UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ________ to ________ |
Commission file number
Air Transport Services Group, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | ☒ | Accelerated filer | ☐ | Smaller reporting company | |
| Non-accelerated filer | ☐ | Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of May 9, 2024, there were
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
| Page |
||
| PART I. FINANCIAL INFORMATION |
||
| Item 1. |
||
| Unaudited Condensed Consolidated Statements of Comprehensive Income |
||
| Unaudited Condensed Consolidated Statements of Stockholders' Equity |
||
| Notes to Unaudited Condensed Consolidated Financial Statements |
||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| Item 3. |
||
| Item 4. |
||
| PART II. OTHER INFORMATION |
||
| Item 1. |
||
| Item 1A. |
||
| Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
|
| Item 5. |
||
| Item 6. |
||
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The financial information, including the financial statements, included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (the "Form 10-Q") should be read in conjunction with the audited consolidated financial statements and notes thereto of Air Transport Services Group, Inc. ("ATSG" or the "Company") included in ATSG's Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission ("SEC") on February 29, 2024 ("2023 Form 10-K").
The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding ATSG at www.sec.gov. Additionally, ATSG's filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. The Company wishes to take advantage of the safe harbor provisions of the Act.
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part I, Item 2, contains forward-looking statements, within the meaning of the Act. Except for historical information contained in this Form 10-Q, the matters discussed herein contain forward-looking statements that involve inherent risks and uncertainties. Such statements are provided under the “safe harbor” protection of the Act.
Forward-looking statements include, but are not limited to, statements regarding anticipated operating results, prospects and levels of assets under management, technological developments, economic trends, expected transactions and similar matters. The words “may,” “believe,” “expect,” “anticipate,” “target,” “goal,” “project,” “estimate,” “guidance,” “forecast,” “outlook,” “will,” “continue,” “likely,” “should,” “hope,” “seek,” “plan,” “intend” and variations of such words and similar expressions identify forward-looking statements. Similarly, descriptions of the Company’s objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements are susceptible to a number of risks, uncertainties and other factors. While the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, the Company’s actual results and experiences could differ materially from the anticipated results or other expectations expressed in its forward-looking statements.
A number of important factors may cause the Company’s actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to: (i) unplanned changes in the market demand for the assets and services of the Company, including the loss of customers or a reduction in the level of services it performs for customers; (ii) its operating airlines’ ability to maintain on-time service and control costs; (iii) the cost and timing with respect to which it is able to purchase and modify aircraft to a cargo configuration; (iv) fluctuations in the Company’s traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; (v) the number, timing, and scheduled routes of its aircraft deployments to customers; (vi) its ability to remain in compliance with key agreements with customers, lenders and government agencies; (vii) the impact of supply chain constraints both within and outside the United States, which may be more severe or persist longer than it currently expects; (viii) the impact of the current competitive labor market, which could restrict its ability to fill key positions; and (ix) changes in general economic and/or industry-specific conditions, including inflation and regulatory changes; and (x) other uncontrollable factors such as geopolitical tensions or conflicts and human health crises. Other factors that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements are discussed in “Risk Factors” in Item 1A to the 2023 Form 10-K and are contained from time to time in the Company's other filings with the SEC, including its annual reports on Form 10-K and quarterly reports on Form 10-Q.
Readers should carefully review this Form 10-Q and should not place undue reliance on the Company’s forward-looking statements. New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affect it. The forward-looking statements were based on information, plans and estimates as of the date of this Form 10-Q. Except as may be required by applicable law, the Company undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. The Company does not endorse any projections regarding future performance that may be made by third parties.
CERTAIN DEFINED TERMS IN THIS FORM 10-Q
ATSG and its subsidiaries may sometimes be referred to in this Form 10-Q individually or collectively as the “Company,” “we,” “our,” or “us.” ATSG’s outstanding common stock, par value $0.01 per share, is referred to in this Form 10-Q as “common stock,” “common shares,” “stock” or “shares.”
PART I. FINANCIAL INFORMATION
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| March 31, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable, net of allowance of $ in 2024 and $ in 2023 | ||||||||
| Inventory | ||||||||
| Prepaid supplies and other | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Customer incentive | ||||||||
| Goodwill and acquired intangibles | ||||||||
| Operating lease assets | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued salaries, wages and benefits | ||||||||
| Accrued expenses | ||||||||
| Current portion of debt obligations | ||||||||
| Current portion of lease obligations | ||||||||
| Unearned revenue | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Long term debt | ||||||||
| Stock obligations | ||||||||
| Post-retirement obligations | ||||||||
| Long term lease obligations | ||||||||
| Other liabilities | ||||||||
| Deferred income taxes | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (Note H) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, shares authorized, including Series A Junior Participating Preferred Stock | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued and outstanding in 2024 and 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| REVENUES |
$ | $ | ||||||
| OPERATING EXPENSES |
||||||||
| Salaries, wages and benefits |
||||||||
| Depreciation and amortization |
||||||||
| Maintenance, materials and repairs |
||||||||
| Fuel |
||||||||
| Contracted ground and aviation services |
||||||||
| Travel |
||||||||
| Landing and ramp |
||||||||
| Rent |
||||||||
| Insurance |
||||||||
| Other operating expenses |
||||||||
| OPERATING INCOME |
||||||||
| OTHER INCOME (EXPENSE) |
||||||||
| Interest income |
||||||||
| Non-service component of retiree benefit costs |
( |
) | ( |
) | ||||
| Net gain (loss) on financial instruments |
( |
) | ||||||
| Loss from non-consolidated affiliate |
( |
) | ( |
) | ||||
| Interest expense |
( |
) | ( |
) | ||||
| ( |
) | ( |
) | |||||
| EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
||||||||
| INCOME TAX EXPENSE |
( |
) | ( |
) | ||||
| EARNINGS FROM CONTINUING OPERATIONS |
||||||||
| EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES |
||||||||
| NET EARNINGS |
$ | $ | ||||||
| BASIC EARNINGS PER SHARE |
||||||||
| Continuing operations |
$ | $ | ||||||
| Discontinued operations |
||||||||
| TOTAL BASIC EARNINGS PER SHARE |
$ | $ | ||||||
| DILUTED EARNINGS PER SHARE |
||||||||
| Continuing operations |
$ | $ | ||||||
| Discontinued operations |
||||||||
| TOTAL DILUTED EARNINGS PER SHARE |
$ | $ | ||||||
| WEIGHTED AVERAGE SHARES |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
See notes to unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| NET EARNINGS |
$ | $ | ||||||
| OTHER COMPREHENSIVE INCOME: |
||||||||
| Defined Benefit Pension |
||||||||
| Defined Benefit Post-Retirement |
( |
) | ||||||
| TOTAL COMPREHENSIVE INCOME, net of tax |
$ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| Accumulated |
||||||||||||||||||||||||
| Additional |
Other |
|||||||||||||||||||||||
| Common Stock |
Paid-in |
Accumulated |
Comprehensive |
|||||||||||||||||||||
| Number |
Amount |
Capital |
Earnings |
Income (Loss) |
Total |
|||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Stock-based compensation plans |
||||||||||||||||||||||||
| Issuance of common shares, net of withholdings |
( |
) | ( |
) | ||||||||||||||||||||
| Forfeited restricted stock |
( |
) | ||||||||||||||||||||||
| Purchase of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Amortization of stock awards and restricted stock |
||||||||||||||||||||||||
| Total comprehensive income |
||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Accumulated |
||||||||||||||||||||||||
| Additional |
Other |
|||||||||||||||||||||||
| Common Stock |
Paid-in |
Accumulated |
Comprehensive |
|||||||||||||||||||||
| Number |
Amount |
Capital |
Earnings |
Income (Loss) |
Total |
|||||||||||||||||||
| BALANCE AT DECEMBER 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Stock-based compensation plans |
||||||||||||||||||||||||
| Grant of restricted stock |
( |
) | ||||||||||||||||||||||
| Issuance of common shares, net of withholdings |
( |
) | ( |
) | ||||||||||||||||||||
| Forfeited restricted stock |
( |
) | ||||||||||||||||||||||
| Amortization of stock awards and restricted stock |
||||||||||||||||||||||||
| Total comprehensive income |
||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net earnings from continuing operations |
$ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Pension and post-retirement |
||||||||
| Deferred income taxes |
||||||||
| Amortization of stock-based compensation |
||||||||
| Loss from non-consolidated affiliates |
||||||||
| Net (gain) loss on financial instruments |
( |
) | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventory and prepaid supplies |
( |
) | ||||||
| Accounts payable |
||||||||
| Unearned revenue |
||||||||
| Accrued expenses, salaries, wages, benefits and other liabilities |
( |
) | ||||||
| Pension and post-retirement balances |
( |
) | ( |
) | ||||
| Other |
( |
) | ( |
) | ||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES |
||||||||
| INVESTING ACTIVITIES: |
||||||||
| Expenditures for property and equipment |
( |
) | ( |
) | ||||
| Proceeds from property and equipment |
||||||||
| Acquisitions and investments in businesses |
( |
) | ( |
) | ||||
| NET CASH (USED IN) INVESTING ACTIVITIES |
( |
) | ( |
) | ||||
| FINANCING ACTIVITIES: |
||||||||
| Principal payments on long term obligations |
( |
) | ( |
) | ||||
| Proceeds from revolving credit facilities |
||||||||
| Payments for financing costs |
( |
) | ||||||
| Purchase of common stock |
( |
) | ||||||
| Withholding taxes paid for conversion of employee stock awards |
( |
) | ( |
) | ||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
( |
) | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
( |
) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
| Interest paid, net of amount capitalized |
$ | $ | ||||||
| Federal and state income taxes paid |
$ | $ | ||||||
| Restricted balance of cash |
$ | $ | ||||||
| SUPPLEMENTAL NON-CASH INFORMATION: |
||||||||
| Accrued expenditures for property and equipment |
$ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Page |
|
| Note A - Summary of Financial Statement Preparation and Significant Accounting Policies |
|
NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ATSG is a holding company whose subsidiaries lease aircraft and provide contracted airline operations as well as other support services mainly to the air transportation, e-commerce and package delivery industries.
