Atlas Air Worldwide Holdings, Inc. (Nasdaq: AAWW) today announced a loss from continuing operations, net of taxes, of $7.5 million, or $0.30 per diluted share, for the three months ended September 30, 2016. Results for the period were primarily due to the impact of nondeductible expenses triggered by shareholder approval of warrants granted to Amazon in connection with our long-term agreements to dry lease and operate 767-300 aircraft. Results compared with a loss from continuing operations, net of taxes, of $12.8 million, or $0.51 per diluted share, for the three months ended September 30, 2015.
On an adjusted basis, income from continuing operations, net of taxes, in the third quarter of 2016 totaled $27.4 million, or $1.09 per diluted share. That compared with $30.7 million, or $1.23 per diluted share, in the year-ago quarter, which included income tax benefits primarily from the favorable resolution of an IRS exam.
“During the third quarter, we continued to focus on increasing our alignment with the faster-growing express and e-commerce markets,” said William J. Flynn, President and Chief Executive Officer.
“We placed our first aircraft into service for Amazon in August, and we moved forward with preparations to ramp up to 20 by the end of 2018. We also made significant progress toward integrating Southern Air and the two new operating platforms that it adds. Thus far, the contributions and synergies from Southern Air and its express-focused 777 and 737 CMI services have exceeded our expectations.
“Reflecting our expanding business base and the ongoing development of our strategic platform, our third-quarter results were at the upper end of the range that we expected. In ACMI, we started flying for Amazon and benefited from accretion generated by Southern Air. In Charter, our results reflected an increase in military cargo and passenger demand. And our Dry Leasing business maintained its steady, annuity-like performance. Despite publicity about the Hanjin Shipping bankruptcy during the quarter, we did not observe any noticeable impact on airfreight demand or rates.”
Mr. Flynn added: “We are looking forward to a strong fourth quarter, led by our superior fleet, the strength of our brand and our global market leadership in outsourced aircraft and services.
“We expect peak-season demand to be solid and accompanied by a seasonal improvement in commercial airfreight yields. Together with our additional seasonal flying for express operators and a lower level of maintenance expense, we expect both a sequential and a year-over-year improvement in our block-hour volumes, revenue, profitability and margins in the fourth quarter, which we anticipate will account for slightly more than 50% of our 2016 adjusted diluted EPS.”
Mr. Flynn concluded: “We continue to believe strongly in the future of airfreight, express and e-commerce, and we are shaping Atlas to make the most of that future – through the quality and scale of our fleet, through the efficiency of our operations, and through the strength of our business relationships.
“As we announced recently, we have entered into a five-year agreement with FedEx Express to provide it with five 747-400 freighter aircraft for peak-season flying beginning in 2017 and lasting through 2021. We have worked closely and successfully with FedEx for many years, with an agreement to provide five aircraft for 2016 peak-season flying already in place. This new agreement will enable both of our companies to better plan for the longer term.”
ACMI segment contribution increased in the third quarter of 2016, primarily driven by our acquisition of Southern Air but partially offset by the temporary redeployment of 747-8F aircraft to our Charter segment and higher heavy maintenance expense. Segment revenue growth benefited from an increase in block-hour volumes, partially offset by a lower average rate per block hour. Both our volumes and average rate reflected an increase in 777-200 and 737-400 CMI flying following the acquisition of Southern Air, an increase in 767 CMI flying, as well as the temporary redeployment of 747-8F aircraft to our Charter segment.
Higher Charter segment contribution during the period reflected the beneficial impact of additional 747-8F capacity as well as an increase in military cargo and passenger demand. These were partially offset by a decline in market rates and an increase in heavy maintenance expense. Lower revenue per block hour during the period was primarily due to a reduction in fuel prices in 2016 and a decline in market rates, which were partially offset by the beneficial impact of additional 747-8F aircraft.
Segment contribution in Dry Leasing was relatively unchanged on a year-over-year basis.
Higher unallocated income and expenses in the third quarter of 2016 primarily reflected charges resulting from a change in control as defined under certain benefit plans related to the Amazon transaction and the impact of the Southern Air acquisition.
Reported earnings for the third quarter of 2016 included an effective income tax rate of 230.8%, principally due to income tax expense resulting from nondeductible expenses related to shareholder approval of the Amazon transaction. On an adjusted basis, our results reflected an effective income tax rate of 29.9%.
