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. 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.
ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.
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 SeptemberJune 30, 20192020 have been estimated utilizing a 27%25% rate based upon year-to-date income and projected results for the full year. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants, assets impairments and other items which are not subject to tax, have an impact on the effective rate during a period.
The Company has operating loss carryforwards for U.S. federal income tax purposes. Management expects to utilize the loss carryforwards to offset federal income tax liabilities in the future. Due to the Company's deferred tax assets, including its loss carryforwards, management does not expect to pay federal income taxes until 2023 or later. The Company may, however, be required to pay some federal tax due to loss carryforward usage limitations and certain state and local income taxes before then.
Accumulated other comprehensive income (loss) includes the following items by components for the three and ninesix month periods ending SeptemberJune 30, 20192020 and 20182019 (in thousands):
The average grant-date fair value of each performance condition award, non-vested restricted stock award and time-based award granted by the Company in 20192020 was $22.80,$18.39, the fair value of the Company’s stock on the date of grant. The average grant-date fair value of each market condition award granted in 20192020 was $24.75.$20.41. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 2.5%0.7% and a volatility of 35.6%35.0% based on volatility over three years using daily stock prices.
The calculation of basic and diluted earnings per common share are as follows (in thousands, except per share amounts):
The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock warrants recorded as a liability (see Note C)D), if such warrants have an anti-dilutive effect on earnings per share. The dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during the period and comparing that amount with the number of corresponding warrants outstanding.
The Company operates in 2 reportable segments. The CAM segment consists of the Company's aircraft leasing operations while theoperations. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and passenger service agreements that the Company has with its customers. The Company's aircraft maintenance andservices, aircraft modification services, ground services and other activitiesservices, are not large enough to constitute reportable segments and are combined in Allall other. Inter-segmentIntersegment revenues are valued at arms-length market rates.
ACMI Services revenues are generated from airline service agreements and are typically based on hours flown, cycles operated, the amountnumber of aircraft operated and crew resources provided during a month. ACMI Services revenues are recognized over time using the invoice practical expedient as flight hours are performed for the customer. Certain agreements include provisions for incentive payments based upon on-time reliability. These incentives are measured on a monthly basis and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain other flight expenses. When functioning as the customers' agent for arranging such services, the Company records amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter agreements, the Company's airline is obligated to provide full services for one or more flights having specific origins and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all flight services, the related costs are recorded in operating expenses. Any sales commissions paid for charter agreements are generally expensed when incurred because the amortization period is less than one year. ACMI Services are invoiced monthly or more frequently. (There are no customer rewards programs associated with services offered by the Company nor does the Company sell passenger tickets or issue freight bills.)
The Company's revenues for customer contracts for airframe maintenance and aircraft modification services that do not have an alternative use and for which the Company has an enforceable right to payment are generally recognized over time based on the percentage of costs completed. Services for airframe maintenance and aircraft modifications typically have project durations lasting a few weeks to a few months. Other revenues for aircraft part sales, component repairs and line service are recognized at a point in time typically when the parts are delivered to the customer and the services are completed. For airframe maintenance, aircraft modifications and aircraft component repairs, contracts include assurance warranties that are not sold separately.
The Company records revenues and estimated earnings over time for its airframe maintenance and aircraft modification contracts using the costs to costs input method. For such services, the Company estimates the earnings on a contract as the difference between the expected revenue and estimated costs to complete a contract and recognizes
revenues and earnings based on the proportion of costs incurred compared to the total estimated costs. Unexpected or abnormal costs that are not reflected in the price of a contract are excluded from calculations of progress toward contract obligations. The Company's estimates consider the timing and extent of the services, including the amount and rates of labor, materials and other resources required to perform the services. These production costs are specifically planned and monitored for regulatory compliance. The expenditure of these costs closely reflect the progress made toward completion of an airframe maintenance and aircraft modification project. The Company recognizes adjustments in estimated earnings on a contract under the cumulative catch-up method in which the impact of the adjustment on estimated earnings of a contract is recognized in the period the adjustment is identified.
The Company's ground services revenues include load transfer and sorting services, and related facility and equipment maintenance services. These revenues are recognized as the services are performed for the customer over time. Revenues from related facility and equipment maintenance services are recognized over time and at a point in time depending on the nature of the customer contracts.
The Company's external customer revenues from other activities for the three and ninesix month periods ended SeptemberJune 30, 20192020 and 20182019 are presented below (in thousands):
For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. During the three and ninesix month periods ending SeptemberJune 30, 2020 and 2019, the Company recognized $0.5$1.6 million and $2.8 million of non-leasenon lease revenue that was reported in deferred revenue at the beginning of the respective period, respectively, compared to $4.8$0.6 million and $8.8$2.8 million in the corresponding periods of 2018.2019. Deferred revenue was $2.9$4.9 million and $3.1$3.0 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, for contracts with customers.
The Company's assets are presented below by segment (in thousands). Cash and cash equivalents are reflected in Assets - All other.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis 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 analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States of America contained in this report and our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
INTRODUCTION
We lease aircraft and provide airline operations, aircraft modification and maintenance services, ground services, and other support services to the air transportation and logistics industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce businesses,operators, airlines and government customers. Our principal subsidiaries include three independently certificated airlines (ABX, ATI and OAI) and an aircraft leasing company (CAM ).(CAM). CAM provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters and offering them to customers under long-term leases.
We have two reportable segments: CAM, which leases Boeing 777, 767 757 and 737757 aircraft and aircraft engines, and ACMI Services, which includes the cargo and passenger transportation operations of the three airlines. Our other business operations, which primarily provide support services to the transportation industry, include providing aircraft maintenance and modification services, to customers,aviation fuel sales and ground services for load transfer, andparcel sorting services as well asand related equipment maintenance services.maintenance. These operations do not constitute reportable segments. On November 9, 2018, the Company acquired OAI, a passenger airline, along with related entities (referred to collectivelysegments and are reported together as "Omni"). Revenues and operating expenses include the activities of Omni for periods since their acquisition by the Company on November 9, 2018.Other Activities.
Our largest customers are the U.S. Department of Defense ("DoD"); Amazon.com Services, LLC ("ASI"), successor to Amazon.com Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon") and DHL Network Operations (USA), Inc. and its affiliates ("DHL"), Amazon.com Services, Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon"), and the U.S. Department of Defense ("DoD").
DHL
The Company has had long-term contracts with DHL since August 2003. DHL accounted for 14% and 27% of the Company's consolidated revenues during the first nine months of 2019 and 2018, respectively. As of September 30, 2019, the Company, through CAM, leased 14 Boeing 767 cargo aircraft to DHL comprised of seven Boeing 767-200 aircraft and seven Boeing 767-300 aircraft expiring between 2022 and 2024. Eight of the 14 Boeing 767 aircraft were being operated for DHL by the Company's airlines. We also 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 ASI since September 2015. Revenues from our commercial arrangements with ASI comprised approximately 21%29% and 29%19% of our consolidated revenues during the first nine monthssix month periods ending June 30, 2020 and 2019, respectively. The increase in revenues reflects the expansion of 2019the number of aircraft and 2018, respectively. services provided to ASI since June of 2019.
On March 8, 2016, we entered into an Air Transportation Services Agreement (the “ATSA”) with ASI pursuant to which CAM leased 20 Boeing 767 freighter aircraft to ASI, 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 also provides for the operation of those aircraft by our airline subsidiaries for a term of five years, and the performance of ground handling services by our subsidiary, LGSTX Services Inc. ("LGSTX"). In December 2018, the Company announced agreements with Amazon to 1)(1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2)(2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option on the part of ASI to extend the lease term for three more years, 3)(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 on the part of ASI to extend the lease term for three more years and 4) amend and(4) extend the ATSA by five years through March 2026, with an option on the part of ASI to extend the term for an additional three years. DuringIn January 2019, we entered into lease amendments to extendwhich formalized the termslease extensions described in (2), (3) and (4) above. As of aircraft leases were executed. By SeptemberJune 30, 2019,2020, we had executed leases with
ASI for foursix of the ten Boeing 767-300 aircraft. We plan to deliver two more of the 767-300 aircraftremainder in the fourth quartersecond half of 2019 and the remainder in 2020. All ten of these aircraft leases will be for ten years. Under the ATSA, we operate the aircraft based on pre-defined fees scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to ASI for its network.
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 grant Amazon the right to acquire up 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. These warrants have an exercise price of $9.73 per share and will expire on March 9, 2021. If settled in cash, the Company will receive a payment of approximately $145 million for these warrants.
In conjunction with the December 22, 2018 agreementAmazon's commitment for the ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and additional aircraft operations under the ATSA, Amazon may vestand the Company entered into a new investment agreement on December 20, 2018 (the "2018 Investment Agreement"). Pursuant to the 2018 Investment Agreement, the Company issued additional warrants totalingto Amazon for 14.8 million common shares, of which could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the 2016 agreements. On January 22, 2019, 5.511.1 million warrantscommon shares have vested in conjunction with the execution of the 20 aircraft lease extensionsas existing leases were extended and through the third quarter of 2019 3.7 million warrants vested in conjunction with the execution of four Boeing 767 aircraft leases. Additional warrants will vest assix additional aircraft leases arewere executed and added to the ATSA operations. More of these warrants will vest when four additional aircraft leases are executed during the last half of 2020. These warrants have an exercise price of $21.53 per share and will expire if not exercised by December 20, 2025.
