May 7, 2018   SOURCE: BusinessWire

ATSG Extends Strong Earnings Growth in First Quarter

Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, air cargo transportation and related services, today reported consolidated financial results for the quarter ended March 31, 2018:

  • Revenues: $203.0 million (after the adoption new revenue recognition standard)
    • Revenues up 11 percent in 1Q 2018 excluding $54.4 million in 1Q 2017 reimbursable expenses
  • GAAP Earnings from Continuing Operations $15.7 million, $0.26 per share diluted
    • Vs. $9.8 million, $0.13 per share GAAP diluted in 1Q 2017
  • Adjusted Earnings (non-GAAP) from Continuing Operations $23.9 million, $0.35 per share diluted
    • Vs. $11.2 million, or $0.17 per share diluted in 1Q 2017
      Adjusted Earnings from Continuing Operations in 2018 exclude the net effects of warrants issued to Amazon.com Services, Inc. and a share of development costs for ATSG's Airbus A321 freighter conversion venture.
  • Adjusted EBITDA (non-GAAP) from Continuing Operations $71.9 million
    • Up 26 percent vs. $57.0 million in 1Q 2017

Adjusted Earnings and Adjusted EBITDA from continuing operations are non-GAAP measures. (See Revenue Recognition, Non-GAAP Financial Measures, also reconciliation tables at the end of this release)

Joe Hete, President and Chief Executive Officer of ATSG, said, "Continued earnings improvement from our airline businesses and the reduction in the federal tax rate drove a more than doubling of our first quarter adjusted earnings from continuing operations compared to last year. The outstanding efforts of our employees, and strong customer demand for our growing portfolio of freighter aircraft, point to further success during 2018.”

Segment Results

Cargo Aircraft Management (CAM)

     
CAM   First Quarter
($ in thousands) 2018   2017
Aircraft leasing and related revenues $ 56,602 $ 50,569
Lease incentive amortization (4,226 ) (2,591 )
Total CAM revenues $ 52,376   $ 47,978  
Pre-Tax Earnings   $ 15,464     $ 13,330  
 

Significant Developments:

  • CAM's revenues increased $4.4 million, or 9 percent, to $52.4 million. Those revenues were reduced by $4.2 million of non-cash amortization of warrant-related lease incentives for Amazon, versus $2.6 million a year ago.
  • CAM’s pre-tax earnings increased 16 percent to $15.5 million, primarily due to the increase in leased freighters in service. CAM was leasing fifty-two cargo aircraft to external customers as of March 31, 2018, one more than at the end of 2017 and nine more than a year earlier. Of the externally leased freighters, one was a 737 and the rest were 767s. Higher earnings from additional leased aircraft in service were offset by the increase in warrant-related lease incentives, higher interest expense that included non-cash amortization related to ATSG's September 2017 convertible offering, and increased depreciation from its larger fleet.
  • CAM delivered one 767 to Northern Aviation Services in January under a seven-year dry lease. One 737 freighter was delivered in April and one other 767 is due to be delivered later this month on an eight-year lease. That leaves eight additional 767s to be delivered to customers in 2018.
  • Since we completed our 20-aircraft commitment to Amazon in August 2017, CAM will have delivered 13 additional 767 freighters to customers by year-end 2018.
 

ACMI Services

 

ACMI Services First Quarter
($ in thousands) 2018   2017
Revenues 119,374 108,066
Pre-Tax Earnings (Loss)   3,941     (3,534 )

Significant Developments:

  • ACMI Services revenues, excluding revenues from reimbursed expenses, increased 10 percent to $119.4 million in the first quarter. Pre-tax earnings improved by $7.5 million, to a $3.9 million profit for the quarter.
  • Principal factors contributing to the profitability gains versus the first quarter of 2017 were additional flying for CMI customers, lower depreciation expense, and reductions in premium pilot pay and training.
  • ATSG’s airlines were operating six more CAM-owned aircraft at March 31 versus a year earlier, five of which were for CMI customers. Billable block hours increased 10 percent for the quarter.
  • On March 21, ATI pilots represented by the Air Line Pilots Association ratified an amendment to the collective bargaining agreement with Air Transport International, which sets compensation levels for four years from that date. The ratification of the amendment will result in higher costs for pilot compensation at ATI beginning in the second quarter of 2018.

