AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The financial information, including the financial statements, included in thethis Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the Securities and Exchange Commission ("SEC") on March 8, 2017.1, 2022 ("2021 Form 10-K").
The Securities and Exchange CommissionSEC maintains an Internet site that contains reports, proxy and information statements and other information regarding Air Transport Services Group, Inc. at www.sec.gov.www.sec.gov. Additionally, our filings with the Securities and Exchange Commission,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.
FORWARD LOOKING STATEMENTS
Statements contained in this Quarterly reportReport on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigationlitigation Reform Act of 1995). Words such as “projects,“future,” “anticipates,” “believes,” “anticipates,“estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “estimates,“would,” “plans,“could,” “expects,“can,” “intends”“may,” and similar wordsterms and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report and in our 2016 Annual Report filed on2021 Form 10-K with the Securities and Exchange Commission.10-K.
PART I. FINANCIAL INFORMATION
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash, cash equivalents and restricted cash | $ | 54,486 | | | $ | 69,496 | |
Accounts receivable, net of allowance of $989 in 2022 and $742 in 2021 | 250,548 | | | 205,399 | |
Inventory | 55,322 | | | 49,204 | |
Prepaid supplies and other | 28,281 | | | 28,742 | |
TOTAL CURRENT ASSETS | 388,637 | | | 352,841 | |
Property and equipment, net | 2,339,278 | | | 2,129,934 | |
Customer incentive | 85,472 | | | 102,913 | |
Goodwill and acquired intangibles | 495,195 | | | 505,125 | |
Operating lease assets | 61,742 | | | 62,644 | |
Other assets | 154,841 | | | 113,878 | |
TOTAL ASSETS | 3,525,165 | | | $ | 3,267,335 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 186,460 | | | $ | 174,237 | |
Accrued salaries, wages and benefits | 60,170 | | | 56,652 | |
Accrued expenses | 12,910 | | | 14,950 | |
Current portion of debt obligations | 637 | | | 628 | |
Current portion of lease obligations | 21,879 | | | 18,783 | |
Unearned revenue and grants | 37,289 | | | 47,381 | |
TOTAL CURRENT LIABILITIES | 319,345 | | | 312,631 | |
Long term debt | 1,369,006 | | | 1,298,735 | |
Stock warrant obligations | 715 | | | 915 | |
Post-retirement obligations | 20,140 | | | 21,337 | |
Long term lease obligations | 40,581 | | | 44,387 | |
Other liabilities | 56,810 | | | 49,662 | |
Deferred income taxes | 253,036 | | | 217,291 | |
TOTAL LIABILITIES | 2,059,633 | | | 1,944,958 | |
Commitments and contingencies (Note H) | | | |
STOCKHOLDERS’ EQUITY: | | | |
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock | — | | | — | |
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 74,366,636 and 74,142,183 shares issued and outstanding in 2022 and 2021, respectively | 744 | | | 741 | |
Additional paid-in capital | 1,039,354 | | | 1,074,286 | |
Retained earnings | 486,231 | | | 309,430 | |
Accumulated other comprehensive loss | (60,797) | | | (62,080) | |
TOTAL STOCKHOLDERS’ EQUITY | 1,465,532 | | | 1,322,377 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | 3,525,165 | | | $ | 3,267,335 | |
| | | |
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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
REVENUES | $ | 516,916 | | | $ | 465,955 | | | $ | 1,512,444 | | | $ | 1,251,915 | |
OPERATING EXPENSES | | | | | | | |
Salaries, wages and benefits | 169,967 | | | 148,074 | | | $ | 494,526 | | | 431,614 | |
Depreciation and amortization | 83,283 | | | 77,751 | | | $ | 246,726 | | | 224,435 | |
Maintenance, materials and repairs | 41,541 | | | 43,751 | | | $ | 116,657 | | | 131,671 | |
Fuel | 68,620 | | | 50,176 | | | $ | 202,080 | | | 117,210 | |
Contracted ground and aviation services | 18,278 | | | 21,620 | | | $ | 56,762 | | | 55,217 | |
Travel | 29,865 | | | 24,928 | | | $ | 82,544 | | | 61,833 | |
Landing and ramp | 4,210 | | | 4,027 | | | $ | 12,873 | | | 10,162 | |
Rent | 8,383 | | | 5,807 | | | $ | 22,114 | | | 17,401 | |
Insurance | 2,346 | | | 3,178 | | | $ | 7,224 | | | 9,382 | |
Other operating expenses | 17,764 | | | 17,205 | | | $ | 57,968 | | | 48,378 | |
Government grants | — | | | (30,322) | | | $ | — | | | (96,626) | |
| 444,257 | | | 366,195 | | | $ | 1,299,474 | | | 1,010,677 | |
OPERATING INCOME | 72,659 | | | 99,760 | | | $ | 212,970 | | | 241,238 | |
OTHER INCOME (EXPENSE) | | | | | | | |
Interest income | 56 | | | 8 | | | $ | 80 | | | 36 | |
Non-service component of retiree benefit (costs) gains | 4,635 | | | 4,457 | | | $ | 15,411 | | | 13,370 | |
Debt issuance costs | — | | | — | | | $ | — | | | (6,505) | |
Net gain (loss) on financial instruments | 695 | | | (7,378) | | | $ | 9,402 | | | 37,797 | |
Loss from non-consolidated affiliates | (954) | | | (1,147) | | | $ | (5,577) | | | (1,365) | |
Interest expense | (12,167) | | | (14,459) | | | $ | (33,027) | | | (44,002) | |
| (7,735) | | | (18,519) | | | $ | (13,711) | | | (669) | |
| | | | | | | |
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 64,924 | | | 81,241 | | | $ | 199,259 | | | 240,569 | |
INCOME TAX EXPENSE | (14,736) | | | (18,878) | | | $ | (45,065) | | | (56,047) | |
EARNINGS FROM CONTINUING OPERATIONS | 50,188 | | | 62,363 | | | $ | 154,194 | | | 184,522 | |
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES | 854 | | | 2,309 | | | $ | 1,736 | | | 2,374 | |
NET EARNINGS | 51,042 | | | $ | 64,672 | | | $ | 155,930 | | | $ | 186,896 | |
| | | | | | | |
BASIC EARNINGS PER SHARE | | | | | | | |
Continuing operations | $ | 0.68 | | | $ | 0.85 | | | $ | 2.08 | | | $ | 2.75 | |
Discontinued operations | 0.01 | | | 0.03 | | | 0.03 | | | 0.03 | |
TOTAL BASIC EARNINGS PER SHARE | $ | 0.69 | | | $ | 0.88 | | | $ | 2.11 | | | $ | 2.78 | |
| | | | | | | |
DILUTED EARNINGS PER SHARE | | | | | | | |
Continuing operations | $ | 0.57 | | | $ | 0.81 | | | $ | 1.76 | | | $ | 2.14 | |
Discontinued operations | 0.01 | | | 0.03 | | | 0.02 | | | 0.03 | |
TOTAL DILUTED EARNINGS PER SHARE | $ | 0.58 | | | 0.84 | | | $ | 1.78 | | | $ | 2.17 | |
| | | | | | | |
WEIGHTED AVERAGE SHARES | | | | | | | |
Basic | 73,998 | | | 73,721 | | | 73,956 | | | 67,177 | |
Diluted | 88,746 | | | 76,743 | | | 88,980 | | | 75,277 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
REVENUES | $ | 254,101 |
| | $ | 193,261 |
| | $ | 745,229 |
| | $ | 547,195 |
|
OPERATING EXPENSES | | | | | | | |
Salaries, wages and benefits | 66,706 |
| | 59,405 |
| | 205,379 |
| | 165,471 |
|
Depreciation and amortization | 37,605 |
| | 33,939 |
| | 111,828 |
| | 99,605 |
|
Maintenance, materials and repairs | 33,100 |
| | 30,196 |
| | 100,970 |
| | 90,968 |
|
Fuel | 34,035 |
| | 24,372 |
| | 101,134 |
| | 58,171 |
|
Contracted ground and aviation services | 40,445 |
| | 12,865 |
| | 93,283 |
| | 32,664 |
|
Travel | 6,357 |
| | 5,440 |
| | 20,543 |
| | 14,926 |
|
Landing and ramp | 4,682 |
| | 3,220 |
| | 14,338 |
| | 9,523 |
|
Rent | 3,052 |
| | 3,309 |
| | 10,091 |
| | 8,515 |
|
Insurance | 1,234 |
| | 1,099 |
| | 3,451 |
| | 3,335 |
|
Other operating expenses | 7,962 |
| | 4,960 |
| | 24,588 |
| | 18,409 |
|
| 235,178 |
| | 178,805 |
| | 685,605 |
| | 501,587 |
|
OPERATING INCOME | 18,923 |
| | 14,456 |
| | 59,624 |
| | 45,608 |
|
OTHER INCOME (EXPENSE) | | | | | | | |
Interest income | 37 |
| | 37 |
| | 85 |
| | 98 |
|
Net loss on financial instruments | (34,433 | ) | | (8,473 | ) | | (100,213 | ) | | (3,443 | ) |
Charges from non-consolidated affiliate | (945 | ) | | — |
| | (945 | ) | | — |
|
Interest expense | (4,351 | ) | | (2,897 | ) | | (11,658 | ) | | (8,229 | ) |
| (39,692 | ) | | (11,333 | ) | | (112,731 | ) | | (11,574 | ) |
| | | | | | | |
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (20,769 | ) | | 3,123 |
| | (53,107 | ) | | 34,034 |
|
INCOME TAX EXPENSE | (7,460 | ) | | (1,007 | ) | | (19,244 | ) | | (12,219 | ) |
EARNINGS (LOSS) FROM CONTINUING OPERATIONS | (28,229 | ) | | 2,116 |
| | (72,351 | ) | | 21,815 |
|
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES | (4,655 | ) | | 47 |
| | (4,271 | ) | | 141 |
|
NET EARNINGS (LOSS) | $ | (32,884 | ) | | $ | 2,163 |
| | $ | (76,622 | ) | | $ | 21,956 |
|
| | | | | | | |
BASIC EARNINGS (LOSS) PER SHARE | | | | | | | |
Continuing operations | $ | (0.48 | ) | | $ | 0.04 |
| | $ | (1.23 | ) | | $ | 0.35 |
|
Discontinued operations | (0.08 | ) | | — |
| | (0.07 | ) | | — |
|
TOTAL BASIC EARNINGS (LOSS) PER SHARE | $ | (0.56 | ) | | $ | 0.04 |
| | $ | (1.30 | ) | | $ | 0.35 |
|
| | | | | | | |
DILUTED EARNINGS (LOSS) PER SHARE | | | | | | | |
Continuing operations | $ | (0.48 | ) | | $ | 0.04 |
| | $ | (1.23 | ) | | $ | 0.34 |
|
Discontinued operations | (0.08 | ) | | — |
| | (0.07 | ) | | — |
|
TOTAL DILUTED EARNINGS (LOSS) PER SHARE | $ | (0.56 | ) | | $ | 0.04 |
| | $ | (1.30 | ) | | $ | 0.34 |
|
| | | | | | | |
WEIGHTED AVERAGE SHARES | | | | | | | |
Basic | 58,733 |
| | 59,379 |
| | 58,965 |
| | 62,084 |
|
Diluted | 58,733 |
| | 60,283 |
| | 58,965 |
| | 64,024 |
|
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
NET EARNINGS | $ | 51,042 | | | $ | 64,672 | | | $ | 155,930 | | | $ | 186,896 | |
OTHER COMPREHENSIVE INCOME: | | | | | | | |
Defined Benefit Pension | 773 | | | 1,362 | | | 1,256 | | | 4,086 | |
Defined Benefit Post-Retirement | 9 | | | 36 | | | 27 | | | 108 | |
| | | | | | | |
| | | | | | | |
TOTAL COMPREHENSIVE INCOME, net of tax | $ | 51,824 | | | $ | 66,070 | | | $ | 157,213 | | | $ | 191,090 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
NET EARNINGS (LOSS) | $ | (32,884 | ) | | $ | 2,163 |
| | $ | (76,622 | ) | | $ | 21,956 |
|
OTHER COMPREHENSIVE INCOME: | | | | | | | |
Defined benefit pension | 5,763 |
| | 2,146 |
| | 8,232 |
| | 6,438 |
|
Defined benefit post-retirement | 37 |
| | 9 |
| | 111 |
| | 27 |
|
Foreign currency translation | (15 | ) | | (256 | ) | | 121 |
| | 54 |
|
| | | | | | | |
TOTAL COMPREHENSIVE INCOME (LOSS), NET OF TAXES | $ | (27,099 | ) | | $ | 4,062 |
| | $ | (68,158 | ) | | $ | 28,475 |
|
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Number | | Amount | |
BALANCE AT JUNE 30, 2021 | 74,202,815 | | | $ | 742 | | | $ | 989,611 | | | $ | 200,234 | | | $ | (75,860) | | | $ | 1,114,727 | |
Stock-based compensation plans | | | | | | | | | | | |
Grant of restricted stock | (761) | | | — | | | — | | | | | | | — | |
Withholdings of common shares, net of issuances | — | | | — | | | (5) | | | | | | | (5) | |
Forfeited restricted stock | (2,800) | | | — | | | — | | | | | | | — | |
| | | | | | | | | | | |
Amortization of stock awards and restricted stock | | | | | 2,044 | | | | | | | 2,044 | |
Total comprehensive income | | | | | | | 64,672 | | | 1,398 | | | 66,070 | |
BALANCE AT SEPTEMBER 30, 2021 | 74,199,254 | | | 742 | | | 991,650 | | | 264,906 | | | (74,462) | | | 1,182,836 | |
| | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2020 | 59,560,036 | | | 596 | | | 855,547 | | | 78,010 | | | (78,656) | | | 855,497 | |
Stock-based compensation plans | | | | | | | | | | | |
Grant of restricted stock | 121,339 | | | 1 | | | (1) | | | | | | | — | |
Issuance of common shares, net of withholdings | 92,234 | | | 1 | | | (1,242) | | | | | | | (1,241) | |
Forfeited restricted stock | (2,800) | | | — | | | — | | | | | | | — | |
Conversion of warrants | 14,428,445 | | | 144 | | | 131,823 | | | | | | | 131,967 | |
Amortization of stock awards and restricted stock | | | | | 5,523 | | | | | | | 5,523 | |
Total comprehensive income | | | | | | | 186,896 | | | 4,194 | | | 191,090 | |
BALANCE AT SEPTEMBER 30, 2021 | 74,199,254 | | | 742 | | | 991,650 | | | 264,906 | | | (74,462) | | | 1,182,836 | |
| | | | | | | | | | | |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 53,891 |
| | $ | 16,358 |
|
Accounts receivable, net of allowance of $1,352 in 2017 and $1,264 in 2016 | 65,563 |
| | 77,247 |
|
Inventory | 17,282 |
| | 19,925 |
|
Prepaid supplies and other | 23,699 |
| | 19,123 |
|
TOTAL CURRENT ASSETS | 160,435 |
| | 132,653 |
|
Property and equipment, net | 1,111,201 |
| | 1,000,992 |
|
Lease incentive | 84,910 |
| | 54,730 |
|
Goodwill and acquired intangibles | 45,317 |
| | 45,586 |
|
Convertible note hedges | 60,605 |
| | — |
|
Other assets | 24,435 |
| | 25,369 |
|
TOTAL ASSETS | $ | 1,486,903 |
| | $ | 1,259,330 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 75,820 |
| | $ | 60,704 |
|
Accrued salaries, wages and benefits | 30,260 |
| | 37,044 |
|
Accrued expenses | 10,745 |
| | 10,324 |
|
Current portion of debt obligations | 19,247 |
| | 29,306 |
|
Unearned revenue | 29,186 |
| | 18,407 |
|
TOTAL CURRENT LIABILITIES | 165,258 |
| | 155,785 |
|
Long term debt | 473,924 |
| | 429,415 |
|
Note conversion obligations | 61,230 |
| | — |
|
Stock warrant obligations | 229,965 |
| | 89,441 |
|
Post-retirement obligations | 72,876 |
| | 77,713 |
|
Other liabilities | 48,039 |
| | 52,542 |
|
Deferred income taxes | 143,337 |
| | 122,532 |
|
TOTAL LIABILITIES | 1,194,629 |
| | 927,428 |
|
Commitments and contingencies (Note H) |
| |
|
STOCKHOLDERS’ EQUITY: | | | |
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock | — |
| | — |
|
Common stock, par value $0.01 per share; 85,000,000 shares authorized; 59,123,112 and 59,461,291 shares issued and outstanding in 2017 and 2016, respectively | 591 |
| | 595 |
|
Additional paid-in capital | 471,950 |
| | 443,416 |
|
Accumulated deficit | (108,865 | ) | | (32,243 | ) |
Accumulated other comprehensive loss | (71,402 | ) | | (79,866 | ) |
TOTAL STOCKHOLDERS’ EQUITY | 292,274 |
| | 331,902 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,486,903 |
| | $ | 1,259,330 |
|
| | | |
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, cont.