On May 29, 2020, Amazon agreed to lease twelve more Boeing 767-300 aircraft from the Company. The first of these leases began in the second quarter of 2020 with the remaining eleven to be delivered in 2021. Pursuant to the 2018 Investment Agreement, Amazon was issued warrants for 7.0 million common shares of which 0.6 million common shares have vested. All twelve of these aircraft leases will be for ten year terms. These warrants will expire if not exercised by December 20, 2025. The exercise price of these warrants is $20.40 per share
Additionally, Amazon can earn incremental warrant rights increasing its potential ownership from 33.2% up to approximately 39.9% ofunder the Company,2018 Investment Agreement by leasing up to seventeenfive more cargo aircraft from the Company before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease.
Through the 2016 and 2018 Investment Agreements, Amazon can potentially own approximately 39.9% of the Company if all potential warrants issued vest and are settled with cash. For all warrants vested, Amazon may select a cashless conversion option. Assuming ATSG’s stock price at the time of conversion is above the warrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option. Instead, Amazon would receive the number of ATSG shares equivalent in market value at the time of conversion to the appreciation above the exercise price of the warrants.
Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for financial instruments. The fair value of the warrants issued or issuable to Amazon are recorded as a lease incentive asset and are 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 are impacted by the fair value re-measurement of the Amazon warrants at the end of each reporting period, leasecustomer incentive amortization 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 warrants, see Note C to the accompanying consolidated financial statements.
DoD
The Company's airlines have been providing services to the U.S. DoD since the 1990's. The DoD comprised 36% and 10% of the Company's consolidated revenues during the first nine months of 2019 and 2018, respectively. The Company's airlines provide passenger and cargo airlift services to the DoD. The DoD awards flights to U.S. DoD. Due tocertificated airlines through annual contracts and through temporary "expansion" routes. Under the acquisitioncontracts, we are responsible for all operating expenses including fuel, landing and ground handling expenses. We receive reimbursements from the U.S. Transportation Command of OAI in November 2018, the DoD compriseseach month if the price of fuel paid by us for the flights exceeds a larger portionpreviously set peg price. The DoD comprised 32% and 37% of our 2019the Company's consolidated revenues compared to previous periods.
Aircraft Fleet Summary
Our fleet of cargoduring the six month periods ending June 30, 2020 and passenger aircraft is summarized2019, respectively. The decline in the following table aspercentage of Septemberrevenues from the DoD reflects the impact of Covid-19 and increased revenues from other customers.
DHL
The Company has had long-term contracts with DHL since August 2003. DHL accounted for 11% and 15% of the Company's consolidated revenues, during the first six months of 2020 and 2019, respectively. As of June 30, 2019 and December 31, 2018. Our freighters, most of which were 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, 2019,2020, the Company, owned tenthrough CAM, leased 14 Boeing 767 cargo aircraft to DHL comprised of seven Boeing 767-200 aircraft and seven Boeing 767-300 aircraft thatexpiring between 2022 and 2024. Eight of the 14 Boeing 767 aircraft were either already undergoing, or awaiting induction intobeing operated for DHL by the freighter conversion process.
Aircraft fleet activityCompany's airlines. We also operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL during 2019 and the first nine monthshalf of 2019 is summarized below:
- CAM completed the modification of2020. During 2020, DHL terminated operating agreements for three Boeing 767-300 freighter aircraft purchased in the previous year. After leasing one aircraft to ATI for a short period, CAM began to lease that aircraft to an external customer under a multi-year lease. CAM leased the other two aircraft to an external customer under multi-year leases. ATI operates all three aircraft for the customer.
- ATI returned one Boeing 767-300 freighter and CAM began to lease this aircraft to an external customer under a multi-year lease. ATI operates the aircraft for the customer.
- External customers returned three Boeing 767-200 freighter aircraft, one Boeing 767-300 freighter aircraft and one Boeing 737-400 freighter aircraft to CAM. CAM leased two of the Boeing 767-200 aircraft to ABX and757 aircraft. The decline in the percentage of revenues from DHL primarily reflects the removal of the Boeing 767-300 aircraft757 operations and increased revenues from other customers compared to ATI. CAM sold the Boeing 737-400 aircraft to an external customer.last year.
- CAM purchased eight Boeing 767-300 passenger aircraft and one Boeing 767-300 freighter aircraft for the purpose of converting seven of the passenger aircraft into a standard freighter configuration. CAM leased one of these aircraft to Omni as a passenger aircraft.
|
| | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | ACMI Services | CAM | Total | | ACMI
Services | CAM | Total |
| In-service aircraft | | | | | | | |
| Aircraft owned | | | | | | | |
| Boeing 767-200 Freighter | 7 |
| 26 |
| 33 |
| | 5 |
| 29 |
| 34 |
|
| Boeing 767-200 Passenger | 2 |
| — |
| 2 |
| | 2 |
| — |
| 2 |
|
| Boeing 767-300 Freighter | 5 |
| 31 |
| 36 |
| | 5 |
| 28 |
| 33 |
|
| Boeing 767-300 Passenger | 7 |
| — |
| 7 |
| | 6 |
| — |
| 6 |
|
| Boeing 777-200 Passenger | 3 |
| — |
| 3 |
| | 3 |
| — |
| 3 |
|
| Boeing 757-200 Freighter | 4 |
| — |
| 4 |
| | 4 |
| — |
| 4 |
|
| Boeing 757-200 Combi | 4 |
| — |
| 4 |
| | 4 |
| — |
| 4 |
|
| Boeing 737-400 Freighter | — |
| 1 |
| 1 |
| | — |
| 2 |
| 2 |
|
| Total | 32 |
| 58 |
| 90 |
| | 29 |
| 59 |
| 88 |
|
| Operating lease | | | | | | | |
| Boeing 767-200 Passenger | 1 |
| — |
| 1 |
| | 1 |
| — |
| 1 |
|
| Boeing 767-300 Passenger | 1 |
| — |
| 1 |
| | 1 |
| — |
| 1 |
|
| Total | 2 |
| — |
| 2 |
| | 2 |
| — |
| 2 |
|
| Other aircraft | | | | | | | |
| Owned Boeing 767-300 under modification | — |
| 10 |
| 10 |
| | — |
| 5 |
| 5 |
|
| Owned Boeing 767 available or staging for lease | — |
| 2 |
| 2 |
| | — |
| 1 |
| 1 |
|
As of September 30, 2019, ABX, ATI and OAI were leasing 32 in-service aircraft internally from CAM for use in ACMI Services. As of September 30, 2019, 33 of the 58 aircraft CAM leased to external customers were operated by a Company airline under CMI agreements. The carrying values of the total in-service fleet as of September 30, 2019 and December 31, 2018 were $1,309.8 million and $1,334.9 million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM that is not in service condition or in the process of freighter modification.
RESULTS OF OPERATIONS
Summary
External customer revenuesThe consolidated net losses from continuing operations increased by $161.2 million to $366.1were $105.2 million and by $437.3 million to $1,048.8net earnings of $28.6 million for the three and ninesix month periods ended Septemberending June 30, 2019,2020, respectively, compared to the corresponding periodsnet losses of 2018. Revenues in 2019 grew due to additional passenger transportation services provided to the DoD after the Company completed the acquisition of OAI in November 2018. Revenues also increased due to additional aircraft leases from CAM's leasing operations, expanded CMI, aviation fuel sales and logistics services for ASI.
The consolidated net earnings from continuing operations were $105.1$26.6 million and $101.1 million for the three and nine months periods ended September 30, 2019, respectively, compared to $32.9 million and $73.1$4.0 million for the corresponding periods of 2018.2019. The Company had pre-tax earningslosses from continuing operations of $111.1were $106.2 million and $115.2pre-tax earnings of $34.6 million for the three and ninesix month periods ended Septemberending June 30, 2019,2020, respectively, compared to $38.6pre-tax losses of $23.5 million and $89.4pre-tax earnings of $4.1 million for the corresponding periods of 2018.2019. Earnings were affected by specificthe following events and certain adjustments that do not directly reflect our underlying operations among the years presented. periods presented:
•On a pre-tax basis, earnings included pre-tax gainsnet losses of $92.0$109.7 million and $60.6$2.7 million for the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, for the re-measurement of financial instruments, including theprimarily warrant obligations granted to Amazon. This compares to pre-tax gainslosses for re-measurement of such financial instruments of $17.9$35.9 million and $28.7$31.4 million for the corresponding periods of 2018. Additionally, pre-tax2019.
