
|
|
2019
|
|
|
140,193
|
|
|
|
5,273
|
|
|
|
145,466
|
|
2020
|
|
|
135,372
|
|
|
|
4,875
|
|
|
|
140,247
|
|
2021
|
|
|
145,925
|
|
|
|
4,419
|
|
|
|
150,344
|
|
Thereafter
|
|
|
177,757
|
|
|
|
1,780
|
|
|
|
179,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
861,204
|
|
|
$
|
28,070
|
|
|
$
|
889,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the aircraft we Dry Lease to customers, Polar subleases aircraft from us that are leased
from a third party and are included in the table above under aircraft operating leases. The following table summarizes the contractual amount of minimum income under Dry Leases and the
non-cancelable
aircraft
subleases, reflecting the terms that were in effect as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dry Lease
Income
|
|
|
Sublease
Income
|
|
|
Total
|
|
2017
|
|
$
|
104,970
|
|
|
$
|
63,360
|
|
|
$
|
168,330
|
|
2018
|
|
|
104,023
|
|
|
|
52,800
|
|
|
|
156,823
|
|
2019
|
|
|
91,957
|
|
|
|
|
|
|
|
91,957
|
|
2020
|
|
|
81,582
|
|
|
|
|
|
|
|
81,582
|
|
2021
|
|
|
63,028
|
|
|
|
|
|
|
|
63,028
|
|
Thereafter
|
|
|
115,187
|
|
|
|
|
|
|
|
115,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease receipts
|
|
$
|
560,747
|
|
|
$
|
116,160
|
|
|
$
|
676,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Purchase Commitments
As of December 31, 2016, our estimated payments remaining for flight equipment purchase commitments are $248.6 million, of which
$201.0 million are expected to be made during 2017.
Guarantees and Indemnifications
In the ordinary course of business, we enter into numerous leasing and financing arrangements for real estate, equipment, aircraft and
engines that have various guarantees included in the contracts. These guarantees are primarily in the form of indemnities. In both leasing and financing transactions, we typically indemnify the lessors and any financing parties against tort
liabilities that arise out of the use, occupancy, manufacture, design, operation or maintenance of the leased premises or financed aircraft, regardless of whether these liabilities relate to the negligence of the indemnified parties. Currently, we
believe that any future payments required under many of these guarantees or indemnities would be immaterial, as most tort liabilities and related indemnities are covered by insurance (subject to deductibles). However, payments under certain tax
indemnities related to certain
76
of our financing arrangements, if applicable, could be material, and would not be covered by insurance, although we believe that these payments are not probable. Certain leased premises, such as
maintenance and storage facilities, typically include indemnities of such parties for any environmental liability that may arise out of or relate to the use of the leased premises. We also provide standard indemnification agreements to officers and
directors in the ordinary course of business.
Financings and Guarantees
Our financing arrangements typically contain a withholding tax provision that requires us to pay additional amounts to the applicable
lender or other financing party, if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.
These increased costs and withholding tax provisions continue for the entire term of the applicable transaction and there is no limitation on the maximum additional amount we could be required to pay
under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.
11. Income Taxes
The significant components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(376
|
)
|
|
$
|
52
|
|
|
$
|
607
|
|
State and local
|
|
|
(298
|
)
|
|
|
48
|
|
|
|
65
|
|
Foreign
|
|
|
84
|
|
|
|
1,292
|
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
(590
|
)
|
|
|
1,392
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
46,391
|
|
|
|
(24,425
|
)
|
|
|
(13,332
|
)
|
State and local
|
|
|
(1,436
|
)
|
|
|
(3,531
|
)
|
|
|
2,271
|
|
Foreign
|
|
|
2,426
|
|
|
|
2,058
|
|
|
|
(1,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense (benefit)
|
|
|
47,381
|
|
|
|
(25,898
|
)
|
|
|
(12,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
46,791
|
|
|
$
|
(24,506
|
)
|
|
$
|
(12,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The domestic and foreign earnings before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
61,006
|
|
|
$
|
(57,825
|
)
|
|
$
|
73,386
|
|
Foreign
|
|
|
28,410
|
|
|
|
40,605
|
|
|
|
16,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
89,416
|
|
|
$
|
(17,220
|
)
|
|
$
|
89,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
A reconciliation of differences between the U.S. federal statutory income tax rate and the
effective income tax rates is presented as a percent of expense (benefit) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.S. federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
%)
|
|
|
35.0
|
%
|
State and local taxes based on income, net of federal benefit
|
|
|
1.1
|
%
|
|
|
(2.0
|
%)
|
|
|
2.2
|
%
|
Change in deferred foreign and state tax rates
|
|
|
(2.2
|
%)
|
|
|
(12.0
|
%)
|
|
|
(4.2
|
%)
|
Nondeductible customer incentive related to Amazon
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
Nondeductible compensation expenses related to Amazon
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
Other nondeductible expenses
|
|
|
4.3
|
%
|
|
|
10.2
|
%
|
|
|
2.2
|
%
|
Extraterritorial income tax benefit
|
|
|
|
|
|
|
(23.3
|
%)
|
|
|
(38.8
|
%)
|
Tax incentives and additional deductions
|
|
|
(0.9
|
%)
|
|
|
(4.9
|
%)
|
|
|
(3.8
|
%)
|
Favorable resolution of income tax issues
|
|
|
|
|
|
|
(13.8
|
%)
|
|
|
(1.5
|
%)
|
Tax effect of foreign operations
|
|
|
(9.4
|
%)
|
|
|
(66.4
|
%)
|
|
|
(5.7
|
%)
|
Other
|
|
|
0.5
|
%
|
|
|
4.9
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
52.3
|
%
|
|
|
(142.3
|
%)
|
|
|
(14.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective income tax rate for the twelve months ended December 31, 2016 differed from the U.S.
federal statutory rate primarily due to a nondeductible customer incentive and to nondeductible compensation expenses resulting from a change in control, as defined under certain of the Companys benefit plans, both related to the Amazon
transaction (see Note 7). We also generated
non-recurring
tax benefits from extraterritorial income (ETI) in 2015 and 2014, which reduced our income tax rate in proportion to our income or loss.
