ATSG Reports Strong First Quarter 2020 Results

Solid Growth in Revenues, Earnings, Adjusted Earnings and Adjusted EBITDA vs 1Q 2019.

WILMINGTON, Ohio--(BUSINESS WIRE)--Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, contracted air transportation and related services, today reported consolidated financial results for the quarter ended March 31, 2020.....

ATSG's first quarter 2020 results, as compared with the first quarter of 2019, include:

• Customer revenues up 12 percent, or $41.1 million, to $389.3 million.

  Both of ATSG's principal business segments, aircraft leasing and air transport, plus its other businesses on a combined basis, generated higher revenues.

• GAAP Earnings from Continuing Operations were $133.7 million, or $2.27 per share basic, versus a $22.6 million, or $0.38 per share, for the prior year, including warrant-related effects in each period.

  Quarterly re-measurements of financial instrument values increased first quarter after-tax earnings by $108.1 million and $4.9 million in 2020 and 2019, respectively. Warrant gains in each quarter stemmed primarily from decreases in the traded value of ATSG shares in the first quarter of each year.

• Adjusted Earnings from Continuing Operations (non-GAAP) rose 13 percent, to $29.3 million. Adjusted Earnings Per Share (non-GAAP) were $0.43 diluted, up $0.06.

  Adjusted Earnings from Continuing Operations and Adjusted EPS exclude elements from GAAP results that differ distinctly in predictability among periods or are not closely related to operations. Adjustments from GAAP include financial instrument revaluations, amortization of aircraft lease incentives, retiree benefit costs, losses of non-consolidated ATSG affiliates, and acquisition-related expenses.

• Adjusted EBITDA from Continuing Operations (non-GAAP) increased 9 percent, to $124.0 million.

  Contributions from our airlines, and from the increase in externally leased 767 freighters, drove the majority of the increase in Adjusted EBITDA.

Adjusted Earnings per Share, Adjusted Earnings from Continuing Operations and Adjusted EBITDA from Continuing Operations are non-GAAP financial measures and are defined in the non-GAAP reconciliation tables at the end of this release.

• Capital spending was $143.5 million, up 56 percent.

  Capital expenditures included $105.4 million for the purchase of five Boeing 767 aircraft in the first quarter, and for freighter modification costs.

Joe Hete, Chief Executive Officer of ATSG, said, "The flexibility and resilience of ATSG’s business model again proved its value, as the company responded to rapidly changing business conditions with the speed and attention to detail that its customers demand, while generating solid financial results overall. As an example, our aircraft maintenance technicians on short notice completed avionics adjustments to the New England Patriot's 767 aircraft that enabled it to fly to China to pick up more than 1 million masks for health care workers in Massachusetts. Similarly, our airlines' pilots, flight attendants and line maintenance techs are answering the call from their global customers to maintain the flow of vital supplies and personnel under very challenging conditions. Despite the pandemic, we remain cautiously optimistic about the rest of 2020, as we deploy more 767 converted freighters for customers responding to expanded e-commerce shopping, and operate passenger aircraft to support the U.S. military’s evolving requirements."

Segment Results

Cargo Aircraft Management (CAM)

Significant Developments:

• CAM's first quarter revenues, net of warrant-related lease incentives, increased five percent versus the prior year. Revenues benefited primarily from seven newly converted 767 freighters deployed since March 31, 2019, including one deployed as a dry-lease with UPS in January 2020. CAM's external customer revenues increased 12 percent during the first quarter.
• CAM owned ninety-one aircraft in service at March 31, 2020, versus eighty-nine on the same date in 2019. Of the ninety-one owned aircraft in service, sixteen, including four 757-200 combination cargo/passenger aircraft (combis), are passenger aircraft; seventy-five are cargo aircraft.
• Sixty-two in-service cargo aircraft were dry-leased to external customers on March 31, 2020, three more than a year ago. Of those, thirty-five were operated by ATSG airlines.
• CAM owned fifteen aircraft in cargo conversion or staging for lease as of March 31, versus nine a year ago. CAM has 2020 customer lease commitments for more than half of these aircraft, and is in discussion with customers for deployment of the remainder in 2020 or 2021.
• CAM’s pretax earnings for the quarter were $15.8 million, $0.4 million less than the prior-year's first quarter. Earnings reflected a $0.3 million increase in allocated interest and a $4.3 million increase in depreciation expense due to fleet growth since March 2019. The timing of incremental aircraft leases, and the transitioning of aircraft between lessees had a significant impact on CAM's results for the quarter, and are expected to continue to impact CAM’s 2020 results.

