Atlas Air Worldwide Reports Second-Quarter 2017 Results

Atlas Air Worldwide Holdings, Inc. (Nasdaq:AAWW) today announced income from continuing operations, net of taxes, of $39.0 million, which included an unrealized gain on financial instruments of $13.8 million related to outstanding warrants, for the three months ended June 30, 2017. Results compared with income from continuing operations, net of taxes, of $20.9 million, which included an unrealized gain on financial instruments of $26.5 million related to outstanding warrants, for the three months ended June 30, 2016.

On an adjusted basis, income from continuing operations, net of taxes, in the second quarter of 2017 totaled $29.1 million compared with $20.2 million in the year-ago quarter.

Diluted earnings per share from continuing operations, net of taxes, were $0.92 for the three months ended June 30, 2017 and a loss of $0.26 for the three months ended June 30, 2016, reflecting the impact of warrant accounting and transaction-related expenses. Adjusted diluted EPS from continuing operations, net of taxes, totaled $1.09 in the second quarter of 2017 and $0.80 in the second quarter of 2016.

“Earnings growth in the second quarter reflected a 17% increase in revenue, 15% increase in block hours, and higher direct contribution in all of our segments,” said President and Chief Executive Officer William J. Flynn. “Our growth also reflected an increase in aircraft utilization and a rise in commercial charter yields. During the quarter, we started flying for Cathay Pacific and Yangtze River Airlines and added four 767-300 freighters for Amazon, including our fifth and sixth aircraft in June.

“We are experiencing good momentum in our business, and we expect that to carry through 2017, into 2018 and beyond. As a result, we are increasing our full-year 2017 outlook.

“We anticipate that our adjusted income from continuing operations, net of taxes, will grow by a percentage in the mid-teens this year, approximately double the midpoint of our previous outlook.

“As announced today, we have entered into an ACMI agreement to operate three 747-400s for Hong Kong Air Cargo, the first of which will start flying in September. We have a strategic focus on the fast-growing Chinese and Asian markets, and we have added five new customers there this year.

“We also continue to move more deeply into the faster-growing express and e-commerce markets. More than 70% of our current freighters operate for customers in these markets, and that percentage will increase as we ramp up from six aircraft for Amazon currently to an expected 20 by the end of 2018.

“The evolution of e-commerce is transforming the global supply chain and creating significant new opportunities for Atlas. Freighter aircraft in scaled route networks, such as those that we operate, provide the just-in-time service that enables consumers to receive their orders as quickly as possible.”

Second-Quarter Results

Higher ACMI contribution in the second quarter of 2017 was primarily driven by an increase in flying, partially offset by higher heavy maintenance costs. Segment revenue growth benefited from an increase in block-hour volumes, reflecting greater 767 and 747-400 CMI flying as well as higher aircraft utilization. Average rates reflected the growth in 767 and 747-400 CMI flying.

Higher Charter segment contribution during the period was primarily due to improved commercial cargo yields, lower costs related to crew training, and an increase in commercial and military demand. These impacts were partially offset by higher heavy maintenance costs and lower rates paid by the military. Segment revenue growth was driven by an increase in block-hour volumes and average rates.

In Dry Leasing, higher revenue and segment contribution were primarily driven by the placement of six 767-300 converted freighter aircraft with Amazon between August 2016 and June 2017. Segment contribution also benefited from a reduction in interest expense due to the scheduled repayment of debt related to dry leased 777 aircraft in our portfolio.

Higher unallocated income and expenses in the second quarter of 2017 primarily reflected an increase in unallocated interest expense, growth initiatives, and amortization of a customer incentive asset, partially offset by an accrual for legal matters in the year-ago period.

Both reported and adjusted income from continuing operations in the second quarter of 2017 included a $2.7 million, or $0.10 per diluted share, benefit related to the timing of heavy maintenance that has moved to the third quarter of 2017 from the second quarter.

Reported earnings in the second quarter also included an effective income tax rate of 21.6%, due mainly to nontaxable changes in the value of outstanding warrants and our assertion to indefinitely reinvest the net earnings of foreign subsidiaries outside the U.S. On an adjusted basis, our results reflected an effective income tax rate of 29.4%.

Half-Year Results

For the six months ended June 30, 2017, income from continuing operations totaled $39.1 million, which included an unrealized gain on financial instruments of $8.6 million related to outstanding warrants. Results compared with income from continuing operations of $21.4 million, which included an unrealized gain on financial instruments of $26.5 million, for the six months ended June 30, 2016.

On an adjusted basis, first-half 2017 income from continuing operations totaled $37.4 million compared with $27.9 million in the first half of 2016.

Diluted earnings per share from continuing operations were $1.13 for the first six months of 2017 and a loss of $0.24 per share for the first half of 2016, reflecting the impact of warrant accounting and transaction-related expenses.

Adjusted diluted EPS from continuing operations totaled $1.39 in the first six months of 2017 and $1.11 in the first half of 2016.

Cash and Short-Term Investments

At June 30, 2017, our cash, cash equivalents, short-term investments and restricted cash totaled $290.7 million, compared with $142.6 million at December 31, 2016.

The change in position resulted from cash provided by operating and financing activities, partially offset by cash used for investing activities.

Net cash provided by financing activities during the first half of 2017 primarily reflected proceeds from our issuance of convertible notes and our financings of 767-300 aircraft, partially offset by payments on debt obligations.

Net cash used for investing activities primarily related to capital expenditures and payments for flight equipment and modifications, including the acquisition of 767-300 aircraft to be converted to freighter configuration.

Outlook

We are increasing our outlook for the full year.

We expect our adjusted income from continuing operations, net of taxes, in 2017 to grow by a percentage in the mid-teens compared with 2016 adjusted income of $114.3 million, approximately double the midpoint of our prior view of mid-single-digit to low-double-digit percentage growth.

In addition, we expect adjusted income from continuing operations, net of taxes, in the third quarter of 2017 to increase by a percentage in the low- to mid-teens compared with our third-quarter 2016 adjusted income of $27.4 million.

Our view reflects solid demand from our customers, the benefits we expect from our growth initiatives, and the steps we have taken to align our business with the faster-growing express and e-commerce markets.

We believe the current demand, including our new services for Asiana Cargo, Cathay Pacific Cargo, FedEx, Hong Kong Air Cargo, Nippon Cargo Airlines and Yangtze River Airlines, the initial accretion from our Amazon operations, and the first full year of contribution from Southern Air provide a strong foundation for earnings growth.

Given the inherent seasonality of airfreight demand, we anticipate that results in 2017 will reflect historical patterns, with more than 70% of our adjusted income occurring in the second half.

For the full year, we expect total block hours to increase approximately 20% compared with 2016, with more than 75% of our hours in ACMI and the balance in Charter.

Aircraft maintenance expense in 2017 should total approximately $255 million, and depreciation and amortization is expected to total approximately $170 million. In addition, core capital expenditures, which exclude aircraft and engine purchases, are expected to total approximately $65 to $75 million, mainly for parts and components for our fleet.

We provide guidance on an adjusted basis because we are unable to predict, with reasonable certainty, the effects of outstanding warrants and other items that could be material to our reported results.