We indefinitely reinvest the net earnings of certain foreign subsidiaries engaged in our Dry Leasing business, which
favorably impacted our effective income tax rate for all three years. At December 31, 2016, our undistributed net earnings of foreign subsidiaries for which deferred taxes have not been provided were $103.7 million, and the unrecognized
deferred tax liability associated with these earnings was $36.3 million.
78
Deferred tax assets and liabilities represent the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets and liabilities. The net noncurrent deferred tax asset (liability) was comprised of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and credits
|
|
$
|
454,749
|
|
|
$
|
437,408
|
|
Accrued compensation
|
|
|
17,036
|
|
|
|
16,523
|
|
Accrued legal settlements
|
|
|
25,442
|
|
|
|
35,909
|
|
Aircraft leases
|
|
|
16,109
|
|
|
|
14,863
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
1,597
|
|
Goodwill and other intangibles
|
|
|
15,798
|
|
|
|
|
|
Interest rate derivatives
|
|
|
3,124
|
|
|
|
3,825
|
|
Long-term
debt
|
|
|
3,409
|
|
|
|
3,827
|
|
Obsolescence reserve
|
|
|
7,804
|
|
|
|
6,723
|
|
Stock-based compensation
|
|
|
6,731
|
|
|
|
5,385
|
|
Other
|
|
|
686
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
550,888
|
|
|
|
527,929
|
|
Valuation allowance
|
|
|
(49,396
|
)
|
|
|
(50,711
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
501,492
|
|
|
$
|
477,218
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
(778,905
|
)
|
|
$
|
(754,318
|
)
|
Accrued expenses
|
|
|
(10
|
)
|
|
|
(2,166
|
)
|
Acquisition of EETC debt
|
|
|
(4,079
|
)
|
|
|
(6,390
|
)
|
Deferred maintenance
|
|
|
(6,829
|
)
|
|
|
|
|
Incentive related to Amazon
|
|
|
(8,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(798,437
|
)
|
|
$
|
(762,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
|
|
|
2016
|
|
|
2015
|
|
Deferred taxes included within following balance sheet line items:
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
$
|
(298,165
|
)
|
|
$
|
(286,928
|
)
|
Deferred costs and other assets
|
|
|
1,219
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(296,946
|
)
|
|
$
|
(285,656
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 and 2015, we had U.S. federal tax net operating losses (NOLs),
net of unrecognized tax benefits and valuation allowances, of approximately $991.0 million and $951.6 million, respectively, which will expire through 2036, if not utilized. The increase in NOLs during 2016 resulted primarily from
accelerated tax depreciation and from the acquisition of Southern Air (see Note 4). We had alternative minimum tax credits of $4.7 million and $5.2 million as of December 31, 2016 and 2015, respectively, with no expiration date.
Additionally, we had foreign NOLs for Hong Kong and Singapore of approximately $463.5 million and $428.8 million as of December 31, 2016 and 2015, respectively, with no expiration date.
79
Section 382 of the Internal Revenue Code (the Code) imposes an annual
limitation on the amount of a corporations U.S. federal taxable income that can be offset by NOLs if it experiences an ownership change, as defined. We experienced ownership changes, as defined, in 2004 and 2009. Accordingly, the
use of our NOLs generated prior to these ownership changes is subject to an annual limitation. If certain changes in our ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable carryforwards.
On each reporting date, management assesses whether we are more likely than not to realize some or all of our deferred tax
assets. After our assessment, we maintained a valuation allowance of $49.4 million, $50.7 million and $50.8 million against our deferred tax assets as of December 31, 2016, 2015 and 2014, respectively. We recorded a decrease to
the valuation allowance of $1.3 million during the year ended December 31, 2016, and decreases of $0.1 million and increase of $3.0 million during the years ended 2015 and 2014, respectively. The valuation allowance is
attributable to a limitation on NOL utilization resulting from the ownership change under Section 382. Due to this limitation, we expect a portion of our NOLs generated in 2004 and prior years to eventually expire unused.
A reconciliation of the beginning and ending unrecognized income tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
112,555
|
|
|
$
|
109,993
|
|
|
$
|
76,679
|
|
Additions for tax positions related to the current year
|
|
|
1,587
|
|
|
|
551
|
|
|
|
1,614
|
|
Additions for tax positions related to prior years
|
|
|
|
|
|
|
5,503
|
|
|
|
32,933
|
|
Reductions for tax positions related to prior years
|
|
|
(250
|
)
|
|
|
(3,492
|
)
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
113,892
|
|
|
$
|
112,555
|
|
|
$
|
109,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If recognized, all of the unrecognized income tax benefits would favorably impact the effective income
tax rate. We will maintain a liability for unrecognized income tax benefits until these uncertain positions are resolved or until the expiration of the applicable statute of limitations, if earlier.
Our policy is to record
tax-related
interest expense and penalties, if applicable, as a component
of income tax expense. We recorded no interest benefit in 2016 or 2015. The cumulative liability for
tax-related
interest was $0.1 million as of December 31, 2016 and December 31, 2015. We have
not recorded any liability for income
tax-related
penalties, and the tax authorities historically have not assessed any.
For U.S. federal income tax purposes, the 2012 through 2016 income tax years remain subject to examination. We also file income tax returns in multiple states as well as in Hong Kong and Singapore.