The Company's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the Company's airlines as well as to non-affiliated airlines and other lessees. The Company's airlines, ABX Air, Inc. (“ABX”), Air Transport International, Inc. (“ATI”) and Omni Air International, LLC ("OAI") each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. The Company provides a combination of aircraft, crews, maintenance and insurance services for its customers' transportation network through crew, maintenance and insurance ("CMI") agreements and aircraft, crew, maintenance and insurance ("ACMI") agreements and through charter contracts in which aircraft fuel is also included. The Company's subsidiary, LGSTX Services, Inc. ("LGSTX") provides for the management of aircraft ground services.
In addition to its aircraft leasing and airline services, the Company offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers. These include aircraft maintenance and modification services, aircraft parts supply, equipment maintenance services and load transfer and package sorting services.
Basis of Presentation
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with GAAP and such principles are applied on a basis consistent with the financial statements reflected in our 2023 Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company's results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the air cargo industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of the management, but actual results could differ materially from those estimates.
The accompanying unaudited condensed consolidated financial statements include the accounts of ATSG and its wholly-owned subsidiaries. Inter-company balances and transactions are eliminated. Investments in affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. Under the equity method, the Company's share of the non-consolidated affiliate's income or loss is recognized in the consolidated statement of earnings and cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment.
Accounting Standards Updates
In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." This standard requires disclosure of significant segment expenses and other segment items by reportable segment. This ASU becomes effective for annual periods beginning in 2024 and interim periods in 2025. The Company is assessing the impact of this ASU and upon adoption expects that any impact would be limited to additional segment expense disclosures in the footnotes to its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." This standard enhances disclosures related to income taxes, including the rate reconciliation and information on income taxes paid. This ASU becomes effective January 1, 2025. The Company is assessing the impact of this ASU and upon adoption expects to include certain additional disclosures in the footnotes to its consolidated financial statements.
NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
The carrying amounts of goodwill by reportable segment are as follows (in thousands):
| CAM | ACMI Services | All Other | Total | |||||||||||||
| Carrying value as of December 31, 2023 | $ | $ | $ | $ | ||||||||||||
| Carrying value as of March 31, 2024 | $ | $ | $ | $ | ||||||||||||
The Company's acquired intangible assets are as follows (in thousands):
| Airline | Amortizing | |||||||||||
| Certificates | Intangibles | Total | ||||||||||
| Carrying value as of December 31, 2023 | $ | $ | $ | |||||||||
| Amortization | — | ( | ) | ( | ) | |||||||
| Carrying value as of March 31, 2024 | $ | $ | $ | |||||||||
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangible assets, including customer relationship and Supplemental Type Certificates ("STC") intangibles, over
Stock warrants issued to Amazon.com, Inc. (“Amazon”) (see Note C) as an incentive for a subsidiary of Amazon to lease aircraft from the Company are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligations and amortized against revenues over the duration of related aircraft leases. The Company's lease incentive granted to the lessee was as follows (in thousands):
| Lease | ||||
| Incentive | ||||
| Carrying value as of December 31, 2023 | $ | |||
| Amortization | ( | ) | ||
| Carrying value as of March 31, 2024 | $ | |||
The Company has a
The carrying value of the joint ventures totaled $
Three customers each account for a significant portion of the Company's consolidated revenues. The percentage of the Company's revenues for the Company's three largest customers, for the three month period ended March 31, 2024 and 2023 are as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Customer | Percentage of Revenue | |||||||
| DoD | % | % | ||||||
| Amazon | % | % | ||||||
| DHL | % | % | ||||||
The accounts receivable from the Company's three largest customers as of March 31, 2024 and December 31, 2023 are as follows (in thousands):
| March 31, 2024 | December 31, 2023 | |||
| Customer | Accounts Receivable | |||
| DoD | $ | $ | ||
| Amazon | ||||
| DHL | ||||
DoD
The Company is a provider of cargo and passenger airlift services to the U.S. Department of Defense ("DoD"). The Company's airlines are eligible to bid for military charter operations for passenger and cargo transportation through contracts awarded by the DoD. The airlines draw from the Company's fleet of Boeing 757 combi, Boeing 777 passenger, Boeing 767 passenger and Boeing 767 freighter aircraft for the DoD operations. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes.
DHL
The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate CMI agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides additional air cargo transportation services for DHL through ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. As of March 31, 2024, the Company leased 14 Boeing 767 freighter aircraft to DHL comprised of Boeing 767-200 aircraft and
Amazon
The Company has been providing freighter aircraft, airline operations and services for cargo handling and logistical support for Amazon.com Services, LLC, ("ASI") a subsidiary of Amazon, since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases Boeing 767 freighter aircraft to ASI. The ATSA also provides for the operation of aircraft by the Company’s airline subsidiaries, and the management of ground services by LGSTX. As of March 31, 2024, the Company leased 34 Boeing 767 freighter aircraft to ASI with lease expirations between 2024 and 2031.
Amazon Investment Agreement
On December 22, 2018, the Company entered into an Amended and Restated Air Transportation Services Agreement ("A&R ATSA") with ASI, pursuant to which the Company, through CAM and its airline subsidiaries, agreed to (1) lease and operate
On May 29, 2020, the Company entered into a Second Amended and Restated Air Transportation Services Agreement (the "2nd A&R ATSA") with ASI, pursuant to which the Company agreed to lease more Boeing 767-300 aircraft to ASI for operation by the Company's airline subsidiaries under the 2nd A&R ATSA. The first of these leases began in the second quarter of 2020 with the remaining delivered in 2021. All of these aircraft leases were for -year terms. Pursuant to the 2018 Investment Agreement, as a result of leasing
Issued and outstanding warrants are summarized below as of March 31, 2024:
| Common Shares in millions | ||||||||||
| Exercise price | Vested | Non-Vested | Expiration | |||||||
| 2018 Investment Agreement | $ | | ||||||||
| 2018 Investment Agreement | $ | | ||||||||
Prior to May 6, 2024 Amazon could earn additional warrants for up to
For all outstanding warrants vested, Amazon may select a cashless conversion option. Assuming ATSG's stock price at the time of conversion is above the warrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option by surrendering the number of shares with a market value equal to the exercise price.