•Pre-tax earnings from continuing operations included losses of $2.4were reduced by $4.9 million and $7.1$9.8 million for the three and ninesix month periods ended SeptemberJune 30, 2019, respectively, for the non-service components of retiree benefit plans compared to gains of $2.0 million and $6.1 million for the corresponding periods of 2018. Pre-tax earnings for the three and nine month periods ended September 30, 2019 included losses of $2.6 million and $12.5 million, respectively, for the Company's share of development costs for a joint venture and losses from a non-consolidated affiliate, compared to $2.6 million and $7.6 million for the corresponding periods of 2018. Pre-tax earnings were also reduced by $4.3 million and $12.6 million for the three and nine month periods ended September 30, 2019,2020, respectively, for the amortization of customer incentives given to ASI in the form of warrants, compared to $4.2$4.0 million and $12.7$8.3 million for the corresponding periods of 2018. 2019.
•Pre-tax earnings from continuing operations included gains of $2.9 million and $5.8 million for the three and six month periods ended June 30, 2020, respectively, for the non-service components of retiree benefit plans compared to losses of $2.4 million and $4.7 million for the corresponding periods of 2019.
•Pre-tax earnings for the three and six month periods ended June 30, 2020 included losses of $6.5 million and $9.3 million, respectively for the Company's share of development costs for a joint venture and the partial sale of an airline investment, compared to losses of $6.0 million and $9.8 million for the corresponding periods of 2019.
•Pre-tax earnings for the first nine monthsquarter of 2019 also included expense of $0.4 million for acquisition fees incurred during the Company's acquisition of OAI, along with related entities Advanced Flight Services, LLC; Omni Aviation Leasing, LLC; and T7 Aviation Leasing, LLC (collectively, "Omni").
•Pre-tax earnings for the Company's 2018 acquisitionthree and six month periods ending June 30, 2020 were decreased by the impairment of Omni. $39.1 million for our four Boeing 757 freighter aircraft and related asset.
•During the second quarter of 2020, the Company recognized $9.8 million of government grants from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
After removing the effects of thesethe items above, 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 $28.5$41.3 million and $87.1$79.7 million for the three and ninesix month periods ended SeptemberJune 30, 20192020 compared to $25.5$24.8 million and $74.9$58.6 million for the corresponding periods of 2018.
2019. Adjusted pre-tax earnings from continuing operations for 2019 improved for the first nine months of 2019 compared to 2018, driven primarily by additional revenues and the improved financial results of our airline operations, including Omni. We experienced additional revenues and earnings due to the acquisition of Omni in November 2018. Adjusted pre-tax earnings from continuing operations also improved due to additional aircraft leases and the expansion of gateway ground operations for ASI. Increased revenues were partially offset by additional costs necessary to support the growing flight operations, higher costs for flight crews and higher depreciation expense. Pre-tax earnings for 2019 included additional interest expense due to the acquisition of Omni and the expansion of CAM's fleet of $11.1$16.5 million and $34.6$21.1 million for the three and ninesix month periods ended SeptemberJune 30, 2020 compared to the corresponding periods of 2019, driven by increased revenues primarily from CAM and the ACMI Services segments.
External customer revenues from continuing operations increased by $43.2 million, or 13%, to $377.8 million and $84.3 million, or 12%, to $767.1 million for the three and six month periods ended June 30, 2020 compared to the corresponding periods of 2019. Pre-tax earningsCustomer revenues increased in 2020 for 2018 included contributionscontracted airline services, aircraft leasing, ground services and aviation fuel sales compared to the previous year period. Beginning in late February 2020, our revenues were disrupted due to the coronavirus pandemic. The DoD and other customers began canceling scheduled passenger flights as a result of the Covid pandemic. The decline in revenues from these cancellations were offset by an increase in event-driven, ad hoc passenger missions during 2020.
The health and safety of our employees is paramount. We have taken precautions to prevent, detect and limit the Company's former USPS contractsspread of the Covid virus in the workplace. These practices include daily temperature checks, requiring face masks, periodically sanitizing facilities, frequent cleaning of high touch surfaces, supporting remote working, travel restrictions, promoting social distancing and frequent hand washing, contact tracing, quarantining, and other practices prescribed by the Centers for parcelDisease Control and Prevention. We have not experienced a wide-spread outbreak at any location. However, a coronavirus outbreak among our flight crews, at one of our maintenance facilities, at customer sorting which expiredcenters or an airport could result in September 2018.workforce shortages, facility closures and significant numbers of flight cancellations.
A summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ending | | | | Six Months Ending | | |
| | June 30, | | | | June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues from Continuing Operations: | | | | | | | |
| CAM | | | | | | | |
| Aircraft leasing and related services | $ | 79,345 | | | $ | 73,280 | | | 157,954 | | | 147,857 | |
| Lease incentive amortization | (4,475) | | | (4,024) | | | (8,921) | | | (8,251) | |
| Total CAM | 74,870 | | | 69,256 | | | 149,033 | | | 139,606 | |
| ACMI Services | 287,604 | | | 254,938 | | | 571,769 | | | 512,894 | |
| Other Activities | 77,056 | | | 71,104 | | | 157,092 | | | 138,466 | |
| Total Revenues | 439,530 | | | 395,298 | | | 877,894 | | | 790,966 | |
| Eliminate internal revenues | (61,736) | | | (60,722) | | | (110,823) | | | (108,207) | |
| Customer Revenues - non reimbursed | $ | 377,794 | | | $ | 334,576 | | | $ | 767,071 | | | $ | 682,759 | |
| | | | | | | |
| Pre-Tax Earnings (Loss) from Continuing Operations: | | | | | | | |
| CAM, inclusive of interest expense | $ | 19,640 | | | $ | 16,683 | | | $ | 35,460 | | | $ | 32,857 | |
| ACMI Services, inclusive of interest expense | 19,684 | | | 973 | | | 38,062 | | | 13,283 | |
| Other Activities | (2,244) | | | 4,006 | | | (2,191) | | | 5,909 | |
| Net unallocated interest expense | (681) | | | (903) | | | (1,336) | | | (1,683) | |
| Government grants | 9,821 | | | — | | | 9,821 | | | — | |
| Impairment of aircraft and related assets | (39,075) | | | — | | | (39,075) | | | — | |
| Other non-service components of retiree benefits gains (costs), net | 2,898 | | | (2,351) | | | 5,796 | | | (4,702) | |
| Net financial instrument re-measurement loss | (109,723) | | | (35,886) | | | (2,679) | | | (31,386) | |
| Loss from non-consolidated affiliate | (6,513) | | | (5,998) | | | (9,277) | | | (9,814) | |
| Transaction fees | — | | | — | | | — | | | (373) | |
| Pre-Tax Earnings (Loss) from Continuing Operations | (106,193) | | | (23,476) | | | 34,581 | | | 4,091 | |
| Add lease incentive amortization | 4,896 | | | 4,024 | | | 9,753 | | | 8,251 | |
| Less government grants | (9,821) | | | — | | | (9,821) | | | — | |
| Add impairment of aircraft and related assets | 39,075 | | | — | | | 39,075 | | | — | |
| Add other non-service components of retiree benefit (gains) costs, net | (2,898) | | | 2,351 | | | (5,796) | | | 4,702 | |
| Add net loss on financial instruments | 109,723 | | | 35,886 | | | 2,679 | | | 31,386 | |
| Add charges for non-consolidated affiliates | 6,513 | | | 5,998 | | | 9,277 | | | 9,814 | |
| Add transaction fees | — | | | — | | | — | | | 373 | |
| Adjusted Pre-Tax Earnings from Continuing Operations | $ | 41,295 | | | $ | 24,783 | | | $ | 79,748 | | | $ | 58,617 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ending | | Nine Month Ending |
| | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Revenues from Continuing Operations: | | | | | | | |
| CAM | | | | | | | |
| Aircraft leasing and related services | $ | 75,160 |
| | $ | 63,012 |
| | $ | 223,017 |
| | $ | 178,217 |
|
| Lease incentive amortization | (4,156 | ) | | (4,226 | ) | | (12,407 | ) | | (12,678 | ) |
| Total CAM | 71,004 |
| | 58,786 |
| | 210,610 |
| | 165,539 |
|
| ACMI Services | 272,188 |
| | 116,224 |
| | 785,082 |
| | 355,204 |
|
| Other Activities | 87,762 |
| | 69,477 |
| | 226,228 |
| | 206,736 |
|
| Total Revenues | 430,954 |
| | 244,487 |
| | 1,221,920 |
| | 727,479 |
|
| Eliminate internal revenues | (64,881 | ) | | (39,568 | ) | | (173,088 | ) | | (115,913 | ) |
| Customer Revenues | $ | 366,073 |
| | $ | 204,919 |
| | $ | 1,048,832 |
| | $ | 611,566 |
|
| | | | | | | | |
| Pre-Tax Earnings from Continuing Operations: | | | | | | | |
| CAM, inclusive of interest expense | $ | 17,428 |
| | $ | 19,034 |
| | $ | 50,285 |
| | $ | 49,892 |
|
| ACMI Services, inclusive of interest expense | 4,375 |
| | (341 | ) | | 17,658 |
| | 3,574 |
|
| Other Activities | 2,939 |
| | 3,051 |
| | 8,848 |
| | 9,808 |
|
| Net unallocated interest expense | (610 | ) | | (458 | ) | | (2,293 | ) | | (1,098 | ) |
| Net financial instrument re-measurement gain (loss) | 91,952 |
| | 17,895 |
| | 60,566 |
| | 28,707 |
|
| Transaction fees | — |
| | — |
| | (373 | ) | | — |
|
| Other non-service components of retiree benefits (credits) costs, net | (2,351 | ) | | 2,045 |
| | (7,053 | ) | | 6,135 |
|
| Loss from non-consolidated affiliates | (2,645 | ) | | (2,647 | ) | | (12,459 | ) | | (7,600 | ) |
| Pre-Tax Earnings from Continuing Operations | 111,088 |
| | 38,579 |
| | 115,179 |
| | 89,418 |
|
| Add other non-service components of retiree benefit costs (credits), net | 2,351 |
| | (2,045 | ) | | 7,053 |
| | (6,135 | ) |
| Add charges for non-consolidated affiliates | 2,645 |
| | 2,647 |
| | 12,459 |
| | 7,600 |
|
| Add customer incentive amortization | 4,334 |
| | 4,226 |
| | 12,585 |
| | 12,678 |
|
| Add transaction fees | — |
| | — |
| | 373 |
| | — |
|
| Add gain on financial instruments | (91,952 | ) | | (17,895 | ) | | (60,566 | ) | | (28,707 | ) |
| Adjusted Pre-Tax Earnings from Continuing Operations | $ | 28,466 |
| | $ | 25,512 |
| | $ | 87,083 |
| | $ | 74,854 |
|
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding (i) settlement charges and other non-service components of retiree benefit costs, (ii) gains and losses for the fair value re-measurement of financial instruments, lease(iii) customer incentive amortization, (iv) the transaction fees related to the acquisition of Omni, and(v) the start-up costs of a non-consolidated joint venture.venture, and (vi) the partial sale of an airline investment. 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. We also excluded the recognition of government grants from adjusted earnings to improve comparability between periods. 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.