ACMI Services

Significant Developments:

• First-quarter revenues for ACMI Services increased 10 percent from the prior-year period, stemming mainly from growth in Omni Air and ATI operations.
• ATSG's airlines operated sixty-nine aircraft at March 31, fifteen passenger and fifty-four cargo aircraft. Two of ATSG's four 757-200 freighters are expected to remain available for service through 2020, although current DHL commitments for ATSG's 757-200 freighters ended May 1.
• Total block hours increased 31 percent for the first quarter, principally due to six more aircraft in airline service versus a year ago, and expanded flying for Amazon.
• Pretax earnings for the quarter were $18.4 million, up 49 percent versus $12.3 million a year ago. Higher revenues from our airline operations were the principal factor. Interest expense allocated to ACMI Services for the first quarter decreased $1.2 million to $5.3 million.

Other Activities

Significant Developments:

• Total first-quarter revenues from other activities increased by 19 percent due to growth in maintenance services and ground services for external customers. Revenues from external customers increased $9.8 million versus the prior-year period, driven by additional revenue for ground services and fuel sales.
• Pretax earnings for the first quarter of $53,000 reflect lower margins for aircraft maintenance and jet fuel sales.

CARES Act Financing for ATSG Airlines

During the second quarter, ATSG’s subsidiary air carriers, Omni Air International (“Omni”), a passenger carrier, and Air Transport International (“ATI”), a passenger and cargo carrier, each submitted an application for worker-protection grant funds available under the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) to the Secretary of the Treasury. On April 24, 2020, Omni was notified by the Treasury Department that its application for funds under the Payroll Support Program had received preliminary approval for approximately $67 million, to be paid in five monthly installments through September 2020. ATI’s application for a grant under the Payroll Support Program remains pending at this time. Our subsidiary air carriers intend to use any such funds to maintain their respective airlines' staffing necessary to serve the Department of Defense and commercial customers during an extended period of economic uncertainty stemming from the pandemic.

Outlook

Due to uncertainties brought about by the global pandemic, ATSG is no longer able to provide specific guidance for its Adjusted EBITDA for the full year 2020, as the level and duration of COVID-19 impacts, primarily on our passenger business, is difficult to forecast. However, based on our current outlook, we expect 2020 Adjusted EBITDA to exceed our 2019 total of $452 million.

During the current second quarter, ATSG expects that its Adjusted EBITDA will range from $110 million to $115 million, compared with $105 million in the second quarter of 2019. The second quarter results will include the impact of ATI flight crew training expenses necessary to begin CMI operations for Amazon on at least four additional 767-300 aircraft they will begin leasing from CAM during the second half of 2020.

Rich Corrado, President, said that "We are staying in constant contact with our principal customers as the pandemic continues. Today, they are telling us that they intend to continue to use our aircraft and other resources largely in line with their earlier expectations, including plans to lease seven to nine more of our newly converted 767s this year. Most of our cargo aircraft continue to operate within expanding time-definite express networks as e-commerce transactions accelerate during the pandemic. Demand for our passenger aircraft, however, is expected to remain sensitive to pandemic-driven changes in the U.S. military’s troop deployment and rotation plans, and reductions in operations for Omni commercial customers through 2020."