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Number | | Amount | |
BALANCE AT JUNE 30, 2022 | 74,369,138 | | | $ | 744 | | | $ | 1,037,139 | | | $ | 435,189 | | | $ | (61,579) | | | $ | 1,411,493 | |
Stock-based compensation plans | | | | | | | | | | | |
| | | | | | | | | | | |
Issuance of common shares, net of withholdings | (2,202) | | | — | | | (80) | | | | | | | (80) | |
Forfeited restricted stock | (300) | | | — | | | — | | | | | | | — | |
| | | | | | | | | | | |
Amortization of stock awards and restricted stock | | | | | 2,295 | | | | | | | 2,295 | |
Total comprehensive income | | | | | | | 51,042 | | | 782 | | | 51,824 | |
BALANCE AT SEPTEMBER 30, 2022 | 74,366,636 | | | 744 | | | 1,039,354 | | | 486,231 | | | (60,797) | | | 1,465,532 | |
| | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2021 | 74,142,183 | | | $ | 741 | | | $ | 1,074,286 | | | $ | 309,430 | | | $ | (62,080) | | | $ | 1,322,377 | |
Stock-based compensation plans | | | | | | | | | | | |
Grant of restricted stock | 109,200 | | | 1 | | | (1) | | | | | | | — | |
Issuance of common shares, net of withholdings | 120,053 | | | 2 | | | (1,521) | | | | | | | (1,519) | |
Forfeited restricted stock | (4,800) | | | — | | | — | | | | | | | — | |
Cumulative effect in change in accounting principle | | | | | (39,559) | | | 20,871 | | | | | (18,688) | |
Amortization of stock awards and restricted stock | | | | | 6,149 | | | | | | | 6,149 | |
Total comprehensive income | | | | | | | 155,930 | | | 1,283 | | | 157,213 | |
BALANCE AT SEPTEMBER 30, 2022 | 74,366,636 | | | 744 | | | 1,039,354 | | | 486,231 | | | (60,797) | | | 1,465,532 | |
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
OPERATING ACTIVITIES: | | | |
Net earnings (loss) from continuing operations | $ | (72,351 | ) | | $ | 21,815 |
|
Net earnings (loss) from discontinued operations | (4,271 | ) | | 141 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 121,589 |
| �� | 101,971 |
|
Pension and post-retirement | 18,916 |
| | 10,146 |
|
Deferred income taxes | 15,986 |
| | 12,057 |
|
Amortization of stock-based compensation | 2,648 |
| | 2,248 |
|
Net loss on financial instruments | 100,213 |
| | 3,443 |
|
Changes in assets and liabilities: | | | |
Accounts receivable | 11,770 |
| | 2,750 |
|
Inventory and prepaid supplies | (2,661 | ) | | (4,203 | ) |
Accounts payable | 11,698 |
| | 726 |
|
Unearned revenue | 6,995 |
| | (2,883 | ) |
Accrued expenses, salaries, wages, benefits and other liabilities | (7,357 | ) | | 4,267 |
|
Pension and post-retirement assets | (10,658 | ) | | (10,551 | ) |
Other | (1,244 | ) | | 1,670 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES | 191,273 |
| | 143,597 |
|
INVESTING ACTIVITIES: | | | |
Capital expenditures | (218,759 | ) | | (182,106 | ) |
Proceeds from property and equipment | 9 |
| | 7 |
|
Acquisitions and investments in businesses | (6,900 | ) | | — |
|
Redemption of long term deposits | 9,975 |
| | — |
|
NET CASH (USED IN) INVESTING ACTIVITIES | (215,675 | ) | | (182,099 | ) |
FINANCING ACTIVITIES: | | | |
Principal payments on long term obligations | (250,131 | ) | | (23,623 | ) |
Proceeds from borrowings | 90,000 |
| | 155,000 |
|
Proceeds from convertible notes | 258,750 |
| | — |
|
Payments for financing costs | (6,469 | ) | | — |
|
Purchase convertible note hedges | (56,097 | ) | | — |
|
Proceeds from issuance of warrants | 38,502 |
| | — |
|
Purchase of common stock | (11,184 | ) | | (62,155 | ) |
Withholding taxes paid for conversion of employee stock awards | (1,436 | ) | | (1,231 | ) |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 61,935 |
| | 67,991 |
|
| | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 37,533 |
| | 29,489 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 16,358 |
| | 17,697 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 53,891 |
| | $ | 47,186 |
|
| | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
Interest paid, net of amount capitalized | $ | 11,229 |
| | $ | 7,793 |
|
Federal alternative minimum and state income taxes paid | $ | 1,285 |
| | $ | 761 |
|
SUPPLEMENTAL NON-CASH INFORMATION: | | | |
Accrued capital expenditures | $ | 12,561 |
| | $ | 19,721 |
|
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
OPERATING ACTIVITIES: | | | |
Net earnings from continuing operations | $ | 154,194 | | | 184,522 | |
Net earnings from discontinued operations | $ | 1,736 | | | 2,374 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | $ | 265,306 | | | 249,574 | |
Pension and post-retirement | $ | 1,662 | | | 5,433 | |
Deferred income taxes | $ | 40,892 | | | 55,023 | |
Amortization of stock-based compensation | $ | 6,149 | | | 5,524 | |
Loss from non-consolidated affiliates | $ | 5,577 | | | 1,364 | |
Net (gain) loss on financial instruments | $ | (9,402) | | | (37,797) | |
Debt issuance costs | $ | — | | | 6,505 | |
| | | |
Changes in assets and liabilities: | | | |
Accounts receivable | $ | (45,149) | | | (38,235) | |
Inventory and prepaid supplies | $ | (9,200) | | | 4,561 | |
Accounts payable | $ | 4,863 | | | 18,261 | |
Unearned revenue | $ | (10,685) | | | (11,545) | |
Accrued expenses, salaries, wages, benefits and other liabilities | $ | 12,789 | | | 7,181 | |
Pension and post-retirement balances | $ | (18,737) | | | (20,743) | |
Other | $ | (1,925) | | | (2,764) | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | $ | 398,070 | | | 429,238 | |
INVESTING ACTIVITIES: | | | |
Expenditures for property and equipment | $ | (448,358) | | | (428,126) | |
Proceeds from property and equipment | $ | 3,759 | | | 3,524 | |
Investments in businesses | $ | (16,233) | | | (2,155) | |
| | | |
NET CASH (USED IN) INVESTING ACTIVITIES | $ | (460,832) | | | (426,757) | |
FINANCING ACTIVITIES: | | | |
Proceeds from revolving credit facilities | $ | 510,000 | | | 1,430,600 | |
Principal payments on long term obligations | $ | (345,525) | | | (1,758,018) | |
Repurchase of senior unsecured notes | $ | (115,204) | | | — | |
Payments for financing costs | $ | — | | | (3,099) | |
Proceeds from bond issuance | $ | — | | | 207,400 | |
| | | |
Proceeds from issuance of warrants | $ | — | | | 131,967 | |
Withholding taxes paid for conversion of employee stock awards | $ | (1,519) | | | (1,242) | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 47,752 | | | 7,608 | |
| | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (15,010) | | | 10,089 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 69,496 | | | 39,719 | |
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 54,486 | | | $ | 49,808 | |
| | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
Interest paid, net of amount capitalized | $ | 39,711 | | | $ | 39,104 | |
Federal and state income taxes paid | $ | 1,735 | | | $ | 1,859 | |
SUPPLEMENTAL NON-CASH INFORMATION: | | | |
Accrued expenditures for property and equipment | $ | 51,085 | | | $ | 27,358 | |
| | | |
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Air Transport Services Group, Inc. ("ATSG" and, together with its subsidiaries, the "Company," "we," "us," and "our") is a holding company whose principal subsidiaries include anlease aircraft leasing company and two U.S. certificated airlines. The Company providesprovide contracted airline operations aircraft leases, aircraft maintenance andas well as other support services primarilymainly to the cargoair transportation, e-commerce and package delivery industries. Through the Company's subsidiaries, it offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers.
The Company'sATSG's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the Company's airlinesATSG's airline subsidiaries as well as to non-affiliated airlines and other lessees. The airlines,ATSG's airline subsidiaries, ABX Air, Inc. (“ABX”) and, 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. ATI provides passenger transportation, primarily to the U.S. Military, using "combi" aircraft, which are certified to carry passengers as well as cargo on the main deck.
The Company provides air transportation services to a concentrated base of customers. The Company provides a combination of aircraft, crews, maintenance and insurance services for a customer'sits customers' transportation networknetworks through "CMI"crew, maintenance and "ACMI"insurance ("CMI") agreements and aircraft, crew, maintenance and insurance ("ACMI") agreements and through charter contracts in which aviationaircraft fuel is also included.
In addition to its airline operationsaircraft leasing and aircraft leasingairline services, the Company sells aircraft parts, providesoffers 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 operates mailload transfer and package sorting facilities.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 accounting principles generally accepted in the United States of AmericaGAAP and such principles are applied on a basis consistent with the financial statements reflected in our Annual Report on2021 Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”).10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of AmericaGAAP 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’sCompany'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 management, but actual results could differ materially from those estimates.
The accompanying unaudited condensed consolidated financial statements include the accounts of Air Transport Services Group, Inc.ATSG and its wholly-owned subsidiaries. Inter-company balances and transactions are eliminated. Investments in an affiliateaffiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. UsingUnder the equity method, the Company’sCompany's share of the nonconsolidated 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. Inter-company balances
Uncertainties
The Company has experienced disruptions to its operations, such as shortages of personnel, parts shortages, maintenance delays, shortages of transportation and transactions are eliminated.hotel accommodations for flight crews, facility closures and other supply chain related issues as a result of the COVID-19 pandemic. The emergence of COVID-19 variants could result in reduced revenues, additional costs and supply chain delays for the Company. The extent of the impact that the coronavirus pandemic will have on our future operations and financial results will depend on future developments, including: the duration, spread, severity and recurrence of the COVID-19 variants; vaccination rates, the effectiveness of vaccines, the duration and scope of government orders and local restrictions as well as the extent of the impact of the pandemic on overall economic conditions.
New Accounting Pronouncements
In May 2014,February 2022, war started in Ukraine, intensifying geopolitical pressures worldwide. While the Company's operations have not been detrimentally impacted directly, additional supply chain disruptions and inflationary pressures could have an impact on overall economic conditions, as well as the Company's operations and financial results.
Accounting Standards Updates
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from2020-06, "Accounting for Convertible Instruments and Contracts with Customers (Topic 606)” (“in an Entity's Own Equity" ("ASU 2014-09”2020-06"). In April 2016,This new standard removes the FASB issued ASU No. 2016-10, "Revenue from Contractsseparation models for convertible debt with Customers, Identifying Performance Obligationscash conversion or beneficial conversion features. It eliminates the "treasury stock" method for convertible instruments and
Licensing" clarifying requires application of the accounting under ASU 2014-09“if-converted” method for licenses of intellectual property and for identifying distinct performance obligations in a contract.
ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 with earlier adoption permitted for reporting periods beginning after December 15, 2016. ASU 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities would recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity, and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance.
certain agreements. The Company plans to adopt the standardadopted ASU 2020-06 on January 1, 2022 using the modified retrospective method. The Companyapproach which resulted in the following adjustments:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2021 | | Adoption of ASU 2020-06 | | January 1, 2022 |
Balance Sheet line item: | | | | | | |
Principal value | | $ | (258,750) | | | $ | — | | | $ | (258,750) | |
Unamortized issuance cost | | $ | 2,889 | | | $ | — | | | $ | 2,889 | |
Unamortized discount | | $ | 24,215 | | | $ | (24,215) | | | $ | — | |
Convertible Debt | | $ | (231,646) | | | $ | (24,215) | | | $ | (255,861) | |
Net deferred tax liability | | $ | (217,291) | | | $ | 5,527 | | | $ | (211,764) | |
Additional paid-in capital | | $ | (1,074,286) | | | $ | 39,559 | | | $ | (1,034,727) | |
Retained earnings | | $ | (309,430) | | | $ | (20,871) | | | $ | (330,301) | |
After adopting ASU 2020-06, the Company's Convertible Notes due 2024 (as defined and discussed in Note F) are reflected entirely as a liability as the embedded conversion feature is currently evaluatingno longer separately presented within stockholders' equity, which also eliminated the non-cash discount. Accordingly, earnings no longer reflect the discount amortization expense which was $6.4 million of interest expense, net of income taxes during 2021. After giving effect for the standard is expected to haveadoption, the effective interest rate on the Company's consolidated financial position, results of operations, cash flows and related disclosures. The evaluation includes eachConvertible Notes is 1.5%.
ASU 2020-06 requires the application of the five steps identified in the ASU 2014-09 revenue recognition model, which are as follows: 1) identify the contract with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenuemore dilutive if-converted method when (or as) performance obligations are satisfied. The Company's lease contracts within the scope of ASC 840, Leases, are specifically excluded from ASU 2014-09. As the Company completes its evaluation of this new standard, new information may arise that could change the Company's current understanding of the impact to revenue and expense recognized. Management is monitoring recent industry activities and other guidance provided by regulators, standards setters, and the accounting profession that may impact the Company's recognition of revenue.
In July 2015, FASB issued ASU "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). ASU 2015-11 more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards ("IFRS"). The amendment in ASU 2015-11 is for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendment should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the impact of adopting ASU 2015-11 to be material to the Company's financial statements and related disclosures.
In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07"). ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost would be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The standard is effective for annual periods beginning after December 15, 2017 and should be applied retrospectively. The Company anticipates the standard will impact the Operating Income subtotal as reported in the Company's Consolidated Statement of Operations by excluding interest expense, investment returns and other non service cost components of retiree benefit expenses. Information about interest expense, investment returns and other components of retiree benefit expenses can be found in Note I.
In February 2016, the FASB issued ASU "Leases (Topic 842)" ("ASU 2016-02"), which will require the recognition of right to-use-assets and lease liabilities for leases previously classified as operating leases by lessees. The standard will take effect for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early application will be permitted for all entities. In addition, the FASB has decided to require a lessee to apply a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (the date of initial application). The modified retrospective approach would not require any transition accounting for leases that expired before the date of initial application. The FASB decided to not permit a full retrospective transition approach. The Company is currently evaluatingcalculating the impact of the standardConvertible Notes on earnings per diluted share. The adoption of ASU 2020-06 does not change the accounting treatment of shares to be delivered by the convertible note hedges (see Note F) purchased by the Company that are designed to offset the shares issued to settle its financial statementsConvertible Notes, which are anti-dilutive and disclosures.not reflected in earnings per diluted share.
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, 2021 | | 153,290 | | | 234,571 | | | 8,113 | | | 395,974 | |
Carrying value as of September 30, 2022 | | $ | 153,290 | | | $ | 234,571 | | | $ | 8,113 | | | $ | 395,974 | |
The Company's acquired intangible assets are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Airline | | Amortizing | | |
| | Certificates | | Intangibles | | Total |
Carrying value as of December 31, 2021 | | $ | 9,000 | | | $ | 100,151 | | | $ | 109,151 | |
Amortization | | — | | | (9,930) | | | (9,930) | |
Carrying value as of September 30, 2022 | | 9,000 | | | 90,221 | | | 99,221 | |
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and Supplemental Type Certificates ("STC") intangibles, over 4 to 17 remaining years.
Stock warrants issued to Amazon (see Note C) as an incentive for Amazon subsidiary ASI 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 if probable of vesting at the time of issuance, 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, 2021 | | 102,913 | |
Amortization | | (17,442) | |
Carrying value as of September 30, 2022 | | 85,472 | |
The Company has a 49% ownership in a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. In August 2016,April of 2022, the FASB issued ASU, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). ASU 2016-15 clarifies how cash receipts and cash payments in certain transactions are presented and classifiedCompany acquired a 40% ownership interest in the statementjoint-venture company GA Telesis Engine Services, LLC to provide engine tear-down services to harvest and sell engine parts. The Company accounts for its investment in these joint ventures under the equity method of accounting, in which the carrying value of each investment is reduced for the Company's share of the non-consolidated affiliates' operating results.
The carrying value of the joint ventures totaled $20.6 million and $10.3 million at September 30, 2022 and December 31, 2021, respectively, and are reflected in “Other Assets” in the Company’s consolidated balance sheets. The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded carrying value and the fair value of the investment. The fair value is generally determined using an income approach based on discounted cash flows.flows or using negotiated transaction values.
NOTE C—SIGNIFICANT CUSTOMERS
Three customers each account for a significant portion of the Company's consolidated revenues. The effective datepercentage of this update isthe Company's revenues for fiscal years,the Company's three largest customers, for the three and interimnine month periods within those fiscal years, beginning afterending September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Customer | | Percentage of Revenue | | Percentage of Revenue |
DoD | | 31% | | 31% | | 29% | | 26% |
Amazon | | 34% | | 33% | | 34% | | 35% |
DHL | | 13% | | 12% | | 12% | | 13% |
The accounts receivable from the Company's three largest customers as of September 30, 2022 and December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. 31, 2021 are as follows (in thousands):
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 |
Customer | | Accounts Receivable |
DoD | | $ | 101,108 | | | $ | 57,998 | |
Amazon | | 76,966 | | | 68,429 | |
DHL | | 17,037 | | | 9,111 | |
DoD
The Company is currently evaluating the impacta provider of the adoption of the standard on its financial statementscargo and disclosures.
In November 2016, the FASB issued ASU "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"). ASU 2016-18 requires that the statement of cash flows explain the changes in the combined total of restricted and unrestricted cash balance. Amounts generally described as restricted cash or restricted cash equivalents will be combined with unrestricted cash and cash equivalents when reconciling the beginning and end of period balances on the statement of cash flows. Further, the ASU requires a reconciliation of balances from the statement of cash flowspassenger airlift services to the balance sheet in situations in which the balance sheet includes more than one line itemU.S. Department of cash, cash equivalents,Defense ("DoD"). The DoD awards flights to U.S. certificated airlines through annual contracts and restricted cash. Companies will also be disclosing the nature of the restrictions. ASU 2016-18 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.
In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.
NOTE B—SIGNIFICANT CUSTOMERSthrough temporary "expansion" routes.
DHL
The Company has had long termlong-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 25% and 25% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2017, respectively compared to 34% and 35% for the corresponding periods of 2016. The Company’s balance sheets include accounts receivable with DHL of $3.7 million and $7.3 million asAs of September 30, 2017 and December 31, 2016, respectively.
The2022, the Company leases 16leased 14 Boeing 767 freighter aircraft to DHL under both long-termcomprised of three Boeing 767-200 aircraft and short-term lease agreements.eleven Boeing 767-300 aircraft, with expirations between 2023 and 2029. Under a separate crew, maintenance and insurance (“CMI”)CMI agreement, the Company operates ten of the Boeing 767 aircraft that DHL leases from the Company.Company and two Boeing 767 aircraft that DHL provides. The Company provides DHL with scheduled maintenance services under the agreement which is subject to renewal in May of 2028. 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 Boeing 767 and Boeing 757additional air cargo transportation services for DHL through additional ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated fromFurther, beginning in third quarter of 2022, the ACMI agreements are typically based on hours flown and a contracted minimum numberCompany began to operate the first two of block hours. The Company also provides ground equipment, such as power units, air starts and related maintenance services tofour Boeing 767 aircraft provided by DHL under separate agreements.an additional CMI agreement which currently runs through August of 2027.
Amazon
The Company has been providing freighter aircraft, airline operations and services for cargo handling and logistical support for Amazon FulfillmentAmazon.com Services, LLC ("ASI"), successor to Amazon.com Services, Inc. ("AFS"), a subsidiary of Amazon.com, Inc. ("Amazon") since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with AFSASI, pursuant to which CAM will lease 20leases Boeing 767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for
a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years.ASI. The ATSA which has a term of five years, also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the performancemanagement of hub and gatewayground services by the Company's subsidiary LGSTX Services, Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that are leased and operated under the ATSA. The ATSA became effective on April 1, 2016. As of September 30, 2017,2022, the Company has met its 20leased 30 Boeing 767-300 and 12 Boeing 767-200 freighter aircraft commitment.to ASI with lease expirations between 2023 and 2031.
Revenues from aircraft leases and related services performed for AFS comprised approximately 45% and 42% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2017 respectively, compared to 31% and 24% for the corresponding periods of 2016. The Company’s balance sheets include accounts receivable with AFS of $25.9 million and $24.6 million as of September 30, 2017 and December 31, 2016, respectively.Amazon Investment Agreement
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement on March 8, 2016 (the "2016 Investment Agreement") and a Stockholders Agreement on March 8, 2016. The 2016 Investment Agreement callscalled for the Company to issue warrants in three tranches which will grantgranting Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon the execution of the 2016 Investment Agreement granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the right to purchasefirst 7.69 million common shares vesting upon issuance on March 8, 2016, and the right to purchase the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA, or as the Company achieved specified revenue targets in connection with the ATSA. The second tranche of warrants, grantswhich were issued and vested on March 8, 2018, granted Amazon athe right to purchase approximately 1.59 million ATSG common shares, and will be issued and vest on March 8, 2018.shares. The third tranche of warrants will be issued and vestvested on September 8, 2020. The third tranche of warrants will grant2020, and granted Amazon the right to purchase suchan additional number of0.5 million ATSG common shares as is necessary to bring Amazon’s ownership, after the exercise in full of the three tranches of warrants, to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effectsubject to the warrants granted.certain adjustments. The exercise price of the 14.9 million warrants will beissued under the 2016 Investment Agreement was $9.73
per share, which representsrepresented the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants will bewere exercisable in accordance with itstheir terms through March 8, 2021 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date).