Aircraft Fleet
Our fleet of cargo and passenger aircraft is summarized in the following table as of June 30, 2020 and December 31, 2019. Our freighters, primarily 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 June 30, 2020, the Company owned fourteen Boeing 767-300 aircraft that were either already undergoing, or awaiting, induction into the freighter conversion process.
Aircraft fleet activity during the first six months of 2020 is summarized below:
•CAM completed the modification of one Boeing 767-300 freighter aircraft purchased in the previous year and began to lease that aircraft to an external customer under a multi-year lease.
•ABX returned one Boeing 767-200 freighter aircraft and one Boeing 767-300 freighter aircraft to CAM. CAM is prepping the Boeing 767-300 aircraft for lease to an external customer later in 2020.
•ATI returned three Boeing 757-200 freighter aircraft to CAM and the aircraft were retired.
•ATI returned one Boeing 767-300 freighter aircraft to CAM. CAM leased the Boeing 767-300 aircraft to an external customer under a multi-year lease. ATI operates this aircraft for the customer.
•An external customer returned one Boeing 737-400 freighter aircraft to CAM. CAM sold the Boeing 737-400 aircraft to another external customer during the second quarter of 2020.
•An external customer returned one Boeing 767-200 freighter aircraft to CAM. The aircraft is being prepped for lease to another external customer later in 2020.
•CAM leased one Boeing 767-200 freighter aircraft to an external customer under a multi-year lease.
•OAI began to lease one Boeing 767-300 passenger aircraft from an external lessor.
•CAM purchased two Boeing 767-300 freighter aircraft and five Boeing 767-300 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. The aircraft are expected to be leased to external customers during 2020 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| | ACMI
Services | CAM | Total | | ACMI
Services | CAM | Total |
| In-service aircraft | | | | | | | |
| Aircraft owned | | | | | | | |
| Boeing 767-200 Freighter | 6 | | 26 | | 32 | | | 7 | | 26 | | 33 | |
| Boeing 767-200 Passenger | 2 | | — | | 2 | | | 2 | | — | | 2 | |
| Boeing 767-300 Freighter | 3 | | 37 | | 40 | | | 5 | | 35 | | 40 | |
| Boeing 767-300 Passenger | 7 | | — | | 7 | | | 7 | | — | | 7 | |
| Boeing 777-200 Passenger | 3 | | — | | 3 | | | 3 | | — | | 3 | |
| Boeing 757-200 Freighter | 1 | | — | | 1 | | | 4 | | — | | 4 | |
| Boeing 757-200 Combi | 4 | | — | | 4 | | | 4 | | — | | 4 | |
| Boeing 737-400 Freighter | — | | — | | — | | | — | | 1 | | 1 | |
| Total | 26 | | 63 | | 89 | | | 32 | | 62 | | 94 | |
| Operating lease | | | | | | | |
| Boeing 767-200 Passenger | 1 | | — | | 1 | | | 1 | | — | | 1 | |
| Boeing 767-300 Passenger | 2 | | — | | 2 | | | 1 | | — | | 1 | |
| Boeing 767-300 Freighter | 2 | | — | | 2 | | | 2 | | — | | 2 | |
| Total | 5 | | — | | 5 | | | 4 | | — | | 4 | |
| Other aircraft | | | | | | | |
| Owned Boeing 767-300 under modification | — | | 14 | | 14 | | | — | | 8 | | 8 | |
| | | | | | | |
| | | | | | | |
| Owned Boeing 767 available or staging for lease | — | | 3 | | 3 | | | — | | 2 | | 2 | |
As of June 30, 2020, ABX, ATI and OAI were leasing 26 in-service aircraft internally from CAM. As of June 30, 2020, 36 of CAM's 63 Boeing 767 freighter aircraft were leased to customers and operated by ABX or ATI within ACMI Services. CAM leased the other 13 Boeing 767-200 freighter aircraft and 14 Boeing 767-300 aircraft to external customers, including six 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 June 30, 2020 and December 31, 2019 were $1,304.1 million and $1,387.6 million, respectively.
CAM Segment
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 ten years.
As of June 30, 2020 and 2019, CAM had 63 and 56 aircraft under lease to external customers, respectively. CAM's revenues grew by $12.2$5.6 million and $45.1$9.4 million for the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periods of 2018,2019, primarily as a result of additional aircraft leases. Revenues from external customers totaled $42.0$50.0 million and $123.6$96.7 million for the three and ninesix month periods ended
September June 30, 2019,2020, respectively, compared to $41.4$40.0 million and $115.3$81.6 million for the corresponding periods of 2018. As of September 30, 2019 and 2018, CAM had 58 and 54 aircraft under lease to external customers, respectively, with the increase occurring during the last four months.2019. CAM's revenues from the Company's airlines totaled $29.0$24.9 million and $87.0$52.3 million for the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to $17.4$29.3 million and $50.3$58.0 million for the corresponding periods of 2018, reflecting2019. CAM's aircraft leasing and related services revenues, which exclude customer lease revenuesincentive amortization, increased $6.1 million and $10.1 million for the addition of the eleven passenger aircraft acquired with Omni in November 2018. In additionthree and six month periods ended June 30, 2020 compared to the Omni acquisition,corresponding periods of 2019, primarily as a result of new aircraft leases in 2020. Since July 1 2019, CAM has added eight Boeing 767-300 freighter aircraft to its lease portfolio since October 1, 2018.portfolio.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, were $17.4$19.6 million and $50.3$35.5 million for the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to $19.0$16.7 million and $49.9$32.9 million
for the corresponding periods of 2018. Pre-tax2019. Increased pre-tax earnings reflect the eleven initial passenger aircraft leased to Omni as well as lease revenues for additional aircraft offset by increases of $4.8a $0.3 million and $15.2$0.6 million increase in internally allocated interest expense due to higher debt levels for the three and ninesix month periods ended SeptemberJune 30, 2019 compared to the corresponding periods of 2018. The pre-tax earnings were also offset by increased depreciation expense of $7.7 million and $25.7 million for the three and nine month periods ended September 30, 2019,2020, respectively, compared to the corresponding periods of 20182019. The pre-tax earnings are inclusive of increased depreciation expense of $3.3 million and $7.6 million for the three and six month periods ended June 30, 2020, respectively, compared to the corresponding periods of 2019 driven by the addition of eight Boeing freighter aircraft in 2020 compared to the first nine monthshalf of 2019 compared to 2018, and the addition of the 11 Boeing passenger aircraft from the Omni acquisition.2019.
During the first ninesix months of 2019,2020, CAM purchased eightfive Boeing 767-300 passenger aircraft for freighter conversion and onetwo Boeing 767-300 freighter aircraft. We expectAs of June 30, 2020, all five of the Boeing 767-300 passenger aircraft purchased in 2020 and seven of the passenger aircraft purchased in 2019 were being modified from passenger to purchase one more Boeing 767-300freighter configuration. CAM expects eight passenger aircraft to complete the conversion process and enter service, along with two purchased freighter aircraft, during the fourth quartersecond half of 2019 and we expect2020. In addition to add up to sixthe aircraft into service during the fourth quarter of 2019. We have customer commitments or letters of intent for all of these aircraft.
above, CAM has agreements to purchase 17seven more passenger Boeing 767-300 aircraft and expects to complete their modificationsconversion through 2021. We have external customer commitments to lease 20 of these 21 Boeing 767-300 aircraft.