MRO Services

Effective January 1, 2018, ATSG segregated MRO Services, as a new reporting segment that includes the results of its aircraft maintenance services and modification services businesses.

       
MRO Services   First Quarter
($ in thousands) 2018   2017
Revenues $ 52,723 $ 40,388
Pre-Tax Earnings (Loss)   4,462   3,188

Significant Developments:

  • Total revenues from MRO Services were $52.7 million, up 31 percent. External customer revenues increased by 22 percent.
  • Pre-tax earnings including inter-company business, increased $1.3 million driven by increased revenues.

Other Activities

Other Activities include arranging logistics services, providing postal center sorting services, equipment maintenance and other services.

       
Other   First Quarter
($ in thousands) 2018   2017
Revenues $ 19,283 $ 31,398
Pre-Tax Earnings   2,581   2,463

Significant Developments:

  • Total revenues from other activities, excluding revenues from reimbursed expenses, decreased by 39 percent, reflecting the elimination of ground service at Amazon's former hub in Wilmington, Ohio.
  • Pre-tax earnings of $2.6 million were 5 percent higher than a year ago. Additional earnings were driven from ATSG’s minority investment in a European airline and increased mail and package volumes at the USPS and Amazon locations.
  • Beginning January 1, 2018, reimbursed revenues for ground services are reported net of the related expenses under new revenue recognition standards. Effective January 1, 2018, ground services operations are reported in Other Activities due to its size.

Outlook

ATSG continues to expect that its Adjusted EBITDA from Continuing Operations for 2018 will be approximately $310 million, up 16 percent from 2017, after taking into account the ratification of the amended pilot collective bargaining agreement at ATI in late March.

"We are off to a very strong start and optimistic about our growth in revenues and cash flows for the rest of 2018," Hete said. "We continue to project delivery of ten 767-300 freighters to customers this year, one more than last year. Customer demand for additional 767s remains strong. We have customer commitments for seven of the 10 newly converted 767s this year, all of which will be straight dry leases. An agreement for an eighth dry lease is being finalized, and we have strong interest from customers for the remaining two."

ATSG continues to project 2018 capital expenditures of about $300 million, the majority of which is for purchases of 767 aircraft and related freighter modification costs for customer deployments in 2018/2019. Our 2018 capital expenditures also include investment in the design and certification of a new narrow body variant of the Next Gen Boeing 737-700. Additionally, we will continue to contribute, via a joint venture, in the development of a freighter modification supplemental type certificate ("STC") for the Airbus 321-200 which will continue to be reflected as a non-operating charge to our income statement during 2018. We expect FAA approval of the STC by the end of 2019.

Revenue Recognition

In accordance with new GAAP requirements, ATSG's 2018 revenues related to costs that are directly reimbursed to ATSG and controlled by the customer are reported net of the corresponding expenses. Corresponding 2017 revenues include such reimbursements. These are principally costs for aircraft fuel, certain contracted aviation services and airport related expenses. After application of the new GAAP revenue rules, Amazon, DHL and the U.S. Military accounted for 28 percent, 28 percent, and 11 percent, respectively, of ATSG's first quarter 2018 consolidated revenues.

Non-GAAP financial measures

This release, including the attached tables, contains non-GAAP financial measures that management uses to evaluate historical results. Management believes that these non-GAAP measures assist in highlighting operational trends, facilitate period-over-period comparisons, and provide additional clarity about events and trends impacting core operating performance. Disclosing these non-GAAP measures provides insight to investors about additional metrics that management uses to evaluate past performance and prospects for future performance. Non-GAAP measures are not a substitute for GAAP. The non-GAAP financial measures are reconciled to GAAP results in tables later in this release.

Conference Call

ATSG will host a conference call on May 8, 2018, at 10 a.m. Eastern time to review its financial results for the first quarter of 2018. Participants should dial (800) 708-4540 and international participants should dial (847) 619-6397 ten minutes before the scheduled start of the call and ask for conference pass code 46868608. The call will also be webcast live (listen-only mode) via www.atsginc.com.