The Company resumed repurchases of its own shares during October 2022 in conjunction with the expiration of certain government restrictions stemming from the Coronavirus Aid, Relief and Economic Security Act. As the Company repurchases its own shares, Amazon has the option to sell shares of ATSG's common stock to the Company to maintain its ownership percentage of less than 19.9% of the Company's outstanding shares pursuant to the terms of an Investment Agreement dated March 8, 2016, as amended. On August 14, 2023 Amazon sold
As of March 31, 2024 and December 31, 2023, the Company's liabilities reflected warrants and Amazon sale options from the 2018 Amazon agreements having a fair value of $
Subsequent Event
On May 6, 2024, the Company entered into a Third Amended and Restated Air Transportation Services Agreement with ASI (the "3rd A&R ATSA") pursuant to which the Company, through its subsidiary air carriers, will sublease and operate additional Boeing 767-300 freighter aircraft to be provided by ASI, with the potential to add up to additional Boeing 767-300 freighter aircraft. The Company's subsidiary air carriers are scheduled to begin operating the first of those ten aircraft in June of this year with the remaining aircraft being delivered through November of this year. The initial term of the 3rd A&R ATSA runs through May 6, 2029, and may be extended by the parties for an additional years subject to mutual agreement. In conjunction with the execution of the 3rd A&R ATSA, the Company issued warrants to Amazon for up to
Also on May 6, 2024, in conjunction with the execution of the 3rd A&R ATSA, the Company and Amazon agreed upon the form of the warrant to be issued to purchase up to
Additionally, on May 6, 2024, the expiration dates for the two existing vested warrants totaling
The Company's accounting for warrants issued to a customer is determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. Generally, warrants issued to a customer are recorded as an incentive asset using their fair value at the time of issuance if it is probable of vesting at the time of grant. The incentive is amortized against revenues over the duration of related flight operations and leases. The Company's earnings in future periods will be impacted by the re-measurements of warrant fair value, amortizations of the incentive and the related income tax effects. For income tax calculations, the value and timing of related tax deductions may differ from that used for financial reporting.
NOTE D—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance sheets at fair values based on market values from comparable transactions. The fair value of the Company’s money market funds, Convertible Notes (as defined in Note F), convertible note hedges and interest rate swaps are based on observable inputs (Level 2) from comparable market transactions.
The fair values of the stock warrant obligations to Amazon resulting from aircraft leased to ASI were determined using a Black-Scholes pricing model which considers various assumptions, including ATSG's common stock price, the volatility of ATSG's common stock, the expected dividend yield, exercise price and the risk-free interest rate (Level 2 inputs). The fair value of the stock warrant obligations for unvested stock warrants, conditionally granted to Amazon for the execution of incremental, future aircraft leases, include additional assumptions including the expected exercise prices and the probabilities that future leases will occur (Level 3 inputs). The fair value of the sale option for Amazon to sell back shares to the Company under certain conditions was determined based on future share repurchase scenarios. Judgement was applied to determine the number of shares that would be repurchased by the Company at a certain price and the probability of each scenario. There is uncertainty regarding the future stock price at the time of repurchase which affects the magnitude of the gain or loss recognized (Level 3 inputs).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
| As of March 31, 2024 | Fair Value Measurement Using | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash equivalents—money market | $ | $ | $ | $ | ||||||||||||
| Interest rate swap | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Sale option | ( | ) | ( | ) | ||||||||||||
| Stock warrant obligations | ( | ) | ( | ) | ||||||||||||
| Total Liabilities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| As of December 31, 2023 | Fair Value Measurement Using | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash equivalents—money market | $ | $ | $ | $ | ||||||||||||
| Interest rate swap | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Interest rate swap | ( | ) | ( | ) | ||||||||||||
| Sale Option | ( | ) | ( | ) | ||||||||||||
| Stock warrant obligations | ( | ) | ( | ) | ||||||||||||
| Total Liabilities | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
As a result of higher market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately $
The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Flight equipment | $ | $ | ||||||
| Ground equipment | ||||||||
| Leasehold improvements, facilities and office equipment | ||||||||
| Aircraft modifications and projects in progress | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
CAM owned aircraft with a carrying value of $
Debt obligations consisted of the following (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||
| Revolving credit facility | ||||||||
| Senior notes | ||||||||
| Convertible notes | ||||||||
| Other financing arrangements | ||||||||
| Total debt obligations | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Total long term obligations, net | $ | $ | ||||||
The Company is a party to a syndicated credit agreement (as amended, the "Senior Credit Agreement") which includes the ability to execute term loans and a revolving credit facility. The Senior Credit Agreement includes a revolving credit facility of up to $
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain certain collateral coverage ratios set forth in the Senior Credit Agreement. The Senior Credit Agreement contains covenants, including a maximum permitted total EBITDA to debt ratio, a fixed charge covenant ratio requirement, and limitations on certain additional indebtedness and on guarantees of indebtedness. The Senior Credit Agreement stipulates events of default, including unspecified events that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement. The Company has an additional revolving credit facility domiciled in Ireland (the "Irish Facility"). The terms and conditions of the Irish Facility are similar to the Senior Credit Agreement in the U.S. The Irish Facility has a maximum capacity of $
On August 14, 2023 the Company issued $
Conversion of the 2023 Convertible Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning any calendar quarter commencing after December 31, 2023 and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. The Company will settle the principal value of the notes in cash. The initial conversion rate is $31.2864 common shares per $1,000 principal amount of 2023 Convertible Notes (equivalent to an initial conversion price of approximately $
The Company used a portion of the proceeds from the 2023 Convertible Notes to repurchase
On January 28, 2020, CAM completed a debt offering of $
The balance of the Senior Notes is net of debt issuance costs of $
In September 2017, ATSG issued $
ATSG has the right to settle the 2017 Convertible Notes in cash, ATSG common shares or a combination of cash and ATSG common shares. The initial conversion rate is 31.3475 common shares per $1,000 principal amount of 2017 Convertible Notes (equivalent to an initial conversion price of approximately $
In conjunction with the 2017 Convertible Notes, the Company purchased convertible note hedges under privately negotiated transactions for $
The carrying value of the Company's convertible debt is shown below (in thousands):
| 2017 Convertible Notes | 2023 Convertible Notes | Total Convertible Notes | ||||||||||
| Principal Value December 31, 2023 | ||||||||||||
| Unamortized issuance cost | ( | ) | ( | ) | ( | ) | ||||||
| Convertible Debt March 31, 2024 | ||||||||||||
In conjunction with the offering of the 2017 Convertible Notes, the Company also sold warrants to the convertible note hedge counterparties in separate, privately negotiated warrant transactions at a higher strike price and for the same number of the Company’s common shares, subject to customary anti-dilution adjustments.
On August 14, 2023, the Company repurchased outstanding 2017 Convertible Notes having a principal value of $
The Company maintains derivative instruments for protection from fluctuating interest rates. The table below provides information about the Company’s interest rate swaps (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||
| Stated | Market | Market | ||||||||||||||||||
| Interest | Notional | Value | Notional | Value | ||||||||||||||||
| Expiration Date | Rate | Amount | (Liability) | Amount | (Liability) | |||||||||||||||
| March 31, 2026 | % | |||||||||||||||||||
| March 31, 2026 | % | |||||||||||||||||||
| June 30, 2026 | % | ( | ) | |||||||||||||||||
| June 30, 2026 | % | ( | ) | |||||||||||||||||
The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future fluctuations in SOFR interest rates on derivatives held by the Company will result in the recording of unrealized gains and losses into the statement of operations. The Company recorded pre-tax gains on derivatives of $
NOTE H—COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases property, aircraft, aircraft engines and other types of equipment under operating leases. The Company's airlines operate
The Company records the initial right-to-use asset and lease liability at the present value of lease payments scheduled during the lease term. For the three months ended March 31, 2024 and 2023, non-cash transactions to recognize right-to-use assets and corresponding liabilities for new leases were $
For the three months ended March 31, 2024 and 2023, cash payments against operating lease liabilities were $
| Operating Leases | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 and beyond | ||||
| Total undiscounted cash payments | ||||
| Less: amount representing interest | ( | ) | ||
| Present value of future minimum lease payments | ||||
| Less: current obligations under leases | ||||
| Long-term lease obligation | $ | |||
Purchase Commitments
The Company has agreements with vendors for the conversion of Boeing 767-300, Airbus A321 and Airbus A330 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. As of March 31, 2024, the Company owned
Guarantees and Indemnifications
Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or one or more other parties that are considered reasonable and customary (e.g., use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease or agreement.