During 2020 CAM removed a Boeing 737 freighter and three Boeing 757 freighter aircraft from its active fleet. During the remainder of 2020, we expect to retire a Boeing 767-200 and sell one Boeing 767-300 aircraft that is currently under lease.
CAM's operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the time frames required by customers. CAM's future operating results will also depend onPotential supply chain disruptions, including workforce illness, parts shortages and transportation delays, which may be caused by the coronavirus pandemic could result in the delay of aircraft conversions. The timing and lease rates under which these aircraft are ultimately leased.leased, redeployed or disposed will impact CAM's future operating results. Additionally, CAM's future operating results will also be impacted by the amortization of additional warrants committed to Amazon in conjunction with the recent agreements for ten additional long-term aircraft leases and amendments to extend the terms of existing aircraft leases.
ACMI Services
The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance, insurance and aviation fuel. Our customers are typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for the DoD, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of SeptemberJune 30, 2019,2020, ACMI Services included 67 in-service aircraft including 32as follows:
•12 passenger aircraft and 14 freighter aircraft leased internally from CAM eight
•Eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under athe DHL CMI agreement 24
•27 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI andor ABX under the ATSA another
•Two freighter aircraft from an external lessor under lease to ASI and operated by ATI under the ATSA
•Another CAM-owned freighter operated underleased to a CMIcustomer and operated by ATI and two
•Three passenger aircraft leased from an external lessor.lessor
As of June 30, 2020, ACMI Services revenues included the operation of four more aircraft compared to June 30, 2019. Total revenues from ACMI Services increased $156.0$32.7 million and $429.9$58.9 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, to $272.2$287.6 million and $785.1$571.8 million compared to the corresponding periods of 2018. These increases reflect2019 driven primarily by incremental passenger charter assignments from the acquisitionfederal government, and increased block hours for our customers' e-commerce delivery networks. Ad hoc passenger flights during the first half of OAI2020 included special airlift capacity, including flights to return people to the United States who were stranded abroad as a result of the pandemic. During the three and increases insix month periods ending June 30,
2020, billable block hours increased 17% and 25%, respectively, mainly as a result of 56%operating additional aircraft for ASI.
Revenues during the first half of 2020 were impacted by the coronavirus pandemic. In late February 2020, the DoD began canceling combi aircraft flights and in March, commercial customers began canceling scheduled passenger flights as a result of the coronavirus pandemic. Combined block hours flown for contracted commercial passenger and combi fights declined 37% for the three and nine month periods ended September 30, 2019, respectively,second quarter of 2020 compared to 2018. Increasedthe previous year due to the pandemic. The decline in revenues from these cancellations was mitigated by ad hoc passenger flights during the second quarter of 2020 for 2019the DoD and other governmental agencies and increased flying for customer e-commerce networks. Operations during the second quarter of 2020 also included additional aircraft operations for ASI andtransoceanic flights to replace cargo capacity normally serviced in the DoD. Asbelly-hold of September 30, 2019, ACMI Services revenues included the operation of 16 more CAM-owned aircraft compared to September 30, 2018. On a combined pro forma basis, ACMI Services revenues for the three and nine month periods ended September 30, 2018 would have been $243.1 million and $709.6 million, respectively, with the inclusion of OAI.passenger aircraft.
ACMI Services had pre-tax earnings of $4.4$19.7 million and $17.7$38.1 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to pre-tax losses of $0.3$1.0 million and pre-tax earnings of $3.6$13.3 million for the corresponding periods of 2018.2019. Improved pre-tax results in 20192020 compared to 20182019 were bolstered byprimarily a result of expanded revenues from ASI and DHL and ad hoc passenger charters. ACMI Services benefited from reduced travel costs including lower airfares during the acquisitionsecond quarter of OAI and2020 compared to the timingsecond quarter of scheduled airframe maintenance costs. The improved pre-tax earnings were offset by increases of $6.1 million and $18.1 million in internally2019. Internally allocated interest expense due to higher
debt levelsdecreased by $0.8 million and $2.0 million for the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to 2018. Earnings2019, to $5.6 million and $10.9 million for the third quartercorresponding periods of 2019 also reflected2020.
We expect Amazon to lease at least four additional personnel and training time in preparation for additionalBoeing 767-300 freighter aircraft and block hours scheduled for operations in 2019 and 2020. Scheduled airframe maintenance expense decreased $2.4 millionfrom CAM during the first nine monthssecond half of 2019 compared2020 and to 2018. Airframe maintenance expense varies depending uponcontract the numberoperation of C-checksthose aircraft to our airlines through our existing ATSA. However, we expect our operating results to be significantly impacted by the coronavirus pandemic during the second half of 2020 and the scopepotentially during subsequent quarters. The DoD has reduced normal personnel movements while most of the checks requiredour other passenger service customers have suspended their operations and demand for those airframes scheduled for maintenance. In March 2018, ATI began to implement an amendment to the collective bargaining agreement with its crewmembers. The amendment resulted in increased wages for the ATI crewmembers beginning incommercial passenger charters have significantly declined. During the second quarter 2020, the DoD and other government agencies contracted for special airlift capacity and missions which may not continue to occur near the same level in the months ahead. Similarly, customers may find alternatives for the incremental e-commerce routes we operated in the first half of 2018.
The future growth of ACMI Services will be impacted by additional aircraft operations for Amazon. We began2020. While it is difficult to operate four CAM-owned Boeing 767-300 aircraft in 2019 under the ATSA andpredict, we expect to add at least six additional CAM-owned Boeing 767-300 for Amazon, including twolower revenues from passenger operations during the second half of 2020 than we had in the fourth quarterfirst half of 2019 and four during 2020. Additionally, during the fourth quarter of 2019, we expect to add two aircraft which will be provided by Amazon and operated by ATI under the ATSA . Future operating results may also be impacted by the vesting of additional warrants for Amazon, as Amazon leases additional aircraft from CAM and our airline begins to operate the aircraft under the ATSA.
Maintaining profitability in ACMI Services will depend on a number of factors, including customer flight schedules, crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we operate. ABX is negotiating with its flight crewmembers' collective bargaining unit. These negotiations could result in changes that may effect ABX's productivity, its crewmembers compensation levels and the marketability of its services.
Other Activities
We provide other support services to our ACMI Services customers and other airlines by leveraging our knowledge and capabilities developed for our own operations over the years. Through Airborne Maintenanceour FAA certificated maintenance and Engineering Services, Inc. and itsrepair subsidiaries, ("AMES"), we sell aircraft parts and provide aircraft maintenance and modification services. We provided mailalso arrange and perform logistical services and package sorting and logistical support to the U.S. Postal Service (“USPS”) at five USPS facilities through September 30, 2018, at which time our contracts expired. We arrange and perform similar services for certain ASI gateway locations in the U.S. During the second quarter of 2019, ASI began to in-source some of the gateway locations for which we arrange contracted logistical support. We also provide maintenance for ground equipment, facilities and material handling equipment. We alsoequipment and we resell aviation fuel in Ohio andWilmington, Ohio. Additionally, our airlines provide flight training.training services.
External customer revenues from all other activities decreased $4.6increased $0.5 million and $0.9$10.2 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periods of 2018. Declines2019, primarily due to aviation fuel sales at ASI's hub in USPS revenues and aircraft conversionWilmington, Ohio. Revenues also increased at two ASI gateways which we operate. Ground services revenues during 2019 were offset partially by additional2020 included a reduction for equipment and facility maintenance revenues compared to the first half of 2019 as customers chose to in-source some of these services. Revenues from aircraft maintenance and part sales declined during 2020 as passenger airlines have reduced their needs for services ground support services and fuel sales provided to ASI.during the pandemic.
The pre-tax earnings from other activities decreased by $0.1$6.3 million and $1.0$8.1 million during the three and ninesix month periods ended SeptemberJune 30, 20192020 to $2.9losses of $2.2 million and $8.8 million, respectively,each, compared to the corresponding periods of 2018. Lower2019. Reduced earnings for 2019 compared to 2018 reflect2020 are a result of reduced revenues on aircraft maintenance services and the sales of aircraft parts. These reductions were partially offset by additional aviation fuel sales which earn a lower revenuesmargin.
Our customer base for aircraft maintenance and conversions providedrevenues includes passenger airlines. We expect the adverse impact on our aircraft maintenance business to external customers as well as the absence of services for USPS.
Discontinued Operations
The financial results of discontinued operations primarily consist of cost adjustments to benefits of former employees associated with ABX's former hub operations provided to DHL. Pre-tax earnings relatedcontinue due to the former hub operations were $0.4 millioncoronavirus pandemic as passenger airlines reduce their needs for scheduled heavy airframe maintenance. Further, we rely on a skilled workforce to perform aircraft maintenance. Similarly, we staff personnel near airports to sort customer packages, load aircraft and $0.7 million for the first nine monthsmaintain
related equipment. A coronavirus outbreak at one of 2019our maintenance facilities, or at customer sorting centers could result in workforce shortages and 2018, respectively.facility closures.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $39.4$21.7 million and $91.7$47.8 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 20182019 driven by higher employee headcount for flight operations, maintenance services and package sorting services. The increases in expense for the three and nine month periods ended Septembertotal headcount increased 13% as of June 30, 2019 included $28.8 million and $83.4 million, respectively, for Omni, acquired in November 2018. Expenses for 2019 also included higher flight crew wages in conjunction with an amendment2020 compared to the collective bargaining agreement with the ATI crewmembers and additional aircraft maintenance
technicians to support increased block hours. Increases in salaries, wages and benefits expense were partially offset by personnel reductions due to the expiration of the USPS contracts.June 30, 2019.