At a special meeting on September 20, 2016, shareholders of the company, by a vote of approximately 99.9% of the votes cast, approved the issuance to Amazon of warrants to acquire up to 30% of the common shares of the company.
This approval constituted a change in control, as defined under certain of the company’s benefit plans. As a result, we recognized $26.2 million of expense, including accelerated compensation expense for certain restricted and performance share and cash awards, during the third quarter. The share-based portion of the compensation expense was $11.6 million.
The warrants granted to Amazon are part of the inherent value creation and alignment of interests designed to strengthen the long-term relationship between the company and Amazon under long-term commercial agreements announced in May 2016.
Under the agreements, the company will lease and operate 20 B767-300 converted freighters in support of Amazon’s package deliveries to its customers. The agreements also provide for future growth of the relationship as Amazon may increase its business with the company.
For the nine months ended September 30, 2016, our continuing operations generated income of $13.9 million. However, after the impact of warrant accounting, we reported a loss of $0.49 per diluted share. For the nine months ended September 30, 2015, our income from continuing operations totaled $44.9 million, or $1.80 per diluted share.
On an adjusted basis, income from continuing operations in the first nine months of 2016 totaled $55.3 million, or $2.20 per diluted share, compared with $85.9 million, or $3.44 per diluted share, in the first nine months of 2015.
Both reported and adjusted results in 2016 reflect the impact of startup expenses for our new service for Amazon, while reported and adjusted results in 2015 benefited from U.S. West Coast port-congestion-related earnings.
At September 30, 2016, our cash, cash equivalents, restricted cash and short-term investments totaled $117.7 million, compared with $444.0 million at December 31, 2015.
The change in position reflected cash used for investing and financing activities, partially offset by cash provided by operating activities.
Net cash used for investing activities during the first nine months of 2016 primarily related to our acquisition of Southern Air, capital expenditures, and purchase deposits and payments for flight equipment, including the acquisition of 767-300 aircraft to be converted to freighter configuration for our service for Amazon. We expect to finance a substantial portion of the acquisition and conversion costs for these aircraft as they are placed into service with Amazon.
Net cash used for financing activities primarily reflected payments on debt obligations, partially offset by new debt financing.
We are encouraged by our performance in the first nine months of 2016, and the steps we have taken to align our business with the faster-growing express and e-commerce markets.
Looking to the fourth quarter, we anticipate solid peak-season volumes and yields. Consistent with our year-to-date performance and our framework for the full year, we expect adjusted diluted EPS from continuing operations of slightly more than $2.25 in the fourth quarter.
Our view includes an EPS impact for necessary startup expenses and the issuance of warrants as we commence our new service for Amazon. It anticipates substantially lower maintenance expense compared with the third quarter of 2016 and the fourth quarter of 2015. And it reflects:
For the full year, we expect total block hours including Southern Air to increase approximately 19% compared with 2015, with more than 70% of our 2016 hours in ACMI and the balance in Charter.
Including Southern Air, aircraft maintenance expense in 2016 should total approximately $200 million, and depreciation and amortization is expected to total approximately $145 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are expected to total approximately $55 million, mainly for spare parts for our fleet.
We provide guidance on an adjusted basis because we are unable to predict, with reasonable certainty, the effects of the warrants issued to Amazon or certain other significant items that could be material to our reported results.
Management will host a conference call to discuss Atlas Air Worldwide’s third-quarter 2016 financial and operating results at 11:00 a.m. Eastern Time on Thursday, November 3, 2016.
Interested parties are invited to listen to the call live over the Internet at www.atlasair.com (click on “Investor Information,” click on “Presentations” and on the link to the third-quarter call) or at the following Web address:
For those unable to listen to the live call, a replay will be archived on the above websites following the call. A replay will also be available through November 10 by dialing (855) 859-2056 (U.S. Toll Free) or (404) 537-3406 (from outside the U.S.) and using Access Code 2997334#.