Other
In addition to the foregoing matters, the Company is also a party to legal proceedings in various federal and state jurisdictions from time to time arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, the Company believes that its ultimate liability, if any, arising from pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to its financial condition or results of operations.
Employees Under Collective Bargaining Agreements
As of March 31, 2024, the flight crewmember employees of ABX, ATI and OAI and flight attendant employees of ATI and OAI were represented by the labor unions listed below:
| Percentage of | ||||
| the Company’s | ||||
| Airline | Labor Agreement Unit | Employees | ||
| ABX | International Brotherhood of Teamsters | % | ||
| ATI | Air Line Pilots Association | % | ||
| OAI | International Brotherhood of Teamsters | % | ||
| ATI | Association of Flight Attendants | % | ||
| OAI | Association of Flight Attendants | % |
In addition, OAI has less than 20 flight dispatchers that are represented by a recognized labor unit and are beginning to negotiate a collective bargaining agreement.
NOTE I—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Defined Benefit and Post-retirement Healthcare Plans
ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit pension plan for a major portion of its ABX employees that meet minimum eligibility requirements. ABX also sponsors non-qualified defined benefit pension plans for certain employees. These non-qualified plans are unfunded. Employees are no longer accruing benefits under any of the defined benefit pension plans. ABX also sponsors a post-retirement healthcare plan for its ABX crewmembers, which is unfunded. Benefits for covered individuals terminate upon reaching age 65 under the post-retirement healthcare plans.
The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature of these benefit payouts increases the sensitivity of certain estimates of our post-retirement obligations. The assumptions considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts are discount rates and expected long term investment returns on plan assets. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our results of operations.
ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX's sponsored defined benefit pension plans and post-retirement healthcare plans follows below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.
ABX’s net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for the three month periods ended March 31, 2024 and 2023 are as follows (in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| Pension Plans | Post-Retirement Healthcare Plan | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ||||||||||||
| Amortization of net loss | ( | ) | ||||||||||||||
| Net periodic benefit cost (income) | $ | $ | $ | $ | ||||||||||||
During the three month period ended March 31, 2024, the Company made contributions to the pension plans of $
The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Income taxes recorded through March 31, 2024 have been estimated utilizing a rate of
As a result of these differences in which expenses and benefits for tax purposes are different than required by GAAP, the Company's effective tax rate for the three months ended March 31, 2024 was
The Company has operating loss carryforwards for U.S. federal income tax purposes. Management expects to utilize the loss carryforwards to offset federal income tax liabilities in the future. Due to the Company's deferred tax assets, including its loss carryforwards, cash payments for income taxes will be limited through 2025. The Company is required to pay some federal tax due to loss carryforward usage limitations and certain state and local income taxes.
NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following items by components for the three month periods ended March 31, 2024 and 2023 (in thousands):
| Defined Benefit | Defined Benefit | Foreign Currency | ||||||||||||||
| Pension | Post-Retirement | Translation | Total | |||||||||||||
| Balance as of January 1, 2023 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Amounts reclassified from accumulated other comprehensive income: | ||||||||||||||||
| Actuarial costs (reclassified to salaries, wages and benefits) | ||||||||||||||||
| Income Tax (Expense) or Benefit | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Balance as of March 31, 2023 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Balance as of January 1, 2024 | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income: | ||||||||||||||||
| Actuarial costs (reclassified to salaries, wages and benefits) | ( | ) | ||||||||||||||
| Income Tax (Expense) or Benefit | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ||||||||||||||
| Balance as of March 31, 2024 | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
NOTE L—STOCK-BASED COMPENSATION
The Company's Board of Directors has granted stock-based incentive awards to certain employees and directors pursuant to a long-term incentive plan which was approved by the Company's stockholders in May 2005 and in May 2015. Employees have been awarded non-vested restricted stock, non-vested stock units with performance conditions, and non-vested stock units with market conditions. The restrictions on the non-vested restricted stock awards lapse at the end of a specified service period, which is typically years from the grant date. The non-vested stock units will be converted into a number of ATSG common shares depending on the satisfaction of the performance conditions or market conditions at the end of a specified service period, which is typically years from the grant date. The performance condition awards will be converted into a number of ATSG common shares based on the Company's average return on invested capital during the service period. Similarly, the market condition awards will be converted into a number of common shares depending on the appreciation of ATSG common shares compared to the Nasdaq Transportation Index. Directors have been granted time-based awards that vest after a period of months. Under each of the stock-based incentive awards, the restrictions may lapse sooner than the stated settlement period upon (1) the participant's death or disability, (2) an employee participant's qualification for retirement or (3) a change in control, in the case of an employee participant under the 2015 long-term incentive plan, or a business combination, in the case of a director participant under the 2005 or 2015 long-term incentive plan. The Company expects to settle all of the stock unit awards by issuing new ATSG common shares. The table below summarizes award activity for the three months ended March 31, 2024 and 2023:
| March 31, 2024 | March 31, 2023 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| average | average | |||||||||||||||
| Number of | grant-date | Number of | grant-date | |||||||||||||
| Awards | fair value | Awards | fair value | |||||||||||||
| Outstanding at beginning of period | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Converted | ( | ) | ( | ) | ||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Outstanding at end of period | $ | $ | ||||||||||||||
| Vested | $ | $ | ||||||||||||||
The average grant-date fair value of each performance condition award, non-vested restricted stock award and time-based award granted by the Company in 2024 was $
| 2024 | |||
| Risk-free interest rate | % | ||
| Volatility | % |
For the three months ended March 31, 2024 and 2023, the Company recorded expense of $
NOTE M—COMMON STOCK AND EARNINGS PER SHARE
Earnings per Share
The calculation of basic and diluted earnings per common share is as follows (in thousands, except per share amounts):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Earnings from continuing operations - basic | $ | $ | ||||||
| Gain from stock warrants revaluation, net of tax | $ | $ | ( | ) | ||||
| Convertible debt interest charge, net of tax | $ | $ | ||||||
| Earnings from continuing operations - diluted | $ | $ | ||||||
| Denominator: | ||||||||
| Weighted-average shares outstanding for basic earnings per share | ||||||||
| Common equivalent shares: | ||||||||
| Effect of stock-based compensation awards and warrants | ||||||||
| Effect of convertible debt | ||||||||
| Weighted-average shares outstanding assuming dilution | ||||||||
| Basic earnings per share from continuing operations | $ | $ | ||||||
| Diluted earnings per share from continuing operations | $ | $ | ||||||
Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares outstanding due to
The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock warrants recorded as a liability (see Note C), if such warrants have an anti-dilutive effect on earnings per share. The dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during the period and comparing that amount with the number of corresponding warrants outstanding.
NOTE N—SEGMENT AND REVENUE INFORMATION
The Company operates in
The Company's segment information from continuing operations is presented below (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Total revenues: | ||||||||
| CAM | $ | $ | ||||||
| ACMI Services | ||||||||
| All other | ||||||||
| Eliminate inter-segment revenues | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| Customer revenues: | ||||||||
| CAM | $ | $ | ||||||
| ACMI Services | ||||||||
| All other | ||||||||
| Total | $ | $ | ||||||
The Company's external customer revenues from other activities for the three month period ended March 31, 2024, and 2023 are presented below (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Aircraft maintenance, modifications and part sales | $ | $ | ||||||
| Ground services | ||||||||
| Other, including aviation fuel sales | ||||||||
| Total customer revenues | $ | $ | ||||||
During the three month period ended March 31, 2024, the Company recognized $
CAM's leases do not contain residual guarantees. Approximately
The Company's other segment information from continuing operations is presented below (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Depreciation and amortization expense: | ||||||||
| CAM | $ | $ | ||||||
| ACMI Services | ||||||||
| All other | ||||||||
| Total | $ | $ | ||||||
| Interest expense | ||||||||
| CAM | ||||||||
| ACMI Services | ||||||||
| Segment earnings (loss): | ||||||||
| CAM | $ | $ | ||||||
| ACMI Services | ( | ) | ( | ) | ||||
| All other | ||||||||
| Net unallocated interest expense | ( | ) | ( | ) | ||||
| Net gain (loss) on financial instruments | ( | ) | ||||||
| Other non-service components of retiree benefit costs, net | ( | ) | ( | ) | ||||
| Loss from non-consolidated affiliate | ( | ) | ( | ) | ||||
| Pre-tax earnings from continuing operations | $ | $ | ||||||
The amortization of customer incentives included in revenue for CAM was $
The Company's assets are presented below by segment (in thousands). Cash and cash equivalents are reflected in Assets - All other.