On March 5, 2021, Amazon exercised warrants from the 2016 Investment Agreement for 865,548 shares of the Company's common stock through a cashless exercise by forfeiting 480,047 warrants from the 2016 Investment Agreement as payment. For the cashless exchange, ATSG shares were valued at $27.27 per share, its volume-weighted average price for the previous 30 trading days immediately preceding March 5, 2021. Also on March 5, 2021, Amazon notified the Company of its intent to exercise warrants from the 2016 Investment agreement for 13,562,897 shares of the Company's common stock by paying $132.0 million of cash to the Company. This exercise was contingent upon the approval of the DOT, and the expiration or termination of any applicable waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. After receiving all required regulatory approvals and clearances, Amazon remitted the funds to the Company on May 7, 2021, and the Company issued the corresponding shares of common stock, completing the warrant exercise.
The Company anticipates making availableresumed repurchases of its own shares during October 2022 in conjunction with the expiration of certain government restrictions (see Note H) on September 30, 2022. On October 7, 2022, Amazon sold 250,000 shares of the Company's common stock back to the Company for cash of $5.9 million, pursuant to the terms of the 2016 Investment Agreement, as amended on March 5, 2021. This resulted in Amazon maintaining its ownership percentage of less than 19.9% of the Company's outstanding shares at the time.
On December 22, 2018, the Company announced agreements with ASI to 1) lease and operate ten additional Boeing 767-300 aircraft, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years, and 4) extend the ATSA by five years through March 2026, with an option to extend for an additional three years. The Company leased all ten of the 767-300 aircraft in 2020. In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered into another Investment Agreement on December 20, 2018 (the "2018 Investment Agreement"). Pursuant to the 2018 Investment Agreement, the Company issued Amazon warrants for 14.8 million ATSG common shares. This group of warrants will expire if not exercised within seven years from their issuance date, in December of 2025 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date). The warrants have an exercise price of $21.53 per share.
On May 29, 2020, ASI agreed to lease 12 more Boeing 767-300 aircraft from the Company. The first of these leases began in the second quarter of 2020 with the remaining 11 leases commencing in 2021. All 12 of these aircraft leases were for 10-year terms. Pursuant to the 2018 Investment Agreement, as a result of leasing these 12 aircraft, Amazon was issued warrants for 7.0 million common shares, requiredall of which have vested. These warrants will expire if not exercised by December 20, 2025 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date).The exercise price of these warrants is $20.40 per share.
Issued and outstanding warrants are summarized below as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Shares in millions | | |
| | Exercise price | | Vested | | Non-Vested | | Expiration |
| | | | | | | | |
2018 Investment Agreement | | $21.53 | | 14.8 | | 0.0 | | December 20, 2025 |
2018 Investment Agreement | | $20.40 | | 7.0 | | 0.0 | | December 20, 2025 |
| | | | | | | | |
Additionally, Amazon can earn incremental warrants rights of up to 2.9 million common shares under the 2018 Investment Agreement by leasing up to five more cargo aircraft from the Company before January 2026. Incremental warrants granted to Amazon for ASI’s commitment to any such future aircraft leases will have an exercise price based on the underlyingvolume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease.
For all outstanding warrants throughvested, Amazon may select a combinationcashless conversion option. Assuming ATSG's stock price at the time of share repurchases andconversion is above the issuancewarrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option by surrendering the number of additional shares.shares with a market value equal to the exercise price.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. DuringWarrants classified as liabilities are marked to fair value at the first nine monthsend of 2017, 3.8each reporting period. The value of warrants is recorded as a customer incentive asset if it is probable of vesting at the time of grant and further changes in the fair value of warrant obligations are recorded to earnings. Upon a warrant vesting event, the customer incentive asset is amortized as a reduction of revenue over the duration of the related revenue contract.
In accordance with the 2016 Investment Agreement, on September 8, 2020, the final number of shares issuable under the third tranche of warrants was determined to be 0.5 million additional warrants vested in conjunction withcommon shares. As a result, under GAAP, the value of the entire warrant grant under the 2016 Investment Agreement was remeasured on September 8, 2020, and its fair value of $221 million was reclassified from balance sheet liabilities to paid-in-capital. In October 2020, upon the execution of sixthe 10th and final aircraft leases during 2017. lease of the December 2018 commitment, warrants for 14.8 million shares were remeasured on October 1, 2020, and their fair value of $154 million was reclassified from balance sheet liabilities to paid-in-capital. In December 2021, upon execution of the 12th and final aircraft lease of the May 2020 commitment, warrants for 7.0 million shares were remeasured on December 7, 2021, and their fair value of $82.4 million was reclassified from balance sheet liabilities to paid-in-capital.
As of September 30, 2017,2022 and December 31, 2021, the Company's liabilities reflected 14.90 million warrants from the 2018 Amazon agreements having a fair value of $15.44 per share. As of$0.7 million and $0.9 million, respectively. During the three and nine months ended September 30 2017,, 2022 the re-measurements of the warrants to fair value resulted in a third quarter non-operating lossgain of $35.0$0.1 million and $0.2 million before the effect of income taxes.taxes, respectively, compared to net non-operating losses of $9.6 million and gain of $30.8 million before the effect of income taxes, respectively, for the corresponding periods of 2021.
The Company's earnings in future periods will be impacted by the number of warrants granted, the re-measurements of warrant fair value, amortizations of the lease incentive asset and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described above for financial reporting.
U.S. Military
A substantial portion of the Company's revenues is also derived from the U.S. Military. The U.S. Military awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the U.S. Military were approximately 7% and 7% of the Company's total revenues from continuing operations for the three and nine month periods ending September 30, 2017, respectively, compared to 12% and 13% for the corresponding periods of 2016. The Company's balance sheets included accounts receivable with the U.S. Military of $5.3 million and $7.0 million as of September 30, 2017 and December 31, 2016, respectively.
NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
On December 30, 2016, the Company purchased 100% of the outstanding stock of Pemco World Air Services Inc., ("Pemco") for cash consideration in a debt-free acquisition. The purchase price has been allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess purchase price over the estimated fair value of net assets acquired was recorded as goodwill
and reflects the strategic value of marketing Pemco's aircraft conversion capabilities and current aircraft hangar operations with the Company's comprehensive set of air transportation solutions. Identified intangible assets include Supplemental Type Certificates ("STCs") granting approval by the FAA for Pemco to market and complete certain aircraft modifications. The Company is in the process of refining its estimates of certain assets including goodwill and intangible assets, therefore the allocation of purchase price is preliminary at this time. The consolidated statements of operations include the revenues and expenses for Pemco for the periods after its acquisition by the Company. The consolidated statements of operations reflect the reclassification of certain previously reported operating expenses to conform to the current presentation.
The carrying amounts of goodwill are as follows (in thousands):
|
| | | | | | | | | | | | |
| | CAM | | All Other | | Total |
Carrying value as of December 31, 2016 | | $ | 34,395 |
| | $ | 2,738 |
| | $ | 37,133 |
|
Purchase price adjustment | | — |
| | 146 |
| | 146 |
|
Carrying value as of September 30, 2017 | | $ | 34,395 |
| | $ | 2,884 |
| | $ | 37,279 |
|
The Company's acquired intangible assets are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Airline | | Amortizing | | |
| | Certificates | | Intangibles | | Total |
Carrying value as of December 31, 2016 | | $ | 3,000 |
| | $ | 5,453 |
| | $ | 8,453 |
|
Amortization | | — |
| | (415 | ) | | (415 | ) |
Carrying value as of September 30, 2017 | | $ | 3,000 |
| | $ | 5,038 |
| | $ | 8,038 |
|
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and STC intangibles, over 4 to 7 years.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West"). West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767 aircraft from the Company. The Company accounts for West using the equity method of accounting. The Company’s carrying value of West was $7.9 million and $9.9 million at September 30, 2017 and December 31, 2016, respectively, including $5.5 million of excess purchase price over the Company's fair value of West's net assets in January of 2014. The carrying value is reflected in “Other Assets” in the Company’s consolidated balance sheets.
On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates approval of a supplemental type certificate from the FAA in 2019. The Company expects to make contributions equal to its 49% ownership percentage of the program's total costs over the next two years. The Company accounts for its investment in the joint venture under the equity method of accounting. During the third quarter, the company contributed $6.3 million to the joint venture. The carrying value of the joint venture,reflected in “Other Assets” in the Company’s consolidated balance sheets, was $5.3 million at September 30, 2017.
Stock warrants issued to a lessee (see Note B) as an incentive are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligation 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, 2016 | | $ | 54,730 |
|
Value of warrants granted | | 39,940 |
|
Amortization | | (9,760 | ) |
Carrying value as of September 30, 2017 | | $ | 84,910 |
|
The lease incentive began to amortize in April 2016, with the commencement of certain aircraft leases over the duration of the related leases.
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 identical or comparable transactions. The fair value of the Company’s money market funds, stock warrant obligations, convertible note,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 value 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 the Company’s common stock price, and various assumptions, such as the volatility of the Company’s common stock, the expected dividend yield, exercise price and the risk-free interest rate.rate (Level 2 inputs). The fair value of the note conversionstock warrant obligations for unvested stock warrants, conditionally promised to Amazon for the execution of incremental, future aircraft leases, include additional assumptions including the expected exercise prices and the convertible note hedges were estimated using a Black-Scholes pricing model and incorporate the terms and conditions of the underlying financial instruments. The valuations are, among other things, subject to changes in both the Company's credit worthiness and the counter-parties to the instruments as well as change in general market conditions. While the change in fair value of the note conversion obligations and the convertible note hedges are generally expected to move in opposite directions, the net change in any given period may be material.probabilities that future leases will occur (Level 3 inputs).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2022 | Fair Value Measurement Using | | Total |
| Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Cash equivalents—money market | $ | — | | | $ | 5,294 | | | $ | — | | | $ | 5,294 | |
Interest rate swap | — | | | 1,077 | | | — | | | 1,077 | |
Total Assets | $ | — | | | $ | 6,371 | | | $ | — | | | $ | 6,371 | |
Liabilities | | | | | | | |
| | | | | | | |
Stock warrant obligations | — | | | — | | | (715) | | | (715) | |
Total Liabilities | $ | — | | | $ | — | | | $ | (715) | | | $ | (715) | |
|
| | | | | | | | | | | | | | | |
As of September 30, 2017 | Fair Value Measurement Using | | Total |
| Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Cash equivalents—money market | $ | — |
| | $ | 50,800 |
| | $ | — |
| | $ | 50,800 |
|
Interest rate swaps | — |
| | 546 |
| | — |
| | 546 |
|
Convertible note hedges | — |
| | 60,605 |
| | — |
| | 60,605 |
|
Total Assets | $ | — |
| | $ | 111,951 |
| | $ | — |
| | $ | 111,951 |
|
Liabilities | | | | | | | |
Interest rate swaps | $ | — |
| | $ | (351 | ) | | $ | — |
| | $ | (351 | ) |
Note conversion obligations | — |
| | (61,230 | ) | | — |
| | (61,230 | ) |
Stock warrant obligations | — |
| | (229,965 | ) | | — |
| | (229,965 | ) |
Total Liabilities | $ | — |
| | $ | (291,546 | ) | | $ | — |
| | $ | (291,546 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2021 | Fair Value Measurement Using | | Total |
| Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Cash equivalents—money market | $ | — | | | $ | 30,042 | | | $ | — | | | $ | 30,042 | |
| | | | | | | |
Total Assets | $ | — | | | $ | 30,042 | | | $ | — | | | $ | 30,042 | |
Liabilities | | | | | | | |
Interest rate swap | $ | — | | | $ | (3,603) | | | $ | — | | | $ | (3,603) | |
Stock warrant obligations | — | | | — | | | (915) | | | (915) | |
Total Liabilities | $ | — | | | $ | (3,603) | | | $ | (915) | | | $ | (4,518) | |
|
| | | | | | | | | | | | | | | |
As of December 31, 2016 | Fair Value Measurement Using | | Total |
| Level 1 | | Level 2 | | Level 3 | |
Assets | | | | | | | |
Cash equivalents—money market | $ | — |
| | $ | 482 |
| | $ | — |
| | $ | 482 |
|
Interest rate swap | — |
| | 547 |
| | — |
| | 547 |
|
Total Assets | $ | — |
| | $ | 1,029 |
| | $ | — |
| | $ | 1,029 |
|
Liabilities | | | | | | | |
Interest rate swap | $ | — |
| | $ | (77 | ) | | $ | — |
| | $ | (77 | ) |
Stock warrant obligation | — |
| | (89,441 | ) | | — |
| | (89,441 | ) |
Total Liabilities | $ | — |
| | $ | (89,518 | ) | | $ | — |
| | $ | (89,518 | ) |
TheAs a result of lower market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s fixed and variable debt obligations, based on Level 2 observable inputs, was approximately $12.4$70.7 million moreless than the carrying value, which was $493.2$1,369.6 million at September 30, 2017.2022. As of December 31, 2016,2021, the fair value of the Company’s fixed and variable debt obligations was approximately $0.2$37.1 million moreless than the carrying value, which was $458.7$1,299.4 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.
NOTE E—PROPERTY AND EQUIPMENT
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):
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
Flight equipment | $ | 1,689,027 |
| | $ | 1,541,872 |
| Flight equipment | $ | 3,440,294 | | | $ | 3,301,113 | |
Ground equipment | 51,209 |
| | 49,229 |
| Ground equipment | $ | 68,762 | | | 64,641 | |
Leasehold improvements, facilities and office equipment | 27,385 |
| | 27,364 |
| Leasehold improvements, facilities and office equipment | $ | 39,714 | | | 38,769 | |
Aircraft modifications and projects in progress | 157,251 |
| | 113,518 |
| Aircraft modifications and projects in progress | $ | 383,590 | | | 206,917 | |
| 1,924,872 |
| | 1,731,983 |
| | $ | 3,932,360 | | | 3,611,440 | |
Accumulated depreciation | (813,671 | ) | | (730,991 | ) | Accumulated depreciation | $ | (1,593,082) | | | (1,481,506) | |
Property and equipment, net | $ | 1,111,201 |
| | $ | 1,000,992 |
| Property and equipment, net | $ | 2,339,278 | | | $ | 2,129,934 | |
|
CAM owned aircraft with a carrying value of $632.3$1,457.2 million and $524.3$1,404.4 million that were under leaseslease to external customers as of September 30, 20172022 and December 31, 2016,2021, respectively.
The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft type. The costs for ABX's Boeing 767-200 airframe maintenance are expensed as they are incurred. The costs of major airframe maintenance for the Company's other aircraft are capitalized and amortized over the useful life of the overhaul. Many of the Company's General Electric CF6 engines that power the Boeing 767-200 aircraft are maintained under “power by the hour” and "power by the cycle" agreements with an engine maintenance provider. Further, in May 2017, the Company entered into similar maintenance agreements for certain General Electric CF6 engines that power many of the Company's Boeing 767-300 aircraft. Under these agreements, the engines are maintained by the service provider for a fixed fee per cycle and/or flight hour. As a result, the cost of maintenance for these engines is generally expensed as flights occur. During their term, these maintenance agreements contain provisions for a minimum level of flight activity. Maintenance for the airlines’ other aircraft engines, including those powering Boeing 757 aircraft, are typically contracted to service providers on a time and material basis and the costs of those engine overhauls are capitalized and amortized over the useful life of the overhaul.
NOTE F—DEBT OBLIGATIONS
Long termDebt obligations consisted of the following (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Unsubordinated term loan | $ | 74,311 |
| | $ | 85,636 |
|
Revolving credit facility | 220,000 |
| | 355,000 |
|
Aircraft loans | 4,374 |
| | 18,085 |
|
Convertible debt | 194,486 |
| | — |
|
Total long term obligations | 493,171 |
| | 458,721 |
|
Less: current portion | (19,247 | ) | | (29,306 | ) |
Total long term obligations, net | $ | 473,924 |
| | $ | 429,415 |
|
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
Revolving credit facility | 525,000 | | | 360,000 | |
Senior Notes | 577,974 | | | 697,162 | |
Convertible Notes | 256,639 | | | 231,646 | |
Other financing arrangements | 10,030 | | | 10,555 | |
Total debt obligations | 1,369,643 | | | 1,299,363 | |
Less: current portion | (637) | | | (628) | |
Total long term obligations, net | 1,369,006 | | | 1,298,735 | |
The Company executedis party to a syndicated credit agreement ("Senior(as amended, the "Senior Credit Agreement") in May 2011 which includes an unsubordinatedthe ability to execute term loanloans and a revolving credit facility. Effective March 31, 2017, the Company executed anPrior to its amendment toon April 6, 2021, the Senior Credit Agreement.Agreement had a maturity date of November 2024 provided certain liquidity measures are maintained during 2024, an incremental accordion capacity based on debt ratios and a maximum revolver capacity of $600 million. The March 2017 amendment extendedinterest rate is a pricing premium added to LIBOR based upon the maturityratio of the term loan and revolving facilityCompany's debt to May 30, 2022, increased the capacity of the revolving credit facility by $120.0 million to $545.0 million and preserved the accordion feature such that the Company can still draw up to an additional $100.0 million subject to the lenders' consent. Each year, through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent. In September 2017, the Company executed amendments to the Senior Credit agreement. These amendments increased the revolving credit facility's permitted additional indebtedness to $300.0 million for convertible notes described below. The amendments also increased the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any calendar year, provided the Company's total secured debt toits earnings before interest, taxes, depreciation and amortization expenses ("EBITDA") ratio isas defined under 3.00 times, after giving effectthe Senior Credit Agreement. As of September 30, 2022, the unused revolving credit facility available to the dividend or repurchase. UnderCompany at the terms oftrailing twelve-month EBITDA level was $259.7 million with additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants.