Generally, the 2012 through 2016 income tax years remain subject to examination in the states where we file. In addition, 2011 through 2016 Singapore income tax years and 2010 through 2016 Hong Kong income tax years are subject to examination. No
income tax examinations are in process.
12. Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). Inputs used to measure fair value are classified in the following hierarchy:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
|
Level 2
|
|
Other inputs that are observable directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, or inactive quoted prices for identical assets or
liabilities in inactive markets;
|
Level 3
|
|
Unobservable inputs reflecting assumptions about the inputs used in pricing the asset or liability.
|
80
We endeavor to utilize the best available information to measure fair value.
The carrying value of Cash and cash equivalents, Short-term investments and Restricted cash is based on cost, which approximates fair
value.
Long-term investments consist of debt securities for which we have both the ability and the intent to hold until
maturity. These investments are classified as
held-to-maturity
and reported at amortized cost. The fair value of our Long-term investments is based on a discounted cash
flow analysis using the contractual cash flows of the investments and a discount rate derived from unadjusted quoted interest rates for debt securities of comparable risk. Such debt securities represent investments in PTCs related to EETCs issued by
Atlas in 1998, 1999 and 2000. Interest on debt securities and accretion of discounts using the effective interest method are included in Interest income.
The fair value of our term loans, notes guaranteed by the
Ex-Im
Bank and EETCs are based on a discounted cash flow analysis using current borrowing rates for
instruments with similar terms.
The fair value of our Convertible Notes is based on unadjusted quoted market prices for these
securities.
The fair value of the Amazon Warrant is based on a Monte Carlo simulation which requires inputs such as our
common stock price, the warrant strike price, estimated common stock price volatility, and risk-free interest rate, among others.
The following table summarizes the carrying value, estimated fair value and classification of our financial instruments as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
123,890
|
|
|
$
|
123,890
|
|
|
$
|
123,890
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments
|
|
|
4,313
|
|
|
|
4,313
|
|
|
|
|
|
|
|
|
|
|
|
4,313
|
|
Restricted cash
|
|
|
14,360
|
|
|
|
14,360
|
|
|
|
14,360
|
|
|
|
|
|
|
|
|
|
Long-term
investments and accrued interest
|
|
|
27,951
|
|
|
|
33,161
|
|
|
|
|
|
|
|
|
|
|
|
33,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,514
|
|
|
$
|
175,724
|
|
|
$
|
138,250
|
|
|
$
|
|
|
|
$
|
37,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and capital lease
|
|
$
|
1,037,077
|
|
|
$
|
1,083,832
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,083,832
|
|
Ex-Im
Bank guaranteed notes
|
|
|
616,892
|
|
|
|
632,977
|
|
|
|
|
|
|
|
|
|
|
|
632,977
|
|
EETC
|
|
|
20,044
|
|
|
|
22,935
|
|
|
|
|
|
|
|
|
|
|
|
22,935
|
|
Convertible Notes
|
|
|
177,398
|
|
|
|
228,429
|
|
|
|
228,429
|
|
|
|
|
|
|
|
|
|
Amazon Warrant
|
|
|
95,775
|
|
|
|
95,775
|
|
|
|
|
|
|
|
95,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,947,186
|
|
|
$
|
2,063,948
|
|
|
$
|
228,429
|
|
|
$
|
95,775
|
|
|
$
|
1,739,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
425,950
|
|
|
$
|
425,950
|
|
|
$
|
425,950
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments
|
|
|
5,098
|
|
|
|
5,098
|
|
|
|
|
|
|
|
|
|
|
|
5,098
|
|
Restricted cash
|
|
|
12,981
|
|
|
|
12,981
|
|
|
|
12,981
|
|
|
|
|
|
|
|
|
|
Long-term
investments and accrued interest
|
|
|
37,604
|
|
|
|
45,867
|
|
|
|
|
|
|
|
|
|
|
|
45,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
481,633
|
|
|
$
|
489,896
|
|
|
$
|
438,931
|
|
|
$
|
|
|
|
$
|
50,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans
|
|
$
|
1,013,265
|
|
|
$
|
1,049,785
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,049,785
|
|
Ex-Im
Bank guaranteed notes
|
|
|
689,720
|
|
|
|
715,890
|
|
|
|
|
|
|
|
|
|
|
|
715,890
|
|
EETC
|
|
|
28,022
|
|
|
|
30,074
|
|
|
|
|
|
|
|
|
|
|
|
30,074
|
|
Convertible Notes
|
|
|
170,300
|
|
|
|
185,325
|
|
|
|
185,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,901,307
|
|
|
$
|
1,981,074
|
|
|
$
|
185,325
|
|
|
$
|
|
|
|
$
|
1,795,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the carrying value, gross unrealized gain (loss) and fair value of our
long-term investments and accrued interest by contractual maturity as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Value
|
|
|
Gross
Unrealized
Gain
(Loss)
|
|
|
Fair Value
|
|
|
Carrying
Value
|
|
|
Gross
Unrealized
Gain
(Loss)
|
|
|
Fair
Value
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one but within five years
|
|
$
|
27,951
|
|
|
$
|
5,210
|
|
|
$
|
33,161
|
|
|
$
|
37,604
|
|
|
$
|
8,263
|
|
|
$
|
45,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,951
|
|
|
$
|
5,210
|
|
|
$
|
33,161
|
|
|
$
|
37,604
|
|
|
$
|
8,263
|
|
|
$
|
45,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Long-term investments include investments in PTCs related to EETCs. During 2015, we repaid EETCs
related to five
747-400
freighter aircraft owned by us using proceeds from the Convertible Notes (see Note 9). Following the refinancing, we recognized a $13.4 million Gain on investments resulting from
the early redemption of certain PTCs, of which $5.7 million was related to the receipt of debt redemption premiums and $7.7 million was related to the recognition of deferred income on the PTCs purchased at a discount that have been
repaid. The early redemption of PTCs does not impact our ability or intent to hold the remainder of our PTC investments to maturity.