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Assets: | ||||||||
| CAM | $ | $ | ||||||
| ACMI Services | ||||||||
| All other | ||||||||
| Total | $ | $ | ||||||
During the three months ended March 31, 2024, the Company had capital expenditures for property and equipment of $
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") has been prepared with reference to the historical financial condition and results of operations of ATSG and its subsidiaries. The MD&A describes the principal factors affecting our results of operations, financial condition, cash flow, liquidity and capital resources. The MD&A should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) contained in this Form 10-Q and the audited consolidated financial statements and related notes prepared in accordance with GAAP contained in our 2023 Form 10-K.
OVERVIEW
We provide aircraft leasing and air cargo transportation and related services. To support the needs of our leasing customers in the aviation and logistics industries at large, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. Our principal subsidiaries include our aircraft leasing company (CAM) and three independently certificated airlines (ABX, ATI and OAI).
We primarily operate through two reportable segments, CAM and ACMI Services:
CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to our airlines. CAM acquires passenger aircraft and manages the modification of the aircraft into freighters. The follow-on aircraft leases normally cover a term of five to ten years. CAM currently leases Boeing 767, 757 and 777 aircraft, Airbus A321 aircraft and aircraft engines, and is in the process of adding Airbus A330 freighter aircraft to its fleet.
ACMI Services consists of the cargo and passenger transportation operations of our three airline subsidiaries. Our airlines operate under contracts to provide a combination of aircraft, flight crews, aircraft maintenance, aircraft hull and liability insurance and aviation fuel. Our customers are typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for the DoD, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price.
Our other business operations, which primarily provide support services to the transportation industry, include providing aircraft maintenance and modification services to customers, cargo load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute reportable segments and are reported in "All other."
At March 31, 2024, we owned 109 Boeing aircraft and three Airbus aircraft that were in revenue service. We owned three Boeing 767-300 freighter aircraft and one Boeing 767-200 freighter aircraft not in revenue service having been returned from lease and that are expected to be re-leased in 2024 or 2025. We also owned thirteen Boeing 767-300 aircraft, six Airbus 321-200 aircraft and five Airbus A330 aircraft, either undergoing or awaiting induction into the freighter conversion process at March 31, 2024. In addition to these aircraft, we leased five passenger aircraft from third parties and operated 16 freighter aircraft provided by customers for whom we provide services under CMI agreements.
Customers
Our largest customers are ASI, which is a subsidiary of Amazon, the DoD and DHL. Revenues from our commercial arrangements with ASI comprised approximately 34% and 35% of our consolidated revenues during the three month periods ended March 31, 2024 and 2023, respectively. As of March 31, 2024, we leased 34 Boeing 767 freighter aircraft to ASI with lease expirations between 2024 and 2031. The aircraft lease terms typically range from 5 to 10 years. Under a separate air transportation services agreement, we operate those aircraft for ASI and we operate ten other Boeing 767 aircraft provided by ASI. We also provide ground services and aircraft maintenance services to ASI.
On May 6, 2024, we entered an agreement with ASI to operate ten additional Boeing 767-300 freighter aircraft to be provided by ASI, with the potential to add up to ten additional Boeing 767-300 freighter aircraft. The agreement extends the expiration date of the air transportation services agreement from March 2026 to May 2029 with renewal options. Also on May 6, 2024, in conjunction with the agreement, we agreed to issue additional warrants to Amazon and modify provisions of certain existing warrants. See Note C of the accompanying consolidated financial statements for additional information regarding the agreements with ASI.
DHL comprised 13% and 14% of our consolidated revenues during the three month periods ended March 31, 2024 and 2023, respectively. As of March 31, 2024, we leased 14 Boeing 767 freighter aircraft to DHL comprising one Boeing 767-200 aircraft and 13 Boeing 767-300 aircraft, with expirations between 2025 and 2031. Ten of the 14 Boeing 767 aircraft were being operated by our airlines for DHL. Additionally, we operated six Boeing 767 aircraft that were provided by DHL.
The DoD comprised 28% and 29% of our consolidated revenues during the three month periods ended March 31, 2024 and 2023 respectively, derived primarily from operating passenger and combi charter flights. We utilize our fleet of 15 passenger aircraft to operate troop movement flights for the DoD. We also operate our four combi aircraft for the DoD, which are capable of simultaneously carrying cargo and passengers on the main deck. We have been providing services to the DoD since the 1990’s, typically under one-year agreements.
RESULTS OF OPERATIONS
Revenue and Earnings Summary
External customer revenues from continuing operations decreased by $15.6 million, or 3%, to $485.5 million during the three month period ended March 31, 2024 compared to the same period in 2023. Customer revenues decreased from Boeing 767-200 aircraft leases, engine power revenues and flying for customers' delivery networks during the first three months of 2024
The consolidated earnings from continuing operations were $8.6 million for the three month period ended March 31, 2024 compared to $20.1 million for the corresponding period in the prior year. The pre-tax earnings from continuing operations were $12.4 million for the three month period ended March 31, 2024 compared to $26.6 million for the corresponding period in the prior year. Earnings was affected by the following events and items that do not directly reflect our underlying operations among the periods presented. Pre-tax earnings from continuing operations:
| • |
included gains of $2.4 million for the three month period ended March 31, 2024 for financial instrument valuations, including interest rate swaps and instruments granted to Amazon compared to losses of $1.7 million for the same period in the prior year. |
| • |
were also reduced to $3.9 million for the three month period ended March 31, 2024 for the amortization of customer lease incentives given to Amazon in the form of warrants compared to $5.8 million for the same period in the prior year. |
| • |
included losses of $1.1 million for the three month period ended March 31, 2024 for non-service components of retiree benefit plans compared to $3.2 million for the same period in the prior year. |
| • |
included losses of $0.1 million for the three month period ended March 31, 2024 for our share of joint venture results, including engineering costs for the development of an aircraft modification for the Airbus A321 aircraft type compared to losses of $0.4 million for the same period in the prior year. |
| • |
included losses of less than $0.1 million for the three month period ended March 31, 2023, net related insurance recoveries for the costs which occurred as a direct result of a foam release after a hangar's fire suppression system malfunctioned during 2022. |
After removing the effects of these events and items, adjusted pre-tax earnings from continuing operations, a non-GAAP financial measure (see the reconciliation of adjusted pre-tax earnings from continuing operations to pre-tax earnings from continuing operations in the following table), were $15.2 million for three month period ended March 31, 2024 compared to $37.8 million for the corresponding period in 2023. Adjusted pre-tax earnings from continuing operations for the three month period ended March 31, 2024 decreased $22.6 million primarily due to lower earnings from Boeing 767-200 aircraft leases and related engine power programs, as well as higher interest expense and depreciation expense, most of which are reflected in our CAM segment. Additionally, lower revenues and block hours flown for customers' delivery networks resulted in lower earnings for ACMI Services compared to the same period of the previous year.