On April 6, 2021, the Company is required to maintain collateral coverage equal to 125% ofamended the outstanding balances ofSenior Credit Agreement ("Amended Credit Agreement"). The amendment (i) temporarily increased the term loan and the maximum capacityaggregate amount of the revolving credit facility or 150%from $600 million to $1 billion, and subsequently decreased the aggregate amount to $800 million on April 13, 2021, (ii) permitted increases of the outstanding balance of the term loan and the total funded revolving credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitmentcommitments and/or new tranches of term loans in an aggregate principal amount equal to the sum of $400 million plus the principal amount of indebtedness that could be incurred at the time of the increase that would not cause the Secured Leverage Ratio (as defined in the Senior Credit Agreement) to exceed 3.25 to 1.00 on a pro forma basis, (iii) modified the maturity date of the agreement from November 30, 2024, to April 6, 2026, with such extension of the maturity date being subject to (1) at the election of the lenders, five one-year extensions and (2) an earlier springing maturity date of July 12, 2024, if, on such date, (a) more than $75.0 million in aggregate principal amount of the Convertible Notes (as defined below) remain outstanding and (b) the Company has less than $375.0 million of liquidity at such time, (iv) removed the Collateral to Total Exposure Ratio (as defined in the Senior Credit Agreement) as a financial covenant, and (v) required the Company to repay the balance of all term loans outstanding at the time of the amendment.
On October 19, 2022, the Company amended the Senior Credit Agreement. This amendment i) increased the aggregate amount of the revolving credit facility from $800 million to $1 billion, ii) extended the maturity date of the agreement from April 6, 2026 to October 19, 2027, iii) replaced LIBOR with SOFR as an interest rate benchmark, iv) reduced the collateral to outstanding loan ratio to 1.15:1.00 from 1.25:1:00, v) permits cash dividends and share repurchases provided the secured leverage ratio is less than 3.00 to 1.00 and the total leverage ratio is less than 3.50 to 1.00, and removed the annual limitation on cash dividends and share repurchases which was $545.0$100 million.
On January 28, 2020, CAM completed a debt offering of $500 million in senior unsecured notes (together with the "Additional Notes" referred to below, the “Senior Notes”) that were guaranteed by ATSG and certain of its other subsidiaries. The balancesSenior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “1933 Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a fixed rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes mature on February 1, 2028. The indenture for the Senior Notes contains customary events of default and certain covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement. The net proceeds of $495 million from the Senior Notes were used to pay down the revolving credit
facility. The Senior Notes do not require principal payments until maturity but prepayments are allowed without penalty beginning February 1, 2025.
On April 13, 2021, CAM completed its offering of $200 million of additional Senior Notes that were guaranteed by ATSG and certain of its subsidiaries. The additional Senior Notes are fully fungible with the original Senior Notes, treated as a single class for all purposes under the indenture governing all the Senior Notes with the same terms (other than issue date and issue price). The proceeds of $205.5 million, net of scheduled interest payable, were used, in conjunction with draws from the revolving credit facility to repay the unsubordinated term loans. Upon retirement of the unsubordinated term loan areloans, the Company expensed debt issuance costs of $6.5 million related to the unsubordinated term loans.
During the nine month period ended September 30, 2022, the Company repurchased Senior Notes having a principal value of $120.0 million in the open market at a 5.5% reducing the Senior Notes carrying value to $578.0 million. The Company recognized a net pre-tax gain of $4.5 million, net of fees, which was recorded under net gain of financial instruments on the income statement during the corresponding period.
The balance of the Senior Notes is net of debt issuance costs of $0.7$5.7 million and $0.6$7.8 million for the periods endingas of September 30, 20172022 and December 31, 2016,2021, respectively. Under the terms of the Senior Credit Agreement, interest rates are adjusted at least quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current secured debt-to-EBITDA ratio as of September 30, 2022, the LIBOR based financing for the unsubordinated term loan and revolving credit facility bear a variable interest raterates of 3.24% and 3.24%, respectively. The Senior Credit Agreement provides for the issuance of letters of credit on the Company's behalf. As of September 30, 2017, the unused revolving credit facility totaled $315.7 million, net of draws of $220.0 million and outstanding letters of credit of $9.3 million.4.1%.
The aircraft loans are collateralized by two aircraft, and amortize monthly with a balloon payment of approximately 20% with maturities between 2017 and early 2018. Interest rates range from 6.74% to 6.82% per annum payable monthly. The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft that are not collateralized under aircraft loans.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 among other things,a maximum permitted total debt to EBITDA, a fixed charge covenant ratio requirement, and limitations on certain additional indebtedness and guarantees of indebtedness, as well as a total debt to EBITDA ratio and a fixed charge coverage ratio.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.
In September 2017, the CompanyATSG issued $258.8 million aggregate principal amount of 1.125% Convertible Senior Notesconvertible senior notes due 2024 ("Convertible Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Convertible Notes bear interest at a rate of 1.125% per year payable semi-annually in arrears on April 15 and October 15 each year, beginning April 15, 2018. The Convertible Notes mature on October 15, 2024, unless repurchased or converted in
accordance with their terms prior to such date. The Convertible Notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables.
Conversion of the Convertible Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning in any calendar quarter commencing after December 31, 2017, and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon the occurrence of certain fundamental changes, holders of the Convertible Notes can require the Company to repurchase their notes at the cash repurchase price equal to the principal amount of the notes, plus any accrued and unpaid interest. UntilThe Company has the Company's shareholders increase the number of authorized shares of common stock to cover the full number of shares underlying the Notes, the Company is requiredright to settle conversions solely in cash. If the number of authorized shares is increased, theConvertible Notes may be settled in cash, the Company’s common shares or a combination of cash and the Company’s common shares, at the Company’s election. The initial conversion rate is 31.347531.35 shares of common sharesstock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $31.90 per common share). If a “make-whole fundamental change” (as defined in the offering circular with the Convertible Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time.
The Company evaluated the conversion featuresfeature of the Convertible Notes required bifurcation from the principal amount under the applicable accounting guidance including ASC 815, "Derivatives and Hedging,"and determined thatguidance. On January 1, 2022 the conversion features require separate accountingCompany adopted ASU 2020-06 using the modified retrospective approach as a derivative. Atdiscussed in Note A which recombined the time of issuance, the fair value of this derivative was recorded on the balance sheet as the note conversion obligations (a long-term liability) and an offsetting discount to the Notes. Until the Company's shareholders increase the number of authorized shares of common stock, the note conversion obligations will be adjusted to reflect its fair value at the end of each quarter. The fair value of the previously bifurcated embedded feature with the convertible note conversion obligation at issuance was $57.4 million. The fair value ofand eliminated the note conversion obligations at September 30, 2017 was $61.2 million and resulted in a non-operating loss of $3.9 million before the effect of income tax during the third quarter ended September 30, 2017.
The net proceeds from the issuance of the Notes were approximately $252.3 million, after deducting initial issuance costs. These unamortized issuance costs and discount are being amortized to interest expense through October 2024, using an effective interest rate of approximately 5.15%.discount. The carrying value of the Company's Convertibleconvertible debt is shown below.below (in thousands):
|
| | | |
| | September 30, |
| | 2017 |
Principal value, Convertible Senior Notes, due 2024 | | 258,750 |
|
Unamortized issuance costs
| | (6,938 | ) |
Unamortized discount
| | (57,326 | ) |
Convertible debt | | 194,486 |
|
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 |
Principal value, Convertible Notes, due 2024 | | 258,750 | | | 258,750 | |
Unamortized issuance costs | | (2,111) | | | (2,889) | |
Unamortized discount | | — | | | (24,215) | |
Convertible debt | | 256,639 | | | 231,646 | |
In conjunction with the offering of theConvertible Notes, the Company purchased convertible note hedges under privately negotiated transactions for $56.1 million. These transactions cover, subject to customary anti-dilution adjustments,million, having the same number of the Company’sCompany's shares of common sharesstock (8.1 million shares) and the same strike price ($31.90) that initially underlie the Notes, andConvertible Notes. The convertible note hedges are expected to reduce the potential equity dilution with respect to ourthe Company's common stock and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the Convertible Notes. The initial strike priceCompany's current intent and policy is to settle all Note conversions through a combination settlement which satisfies the principal amount of the convertible note hedges is $31.90 per share. The Company evaluated the convertible note hedges under the applicable accounting guidance, including ASC 815, "Derivatives and Hedging," and determined that the convertible note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and are adjusted to reflect their fair value at the end of the quarter. The fair value of the convertible note hedges at September 30, 2017 was $60.6 million. As of September 30, 2017, the re-measurement of the convertible note hedges to fair value resulted in a non-operating gain of $4.5 million before the effect of income tax.Convertible Notes outstanding with cash.
In conjunction with the offering of the Notes, the Company also sold warrants to the convertible note hedges 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. The warrants could have a dilutive effect on the Company’s outstanding common shares and the Company’s earnings per share to the extent that the traded market price of the Company’s common shares exceeds the strike price of the warrants which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions. The Company evaluated the warrants under the applicable accounting guidance, including ASC 815 "Derivatives and Hedging,"and determined that the warrants meet the definition of a derivative, however, because these warrants have been determined to be indexed to the Company's own stock and meet the criteria for equity classification, they have been recorded in shareholder's equity. In the event these warrants are exercised, the Company has enough authorized and unissued shares for their issuance. The amount paid for these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. Taken together, the convertible note hedge and warrant transactions are intended to limit, during Notes conversion events, the dilution of the Company's common shares until the traded market price exceeds $41.35.
NOTE G—DERIVATIVE INSTRUMENTS
The Company's Senior Credit Agreement requires the Company to maintainmaintains derivative instruments for protection from fluctuating interest rates, for at least fifty percent of the outstanding balance of the term loan. Accordingly, the Company entered into interest rate swaps. The Company entered into two new interest rate swaps in February 2017 and April 2017, respectively, having an initial value of $39.4 million and $50.0 million, respectively, and forward start dates of June 30, 2017. The Company also entered into a new interest rate swap in July 2017, having an initial value of $75.0 million and a forward start date of December 31, 2017. Under these three new swaps, the Company pays a fixed rate of 1.703%, 1.9% and 1.95%, respectively, and receives a floating rate that resets monthly based on LIBOR.rates. The table below provides information about the Company’s interest rate swaps (in(dollars in thousands):
| | | | | September 30, 2017 | | December 31, 2016 | | | | September 30, 2022 | | December 31, 2021 |
Expiration Date | Stated Interest Rate | | Notional Amount | | Market Value (Liability) | | Notional Amount | | Market Value (Liability) | Expiration Date | Stated Interest Rate | | Notional Amount | | Market Value (Liability) | | Notional Amount | | Market Value (Liability) |
June 30, 2017 | 1.183 | % | | — |
| | — |
| | 43,125 |
| | (77 | ) | |
May 5, 2021 | 1.090 | % | | 37,500 |
| | 544 |
| | 43,125 |
| | 547 |
| |
May 30, 2021 | 1.703 | % | | 37,500 |
| | 2 |
| | — |
| | — |
| |
March 31, 2022 | 1.900 | % | | 50,000 |
| | (126 | ) | | — |
| | — |
| March 31, 2022 | 1.900 | % | | $ | — | | | $ | — | | | $ | 50,000 | | | $ | (222) | |
March 31, 2022 | 1.950 | % | | 75,000 |
| | (225 | ) | | — |
| | — |
| March 31, 2022 | 1.900 | % | | — | | | — | | | 75,000 | | | (341) | |
March 31, 2023 | | March 31, 2023 | 2.425 | % | | 127,500 | | | 1,077 | | | 133,125 | | | (3,041) | |
The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future fluctuations in LIBOR 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 the net loss on derivatives of $0.3 million and net gains on derivatives of $0.1$0.6 million and $4.7 million for the three and nine month periods ending September 30, 20172022, respectively, compared to net gains of $2.3 million and 2016, respectively. The asset$4.8 million for outstanding derivatives is recorded in other assets.the corresponding periods of 2021. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.
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.
ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit pension plan for a major portion of its other ABX employees that meet minimum eligibility requirements. The plans are funded through Company contributions to an invested trust. 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 costs.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. Effective
Accumulated other comprehensive income (loss) includes the following items by components for the three and nine month periods ending September 30, 20172022 and 20162021 (in thousands):
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 B)C), if such warrants have an anti-dilutive effect on earnings per share. ForThe 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, the weighted-average diluted shares outstanding is calculated using the treasury method.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 two reportable segments.segments - CAM and ACMI Services. The CAM segment consists of the Company's aircraft and engine leasing operations and its segment earnings include an allocation of interest expense.operations. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and charterpassenger service agreements that the Company has with otherits customers. Due to the similarities among the Company's airline operations, the airline operations are aggregated into a single reportable segment, ACMI Services. The Company's other activities, which include mail and parcel handling services, as well as hub management services for the USPS and AFS, the sale of aircraft parts, aircraft maintenance services, aircraft modifications, facilitymodification services, ground services and ground equipment services, the sales of aviation fuel and other support services, are not large enough to constitute separate reportable segments and are combined in “All other” with inter-segment profit eliminations. Inter-segment"All other." Intersegment revenues are valued at arms-length market rates. Cash and cash equivalents are reflected in Assets - All other below.
The Company's segment information from continuing operations is presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Total revenues: | | | | | | | |
CAM | $ | 109,496 | | | $ | 92,931 | | | $ | 326,075 | | | $ | 264,802 | |
ACMI Services | 357,375 | | | 330,906 | | | 1,034,963 | | | 851,338 | |
All other | 108,423 | | | 90,292 | | | 318,837 | | | 281,226 | |
Eliminate inter-segment revenues | (58,378) | | | (48,174) | | | (167,431) | | | (145,451) | |
Total | $ | 516,916 | | | $ | 465,955 | | | $ | 1,512,444 | | | $ | 1,251,915 | |
Customer revenues: | | | | | | | |
CAM | $ | 79,975 | | | $ | 71,070 | | | $ | 237,466 | | | $ | 198,546 | |
ACMI Services | 357,319 | | | 330,903 | | | 1,034,881 | | | 851,325 | |
All other | 79,622 | | | 63,982 | | | 240,097 | | | 202,044 | |
Total | $ | 516,916 | | | $ | 465,955 | | | $ | 1,512,444 | | | $ | 1,251,915 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ending September 30, | | Nine Months Ending September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Total revenues: | | | | | | | |
CAM | $ | 58,465 |
| | $ | 46,346 |
| | $ | 155,973 |
| | $ | 145,511 |
|
ACMI Services | 146,943 |
| | 128,702 |
| | 436,391 |
| | 357,803 |
|
All other | 94,470 |
| | 65,328 |
| | 300,184 |
| | 177,592 |
|
Eliminate inter-segment revenues | (45,777 | ) | | (47,115 | ) | | (147,319 | ) | | (133,711 | ) |
Total | $ | 254,101 |
| | $ | 193,261 |
| | $ | 745,229 |
| | $ | 547,195 |
|
Customer revenues: | | | | | | | |
CAM | $ | 40,940 |
| | $ | 27,920 |
| | $ | 104,102 |
| | $ | 86,068 |
|
ACMI Services | 146,938 |
| | 128,702 |
| | 436,386 |
| | 357,803 |
|
All other | 66,223 |
| | 36,639 |
| | 204,741 |
| | 103,324 |
|
Total | $ | 254,101 |
| | $ | 193,261 |
| | $ | 745,229 |
| | $ | 547,195 |
|
Depreciation and amortization expense: | | | | | | | |
CAM | $ | 26,829 |
| | $ | 22,958 |
| | $ | 31,368 |
| | $ | 68,295 |
|
ACMI Services | 9,805 |
| | 10,528 |
| | 77,383 |
| | 30,300 |
|
All other | 971 |
| | 453 |
| | 3,077 |
| | 1,010 |
|
Total | $ | 37,605 |
| | $ | 33,939 |
| | $ | 111,828 |
| | $ | 99,605 |
|
Segment earnings (loss): | | | | | | | |
CAM | $ | 19,445 |
| | $ | 16,110 |
| | $ | 45,570 |
| | $ | 51,849 |
|
ACMI Services | (5,223 | ) | | (9,686 | ) | | (8,841 | ) | | (27,172 | ) |
All other | 655 |
| | 5,089 |
| | 11,977 |
| | 13,087 |
|
Net unallocated interest expense | (268 | ) | | 83 |
| | (655 | ) | | (287 | ) |
Net loss on financial instruments | (34,433 | ) | | (8,473 | ) | | (100,213 | ) | | (3,443 | ) |
Charges for non-consolidating affiliates | (945 | ) | | — |
| | (945 | ) | | — |
|
Pre-tax earnings (loss) from continuing operations | $ | (20,769 | ) | | $ | 3,123 |
| | $ | (53,107 | ) | | $ | 34,034 |
|
The Company's assetsexternal customer revenues from other activities for the three and nine month periods ending September 30, 2022 and 2021 are presented below by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Aircraft maintenance, modifications and part sales | $ | 34,604 | | | $ | 28,513 | | | $ | 106,766 | | | $ | 91,352 | |
Ground services | 28,204 | | | 22,928 | | | 80,275 | | | 75,410 | |
Other, including aviation fuel sales | 16,814 | | | 12,541 | | | 53,056 | | | 35,282 | |
Total customer revenues | $ | 79,622 | | | $ | 63,982 | | | $ | 240,097 | | | $ | 202,044 | |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Assets: | | | |
CAM | $ | 1,140,559 |
| | $ | 971,986 |
|
ACMI Services | 175,963 |
| | 164,489 |
|
All other | 170,381 |
| | 122,855 |
|
Total | $ | 1,486,903 |
| | $ | 1,259,330 |
|
Interest expense allocated to CAM was $4.0During the three and nine month periods ending September 30, 2022, the Company respectively recognized $5.8 million and $10.9$4.8 million of non lease revenue that was reported in deferred revenue at the beginning of the respective period, compared to $1.1 million and $2.9 million in the respective corresponding periods of 2021. Current deferred revenue of $13.0 million and $8.3 million as of September 30, 2022 and December 31, 2021, respectively, for contracts with customers is derived from other activities as described above and CAM non lease revenues. Revenue related to deferred revenue will be recognized based on percentage of completion. Customers are required to pay deposits and may be required to make milestone payments for these services resulting in deferred revenue. Long-term contract assets were $0.0 million and $0.8 million as of September 30, 2022 and December 31, 2021, respectively.
CAM's leases do not contain residual guarantees. Approximately 12% of CAM's leases to external customers contain purchase options at projected market values. As of September 30, 2022, minimum future payments from
external customers for leased aircraft and equipment were scheduled to be $72.2 million for the remainder of 2022, $247.5 million, $197.3 million, $183.4 million and $157.5 million for the next 4 years ending December 31, 2026, respectively, and $361.9 million thereafter. CAM's external customer revenues for non-lease activities were $9.8 million and $27.1 million for the three and nine month periods ending September 30, 2017,2022, respectively, compared to $2.9$2.3 million and $7.8$9.2 million forduring the respective corresponding periods of 2016, respectively.2021 for engine services and the sale of spare engine parts.