To supplement our financial statements presented in accordance with U.S. GAAP, we present certain non-GAAP financial measures to assist in the evaluation of our business performance. These non-GAAP measures include EBITDAR, as adjusted; EBITDA, as adjusted; Direct Contribution; Adjusted income from continuing operations, net of tax; Adjusted Diluted EPS from continuing operations; and Free Cash Flow, which exclude certain noncash income and expenses, and items impacting year-over-year comparisons of our results. These non-GAAP measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for Income from continuing operations, net of taxes, Diluted EPS from continuing operations, and Net Cash Provided by Operating Activities, which are the most directly comparable measures of performance prepared in accordance with U.S. GAAP.
Our management uses these non-GAAP financial measures in assessing the performance of the Company’s ongoing operations and in planning and forecasting future periods. We believe that these adjusted measures, when considered together with the corresponding U.S. GAAP financial measures and the reconciliations to those measures, provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance.
Atlas Air Worldwide is a leading global provider of outsourced aircraft and aviation operating services. It is the parent company of Atlas Air, Inc., Southern Air Holdings, Inc. and Titan Aviation Holdings, Inc., and is the majority shareholder of Polar Air Cargo Worldwide, Inc. Our companies operate the world’s largest fleet of 747 freighter aircraft and provide customers the broadest array of Boeing 747, 777, 767, 757 and 737 aircraft for domestic, regional and international applications.
Atlas Air Worldwide’s press releases, SEC filings and other information may be accessed through the company’s home page, www.atlasair.com.
This release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect Atlas Air Worldwide’s current views with respect to certain current and future events and financial performance. Those statements are based on management’s beliefs, plans, expectations and assumptions, and on information currently available to management. Generally, the words “will,” “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “project,” “estimate,” and similar expressions used in this release that do not relate to historical facts are intended to identify forward-looking statements.
Such forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the operations and business environments of Atlas Air Worldwide and its subsidiaries (collectively, the “companies”) that may cause the actual results of the companies to be materially different from any future results, express or implied, in such forward-looking statements.
Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: our ability to effectively operate the network service contemplated by our agreements with Amazon, including the cost and timing of securing any aircraft necessary to fulfill our agreements; the risk that the anticipated benefits of our agreements with Amazon will not be realized when expected, or at all; the possibility that Amazon may terminate its agreements with the companies; the effect of the announcement or pendency of the transactions contemplated by the agreements with Amazon; costs associated with the acquisition of Southern Air; failure to achieve expected synergies, accretion and other anticipated benefits of the transaction or to successfully integrate the Southern Air business; adverse reactions to the acquisition by employees, key customers, including DHL Express, suppliers or competitors of either Atlas Air Worldwide, Southern Air, or their subsidiaries; our ability to effectively operate the 777 platform or grow the business of Southern Air; the ability of the companies to operate pursuant to the terms of their financing facilities; the ability of the companies to obtain and maintain normal terms with vendors and service providers; the companies’ ability to maintain contracts that are critical to their operations; the ability of the companies to fund and execute their business plan; the ability of the companies to attract, motivate and/or retain key executives and associates; the ability of the companies to attract and retain customers; the continued availability of our wide-body aircraft; demand for cargo services in the markets in which the companies operate; economic conditions; the effects of any hostilities or act of war (in the Middle East or elsewhere) or any terrorist attack; labor costs and relations; financing costs; the cost and availability of war risk insurance; our ability to maintain adequate internal controls over financial reporting; aviation fuel costs; security-related costs; competitive pressures on pricing (especially from lower-cost competitors); volatility in the international currency markets; weather conditions; government legislation and regulation; consumer perceptions of the companies’ products and services; anticipated and future litigation; and other risks and uncertainties set forth from time to time in Atlas Air Worldwide’s reports to the United States Securities and Exchange Commission.
For additional information, we refer you to the risk factors set forth under the heading “Risk Factors” in the most recent Annual Report on Form 10-K and subsequent reports on Form 10-Q filed by Atlas Air Worldwide with the Securities and Exchange Commission. Other factors and assumptions not identified above may also affect the forward-looking statements, and these other factors and assumptions may also cause actual results to differ materially from those discussed.
Except as stated in this release, Atlas Air Worldwide is not providing guidance or estimates regarding its anticipated business and financial performance for 2016 or thereafter.
Atlas Air Worldwide assumes no obligation to update such statements contained in this release to reflect actual results, changes in assumptions or changes in other factors affecting such estimates other than as required by law.
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