A summary of our revenues from continuing operations, pre-tax earnings from continuing operations and adjusted pre-tax earnings from continuing operations, as well as a reconciliation of adjusted pre-tax earnings from continuing operations to pre-tax earnings from continuing operations, is shown below:
| Three Months Ended |
||||||||
| March 31, |
||||||||
| 2024 |
2023 |
|||||||
| Revenues from Continuing Operations: |
||||||||
| CAM |
||||||||
| Aircraft leasing and related services |
$ | 108,645 | $ | 117,074 | ||||
| Lease incentive amortization |
(3,096 | ) | (5,030 | ) | ||||
| Total CAM |
105,549 | 112,044 | ||||||
| ACMI Services |
323,824 | 334,127 | ||||||
| Other Activities |
109,040 | 110,588 | ||||||
| Total Revenues |
538,413 | 556,759 | ||||||
| Eliminate internal revenues |
(52,896 | ) | (55,664 | ) | ||||
| Customer Revenues |
$ | 485,517 | $ | 501,095 | ||||
| Pre-Tax Earnings from Continuing Operations: |
||||||||
| CAM, inclusive of interest expense |
$ | 13,409 | $ | 34,200 | ||||
| ACMI Services, interest expense |
(3,485 | ) | (2,411 | ) | ||||
| Other Activities |
2,307 | 654 | ||||||
| Net unallocated interest expense |
(976 | ) | (510 | ) | ||||
| Net financial instrument re-measurement (loss) gain |
2,355 | (1,740 | ) | |||||
| Other non-service components of retiree benefits costs, net |
(1,085 | ) | (3,218 | ) | ||||
| Loss from non-consolidated affiliate |
(79 | ) | (406 | ) | ||||
| Pre-Tax Earnings from Continuing Operations |
12,446 | 26,569 | ||||||
| Add other non-service components of retiree benefit costs, net |
1,085 | 3,218 | ||||||
| Add charges for non-consolidated affiliates |
79 | 406 | ||||||
| Add lease incentive amortization |
3,912 | 5,822 | ||||||
| Add net loss (gain) on financial instruments |
(2,355 | ) | 1,740 | |||||
| Add net charges for hangar foam incident |
— | 41 | ||||||
| Adjusted Pre-Tax Earnings from Continuing Operations (non-GAAP) |
$ | 15,167 | $ | 37,796 | ||||
We define adjusted pre-tax earnings from continuing operations, a non-GAAP financial measure, as pre-tax earnings from continuing operations excluding the following: (i) non-service components of retiree benefit costs; (ii) gains and losses for the fair value re-measurement of financial instruments including warrants issued to Amazon; (iii) customer lease incentive amortization; (iv) gains and losses from non-consolidated joint ventures; and (v) charges related to the discharge of a fire suppression system in the Company's aircraft hangar, net of related insurance recoveries. We exclude these items from pre-tax earnings from continuing operations because they are distinctly different in their predictability or not closely related to our ongoing operating activities. Management uses adjusted pre-tax earnings from continuing operations to compare the performance of core operating results between periods. Presenting this non-GAAP financial measure provides management and investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted results should not be considered in isolation or as a substitute for analysis of the Company's results as calculated and reported under GAAP.
Aircraft Fleet Summary
Our fleet of cargo and passenger aircraft is summarized in the following table as of March 31, 2024, and December 31, 2023. Our freighters, converted from passenger aircraft, utilize standard shipping containers and can be deployed into regional cargo markets more economically than larger capacity aircraft, newly built freighters or other competing alternatives. At March 31, 2024, we owned 13 Boeing 767-300 aircraft, six Airbus A321-200 aircraft and five Airbus A330 aircraft that were either already undergoing or awaiting induction into the freighter conversion process. As of March 31, 2024, we also owned three Boeing 767-300 freighter aircraft and one Boeing 767-200 freighter aircraft staging for future lease.
Aircraft fleet activity during the first three months of 2024 is listed below:
| • |
CAM completed the modification of four Boeing 767-300 freighter aircraft purchased in the previous year. The aircraft are leased to external customers under multi-year leases. |
| • |
External customers returned three Boeing 767-200 freighter aircraft to CAM. One of these aircraft was leased to ABX. The remaining aircraft have currently been removed from service and their parts and engines will be used to support the fleet, re-leased to customers or possibly sold. |
| • |
An external customer returned one Boeing 767-300 freighter aircraft to CAM. This aircraft has been leased to ABX. |
| •
|
OAI began a short term lease of one Boeing 767-300 passenger aircraft from an external lessor. |
| • |
CAM purchased three Boeing 767-300 passenger aircraft. These aircraft are expected to be converted into standard freighter configuration and leased to external customers during 2025 or 2026. |
| • |
CAM purchased two Airbus A330 passenger aircraft for the purpose of converting them into a standard freighter configuration. These aircraft are expected to be leased to an external customer during 2025. |
| March 31, 2024 |
December 31, 2023 |
|||||||||||||||||||||||
| ACMI |
ACMI |
|||||||||||||||||||||||
| Services |
CAM |
Total |
Services |
CAM |
Total |
|||||||||||||||||||
| In-service aircraft |
||||||||||||||||||||||||
| Aircraft owned |
||||||||||||||||||||||||
| Boeing 767-200 Freighter |
5 | 13 | 18 | 4 | 16 | 20 | ||||||||||||||||||
| Boeing 767-200 Passenger |
2 | — | 2 | 2 | — | 2 | ||||||||||||||||||
| Boeing 767-300 Freighter |
3 | 74 | 77 | 2 | 71 | 73 | ||||||||||||||||||
| Boeing 767-300 Passenger |
5 | — | 5 | 5 | — | 5 | ||||||||||||||||||
| Boeing 777-200 Passenger |
3 | — | 3 | 3 | — | 3 | ||||||||||||||||||
| Boeing 757-200 Combi |
4 | — | 4 | 4 | — | 4 | ||||||||||||||||||
| Airbus A321-200 Freighter |
— | 3 | 3 | — | 3 | 3 | ||||||||||||||||||
| 22 | 90 | 112 | 20 | 90 | 110 | |||||||||||||||||||
| Operating lease |
||||||||||||||||||||||||
| Boeing 767-200 Passenger |
1 | — | 1 | 1 | — | 1 | ||||||||||||||||||
| Boeing 767-300 Passenger |
4 | — | 4 | 3 | — | 3 | ||||||||||||||||||
| Boeing 767-200 Freighter |
2 | — | 2 | 2 | — | 2 | ||||||||||||||||||
| Boeing 767-300 Freighter |
14 | — | 14 | 14 | — | 14 | ||||||||||||||||||
| Total |
21 | — | 21 | 20 | — | 20 | ||||||||||||||||||
| Other aircraft |
||||||||||||||||||||||||
| Owned Boeing 767-300 under or awaiting modification |
— | 13 | 13 | — | 14 | 14 | ||||||||||||||||||
| Owned Airbus A321-200 under or awaiting modification |
— | 6 | 6 | — | 6 | 6 | ||||||||||||||||||
| Owned Airbus A330 under or awaiting modification |
— | 5 | 5 | — | 3 | 3 | ||||||||||||||||||
| Boeing 767 available for lease |
— | 4 | 4 | — | 4 | 4 | ||||||||||||||||||
As of March 31, 2024, ABX, ATI and OAI were leasing 22 in-service aircraft internally from CAM for use in ACMI Services. Of CAM's 13 externally leased Boeing 767-200 freighter aircraft, four were leased to ASI and operated by ABX or ATI, one was leased to DHL and operated by ABX and eight were leased to other external customers. Of the 74 externally leased Boeing 767-300 freighter aircraft, 30 were leased to ASI and operated by ABX or ATI, nine were leased to DHL and operated by ABX, four were leased to DHL and were being operated by a DHL-affiliated airline and 31 were leased to other external customers. The carrying values of the total in-service fleet as of March 31, 2024 and December 31, 2023 were $1,994.1 million and $1,898.7 million, respectively. Additionally, we own several Boeing 767 airframes that are not in service condition. These aircraft are being used to support our in-service Boeing fleet with engines and aircraft parts or are being marketed.