The Company's external customers revenuesother segment information from other activities for the three and nine month periods ended September 30, 2017 and 2016 arecontinuing operations is presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Depreciation and amortization expense: | | | | | | | |
CAM | $ | 59,231 | | | $ | 51,383 | | | $ | 171,943 | | | $ | 148,390 | |
ACMI Services | 23,447 | | | 25,649 | | | 72,885 | | | 73,398 | |
All other | 605 | | | 719 | | | 1,898 | | | 2,647 | |
Total | $ | 83,283 | | | $ | 77,751 | | | $ | 246,726 | | | $ | 224,435 | |
Interest expense | | | | | | | |
CAM | 7,908 | | | 9,408 | | | 21,837 | | | 28,303 | |
ACMI Services | 3,693 | | | 4,672 | | | 9,719 | | | 13,668 | |
Segment earnings (loss): | | | | | | | |
CAM | $ | 36,975 | | | $ | 28,502 | | | $ | 111,587 | | | $ | 72,518 | |
ACMI Services | 25,265 | | | 58,225 | | | 69,267 | | | 124,246 | |
All other | (1,182) | | | (1,047) | | | 560 | | | 2,503 | |
Net unallocated interest expense | (510) | | | (371) | | | (1,391) | | | (1,995) | |
Net gain (loss) on financial instruments | 695 | | | (7,378) | | | 9,402 | | | 37,797 | |
Debt issuance costs | — | | | — | | | — | | | (6,505) | |
Other non-service components of retiree benefit costs, net | 4,635 | | | 4,457 | | | 15,411 | | | 13,370 | |
Loss from non-consolidated affiliate | (954) | | | (1,147) | | | (5,577) | | | (1,365) | |
Pre-tax earnings from continuing operations | $ | 64,924 | | | $ | 81,241 | | | $ | 199,259 | | | $ | 240,569 | |
The Company's assets are presented below by segment (in thousands). Cash and cash equivalents are reflected in Assets - All other.
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
Assets: | | | |
CAM | $ | 2,427,780 | | | $ | 2,218,012 | |
ACMI Services | 959,801 | | | 872,311 | |
| | | |
All other | 137,584 | | | 177,012 | |
Total | $ | 3,525,165 | | | $ | 3,267,335 | |
During the first nine months of 2022, the Company had capital expenditures for property and equipment of $69.8 million and $378.3 million for ACMI Services and CAM, respectively.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Mail and package handling services | | $ | 48,283 |
| | $ | 23,502 |
| | $ | 123,564 |
| | $ | 62,553 |
|
Aircraft maintenance, modifications and part sales | | 13,915 |
| | 8,958 |
| | 70,492 |
| | 30,217 |
|
Facility and ground equipment services | | 3,625 |
| | 3,780 |
| | 9,528 |
| | 9,281 |
|
Other | | 400 |
| | 399 |
| | 1,157 |
| | 1,273 |
|
Total customer revenues | | $ | 66,223 |
| | $ | 36,639 |
| | $ | 204,741 |
| | $ | 103,324 |
|
NOTE O—DISCONTINUED OPERATIONS
The Company's results of discontinued operations consist primarily of changes in liabilities related to self-insurance reserves for medical expenses and wage loss for former employees previously associated with ABX's former hub operations. For the nine month ended September 30, 2022 and 2021, pre-tax earnings from discontinued operations were $2.2 million and $3.1 million, respectively.
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 Air Transport Services Group, Inc., and its subsidiaries. Air Transport Services Group, Inc. and its subsidiaries may hereinafter individually and collectively be referred to as "the Company", "we", "our", or "us" from time to time. The following discussion and analysisMD&A describes the principal factors affecting theour results of operations, financial condition, cash flows,flow, liquidity and capital resources. ItThe MD&A should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") contained in this report and the audited consolidated financial statements and related notes prepared in accordance with GAAP contained in our Annual Report on2021 Form 10-K for the year ended December 31, 2016.10-K.
INTRODUCTIONBACKGROUND
The Company leasesWe lease aircraft provides air cargo lift and performsprovide airline operations, aircraft modification and maintenance services, ground services, and other support services primarily to the air cargo transportation and package deliverylogistics industries. Through the Company'sATSG's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. The Company'sOur principal subsidiaries include twoour aircraft leasing company (CAM) and three independently certificated airlines ABX Air, Inc. (“ABX”)(ABX, ATI and Air Transport International, Inc. (“ATI”), and an aircraft leasing company, Cargo Aircraft Management, Inc. (“CAM”)OAI). CAM provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters and offering them to customers under long-term leases.
The Company hasWe have two reportable segments: CAM, which leases Boeing 767 and Boeing 757 aircraft and aircraft engines, and ACMI Services, which primarily includes the cargo transportation operations of the Company's two airlines. The ACMI Services segment provides airline operations to its customers. Services include a combination of aircraft, crews, maintenance and insurance through "CMI" and "ACMI" agreements and through charter contracts in which aviation fuel is also included. The Company's other business operations, which primarily provide support services to the transportation industry, include aircraft maintenance, aircraft parts sales, ground and material handling equipment maintenance and mail handling services. These operations do not constitute reportable segments due to their size.
DHL
The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. DHL accounted for 25% of the Company's consolidated revenues for the first nine months of 2017, compared with 35% of the Company's consolidated revenues in the corresponding period in 2016. As of September 30, 2017, the Company, through CAM, leased 16 Boeing 767 aircraft to DHL, 12 of which were being operated by the Company's airlines for DHL under a crew, maintenance and insurance agreement and four aircraft which are operated by a DHL-affiliated airline in the Middle East. Additionally, ATI operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL.
Amazon
The Company has been providing freighter aircraft and services for cargo handling and logistical support for Amazon Fulfillment Services, Inc. ("AFS"), a subsidiary of Amazon.com, Inc. ("Amazon") since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with AFS pursuant to which CAM agreed to lease 20 Boeing 767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years.
The ATSA, which has a term of five years, provides for the operation of those aircraft by the Company’s airline subsidiaries, and the performance of ground handling services by the Company's subsidiary, LGSTX Services, Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that are leased and operated under the ATSA. The ATSA became effective on April 1, 2016.
Revenues from continuing operations performed for AFS comprised approximately 42% of the Company's consolidated revenues from continuing operations for the first nine months of 2017, compared with 24% of the Company's consolidated revenues from continuing operations during the corresponding period in 2016.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common
shares as described below. The first tranche of warrants, issued upon execution of the Investment Agreement, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the right to purchase 7.69 million common shares vesting upon issuance on March 8, 2016, and the right to purchase the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA, or as the Company achieved specified revenue targets in connection with the ATSA. The second tranche of warrants grants Amazon a right to purchase approximately 1.59 million ATSG common shares, and will be issued and vest on March 8, 2018. The third tranche of warrants will be issued and vest on September 8, 2020. The third tranche of warrants will grant Amazon the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. The exercise price of the warrants will be $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants will be exercisable in accordance with its terms through March 8, 2021.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. The fair value of the warrants issuable to Amazon is recorded as a lease incentive asset and is amortized against revenues over the duration of the aircraft leases. The warrants are accounted for as financial instruments, and accordingly, the fair value of the outstanding warrants are measured and classified in liabilities at the end of each reporting period. The Company's earnings in future periods will be impacted by the number of warrants granted, the fair value re-measurement of warrants at the end of each period, lease incentive amortizations and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described above for financial reporting. For additional information about the accounting for the warrants, see Note B to the accompanying unaudited condensed consolidated financial statements.
U.S. Military
The U.S. Military comprised 7% and 13% of the Company's consolidated revenues from continuing operations during the nine month periods ending September 30, 2017 and 2016, respectively. Revenues from the U.S. Military are primarily for the operation of four Boeing 757 "combi" aircraft which are capable of simultaneously carrying passengers and cargo containers on the main flight deck.
Fleet Summary 2017
As of September 30, 2017, the combined operating fleet of owned freighter aircraft consisted of 36 Boeing 767-200 aircraft, 22 Boeing 767-300 aircraft, four Boeing 757-200 aircraft and four Boeing 757 "combi" aircraft. At September 30, 2017, the Company owned six Boeing 767-300 aircraft and two Boeing 737-400 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.
Aircraft fleet activity during the first nine months of 2017 is summarized below:
- CAM completed the modification of six Boeing 767-300 freighter aircraft purchased in the previous year and began to lease five of those aircraft, which are being operated by ATI, under a multi-year lease to AFS. CAM began to lease the sixth aircraft to ATI.
- CAM leased one Boeing 767-300 freighter aircraft, which was modified during 2016, to AFS under a multi-year lease. ATI was separately contracted to operate that aircraft.
- CAM leased one Boeing 767-200 freighter, which was being staged for leasing, to ATI.
- External lessees returned two Boeing 767-200 freighter aircraft which were operated by ABX. Two Boeing 767-200 aircraft were released to external customers.
- CAM purchased five Boeing 767-300 passenger aircraft during the first nine months of 2017 for the purpose of converting the aircraft into standard freighter configuration.
- The Company purchased two Boeing 737-400 passenger aircraft during the first nine months of 2017 for the purpose of converting the aircraft into standard freighter configuration.
The Company’s cargo aircraft fleet is summarized below as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| ACMI Services | CAM | Total | | ACMI Services | CAM | Total |
In-service aircraft | | | | | | | |
Aircraft owned | | | | | | | |
Boeing 767-200 | 7 |
| 29 |
| 36 |
| | 6 |
| 29 |
| 35 |
|
Boeing 767-300 | 4 |
| 18 |
| 22 |
| | 4 |
| 12 |
| 16 |
|
Boeing 757-200 | 4 |
| — |
| 4 |
| | 4 |
| — |
| 4 |
|
Boeing 757-200 Combi | 4 |
| — |
| 4 |
| | 4 |
| — |
| 4 |
|
Total | 19 |
| 47 |
| 66 |
| | 18 |
| 41 |
| 59 |
|
Other aircraft | | | | | | | |
Owned Boeing 767-300 under modification | — |
| 6 |
| 6 |
| | — |
| 7 |
| 7 |
|
Owned Boeing 737-400 under modification | — |
| 2 |
| 2 |
| | — |
| — |
| — |
|
Owned Boeing 767 available or staging for lease | — |
| — |
| — |
| | — |
| 1 |
| 1 |
|
As of September 30, 2017, ABX and ATI were leasing 19 in-service aircraft internally from CAM for use in ACMI Services. As of September 30, 2017, six of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above and six of the 18 Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, twelve of CAM's 29 Boeing 767-200 aircraft and eight of CAM's 18 Boeing 767-300 aircraft were leased to AFS and operated by ABX or ATI. CAM leased the other eleven Boeing 767-200 aircraft and four Boeing 767-300 aircraft to external customers, including four Boeing 767-200 aircraft to DHL that are being operated by a DHL-affiliated airline. The carrying values of the total in-service fleet as of September 30, 2017 was $881.6 million compared to $793.9 million as of December 31, 2016. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM.
RESULTS OF OPERATIONS
Summary
External customer revenues from continuing operations increased by $60.8 million to $254.1 million and increased by $198.0 million to $745.2 million for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. Excluding directly reimbursed revenues, customer revenues increased $49.1 million and $146.0 million during the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. External customer revenues increased due to additional aircraft leases, expanded CMI and logistics services for AFS and aircraft maintenance and modification services for various customers.
The consolidated net losses from continuing operations were $28.2 million and $72.4 million for the three and nine month periods ended September 30, 2017, respectively, compared to earnings of $2.1 million and $21.8 million for the corresponding periods of 2016. The pre-tax losses from continuing operations were $20.8 million and $53.1 million for the three and nine month periods ended September 30, 2017, respectively, compared to pre-tax earnings of $3.1 million and $34.0 million for the corresponding periods of 2016. Earnings were affected by specific events and certain adjustments that do not directly reflect our underlying operations among the years presented. On a pre-tax basis, earnings included net losses of $34.4 million and $100.2 million for the three and nine month periods ended September 30, 2017, respectively, for the re-measurement of financial instruments, including warrant obligations granted to Amazon, to fair value. This compares to pre-tax losses for re-measurements of $8.5 million and $3.4 million for the corresponding periods of 2016. Pre-tax earnings were also reduced by $3.9 million and $9.8 million for the three and nine month periods ended September 30, 2017, respectively, for the amortization of lease incentives given to AFS in the form of warrants, compared to $1.4 million and $2.4 million for the corresponding periods of 2016. Additionally, pre-tax earnings from continuing operations included expenses of $5.5 million and $5.9 million for the three and nine month periods ending September 30, 2017, respectively, for settlement charges and other non-service components of retiree benefit plans, compared to $2.2 million and $6.6 million for the corresponding periods of 2016. Pre-tax earnings for the third quarter of 2017 included a $0.9 million charge for the Company's share of development costs for a new
joint venture. Pre-tax earnings for the first quarter of 2016 also included a $1.2 million charge for the Company's share of capitalized debt issuance costs that were charged off when West Atlantic AB, a non-consolidated affiliate, restructured its debt. After removing the effects of these items, adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows) were $24.0 million and $63.7 million for the three and nine months ended September 30, 2017, respectively, compared to $15.2 million and $47.7 million for 2016.
Adjusted pre-tax earnings from continuing operations for the third quarter and first nine months of 2017 improved compared to 2016, driven primarily by additional revenues and the improved financial results of our airline operations. We also experienced additional revenues and earnings due to the acquisition of Pemco World Air Services, Inc. ("Pemco") in December 2016 and the expansion of gateway operations for AFS since June of 2016. This growth in revenue was partially offset by the cost necessary to support expanded flight operations, including training costs related to new flight crews, higher aircraft depreciation expense and more employee expenses, particularly in support of logistical services.
A summary of our revenues, pre-tax earnings from continuing operations, adjusted pre-tax earnings from continuing operations (a non-GAAP measure), and a non-GAAP reconciliation, is shown below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ending September 30, | | Nine Months Ending September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues from Continuing Operations: | | | | | | | |
CAM | | | | | | | |
Aircraft leasing and related revenues | $ | 62,351 |
| | $ | 47,778 |
| | $ | 165,733 |
| | $ | 147,877 |
|
Lease incentive amortization | (3,886 | ) | | (1,432 | ) | | (9,760 | ) | | (2,366 | ) |
Total CAM | 58,465 |
| | 46,346 |
| | 155,973 |
| | 145,511 |
|
ACMI Services | | | | | | | |
Airline services | 112,203 |
| | 105,747 |
| | 332,120 |
| | 305,587 |
|
Reimbursable | 34,740 |
| | 22,955 |
| | 104,271 |
| | 52,216 |
|
Total ACMI Services | 146,943 |
| | 128,702 |
| | 436,391 |
| | 357,803 |
|
Other Activities | 94,470 |
| | 65,328 |
| | 300,184 |
| | 177,592 |
|
Total Revenues | 299,878 |
| | 240,376 |
| | 892,548 |
| | 680,906 |
|
Eliminate internal revenues | (45,777 | ) | | (47,115 | ) | | (147,319 | ) | | (133,711 | ) |
Customer Revenues | $ | 254,101 |
| | $ | 193,261 |
| | $ | 745,229 |
| | $ | 547,195 |
|
| | | | | | | |
| | | | | | | |
Pre-Tax Earnings (Loss) from Continuing Operations: | | | | | | | |
CAM, inclusive of interest expense | $ | 19,445 |
| | $ | 16,110 |
| | $ | 45,570 |
| | $ | 51,849 |
|
ACMI Services | (5,223 | ) | | (9,686 | ) | | (8,841 | ) | | (27,172 | ) |
Other Activities | 655 |
| | 5,089 |
| | 11,977 |
| | 13,087 |
|
Net unallocated interest expense | (268 | ) | | 83 |
| | (655 | ) | | (287 | ) |
Net financial instrument re-measurement loss | (34,433 | ) | | (8,473 | ) | | (100,213 | ) | | (3,443 | ) |
Charges for non-consolidated affiliate | (945 | ) | | — |
| | (945 | ) | | — |
|
Pre-Tax Earnings (Loss) from Continuing Operations | (20,769 | ) | | 3,123 |
| | (53,107 | ) | | 34,034 |
|
Add other non-service components of retiree benefit costs, net | 5,529 |
| | 2,203 |
| | 5,883 |
| | 6,609 |
|
Add charges for non-consolidated affiliate | 945 |
| | — |
| | 945 |
| | 1,229 |
|
Add lease incentive amortization | 3,886 |
| | 1,432 |
| | 9,760 |
| | 2,366 |
|
Add net loss on financial instruments | 34,433 |
| | 8,473 |
| | 100,213 |
| | 3,443 |
|
Adjusted Pre-Tax Earnings from Continuing Operations | $ | 24,024 |
| | $ | 15,231 |
| | $ | 63,694 |
| | $ | 47,681 |
|
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding settlement charges and other non-service components of retiree benefit plans, gains and losses for the fair value re-measurement of financial instruments, lease incentive amortizations, the start-up costs of a non-consolidated joint venture and the charge off of debt issuance costs from a non-consolidated affiliate during the first quarter of 2016. We exclude these items from adjusted pre-tax earnings because they are distinctly different in their predictability or not closely related to our on-going operating activities. Management uses adjusted pre-tax earnings to compare the
performance of core operating results between periods. Presenting this measure provides investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.
ACMI Reimbursable revenues shown above include revenues related to fuel, landing fees, navigation fees and certain other operating costs that are directly reimbursed to the airlines by their customers.
CAM Segmentsegments:
CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the Company's 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 eightten years. In a typical leasing agreement, customers pay rentCAM currently leases Boeing 767, 757 and maintenance deposits on a monthly basis.
As of September 30, 2017, CAM had a fleet of 66 cargo aircraft in service condition, 19 of them leased internally to the Company's airlines and 47 leased to external customers. CAM has added eight aircraft to its operating fleet since October 1, 2016.
As of September 30, 2017 and 2016, CAM had 47 and 38 aircraft under lease to external customers, respectively. Revenues from external customers totaled $40.9 million and $104.1 million for the three and nine month periods ending September 30, 2017, respectively, compared to $27.9 million and $86.1 million for the corresponding periods of 2016. CAM's revenues from the Company's airlines totaled $17.5 million and $51.2 million for the three and nine month periods ending September 30, 2017, respectively, compared to $18.4 and $59.4 for the corresponding periods of 2016, reflecting the transition of CAM owned aircraft to long-term leases with external customers. CAM's aircraft leasing and related revenues, which excludes customer lease incentive costs, increased $14.6 million and $17.9 million during the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016, primarily as a result of new aircraft leases since October 1, 2016, additional engine maintenance agreements and the timing of maintenance related revenues. CAM's revenues related to maintenance increased $7.5 million and $2.3 million for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. CAM's revenues related to maintenance can vary among periods due to the timing of customer maintenance events.
CAM's pre-tax earnings were reduced by the increased amortization for the value of warrants issued to Amazon as a lease incentive. The amortization of the lease incentive increased by $2.5 million and $7.4 million for the three and nine months ended September 30, 2017 compared to the corresponding periods of 2016 due to additional vesting of warrants and a higher value of warrants at the time of vesting. CAM's pre-tax earnings, inclusive of an interest expense allocation, were $19.4 million and $45.6 million during the three and nine month periods ended September 30, 2017, respectively, compared to $16.1 million and $51.8 million during the corresponding periods of 2016. Increased earnings for the third quarter reflect additional aircraft leases and the timing of customer maintenance revenues and related expenses. Decreased earnings for the first nine months reflect more amortization of the value of warrants issued to Amazon as a lease incentive, higher depreciation expense for eight additional Boeing 767-300 aircraft, the interruption of lease revenues when transitioning aircraft between customers and increased interest allocation due to the higher debt levels.