A replay of the conference call will be available by phone on May 8, 2018, beginning at 2 p.m. and continuing through May 15, 2018, at (888) 843-7419 (international callers (630) 652-3042); use pass code 46868608#. The webcast replay will remain available via www.atsginc.com for 30 days.

About ATSG

ATSG is a leading provider of aircraft leasing and air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements. ATSG, through its leasing and airline subsidiaries, is the world's largest owner and operator of converted Boeing 767 freighter aircraft. Through its principal subsidiaries, including two airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, aircraft maintenance services and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Air Transport International, Inc.; Cargo Aircraft Management, Inc.; and Airborne Maintenance and Engineering Services, Inc. including its division, Pemco World Air Services, Inc. For more information, please see www.atsginc.com.

Except for historical information contained herein, the matters discussed in this release contain forward-looking statements that involve risks and uncertainties. There are a number of important factors that could cause Air Transport Services Group's (ATSG's) actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, changes in market demand for our assets and services; our operating airlines' ability to maintain on-time service and control costs; the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's traded share price, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; and other factors that are contained from time to time in ATSG's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Readers should carefully review this release and should not place undue reliance on ATSG's forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this release. ATSG undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

 
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

 
Three Months Ended
March 31,
2018   2017
REVENUES $ 203,040 $ 237,917
 
OPERATING EXPENSES
Salaries, wages and benefits 70,783 72,486
Depreciation and amortization 40,004 36,442
Maintenance, materials and repairs 36,866 30,282
Fuel 5,788 34,841
Contracted ground and aviation services 2,384 20,687
Travel 6,632 7,366
Landing and ramp 1,148 5,299
Rent 3,230 3,286
Insurance 1,357 1,262
Other operating expenses 7,205   8,036  
175,397 219,987
   
OPERATING INCOME 27,643 17,930
OTHER INCOME (EXPENSE)
Net gain (loss) on financial instruments (885 ) 1,869
Interest expense (5,362 ) (3,548 )
Non-service component of retiree benefit costs 2,045 (177 )
Loss from non-consolidated affiliate (2,536 ) —
Interest income 23   32  
(6,715 ) (1,824 )
   
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 20,928 16,106
INCOME TAX EXPENSE (5,246 ) (6,310 )
   
EARNINGS FROM CONTINUING OPERATIONS 15,682 9,796
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAX 196   192  
NET EARNINGS $ 15,878   $ 9,988  
 
EARNINGS PER SHARE - CONTINUING OPERATIONS
Basic $ 0.27 $ 0.17
Diluted $ 0.26 $ 0.13
 
WEIGHTED AVERAGE SHARES - CONTINUING OPERATIONS
Basic 58,840   59,133  
Diluted 59,558   64,949  

Certain historical expenses have been reclassified to conform to the presentation above.

   

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 
March 31, December 31,
2018 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 47,472 $ 32,699
Accounts receivable, net of allowance of $2,495 in 2018 and $2,445 in 2017 100,186 109,114
Inventory 22,256 22,169
Prepaid supplies and other 13,426   20,521  
TOTAL CURRENT ASSETS 183,340 184,503
 
Property and equipment, net 1,176,520 1,159,962
Lease incentive 76,458 80,684
Goodwill and acquired intangibles 44,287 44,577
Convertible note hedges 56,046 53,683
Other assets 30,852   25,435  
TOTAL ASSETS $ 1,567,503   $ 1,548,844  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 96,041 $ 99,728
Accrued salaries, wages and benefits 29,436 40,127
Accrued expenses 10,259 10,455
Current portion of debt obligations 14,846 18,512
Unearned revenue 12,765   15,850  
TOTAL CURRENT LIABILITIES 163,347 184,672
 
Long term debt 515,595 497,246
Convertible note obligations 56,881 54,359
Stock warrant obligations 214,205 211,136
Post-retirement obligations 56,771 61,355
Other liabilities 44,276 45,353
Deferred income taxes 107,930 99,444
 