CAM
CAM's revenues from external customers totaled $79.6 million for the three month period ended March 31, 2024 compared to $83.2 million for the same period in the prior year. CAM's revenues from our airlines totaled $26.0 million during the three month period ended March 31, 2024 compared to $28.9 million for the same period in the prior year. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, decreased $8.4 for the three month period ended March 31, 2024, compared to the corresponding period in 2023. Revenues during 2024 were reduced by the scheduled returns of Boeing 767-200 freighter aircraft from lease and lower hours flown by engines in our Boeing 767-200 engine power program. Since April 1, 2023, CAM added 12 Boeing 767-300 freighter aircraft and three Airbus A321-200 freighters to its portfolio and placed all 15 of these aircraft with external customers under long-term leases. During that same time period, 12 767-200 freighters and four 767-300 freighters were returned from leases from external customers. CAM's revenues from its 767-200 engine power program have decreased $7.3 million for the three month period ended March 31, 2024 compared to the corresponding period of 2023, due primarily to the reduction in leased 767-200 aircraft.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, was $13.4 million for the three months ended March 31, 2024 compared to $34.2 million for the same period in the prior year. CAM's earnings was negatively impacted by the reduction in 767-200 freighter lease and engine power program revenues. Additionally, reduced earnings compared to the prior year period included $5.3 million more internally allocated interest expense due to higher company-wide interest expense and $5.0 million more depreciation expense primarily due to the new aircraft placed into service. Pre-tax earnings reflects the same amount of aircraft, netting additional 767-300 leases with 767-200 freighter returns since April 1, 2023. Additionally, depreciation expense increased $5.0 million for the three month period ended March 31, 2024
CAM's future operating results will depend on a number of factors including the continued demand from lessees for mid-sized widebody freighters, our ability to convert passenger aircraft into freighters within planned costs and within the time frames required by customers and the lease rates under which aircraft are redeployed or renewed. Our CAM fleet projections for 2024 are described below by aircraft type:
| ● |
CAM plans to remove five more Boeing 767-200's from service during the remainder of 2024 and retire most of these aircraft for a combination of parts to support our fleet and part sales to third parties. |
| ● |
In addition to three Boeing 767-300 freighter aircraft available for lease and 13 Boeing 767-300 aircraft subject to freighter modification as of March 31, 2024, CAM has commitments to purchase one more Boeing 767-300 passenger aircraft during 2024 for freighter modification. CAM plans to complete the modification of five more Boeing 767-300 aircraft during 2024. CAM has leased four aircraft through March 31, 2024 and currently has inter-ATSG assignments for one more aircraft lease during the remainder of 2024. The other seven aircraft are being marketed for lease during 2024. During the remainder of 2024, CAM has three Boeing 767-300 aircraft leases scheduled to expire. |
| ● |
CAM expects to complete the freighter modification of the six Airbus A321 aircraft that were subject to freighter modification as of March 31, 2024. CAM is currently marketing these six for lease to external customers for leases to begin in 2024. CAM does not have commitments to acquire more Airbus A321 aircraft at this time. The U.S. FAA, the Civil Aviation Administration of China and aviation regulators in Europe have certified the design of the modified Airbus A321 that CAM utilizes to convert the passenger aircraft to a freighter via its joint venture. |
| ● |
In addition to the five Airbus A330 aircraft that CAM owned at March 31, 2024, CAM is scheduled to purchase three more Airbus A330 passenger aircraft during 2024. CAM expects to complete the freighter modification for two of these Airbus A330 aircraft during 2024 and they are being marketed for lease. |
CAM's future operating results will also depend on depreciation expense for newly modified aircraft as an aircraft reaches service condition, the sale price of aircraft which could be sold, interest expense, revenues from the utilization of the engines that power our Boeing 767-200 aircraft and other factors. Further, certain airline customers serving international routes have in recent times experienced and could further experience a weakness in demand from the large integrators and markets they serve. This could lead to a disruption in our expected revenues and cash remittances from one or more customers. CAM's pre-tax earnings are subject to changes from market interest rates and our level of debt. Changes to market conditions could affect the demand for modified aircraft or the projected returns on our fleet expansion from the outcomes currently expected, and further, management may take additional actions such as the further deferral or cancellation of planned growth investments or the divestiture of certain aircraft.
ACMI Services
Total revenues from ACMI Services decreased $10.3 million compared to 2023 for the three month period ended March 31, 2024 to $323.8 million. During the three month period ended March 31, 2024, block hours flown for our customers' delivery networks decreased 3% compared to the corresponding period in 2023 reflecting to the removal of certain Boeing 767-200 aircraft and fewer international flights. Block hours for passenger services during the three month period ended March 31, 2024, including operation of Boeing 757 combi aircraft, were flat compared to the corresponding period of 2023.
ACMI Services had pre-tax losses of $3.5 million during the three month period ended March 31, 2024 compared to pre-tax losses of $2.4 million for the corresponding period of 2023 inclusive of internally allocated interest expense. ACMI Services was impacted by additional internally allocated interest expense of $0.5 million for the three month period ended March 31, 2024, compared to the corresponding period in 2023 due to higher interest rates and debt balances in 2024. The decline in earnings during 2024 reflects the reduced operations for our customers delivery networks' during 2024 compared to the first three months of 2023. We operated three fewer freighter aircraft in ACMI Services since April 1, 2023.
Maintaining profitability in ACMI Services will depend on a number of factors, including the impact of inflation on operating expenses, customer billing rates, customer flight schedules, crewmember productivity and pay, employee attrition, employee benefits, aircraft maintenance schedules and the number of aircraft we operate. Our airlines are planning to add eleven customer provided aircraft into operations during the remainder of 2024. These additions will require start-up expenses and may impact our operational performance in the near term. The war in Israel and conflicts in other parts of the world may also impact our operations, reducing the number of flights that we operate for the DoD and other customers.
Other Activities
External customer revenues from all other activities decreased $1.6 million for the three month period ended March 31, 2024 compared to the corresponding period of 2023. External aircraft maintenance revenues declined during the first quarter of 2024 compared to 2023 while aircraft maintenance resources were applied to more internally billed projects. Pre-tax earnings from other activities were $2.3 million for the three month period ended March 31, 2024 compared to pre-tax earnings of $0.7 million for the same period in the prior year. The increase in earnings during 2024 reflects a revenue mix of higher margin airframe maintenance contracts instead of lower margin line maintenance revenues. Additionally, lower overhead expense during 2024 contributed to improved earnings compared to the previous year.
Expenses from Continuing Operations
Salaries, wages and benefits expense decreased $5.2 million or 3% during the first quarter of 2024 compared to the first quarter of 2023. The decline in expense is due primarily to the decrease in total employees in the first quarter of 2024 compare to 2023. Inflationary pressures and employee attrition may continue to impact wages in the future.
Depreciation and amortization expense increased $5.7 million during the first quarter of 2024 compared to the first quarter of 2023. The increase reflects incremental depreciation for 15 newly converted aircraft added to its operating fleet since April 1, 2023. Increased depreciation from newly converted aircraft was partially offset by lower depreciation for our fleet of Boeing 767-200 aircraft. We expect depreciation expense to continue to increase during future periods in conjunction with our fleet expansion, engine programs and capital spending plans.
Maintenance, materials and repairs expense increased by $6.1 million or 14% during the first quarter of 2024 compared to the first quarter of 2023. This expense line includes the cost of materials and repairs to maintain aircraft and engines, as well as similar costs for providing maintenance services to customers. The increase reflects an increase in scheduled airframe maintenance, part repairs and engine repairs. The aircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed.
Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services decreased $2.1 million during the first quarter of 2024 compared to the first quarter of 2023. Contracted ground and aviation services vary with the level of passenger airline operations. The decrease corresponded to decreased flying volumes.
Fuel expense decreased by $3.2 million during the first quarter of 2024 compared to the first quarter of 2023. Fuel expense includes the cost of fuel to operate DoD flights, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel we resell to customers at the airport in Wilmington, Ohio. For the three month period ended March 31, 2024, the decrease in fuel expense reflects a decrease in block hours flown and a decrease in the price of fuel.
Other operating expenses decreased by $2.7 million during the first quarter of 2024 compared to the first quarter of 2023. Other operating expenses for 2024 include decreases for professional fees and precautionary expense related to COVID prevention.
Non-Operating Income, Adjustments and Expenses
Interest expense increased by $6.3 million during the first quarter of 2024 compared to the first quarter of 2023. Interest rates under our Senior Credit Agreement increased year over year. Additionally, during August 2023 we issued $400.0 million of unsecured convertible notes bearing interest at 3.875%, proceeds from which were used in part to replace $204.5 million of convertible notes bearing 1.125% which were set to mature in 2024.
We recorded unrealized pre-tax gains on financial instrument re-measurements of $2.4 million during the first quarter of 2024 compared to pre-tax losses of $1.7 million for the first quarter in 2023. The gains and losses include the re-valuing, as of March 31, 2024 and 2023, the stock warrants and ATSG stock sale option granted to Amazon and interest rate swaps that we hold. Generally, the warrant values increase or decrease with corresponding decreases or increases in the ATSG common stock price during the measurement period. Additionally, the value of warrants depends partially on the probability that warrants will vest upon the execution of aircraft leases. Increases in the probability of a warrants vesting and the sales option exercise price being above the traded ATSG price results in higher liabilities and losses.
Non-service components of retiree benefits resulted in net losses of $1.1 million during the first quarter of 2024 compared to losses of $3.2 million for the corresponding period in 2023. The non-service component gain and losses of retiree benefits are determined by actuaries and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non-service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans.