2020 capital expenditures, principally to purchase and modify Boeing 767-300 aircraft for freighter deployment, are projected to be $420 million. That includes expected purchases of eight Boeing 767-300 aircraft including two freighters and six passenger aircraft for freighter conversion. Five of the eight Boeing 767-300 aircraft were purchased in the first quarter.

“We take pride in providing essential air transport services to the global economy, and we are confident that ATSG will support the needs of its customers no matter how the pandemic requires us to adapt,” Corrado said. “That includes our ability to meet stringent requirements to prevent the spread of the coronavirus among our own employees and those of our customers. Better days are ahead for all of us, including our shareholders.”

Non-GAAP Financial Measures

This release, including the attached tables, contains non-GAAP financial measures that management uses to evaluate historical results and project future 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 affecting 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 historical non-GAAP financial measures included in this release are reconciled to GAAP earnings in tables included later in this release. The Company does not provide a reconciliation of projected Adjusted EBITDA because it is unable to predict with reasonable accuracy the value of certain adjustments. Certain adjustments can be significantly impacted by the re-measurements of financial instruments including stock warrants issued to a customer. The Company’s earnings on a GAAP basis and the non-GAAP adjustments for gain and losses resulting from the re-measurement of stock warrants, will depend on the future prices of ATSG stock, interest rates and other assumptions which are highly uncertain.

Conference Call

ATSG will host a conference call on May 6, 2020, at 10 a.m. Eastern time to review its financial results for the first quarter of 2020. Participants should dial (800) 708-4539 and international participants should dial (847) 619-6396 ten minutes before the scheduled start of the call and ask for conference pass code 49650065. The call will also be webcast live (in listen-only mode) via a link at www.atsginc.com. The conference call also will be available on webcast replay 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 three airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, passenger ACMI and charter services, aircraft maintenance services and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Airborne Maintenance and Engineering Services, Inc., including its subsidiary, Pemco World Air Services, Inc.; Air Transport International, Inc.; Cargo Aircraft Management, Inc.; and Omni Air International, LLC. 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. A number of important factors 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, (i) the following which relate to the current COVID-19 pandemic and related economic downturn: our expectations regarding the receipt of funds by two of our subsidiary airlines pursuant to the Payroll Support Program under the CARES Act and the final terms of the grants issued through such Program; the potential for reduced flight operations; disruptions to our workforce and staffing capability; the impact on our customers' creditworthiness; and the continuing ability of our vendors and third party service providers to maintain customary service levels; and (ii) other factors that could impact the market demand for our assets and services, including 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 and in interest rates, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; our ability to remain in compliance with our agreements with key customers and lenders; changes in general economic and/or industry specific conditions; 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. Except as may be required by applicable law, 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.

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

Adjusted Pretax Earnings excludes certain items included in GAAP based pretax 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 Pretax 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.

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 secured credit facility 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 ongoing 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 warrant-based customer 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 substitutes for analysis of the Company's results as reported under GAAP, or as alternative measures 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, both non-GAAP measures, 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.

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. Under U.S. GAAP, certain 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. Adjustment removes the unrealized gains for a large grant of stock warrants granted to a customer as a lease incentive.
2. Adjustment removes the amortization of the warrant-based customer incentives which are recorded against revenue over the term of the related aircraft leases and customer contracts.
3. Removes the non-service component of post-retirement costs and credits.
4. Adjustment removes losses for the Company's non-consolidated affiliates.
5. Adjustment removes the fees incurred for the acquisition of Omni Air International.
6. Adjustment removes gains and losses from derivative interest rate instruments and warrant revaluations.

1. Includes four Boeing 767-300ER passenger aircraft and one 767-200ER passenger aircraft leased from external companies.
2. Beginning in the fourth quarter of 2019, two aircraft provided by a customer were operated under a CMI agreement by a Company airline.

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Quint Turner, ATSG Inc. Chief Financial Officer

937-366-2303

Source: Air Transport Services Group, Inc...