Depreciation and amortization expense increased $20.9$5.0 million and $65.2$11.7 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018.2019. The increase in depreciation expense for the three and nine month periods ended September 30, 2019 included $16.6 million and $47.7 million, respectively, for Omni assets acquired in November 2018. The increase also reflects incremental depreciation for eight Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since OctoberJuly 1, 2018,2019, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion and capital spending plans.
Maintenance, materials and repairs expense increased by $8.0$4.2 million and $18.3$1.4 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018. The increase in2019. Increased maintenance expense for the three2020 was due to increases corresponding to increased flight hours and nine month periods ended September 30, 2019 included $3.6 million and $11.7 million, respectively,higher costs for Omni, acquired in November 2018.unscheduled engine repairs at our airlines. The timing and work scope of scheduled airframe checks resulted in fluctuations of maintenance expense during 2019 compared to 2018. Aircraftaircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed.
Fuel expense increased by $35.2$2.6 million and $92.6$11.5 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018.2019. Fuel expense includes the cost of fuel to operate DoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel sales. The increase in fuel during 2020 is primarily for the three and nine month periods ended September 30, 2019 included $27.4 million and $81.7 million, respectively, for Omni and $5.6 million and $5.7 million, respectively, for increased amounts of aviation fuel sales.we sell at the ASI air hub in Wilmington, Ohio since it opened in mid 2019.
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 $14.6decreased $1.0 million and $39.9$2.2 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018. This increase for the three and nine month periods ended September 30,2019. Since mid 2019, included $13.6 million and $37.8 million, respectively, for Omni.certain customers chose to in-source some ground services that we had subcontracted.
Travel expense increaseddecreased by $18.5$3.6 million and $45.6$2.1 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018.2019. The increase fordecrease in travel expense was due to less employee travel and the three and nine month periods ended September 30, 2019 included $16.2lower costs of air travel as airfares have fallen.
Rent expense increased by $1.2 million and $42.2 million, respectively, for Omni.
Landing and ramp expense, which includes the cost of deicing chemicals, increased by $1.3 million and $4.3$0.9 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018. The increase2019 due to increased rent expense for additional aircraft partially offset by lower facility rents during 2020.
Asset impairment charges were recorded during the threesecond quarter of 2020, in conjunction with management's decision to retire four Boeing 757 freighter aircraft. Three of the 757 airframes have been removed from service and nine month periods ended September 30, 2019are available for sale. One remains in service through 2020. Impairment charges totaling $39.1 million were recorded, primarily reflecting the fair value of these assets as well as other surplus engines and parts.
Operating results included $1.6a pre-tax contra expense of $9.8 million during the second quarter of 2020 to recognize grants received from the U.S. government under the CARES Act. For additional information about the CARES Act grants, see Note H of the unaudited condensed consolidated financial statements included in this report.
Non Operating Income, Adjustments and $4.8 million, respectively, for Omni.Expenses
RentInterest expense increaseddecreased by $0.8 million and $1.6$1.8 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to the corresponding periodsperiod of 2018. This increase for2019. Interest expense during the three and nine month periods ended September 30, 2019 included $1.6first half of 2020 decreased compared to the previous year due to lower interest rates on our borrowings under the Senior Credit Agreement.
The Company recorded unrealized pre-tax losses on financial instrument re-measurements of $109.7 million and $4.6 million, respectively, for Omni. This increase was partially offset by decreases in building rent after the expirationgains of the contracts for the five USPS facilities.
Insurance expense increased by $0.1 million and $1.1$2.7 million during the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively, compared to
unrealized pre-tax net gains of $35.9 million and $31.4 million for the corresponding periods of 2018. Aircraft fleet insurance has increased due to additional aircraft operations during2019. The gains include the first nine months of 2019 compared to 2018.
Other operating expenses increased by $8.3 million and $30.1 million during the three and nine month periods ended September 30, 2019, respectively, compared to the corresponding periods of 2018. Other operating expenses include professional fees, employee training and utilities. The increase for the three and nine month periods ended September 30, 2019 included $7.4 million and $23.7 million, respectively, for Omni. Other operating expenses during 2019 were negatively impacted by the operating results of an airline affiliate accounted for under the equity method.
The following table provides pro forma operating expenses (in thousands) for the Company after giving effect to the Omni acquisition. This information is based on adjustments to the historical consolidated financial statements of Omni using the purchase method of accounting for business combinations. The pro forma adjustments do not include any of the cost savings and other synergies anticipated to result from the acquisition. These pro forma expenses have been prepared for comparative purposes only and do not purport to be indicative of results that would have actually been reportedre-valuing, as of the date or for the quarter presented had the acquisition taken place on such date or at the beginning
of the quarter indicated, or to project the Company’s financial position or results of operations which may be reported in the future. The pro forma results exclude non-recurring charges recorded by Omni that were directly related to the acquisition by the Company.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2018 |
| | | Actual ATSG | | Actual Omni | | Pro Forma Adjustments | | Pro Forma Results |
| Operating Expenses | | | | | | | | |
| Salaries, wages and benefits | | $ | 71,341 |
| | $ | 24,837 |
| | $ | (2,029 | ) | | $ | 94,149 |
|
| Depreciation and amortization | | 43,201 |
| | 14,531 |
| | 2,645 |
| | 60,377 |
|
| Maintenance, materials and repairs | | 33,469 |
| | 4,706 |
| | (52 | ) | | 38,123 |
|
| Fuel | | 5,981 |
| | 26,357 |
| | 23 |
| | 32,361 |
|
| Contracted ground and aviation services | | 2,636 |
| | 12,625 |
| | — |
| | 15,261 |
|
| Travel | | 6,903 |
| | 12,291 |
| | — |
| | 19,194 |
|
| Landing and ramp | | 1,211 |
| | 1,603 |
| | — |
| | 2,814 |
|
| Rent | | 3,274 |
| | 1,726 |
| | — |
| | 5,000 |
|
| Insurance | | 1,696 |
| | 444 |
| | — |
| | 2,140 |
|
| Other operating expenses | | 8,380 |
| | 5,128 |
| | — |
| | 13,508 |
|
| Total Operating Expenses | | $ | 178,092 |
| | $ | 104,248 |
| | $ | 587 |
| | $ | 282,927 |
|
| | | | | | | | | |
| | | Nine Months Ended September 30, 2018 |
| | | Actual ATSG | | Actual Omni | | Pro Forma Adjustments | | Pro Forma Results |
| Operating Expenses | | | | | | | | |
| Salaries, wages and benefits | | $ | 216,173 |
| | $ | 70,232 |
| | $ | (2,294 | ) | | $ | 284,111 |
|
| Depreciation and amortization | | 124,825 |
| | 44,550 |
| | 7,933 |
| | 177,308 |
|
| Maintenance, materials and repairs | | 107,152 |
| | 11,957 |
| | (372 | ) | | 118,737 |
|
| Fuel | | 17,682 |
| | 73,802 |
| | — |
| | 91,484 |
|
| Contracted ground and aviation services | | 7,464 |
| | 36,960 |
| | — |
| | 44,424 |
|
| Travel | | 20,823 |
| | 32,188 |
| | — |
| | 53,011 |
|
| Landing and ramp | | 3,670 |
| | 5,080 |
| | — |
| | 8,750 |
|
| Rent | | 10,264 |
| | 5,327 |
| | — |
| | 15,591 |
|
| Insurance | | 4,473 |
| | 1,419 |
| | — |
| | 5,892 |
|
| Other operating expenses | | 20,672 |
| | 17,297 |
| | — |
| | 37,969 |
|
| Total Operating Expenses | | $ | 533,198 |
| | $ | 298,812 |
| | $ | 5,267 |
| | $ | 837,277 |
|
The following adjustments were made to the historical financial records to create the unaudited pro forma information in the table above:
Adjustments to eliminate transactions between the CompanyJune 30, 2020 and Omni during the three and nine month periods ended September 30, 2018.
Adjustment to reflect estimated additional depreciation and amortization expense of $2.6 million and $7.9 million for the three and nine month periods ended September 30, 2018, resulting from the fair value adjustments to Omni’s intangible and tangible assets. Pro forma combined depreciation expense for the periods presented reflect the increased fair values of the aircraft acquired and longer useful lives of the aircraft, indicative of the Company's polices and intent to modify certain aircraft to freighters as an aircraft is removed from passenger service.
Interest expense increased by $11.1 million and $34.6 million during the three and nine month periods ended September 30, 2019, respectively, compared to the corresponding periods of 2018. Interest expense increased due to
a higher average debt level, including an additional term loan under the Senior Credit Agreement of $675.0 million to finance the acquisition of Omni and higher interest rates on the Company's outstanding loans. Interest expense in 2019 and 2018 was also impacted by the convertible notes issued in September 2017. The convertible notes have a principal value of $258.8 million and bear interest at a cash coupon rate of 1.125%. 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 costs to interest expense over the seven year term of the convertible notes.