The provision for income taxes for interim periods is based on management's best estimates of the effective income tax rates expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Income taxes recorded through March 31, 2024 have been estimated based on year-to-date income and projected results for the full year.
The effective rate from continuing operations for the three month period ended March 31, 2024 was 31%. The effective tax rate is affected by the discrete tax items in which expense and benefits for tax purposes are different than required by generally accepted accounting principles. The effective rate can be impacted by a number of factors, including the apportionment of income among taxing jurisdictions, deductibility limitations on employee compensation, deductibility limitations on meals and per diems and the results of our Ireland-based subsidiary. The Company's effective tax rate before including the effects of the re-measurement of financial instruments, incentive amortizations and other adjustments for adjusted pre-tax earnings from continuing operations (see items in the table above) was 29% for the three month period ended March 31, 2024 compared to 24% for 2023. The increase in the effective tax rate for 2024 is due to an increase in non-deductible items on lower pre-tax earnings and an increase in the portion of pre-tax earnings occurring in tax jurisdictions with higher rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $126.4 million and $216.4 million for the three month periods ended March 31, 2024 and 2023, respectively. Operating cash flows during the first three months of 2023 were higher due to the collection of large amounts of customer receivables from previous periods. Cash payments for interest expense increased $19.7 million to $32.9 million for the first three months of 2024 compared to the same period of 2023 due to increased interest rates. Cash outlays for pension contributions were $0.9 million and $0.8 million for the three month periods ended March 31, 2024 and 2023, respectively.
Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were $102.3 million and $218.8 million for the three month periods ended March 31, 2024 and 2023, respectively. Capital expenditures for the first three months of 2024 included $71.9 million for the acquisition of three Boeing 767-300 aircraft, two Airbus A330 aircraft and freighter modification costs; $28.1 million for required heavy maintenance; and $2.3 million for other equipment. Capital expenditures in the first three months of 2023 included $164.6 million for the acquisition of five Boeing 767-300 aircraft, two Airbus A321-200 aircraft and freighter modification costs; $51.8 million for required heavy maintenance; and $2.4 million for other equipment.
Cash proceeds of $0.9 million and $9.9 million were received during the three month periods ended March 31, 2024 and 2023, respectively, primarily for the sale of aircraft engines.
During the three month period ended March 31, 2024 we spent $9.8 million to invest in joint ventures compared to $0.8 million during the corresponding period in 2023. Our joint venture with Precision Aircraft Solutions, LLC, developed a passenger-to-freighter conversion program for Airbus A321-200 aircraft and our joint venture with GA Telesis Engine Services, LLC provides engine tear-down services to harvest and sell engine parts.
Net cash used in financing activities was $45.6 million during the three month period ended March 31, 2024 compared to $55.8 million net cash provided by financing activities during the corresponding period in 2023.
During the first three months of 2024, we drew $95.0 million from the revolving credit facility under the Senior Credit Agreement and repaid $140.1 million on the revolving credit and other financing arrangements. During the corresponding period in the prior year, we made debt principal payments of $25.2 million and we drew $105.0 million from the revolving credit facility.
Commitments
As of March 31, 2024, we had 24 aircraft that were in or awaiting modification to a freighter configuration. Additionally, we placed non-refundable deposits and have agreements to purchase three more Boeing 767-300 aircraft and five Airbus A330 passenger aircraft through 2025. We outsource a significant portion of the aircraft freighter modification process to non-affiliated third parties. The modification process primarily consists of the installation of a standard cargo door and loading system. We estimate that total capital expenditures for 2024 will be approximately $410 million, of which the majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by whether customer demand supports our return requirements as well as aircraft acquisitions, maintenance and modification processes.
Liquidity and Capital Resources
At March 31, 2024, we had $23.2 million of cash balances and $403.7 million available from the unused portion of the revolving credit facility under the Senior Credit Agreement as described in Note F of the accompanying consolidated financial statements. We expect our operations to continue to generate significant net cash in-flows after deducting required spending of approximately $165 million for heavy maintenance and other sustaining capital expenditures. To expand our fleet, we estimate that capital expenditures for aircraft purchases and freighter modifications will total $245 million for 2024. We believe that our current cash balance, forecasted cash flows provided from customer leases and operating agreements, combined with the Senior Credit Agreement, will be sufficient to fund the expansion and maintenance of our fleet while meeting our contractual obligations, other commitments and working capital requirements for at least the next twelve months. See Note F of the accompanying consolidated financial statements for additional information regarding our credit facilities and outstanding debt obligations.
CRITICAL ACCOUNTING ESTIMATES
The MD&A and certain other disclosures included elsewhere in this Form 10-Q are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. In certain cases, there are alternative policies or estimation techniques which could be applied. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed by management to be reasonable under the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. By their nature, these judgments are subject to uncertainty. Actual results may differ from these estimates under different assumptions or conditions.
For information regarding recently issued accounting pronouncements and the expected impact on our annual statements, see Note A in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Except as provided in Note A, our critical accounting policies and estimates have not changed materially from those disclosed in our 2023 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk for increasing interest rates and changes in the price of jet fuel. The risk associated with jet fuel, however, is largely mitigated by reimbursement through the agreements with its customers.
Market risks have not materially changed from those disclosed in Item 7A of the Company's 2023 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2024, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Form 10-Q (the "Evaluation Date"). Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's "internal control over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during its most recently completed fiscal quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
We are currently a party to legal proceedings in various federal and state jurisdictions arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, we believe that the Company's ultimate liability, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations. In addition, we carry various forms of aviation, commercial, property and casualty, cybersecurity, product liability, and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us.
For more information on various legal proceedings, see the discussion in Note H to our Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q. The information set forth therein related to legal proceedings is incorporated into this Item 3 by reference.
The Company faces risks that could adversely affect its condition or results of operations. There have been no material changes to the Company's risk factors from the information disclosed in Item 1A of the Company's 2023 Form 10-K. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.
On July 27, 2023, the Board authorized the repurchase of up to $120.0 million of ATSG's outstanding common stock (the "2023 Repurchase Program") exclusively in conjunction with a convertible bond offering that the Company was marketing at that time. The 2023 Repurchase Program is separate from the 2022 Repurchase Program described below. The Company subsequently purchased shares in August 2023. The remaining available authorization under the 2023 Repurchase Program is $1.5 million which can only be used in conjunction with the repurchase of our 2017 Convertible Notes.
In addition, on November 29, 2022, the Board of Directors of ATSG (the "Board") authorized the repurchase of up to $150.0 million of ATSG's outstanding common stock (the "2022 Repurchase Program"). The 2022 Repurchase Program does not require the repurchase of a specific number of shares or establish a time frame for any repurchase and the Board may terminate the 2022 Repurchase Program at any time. Repurchases may be made under the 2022 Repurchase Program from time to time in the open market or in privately negotiated transactions. There is no expiration date for the 2022 Repurchase Program. The Company did not purchase any ATSG common stock under the 2022 Repurchase Program during the first quarter of 2024. As of March 31, 2024, the remaining available authorization under the 2022 Repurchase Program was $103.5 million.
During the quarter ended March 31, 2024, director or officer (as defined under Rule 16a-1 of the Exchange Act) of the Company adopted or terminated any Rule 10b5-1 trading arrangements or any non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).
The following exhibits are filed with or incorporated by reference into this report.
| Exhibit No. |
Description of Exhibit |
| Material Contracts |
|
| 10.1 |
Air Transport Services Group, Inc. Executive Incentive Compensation Plan. (1) |
| 10.2 |
| 101.INS |
Inline XBRL Instance Document |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 |
Cover Page Interactive Date File (formatted as inline XBRL and contained in Exhibit 101). |
| (1) |
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on February 23, 2024. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AIR TRANSPORT SERVICES GROUP, INC., |
||||
| a Delaware Corporation |
||||
| Registrant |
||||
| /S/ JOSEPH C. HETE |
||||
| Joseph C. Hete |
||||
| Chief Executive Officer (Principal Executive Officer) |
||||
| Date: |
May 9, 2024 |
|||
| /S/ QUINT O. TURNER |
||||
| Quint O. Turner |
||||
| Chief Financial Officer (Principal Financial Officer |
||||
| Date: |
May 9, 2024 | and Principal Accounting Officer) |