13. Segment Reporting
Our business is organized into three operating segments based on our service offerings: ACMI, Charter and Dry Leasing. All segments are directly or indirectly engaged in the business of air transportation
services but have different commercial and economic characteristics. Each operating segment is separately reviewed by our chief operating decision maker to assess operating results and make resource allocation decisions. We do not aggregate our
operating segments and, therefore, our operating segments are our reportable segments.
We use an economic performance metric
(Direct Contribution) that shows the profitability of each segment after allocation of direct operating and ownership costs. Direct Contribution represents Income (loss) from continuing operations before income taxes excluding the
following: Special charges, Transaction-related expenses, nonrecurring items, Losses (gains) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized losses (gains) on financial instruments, Gains on investments and
Unallocated income and expenses,
82
net. Direct operating and ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, interest expense on the portion of debt used for financing
aircraft, interest income on debt securities and aircraft depreciation. Unallocated income and expenses, net include corporate overhead, nonaircraft depreciation, noncash expenses and income, interest expense on the portion of debt used for general
corporate purposes, interest income on nondebt securities, capitalized interest, foreign exchange gains and losses, other revenue and other
non-operating
costs.
Management allocates the costs attributable to aircraft operation and ownership among the various segments based on the aircraft type and
activity levels in each segment. Depreciation and amortization expense, aircraft rent, maintenance expense, and other aircraft related expenses are allocated to segments based upon aircraft utilization because certain individual aircraft are
utilized across segments interchangeably. In addition, certain ownership costs are directly apportioned to the ACMI segment. Other allocation methods are standard activity-based methods that are commonly used in the industry.
The ACMI segment provides aircraft, crew, maintenance and insurance services to customers. Also included in the ACMI segment is CMI,
whereby we provide crew, maintenance and insurance services but not the aircraft. Under ACMI and CMI contracts, customers generally guarantee a monthly level of operation at a predetermined rate for a defined period of time. The customer bears the
commercial revenue risk and the obligation for other direct operating costs, including fuel.
The Charter segment provides
full-planeload air cargo and passenger aircraft charters to customers, including the U.S. Military Air Mobility Command (the AMC), brokers, freight forwarders, direct shippers, airlines, sports teams and fans, and private charter
customers. Charter customers generally pay a fixed charter fee and we bear the direct operating costs.
The Dry Leasing
segment provides for the leasing of aircraft and engines to customers.
Other represents revenue for services that are not
allocated to any segment, including administrative and management support services and flight simulator training.
83
The following table sets forth Operating Revenue and Direct Contribution for our reportable
segments reconciled to Operating Income and Income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
834,997
|
|
|
$
|
791,442
|
|
|
$
|
778,091
|
|
Charter
|
|
|
881,991
|
|
|
|
908,753
|
|
|
|
906,676
|
|
Dry Leasing
|
|
|
105,795
|
|
|
|
107,218
|
|
|
|
100,059
|
|
Customer incentive asset amortization
|
|
|
(537
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
17,381
|
|
|
|
15,246
|
|
|
|
14,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
$
|
1,839,627
|
|
|
$
|
1,822,659
|
|
|
$
|
1,799,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
200,563
|
|
|
$
|
185,615
|
|
|
$
|
200,489
|
|
Charter
|
|
|
133,727
|
|
|
|
124,808
|
|
|
|
47,245
|
|
Dry Leasing
|
|
|
33,114
|
|
|
|
42,023
|
|
|
|
33,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Contribution for Reportable Segments
|
|
|
367,404
|
|
|
|
352,446
|
|
|
|
280,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back (subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated income and expenses, net
|
|
|
(242,768
|
)
|
|
|
(294,451
|
)
|
|
|
(161,616
|
)
|
Loss on early extinguishment of debt
|
|
|
(132
|
)
|
|
|
(69,728
|
)
|
|
|
|
|
Unrealized loss on financial instruments
|
|
|
(2,888
|
)
|
|
|
|
|
|
|
|
|
Gain on investments
|
|
|
|
|
|
|
13,439
|
|
|
|
|
|
Special charge
|
|
|
(10,140
|
)
|
|
|
(17,388
|
)
|
|
|
(15,114
|
)
|
Transaction-related expenses
|
|
|
(22,071
|
)
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of aircraft
|
|
|
11
|
|
|
|
(1,538
|
)
|
|
|
(14,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
89,416
|
|
|
|
(17,220
|
)
|
|
|
89,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back (subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(5,532
|
)
|
|
|
(12,554
|
)
|
|
|
(18,480
|
)
|
Interest expense
|
|
|
84,650
|
|
|
|
96,756
|
|
|
|
104,252
|
|
Capitalized interest
|
|
|
(3,313
|
)
|
|
|
(1,027
|
)
|
|
|
(453
|
)
|
Loss on early extinguishment of debt
|
|
|
132
|
|
|
|
69,728
|
|
|
|
|
|
Unrealized loss on financial instruments
|
|
|
2,888
|
|
|
|
|
|
|
|
|
|
Gain on investments
|
|
|
|
|
|
|
(13,439
|
)
|
|
|
|
|
Other expense
|
|
|
70
|
|
|
|
1,261
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
$
|
168,311
|
|
|
$
|
123,505
|
|
|
$
|
175,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Given the nature of our business and international flying, geographic information for revenue, long-lived
assets and total assets is not presented because it is impracticable to do so.