During the first nine months of 2017, CAM purchased five 767-300 passenger aircraft for freighter conversion. As of September 30, 2017, all five of these Boeing 767-300 passenger777 aircraft and one other Boeing 767-300 passenger aircraft purchased in 2016 were being modified from passenger to freighter configuration. The Company also purchased two Boeing 737-400 aircraft during the first nine months of 2017, and these aircraft are currently being modified from passenger to freighter configuration.
CAM's agreement to lease 20 Boeing 767 freighter aircraft to AFS includes 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Leases for six of these aircraft began in April 2016 and the remaining fourteen were executed as of September 1, 2017, to fulfill the 20 aircraft requirement for AFS.
CAM expects to complete, through the third quarter of 2018, the freighter modification of eight passenger aircraft which it owns. While CAM has customer commitments or letters of intent for most of these aircraft, CAM's future operating results will depend on the timing and lease rates under which these aircraft are ultimately leased. CAM's
operating results will depend on its ability to convert passenger aircraft into freighters within planned costs and within the time frames of customers' needs. Additionally, CAM's operating results will be negatively impacted by the amortization of warrants issuable to Amazon as a lease incentive.engines.
ACMI Services Segment
The ACMI Services segment provides airlineincludes the cargo and passenger transportation operations to its customers, typicallyof our three airlines. Our airlines operate under contracts providing forto provide a combination of aircraft, crews, maintenance, insurance and insurance ("ACMI").aviation fuel. Our customers are usuallytypically 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 U.S. Military,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 separate reportable segments.
At September 30, 2022, we owned 110 Boeing aircraft that were in revenue service. We also owned fourteen Boeing 767-300 aircraft and seven Airbus 321-200 aircraft either already undergoing or awaiting induction into the freighter conversion process at September 30, 2022. In addition to these aircraft, we leased four passenger aircraft from third parties and operated ten freighter aircraft provided by customers for whom we provide services under CMI agreements.
Due to the strong demand for medium widebody and narrow body freighters and as part of our continued growth strategy to expand and diversify our fleet, during 2021 we secured additional aircraft conversion slots over the next few years. We continue to work closely with Israel Aerospace Industries and have forged new conversion relationships with Boeing and Elbe Flugzeugwerke (“EFW”). Further, we perform our own conversions of the Airbus A321 aircraft through a joint venture arrangement.
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 nine month periods ended September 30, 2022 and 2021, respectively. As of September 30, 2017,2022, we leased 42 Boeing 767 freighter aircraft to ASI with lease expirations between 2023 and 2031 and we operate those aircraft for ASI. The aircraft lease terms typically range from 5 to 10 years. We operate six other Boeing 767 aircraft provided by ASI. We also provide ground services and aircraft maintenance services to ASI.
DHL comprised 12% and 13% of our consolidated revenues during the nine month periods ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we leased 14 Boeing 767 freighter aircraft to DHL comprised of three Boeing 767-200 aircraft and eleven Boeing 767-300 aircraft, with expirations between 2023 and 2029. Under a separate CMI agreement, we operate ten of the Boeing 767 aircraft that DHL leases from the Company and two Boeing 767 aircraft that DHL provides. We provide DHL with scheduled maintenance services under the agreement which is subject to renewal in May of 2028. 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 network. We also provide additional air cargo transportation services for DHL through ACMI Servicesagreements in which we provide the aircraft, crews, maintenance and insurance under a single contract. Further, beginning in third quarter of 2022, we began to operate the first two of four Boeing 767 aircraft provided by DHL under an additional CMI agreement which currently runs through August of 2027.
The DoD comprised 29% and 26% of our consolidated revenues during the nine month periods ended September 30, 2022 and 2021 respectively, derived primarily from operating passenger and combi charter flights. We utilize our fleet of fourteen 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 increased by $51.0 million, or 11%, to $516.9 million and $260.5 million, or 21%, to $1,512.4 million during the first three and nine months of 2022 compared to the same periods in 2021. Customer revenues increased during the first nine months of 2022, particularly for contracted airline services, aircraft leasing and aviation fuel sales, compared to the previous year's period. Nine additional aircraft have been placed under customer leases since October 1, 2021.
Consolidated net earnings from continuing operations were $50.2 million and $154.2 million for the three and nine month periods ended September 30, 2022, respectively, compared to $62.4 million and $184.5 million for the corresponding periods of 2021. The pre-tax earnings from continuing operations were $64.9 million and $199.3 million for the three and nine month periods ended September 30, 2022, respectively, compared to $81.2 million and $240.6 million for the corresponding periods of 2021. Earnings were affected by the following specific events and certain adjustments that do not directly reflect our underlying operations among the periods presented.
•Pre-tax earnings from continuing operations included 51net gains of $0.7 million and $9.4 million for the three and nine month periods ended September 30, 2022, respectively for gains related to the repurchase of debt as well as financial instrument valuations, including warrant obligations granted to Amazon. This compares to pre-tax net losses for remeasurement of financial instruments of $7.4 million and gains of $37.8 million for the corresponding periods of 2021.
•Pre-tax earnings from continuing operations were reduced by $5.8 million and $17.4 million for the three and nine month periods ended September 30, 2022, respectively, for the amortization of customer
incentives given to Amazon in the form of warrants, compared to $5.8 million and $17.3 million for the corresponding periods of 2021.
•Pre-tax earnings from continuing operations included gains of $4.6 million and $15.4 million for the three and nine month periods ended September 30, 2022, respectively, for non-service components of retiree benefit plans compared to net gains of $4.5 million and $13.4 million for the corresponding periods of 2021.
•Pre-tax earnings from continuing operations included losses of $1.0 million and $5.6 million for the three and nine month periods ended September 30, 2022, respectively, for the Company's share of joint venture results, including engineering costs to development aircraft modifications, compared to losses of $1.1 million and $1.4 million for the corresponding periods of 2021.
•Pre-tax earnings for the nine month period September 30, 2021 included a one-time charge of $6.5 million to write-off debt issuance costs in conjunction with the restructuring of the Company's debt obligations.
•During the three and nine months period ended September 30, 2021, the Company recognized $30.3 million and $96.6 million, respectively, of government grants from the CARES Act, PSP Extension Law and the American Rescue Plan. No government grants were recognized during the nine month period ended September 30, 2022.
•Pre-tax earnings from continuing operations included losses of $1.0 million, net of related insurance recoveries, for both the three and nine month periods ended September 30, 2022, for the costs of employee coverage, property damage, clean-up and repairs which occurred as a direct result of a foam release after a hangar's fire suppression system malfunctioned.
After removing the effects of these items, adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows), were $67.3 million and $198.4 million for the three and nine month periods ended September 30, 2022, respectively, compared to $60.8 million and $117.9 million for the corresponding periods of 2021. Improved results were driven by additional aircraft leases to external customers, an increase in the number of freighter aircraft we operate and more block hours flown for customers compared to the previous year's periods.
A summary of our revenues and 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 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues from Continuing Operations: | | | | | | | | |
CAM | | | | | | | | |
Aircraft leasing and related services | | $ | 114,526 | | | $ | 97,960 | | | $ | 341,164 | | | $ | 279,813 | |
Lease incentive amortization | | (5,030) | | | (5,029) | | | (15,089) | | | (15,011) | |
Total CAM | | 109,496 | | | 92,931 | | | 326,075 | | | 264,802 | |
ACMI Services | | 357,375 | | | 330,906 | | | 1,034,963 | | | 851,338 | |
Other Activities | | 108,423 | | | 90,292 | | | 318,837 | | | 281,226 | |
Total Revenues | | 575,294 | | | 514,129 | | | 1,679,875 | | | 1,397,366 | |
Eliminate internal revenues | | (58,378) | | | (48,174) | | | (167,431) | | | (145,451) | |
Customer Revenues | | $ | 516,916 | | | $ | 465,955 | | | $ | 1,512,444 | | | $ | 1,251,915 | |
| | | | | | | | |
| | | | | | | | |
Pre-Tax Earnings from Continuing Operations: | | | | | | | | |
CAM, inclusive of interest expense | | $ | 36,975 | | | $ | 28,502 | | | $ | 111,587 | | | $ | 72,518 | |
ACMI Services, inclusive of government grants and interest expense | | 25,265 | | | 58,225 | | | 69,267 | | | 124,246 | |
Other Activities | | (1,182) | | | (1,047) | | | 560 | | | 2,503 | |
Net unallocated interest expense | | (510) | | | (371) | | | (1,391) | | | (1,995) | |
Net financial instrument re-measurement gain (loss) | | 695 | | | (7,378) | | | 9,402 | | | 37,797 | |
Other non-service components of retiree benefits costs, net | | 4,635 | | | 4,457 | | | 15,411 | | | 13,370 | |
Loss from non-consolidated affiliate | | (954) | | | (1,147) | | | (5,577) | | | (1,365) | |
Debt issuance cost | | — | | | — | | | — | | | (6,505) | |
Pre-Tax Earnings from Continuing Operations | | 64,924 | | | 81,241 | | | 199,259 | | | 240,569 | |
Add other non-service components of retiree benefit costs, net | | (4,635) | | | (4,457) | | | (15,411) | | | (13,370) | |
Less government grants | | — | | | (30,322) | | | — | | | (96,626) | |
Add charges for non-consolidated affiliates | | 954 | | | 1,147 | | | 5,577 | | | 1,365 | |
Add lease incentive amortization | | 5,822 | | | 5,798 | | | 17,442 | | | 17,295 | |
Add net (gain) loss on financial instruments | | (695) | | | 7,378 | | | (9,402) | | | (37,797) | |
Add net charges for hangar foam incident | | 960 | | | — | | | 960 | | | — | |
Add debt issuance cost | | — | | | — | | | — | | | 6,505 | |
Adjusted Pre-Tax Earnings from Continuing Operations | | $ | 67,330 | | | $ | 60,785 | | | $ | 198,425 | | | $ | 117,941 | |
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings from continuing operations excluding the following: (i) settlement charges and other non-service components of retiree benefit costs; (ii) gains and losses from financial instrument valuations including 19warrants issued to Amazon; (iii) customer incentive amortization; and (iv) the start-up costs and expenses of a non-consolidated joint venture. We exclude these items when calculating adjusted pre-tax earnings because they are distinctly different in their predictability or not closely related to our on-going operating activities. We also excluded the recognition of government grants and charges, net of related insurance recoveries, resulting from the malfunction of a fire suppression system in an aircraft maintenance hangar, from adjusted earnings to improve comparability between periods. Management uses adjusted pre-tax earnings from continuing operations to compare the performance of core operating results between periods. Presenting this measure provides management and investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted pre-tax earnings from continuing operations should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.
The Company's earnings for the reported periods were impacted by the fair value re-measurement of the Amazon warrants classified in liabilities at the end of each reporting period, customer incentive amortization and the related income tax effects. The fair value of the warrants issued or issuable to Amazon were recorded as a customer incentive asset and are amortized against revenues over the duration of the aircraft leases. Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for financial instruments. For additional information about the warrants issued to Amazon, see the accompanying notes to the financial statements included in this report.
Aircraft Fleet Summary
Our fleet of cargo and passenger aircraft is summarized in the following table as of September 30, 2022 and December 31, 2021. 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 September 30, 2022, we owned fourteen Boeing 767-300 aircraft and seven Airbus A321-200 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.
Aircraft fleet activity during the first nine months of 2022 is summarized below:
•CAM completed the modification of five Boeing 767-300 freighter aircraft purchased in the previous year. The aircraft are leased to external customers under multi-year leases. Two of the aircraft are being operated by ABX for the customer.
•CAM purchased six Boeing 767-300 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. These aircraft are expected to be leased to external customers during 2023.
•OAI returned one Boeing 767-300 passenger aircraft to CAM. CAM expects to modify this aircraft into a standard freighter configuration and lease it to an external customer in 2023.
•CAM purchased six Airbus A321-200 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. These aircraft are expected to be leased to external customers during 2023.
•ATI began to operate two customer-provided Boeing 767-300 freighter aircraft.
•ABX began to operate two customer-provided Boeing 767-300 freighter aircraft.
•An external customer returned one Boeing 767-200 freighter aircraft to CAM. That aircraft has currently been removed from service.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | |
| ACMI Services | CAM | Total | | ACMI Services | CAM | Total | |
In-service aircraft | | | | | | | | |
Aircraft owned | | | | | | | | |
Boeing 767-200 Freighter | 5 | | 25 | | 30 | | | 5 | | 26 | | 31 | | |
Boeing 767-200 Passenger | 2 | | — | | 2 | | | 2 | | — | | 2 | | |
Boeing 767-300 Freighter | 2 | | 64 | | 66 | | | 2 | | 59 | | 61 | | |
Boeing 767-300 Passenger | 5 | | — | | 5 | | | 6 | | — | | 6 | | |
Boeing 777-200 Passenger | 3 | | — | | 3 | | | 3 | | — | | 3 | | |
| | | | | | | | |
Boeing 757-200 Combi | 4 | | — | | 4 | | | 4 | | — | | 4 | | |
| | | | | | | | |
Total | 21 | | 89 | | 110 | | | 22 | | 85 | | 107 | | |
Operating lease | | | | | | | | |
Boeing 767-200 Passenger | 1 | | — | | 1 | | | 1 | | — | | 1 | | |
Boeing 767-300 Passenger | 3 | | — | | 3 | | | 3 | | — | | 3 | | |
Boeing 767-200 Freighter | 2 | | — | | 2 | | | 2 | | — | | 2 | | |
Boeing 767-300 Freighter | 8 | | — | | 8 | | | 4 | | — | | 4 | | |
Total | 14 | | — | | 14 | | | 10 | | — | | 10 | | |
Other aircraft | | | | | | | | |
Owned Boeing 767-300 under modification | — | | 14 | | 14 | | | — | | 12 | | 12 | | |
Owned Airbus A321-200 under modification | — | | 7 | | 7 | | | — | | 1 | | 1 | | |
Owned Boeing 767 available or staging for lease | — | | 1 | | 1 | | | — | | 1 | | 1 | | |
As of September 30, 2022, ABX, ATI and OAI were leasing 21 in-service aircraft internally from CAM 12 CAM-ownedfor use in ACMI Services. Of CAM's 25 externally leased Boeing 767-200 freighter aircraft, which are under lease12 were leased to ASI and operated by ABX or ATI, one was leased to DHL and operated by ABX, undertwo were leased to DHL and were being operated by a CMI agreement,DHL-affiliated airline and 20 CAM-ownedten were leased to other external customers. Of the 64 externally leased Boeing 767-300 freighter aircraft, which are under lease30 were leased to AFSASI and operated by ATI, nine were leased to DHL and operated by ABX, two were leased to DHL and are being operated by a DHL-affiliated airline and 23 were leased to other external customers. The carrying values of the total in-service fleet as of September 30, 2022 and December 31, 2021 were $1,722.9 million and $1,693.0 million, respectively.
CAM Segment
CAM added nine Boeing 767-300 freighter aircraft to its portfolio since October 1, 2021. CAM grew its revenues by $16.6 million and $61.3 million during the first three and nine months of 2022, respectively, compared to the same periods in 2021.
As of September 30, 2022 and 2021, CAM had 89 and 82 aircraft under lease to external customers, respectively. Revenues from external customers totaled $80.0 million and $237.5 million for the ATSA.three and nine months periods ended September 30, 2022, respectively, compared to $71.1 million and $198.5 million for the corresponding periods of 2021. Since October 1, 2021, CAM placed nine more Boeing 767-300 aircraft with external customers under long-term leases. Additionally, in October of 2021, CAM began to offer engine power coverage to lessees of CAM's General Electric powered Boeing 767-200 aircraft. Under this service, CAM is responsible for providing and maintaining engines for its lease customers as needed through a pool of engines. Revenues from external customers increased $6.7 million and $17.7 million for the three and nine months ended September 30, 2022 compared to the corresponding periods in 2021 for this engine service. Additionally, CAM generates earnings from the lease of spare engines and the sale of spare aircraft parts. CAM's revenues from the Company's airlines totaled $29.5 million and $88.6 million for the three and nine month periods ended September 30, 2022, compared to $21.9 million and $66.3 million for the corresponding periods in 2021.
CAM's pre-tax earnings from continuing operations, inclusive of internally allocated interest expense, were $37.0 million and $111.6 million for the three and nine month periods ended September 30, 2022 compared to $28.5 million and $72.5 million for the corresponding periods in 2021. Increased pre-tax earnings reflect the nine aircraft placed into service since October 1, 2021 and decreases in internally allocated interest expense of $1.5 million and $6.5 million for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021 due to lower company-wide interest expense and debt. Additionally, CAM generates earnings from the lease of spare engines and the sale of spare aircraft parts.Increased pre-tax earnings were offset by increased depreciation of $7.8 million and $23.6 million for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021 driven by the addition of aircraft.
In addition to the 14 Boeing 767-300 aircraft and seven Airbus A321-200 aircraft which were in the modification process at September 30, 2022, CAM has agreements to purchase seventeen more Boeing 767-300 aircraft, two more Airbus A321-200 aircraft and six Airbus A330 aircraft through 2024. CAM's future operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the timeframes required by customers. During the fourth quarter of 2022, we expect to lease to external customers at least three more newly modified Boeing 767-300 freighters and re-deploy one Boeing 767-200 freighter. CAM's future operating results will also depend on the timing and lease rates under which aircraft are redeployed when leases expire. Additionally, CAM's future operating results from engine power services will depend upon engine cycles operated, the number of engine overhauls and the severity of unscheduled maintenance events.
ACMI Services
Total revenues from ACMI Services increased $18.2$26.5 million and $78.6$183.6 million during the three and nine month periods ended September 30, 20172022, respectively, compared with the corresponding periods of 2021. Increased revenues for 2022 reflected a 16% increase in block hours flown for DoD troop movements particularly to $146.9Europe for the nine month period ended September 30, 2022, respectively, compared to the corresponding period in 2021, as well as ten additional freighter aircraft added to operations compared to the third quarter of 2021, including six more customer-provided aircraft that are not owned by CAM. Revenues also increased due to fuel expenses that are billed through to the DoD and charter customers. The customer fuel portion of ACMI Services revenue increased approximately $12.6 million and $436.4$55.8 million during the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods in 2021. As of 2016. Airline services revenues from external customers, which do not include revenuesSeptember 30, 2022 and 2021, ACMI Services included 87 and 77 in-service aircraft, respectively. Total customer block hours increased 3% and 10% for the reimbursementthree and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods in 2021, reflecting increases in block hours flown for DHL and Amazon. Block hours for the DoD increased during the nine month period ended September 30, 2022 compared to the previous year, however we operated fewer block hours for the DoD during the third quarter of fuel2022 compared to 2021, when we supported the evacuation of military and certain operating expenses, increased $6.5civilian personnel from Afghanistan.