STOCKHOLDERS’ EQUITY:
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock — —
Common stock, par value $0.01 per share; 85,000,000 shares authorized; 59,080,512 and 59,057,195 shares issued and outstanding in 2018 and 2017, respectively 591 591
Additional paid-in capital 467,570 471,456
Retained earnings (accumulated deficit) 2,644 (13,748 )
Accumulated other comprehensive loss (62,307 ) (63,020 )
TOTAL STOCKHOLDERS’ EQUITY 408,498   395,279  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,567,503   $ 1,548,844  
 
 

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

PRE-TAX EARNINGS AND ADJUSTED PRE-TAX EARNINGS SUMMARY
FROM CONTINUING OPERATIONS
NON-GAAP RECONCILIATION
(In thousands)
 
Three Months Ended
March 31,
2018   2017
Revenues
CAM
Aircraft leasing and related revenues $ 56,602 $ 50,569
Lease incentive amortization (4,226 ) (2,591 )
Total CAM 52,376 47,978
ACMI Services 119,374 108,066
MRO Services 52,723 40,338
Other Activities 19,283   31,398  
Total Revenues 243,756 227,780
Eliminate internal revenues (40,716 ) (44,216 )
Customer Revenues - non reimbursed 203,040 183,564
Revenues recorded for reimbursed expenses —   54,353  
Customer Revenues (GAAP) $ 203,040   $ 237,917  
 
Pre-tax Earnings (Loss) from Continuing Operations
CAM, inclusive of interest expense 15,464 13,330
ACMI Services 3,941 (3,534 )
MRO Services 4,462 3,188
Other Activities 2,581 2,463
Inter-segment earnings eliminated (3,325 ) (862 )
Net, unallocated interest expense (819 ) (171 )
Net gain (loss) on financial instruments (885 ) 1,869
Other non-service components of retiree benefit costs, net 2,045 (177 )
Non-consolidated affiliate (2,536 ) —  
Earnings from Continuing Operations before Income Taxes (GAAP) $ 20,928 $ 16,106
 
Adjustments to Pre-tax Earnings
Add non-service components of retiree benefit costs, net (gain) loss (2,045 ) 177
Add loss from non-consolidated affiliates 2,536 —
Add lease incentive amortization 4,226 2,591
Add net (gain) loss on financial instruments 885   (1,869 )
Adjusted Pre-tax Earnings (non-GAAP) $ 26,530   $ 17,005  
 

Revenues recorded for reimbursed expenses reflect certain revenues which were reported during 2017 prior to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The adoption of Topic 606 resulted in the netting of these revenues with the directly reimbursed expenses for 2018 financial reporting. This application of Topic 606 did not affect the Company's earnings.

Adjusted Pre-tax Earnings excludes certain items included in GAAP based pre-tax earnings (loss) from continuing operations because they are distinctly different in their predictability among periods or not closely related to our operations. Presenting this measure provides investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted Pre-tax Earnings should not be considered an alternative to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

 

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

ADJUSTED EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
NON-GAAP RECONCILIATION
(In thousands)
 
Three Months Ended
March 31,
2018   2017
 
Earnings from Continuing Operations Before Income Taxes $ 20,928 $ 16,106
Interest Income (23 ) (32 )
Interest Expense 5,362 3,548
Depreciation and Amortization 40,004   36,442  
EBITDA from Continuing Operations $ 66,271 $ 56,064
Add non-service components of retiree benefit costs, net (gain) loss (2,045 ) 177
Add losses for non-consolidated affiliates 2,536 —
Add lease incentive amortization 4,226 2,591
Add net (gain) on financial instruments 885 (1,869 )
   
Adjusted EBITDA $ 71,873   $ 56,963  
 

Management uses Adjusted EBITDA to assess the performance of its operating results among periods. It is a metric that facilitates the comparison of financial results of underlying operations. Additionally, these non-GAAP adjustments are similar to the adjustments used by lenders in the Company’s Senior Credit Agreement to assess financial performance and determine the cost of borrowed funds. The adjustments also exclude the non-service cost components of retiree benefit plans because they are not closely related to on-going operating activities. Management presents EBITDA from Continuing Operations, a commonly referenced metric, as a subtotal toward computing Adjusted EBITDA.