84
We are exposed to a concentration of revenue from the AMC and Polar (see Note 3 for further
discussion regarding Polar). No other customer accounted for more than 10.0% of our Total Operating Revenue. Revenue from the AMC was $436.1 million in 2016 and $418.3 million in 2015. Accounts receivable from the AMC were
$9.0 million and $26.3 million as of December 31, 2016 and December 31, 2015, respectively. We have not experienced any credit issues with either of these customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
ACMI
|
|
$
|
61,630
|
|
|
$
|
62,253
|
|
|
$
|
56,289
|
|
Charter
|
|
|
37,239
|
|
|
|
27,294
|
|
|
|
25,286
|
|
Dry Leasing
|
|
|
40,164
|
|
|
|
31,326
|
|
|
|
31,592
|
|
Unallocated
|
|
|
9,843
|
|
|
|
7,867
|
|
|
|
7,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization
|
|
$
|
148,876
|
|
|
$
|
128,740
|
|
|
$
|
120,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Labor and Legal Proceedings
Labor
Pilots of Atlas and Southern Air, and flight dispatchers of Atlas and Polar are represented by the International Brotherhood of Teamsters (the IBT). We have a five-year collective bargaining
agreement (CBA) with our Atlas pilots, which became amendable in September 2016 and a four-year CBA with the Southern Air pilots, which became amendable in November 2016. We also have a five-year CBA with our Atlas and Polar dispatchers,
which becomes amendable in November 2017.
After we completed the acquisition of Southern Air in April 2016, we informed the
IBT of our intention to pursue (and we have been pursuing) a complete operational merger of Atlas and Southern Air. Pursuant to the merger provisions in both the Atlas and Southern Air CBAs, joint negotiations for a single CBA for Atlas and Southern
Air should commence promptly. Once a seniority list is presented to us by the unions, it triggers an agreed-upon time frame to negotiate a new joint CBA with any unresolved issues submitted to binding arbitration. After the merger process began, the
IBT filed an application for mediation with the National Mediation Board (NMB) on behalf of the Atlas pilots. We have opposed the mediation application as it is not in accordance with the merger provisions in the parties existing
CBAs, which have a defined and streamlined process for negotiating a joint CBA when a merger occurs, as in the case with the Atlas and Southern Air merger. The NMB conducted a
pre-mediation
investigation in
June 2016, which is currently pending. Due to a lack of meaningful progress in such discussions, in February 2017, we filed a lawsuit against the IBT to compel arbitration on the issue of whether the merger provisions in Atlas and Southern
Airs CBAs apply to the bargaining process.
We are subject to risks of work interruption or stoppage as permitted by the
Railway Labor Act of 1926 (the Railway Labor Act) and may incur additional administrative expenses associated with union representation of our employees.
Matters Related to Alleged Pricing Practices
The Company and Polar
Air Cargo, LLC (Old Polar), a consolidated subsidiary, were named defendants, along with a number of other cargo carriers, in several class actions in the U.S. arising from allegations about
the pricing practices of Old Polar and
a number of air cargo carriers. These actions were all centralized in the U.S. District Court for the Eastern District of New York. Polar was later joined as an additional defendant. The consolidated complaint alleged, among other things, that the
defendants, including the Company and Old Polar, manipulated the market price for air cargo services sold domestically and abroad through the use of surcharges, in violation of U.S., state, and European Union antitrust laws. The suit sought treble
damages and attorneys fees.
85
On January 7, 2016, the Company, Old Polar, and Polar entered into a settlement agreement to
settle all claims by participating class members against the Company, Old Polar and Polar. The Company, Polar, and Old Polar deny any wrongdoing, and there is no admission of any wrongdoing in the settlement agreement. Pursuant to the settlement
agreement, the Company, Old Polar and Polar have agreed to make installment payments over three years to settle the plaintiffs claims, with payments of $35.0 million paid on January 15, 2016, $35.0 million due on or before January 15, 2017,
and $30.0 million due on or before January 15, 2018. The U.S. District Court for the Eastern District of New York issued an order granting preliminary approval of the settlement on January 12, 2016. On October 6, 2016, the final judgment was issued
and the settlement was approved.
In the United Kingdom, several groups of named claimants have brought suit against British
Airways in connection with the same alleged pricing practices at issue in the proceedings described above and are seeking damages allegedly arising from that conduct. British Airways has filed claims in the lawsuit against Old Polar and a number of
air cargo carriers for contribution should British Airways be found liable to claimants. Old Polars formal statement of defense was filed on March 2, 2015. On October 14, 2015, the U.K. Court of Appeal released decisions favorable to
the defendant and contributory defendants on two matters under appeal. Permission has been sought to appeal the U.K. Court of Appeals decisions to the U.K. Supreme Court. In December 2015, certain claimants settled with British Airways
removing a significant portion of the claim against British Airways and therefore reducing the potential contribution required by the other airlines, including Old Polar. On December 16, 2015, the European General Court released decisions
annulling decisions that the European Commission made against the majority of the air cargo carriers. The European Commission did not appeal the General Court decision, but may still reopen its investigation or reissue a revised decision, either of
which would have a significant impact on the proceedings in the U.K. court. Future procedures, including the pretrial disclosure process, are continuing. We are unable to reasonably predict the outcome of the litigation.
In the Netherlands, Stichting Cartel Compensation, successor in interest to claims of various shippers, has filed suit in the district
court in Amsterdam against British Airways, KLM, Martinair, Air France, Lufthansa and Singapore Airlines seeking recovery for damages purportedly arising from the same pricing practices at issue in the proceedings described above. In response,
British Airways, KLM, Martinair, Air France and Lufthansa filed third-party indemnification lawsuits against Old Polar and Polar seeking indemnification in the event the defendants are found to be liable in the main proceedings. Old Polar and Polar
entered their initial court appearances on September 30, 2015. Various procedural issues are undergoing court review. Like the U.K. proceedings, the Netherlands proceedings are likely to be affected by the European Commissions response to
the European General Court decisions of December 16, 2015. We are unable to reasonably predict the outcome of the litigation.