The Company recorded net, pre-tax gains on financial instruments of $92.0 million and $60.6 million during the three and nine month periods ended September 30, 2019, respectively, compared to gains of $17.9 million and $28.7 million during 2018. The gains and losses are primarily a result of re-measuring, as of September 30, 2019 and 2018, the fair value of the stock warrants granted to Amazon. Generally, the warrant value increases or decreases with corresponding increases or decreases in the ATSG stock price during the measurement period. Additionally, the value of certain warrants depend partially on the probability that warrants will vest upon the execution of aircraft leases. Warrant gains for the first six months of 2020 were primarily a result of a 5% decrease in the traded value of ATSG shares.
Non-serviceNon service components of retiree benefits were net gains of $2.9 million and $5.8 million for the three and six month periods ended June 30, 2020, respectively, compared to net losses of $2.4 million and $7.1 million during the three and nine month periods ended September 30, 2019, respectively, compared to net gains of $2.0 million and $6.1$4.7 million for 2018.corresponding periods of 2019. The non-servicenon service component gain and losses of retiree benefits are actuarially determined and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non-serviceNon service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans.
The provision for income taxes for interim periods is based on management's best 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 SeptemberJune 30, 20192020 have been estimated utilizing a 27%25% rate based upon year-to-date income and projected results for the full year. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items have an impact on the effective rate during a period.
The effective tax rate from continuing operations for the three and ninesix month periods ended SeptemberJune 30, 2019 was 5%2020 were 1% and 12%17%, respectively. The effective tax rate is affected by the re-measurement of warrants, changes in valuation allowances and other discrete tax items in which expenses and benefits for tax purposes are different than required by generally accepted accounting principals.principles. The effective tax rate before including the effects of the warrant re-measurements, incentive amortizations and valuation allowance changesthe other adjustments for adjusted pretax earnings from continuing operations (see items in table above) was 25%21% and 24%23% for the three and ninesix month periods ended SeptemberJune 30, 2019,2020, respectively. The effective tax rate before including the effects of the warrants was 25% and 24% for both the three and ninesix month periods ended SeptemberJune 30, 2018.2019.
AsDiscontinued Operations
The financial results of December 31, 2018,discontinued operations primarily reflect pension, workers' compensation cost adjustments and other benefits for former employees previously associated with ABX's former hub operations pursuant to which ABX performed package sorting services for DHL. Pre-tax gains related to the Company had operating loss carryforwardsformer sorting operations were $5.2 million for U.S. federal income tax purposesthe first six months of approximately $253.82020 compared to $0.1 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. Asfor 2019. Pre-tax earnings during 2020 and 2019 were a result we do not expect to pay federal income taxes until 2023 or later. The Company may, however, be required to pay minimum taxesof reductions in self-insurance reserves for former employee claims and certain state and local income taxes before then. The Company's taxable income earned from international flights is primarily sourced to the United States under international aviation agreements and treaties. When we operate in countries without such agreements, the Company could incur additional foreign income taxes.pension credits.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $307.1$249.0 million and $200.8$209.4 million for the first ninesix months in 2020 and 2019, and 2018, respectively. Improved cashCash flows generated from operating activities during 2020 and 2019 were driven primarily by additional aircraft leases to customers and by increased operating levels of the ACMI Services segment. Operating cash flows increased $39.6 million for the first six months of 2020 compared to the corresponding period of 2019. Operating cash flows for 2020 include the receipt of $37.7 million of grant funds from the CARES Act. Cash outlays for pension contributions were $5.4$1.6 million and $22.2$1.4 million for the first ninesix months of 20192020 and 2018,2019, respectively.
Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were $336.9$265.9 million and $214.0$216.8 million for the first ninesix months of 20192020 and 2018,2019, respectively. Capital expenditures in 2019the first half of 2020 included $247.9$188.2 million for the acquisition of nineseven Boeing 767-300 aircraft and freighter modification costs; $54.3$47.2 million for required heavy maintenance; and $34.7$30.5 million for other equipment, including purchases of aircraft engines and rotables. Our capitalCapital expenditures in
the first nine monthshalf of 20182019 included $149.2$159.0 million for the acquisition of fiveseven Boeing 767-300 aircraft
and freighter modification costs; $38.4$34.7 million for required heavy maintenance; and $26.4$23.1 million for other equipment, including purchases of aircraft engines and rotables.
During the first ninesix months of 2019, we paid $12.0 million to complete the acquisitions of Omni and TriFactor. During the first ninesix months of 20192020 and 2018,2019, we contributed $9.8$5.6 million and $8.3$6.4 million, respectively, to a joint venturejoint-venture with Precision Aircraft Solutions, LLC, which is developingto develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft.
Net cash provided by financing activities was $28.0$27.4 million for the first ninesix months of 20192020 compared to $14.8$21.1 million used byin 2019. Our financing activities during the first six months of 2020 included a debt offering of $500 million in 2018. senior unsecured notes (the “Senior Notes”). The Senior 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 “Securities Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.750% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes will mature on February 1, 2028. The net proceeds from the Senior Notes were used to pay down the revolving credit facility.
During the first ninesix months of 2019,2020, we drew $70.0a total of $80.0 million from the revolving credit facility under the Senior Credit Agreement to fund capital spending for aircraft acquisition and modifications. We made debt principal payments of $38.9 million.
During$40.0 million during the first quartersix months of 2018, we repurchased 157,000 shares of the Company's common stock pursuant2019. Our borrowing activities were necessary to an authorized share repurchase planpurchase and modify aircraft for $3.6 million, of which $0.6 million was paid in the first quarter and $3.0 million was paid in April 2018. The repurchase plan was amended by the Board in February 2018 to increase such authorization to up to $150 million. We have not repurchased any shares in 2019.lease deployment into air cargo markets.
Commitments
As of June 30, 2020, the Company had fourteen aircraft that were in, or awaiting, the freighter modification process. Additionally, we have agreed to purchase seven more Boeing 767-300 aircraft through 2021. We estimate that capital expenditures for 20192020 will total $460$465 million, of which the majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance thethese capital expenditures from current cash balances, future operating cash flowflows and the Senior Credit Agreement. The Company outsources a significant portion of the aircraft freighter modification process to a non-affiliated third party. The modification process primarily consists of the installation of a standard cargo door and loading system. For additional information about the Company's aircraft modification obligations, see Note HI of the accompanying financial statements.
Since August 3, 2017, the Company has been part of a joint-venture 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 from the FAA induring the fourth quarter of 2020. We expect to make contributions equal to the Company's 49% ownership percentage of the program's total costs during 2019.2020.
Liquidity
The Company hasWe have a Senior Credit Agreement with a consortium of banks that includes twoan unsubordinated term loansloan of $698.4$619.2 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn $530.0$177.9 million, net of repayments, as of SeptemberJune 30, 2019.2020. The Senior Credit Agreement expires in November 2024 if certain liquidity measures are maintained during 2024 and contains an incremental accordion capacity based on debt ratios. As of June 30, 2020, the available unused revolving credit facility has a capacity of $645.0totaled $408.2 million, and additional permitted additional indebtedness of $500.0 million of which $258.8 million has been utilized forunder the issuance of convertible notes, and an accordion feature whereby the Company can draw up to an additional $300.0 millionSenior Credit Agreement subject to the lenders' consent. compliance with other covenants, was limited to $250.0 million.
The Senior Credit Agreement is collateralized by the Company'sour fleet of Boeing 777, 767 and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, the Company iswe are required to maintain collateral coverage equal to 102%115% of the outstanding balances of the term loansloan and the total funded revolving credit facility. The Senior Credit Agreement requires a minimum collateral coverage which must be maintained isof 50% of the outstanding balance of the term loan plus the revolving credit facility commitment.
In November 2019, the Senior Credit Agreementcommitment, which was amended. This amendment includes an increase to the maximum revolver capacity from $645.0 million to $750.0 million, combines the two terms loans into one loan and reduces the interest rate spread of the LIBOR based financing at the current debt-to-EBITDA ratio. This amendment extends the agreement six months to November 2024 if certain liquidity measures are maintained during 2024 and adds incremental accordion capacity based on debt ratios.$600.0 million.
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 (earnings before interest, taxes, depreciation and amortization expenses) 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. At the Company's current debt-to-EBITDA ratio, the unsubordinated term loans, the Senior Notes and the revolving credit facility each bear variable interest rates of 4.3%.1.68%, 4.75% and 1.68%, respectively.
At SeptemberJune 30, 2019,2020, the Company had $46.8$60.3 million of cash balances. The Company had $100.8 million available under the revolving credit facility, net of outstanding letters of credit, which totaled $14.2 million. Also, the Company has additional borrowing capacity available under the accordion feature of its Senior Credit Agreement, subject to lender consent (see Note F). We believe that the Company's current cash balances and forecasted cash flows provided from its customer leases and operating agreements, combined with its Senior Credit Agreement, will be sufficient to fund operations, capital spending, scheduled debt payments and required pension funding for at least the next 12 months.