ACMI Services had pre-tax earnings of $25.3 million and $26.5$58.2 million for the three and nine month periods ended September 30, 2017,2022, respectively, compared to $69.3 million and $124.2 million for the corresponding periods in 2021, inclusive of 2016. Improved revenues were driven by additional aircraft operationsinternally allocated interest expense and the recognition of pandemic-related government grants of $30.3 million and $96.6 million, respectively. Pre-tax earnings, excluding the recognition of government grants, for AFS and reflect an 8% and 21% increase in billable block hours for both the three and nine month periods ended September 30, 2017,2022 declined $2.6 million and improved $41.6 million, respectively, compared to the corresponding periods of 2016. In2021. The decline in earnings for the third quarter of 2017, we added two CAM-owned Boeing 767-300 aircraft into ACMI Service for AFS. As of September 30, 2017, ACMI Services were operating seven more aircraft2022 reflects lower DoD block hours compared to September 30, 2016. Beginningthe 2021 evacuation flights and increased operating expenses, particularly for flight crews and contracted maintenance services. Improved earnings for the nine month period of 2022 were a result of the increased number of aircraft in April 2016, in conjunction withoperations and more block hours compared to 2021. We experienced increased expense levels for crew premium pay and training, contract labor, aircraft positioning fuel and travel expenses compared to the long-term leases executed between AFS and CAM, the related aircraft rent revenues for five aircraft operated for AFS during the first quarter of 2016 are reflected under CAM instead of ACMI Services.
ACMI Services had pre-tax losses of $5.2prior year periods. Internally allocated interest expense decreased $1.0 million to $3.7 million and $8.8decreased $3.9 million duringto $9.7 million for the three and nine month periods ended September 30, 2017, respectively, compared to pre-tax losses of $9.7 million and $27.2 million for the corresponding periods of 2016. Pre-tax results in 2017 compared to 2016 were affected by expanded revenues, the timing of scheduled airframe maintenance events, crew training and related expenses, and increased pension expenses. Scheduled airframe maintenance expense increased $0.9 million and decreased $3.1 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016. Airframe maintenance expense varies depending upon the number of C-checks and the scope of the checks required2021.
Future profitability levels for those airframes scheduled for maintenance. Pension expense for ACMI Services, including non-service components of retiree benefit costs, increased $3.3 million and decreased $0.8 million as actuarially determined for the three and nine month periods ending September 30, 2017, respectively, compared to the corresponding periods of 2016. The pension expense in the third quarter of 2017 included a $5.3 million pre-tax charge for the settlement of certain retirement obligations through a third party group annuity contract.
Achieving longer term profitability in ACMI Services will depend on a number of factors, including the impact of increasing inflation, potential COVID-19 outbreaks, customer flight schedules, revenue levels for airline services, crewmembercrew member productivity the level of pilotand pay, rising employee wages and benefits, aircraft maintenance schedules, the severity and frequency of unscheduled maintenance events, the number of aircraft we operate. Currently eachoperate and our ability to pass cost increases on to customers.
Recruiting, training and retaining employees and contractors are important factors to our success. Severe disruptions or shortages of the Company's airlines are negotiating with their respective flight crewmembers' collective bargaining units. These negotiationsqualified employees could result in changes that may effect the productivity and costs ofhave a detrimental impact on our operations.financial results.
Other Activities
We provide relatedother support services to our ACMI Services customers and other airlines by leveraging our knowledge and capabilities developed for our own operations over the years. The Company's aircraftThrough our FAA certificated maintenance engineering and repair businesses, Airborne Maintenance and Engineering Services, Inc. ("AMES") and Pemco,subsidiaries, we sell aircraft parts and provide aircraft maintenance and modification services. We also provide mail sorting, parcel handling and logistical support to the U.S. Postal Service (“USPS”) at five USPS facilities and similar services to certain AFS hubsASI hub and gateway locations in the U.S. We provide othermaintenance for ground services for our own airlinesequipment, facilities and external customers, including the sale
ofmaterial handling equipment and we resell aviation fuel the lease of ground equipment such as ground power units and cargo loaders, as well as facility and equipment maintenancein Wilmington, Ohio. Additionally, we provide flight training services.
External customer revenues from all other activities were $66.2increased $15.6 million and $204.7$38.1 million in the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021. Revenues from fuel sales were up $4.3 million and $17.7 million for the three and nine month periods ended September 30, 2017,2022, respectively, while revenues from aircraft maintenance services increased $6.1 million and $15.4 million for the three and nine month periods ended September 30, 2022, respectively, compared to $36.6 million and $103.3 million for the corresponding periods of 2016.2021. Revenues from our mail sorting, parcel handling and logistical supporthigher margin ground services increased $24.8$5.3 million and $61.0$4.9 million for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods during the prior year. Pre-tax earnings from other activities decreased by $0.1 million and $1.9 million for the three and nine month periods ended September 30, 2022, respectively, compared to the same periods last year. Lower earnings reflects disruptions to our aircraft hangar operations due to the malfunction of the fire suppression system, as well as the inflationary impacts, including the rising costs of labor, versus the previous year.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $21.9 million, or 15%, and $62.9 million, or 15% during the three and nine month periods ended September 30, 2017,2022, respectively, compared to 2016, reflectingthe corresponding periods of 2021. While the number of total employees was flat compared to the previous year, salaries and wages have been impacted by higher contractualwage rates, including more pilots, benefit costs, and additional AFS locations. Additionally, airframe maintenancemore overtime pay.
Depreciation and modification revenues from external customersamortization expense increased by $5.0$5.5 million and $40.3$22.3 million duringduring the three and nine month periods ended September 30, 2017, respectively, primarily due to the addition of Pemco, which was acquired at the end of 2016. Revenues from aircraft maintenance can vary among periods due to the timing of scheduled maintenance events and the completion level of work during a period.
The pre-tax earnings from other activities decreased by $4.4 million and $1.1 million during the three and nine month periods ended September 30, 2017 to $0.7 million and $12.0 million, respectively, compared to the corresponding periods in 2016, principally reflecting the termination of aircraft fueling and hub logistics services we provided for Amazon at the airport in Wilmington, Ohio through May of 2017, as well as the timing of completion of airframe services. Revenues for scheduled airframe maintenance and modification services are recognized by our subsidiaries when the customer work is completed.
Discontinued Operations
Pre-tax results related to former sorting operations were a $6.7 million loss and a $0.2 million gain for the first nine months of 2017 and 2016, respectively. Results in the third quarter of 2017 included a $7.6 million pre-tax charge for the settlement of certain retirement obligations through a third party group annuity contract. The results of discontinued operations primarily reflect the effects of defined benefit pension plans for former employees that supported sort operations under a former hub service agreement with DHL.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $7.3 million and $39.9 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016.2021. The increase in expense for the third quarter of 2017 reflects the $5.3 million settlement charge for the pension plan and $4.7 million for Pemco acquired in December 2016, offset by a reduction in pilot premium pay from year-ago levels and the reduction in the number of employees for the Wilmington, Ohio logistics operation, which was terminated in May 2017. The increase in expense through the first nine months of 2017 also includes higher headcount for expanded flight operations and package handling services during the first half of 2017.
Depreciation and amortization expense increased $3.7 million and $12.2 million during the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. The increase in depreciation expense reflects incremental depreciation for eight Boeing 767-300 aircraft andnine additional aircraft engines added to the operating fleet since October, 2016, as well as capitalized heavy maintenanceadditional depreciation expense for engines that are now being serviced and navigation technology upgrades.maintained by CAM under engine power coverage arrangements. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion, engine programs and capital spending plans.
Maintenance, materials and repairs expense increaseddecreased by $2.9$2.2 million and $10.0$15.0 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016. The increase is primarily due to the addition of Pemco's maintenance and materials, which added $7.0 million and $21.1 million of expenses2021. Maintenance expense for the three and nine month periods ended September 30, 2017,2021 included $8.8 million and $27.2 million, respectively, comparedfor an engine power-by-the-cycle ("PBC") agreement that expired in September 2021. We are now maintaining these engines through time and material agreements with engine maintenance providers to replace the corresponding periods of 2016.expired PBC agreement. The additionaldecline in PBC expense from Pemco was partially offset by fewer airframe checks for the Company's airlinesincreases driven by increased flight operations. The aircraft maintenance and lower airframe maintenance costs for third party customers during 2017 compared to 2016. Aircraft maintenancematerial expenses and materials can vary among periods due to the number of scheduled airframe maintenance checksevents and the scope of theairframe checks that are performed. In May 2017, our airlines entered into maintenance agreements for certain General Electric CF6 engines that power many of the Boeing 767-300 aircraft leased from CAM. Under the agreement, the engines are maintained by the service provider for a fixed fee per cycle. As a result, beginning in June 2017, the airlines began to record engine maintenance expense as flights occur. As a result, we estimate that our airlines' engine maintenance expense will increase approximately $2.0 million per quarter with a partially offsetting reduction to engine depreciation expense.
Fuel expense increased by $9.7$18.4 million and $43.0$84.9 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016.2021. Fuel expense includes the cost of fuel to operate U.S. MilitaryDoD charters, reimbursable fuel billed to DHL, AFS and other ACMI customers, as well as fuel used to position aircraft for service and for maintenance purposes. The increasepurposes, as well as the cost of fuel sales. Fuel expense increased due to the additional block hours for the DoD and due to increases in the price per gallon of aviation fuel expense was driven by a higher level of customer-reimbursedcompared to the previous year. Aviation fuel whichrates increased $11.3 millionapproximately 70% and $48.7 million58% per gallon for the three and nine month periods ended September 30, 2017, respectively, compared to 2016. Fuel expense for military customers and other purposes declined due to fewer block hours flown for military customers in 2017.
Travel expense increased by $0.9 million and $5.6 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016. The increase reflects additional aircraft in service and the higher level of employee headcount in airline operations during 2017 compared to 2016.2021.
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 increased $27.6decreased
$3.3 million and $60.6increased $1.5 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016, due2021. Contracted ground and aviation services vary with the level of passenger airline operations. Declines in these expense for the third quarter of 2022 correspond with the decline in passenger block hours compared to additional logistical support servicesthe third quarter of 2021. The increases for AFS gateways.the year correspond to increased flying volume.
RentTravel expense decreasedincreased by $0.3$4.9 million and increased by $1.6$20.7 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016. Rent2021. In addition to the increased number of crew member and flying volumes, travel expense increased due to the acquisition of Pemcosignificantly higher airfares and declined during the third quarter of 2017 duehotels rates compared to a reduced need for aircraft simulators to train new flight crews.year ago.
Landing and ramp expense, which includes the cost of deicing chemicals, increased by $1.5$0.2 million and $4.8$2.7 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016,2021, driven by additional flight operations. Landing and ramp fees can vary based on the flight schedules and the airports that are used in a period.increased flying volumes for our customers' express cargo networks.
Other operating expenses increased by $3.0$0.6 million and $6.2$9.6 million during the three and nine month periods ended September 30, 2017,2022, respectively, compared to the corresponding periods of 2016.2021. Other operating expenses include professional fees, employee training, utilities, commission expense to our CRAF team for DoD revenues and utilities. Other operating expenses increased by $0.4other expenses.
Operating results included a pre-tax expense credit of $30.3 million and $96.6 million during the three and nine month periods ended September 30, 2021, respectively, to recognize grants received from the U.S. government under the CARES Act, PSP Extension Law and the American Rescue Plan. For additional information about these grants, see Note H of the unaudited condensed consolidated financial statements included in this report.
Non-Operating Income, Adjustments and Expenses
Interest expense decreased by $2.3 million and $11.0 million for the three and nine months ended September 30, 2022 compared to the corresponding periods for 2021. Interest expense declined primary due to the adoption of Accounting Standards Update ("ASU") No. 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" and the effects of interest rates swaps. See Note G for additional information about the interest rate swaps. ASU No.2020-06 resulted in the elimination of the discount on the convertible notes and accordingly the reduction of discount amortization to interest expense. See Note A for additional information about ASU No. 2020-06. We expect interest expense to increase in future periods due to increases in our revolver balances as we expand CAM's fleet and increased interest rates which are derived from our Senior Credit Agreement.
During the second quarter of 2022 the company repurchased $120.0 million of its Senior Notes par value in the open market resulting in a net pre-tax gain of $4.5 million, net of fees, which was recorded under net gain on financial instruments on the income statement during the corresponding period. The Company recorded unrealized pre-tax gains on financial instrument re-measurements of $0.7 million and $9.4 million for the three and nine month periods ended September 30, 2017, respectively,2022, compared to pre-tax losses of $7.4 million and gains of $37.8 million for the additioncorresponding periods in 2021. The pre-tax gains for 2022 are primarily a result of Pemco, acquired at the endimpact of 2016. Other operating expense also increasedhigher market interest rates on the interest rate derivatives that we held. (See Note G for additional information about the interest rate derivatives.). The pre-tax gains for 2021 are primarily a result of re-valuing the stock warrants granted to supportAmazon. The warrant values generally increase or decrease with corresponding increases or decreases in the ATSG share price during the measurement period. Additionally, the value of certain warrants depends partially on the probability that such warrants will vest upon the execution of aircraft leases. Increases in the probability of warrants vesting results in higher liabilities and losses. In December 2021, most of the outstanding warrants were reclassified from liabilities to paid in capital and are no longer subject to periodic reevaluation. (See Note C for additional aircraft and customer block hours. Losses from a non-consolidated affiliate airline accounted for underinformation about the equity method increased $0.6Amazon warrants.)
Non service components of retiree benefits resulted in net gains of $4.6 million and decreased by $0.7$15.4 million for the three and nine month periods ended September 30, 2017, respectively,2022 compared to net gains of $4.5 million and $13.4 million for the corresponding periods of 2016.
Interest expense increased2021. The non service component gain and losses of retiree benefits are determined by $1.5 millionactuaries and $3.4 million during the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. Interest expense increased due to a higher average debt level and interest rates on the Company's outstanding loans, partially offset by more capitalized interest related to our fleet expansion. Capitalized interest increased $0.1 million and $0.6 million during the three and nine month periods ended September 30, 2017 to $0.4 million and $1.5 million, respectively.
Future interest expense will be impacted by convertible notes issued in September 2017. The convertible notes have a principal value of $258.8 million, bear interest at a rate of 1.125% and mature on October 15, 2024. At the time of issuance, the value of the conversion feature of the convertible notes was recorded as a debt discount and is being amortized along with debt issuance cost to interest expense over the seven year term of the convertible notes. We expectinclude the amortization of the debt discount and issuance costs will be approximately $2 million during the fourth quarter of 2017. We received net proceeds of $234.7 million from the issuance of the convertible notes and related bond hedge and warrant transactions. Interest payments for the convertible notes will be $2.9 million annually and there are no scheduled principal payments until maturity, resulting in a combined cash financing rate of approximately 2.55%.
The Company recorded pre-tax net losses on financial instruments of $34.4 million and $100.2 million for the three and nine month periods ended September 30, 2017, respectively, compared to $8.5 million and $3.4 million during the corresponding period of 2016. The 2017 losses are primarily a result of re-measuring, as of September 30, 2017, the fair value of the stock warrants granted to Amazon. An increase in the fair value of the warrants since previous re-measurement dates of June 30, 2017 and December 31, 2016, corresponded to an increase in the traded price of the
Company's shares and resulted in the non-cash loss. The non-cashunrecognized gains and losses resultingstemming from quarterly re-measurementschanges 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 financial instruments may vary widely among quarters.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 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 September 30, 20172022 have been estimated utilizing a 23% rate based upon year-to-date income projected annualized 39.6% rate, applied to year-to-date income.results for the full year. The recognition of discrete tax items such as the conversion of employee stock awards, officer compensation, the issuance of stock warrants and other items have an impact on the effective tax rate during a period.
The effective tax rate from continuing operations for both the three and nine month periods ended September 30, 20172022 was (35.9)% and (36.2)%, respectively. These effective tax rates reflect the non deductible tax treatment of certain warrants vesting for Amazon and certain warrant revaluation losses at the end of the period.23%. The effective tax ratesrate 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 tax rate before including the effects of the warrant re-measurement, incentive amortizations and the other adjustments for adjusted pre-tax earnings from continuing operations (see items in the table above) was 23% for both the three and nine month periods ended September 30 2017 are negative because the warrant revaluation losses do not generate a corresponding tax benefit for certain warrants.2022, respectively. The effective tax rate withoutbefore including the effects of the warrants was 37.5% and 36.5%24% for the three and nine months periods ended September 30, 2017, respectively. The effective tax rate from continuing operations, without including the effects of the warrants forboth the three and nine month periods ended September 30, 2016 were 35.4%2021.
Discontinued Operations
The financial results of discontinued operations primarily reflect workers' compensation cost adjustments and 36.0%, respectively. The effective tax rate, without including the effects of the warrants, increasedother benefits for 2017 dueformer employees previously associated with ABX's former hub operations pursuant to a lesser amount of discrete tax benefitswhich ABX performed package sorting services for DHL. Gains related to state income taxesthe former sorting operations were $2.2 million for the first nine months of 2022, compared to $3.1 million for the corresponding period of 2021. Gains during 2022 and employee stock incentive awards.
As of December 31, 2016, the Company had operating loss carryforwards for U.S. federal income tax purposes of approximately $40.2 million, which will begin to expire in 2031 if not utilized before then. We expect to utilize the loss carryforwards to offset federal income tax liabilities in the future. As2021 were primarily a result we do not expect to pay federal income taxes until 2019 or later. However, the Company may be required to pay alternative minimum taxes and certain state and local income taxes before then. The Company's taxable income earned from international flights are primarily sourced to the United States under international aviation agreements and treaties. When we operateof reductions in countries without such agreements, the Company could incur additional foreign income taxes.self-insurance reserves for former employee benefit claims.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $191.3$398.1 million and $143.6$429.2 million for the nine month periods ended September 30, 2022 and 2021, respectively. Cash flows from operating activities included $83.0 million from government payroll support programs during the first nine months of 2021. The decrease in government grant support was offset by improved cash flows generated from additional aircraft leases to customers and increased operating levels under the ACMI Services segment. Cash flows from operations can vary among periods depending on the timing of customer payments received as well as vendor payments we make at the end of a period. Cash outlays for pension contributions were $1.5 million and $1.8 million for the first nine months of 20172022 and 2016,2021, respectively. Cash flows generated from operating activities increased during the first nine months of 2017, reflecting improved operating results and customer collections. Cash outlays for pension contributions for the first nine months of 2017 were $4.1 million compared to $6.3 million for the corresponding period of 2016.
Capital spending levels were primarilysubstantially the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were $218.8$448.4 million and $182.1$428.1 million forin the first nine months of 20172022 and 2016,2021, respectively. Capital expenditures in 2017the first nine months of 2022 included $159.4$303.0 million for the acquisition of fivesix Boeing 767-300 aircraft, and two Boeing 737-400six Airbus A321-200 aircraft and freighter modification costs; $36.2$135.0 million for required heavy maintenance; and $23.2$10.4 million for other equipment, including purchasesequipment. Capital expenditures in the first nine months of aircraft engines and rotables. Our capital expenditures during 20162021 included $133.1$278.5 million for the acquisition of nine14 Boeing 767-300 aircraft, one Airbus A321-200 aircraft and freighter modification costs and next generation navigation modifications; $20.5costs; $140.9 million for required heavy maintenance; and $28.5$8.7 million for other equipment, including purchasesequipment.