If the Company, Old Polar or Polar were to incur an unfavorable outcome in connection with the U.K. or Netherlands proceedings, such outcome may have a material adverse impact on our business, financial
condition, results of operations or cash flows. We are unable to reasonably estimate a range of possible loss for such matters at this time.
Brazilian Customs Claim
Old Polar was cited for two alleged customs
violations in Sao Paulo, Brazil, relating to shipments of goods dating back to 1999 and 2000. Each claim asserts that goods listed on the flight manifest of two separate Old Polar scheduled service flights were not on board the aircraft upon arrival
and therefore were improperly brought into Brazil. The two claims, which also seek unpaid customs duties, taxes and penalties from the date of the alleged infraction, are approximately $9.3 million in aggregate based on December 31, 2016
exchange rates.
In both cases, we believe that the amounts claimed are substantially overstated due to a calculation error
when considering the type and amount of goods allegedly missing, among other things. Furthermore, we may seek appropriate indemnity from the shipper in each claim as may be feasible. In the pending claim for one of the
86
cases, we have received an administrative decision dismissing the claim in its entirety, which remains subject to a mandatory appeal by the Brazil customs authorities. As required to defend such
claims, we have made deposits pending resolution of these matters. The balances were $5.0 million as of December 31, 2016 and $3.8 million as of December 31, 2015, and are included in Deposits and other assets.
We are currently defending these and other Brazilian customs claims and the ultimate disposition of these claims, either individually or
in the aggregate, is not expected to materially affect our financial condition, results of operations or cash flows.
Accruals
As of December 31, 2016, the Company had a remaining accrual of $65.0 million related to the U.S. class action settlement that was recognized in 2015. During 2016, the Company recorded a net
accrual of $6.2 million within Other operating expense in the consolidated statement of operations related to pending litigation outside of the U.S.
Other
We have certain other contingencies incident to the ordinary
course of business. Management believes that the ultimate disposition of such other contingencies is not expected to materially affect our financial condition, results of operations or cash flows.
15. Stock-Based and Long-term Incentive Compensation Plans
In 2007, our stockholders approved a Long-Term Incentive Plan (the 2007 Plan). An aggregate of 0.6 million shares of
common stock was reserved for issuance to participants under the 2007 Plan. The 2007 Plan provided for stock awards of up to approximately 2.8 million shares of AAWWs common stock to employees in various forms, including cash awards and
performance cash awards. Stock awards included nonqualified options, incentive stock options, share appreciation rights, restricted shares, restricted share units, performance shares and performance units, dividend equivalents and other share-based
awards. In 2016, the stockholders approved a revised Long-Term Incentive Plan (the 2016 Plan), which replaced the 2007 Plan. An aggregate of 0.7 million shares of common stock was reserved for issuance to participants under the 2016
Plan. No new awards have been made under the 2007 Plan since the adoption of the 2016 Plan in May 2016. Awards outstanding under the 2007 Plan will continue to be governed by the terms of that plan and agreements under which they were granted. The
2016 Plan limits the terms of awards to ten years and prohibits the granting of awards more than ten years after the effective date of the 2016 Plan.
As of December 31, 2016, the 2016 Plan had a total of 0.7 million shares of common stock available for future award grants to management and members of the board of directors. Including the
impact of the change in control as defined under the benefit plan in 2016 (see Note 7), our compensation expense for both plans was $30.9 million in 2016, $15.0 million in 2015 and $12.5 million in 2014. Income tax benefits recognized
for share-based compensation arrangements were $8.7 million in 2016, $5.7 million in 2015 and $4.0 million in 2014. The excess cash tax effect classified as a financing cash inflow was a nominal benefit in 2016, 2015 and 2014.
Nonqualified Stock Options
The portion of the 2016 Plan and the 2007 Plan applicable to employees is administered by the compensation committee of the board of directors, which also establishes the terms of the awards.
Nonqualified stock options, which have not been granted since 2007, vest over a three or four year period and expire seven to ten years
from the date of grant. While nonqualified stock options may be granted at any price, they have never been granted with an exercise price less than the fair market value of the stock on the date of grant.
87
A summary of our options as of December 31, 2016 and changes during the year then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Term
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding as of December 31, 2015
|
|
|
34,700
|
|
|
$
|
58.41
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30,200
|
)
|
|
|
58.34
|
|
|
|
|
|
|
|
|
|
Forfeited, net of adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
4,500
|
|
|
$
|
58.89
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
|
|
4,500
|
|
|
$
|
58.89
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised in 2016 and 2015 was nominal and the cash received was
zero and $1.2 million, respectively. No options were exercised in 2014.
As of December 31, 2016, there was no
unrecognized compensation cost related to
non-vested
stock options granted and all options have vested.
Restricted Share Awards
Restricted shares granted vest and are
expensed over
one-,
three- or four- year periods. Restricted share awards have been granted in both shares and units. As of December 31, 2016, a total of 3.5 million restricted shares have been
granted under the 2007 and 2016 Plans. All shares were valued at their fair market value on the date of issuance. Unrecognized compensation cost as of December 31, 2016 is $18.9 million and will be recognized over the remaining weighted
average life of 2.1 years.