Off-Balance Sheet Arrangements
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 SeptemberJune 30, 20192020 and 2018,2019, 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 Discussion and Analysis of Financial Condition and Results of Operations,” as well as certain 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. The preparation of these 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. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed 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. 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.
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.
No changes have occurred to the market risks the Company faces since information about those risks werewas disclosed in item 7A of the Company's 20182019 Annual Report on form 10-K filed with the Securities and Exchange Commission on March 1, 2019.2, 2020.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2019,2020, 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
Except for the internal controls of Omni, which was acquired on November 9, 2018, thereThere were no changes in internal control over financial reporting during the most recently completed fiscal year that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently a party to legal proceedings in various federal and state jurisdictions arising out of the operation of the Company's business.businesses. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, we believe that the Company's ultimate liability, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.
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 20182019 Annual Report on formForm 10-K, filed with the Securities and Exchange Commission on March 1, 2019.2, 2020. The risk factors presented below update, and should be considered in addition to, the risk factors previously disclosed in Item 1A of the Company's 2019 Annual Report on form 10-K. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.
In late 2019, an outbreak of a coronavirus (COVID-19) was identified in China and has since spread globally, becoming a pandemic. The pandemic has had an impact on our operations and financial results and is expected to continue to affect our operations and financial results. The extent of the impact that the coronavirus pandemic will have on our operations and financial results will depend on future developments, including the duration, spread, severity and any recurrence of the COVID-19 virus; the duration and scope of government orders and restrictions; and the extent of the impact of the pandemic on overall economic conditions. These are highly uncertain and cannot reasonably be predicted. We expect our operating results to be significantly impacted by the coronavirus pandemic during the second half of 2020 and most likely during subsequent quarters. The DoD reduced normal personnel movements while most of our other passenger service customers suspended their operations and demand for commercial passenger charters significantly declined. During the second quarter 2020 the DoD and other government agencies contracted for special airlift capacity which may not be needed in the months ahead. As a result, we expect the revenues of ACMI Services to decline at least for the second half of 2020 compare to the first half. It is difficult to reasonably predict when flights will actually resume, the frequency in which flights will resume, and the length of time necessary before passenger flights substantially recover to pre-pandemic levels. The economic downturn resulting from the coronavirus pandemic has also resulted in the reduction of demand for other types of services including aircraft maintenance services.
Some of our employees and employees of suppliers and service providers have tested positive for, or have been suspected of having, COVID-19. Additional instances of actual or perceived risk of infection among our employees, or our suppliers' or service providers’ employees, could further negatively impact our operations We rely on a skilled workforce to perform aircraft maintenance. Similarly, we staff personnel near airports to sort customer packages, load aircraft and maintain related equipment. In addition to our own employees, we rely on services from suppliers and customers to operate efficiently and safely. Measures restricting the ability of airport personnel or flight crews to work may result in the reductions of flights. Our operations could be negatively affected if our own personnel or those of our suppliers and customers are quarantined or sickened as a result of exposure to COVID-19, or if they are subject to governmental curfews or “shelter in place” health orders. A coronavirus outbreak at certain maintenance facilities, customer sorting centers or airports could result in workforce shortages or closures causing reduced revenues and higher expenses.
In addition to workforce shortages, the coronavirus pandemic may result in parts shortages, maintenance delays, shortages of transportation and hotel accommodations for flight crews, any of which could result in reduced revenues and additional expenses. Similarly, the effects of the coronavirus pandemic could result in the slower completion of aircraft freighter conversions which in turn would disrupt our aircraft leasing operations. Our
customer base for aircraft maintenance revenues includes passenger airlines. Our operating results have been impacted and may continue to be impacted by the coronavirus pandemic as passenger airlines reduce their needs for scheduled heavy airframe maintenance.
The pandemic may have a long term impact on the demand for aviation services and our operating results.
Due to the pandemic, passenger air travel has declined sharply and passenger airlines have temporarily removed much of their fleets from service. The demand for passenger air travel could remain low for an extended period of time and accordingly, the value of airframes and engines could decline for the foreseeable future. If the coronavirus pandemic persists or reemerges, our expectations of related operating cash flows could significantly decline. If such circumstances occur or appear likely to occur, we may need to impair the carrying value of certain recorded assets.
Conditions of the CARES Act
Two of the Company's airline subsidiaries, OAI and ATI, have been granted government funds totaling $75.4 million pursuant to the payroll support program agreement under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The funds are being received in installments through September 2020. In conjunction with the payroll support program agreements, the airlines agreed to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020; limit, on behalf of themselves and certain of their affiliates, executive compensation through March 24, 2022; maintain certain air transportation services through March 1, 2022, as may be required by the U.S. Department of Transportation pursuant to its authority under the CARES Act; and maintain certain internal controls and records relating to the CARES Act funds and comply with certain reporting requirements. In addition, we may not pay dividends or repurchase our shares through September 30, 2021. If we do not comply with the provisions of the CARES Act and the payroll support program agreements, the Company may be required to repay the government funds and also subject to other remedies.
If the coronavirus pandemic persists or reemerges after September 30, 2020, we may need to terminate or furlough airline employees.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 5, 2014, the Board of Directors authorized the Company to repurchase up to $50.0 million of outstanding common stock. In May 2016, the Board amended the Company's common stock repurchase program increasing the amount that management may repurchase from $50.0 million to $100.0 million of outstanding common stock. In February 2018, the Board increased the authorization from $100.0 million to $150.0 million (less amounts previously repurchased). The Board's authorization does not require the Company to repurchase a specific number of shares or establish a time frame for any repurchase and the Board 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 thirdsecond quarter of 2019.2020. As of SeptemberJune 30, 2019,2020, the Company had repurchased 6,592,349 shares and the maximum dollar value of shares that could then be purchased under the program was $61.3 million.
The share repurchase program has been suspended until the CARES Act restrictions on the repurchase of shares have lapsed.See “Conditions of the CARES Act.”
ITEM 5. OTHER INFORMATION
On November 4, 2019, Air Transport Services Group, Inc. (“ATSG”) entered into an amendment (the “Third Amendment”) of its Second Amended and Restated Credit Agreement (the “Credit Agreement”), dated November 9, 2018, with SunTrust Bank, as Administrative Agent, and the other financial institutions from time to time a party thereto. The Third Amendment: (i) extends the maturity date of the term loan and revolving credit facility for six months to November 30, 2024; (ii) reduces the interest pricing, by lowering rate spreads above the one-month LIBOR for borrowings, ranging from 37.5 basis points at ATSG’s current secured net leverage ratio to 25.0 basis points at each of the other steps on the pricing grid; (iii) reduces the pricing applied to unused revolver capacity by 5 basis points; (iv) increases the aggregate amount of the revolving credit facility by $105 million, to $750 million; (iv) consolidates two term loans totaling $707 million at September 30, 2019, into a single term loan of $635 million; (v) reduces the required term loan principal amortization over its remaining duration; (vi) adds a new leverage-based feature providing access to additional revolver or term loan capacity through the accordion option, subject to lenders’ consent; (vii) increases the maximum permitted total (secured and unsecured) leverage from 4.0x to 4.25x trailing 12-month EBITDA, as defined under the Credit Agreement; and (viii) increases the additional permitted indebtedness outside of the secured facility from $500 million to $750 million, excluding the existing convertible notes.None.
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 |
| Articles of Incorporation |
| 3.1 | |
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3.2 | |
| |
| Instruments defining the rights of security holders |
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| 4.1 | |
| |
| 4.2 | Material Contracts |
| | | | | |
| Material Contracts |
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| 10.1 | |
| |
10.2 | |
| |
10.310.2 | |
| |
| 10.3 | |
| |
| 10.4 | |
| | | | | |
| Certifications |
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| 31.1 | |
| |
| 31.2 | |
| |
| 32.1 | |
| |
| 32.2 | |
| | | | | |
| 101.INS | XBRL Instance Document |
| |
101.INS101.SCH | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema Document |
| |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
| |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
____________________
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(1) | Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on May 10, 2019. |
| |
(2) | Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on May 29, 2019. |
| |
(3) | Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 6, 2019. |
| |
(4) | Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on November 6, 2019 |
(1)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on January 28, 2020. (2)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on March 24, 2020.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | AIR TRANSPORT SERVICES GROUP, INC., |
| | | | a Delaware Corporation |
| | | | Registrant |
| | | | |
| | | | /S/ RICHARD F. CORRADO |
| | | | Richard F. Corrado |
| | | | Chief Executive Officer (Principal Executive Officer) |
| Date: | August 7, 2020 | | | |
| | | | |
| | | | AIR TRANSPORT SERVICES GROUP, INC., |
| | | | a Delaware Corporation |
| | | | Registrant |
| | | | |
| | | | /S/ JOSEPH C. HETE |
| | | | Joseph C. Hete |
| | | | Chief Executive Officer (Principal Executive Officer) |
Date: | November 7, 2019 | | | |
| | | | |
| | | | /S/ QUINT O. TURNER |
| | | | Quint O. Turner |
| | | | Chief Financial Officer (Principal Financial Officer |
| Date: | NovemberAugust 7, 20192020 | | | and Principal Accounting Officer) |