EBITDA from Continuing Operations is defined as Earnings (Loss) from Continuing Operations Before Income Taxes plus net interest expense, depreciation, and amortization expense. Adjusted EBITDA is defined as EBITDA from Continuing Operations less financial instrument revaluation gains or losses, non-service components of retiree benefit costs including pension plan settlements, amortization of lease incentive costs recorded in revenue and costs from non-consolidated affiliates.

Adjusted EBITDA and EBITDA from Continuing Operations are non-GAAP financial measures and should not be considered as alternatives to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP. Adjusted EBITDA and EBITDA from Continuing Operations should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, or as an alternative measure of liquidity.

 
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

ADJUSTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS

NON-GAAP RECONCILIATION

(In thousands)

 

Management presents Adjusted Earnings and Adjusted Earnings per Share from Continuing Operations, non-GAAP
calculations, to provide additional information regarding earnings per share without the volatility otherwise caused by the items
below. Management uses Adjusted Earnings and Adjusted Earnings per Share from Continuing Operations to compare the
performance of its operating results among periods.

 
Three Months Ended
March 31, 2018   March 31, 2017
  $ Per   $ Per
$ Share $ Share
 
Earnings from Continuing Operations - basic (GAAP) $ 15,682 $ 9,796
Gain from warrant revaluation, net tax —   (1,539 )
Earnings from Continuing Operations - diluted (GAAP) 15,682 $ 0.26 8,257 $ 0.13
Adjustments, net of tax
Loss from warrant revaluation 1 2,975 — — —
Lease incentive amortization 2 3,272 0.06 2,962 0.04
Loss from joint venture 3 1,963   0.03   —   —
Adjusted Earnings from Continuing Operations (non-GAAP) $ 23,892   $ 0.35   $ 11,219   $ 0.17
 
Shares Shares
Weighted Average Shares - diluted 59,558 64,949
Additional weighted average shares 1 9,651   —  
Adjusted Shares (non-GAAP) 69,209   64,949  
 

Adjusted Earnings from Continuing Operations and Adjusted Earnings per Share from Continuing Operations are non-GAAP financial measures and should not be considered as alternatives to Earnings from Continuing Operations, Weighted Average Shares - diluted or Earnings per Share from Continuing Operations or any other performance measure derived in accordance with GAAP. Adjusted Earnings and Adjusted Earnings per Share from Continuing Operations should not be considered in isolation or as a substitute for analysis of the company's results as reported under GAAP.

1.   Adjustment removes the unrealized losses for a large grant of stock warrants granted to a customer as a lease incentive. Under U.S. GAAP, these warrants are reflected as a liability and unrealized warrant gains are typically removed from diluted earnings per share (“EPS”) calculations while unrealized warrant losses are not removed because they are dilutive to EPS. As a result, the Company’s EPS, as calculated under U.S. GAAP, can vary significantly among periods due to unrealized mark-to-market losses created by an increased trading value for the Company's shares.
2. Adjustment removes the amortization of the customer lease incentive which is recorded against revenue over the term of the related aircraft leases.
3. Adjustment removes losses for the Company's share of development costs for a joint venture accounted for under the equity method.
 
   
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

CARGO AIRCRAFT FLEET

 
Owned Aircraft Types
  December 31,   March 31,   December 31,
2017 2018 2018 Projected
               
B767-200 36 36 35
B767-300 25 25 35
B757-200 4 4 4
B757 Combi 4 4 4
B737-400 1 1 2
Total Aircraft in Service 70 70 80
 
B767-300 in or awaiting cargo conversion 6 8 1
B737-400 in or awaiting cargo conversion 1 1 —
Total Aircraft 77 79 81
 
Aircraft in Service Deployments
December 31, March 31, December 31,
2017 2018 2018 Projected
 
Dry leased without CMI 18 18 32
Dry leased with CMI 33 34 30
ACMI/Charter 19 18 18