A summary of our restricted shares as of December 31, 2016 and changes during the year then
ended are presented below:
|
|
|
|
|
|
|
|
|
Restricted Share Awards
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Unvested as of December 31, 2015
|
|
|
840,879
|
|
|
$
|
40.52
|
|
Granted
|
|
|
428,314
|
|
|
|
36.10
|
|
Vested
|
|
|
(522,994
|
)
|
|
|
37.84
|
|
Forfeited
|
|
|
(16,053
|
)
|
|
|
38.54
|
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2016
|
|
|
730,146
|
|
|
$
|
39.89
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested on various vesting dates was $19.8 million in 2016,
$13.7 million in 2015 and $11.3 million in 2014. Weighted average grant date fair value was $47.10 in 2015 and $33.21 in 2014.
Performance Share and Performance Cash Awards
Performance share and
performance cash awards granted are expensed over three years, which generally is the requisite service period. Awards generally become vested if (1) we achieve certain specified performance levels compared with predetermined performance
thresholds during a three-year period starting in the grant year and ending on December 31 three years later, and (2) the employee remains employed by us through the determination date which can be no later than four months following the
end of the Performance Period. Partial
88
vesting may occur for certain employee terminations. As a result of a change in control as defined under the benefit plan (see Note 7), the performance levels are deemed to be achieved for all
performance share and performance cash awards outstanding as of December 31, 2016. Performance share awards have been granted to employees in shares and units. All performance share and performance cash awards are valued at their fair market
value on the date of grant. The estimated compensation expense recognized for performance share and performance cash awards are net of estimated forfeitures. We assess the performance levels in the first quarter of each year for the prior year. We
review the results, adjust the estimated performance level and record any change to compensation cost. As of December 31, 2016, a total of 1.7 million performance shares have been granted. Unrecognized compensation cost as of
December 31, 2016 is $8.3 million and will be recognized over the remaining weighted average life of 1.7 years. For the performance cash awards, we had accruals of $13.1 million as of December 31, 2016 and $4.0 million as of
December 31, 2015 in Other liabilities. Including the impact of the change in control as defined under the benefit plan in 2016, we recognized compensation expense associated with the performance cash awards totaling $13.9 million in 2016,
$1.6 million in 2015 and $1.3 million in 2014.
A summary of our performance shares as of December 31, 2016 and
changes during the year then ended are presented below:
|
|
|
|
|
|
|
|
|
Performance Share Awards
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
Unvested as of December 31, 2015
|
|
|
334,692
|
|
|
$
|
23.85
|
|
Granted
|
|
|
494,894
|
|
|
|
37.21
|
|
Vested
|
|
|
(151,719
|
)
|
|
|
38.32
|
|
Forfeited
|
|
|
(101,701
|
)
|
|
|
47.76
|
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2016
|
|
|
576,166
|
|
|
$
|
27.30
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested on various vesting dates in 2016 was $5.8 million,
$3.7 million in 2015 and $7.0 in 2014. Weighted average grant date fair value was $47.48 in 2015 and $32.2 in 2014.
16. Profit Sharing, Incentive and Retirement Plans
Profit Sharing and Incentive Plans
We have an annual incentive
compensation program for management employees. The program provides for payments to eligible employees based upon our financial performance, service performance and attainment of individual performance goals, among other things. In addition, our
profit sharing plan allows
IBT-represented
Atlas crewmembers to receive payments from the plan based upon Atlas financial performance. The profit sharing plan is subject to a minimum financial
performance threshold. For both plans, we had accruals of $22.1 million as of December 31, 2016 and $27.0 million as of December 31, 2015 in Accrued liabilities. Including the impact of the change in control as defined under the
benefit plan in 2016 (see Note 7), we recognized compensation expense associated with both plans totaling $21.8 million in 2016, $28.5 million in 2015 and $21.7 million in 2014.
401(k) and 401(m) Plans
Participants in our retirement plan may contribute a portion of their annual compensation to a 401(k) plan on a pretax basis, subject to aggregate limits under the Code. In addition to 401(k)
contributions, participants may contribute a portion of their eligible compensation to a 401(m) plan on an
after-tax
basis. On behalf of participants in the plan who make elective compensation deferrals, we
provide a matching contribution subject to certain limitations. Employee contributions in the plan are vested at all times and our matching contributions are subject to a three-year cliff vesting provision, except for employees who are represented
by a collective bargaining agreement and are subject to a three-year graded vesting provision. We recognized compensation expense associated with the plan matching contributions totaling $10.5 million in 2016, $9.5 million in 2015 and
$8.5 million in 2014.
89
17. Stock Repurchases
We record the repurchase of our shares of common stock at cost based on the settlement date of the transaction. These shares are
classified as treasury stock, which is a reduction to stockholders equity. Treasury shares are included in authorized and issued shares but excluded from outstanding shares.
In 2008, we established a stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock. In
November 2013, we announced an increase of $51.0 million to our stock repurchase program. As of December 31, 2016, we had repurchased a total of 3,307,911 shares of our common stock for approximately $126.0 million under this program,
resulting in $25.0 million of available authorization remaining. Purchases may be made at our discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase programs or a combination
of these methods. The actual timing and amount of our repurchases will depend on Company and market conditions.
In addition,
we repurchased 297,569 and 140,198 shares of common stock from management, in connection with the vesting of equity awards to pay the statutory tax withholdings of employees, at an average price of $37.89 per share in 2016 and $46.54 per share in
2015, and held the shares as treasury shares.
18. Earnings Per Share
Basic earnings per share (EPS) represent net income divided by the weighted average number of common shares outstanding during
the measurement period. Diluted EPS represent net income divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding
during the period using the treasury stock method. Anti-dilutive shares related to warrants and stock options that were out of the money and excluded for 2016 were 3.3 million, 2015 were 3.0 million, and were de minimis for 2014.