During the first nine months of 2022 and 2021, we contributed $16.5 million and $2.5 million, respectively, to our two joint-ventures. Our joint-venture with Precision Aircraft Solutions, LLC, developed a passenger-to-freighter conversion program for Airbus A321-200 aircraft engines and rotables.our joint-venture with GA Telesis Engine Services, LLC will provide engine tear-down services to harvest and sell engine parts.
Net cash provided by financing activities was $61.9$47.8 million and $7.6 million for the first nine months of 2017 compared to $68.0 million in 2016.ended September 30, 2022 and 2021, respectively. During the first nine months of 2017,2022, we made debt payments of $345.5 million, we drew $90.0$510.0 million from the revolving credit facility under theand we paid $115.2 million to retire Senior Credit Agreement to fund capital spending. We made debt principal payments of $250.1 million during 2017. Our borrowing activities were necessary to acquire and modify aircraft for deployment into air cargo markets.
In September 2017, we received proceeds of $258.8 million from the issuance of convertible notes. In conjunction with the issuance of convertible notes, we received $38.5 million for the issuance of stock warrants and paid $56.1 million for related convertible note hedges. We paid issuance costs of $6.5 million for these transactions. The net proceeds from these transactions were $234.7 million, of which $205.0 million was used to pay down the balance of our revolving credit facility, thereby increasing the amount available for future draws under that facility. The convertible notes bear interest at a rate of 1.125% and mature on October 15, 2024, unless repurchased or converted in accordance
with their terms prior to such date. The convertible notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables. The convertible notes and the related transactions are described further in Note F of the accompanying condensed consolidated financial statements.
Notes. During the first nine months of 2017,2021, we spent $11.2made debt principal payments of $1,758.0 million and we drew $1,430.6 million from the revolving credit facility. During the first nine months of 2021, we received $207 million in proceeds from the issuance of Additional Senior Notes as well as received $132 million from Amazon for the exercise of warrants for the Company's stock.
Commitments
As of September 30, 2022, the Company had 21 aircraft that were in or awaiting modification to buy 530,637 sharesa freighter configuration. Additionally, we placed non-refundable deposits and have agreements to purchase 17 more Boeing 767-300 passenger aircraft, two more Airbus 321-200 and six Airbus A330 aircraft through 2024. We expect to purchase additional aircraft for modification in 2023. The Company outsources a significant portion of the Company's common stock pursuantaircraft freighter modification process to a share repurchase plan authorized in 2014 and amended in May 2016 by the Board of Directors to repurchase up to $100 millionnon-affiliated third parties. The modification process primarily consists of the Company's common stock.
Commitments
installation of a standard cargo door and loading system. We estimate that total capital expenditures for 20172022 will total $335be approximately $625 million, of which $265 millionthe majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance
Liquidity
At September 30, 2022, the capital expenditures from currentCompany had $54.5 million of cash balances future operating cash flow and $259.7 million available from the Senior Credit Agreement. The Company outsources a significantunused portion of the aircraft freighter modification process to a non-affiliated third party. The modification primarily consists of the installation of a standard cargo door and loading system. For additional information about the Company's aircraft modification obligations, seerevolving credit facility under its Senior Credit Agreement as described in Note HF of the accompanying financial statements.
In September 2015, the Company entered into a joint venture agreement We expect our operations to establish an express cargo airline serving multiple destinations within the People's Republiccontinue to generate significant net cash in-flows after deducting required spending of China (including Hong Kong, Macauapproximately $195 million for heavy maintenance and Taiwan)other sustaining capital expenditures during fiscal year 2022. To expand our fleet, we estimate that capital expenditures for aircraft purchases and surrounding countries, pending governmental approvals. The Company's contributions to the joint venture have been minimal and are expected to remain so over the next several months. Obtaining required governmental approvalsfreighter modifications will total $430 million for any new airline has since been delayed and as a result, the Company is evaluating alternatives. The Company is seeking to develop other aircraft investments in China by leveraging the relationship developed by Pemco, which provides modified Boeing 737 freighter aircraft in China.
Liquidity
The Company has a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term loan of $74.3 million, net of debt issuance costs, and a revolving credit facility from which the Company had drawn $220.0 million, net of repayments, as of September 30, 2017. The revolving credit facility has a capacity of $545.0 million, permitted additional indebtedness of $300.0 million of which $258.8 million has been utilized for the issuance of convertible notes, and an accordion feature whereby the Company can draw up to an additional $100.0 million subject to the lenders' consent. The Senior Credit Agreement is collateralized by the Company's fleet of Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. Under the amended terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 125% of the outstanding balances of the term loan and the maximum capacity of the revolving credit facility or 150% of the outstanding balance of the term loan and the total funded revolving credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment which was $545.0 million. Eachfiscal year through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent. Absent such future extensions, the maturity date is currently set to expire on May 30, 2022.
Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt to EBITDA ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.
Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding debt level to EBITDA (earnings before interest, taxes, depreciation and amortization expenses). At the Company's current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving credit facility both bear a variable interest rate of 3.24%.
At September 30, 2017, the Company had $53.9 million of cash balances. The Company had $315.7 million available under the revolving credit facility, net of outstanding letters of credit, which totaled $9.3 million. We believe that the Company's current cash balances andbalance, forecasted cash flows provided from its customer leases and operating agreements, combined
with borrowing availability under its Senior Credit Agreement, will be sufficient to fund operations,the expansion and maintenance of our fleet while meeting our contractual obligations, other commitments and working capital spending, scheduled debt payments and required pension fundingrequirements for at least the next 12twelve months.In October 2022, we amended the Senior Credit Agreement. See Note F for additional information.
Off-Balance Sheet ArrangementsContinued global disruptions in supply chains and labor shortages may delay aircraft modification projects, pushing contractual obligations into later periods, and could have an impact on the projected amount of capital expenditures.
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2017 and 2016, we were not involved in any material unconsolidated SPE transactions.
Certain of our operating leases and agreements contain indemnification obligations to the lessor or one or more other parties that are considered usual 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 the expiration of the respective lease or agreement. No amounts have been recognized in our financial statements for the underlying fair value of guarantees and indemnifications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s DiscussionThe MD&A and Analysis of Financial Condition and Results of Operations,” as well as certain other disclosures included elsewhere in this report are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.GAAP. The preparation of thesethe 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 selected.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. The Company bases itsWe 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 "SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES" 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 2021 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk for changes in 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 ourits customers.
ChangesMarket risks have occurred to the market risks the Company faces since information aboutnot materially changed from those risks were disclosed in itemItem 7A of the Company's 2016 Annual Report on2021 Form 10-K filed with the Securities and Exchange Commission on March 8, 2017.10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2017,2022, 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")). Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that 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.
(b) Changes in Internal Controls
There were no changes in internalthe Company's "internal control over financial reportingreporting" (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during theits most recently completed fiscal quarter ended September 30, 2022 that has materially affected, or isare reasonably likely to materially affect, the Company'sits internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company isWe are currently a party to legal proceedings including FAA enforcement actions, 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, we believe that the Company believes that itsCompany'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.
ITEM 1A. RISK FACTORS
The Company faces risks that could adversely affect its condition or results of operations. Many of these risks are disclosed in Item 1A of the Company's 2016 Annual Report on form 10-K, filed with the Securities and Exchange Commission on March 8, 2017. The risk factors presented below update, and should be considered in2021 Form 10-K.
In addition to the risk factorsrisks previously disclosed, the recent outbreak of war in Item 1AUkraine and the emergence of COVID-19 variants in China and other countries may result in further supply chain disruptions. These matters, coupled with inflationary pressures, could have an impact on overall economic conditions as well as the Company's 2016 Annual Reportoperations and financial results.
As disclosed in Note H of this report, on Form 10-K. August 7, 2022 the fire suppression system discharged at one of our aircraft maintenance hangars in Wilmington, Ohio, impacting employees, three aircraft, and equipment in and around the hangar. We expect that employee claims, property and equipment damage, customer claims and certain costs of business interruption will be covered by insurance, subject to customary deductibles and policy limits. However, our operating results may be impacted by losses and liabilities that are not covered by our insurance. Additionally, property losses will be recognized as they become known to us and related expenses as they are incurred, however insurance proceeds may not be recognized until later periods. As a result, the impact on our earnings may vary from period to period. The timeframes needed to return all aircraft and engines to operating condition are not known at this time. If some or all of these assets remain inoperable for an extended period of time, our operating results could be negatively impacted.
Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.
On August 3, 2017 we entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of a supplemental type certificate by the FAA in 2019. We expect to make contributions equal to our 49% ownership percentage of the program's total costs over the next two years and account for the investment in the joint venture under the equity method of accounting. While the joint venture is developing the conversion program, the Company's results will reflect non operating losses for our 49% share of the joint venture's development costs. The development costs may be larger than we expect and approval may take longer than anticipated. The benefits of our investment may be less than projected.
The convertible note hedge transactions and the warrant transactions that we entered into in September 2017 may affect the value of our common stock. In connection with the pricing of our 1.125% senior convertible notes due 2024 (the "Notes") and the exercise by the initial purchasers of their option to purchase additional Notes, we entered into privately-negotiated convertible note hedge transactions with the hedge counterparties. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Notes. We also entered into separate, privately-negotiated warrant transactions with the hedge counterparties relating to the same number of shares of our common stock that initially underlie the Notes, subject to customary anti-dilution adjustments.
The hedge counterparties and/or their affiliates may modify their hedge positions with respect to the convertible note hedge transactions and the warrant transactions from time to time after the pricing of the Notes. They may do so by purchasing and/or selling shares of our common stock and/or other securities of ours, including the Notes in privately-negotiated transactions and/or open-market transactions or by entering into and/or unwinding various over-the-counter derivative transactions with respect to our common stock. The hedge counterparties are likely to modify their hedge positions during any observation period for the Notes.
The effect, if any, of these activities on the market price of our common stock will depend on a variety of factors, including market conditions, and cannot be determined at this time. Any of these activities could, however, adversely affect the market price of our common stock. In addition, the hedge counterparties and/or their affiliates may choose to engage in, or to discontinue engaging in, any of these transactions with or without notice at any time, and their decisions will be at their sole discretion and not within our control.
We are subject to counterparty risk with respect to the convertible note hedge transactions. The hedge counterparties are financial institutions, and we will be subject to the risk that they might default under the convertible note hedge transactions. Our exposure to the credit risk of the hedge counterparties is unsecured by any collateral. Global economic conditions have from time to time resulted in failure or financial difficulties for many financial institutions. If a hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that hedge counterparty. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market
price and volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any hedge counterparty.
Conversion of the Notes or exercise of the warrants may dilute the ownership interest of stockholders. Any sales in the public market of the common stock issuable upon such conversion of the Notes or such exercise of the warrants could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 5, 2014, the Board of Directors of ATSG authorized the Company to repurchase of up to $50.0 million of ATSG's outstanding common stock. In May 2016, the Board of Directors amended the Company's common stock repurchase program increasingto increase the maximum repurchase amount that management may repurchase from $50.0 million to $100.0 million. In February 2018, the Board of Directors increased the repurchase authorization from $100.0 million of outstanding common stock.to $150.0 million (less amounts previously repurchased). The Board's authorization does not require the Company to repurchase of a specific number of shares or establish a time frame for any repurchase and the Board of Directors may terminate the repurchase program at any time. Repurchases may be made from time to time in the open market or in privately negotiated transactions. There is no expiration date for the repurchase program. There were no repurchases made during the third quarter of 2017.2022. As of September 30, 2017,2022, the Company hashad repurchased 6,435,3496,592,349 shares and has athe maximum dollar value of shares that may yetcould then be purchased under the program of $14.9was $61.3 million.
ITEM 5. OTHER INFORMATION
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(a) | Severance Pay Plan for Senior Management |
On November 3, 2017,The share repurchase program was suspended until the BoardCARES Act, PSP Extension Law and American Rescue Plan restrictions on the repurchase of Directorsshares lapsed after September 30, 2022. For more information, see Note H of the Company (the “Board”) adopted the Air Transport Services Group, Inc. Severance Pay Plan for Senior Management (the “Severance Plan”), which Severance Plan will cover certain designated key employees of the Company and its subsidiaries, including Messrs. Hete, Corrado, Payne and Turner, each a named executive officer of the Company.accompanying consolidated financial statements in this report.
The Severance Plan sets forth the terms and conditions of severance benefits to be provided to a covered employee in the event the covered employee experiences a covered termination.
Eligibility40
The Board’s Compensation Committee will designate those key employees of the Company who are eligible for the Severance Plan pursuant to a participation agreement and will include in such participation agreement whether the level of participation of such employee is as a Tier I Participant, Tier II Participant, Tier III Participant or Tier IV Participant.
Severance on Account of Employment Termination
Under the terms of the Severance Plan, if a covered employee (i) is terminated by the Company for any reason other than for “Cause” (as defined in the Plan), death or disability, or (ii) in the case of Tier I and Tier II Participants only, resigns on account of “Good Reason” (as defined in the Plan), the covered employee will receive the following severance benefits:
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- | | A continuation of annual base salary for the covered employee’s Severance Period (as defined below); |
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- | | Pro rata annual incentive bonus for the fiscal year in which the covered employee’s employment termination occurs, which bonus will be paid at the same time that bonuses are paid under the applicable plan or policy; and |
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- | | For the shorter of (a) the Severance Period and (b) 18 months following the covered employee’s termination date, a continuation of eligibility to participate in the Company’s medical, dental, vision and prescription drug plans in which the covered employee was participating (including the covered employee’s spouse and eligible dependents); provided that to receive such coverage, the covered employee must pay the amount that the covered employee would have been required to pay if such covered employee were employed by the Company at such time. |
The severance benefits will be discontinued if it is determined that the covered employee has engaged in actions that constitute Cause or has breached the terms of the release, restrictive covenants or any other agreement relating to the covered employee’s employment with the Company or termination thereof. The Severance Period for Tier I Participants is 24 months, for Tier II Participants is 18 months, for Tier III Participants is 12 months, and for Tier IV Participants is six months.
Release
The receipt of severance benefits is conditioned upon the execution and non-revocation of a release of claims. The severance benefits will be discontinued if a covered employee breaches any term of the release.
Effect of a Change in Control Agreement or Employment Agreement
If a covered employee is also a party to a change in control agreement and there occurs a change in control that results in such covered employee being entitled to receive severance benefits thereunder, then the Severance Plan will cease to be applicable to such covered employee, with all payments and benefits to such covered employee arising out of any termination of the employment of such covered employee to be determined and paid in accordance with the terms of such change in control agreement. Similarly, if a covered employee is also a party to an employment agreement with the Company that provides for severance payments and benefits following termination of employment under the same or similar circumstances as are set forth in the Severance Plan, then the Severance Plan will not be applicable to such covered employee so long as such employment agreement is in effect.
Restrictive Covenants
As a condition for a covered employee to be eligible to participate in the Severance Plan, and to receive severance benefits under the Severance Plan, a covered employee must agree to comply with the restrictive covenants set forth in the Severance Plan, which restrictive covenants include (a) a confidential information disclosure restriction during the term of the covered employment and thereafter, (b) a non-competition restriction during the term of the covered employee’s employment and for the Restriction Period (as defined below) after such termination of employment and (c) a non-solicitation restriction applicable to the solicitation of actual or prospective customers and employees and contractors of the Company during the term of the covered employee’s employment and for the Restriction Period after such termination of employment. The Restriction Period for Tier I Participants is 24 months, for Tier II Participants is 18 months, for Tier III Participants is 12 months and for Tier IV Participants is six months. The severance benefits will be discontinued if a covered employee breaches any terms of the restrictive covenants.
Amendment and Termination
The Board or the Compensation Committee may amend, suspend or terminate the Severance Plan at any time; provided that (i) no amendment, suspension or termination may materially adversely affect a covered employee’s entitlements under the Severance Plan without the prior written consent of such adversely affected covered employee and (ii) no such amendment, suspension or termination will give the Company the right to recover any amount paid to a covered employee prior to the date of such amendment, suspension or termination or to cause the cessation and termination of payments of severance benefits to any person under the Severance Plan receiving severance benefits.
Terms for Initially Designated Covered Employees
In connection with the adoption of the Severance Plan, Mr. Hete was designated as being eligible to participate in the Severance Plan as a Tier I Participant and Messrs. Corrado, Payne and Turner were designated as being eligible to participate in the Severance Plan as Tier II Participants.
The foregoing description of the Severance Plan is qualified in its entirety by the provisions of the Severance Plan, a copy of which is filed herewith as Exhibit 10.21.
ITEM 6. EXHIBITS
The following exhibits are filed with or incorporated by reference into this report.
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Exhibit No. | Description of Exhibit |
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Exhibit No. | Description of ExhibitMaterial Contracts |
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Instruments defining10.1 | |
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4.1 | |
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Material Contracts |
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10.1 | |
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10.2 | |
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10.3 | Letter agreement setting out a compensation arrangement between Mike Berger, Chief Commercial Officer, and Air Transport Services Group, Inc., the Lenders from time to time party hereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase Bank, N.A., as Syndication Agents and Bank of America, N.A., as Documentation Agent. (1) |
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10.3 | Second Amendment to the Amended and Restated Credit Agreement, entered into on September 25, 2017, by and among Air Transport Services Group, Inc., Cargo Aircraft Management, Inc., as borrower, the guarantors party thereto, the lenders party thereto and SunTrust Bank, as Administrative Agent. (3) |
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10.1731.1 | |
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32.1 | |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema Document |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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(1)104 | Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the SecuritiesCover Page Interactive Data File (formatted as inline XBRL and Exchange Commission on May 8, 2017.contained in Exhibit 101). |
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(2) | Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on June 2, 2017. |
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(3) | Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 25, 2017. |
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(4) | Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 29, 2017. |
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(1)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on June 1, 2022.
(2)Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on August 9, 2022.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | AIR TRANSPORT SERVICES GROUP, INC., |
| | | | a Delaware Corporation |
| | | | Registrant |
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| | | | /S/ RICHARD F. CORRADO |
| | | | Richard F. Corrado |
| | | | Chief Executive Officer (Principal Executive Officer) |
Date: | November 9, 2022 | | | |
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| | | | AIR TRANSPORT SERVICES GROUP, INC., |
| | | | a Delaware Corporation |
| | | | Registrant |
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| | | | /S/ JOSEPH C. HETE |
| | | | Joseph C. Hete |
| | | | Chief Executive Officer (Principal Executive Officer) |
Date: | November 9, 2017 | | | |
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| | | | /S/ QUINT O. TURNER |
| | | | Quint O. Turner |
| | | | Chief Financial Officer (Principal Financial Officer |
Date: | November 9, 20172022 | | | and Principal Accounting Officer) |