The calculations of basic and diluted EPS were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of taxes
|
|
$
|
42,625
|
|
|
$
|
7,286
|
|
|
$
|
102,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS weighted average shares outstanding
|
|
|
24,843
|
|
|
|
24,833
|
|
|
|
25,031
|
|
Effect of dilutive stock options and restricted stock
|
|
|
277
|
|
|
|
185
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS weighted average shares outstanding
|
|
|
25,120
|
|
|
|
25,018
|
|
|
|
25,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.72
|
|
|
$
|
0.29
|
|
|
$
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.70
|
|
|
$
|
0.29
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.67
|
|
|
$
|
0.29
|
|
|
$
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.65
|
|
|
$
|
0.29
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Diluted shares reflect the potential dilution that could occur from stock options and
restricted shares using the treasury stock method. The calculation of EPS does not include restricted share units and warrants in which performance or market conditions were not satisfied of 7.5 million in 2016, 0.3 million in 2015 and
0.4 million in 2014.
19. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
Derivatives
|
|
|
Foreign Currency
Translation
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
$
|
(9,924
|
)
|
|
$
|
352
|
|
|
$
|
(9,572
|
)
|
Reclassification to interest expense
|
|
|
6,129
|
|
|
|
|
|
|
|
6,129
|
|
Translation adjustment
|
|
|
|
|
|
|
(343
|
)
|
|
|
(343
|
)
|
Tax effect
|
|
|
(2,277
|
)
|
|
|
|
|
|
|
(2,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
(6,072
|
)
|
|
|
9
|
|
|
|
(6,063
|
)
|
Reclassification to interest expense
|
|
|
1,770
|
|
|
|
|
|
|
|
1,770
|
|
Translation adjustment
|
|
|
(700
|
)
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
(5,002
|
)
|
|
$
|
9
|
|
|
$
|
(4,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives
As of December 31, 2016, there was $8.1 million of net unamortized realized loss before taxes remaining in Accumulated other
comprehensive income (loss) related to forward-starting interest rate swaps terminated in prior years, which had been designated as cash flow hedges to effectively fix the interest rates on two
747-8F
financings in 2011 and three
777-200LRF
financings in 2014. The net loss is amortized and reclassified into Interest expense over the remaining life of the related debt. Net realized loss reclassified into
earnings was $1.8 million in 2016 and $6.1 million in 2015. Net realized loss expected to be reclassified into earnings within the next 12 months is $1.6 million as of December 31, 2016.
91
20. Selected Quarterly Financial Information (unaudited)
The following tables summarize the 2016 and 2015 quarterly results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016*
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Total Operating Revenue
|
|
$
|
418,615
|
|
|
$
|
443,272
|
|
|
$
|
448,015
|
|
|
$
|
529,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
20,057
|
|
|
|
20,824
|
|
|
|
25,998
|
|
|
|
101,432
|
|
Income (Loss) from continuing operations, net of taxes
|
|
|
471
|
|
|
|
20,919
|
|
|
|
(7,501
|
)
|
|
|
28,736
|
|
Loss from discontinued operations, net of taxes
|
|
|
|
|
|
|
(345
|
)
|
|
|
(445
|
)
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
471
|
|
|
$
|
20,574
|
|
|
$
|
(7,946
|
)
|
|
$
|
28,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.84
|
|
|
$
|
(0.30
|
)
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted**
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.83
|
|
|
$
|
(0.32
|
)
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted**
|
|
$
|
0.02
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015***
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Total Operating Revenue
|
|
$
|
444,845
|
|
|
$
|
455,833
|
|
|
$
|
449,904
|
|
|
$
|
472,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
56,970
|
|
|
|
61,284
|
|
|
|
48,995
|
|
|
|
(43,744
|
)
|
Income (Loss) from continuing operations, net of taxes
|
|
|
29,232
|
|
|
|
28,390
|
|
|
|
(12,754
|
)
|
|
|
(37,582
|
)
|
Loss from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
29,232
|
|
|
$
|
28,390
|
|
|
$
|
(12,754
|
)
|
|
$
|
(37,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.13
|
|
|
$
|
(0.51
|
)
|
|
$
|
(1.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
1.13
|
|
|
$
|
(0.51
|
)
|
|
$
|
(1.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.13
|
|
|
$
|
(0.51
|
)
|
|
$
|
(1.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
1.13
|
|
|
$
|
(0.51
|
)
|
|
$
|
(1.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Included in the first quarter was a special charge of $6.6 million. Included in the second quarter were an unrealized gain on financial
instruments of $26.5 million, transaction-related expenses of $16.8 million and an accrual for legal matters of $6.7 million. Included in the third quarter were compensation costs related to a
|
92
|
change in control as defined under certain benefit plans of $26.2 million, transaction-related expenses of $3.9 million and an unrealized loss on financial instruments of
$1.5 million. Included in the fourth quarter were an unrealized loss on financial instruments of $27.9 million, a special charge of $3.5 million and transaction-related expenses of $0.6 million.
|
**
|
In 2016, the sum of quarterly diluted EPS amounts differs from the full year diluted EPS. The difference primarily relates to the exclusion from the calculation of
diluted EPS of an unrealized gain on financial instruments in the second quarter and anti-dilutive shares in the third quarter, both related to the Amazon Warrant.
|
***
|
Included in the third quarter was a pretax loss on early extinguishment of debt of $66.7 million, a gain on investments of $13.4 million and a special charge
of $7.7 million. Included in the fourth quarter was a pretax charge for a legal settlement of $99.8 million included in Other operating expenses (see Note 14), the reclassification of a derivative loss into earnings of $3.7 million, a
loss on early extinguishment of debt of $3.0 million and a special charge of $9.8 million.
|